2025 (6) TMI 1448 - AT - Income Tax

Revision u/s 263 - CIT revising the assessment framed under section 147 - assessee has submitted that while exercising powers u/s 263 PCIT issued direction to the AO for framing the assessment on a issue other than issue/income which the AO had found to have escaped assessment which was duly explained by the assessee to his satisfaction. HELD THAT - As is available from a perusal of provisions of section 147 the essential requirement to exercise jurisdiction for initiating proceedings thereunder is that the AO should have reason to believe that any income chargeable to tax has escaped assessment for any assessment year . Since as per settled law the AO cannot be said to have any jurisdiction as regards any other income which is alleged to have subsequently come to his notice in the course of proceedings under section 147 and that too without resorting to the procedure prescribed under the Act PCIT also cannot be said to have any jurisdiction to issue direction to the AO to make assessment afresh in respect of such other income. As regards issue of income of Rs. 11 lacs - In view of the decisions cited by ld. AR for the assessee it is held that once the AO verified and examined the issue of income of Rs. 11.00 lacs deposited by the assessee in the bank account with Axis Bank after having issued notices to the assessee and seeking his response(s) and requisite information/documents and ultimately accepted the returned income ld. PCIT was not justified in observing that the Assessing Officer had not at all verified said transaction or conducted proper enquiry in respect thereof. As regards the other transactions of Rs. 50.00 lacs - As regards said other transactions of Rs. 50.00 lacs in respect of which Ld. PCIT was of the view that the AO had not at all verified and made proper enquiries as to its source and genuineness it is significant to note here that had the Assessing Officer after reopening of the matter for reassessment come across any other income independently or of his own and issued notice under section 148 of the Act then the things would have been otherwise. But herein the Assessing Officer after having reopened the matter only in respect of income of Rs. 11 lacs and having been satisfied by the assessee in respect thereof did not come across any other income what to say of issuance of any notice under section 148 of the Act for subjecting said other income to tax after following prescribed procedure. Here only Ld. PCIT is stated to have come across the other income and then issued directions to the Assessing Officer for framing of assessment afresh in respect of said other income. In other words the issue pertaining to income or transaction of Rs. 50 lacs is not stated to have come to the notice of the Assessing Officer himself. Thus we find merit in this appeal and consequently hereby set aside the impugned order passed by PCIT. Assessee appeal allowed.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered by the Tribunal include:

- Whether the order passed by the Principal Commissioner of Income Tax (PCIT) under section 263 of the Income Tax Act, 1961, revising the assessment framed under section 147 read with section 144B for the assessment year 2013-14, was justified and lawful.

- Whether the Assessing Officer (AO) had conducted proper verification and enquiry regarding the cash deposit of Rs. 11 lakhs in the assessee's bank account, which was alleged to be unexplained income that escaped assessment.

- Whether the PCIT was justified in directing reassessment on an additional transaction of Rs. 50 lakhs, which was not part of the original notice under section 148 and pertained to a different assessment year (2014-15).

- The scope and limits of the AO's jurisdiction under section 147/148 to reassess income and the PCIT's powers under section 263 to revise an assessment order.

- The applicability of relevant judicial precedents on the powers of AO and PCIT, and the requirement of proper inquiry before acceptance of returned income or revision of assessment orders.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Legality of PCIT's revision of assessment order under section 263

Legal framework and precedents: Section 263 empowers the PCIT to revise an assessment order if it is erroneous in so far as it is prejudicial to the interests of the Revenue. The power is not contingent on issuance of a show cause notice but requires an opportunity of hearing. The AO's jurisdiction under section 147/148 is triggered only when there is reason to believe that income chargeable to tax has escaped assessment. Judicial precedents such as M/s Gee Vee Enterprises, Jagdish Kumar Gulati vs CIT, and Duggal & Co. emphasize the AO's duty as an investigator to conduct proper inquiries before accepting returns.

Court's interpretation and reasoning: The PCIT found the AO's order erroneous and prejudicial because the AO allegedly did not verify certain transactions and accepted the returned income in a routine and casual manner. The PCIT relied on judicial pronouncements to hold that the AO must conduct thorough verification and enquiry before acceptance.

Key evidence and findings: The PCIT noted discrepancies in cash balances reported in various Income Tax Returns (ITRs) and cash book entries, and the unexplained transaction of Rs. 50 lakhs. The PCIT observed that the AO did not verify the source and genuineness of these transactions.

Application of law to facts: While the PCIT's reliance on the AO's duty to verify is legally sound, the Tribunal examined whether the AO actually failed to conduct the necessary enquiries regarding the Rs. 11 lakhs cash deposit, which was the subject matter of the reassessment notice.

Treatment of competing arguments: The assessee contended that the AO had issued multiple notices under sections 142(1) and 142(2), obtained explanations and documents, and accepted the returned income after verification. The AO's acceptance was thus not casual or routine. The PCIT's direction to reassess on transactions beyond the scope of the original notice was challenged as exceeding jurisdiction.

Conclusion: The Tribunal found that the AO had indeed conducted enquiries and verified documents regarding the Rs. 11 lakhs deposit before accepting the returned income. Therefore, the PCIT's revision on this ground was not justified.

Issue 2: Jurisdiction to reassess on Rs. 50 lakhs transaction not covered in original notice

Legal framework and precedents: Under section 147/148, the AO's jurisdiction is limited to income which he has reason to believe has escaped assessment, and which forms the basis of the notice. Judicial decisions in CIT vs Shri Ram Singh and CIT vs Jet Airways (I) Ltd. clarify that the AO cannot assess or reassess income not covered in the notice without following prescribed procedures. The PCIT's powers under section 263 cannot be used to direct reassessment on issues outside the original scope.

Court's interpretation and reasoning: The Rs. 50 lakhs transaction was not part of the original notice under section 148 for AY 2013-14 but pertained to AY 2014-15, which was separately reopened and assessed. The PCIT's order for reassessment on this transaction in AY 2013-14 proceedings was therefore beyond jurisdiction.

Key evidence and findings: The PCIT's own admission and the record showed that the Rs. 50 lakhs transaction related to AY 2014-15 and had been reopened and thoroughly examined by the AO in that year's proceedings. The assessee had no notice or opportunity to respond to this issue in AY 2013-14 proceedings.

Application of law to facts: The Tribunal emphasized that the AO's jurisdiction under section 147/148 is issue-specific and year-specific. The PCIT cannot direct reassessment on unrelated transactions or assessment years in revision proceedings under section 263.

Treatment of competing arguments: The Revenue argued that PCIT's power under section 263 is wide and can be exercised to protect revenue interests. The Tribunal rejected this, holding that such power cannot override statutory limits on AO's jurisdiction and procedural safeguards.

Conclusion: The PCIT's direction to reassess the Rs. 50 lakhs transaction in AY 2013-14 proceedings was invalid and the issue was rightly excluded from reassessment in that year.

Issue 3: Adequacy of AO's enquiry into Rs. 11 lakhs cash deposit

Legal framework and precedents: AO's duty to investigate and verify returned income is well-established. Failure to do so renders assessment order erroneous and prejudicial. However, once AO is satisfied after enquiry, further revision is not warranted unless new information arises.

Court's interpretation and reasoning: The AO issued notices under sections 142(1) and 142(2), sought explanations and documents including cash book, balance sheet, P&L account, and found the assessee's explanation consistent with the records. The AO accepted the returned income accordingly.

Key evidence and findings: The AO's order records detailed examination of cash balances and transactions. The assessee's explanation that cash deposit was from cash-in-hand as of 31-03-2012 was supported by documentary evidence.

Application of law to facts: The Tribunal held that the AO's enquiry was adequate and proper, negating the PCIT's claim of casual or routine acceptance.

Treatment of competing arguments: The Revenue's contention that the AO failed to verify was rebutted by the documented enquiries and explanations accepted by the AO. The Tribunal favored the assessee's position based on the record.

Conclusion: The AO's acceptance of the returned income relating to Rs. 11 lakhs was justified and not erroneous or prejudicial.

Issue 4: Powers of PCIT under section 263 and procedural fairness

Legal framework and precedents: Section 263 allows revision of erroneous and prejudicial orders. The PCIT must issue a show cause notice and provide opportunity of hearing. The power is supervisory and cannot be exercised arbitrarily.

Court's interpretation and reasoning: The PCIT issued a show cause notice dated 12-02-2024 and heard the assessee's reply. Procedural fairness was observed. However, the scope of revision was limited by jurisdictional constraints.

Key evidence and findings: The PCIT's order referred to judicial precedents confirming the AO's duty to investigate and the PCIT's power to revise erroneous orders.

Application of law to facts: The Tribunal acknowledged the PCIT's procedural compliance but emphasized that the revision must be confined to the issues properly before the AO and covered by the notice under section 148.

Treatment of competing arguments: The assessee argued that the PCIT exceeded jurisdiction by directing reassessment on issues not before the AO. The Tribunal agreed with this submission.

Conclusion: The PCIT's exercise of power under section 263 was procedurally valid but substantively flawed in extending revision beyond the AO's jurisdiction.

3. SIGNIFICANT HOLDINGS

- "The order passed by the AO was erroneous in so far as it is prejudicial to the interests of the revenue for the purpose of section 263 of the IT. Act. The said order has been passed by the Assessing Officer in a routine and casual manner without applying the applicable sections of the Act." (As held by PCIT, but reversed by Tribunal in respect of Rs. 11 lakhs)

- "Once the AO verified and examined the issue of income of Rs. 11.00 lacs deposited by the assessee in the bank account with Axis Bank, after having issued notices to the assessee and seeking his response(s) and requisite information/documents, and ultimately accepted the returned income, ld. PCIT was not justified in observing that the Assessing Officer had not at all verified said transaction or conducted proper enquiry in respect thereof." (Tribunal's holding)

- "The Assessing Officer may assess or reassess such income which is believed to have escaped assessment for any assessment year, 'and also' any other income chargeable to tax which comes to his notice subsequently during the proceedings as having escaped assessment," but only if such income forms the subject matter of the notice under section 148. (As interpreted from CIT vs Jet Airways and Shri Ram Singh cases)

- "The PCIT cannot direct reassessment on issues or income not covered in the original notice under section 148 and not within the AO's jurisdiction in the reassessment proceedings." (Tribunal's holding)

- "The power of revision under section 263 is supervisory and cannot be exercised to override statutory limits on AO's jurisdiction or to assess income not properly before AO." (Tribunal's holding)

- "The AO is not only an adjudicator but also an investigator, and failure to conduct required inquiries renders the order erroneous as well as prejudicial to the interests of the revenue." (Judicial precedent relied upon)

- "The PCIT issued show cause notice and provided opportunity of hearing, fulfilling procedural requirements under section 263." (Tribunal's observation)

- Final determinations:

o The PCIT's revision of the assessment order under section 263 in respect of the Rs. 11 lakhs cash deposit was unwarranted as the AO had conducted proper enquiry and accepted the returned income.

o The PCIT's direction to reassess the Rs. 50 lakhs transaction in AY 2013-14 proceedings was beyond jurisdiction as it pertained to AY 2014-15 and was not part of the original notice under section 148.

o The impugned order passed by the PCIT under section 263 was set aside and the assessment order framed by the AO was upheld.