2025 (7) TMI 1485 - AT - Income Tax

Revision u/s 263 - difference between Lack of inquiry and Inadequate inquiry - Addition u/s 68 - as per CIT AO has never asked the assessee to prove source of source therefore it is a case of no enquiry on the part of the assessing officer so far the source of the source is concerned - HELD THAT - We note that first proviso to section 68 of the Act clearly provides that in respect of share capital explanation offered by the assessee-company shall be deemed to be not satisfactory unless the shareholder offers explanation about the nature and source of such investment and the AO is satisfied about such explanation. As per the proviso to section 68 assessee needs to explain the source of the source. However the assessee has failed to prove the source of the source as necessary documents and evidences were not filed by the assessee. As per ld DR balance-sheets of 55 shareholders are not available. The assessee has not submitted the entire documents and evidences to prove the first decree evidences wherein only the source is to be proved. However the second decree evidences which is known as source of the source have never been submitted by the assessee before the Ld.PCIT. Therefore considering the facts and circumstances we are of the view that one more opportunity should be given to the assessee to plead his case before the ld. PCIT to prove the source of the source. Therefore considering the above facts we are of the view that this matter should be remitted back to the file of the Ld. PCIT with the direction to the assessee to submitted all details and documents to prove the source of the source. Some of the documents that is balance sheets of 55 shareholders to prove the first decree of evidences are absent before the Ld. PCIT. We also find that the second decree evidences to prove the source of the source in respect of share capital have not been furnished by the assessee before the Ld. PCIT. Therefore we are of the view that one more opportunity should be given to the assessee to furnish the required documents and evidences to prove the source of the source before the Ld. PCIT. Appeal of the assessee is allowed for statistical purposes.

Summary

ISSUES:

Whether the revisionary jurisdiction under section 263 of the Income-tax Act, 1961 can be invoked when the assessment order is neither erroneous nor prejudicial to the interest of revenue.Whether the assessing officer's inquiry and verification during scrutiny assessment were adequate to satisfy the requirements of section 68 of the Income-tax Act, 1961 regarding share capital investments.Whether the explanation about the "source of source" of share capital investments was satisfactorily furnished by the assessee as mandated by the first proviso to section 68 of the Income-tax Act, 1961.Whether the absence of balance sheets and other financial documents of shareholders affects the proof of creditworthiness and genuineness of share capital investments.Whether the assessing officer's failure to inquire into the source of source of funds justifies revision under section 263 of the Income-tax Act, 1961.Whether the revisionary authority can set aside the assessment order merely because it holds a different opinion than the assessing officer.Whether principles of natural justice require affording the assessee an opportunity to furnish additional documents and be heard before passing a fresh order under section 263.

RULINGS / HOLDINGS:

The revisionary jurisdiction under section 263 cannot be invoked unless the order is found to be "erroneous and prejudicial to the interest of revenue"; mere difference of opinion is insufficient to invoke such jurisdiction.The assessing officer conducted inquiries by issuing multiple notices under section 142(1) and examined documentary evidence submitted by the assessee, thus carrying out "inquiry" though the Principal CIT found it "inadequate" for the purpose of section 68.Under the first proviso to section 68, explanation about the "nature and source" of share capital must be "found to be satisfactory" by the assessing officer, which includes proving the "source of source"; the assessee failed to satisfactorily prove the "source of source" due to non-submission of balance sheets and other relevant documents of 55 shareholders.The absence of balance sheets and financial documents of shareholders impairs the ability to establish their creditworthiness and genuineness of investment, which is critical under section 68.The assessing officer's failure to inquire into the "source of source" constitutes "lack of inquiry" justifying revision under section 263, as the assessment was passed without necessary verification.The revisional authority cannot set aside an assessment order merely because it holds a different opinion; it must be shown that the order is "erroneous and prejudicial to the interest of revenue."The principles of natural justice and fair play require affording the assessee an opportunity to furnish missing documents and be heard before a fresh order is passed; accordingly, the matter was remitted for de novo adjudication after giving the assessee a chance to prove the "source of source."

RATIONALE:

The Court applied the statutory framework of section 263 and section 68 of the Income-tax Act, 1961, emphasizing the first proviso to section 68 which mandates that the explanation offered by the assessee regarding share capital must be satisfactory, including proof of "source of source" of funds.The Court distinguished between "lack of inquiry" and "inadequate inquiry," holding that while the assessing officer conducted some inquiry, it was insufficient to satisfy the statutory requirement of proving the "source of source."The Court underscored settled principles that revision under section 263 is not to be exercised merely on a difference of opinion but only where the order is "erroneous and prejudicial to the interest of revenue."The Court acknowledged the factual findings of discrepancies and mismatches between declared income and investments, and the absence of critical financial documents, which raised legitimate doubts about the genuineness and creditworthiness of shareholders.The Court reinforced the doctrine of natural justice by directing that the assessee be given an opportunity to furnish all necessary documents and be heard before a fresh order is passed, thereby ensuring procedural fairness.No dissent or doctrinal shift was noted; the decision aligns with established jurisprudence on the scope of section 263 and evidentiary requirements under section 68.