2025 (7) TMI 1495 - AT - Income Tax

Revision u/s 263 on the basis of audit objection - ACIT/JCIT(Audit) raising objection is respect of action of AO in allowing the exemption claimed by assessee u/s 10(38) HELD THAT - The transaction of purchase and sale of CCL Ltd. giving rise to LTCG claim to be exempted under Section 10(38) of the Act is fully elaborated by documentary evidence as pointed out by the Ld. Counsel for the assessee. The shares have been credited in the Demat account both purchase and sale transactions have been carried out through the banking channel and by transferring of shares. The prima facie bona fide existence of transaction cannot be doubted. The assessee has demonstrated that the capital gain arising to the assessee is in nature of LTCG. The view taken by PCIT following audit objections rather than applying his mind is not permissible in law and deserves to be set aside. Accordingly ground of appeal nos. 1 and 2 are allowed.

Summary

ISSUES:

Whether the order passed under Section 143(3) of the Income Tax Act, 1961 was erroneous and prejudicial to the interest of revenue, justifying revision under Section 263.Whether the Principal Commissioner of Income Tax (PCIT) validly assumed jurisdiction under Section 263 based on audit objections without independent application of mind.Whether the claim of exemption under Section 10(38) on long-term capital gains (LTCG) arising from sale of shares of a listed company was properly examined and accepted by the Assessing Officer (AO).Whether the alleged non-verification of third-party details, including the status of the seller company and payment discrepancies, rendered the assessment order erroneous.Whether jurisdiction under Section 263 can be exercised on mere suspicion or audit objections without concrete evidence.Whether the revisionary order under Section 263 was passed in violation of principles of natural justice.Whether the order under Section 263 was barred by limitation.

RULINGS / HOLDINGS:

The order passed under Section 143(3) was not erroneous or prejudicial to the interest of revenue as the claim under Section 10(38) was supported by "comprehensive documentary evidence" and the AO had taken a "plausible view".The PCIT erred in assuming jurisdiction under Section 263 by "following the audit objection rather than applying his own mind," which is "not permissible in law," thus the revisionary order was quashed.The exemption claimed under Section 10(38) was validly allowed by the AO after due verification of all relevant evidence, including dematerialized shares, banking transactions, and contract notes, establishing the "prima facie bona fide existence of transaction."The alleged non-verification of the struck-off status of the seller company and the gap in payment timing did not render the assessment order erroneous, as the purchase was genuine and payment terms are a matter of commercial arrangement.Jurisdiction under Section 263 cannot be exercised on "surmises and conjectures" or mere suspicion without concrete evidence, as held by coordinate judicial authorities.The revisionary order under Section 263 was passed without observing principles of natural justice, including failure to provide adequate opportunity of hearing, rendering it liable to be set aside.The limitation period for initiating proceedings under Section 263 was not specifically adjudicated as the grounds became academic after allowing the appeal on merits.

RATIONALE:

The Court applied the statutory framework of the Income Tax Act, 1961, particularly Sections 143(3), 263, and 10(38), and relied on established precedents emphasizing that revision under Section 263 requires the original order to be "erroneous and prejudicial to the interest of revenue."Judicial precedents were cited to reinforce that audit objections cannot substitute the independent application of mind by the revisional authority and that suspicion alone is insufficient to invoke Section 263 jurisdiction.Decisions of coordinate benches and the High Court were relied upon to affirm that an astronomical increase in share price or the status of the seller company does not ipso facto render LTCG claims as accommodation entries or sham transactions.The Court recognized the principle that when "from a given set of circumstances two inferences of fact are possible," the inference drawn by the original authority (AO) should not be disturbed unless it is perverse.The Court noted the absence of any concrete evidence against the assessee in the investigation report allegedly available at the time of assessment, and held that reliance on such unsubstantiated reports is impermissible.No doctrinal shift was made, but the judgment reaffirmed the settled principle that the AO's order must be set aside only if it is "erroneous and prejudicial," and that jurisdiction under Section 263 cannot be exercised merely on audit objections or suspicion.