2025 (7) TMI 1567 - AT - Income Tax

Validity of Revision u/s 263 - Lack of enquiry - Claim of interest on borrowed capital under the provisions of Section 24 - HELD THAT - An action u/s 133A was undertaken in the case of the assessee and the sole and whole aspect of investigation in the survey post-survey enquiry and the reassessment proceedings was confined to the rental income which according to the AO was suppressed. When the principal issue is pivoted to the correctness of rental income offered in the returns filed prior to the action u/s 133A it cannot be said that there was a total lack of enquiry while concluding the assessment proceedings. Even if it were an error on part of the AO to have missed out to check the correctness of claim of interest u/s.24(a) such omission can only be categorized as a case of inadequate enquiry . Only in the event of a complete lack of enquiry can the ld.Pr. CIT revise the order of assessment directly but in case of inadequate enquiry the ld. Pr. CIT must make their own enquiries before passing the revision order. If the Commissioner wants to revise the assessment on the ground that the enquiry was inadequate then he must make an independent inquiry to demonstrate how the assessment is erroneous and prejudicial. Mere inadequacy of inquiry does not justify revision unless supported by material gathered by the ld.Pr. CIT . If the AO has conducted an enquiry however inadequate the ld. Pr. CIT cannot just label it as erroneous without doing further enquiry by himself. In the action taken by the ld.Pr. CIT to revise the eight assessment orders there is not even an iota of proof having undertaken any inquiry before concluding the orders to be erroneous. Also apparent from the period of time made available to the assessee to respond to the notice under Section 263 and the conclusion drawn that the ld. Pr. CIT passed the orders in a hurried and mechanical manner without proper application of mind. The decision cited by the Ld. AR in the case of Pr. CIT v. Earth Minerals Co. 2024 (5) TMI 109 - SC ORDER rallies squarely in favour of the assessee and in view of the foregoing discussions we conclude that the issue under question does not warrant invoking of Section 263 and hence set aside the PCIT s order which is untenable in law. Assessee appeal allowed.

Summary

ISSUES:

Whether an order passed by the Assessing Officer can be revised under Section 263 of the Income Tax Act on the ground that it is erroneous and prejudicial to the interests of Revenue without the revisionary authority conducting or causing an enquiry before passing such order.Whether the principles of natural justice, specifically the maxim of audi alteram partem, were violated by not granting sufficient time to the assessee to respond to the show-cause notice before passing the order under Section 263.Whether mere inadequacy of enquiry by the Assessing Officer justifies revision under Section 263 without the Principal Commissioner of Income Tax (PCIT) making an independent enquiry.Whether the revisionary authority can exercise jurisdiction under Section 263 when the larger issue is pending before the Commissioner of Income Tax (Appeals).

RULINGS / HOLDINGS:

The order passed under Section 263 without making or causing to be made such enquiry as deemed necessary by the revisionary authority is "grossly inappropriate" and "bad in law," as the revisionary authority must conduct or cause an enquiry before classifying an order as erroneous and prejudicial to Revenue.The revisionary authority violated the principles of natural justice by not granting adequate opportunity and sufficient time to the assessee to respond to the show-cause notice, thereby contravening the maxim of audi alteram partem.In cases of inadequate enquiry by the Assessing Officer, the revisionary authority must make an independent enquiry before revising the assessment order; mere inadequacy of enquiry does not justify revision under Section 263 unless supported by material gathered by the PCIT.When the larger issue is pending before the Commissioner of Income Tax (Appeals), the revisionary authority cannot exercise jurisdiction under Section 263.

RATIONALE:

The Court applied the statutory framework of Section 263(1) of the Income Tax Act, which mandates that the revisionary authority must "make or cause to be made such inquiry as he deems necessary" before revising an order deemed erroneous and prejudicial to Revenue.The Court relied on the Supreme Court decision in Pr. CIT v. Earth Minerals Co. Ltd. [2024] 162 taxmann.com 273 (SC), which held that absence of any enquiry by the revisionary authority before passing the order under Section 263 renders the order bad in law and liable to be annulled.The Court emphasized the distinction between "reason to suspect" and "reason to believe," holding that the revisionary authority's opinion based on suspicion without enquiry does not satisfy the legal threshold for revision under Section 263.The Court noted that the principles of natural justice require adequate opportunity to be given to the assessee to respond, and failure to do so invalidates the revisionary order.The Court recognized a doctrinal limitation on Section 263 jurisdiction when the same issues are already pending adjudication before the Commissioner of Income Tax (Appeals), following the precedent set by the ITAT Chennai in Golden Vats Pvt Ltd vs. ACIT.