2024 (1) TMI 1458 - HC - Income Tax

Revision u/s 263 - exemption u/s 54F - Tribunal allowed the appeal of the assessee and set aside the order passed by the PCIT under Section 263 - HELD THAT - The settled legal position is with regard to exercise of jurisdiction u/s 263 of the Act on the ground that the AO failed to make inquiry which he ought to have made in the given circumstances of a case is no more res integra. The Hon ble Supreme Court in the case of M/s. Malabar Industrial Co. Ltd. 2000 (2) TMI 10 - SUPREME COURT has held that the prerequisite to exercise jurisdiction by the PCIT u/s 263 of the Act is that the assessment order is erroneous and prejudicial to the interest of the Revenue and for that both the conditions are required to be fulfilled. Hon ble Supreme Court in the case M/s. Earth Minerals Company Ltd 2023 (3) TMI 1480 - ORISSA HIGH COURT dismissing the SLP arising out of the judgement and order of the Hon ble High Court of Orissa held that the view taken by the Tribunal was plausible one and not erroneous in law and consequently no substantial question of law arose. We are of the view that the findings of fact recorded by the Tribunal in the impugned order cannot be termed as perverse or contrary to the evidence on record. We are convinced that the decision of the Tribunal is correct and requires no interference. No substantial question of law.

Summary

1. ISSUES PRESENTED and CONSIDERED

The Court considered the following core legal questions arising under the Income Tax Act, 1961:

(i) Whether the Income Tax Appellate Tribunal (ITAT) was justified in quashing the Principal Commissioner of Income Tax's (PCIT) order passed under Section 263 of the Act on the ground that the Assessing Officer's (AO) order was not erroneous or prejudicial to the revenue despite the AO allegedly failing to make necessary inquiries regarding the claim of deduction under proviso (a)(i) to Section 54F of the Act;

(ii) Whether the PCIT was empowered and entitled to revise the assessment order under Section 263 read with Explanation 2, given that the AO did not conduct any inquiry or verification concerning the exemption claimed under Section 54F, especially when the assessee owned multiple properties and the AO did not examine details of such properties;

(iii) Whether the ITAT's conclusion that the AO's order was neither erroneous nor prejudicial to the revenue was perverse, considering that the AO's record showed the assessee did not submit details regarding the number and nature of residential properties owned during the relevant year.

2. ISSUE-WISE DETAILED ANALYSIS

Issue (i) & (iii): Whether the AO's order was erroneous and prejudicial to the revenue due to lack of inquiry regarding Section 54F exemption claim

Relevant Legal Framework and Precedents: Section 54F of the Income Tax Act provides exemption from long-term capital gains tax on the sale of a capital asset if the net consideration is invested in a residential house, subject to conditions including that the assessee should not own more than one residential house other than the new asset on the date of transfer of the original asset (proviso (a)(i)). Section 263 empowers the PCIT to revise an assessment order if it is erroneous and prejudicial to the revenue. Explanation 2(a) to Section 263 clarifies that failure by the AO to make inquiries which he ought to have made renders the order erroneous.

Judicial precedents emphasize that for invoking Section 263, the order must be both erroneous and prejudicial to revenue. The Hon'ble Supreme Court in Malabar Industrial Co. Ltd. v. CIT held that an order is erroneous if the AO fails to apply his mind or make necessary inquiries, and that mere loss of revenue is insufficient unless the order is unsustainable in law. The AO is both adjudicator and investigator and must conduct inquiries when circumstances warrant.

Court's Interpretation and Reasoning: The Tribunal examined the assessment proceedings and found the AO had issued notices under Sections 143(2) and 142(1) of the Act, specifically calling for details and documents relating to the capital gains exemption claim. The assessee had submitted extensive documentation, including sale deeds, ledger accounts, affidavits, balance sheets, and evidence regarding the nature of properties owned-whether residential, commercial, rented, or used for office purposes.

The Tribunal noted that the AO applied his mind to the documents and facts, made inquiries as appropriate, and concluded that the assessee was entitled to exemption under Section 54F. The Tribunal held that the AO's order was based on a plausible view and was neither erroneous nor prejudicial to the revenue.

Key Evidence and Findings: The assessee submitted a detailed affidavit explaining the nature and use of multiple properties: one property was used as rent-free office accommodation, another was rented out, some were commercial properties, and one was an open plot. The AO considered municipal tax receipts, trade licenses, insurance schemes, and other documentary evidence to verify the nature of properties. The AO's acceptance of the exemption claim was after such verification and inquiry.

Application of Law to Facts: The Tribunal applied the legal principle that the AO must make inquiries where circumstances warrant and that failure to do so renders the order erroneous. However, since the AO had indeed made inquiries and considered evidence, the order was not erroneous. The Tribunal emphasized that the PCIT's jurisdiction under Section 263 cannot be invoked merely because the PCIT disagrees with the AO's view.

Treatment of Competing Arguments: The Revenue argued that the AO did not discuss or examine the nature of properties in the assessment order and merely accepted a list of properties without inquiry, thereby making the order erroneous and prejudicial. The Revenue also contended that the assessee failed to prove that certain properties were commercial in nature and not residential, which would disqualify the exemption.

The Tribunal rejected these contentions, holding that the AO had indeed made inquiries and considered the nature of properties as per the documents and affidavits submitted. The absence of detailed discussion in the assessment order itself was not sufficient to conclude lack of inquiry if the record showed otherwise.

Conclusions: The Tribunal concluded that the AO's order was neither erroneous nor prejudicial to the revenue on account of lack of inquiry. The PCIT's revision under Section 263 was therefore unjustified and was quashed.

Issue (ii): Whether the PCIT was empowered to revise the assessment order under Section 263 in the facts of the case

Relevant Legal Framework and Precedents: Section 263 permits revision of an assessment order if it is erroneous and prejudicial to the revenue. Explanation 2 clarifies that failure to make inquiries which ought to have been made renders the order erroneous. The Supreme Court in Malabar Industrial Co. Ltd. and other cases has held that both conditions-error and prejudice-must be satisfied for exercise of revisionary jurisdiction. The AO's order must be unsustainable in law or passed without application of mind.

Court's Interpretation and Reasoning: The Tribunal examined the scope of PCIT's power under Section 263 and emphasized that it is not a routine supervisory power but a limited jurisdiction to correct erroneous orders prejudicial to revenue. The Tribunal noted that the PCIT's power cannot be exercised merely because the PCIT disagrees with the AO's view or because the AO's order results in loss of revenue.

The Tribunal observed that the AO had applied his mind and made inquiries, and therefore the order was not erroneous. The PCIT's invocation of Section 263 on the ground of lack of inquiry was unsustainable. The Tribunal relied on the precedent that an order cannot be revised under Section 263 if it is based on a plausible view taken by the AO after due consideration of facts and documents.

Key Evidence and Findings: The Tribunal considered the notices issued by the AO, the replies submitted by the assessee, and the documents examined by the AO. The Tribunal found that the AO had sufficient material and had conducted the necessary investigation before granting exemption under Section 54F.

Application of Law to Facts: Applying the settled legal principles, the Tribunal concluded that the PCIT's order was not sustainable as the AO's order was not erroneous or prejudicial. The PCIT's jurisdiction under Section 263 was therefore not properly invoked.

Treatment of Competing Arguments: The Revenue's argument that the PCIT was justified in revising the assessment order due to absence of inquiry was rejected. The Tribunal held that mere absence of detailed discussion in the assessment order does not amount to failure of inquiry if the record shows otherwise. The Tribunal also rejected the contention that the PCIT's power was broader than the AO's and could be invoked on mere suspicion or disagreement.

Conclusions: The Tribunal held that the PCIT was not empowered to revise the assessment order under Section 263 in the present facts and circumstances, and the revisionary order was quashed.

3. SIGNIFICANT HOLDINGS

The Court upheld the Tribunal's findings and reasoning, affirming the following core principles and conclusions:

"The phrase 'prejudicial to the interests of the revenue' has to be read in conjunction with an erroneous order passed by the Assessing Officer. Every loss of revenue as a consequence of an order of Assessing Officer cannot be treated as prejudicial to the interests of the revenue, for example, when an Income-tax Officer adopted one of the courses permissible in law and it has resulted in loss of revenue; or where two views are possible and the Income-tax Officer has taken one view with which the Commissioner does not agree, it cannot be treated as an erroneous order prejudicial to the interests of the revenue unless the view taken by the Income-tax Officer is unsustainable in law."

"The Income-tax Officer is not only an adjudicator but also an investigator. He cannot remain passive in the face of a return which is apparently in order but calls for further inquiry. It is his duty to ascertain the truth of the facts stated in the return when the circumstances of the case are such as to provoke an inquiry. It is because it is incumbent on the Income-tax Officer to further investigate the facts stated in the return when circumstances would make such an inquiry prudent that the word 'erroneous' in section 263 includes the failure to make such an enquiry."

"A mere observation that no proper details have been obtained, cannot be sufficient to come to a conclusion that the Assessing Officer did not make proper and adequate inquiries which he ought to have made in the given facts and circumstances of this case."

"The order passed by the Assessing Officer is neither erroneous nor prejudicial to the interest of the Revenue for the reason of any lack of inquiry that the Assessing Officer ought to have made in the given facts and circumstances of the case."

"The findings of fact recorded by the Tribunal in the impugned order cannot be termed as perverse or contrary to the evidence on record."

Accordingly, the Court dismissed the Revenue's appeal, holding that no substantial question of law arises from the Tribunal's order and that the PCIT's revisionary order under Section 263 was not sustainable.