2025 (5) TMI 8 - AT - Income Tax

Revision u/s 263 based on the invalid reassessment order - as per CIT unsecured loan received from shell company by the assessee which was not examined by the AO during the course of reassessment proceedings u/s 147 - assessee filed return of income in response to notice u/s 148 which is beyond the period of time allowed as per notice issued by the AO u/s 148 as well as 142(1) - HELD THAT - The section 142 is enquiry before assessment 143 deals the assessment 147 is income escaping assessment and 148 is issue of notice where income has escaped assessment as per the Act. In case of income escaping assessment the notice u/s 143(2) can be issued by AO only if there is valid return filed by the assessee u/s 139 in pursuance of the notice issued u/s 148 of the Act . In the case on hand the asseseee has not filed valid return within the time allowed. Hence the arguments submitted by assessee in regard to issue of notice u/s 143(2) are rejected. Pr.CIT has to exercise his power on the basis record available before him at the time of exercising powers u/s 263 of the Act . However the documents as relied on by the ld. Pr. CIT were not available at the time of issue of notice and it was called from the DDIT Kolkata. The show cause notice was issued to the assessee on 26.03.2022 whereas the CIT wrote letter to the DDIT Unit- 3 Kolkata on 11.03.2024 almost after two years. Therefore the documents relied on by the ld. Pr.CIT were not available. The power under section 263 could have been invoked on the basis of the record as it stood at the time of examination. Accordingly the entire proceedings exercised by the ld. Pr.CIT is beyond the purview of law as mandated in the law . See Shri Manjunatheshwar Campho 1997 (12) TMI 4 - SUPREME COURT Thus we set aside the Order passed by ld. Pr.CIT. Issues which were not part of the proceedings under section 147 of the Act has also been considered by the Pr.CIT - Pr. CIT has exceeded his jurisdiction. since the very initiation of exercising power u/s 263 is on the basis of Order passed u/s 147 of the Act on the reassessment proceedings. On going through the reassessment Order passed u/s 147 there is only one issue raised on the basis of the reasons recorded is regarding accommodation entries received by the assessee from shelle company and the ld. Pr.CIT has also directed the AO to examine the sale tax penalty and employees contribution to PF and ESI is not correct because all these 2 issues were not part of the reassessment proceedings. Our this view is supported by the judgement of Hotel Babylon Continental (P.) Ltd. 2024 (7) TMI 402 - ITAT RAIPUR Appeal filed by the assessee is partly allowed.

Summary

Issues Presented and Considered

1. Whether the reassessment order passed by the Assessing Officer (AO) under sections 147/148 of the Income Tax Act, 1961 (the Act) is valid, given that the AO did not issue a notice under section 143(2) of the Act after the assessee filed a return in response to the section 148 notice.

2. Whether the AO erred in not examining and making inquiries regarding unsecured loans of Rs. 1,16,00,000/- received by the assessee from shell companies, which formed the basis for reopening the assessment.

3. Whether the AO was justified in not disallowing the sales tax penalty of Rs. 28,165/- under section 37 of the Act.

4. Whether the AO erred in not disallowing employees' contribution to Provident Fund (PF) and Employee State Insurance (ESI) of Rs. 8,159/- paid after the due date, which ought to have been disallowed under section 36(1)(va) of the Act.

5. Whether the Principal Commissioner of Income Tax (Pr.CIT) validly exercised jurisdiction under section 263 of the Act to revise the reassessment order, especially considering that the Pr.CIT relied on documents obtained after the reassessment order was passed.

6. Whether the Pr.CIT exceeded jurisdiction by directing the AO to examine issues (sales tax penalty and PF/ESI contributions) which were not part of the reassessment proceedings initiated under section 147/148 of the Act.

7. Whether the reassessment proceedings initiated on the basis of incriminating material found during search and seizure operations on other persons (Banka Group) are valid, or whether such proceedings should have been initiated under section 153C of the Act instead.

Issue-Wise Detailed Analysis

Issue 1: Validity of reassessment order without issuance of notice under section 143(2)

The legal framework mandates that after issuance of a notice under section 148 for reassessment, if the assessee files a return in response, the AO must issue a notice under section 143(2) to commence scrutiny proceedings. The AO issued the section 148 notice on 31.03.2021, allowing 30 days for filing the return. The assessee did not file the return within this time but filed it belatedly on 04.03.2022. The AO did not issue a notice under section 143(2) thereafter.

The assessee contended that the reassessment order is invalid as the mandatory notice under section 143(2) was not issued. The assessee relied on various judgments supporting this proposition.

The Revenue argued that since the return was filed beyond the statutory time limit, it is an invalid return under section 139 of the Act. Consequently, issuance of notice under section 143(2) is not mandatory. The AO's issuance of show cause notices under section 142(1) and proposal for ex-parte assessment under section 144 confirm that the return was not accepted as valid for scrutiny purposes.

The Tribunal referred to a coordinate bench decision which held that notice under section 143(2) is not required if the return is not filed within the time allowed under section 148 and 142(1). The Tribunal observed that section 147/148 does not mandate issuance of notice under section 143(2), unlike section 158BD. The Tribunal also noted that the jurisdictional High Court had not ruled otherwise, and thus, the assessee's argument was rejected.

Issue 2: Examination of unsecured loans from shell companies

The reassessment was initiated based on information from the Investigation Wing, Kolkata, that the assessee received accommodation entries in the form of unsecured loans amounting to Rs. 1,16,00,000/- from shell companies linked to Banka Group. Statements recorded under sections 131 and 132(4) of the Act from Mukesh Banka, a key person in the Banka Group, confirmed that these companies were incorporated to provide accommodation entries for commission.

The AO, however, completed the reassessment without making any inquiry into these unsecured loans, despite the reopening being premised on this information. The Pr.CIT held that this omission amounted to an error prejudicial to the interest of revenue under explanation 2(a) to section 263 of the Act.

The assessee denied receipt of such loans and argued that the AO had conducted necessary inquiries and that the Pr.CIT's reliance on information obtained after the reassessment order was improper. The Tribunal noted that the Pr.CIT had called for additional information from the Investigation Wing during the pendency of section 263 proceedings, which was not available to the AO at the time of reassessment.

The Tribunal, following the Supreme Court ruling in CIT vs. Shri Manjunatheshwar Camphor, held that the Pr.CIT is entitled to consider records available at the time of revision, even if they came into possession after the assessment order, provided an inquiry is made. Hence, the Pr.CIT's exercise of jurisdiction was valid in this respect.

Issue 3: Disallowance of sales tax penalty under section 37

The Pr.CIT noted that the AO failed to disallow a sales tax penalty of Rs. 28,165/- which is not allowable as a business expenditure under section 37 of the Act. The reassessment order did not address this issue.

The assessee contended that this issue was not part of the reassessment proceedings and could not be directed by the Pr.CIT under section 263. The Tribunal agreed with the assessee, citing a coordinate bench decision which held that the Pr.CIT's jurisdiction under section 263 is limited to the issues involved in the original assessment or reassessment proceedings. Therefore, the Pr.CIT exceeded jurisdiction by directing the AO to disallow the sales tax penalty.

Issue 4: Disallowance of employees' contribution to PF and ESI under section 36(1)(va)

Similar to the sales tax penalty, the Pr.CIT directed the AO to disallow employees' contribution to PF and ESI of Rs. 8,159/- paid after the due date under section 36(1)(va) of the Act, which the AO had not done.

The assessee argued that this was beyond the scope of reassessment and the Pr.CIT's directions were not justified. The Tribunal concurred with the assessee's submissions, holding that the Pr.CIT cannot expand the scope of reassessment under section 263 to unrelated issues not part of the reassessment order.

Issue 5: Validity of section 263 revision proceedings based on records not available at reassessment

The Pr.CIT issued the show cause notice under section 263 on 27.02.2024, nearly two years after the reassessment order dated 30.03.2022. The Pr.CIT sought and obtained additional information from DDIT (Investigation), Kolkata, which was not available to the AO at the time of reassessment.

The assessee contended that the Pr.CIT's jurisdiction under section 263 is limited to the record available at the time of the assessment order and that reliance on subsequently obtained documents was impermissible. The Tribunal examined the relevant statutory provision and Supreme Court precedent in CIT vs. Shri Manjunatheshwar Camphor, which clarified that the term "record" under section 263 is comprehensive and includes all material relevant to the assessment, even if received after the assessment order, provided the Pr.CIT makes or causes to be made an inquiry.

Accordingly, the Tribunal held that the Pr.CIT was entitled to consider the additional material obtained during the revision proceedings and that the exercise of jurisdiction was valid.

Issue 6: Whether Pr.CIT exceeded jurisdiction by directing AO to examine issues beyond reassessment scope

The reassessment was initiated solely on the issue of unsecured loans from shell companies. The Pr.CIT, however, directed the AO also to disallow sales tax penalty and employees' contribution to PF/ESI, which were not part of the reassessment issues.

The Tribunal held that such directions amounted to exceeding jurisdiction under section 263. The Pr.CIT's power to revise is confined to the order under challenge and cannot be used to expand the scope of reassessment to unrelated issues. This view was supported by a coordinate bench decision.

Issue 7: Validity of reassessment based on incriminating material found during search in other cases

The assessee argued that since the incriminating material relating to shell companies was found during search and seizure operations on other persons (Banka Group), reassessment proceedings should have been initiated under section 153C of the Act, not under section 147/148. The reassessment under section 147/148 on such material is invalid.

The Tribunal did not expressly rule on this issue in the judgment but noted the contention. The Pr.CIT and Revenue did not dispute the reassessment initiation under section 147/148. The Tribunal's decision to set aside the Pr.CIT's order and remit for fresh assessment indicates that the reassessment itself remains valid but requires proper inquiry.

Significant Holdings

"The revisional power conferred on the Commissioner under section 263 is of wide amplitude. It enables the Commissioner to call for and examine the record of any proceeding under the Act. It empowers the Commissioner to make or cause to be made such enquiry as he deems necessary in order to find out if any order passed by the Assessing Officer is erroneous insofar as it is prejudicial to the interests of the revenue."

"The expression 'record' as used in section 263 is comprehensive enough to include the whole record of evidence on which the original assessment order was passed. Where any proceeding is initiated in the course of the assessment having a relevant and material bearing on the assessment to be made and the result of such proceeding was not available with the ITO before completion of the assessment, but the result came subsequently, the revising authority is entitled to look into such material as it forms part of the assessment records of the particular assessment year."

"The notice under section 143(2) of the Act can be issued only if the return has been filed by the assessee as per section 139 of the Act or in response to notice under section 142(1) of the Act within the time allowed. Since the assessee did not file a valid return within the time allowed under section 148 and 142(1), the AO was not required to issue notice under section 143(2)."

"The Pr.CIT's jurisdiction under section 263 is limited to the issues involved in the original assessment or reassessment order. Directions to examine issues not part of the reassessment proceedings amount to exceeding jurisdiction."

"The reassessment order passed by the AO without making any inquiry regarding the unsecured loans from shell companies, which was the sole basis for reopening, is erroneous and prejudicial to the interest of revenue."

Final Determinations

- The reassessment order under section 147/148 is valid despite the absence of notice under section 143(2), since the return filed was not within the prescribed time and thus invalid.

- The AO erred in not examining the unsecured loans received from shell companies; this omission rendered the reassessment order erroneous and prejudicial to revenue.

- The Pr.CIT validly exercised revisionary jurisdiction under section 263 by considering additional material obtained during revision proceedings, consistent with Supreme Court precedent.

- The Pr.CIT exceeded jurisdiction by directing the AO to examine and disallow sales tax penalty and PF/ESI contributions, which were not part of the reassessment issues.

- The reassessment order was set aside and the matter remitted for fresh assessment in accordance with the directions of the Pr.CIT, excluding issues beyond the reassessment scope.