2025 (5) TMI 1717 - HC - Income Tax

Revision u/s 263 - genuineness of the transactions pertaining to the sundry creditors was not verified by the AO - HELD THAT - AO had passed an order without verification or enquiries; the DCIT had on verification of one of the entries had found the first entry out of the 70 entries of sundry creditors to be bogus and had therefore sent the recommendation to PCIT. AO s order would naturally not have referred to any bogus entry as the AO had not bothered to find out or verify as to whether the entries were bogus or not. That is precisely the premise on which the DCIT had opined that the assessment order was erroneous and had proposed action u/s 263. In such circumstances for the ITAT to hold that the AO s order did not find mention of bogus entry was clearly without application of mind since that was exactly the ground that he had not verified the entries which laid the edifice of passing of order u/s 263. Had the AO conducted enquiries or verified the sundry creditors there may not have been an occasion to exercise jurisdiction u/s 263 of the Act. PCIT in our view rightly held that the assessment order was erroneous since the same was passed without making any inquiries qua and verification of the transactions pertaining to the sundry creditors. The said observations of the PCIT were premised on the fact that when only one entry out of the 70 entries in the list of sundry creditors had been checked and verified from the records available with the DCIT the same was found to be bogus. Therefore by setting aside the assessment order the PCIT acted within the scope of its revisional jurisdiction ensuring that the deficiencies in the assessment process are rectified in accordance with the law. Decided in favour of revenue. Whether the PCIT could direct the AO u/s 263 to examine the genuineness of the transactions on account of sundry creditors and conduct proper enquiries and investigation in this regard? - Scope of Time limit for completion of assessment reassessment and recomputation - The time limit stipulated in sub-sections (1) and (2) of Section 153 of the Act do not apply to any assessment reassessment or recomputation which is made inter alia to give effect to any finding or direction contained in an order passed under Section 263 as in the present case. Question No. 2 is thus answered in favour of the Revenue and against the assessee.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered by the Court are:

A. Whether the Income Tax Appellate Tribunal (ITAT) erred in law by holding that the assessment order passed by the Assessing Officer (AO) was not erroneous and that the exercise of revisionary power under Section 263 of the Income Tax Act, 1961 (the Act) by the Principal Commissioner of Income Tax (PCIT) was unjustified, despite the AO having passed the assessment order without making necessary inquiries or verification which should have been made in the facts and circumstances of the case.

B. Whether the ITAT erred in law in holding that the power under Section 263 of the Act cannot be extended to direct the AO to verify the genuineness of transactions if, in the opinion of the PCIT, the non-verification of such genuineness is erroneous and prejudicial to the interests of the Revenue.

2. ISSUE-WISE DETAILED ANALYSIS

Issue A: Whether the AO's assessment order was erroneous and prejudicial due to lack of inquiry or verification, justifying revision under Section 263 of the Act

Relevant Legal Framework and Precedents: Section 263(1) of the Act empowers the PCIT to revise an order passed by the AO if it is "erroneous in so far as it is prejudicial to the interests of the Revenue." Explanation 2(a) clarifies that an order is deemed erroneous if it is passed without making inquiries or verification which should have been made. The twin conditions of "erroneous" and "prejudicial" are cumulative and must both be satisfied for jurisdiction to be invoked. Judicial precedents elucidate the scope of "erroneous" orders: an order is erroneous if based on incorrect facts, incorrect application of law, lack of application of mind, or failure to conduct necessary inquiries.

Key precedents include:

• Malabar Industrial Co. Ltd v. CIT: An order is erroneous if passed without supporting material or inquiry.
• Gee Vee Enterprise v. Additional Commissioner of Income Tax: The AO must investigate facts when circumstances warrant; failure to do so renders the order erroneous.
• Commissioner of Income-tax v. Toyota Motor Corporation: An order that is cryptic and unsupported by reasons cannot be sustained; the Tribunal cannot substitute its own reasoning for that of the AO.
• Commissioner of Income Tax v. Sunbeam Auto Ltd.: Distinction between "lack of inquiry" (which justifies revision) and "inadequate inquiry" (which does not).
• Pr. Commissioner of Income Tax-II v. Shri Braham Dev Gupta: Failure to verify creditors' particulars and PAN details justifies revision under Section 263.

Court's Interpretation and Reasoning: The Court examined the facts that the assessee's case was selected for scrutiny, but the assessee delayed cooperation, submitting the list of sundry creditors amounting to over Rs. 51 crores only three days before the assessment's limitation period expired. The list lacked essential details such as PAN numbers and addresses, impeding verification.

The AO's assessment order was silent on any verification or inquiry into the sundry creditors. The Deputy Commissioner of Income Tax (DCIT) independently verified one creditor-EGIS Infra-for Rs. 4.65 crores and found no corresponding entry in EGIS Infra's books, concluding it was bogus. This raised suspicion about the entire sundry creditors list.

The PCIT, exercising revisionary powers under Section 263, held the AO's order erroneous and prejudicial due to lack of verification and directed fresh assessment after proper inquiry.

The ITAT, however, held that the AO disallowed 20% of expenses under Section 37 of the Act based on statistical analysis, which was one of two possible approaches (disallow expenditure or add creditors as unsubstantiated income). The ITAT reasoned that the AO's order was not erroneous as it reflected a reasoned choice and that the AO could have conducted further inquiries but chose not to. It further held that invoking Section 263 to extend time for inquiries would contravene statutory timelines.

The Court disagreed with the ITAT, emphasizing that the AO's order was cryptic and devoid of any inquiry or verification regarding sundry creditors. The Court held that the ITAT impermissibly supplied reasons absent in the AO's order, which is contrary to the principle established in Toyota Motor Corporation. The Court also noted that the DCIT's finding of a bogus creditor was the basis for the PCIT's action and that the AO's failure to verify was a clear omission, rendering the order erroneous and prejudicial.

Key Evidence and Findings: The DCIT's verification of one creditor as bogus and the absence of inquiry by the AO into the sundry creditors list were pivotal. The assessee's delayed and incomplete submission of creditor details further compounded the issue.

Application of Law to Facts: The Court applied the legal principles that an order passed without necessary inquiries is erroneous and prejudicial to Revenue. The AO's failure to verify sundry creditors, despite their substantial amount, constituted lack of inquiry, justifying revision under Section 263.

Treatment of Competing Arguments: The Court rejected the ITAT's rationale that disallowance of 20% expenses sufficed as a reasoned order, holding that the AO's silence on verification cannot be supplemented by the Tribunal's reasoning. The Court also rejected the assessee's argument that no bogus creditor was found by the AO, clarifying that the DCIT's finding formed the basis for PCIT's action.

Conclusion: The Court held that the AO's order was erroneous and prejudicial to the interests of Revenue due to failure to verify sundry creditors, justifying exercise of revisionary powers under Section 263.

Issue B: Whether the PCIT can direct the AO to verify genuineness of transactions under Section 263, even if the assessment order's limitation period has expired

Relevant Legal Framework and Precedents: Section 263(1) allows the PCIT to pass such order as circumstances justify, including cancelling the assessment and directing a fresh assessment. Section 153(6)(i) excludes assessments made to give effect to orders under Section 263 from the limitation period under Section 153(1) and (2), allowing fresh assessments within twelve months of receipt of the revision order.

Court's Interpretation and Reasoning: The ITAT held that granting further time to the AO to verify transactions under Section 263 would amount to impermissible extension of the limitation period under Section 153(1) and (2). The Court rejected this view, noting that the limitation under Section 153 does not apply to assessments made consequent to orders under Section 263, as per Section 153(6)(i).

The Court further observed that the assessee's delay in submitting incomplete creditor details three days before the limitation expiry contributed to the AO's inability to verify. The PCIT's direction to the AO to conduct inquiries and frame a fresh assessment was held to be within the scope of Section 263.

Key Evidence and Findings: The assessee's delayed and incomplete submissions, the PCIT's order under Section 263 directing fresh assessment, and the statutory provisions governing limitation were central.

Application of Law to Facts: The Court applied the statutory language of Sections 263 and 153 to conclude that the PCIT is empowered to direct the AO to verify transactions and conduct fresh assessment beyond the original limitation period, pursuant to a valid revision order.

Treatment of Competing Arguments: The Court rejected the assessee's argument that the PCIT's direction amounted to impermissible extension of time, clarifying that the law explicitly permits such assessments post-Section 263 orders.

Conclusion: The Court held that the PCIT was within jurisdiction to direct the AO to verify the genuineness of transactions and conduct fresh assessment, notwithstanding the expiry of the original limitation period.

3. SIGNIFICANT HOLDINGS

"263. Revision of orders prejudicial to revenue.

(1) The Principal Chief Commissioner or Chief Commissioner or Principal Commissioner or Commissioner may call for and examine the record of any proceeding under this Act, and if he considers that any order passed therein by the Assessing Officer ... is erroneous in so far as it is prejudicial to the interests of the revenue, he may, after giving the assessee an opportunity of being heard and after making or causing to be made such inquiry as he deems necessary, pass such order thereon as the circumstances of the case justify, including-

(i) an order enhancing or modifying the assessment or cancelling the assessment and directing a fresh assessment;

Explanation 2.- For the purposes of this section, it is hereby declared that an order passed by the Assessing Officer ... shall be deemed to be erroneous in so far as it is prejudicial to the interests of the revenue, if, in the opinion of the Principal Chief Commissioner ... -

(a) the order is passed without making inquiries or verification which should have been made;

(b) the order is passed allowing any relief without inquiring into the claim;

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"The position and function of the Income-tax Officer is very different from that of a civil court. 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. The meaning to be given to the word "erroneous" in section 263 emerges out of this context. 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 inquiry. The order becomes erroneous because such an inquiry has not been made and not because there is anything wrong with the order if all the facts stated therein are assumed to be correct." (Gee Vee Enterprise)

"It is also necessary for the parties to know the reasons that have weighed with the Adjudicating Authority in coming to a conclusion. The order passed by the Assessing Officer should be a self-contained order giving the relevant facts and reasons for coming to the conclusion based on those facts and law." (Toyota Motor Corporation)

"If there was any inquiry, even inadequate that would not by itself give occasion to the Commissioner to pass orders under section 263 of the Act, merely because he has a different opinion in the matter. It is only in cases of "lack of inquiry" that such a course of action would be open." (Sunbeam Auto Ltd.)

"Clearly, the orders of the ITAT cannot be sustained. They are set aside." (Braham Dev Gupta)

"Nothing contained in sub-sections (1) and (2) shall apply to the following classes of assessments ... which may ... be completed-

(i) where the assessment ... is made ... to give effect to any finding or direction contained in an order under section 263 ... on or before the expiry of twelve months from the end of the month in which such order is received or passed by the Principal Commissioner or Commissioner, as the case may be." (Section 153(6)(i))

Final Determinations:

• The AO's assessment order was erroneous and prejudicial to the interests of Revenue as it was passed without making necessary inquiries or verification of sundry creditors amounting to over Rs. 51 crores.
• The PCIT was justified in exercising revisionary powers under Section 263 of the Act to set aside the assessment order and direct the AO to conduct proper inquiries and frame a fresh assessment.
• The ITAT erred in substituting its own reasoning for the AO's silent assessment order and in holding that the PCIT could not direct fresh verification under Section 263.
• The PCIT's direction to the AO to verify genuineness of transactions and conduct fresh assessment is within the scope of Section 263 and does not violate limitation provisions under Section 153(6)(i) of the Act.