2025 (6) TMI 1643 - AT - Income Tax

Revision u/s 263 - Validity of assessment and reassessment proceedings u/s 153A - no or inadequate enquiries - computation of total income claiming interest u/s 24B - HELD THAT - Order impugned invoking Explanation 2 by the Ld. PCIT is found to have no manner of application having regard to all relevant documents being filed by the Ld. AO during reassessment proceedings under Section 153A by the assessee and on verification whereof the assessment was finalized allowing the claim of interest under Section 24B of the Act. We note that apart from that in fact this particular aspect of the matter of income from house as declared by the assessee has duly been taken care by the AO in A.Y. 2012-13 which is evident from the order passed by AO being the DCIT Circle 25(1) New Delhi dated 5.3.2015 u/s143(3) of the Act a copy whereof has already been filed before us. Needless to mention that it is the continuing cause of action and once the interest has been allowed by the AO initially in A.Y. 2012-13 the same cannot be disturbed subsequently without finding of any different fact which has already been narrated by us hereinbefore against the assessee. Thus taking into consideration the entire aspect of the matter we find that the order impugned is nothing but the non application of mind having regard to the order passed by the Ld. AO in the reassessment proceedings under Section 153A of the Act accepting the claim of interest income under Section 24B of the Act upon examination of the issue after verification of the details filed by the Assessee AR submitted before us that under the present facts and circumstances of the matter it cannot be said that no inquiries what-so-ever have been conducted by the AO with respect to the claims under consideration as relied upon the judgment of Clix Finance India (P) Ltd. 2024 (3) TMI 157 - DELHI HIGH COURT It was also mentioned by him that the plausible view having been taken by the AO in the assessment order the same cannot be held to be prejudicial to the interests of Revenue. In support of his contention Ld. AR relied upon the decision of Sunbeam Auto Pvt. Ltd. 2009 (9) TMI 633 - DELHI HIGH COURT which has been duly considered by us and found to be applicable in the case in hand having regard to the facts and circumstances of the case. Thus when the claims of the assessee have been duly examined during original assessment proceedings and also the reassessment proceedings under Section 153A of the Act itself there could have been no error neither the same is found to be prejudicial to the interest of Revenue as observed by the Ld. PCIT in the order impugned before us. The order passed under Section 263 of the Act is therefore found to have no legs to stand and thus quashed. Assessee s appeal stands allowed accordingly.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered by the Tribunal in these appeals under Section 263 of the Income Tax Act, 1961 ("the Act") are:

• Whether the initiation of revisionary proceedings under Section 263 was legally valid, given the nature of the original assessment order;
• Whether the original assessment order was erroneous or prejudicial to the interests of the revenue as per Explanation 2 to Section 263 of the Act;
• Whether the Assessing Officer (AO) conducted necessary inquiries and verifications during the original assessment proceedings;
• Whether the revisionary order under Section 263 amounted to an impermissible change of opinion;
• Whether the revisionary proceedings were initiated without providing reasonable opportunity of hearing, thus violating principles of natural justice;
• Whether the directions for fresh assessment should be restricted only to issues indicated in the revisionary order;
• Whether the original assessment order was passed after due application of mind and concurrent discussions among senior tax authorities;
• Whether the claim of interest deduction under Section 24(b) of the Act was correctly allowed by the AO, considering the use of loan funds and acquisition of property;
• Whether the procedural aspects of the original assessment order, including issuance of notices and approval under relevant sections, were complied with.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Validity of initiation of revisionary proceedings under Section 263

Legal framework and precedents: Section 263 empowers the Commissioner to revise an assessment order if it is found to be erroneous and prejudicial to the interests of the revenue. The Supreme Court in Malabar Industrial Co. Ltd. vs. CIT (2000) clarified that both conditions-error and prejudice-must be satisfied. The revisionary power cannot be exercised merely to correct every mistake or for a change of opinion.

Court's interpretation and reasoning: The Tribunal examined whether the original assessment order was erroneous or prejudicial. It noted that the AO had conducted detailed inquiries, including issuing notices under Section 142(1), and had considered documentary evidence submitted by the assessee regarding the interest claimed under Section 24(b). The Tribunal held that since the AO had applied his mind and examined relevant documents, the revisionary proceedings under Section 263 were not justified.

Key evidence and findings: The assessee had submitted loan sanction letters, lease deeds, bank statements, and interest certificates, all of which were considered by the AO. The Tribunal found no new or additional material to justify the revision.

Application of law to facts: The Tribunal applied the principle that Section 263 cannot be invoked for mere change of opinion and found that the AO's order was neither erroneous nor prejudicial to revenue.

Treatment of competing arguments: The Department argued that the AO failed to verify genuineness of claims and that the order was erroneous. The assessee contended that all relevant inquiries were made and documents were submitted. The Tribunal sided with the assessee, emphasizing the comprehensive nature of the AO's inquiries.

Conclusion: The initiation of revisionary proceedings was held to be legally unsustainable.

Issue 2: Whether the original assessment order was erroneous or prejudicial to revenue under Explanation 2 to Section 263

Legal framework: Explanation 2 to Section 263 specifies conditions under which an order is considered erroneous and prejudicial, including failure to make inquiries or verification that should have been made.

Analysis: The Tribunal scrutinized the AO's assessment and found that the AO had raised specific queries about the interest deduction and the loan, and the assessee had responded with detailed evidence. The Tribunal noted that the AO had allowed the interest deduction after due examination.

Conclusion: The Tribunal concluded that the conditions under Explanation 2 were not met, as proper inquiries and verifications had been conducted.

Issue 3: Whether the revisionary order under Section 263 amounted to impermissible change of opinion

Legal framework and precedent: The Supreme Court in Malabar Industrial Co. Ltd. held that Section 263 cannot be invoked for mere change of opinion.

Application: The Tribunal found that the PCIT's order under Section 263 was based on disagreement with the AO's view, without any new material or adverse findings. This amounted to a change of opinion, which is impermissible.

Conclusion: The revisionary order was a classic example of change of opinion and therefore invalid.

Issue 4: Whether reasonable opportunity of hearing was provided

Facts: The assessee contended that the show cause notice dated 20.03.2024 allowed only three days to respond, including a Sunday and a festival day, thus violating principles of natural justice.

Analysis: The Tribunal acknowledged the limited time for compliance and the importance of audi alteram partem principle. However, the Tribunal's main reasoning focused on merits of the case and did not find the procedural lapse sufficient to uphold the revisionary order.

Conclusion: The limited opportunity was a procedural defect but the substantive order was quashed on merits.

Issue 5: Whether the directions for fresh assessment should be restricted to issues indicated in the revisionary order

Analysis: The Tribunal noted that if revisionary proceedings are valid, the scope of fresh assessment should be limited to issues specified in the revisionary order. However, since the revisionary order itself was quashed, this issue became moot.

Issue 6: Whether the original assessment was passed after collective application of mind and concurrent discussions

Facts: The assessee submitted that the assessment was finalized after discussions among various senior officers, including the AO, Additional Commissioner, Commissioner, and DGIT.

Analysis: The Tribunal accepted that such concurrent discussions and approvals were part of the assessment process, supporting the conclusion that the AO's order was well-considered and not erroneous.

Issue 7: Whether the claim of interest deduction under Section 24(b) was correctly allowed

Legal framework: Section 24(b) allows deduction of interest on borrowed capital used for acquisition of property.

Facts and evidence: The assessee had claimed interest of Rs. 3.88 crores on loans taken for purchase of commercial property in Bangalore. The loan was sanctioned by State Bank of India and later refinanced by Standard Chartered Bank. The property was leased to a reputed company. The AO had allowed the deduction after verifying loan sanction letters, lease deed, bank statements, and interest certificates.

Department's argument: The PCIT argued that the loan was not used for purchase of property during the relevant year and no details of loan were submitted.

Tribunal's reasoning: The Tribunal found that the property was acquired in 2008-09, prior to the year under consideration, and that the loan was sanctioned specifically for purchase of the property. The assessee had submitted all relevant documents during assessment proceedings. The Tribunal also noted that the requirement to disclose assets and liabilities in the return was introduced only from A.Y. 2016-17, thus the claim that the assessee failed to disclose assets for earlier years was unfounded.

Conclusion: The interest deduction claim was valid and correctly allowed by the AO. The revisionary order disallowing it was unsustainable.

Issue 8: Procedural compliance in passing the original assessment order

Contentions: The assessee contended that the original assessment order was incomplete, time-barred, passed without mandatory notices under Section 143(2), and without proper approval under Section 153D. It was also argued that the officer passing the order was not authorized under Section 120.

Tribunal's observation: These contentions were raised before the Tribunal but the primary focus was on the merit of the Section 263 revision. The Tribunal did not find sufficient material to uphold the revisionary proceedings on procedural grounds, especially since the original assessment was under challenge before the ITAT.

3. SIGNIFICANT HOLDINGS

The Tribunal's key legal conclusions include:

"A bare reading of section 263(1) makes it clear that the pre-requisite to exercise of Jurisdiction by the Commissioner suo motu under it, is that the order of the ITO is erroneous insofar as it is prejudicial to the interests of the revenue. The Commissioner has to be satisfied of twin conditions, namely, (1) the order of the Assessing Officer sought to be revised is erroneous; and (II) It is prejudicial to the interests of the revenue. If one of them is absent... recourse cannot be had to section 263(1)."

"Every loss of revenue as a consequence of an order of the Assessing Officer cannot be treated as prejudicial to the interests of the revenue... where two views are possible and the ITO 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 ITO is unsustainable in law."

"The order impugned is nothing but the non application of mind having regard to the order passed by the Ld. AO in the reassessment proceedings under Section 153A of the Act accepting the claim of interest income under Section 24B of the Act upon examination of the issue after verification of the details filed by the Assessee."

Core principles established:

• Section 263 can only be invoked if the original order is both erroneous and prejudicial to revenue;
• Change of opinion by the Commissioner is not a valid ground for revision under Section 263;
• The AO's detailed inquiries and acceptance of evidence preclude a finding of error or prejudice;
• Procedural lapses such as limited time for reply to show cause notice do not validate revisionary proceedings if the substantive order is sound;
• Claims allowed in earlier years and supported by documents cannot be disturbed without new adverse findings;
• Requirement to disclose assets and liabilities in returns is governed by statutory amendments and cannot be retrospectively imposed.

Final determinations on each issue:

• The initiation of revisionary proceedings under Section 263 was held to be invalid;
• The original assessment order was neither erroneous nor prejudicial to revenue;
• The claim of interest deduction under Section 24(b) was correctly allowed;
• The revisionary order was quashed as a mere change of opinion;
• The assessee was not denied reasonable opportunity in a manner that would validate the revision;
• The directions for fresh assessment were unwarranted;
• Procedural objections raised by the assessee did not justify sustaining the revisionary order;
• All appeals arising from similar facts were allowed following the lead case decision.