2025 (6) TMI 1837 - HC - Income Tax

Revision u/s 263 - exemption of Long Term Capital Gain LTCG u/s 10(38) - PCIT has categorically observed that the AO has failed to conduct the investigation and inquiry on the basis of the report received from Directorate of Investigation Kolkatta wherein it is disclosed that M/s. Suchak Trading Limited is a penny stock company - Tribunal held that it is a case of inadequate enquiry without even pointing out what further enquiry could have been conducted HELD THAT - Tribunal has rightly come to the conclusion that PCIT was justified in setting aside the assessment order directing the AO to conduct further inquiries or verification which ought to have been condoned for the purpose of computation of the income of the assessee as the assessment order is found to be erroneous as per the provision of Explanation 2(a) to section 263 to that extent and also prejudicial to the interest of the Revenue in absence of the inquiry which should have been made by the AO. Therefore the contention raised on behalf of the appellant-assessee that there are two views are available is also not tenable. Contention raised on behalf of the appellant assessee that there is breach of principles of natural justice as the documents which were relied upon by the PCIT for initiation of the revisional proceedings were not supplied is also without any basis as the PCIT has only relied upon the documents which are available on record at the time of assessment proceedings only and by invoking Explanation 2(a) to section 263 it was held that the assessment order is erroneous and prejudicial to the interest of the Revenue in absence of inquiry which ought to have been conducted by the AO. Therefore the case law relied upon by the learned advocate of the appellant is not applicable in the facts of the case as admittedly the assessing officer has not carried out inquiry which he should have made as appellant assessee has availed exemption of LTCG on transactions of sale of shares of penny stock company. Therefore in view of concurrent findings arrived at by the PCIT and the Tribunal and in the facts of the case when the AO has failed to conduct inquiry which should have been made by him the PCIT was justified in invoking as per Explanation 2(a) to section 263 to hold that the assessment order would be erroneous and prejudicial to the interest of revenue.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered by the Court arising from the appeal under section 260A of the Income Tax Act, 1961, are as follows:

A. Whether revision proceedings initiated under section 263 of the Act on the basis of the Assessing Officer's proposal, without independent examination of records by the Principal Commissioner of Income Tax (PCIT), are invalid in law.

B. Whether the Tribunal erred in upholding the revision on the ground of inadequate inquiry without specifying what further inquiry should have been conducted by the Assessing Officer.

C. Whether revision proceedings under section 263 on the ground of inadequate inquiry are legally sustainable.

D. Whether revision proceedings initiated on an incorrect factual foundation are maintainable.

E. Whether the mere possibility of different views on the same material renders the assessment order erroneous for invoking revision under section 263.

F. Whether an order under section 263 directing the Assessing Officer to conduct inquiries, instead of the Commissioner conducting them himself, is legally valid.

G. Whether the revision order under section 263 is vitiated by breach of principles of natural justice where documents forming the basis of revision were not provided to the assessee.

2. ISSUE-WISE DETAILED ANALYSIS

Issue A: Validity of revision proceedings initiated solely on AO's proposal without independent application of mind by PCIT

Legal framework and precedents: Section 263 empowers the PCIT to revise an assessment if it is erroneous and prejudicial to the interests of revenue. The PCIT must apply independent mind and not merely act on the AO's proposal. The decision in PCIT vs. Reeta Lakhmani held that initiation of revision based solely on AO's proposal without PCIT's independent application of mind is impermissible.

Court's interpretation and reasoning: The Court examined the PCIT's order and found that the PCIT did not merely act on the AO's proposal but conducted an independent inquiry based on the material on record, including the investigation report from the Directorate of Investigation, Kolkata. The PCIT recorded reasons for assuming jurisdiction and concluded that the AO had failed to conduct necessary inquiries.

Application of law to facts: The Court rejected the appellant's contention that the revision was initiated without PCIT's independent application of mind. The PCIT's order clearly demonstrated an independent examination of the facts and reasons for invoking section 263.

Conclusion: Revision proceedings initiated under section 263 on the basis of AO's proposal but accompanied by independent application of mind by PCIT are valid.

Issue B: Whether the Tribunal erred in upholding revision without specifying what further inquiry was required

Legal framework: Explanation 2(a) to section 263 states that revision can be invoked if the AO failed to make inquiries or verification which should have been made. The Commissioner is expected to indicate what inquiry was lacking.

Court's reasoning: The Court held that it is ultimately the AO's responsibility to conduct inquiries to ascertain the true nature of transactions. The PCIT was not required to enumerate the precise inquiries to be conducted but only to find that the AO did not conduct the inquiries which ought to have been made.

Key findings: The AO issued summons to five buyers but did not pursue further inquiries despite the investigation report indicating manipulation of penny stock transactions. The AO accepted superficial documents without deeper scrutiny.

Treatment of competing arguments: The appellant relied on the decision in Commissioner of Income Tax vs. Hero Auto Ltd., which held that the Commissioner must specify the inquiry lacking. The Court distinguished that case on facts, noting that here the AO failed to conduct any meaningful inquiry despite clear indications from investigation reports.

Conclusion: The Tribunal rightly upheld the revision without specifying further inquiry details, as the AO's failure to conduct any adequate inquiry was evident.

Issue C: Legality of revision proceedings on ground of inadequate inquiry

Legal framework and precedents: Explanation 2(a) to section 263 permits revision if the AO failed to make inquiries or verification which should have been made. The Kolkata Tribunal in Subhalakshmi Vanijya Pvt. Ltd. vs. CIT held that highly inadequate inquiry amounts to no inquiry, rendering the assessment order erroneous and prejudicial.

Court's interpretation: The Court found that the AO did not conduct a detailed investigation to uncover the true nature of transactions involving penny stock shares, despite the investigation report exposing a scheme to channel unaccounted money under the guise of LTCG.

Application to facts: The AO relied on superficial documents such as balance sheets and bank statements without probing the suspicious price rise or the modus operandi revealed by the investigation. Summons issued to buyers were not followed up effectively.

Conclusion: Revision on the ground of inadequate inquiry is legally sustainable as the AO failed to conduct the inquiries he should have.

Issue D: Maintainability of revision proceedings initiated on factually incorrect foundation

Arguments and findings: The appellant contended that the revision was based on incorrect facts, such as the assertion that the appellant held shares only in the penny stock company, while broker statements showed holdings in other companies.

Court's reasoning: The Court observed that the PCIT relied only on documents available on record at the time of assessment and the investigation report. The core issue was the failure of the AO to conduct inquiry into suspicious transactions. Minor factual differences did not vitiate the revision.

Conclusion: The revision proceedings were maintainable despite the appellant's contentions of factual inaccuracies.

Issue E: Whether possibility of different views precludes revision under section 263

Legal principles: It is well-established that mere possibility of different views on the same material does not render an assessment order erroneous under section 263. The Commissioner's power is limited to cases where the order is erroneous and prejudicial to revenue.

Application: The Court found that the AO's order was not a mere alternative view but was based on inadequate inquiry ignoring the investigation report. Hence, the revision was justified.

Conclusion: The presence of alternative views did not preclude revision in this case.

Issue F: Validity of order directing AO to conduct inquiries instead of PCIT conducting them

Legal framework and precedents: The Commissioner under section 263 can set aside an order and direct the AO to make fresh assessment after proper inquiry. Decisions in Director of Income Tax vs. Jyoti Foundation and ITO vs. DG Housing Projects Ltd. support this practice.

Court's reasoning: The Court upheld the PCIT's direction to the AO to conduct further inquiries, as it is the AO's duty to investigate and assess facts. The PCIT's role is supervisory and revisional.

Conclusion: The order directing AO to conduct inquiries is valid and not bad in law.

Issue G: Alleged breach of natural justice due to non-provision of documents relied upon for revision

Arguments: The appellant contended that documents forming the basis of revision were not supplied, violating principles of natural justice.

Court's findings: The PCIT relied only on documents already available on record during assessment proceedings. No new documents were introduced. Hence, there was no breach of natural justice.

Conclusion: No violation of natural justice occurred.

3. SIGNIFICANT HOLDINGS

The Court made the following crucial legal determinations:

"Clause (a) of the Explanation 2 to section 263 empowers PCIT to invoke section 263. Clause (a) talks about the inquiry or investigation having not been made by the A.O., which 'should have been made'. The phrase 'should have been done' as provided in this clause means the verification/ enquiry which ought to have been done."

"Unless all fruitful areas of enquiry are pursued, the enquiry cannot be said to have been faithfully conducted. Failure to conduct adequate inquiry by the AO has resulted in drawing incorrect assumption of facts. This has rendered the order passed u/s 143(3) of the Act erroneous and prejudicial to the interests of the revenue."

"The PCIT has applied his mind to the record and recorded his reasons for assuming jurisdiction."

"The order passed by the PCIT directing the AO to pass fresh assessment order after conducting adequate enquiries is in accordance with law."

"The contention that there are two views available is not tenable where the AO has failed to conduct inquiry which he should have made."

"No question of law much less any substantial question of law arises from the impugned order of the Tribunal."

In conclusion, the Court dismissed the appeal, affirming the Tribunal's order that the PCIT was justified in invoking section 263 to set aside the assessment order due to the AO's failure to conduct necessary inquiries, rendering the original assessment erroneous and prejudicial to the interests of revenue.