Section 263 revision quashed as underlying Section 147 reassessment beyond limitation period was invalid and non-est

ITAT Raipur quashed the Pr. CIT's order under Section 263 after finding that the underlying reassessment order under Section 143(3) read with Section 147 was invalid. The AO had issued notice under Section 148 beyond the four-year limitation period without valid reasons as required under the first proviso to Section 147. Since the original reassessment was based on invalid assumption of jurisdiction and was non-est, the Pr. CIT could not revise it under Section 263. The tribunal held that validity of primary proceedings can be challenged in collateral proceedings and decided in favor of the assessee.

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Issues Involved:
1. Jurisdiction of the Principal Commissioner of Income Tax (PCIT) under Section 263 of the Income-Tax Act, 1961.
2. Limitation period for invoking Section 263.
3. Examination of share capital and share premium.
4. Principles of natural justice and reasonable opportunity of being heard.
5. Validity of reassessment order under Section 147/143(3).
6. Twin conditions under Section 263.
7. Independent enquiry by PCIT.
8. Prospective nature of Explanation 2 to Section 263.
9. Validity of notice under Section 148.

Detailed Analysis:

1. Jurisdiction of the Principal Commissioner of Income Tax (PCIT) under Section 263:
The assessee challenged the jurisdiction of the PCIT to pass the order under Section 263, claiming it was beyond jurisdiction, illegal, and bad in law. The Tribunal noted that the PCIT had issued a show cause notice to the assessee regarding the reassessment order, which was claimed to be erroneous and prejudicial to the interests of the revenue. The PCIT observed that the assessee had raised a fund of Rs.176 crore by issuing equity shares at a high premium, but the AO failed to carry out necessary enquiries regarding the nature and source of the capital introduced. The Tribunal concluded that the PCIT had jurisdiction to revise the order if it was erroneous and prejudicial to the interest of the revenue.

2. Limitation Period for Invoking Section 263:
The assessee argued that the order passed by the PCIT was barred by limitation under Section 263(2). The Tribunal considered the Supreme Court's orders regarding the extension of the limitation period due to the Covid-19 pandemic and concluded that the appeal filed by the assessee was within the extended period of limitation.

3. Examination of Share Capital and Share Premium:
The PCIT observed that the assessee had issued equity shares at a high premium and raised Rs.176 crore during the year. The PCIT noted that the financial strength of the investor companies did not justify the substantial investment made in the assessee company. The Tribunal found that the AO had failed to carry out necessary enquiries regarding the share capital and share premium, rendering the reassessment order erroneous and prejudicial to the interests of the revenue.

4. Principles of Natural Justice and Reasonable Opportunity of Being Heard:
The assessee contended that the PCIT passed the order without affording a reasonable opportunity of being heard, violating the principles of natural justice. The Tribunal did not specifically address this issue but focused on the validity of the reassessment order and the jurisdiction of the PCIT under Section 263.

5. Validity of Reassessment Order under Section 147/143(3):
The assessee challenged the validity of the reassessment order, claiming it was based on invalid assumption of jurisdiction under Section 147. The Tribunal examined the "reasons to believe" recorded by the AO for reopening the assessment and found that the AO had not alleged any failure on the part of the assessee to disclose fully and truly all material facts necessary for its assessment. The Tribunal concluded that the AO had exceeded his jurisdiction by reopening the assessment after the expiry of four years from the end of the relevant assessment year, rendering the reassessment order invalid and non-est in the eyes of law.

6. Twin Conditions under Section 263:
The assessee argued that the twin conditions under Section 263, i.e., the reassessment order being erroneous and prejudicial to the interests of the revenue, were not satisfied. The Tribunal found that the AO had failed to carry out necessary enquiries regarding the share capital and share premium, rendering the reassessment order erroneous and prejudicial to the interests of the revenue.

7. Independent Enquiry by PCIT:
The assessee contended that the PCIT had not conducted an independent enquiry before passing the order under Section 263. The Tribunal noted that the PCIT had observed the failure of the AO to carry out necessary enquiries and directed the AO to adjudicate the matter afresh after making adequate enquiries.

8. Prospective Nature of Explanation 2 to Section 263:
The assessee argued that Explanation 2 to Section 263 was prospective in nature and not applicable for the year under consideration. The Tribunal did not specifically address this issue, focusing instead on the validity of the reassessment order and the jurisdiction of the PCIT under Section 263.

9. Validity of Notice under Section 148:
The assessee raised an additional ground challenging the validity of the notice issued under Section 148. The Tribunal found that the AO had issued the notice beyond the prescribed period of four years from the end of the relevant assessment year without alleging any failure on the part of the assessee to disclose fully and truly all material facts. The Tribunal concluded that the reassessment order was based on invalid assumption of jurisdiction and could not be revised by the PCIT under Section 263.

Conclusion:
The Tribunal quashed the order passed by the PCIT under Section 263, dated 27.03.2021, on account of invalid assumption of jurisdiction. The reassessment order passed by the AO under Section 143(3) r.w.s 147, dated 30.12.2018, was found to be invalid and non-est in the eyes of law. The appeal filed by the assessee was allowed, and the Tribunal refrained from adjudicating the other contentions raised by the assessee.

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