2023 (5) TMI 1292 - AT - Income Tax

Tribunal Rules in Favor of Assessee, Cancels PCIT's Order; Adequate Enquiries Conducted in 2016-17 Assessment.

The tribunal allowed the appeal, concluding that the Ld. AO had conducted adequate enquiries and appropriately completed the assessment under section ... Revision u/s 263 - assumption of jurisdiction by CIT presuming, and merely on basis of audit objection and lack of enquiry by the AO - HELD THAT:- From the order of the PCIT passed u/s 263 it is observed that in the show cause notice he raised certain issues and made observations to which the assessee gave reply in seriatim followed by legal submissions but not a word thereupon has been mentioned by the Ld. PCIT. This is contrary to the law laid down in PCIT vs. Delhi Airport Metro Express Pvt. Ltd. [2017 (9) TMI 529 - DELHI HIGH COURT] wherein the Hon’ble Jurisdictional High Court held that for purposes of exercising jurisdiction u/s 263 the conclusion that the order of the AO is erroneous and prejudicial to the interests of the Revenue has to be preceded by some minimal enquiry. In fact, if the Ld. PCIT is of the view that the AO did not undertake any enquiry, it becomes incumbent on him to conduct such enquiry. Nothing of the sort has been done by the Ld. PCIT in the case of the assessee before us. In Synergy Waste Management (P) Ltd. [2016 (6) TMI 23 - ITAT DELHI] is held that if an AO, acting in accordance with law, makes a certain assessment, the same cannot be branded as erroneous by the Commissioner simply because according to him the order should have been written more elaborately. Section 263 does not visualise a case of substitution of the judgment of the Commissioner for that of the AO. In our opinion this cannot be done as in the show cause notice the Ld. PCIT has nowhere mentioned to invoke the Explanation 2 to Section 263. Likewise, the assessee cannot take a plea of assumption of jurisdiction by the Ld. PCIT on the basis of audit objection without there being any material in the record to substantiate the plea. We are of the view that the Ld. AO made enquiries and after applying his mind he completed the assessment under section 143(3) of the Act accepting the income declared by the assessee in its return. Appeal of assesee allowed. 1. ISSUES PRESENTED AND CONSIDERED 1. Whether the Commissioner's exercise of jurisdiction under section 263 was valid on the ground that the assessment order was 'erroneous and prejudicial to the interests of Revenue'. 2. Whether the assessment order could be said to be passed without proper inquiry by the Assessing Officer so as to attract revisional jurisdiction under section 263. 3. Whether the Commissioner can invoke Explanation 2 to section 263 (as inserted w.e.f. 01.06.2015) or rely on audit objections to assume jurisdiction where the show-cause notice did not invoke Explanation 2 and there is no material on record to substantiate reliance on audit objection alone. 2. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Validity of exercise of section 263 jurisdiction (whether assessment was 'erroneous and prejudicial') Legal framework: Section 263 permits the Commissioner to revise an assessment if it is 'erroneous and prejudicial to the interests of Revenue'; such jurisdiction is exceptional and requires demonstration of error and prejudice. Precedent treatment: The Tribunal relied on the established principle that mere difference of opinion or view between AO and Commissioner does not justify invocation of section 263; where AO has made enquiry and applied mind, his order cannot be branded erroneous simply because the Commissioner would have written a more elaborate order. Interpretation and reasoning: The record shows the AO issued statutory notices, a detailed 38-question questionnaire and considered replies and documents submitted during multiple hearings before passing the assessment under section 143(3). The AO expressly recorded that replies/details were submitted and duly considered. Given these facts, the Tribunal held that the AO applied his mind and made adequate enquiries; therefore there was no demonstrable error or prejudice to Revenue warranting exercise of revisional power. Ratio vs. Obiter: Ratio - where the assessment record evidences that the AO called for, received and considered detailed replies and documentary evidence, the Commissioner cannot characterise the assessment as 'erroneous and prejudicial' under section 263 merely on disagreement of view. Obiter - general statements on how detailed the AO's order ought to be are ancillary. Conclusion: The Commissioner's assumption of jurisdiction under section 263 was not valid on the ground that the assessment was erroneous and prejudicial; the impugned order was cancelled. Issue 2 - Whether non-enquiry or inadequate enquiry by the AO was established so as to justify revisional jurisdiction Legal framework: Jurisdiction under section 263 can be exercised where AO failed to make requisite enquiries; however, such conclusion must be preceded by a minimal enquiry by the Commissioner and be supported by record indicating lack of enquiry. Precedent treatment: The Tribunal applied the principle that absence of enquiry must be evidenced; if AO called for and considered details furnished, there is no inference of lack of enquiry. It referenced authority holding that inadequacy of enquiry in matters of judgment does not confer revisional jurisdiction. Interpretation and reasoning: The assessment record contains the questionnaire, answers, documents produced and AO's express finding that submissions were considered. The show-cause notice by the Commissioner noted certain issues, but the Commissioner did not address the assessee's detailed replies in the impugned order nor conduct any independent inquiry to verify alleged non-enquiry. The Tribunal found that the Commissioner's conclusion of non-enquiry was not preceded by any minimal inquiry and therefore was legally impermissible. Ratio vs. Obiter: Ratio - finding of lack of enquiry cannot be presumed where record shows AO sought and considered material; Commissioner must make minimal inquiry before invoking section 263 on that ground. Obiter - comments on what constitutes adequate depth of AO's enquiry where not in dispute. Conclusion: No lack of enquiry by the AO was established; assumption of jurisdiction on that basis was improper. Issue 3 - Applicability of Explanation 2 to section 263 and reliance on audit objections without supporting material Legal framework: Explanation 2 to section 263 (as inserted by Finance Act, 2015) expands circumstances in which revisional jurisdiction may be exercised; however, invocation must be properly pleaded and supported by material in the show-cause notice and record. Precedent treatment: The Tribunal noted that a Commissioner cannot rely on an Explanation or audit objections that were neither invoked in the show-cause nor supported by the record; jurisdictional bases must be specifically stated and substantiated. Interpretation and reasoning: The show-cause notice did not invoke Explanation 2, and the impugned order did not cite or apply that Explanation. The Tribunal held it is impermissible for the Commissioner to subsequently rely on Explanation 2 or mere audit objections as the sole basis for assuming jurisdiction where there is no material in the record to substantiate such reliance and where the assessee's replies to show-cause were not addressed. Ratio vs. Obiter: Ratio - Commissioner cannot invoke Explanation 2 or rely solely on audit objections to assume section 263 jurisdiction unless such basis is invoked in the show-cause and supported by material; failure to address assessee's replies is legally significant. Obiter - observations on broader implications of Explanation 2 where properly invoked. Conclusion: Explanation 2 and audit-objection-based reliance were not available grounds in the present case; they could not cure the Commissioner's failure to show error or non-enquiry. Cross-reference The conclusions on Issues 1-3 are interrelated: because the record evidenced AO's enquiry and application of mind, the Commissioner could not validly characterize the assessment as erroneous and prejudicial, nor could he rely on Explanation 2 or audit objections not invoked or supported in the show-cause notice. Final determination The Tribunal held that the revisional order under section 263 was not in accordance with law, cancelled the impugned order and allowed the appeal. The Court emphasized that section 263 is not a tool for substitution of the Commissioner's judgment for that of the AO where the AO has made requisite enquiries and applied his mind.