ITAT rules in favor of assessee, quashes Section 263 order

The ITAT held that the Pr. CIT's order under Section 263 was not justified as the Assessing Officer had conducted a proper inquiry, and the order was not erroneous or prejudicial to the revenue. The principles of natural justice were violated by the Pr. CIT, and the AO's decision to allow deductions under Section 80P was reasonable and supported by judicial precedents. As a result, the ITAT quashed the Section 263 proceedings and ruled in favor of the assessee.

---

---

Issues Involved:
1. Jurisdiction and validity of the order under Section 263.
2. Error in law and facts by invoking Section 263.
3. Allegations regarding interest income and deduction under Section 80P(2)(d).
4. Opportunity of being heard and natural justice.
5. Examination and verification by the Assessing Officer (AO).

Detailed Analysis:

1. Jurisdiction and Validity of the Order under Section 263:
The assessee contended that the order under Section 263 was invalid and without jurisdiction. The Pr. CIT incorrectly stated that the case was selected for complete scrutiny through CASS, whereas it was reopened under Sections 147/148 for a limited issue of cash deposits. The Pr. CIT's action was deemed illegal and void ab initio due to this incorrect basis.

2. Error in Law and Facts by Invoking Section 263:
The Pr. CIT can invoke Section 263 only if the AO's order is both erroneous and prejudicial to the interests of the revenue. The AO had reopened the case based on cash deposits, issued detailed queries, and received responses, thus conducting a proper inquiry. The AO's decision to allow the deduction under Section 80P was a reasonable view after examining the details, and the AO's order was not erroneous or prejudicial to the revenue.

3. Allegations Regarding Interest Income and Deduction under Section 80P(2)(d):
The Pr. CIT alleged that the AO erroneously allowed a deduction of Rs. 1,08,464 under Section 80P(2)(d) for interest income from FDRs with cooperative banks. The assessee clarified that the interest income was from Sikar Kendriya Sahakari Bank Ltd., a cooperative society, making the deduction allowable. The Pr. CIT failed to prove that the claims were not genuine or verifiable, and the AO's view was supported by relevant judicial precedents.

4. Opportunity of Being Heard and Natural Justice:
The Pr. CIT issued a notice under Section 263 on 25.03.2021 and scheduled a hearing for the next day, 26.03.2021. Despite the short notice, the assessee filed a detailed reply. The Pr. CIT did not provide a further opportunity or address the assessee's explanations, violating the principles of natural justice. The hurried manner of passing the order without adequate hearing was deemed a breach of natural justice.

5. Examination and Verification by the Assessing Officer (AO):
The AO had issued detailed queries and received responses regarding cash deposits and deductions under Section 80P. The AO verified the books of accounts and allowed the deductions after due examination. The Pr. CIT's view that the AO did not make proper inquiries was unfounded, as the AO had conducted a reasonable and prudent examination. The AO's order was not erroneous merely because the Pr. CIT disagreed with the AO's conclusions.

Conclusion:
The ITAT concluded that the Pr. CIT's order under Section 263 was not justified as the AO had conducted a proper inquiry and the order was not erroneous or prejudicial to the revenue. The principles of natural justice were violated by the Pr. CIT, and the AO's view was a reasonable one supported by judicial precedents. Consequently, the ITAT quashed the proceedings under Section 263 and allowed the appeals of the assessee.

---