2022 (3) TMI 1158 - AT - Income Tax

Tribunal rules in favor of assessee, finding PCIT's jurisdiction under sec 263 unjustified.

The Tribunal held that the Principal Commissioner of Income Tax (PCIT) was not justified in exercising jurisdiction under section 263 of the Income Tax ... Revision u/s 263 by CIT - According to Ld. PCIT A.O. accepted the claim of the agricultural income without examining the expenses incurred to earn the said agricultural income and the estimated gross receipt from agricultural holding @ 52,000/- per acre was accepted as net income without considering the expenditure - HELD THAT:- Case of the assessee was selected for limited scrutiny under CASS for the issue relating to the agricultural income. The A.O. issued the Questionnaire to the assessee, in response to which, the assessee furnished the replies to the A.O. In the said replies it has been stated that the assessee was holding 41 Acres of agricultural land in the name of his family member and was used to take approximately 60 acres of agricultural land on lease (Theka) on the said land, cash crop like potato, vegetable, fodder etc. were grown. The assessee was also cultivating crop of wheat, paddy which were sold through Kaccha arathia in Raikot namely M/s Gupta Trader Raikot. The assessee furnished the copies of J Form in support of the claim for sale of wheat & paddy - The assessee also furnished an affidavit from the Sarpanch of the village, before the A.O. in support of the above contention, the contents of the said affidavit were duly verified by Sarpanch of the Village Tajpur, District Ludhiana Therefore it cannot be said that the A.O. had not applied his mind or had not asked the assessee about the agricultural income declared. A.O. framed the assessment after making the proper enquiry and applying his mind. In our opinion, when the assessment is framed after making the inquiries and by considering the relevant details relating to the issue on which the case was selected for scrutiny then it cannot be said that the assessment so framed was erroneous or prejudicial to the interest of the Revenue. CIT(A) exercised his jurisdiction under section 263 of the Act on the issue which was considered in depth by the A.O. while framing the assessment order, therefore the impugned order passed by the Ld. CIT(A) has no legs to stand, as the assessment order was passed by the A.O. under section 143(3) of the Act after due verification and application of mind on the issue relating to the agricultural income shown by the assessee. On the basis of the same agricultural income the Ld. Pr. CIT considered the assessment order as erroneous and prejudicial to the interest Revenue. Show cause notice was issued by the Ld. PCIT on the basis of the audit objection copy - As relying on SOHANA WOOLLEN MILLS. [2006 (9) TMI 157 - PUNJAB AND HARYANA HIGH COURT] PCIT was not justified in exercising his power to invoke the provision of Section 263 of the Act on the basis of audit objection by the Audit Wing of the Department. Appeal of assessee allowed. Issues Involved:1. Jurisdiction assumed by the Principal Commissioner of Income Tax (PCIT) under section 263(1) of the Income Tax Act, 1961.2. Whether the assessment order dated 14.07.2017 was erroneous and prejudicial to the interest of revenue.3. Whether the Assessing Officer (AO) conducted a thorough investigation and applied due diligence.4. Validity of the PCIT's action based on audit objections.5. Application of Explanation 2 to section 263 by the PCIT.Issue-wise Detailed Analysis:1. Jurisdiction Assumed by PCIT under Section 263(1):The primary grievance of the assessee was the jurisdiction assumed by the PCIT under section 263 of the Income Tax Act, 1961. The PCIT exercised his jurisdiction under section 263 and issued a notice through ITBA for compliance, observing that the assessment was completed without making proper and in-depth enquiries. The PCIT noted that the AO did not adequately verify the agricultural income and expenses incurred to earn the said income, rendering the assessment erroneous and prejudicial to the interest of the Revenue.2. Assessment Order Dated 14.07.2017 - Erroneous and Prejudicial:The PCIT held that the assessment order dated 14.07.2017 was erroneous and prejudicial to the interest of revenue. The AO accepted the agricultural income disclosed by the assessee without proper verification. The PCIT highlighted that the AO failed to call for evidence regarding the 60 acres of agricultural land taken on lease and did not examine the expenses incurred to earn the agricultural income. The PCIT concluded that the AO completed the assessment without making necessary enquiries.3. Thorough Investigation and Due Diligence by AO:The assessee contended that the AO conducted a thorough investigation and applied due diligence. The AO issued a questionnaire, and the assessee provided detailed responses, including copies of J-Forms, Jamabandi, and an affidavit from the Sarpanch. The AO, after considering the replies and documents, accepted the agricultural income declared by the assessee. The AO's office note indicated that the case was selected for scrutiny under CASS to verify the 'Large Agricultural Income,' which was examined and verified, with no adverse inference drawn.4. Validity of PCIT's Action Based on Audit Objections:The assessee argued that the PCIT's action under section 263 was based on audit objections, which is contrary to the decision of the Jurisdictional Punjab and Haryana High Court in the case of CIT Vs. Sohana Woollen Mills (296 ITR 238). The assessee contended that the PCIT initiated proceedings merely on the basis of information received from the audit wing without independent application of mind. The PCIT's reliance on audit objections was evident from the timing of the show cause notice, which was issued close to the expiration of the limitation period.5. Application of Explanation 2 to Section 263:The PCIT invoked Explanation 2 to section 263, asserting that the AO failed to apply his mind to the issues taken up under section 263. The assessee argued that the AO had duly applied his mind and conducted a detailed inquiry during the original assessment proceedings. The assessee provided multiple replies and documents to substantiate the agricultural income and landholding, which the AO considered before finalizing the assessment.Conclusion:The Tribunal concluded that the AO framed the assessment after making proper inquiries and applying his mind. The assessment order was passed after due verification of the agricultural income declared by the assessee. The Tribunal held that the PCIT was not justified in exercising his power under section 263 based on audit objections, as the AO had conducted a thorough investigation. The Tribunal set aside the impugned order passed by the PCIT, allowing the appeal of the assessee.