2023 (4) TMI 621 - AT - Income Tax

Appellate Court Overturns PCIT Order Due to Lack of Jurisdiction & Assessment Errors

The appellate court allowed the appeal against the order of the Principal Commissioner of Income Tax (PCIT) dated 23.03.2022. The court held that the PCIT ... Revision u/s 263 by CIT - satisfaction of the ld. PCIT that order of AO is erroneous in so far as it is prejudicial to the interests of the revenue - HELD THAT:- Show cause issued by the ld. PCIT is total replication of the letter of the ITO. From, the above, we find that it is more of the satisfaction of the ITO that the Assessment Order is erroneous in so far as it is prejudicial to the interest of revenue than the satisfaction of the ld. PCIT. The common portion has been highlighted which could only lead to an inevitable conclusion that there was an absolute lack of application of mind by the ld. PCIT while issuing the show cause, as the show cause clearly proves that the consideration of the ld. PCIT is solely derived from the letter of the ITO and bereft of independent application of mind by the ld. PCIT which makes the order passed u/s 263 void ab initio. Appeal of the assessee is allowed. ISSUES PRESENTED AND CONSIDERED 1. Whether the initiation of proceedings and the order under section 263 were valid where the Pr. Commissioner issued a show cause notice that merely replicated the Income-tax Officer's (ITO's) proposal without independent application of mind. 2. Whether the twin conditions for exercise of jurisdiction under section 263 - that the assessment order is (a) erroneous and (b) prejudicial to the interests of revenue - were satisfied on the material on record. 3. Whether proceedings under section 263 can be used to substitute the opinion of the Assessing Officer (AO) without proper satisfaction and independent reasons by the Pr. CIT, including invocation of Explanation 2 to section 263(1). 4. Whether setting aside the assessment to the file of the AO for fresh framing without the Pr. CIT recording specific findings on the error and prejudice is permissible. 5. Whether the AO erred in accepting share application money as genuine without verifying identity, address, PAN, ITR or bank statements of subscribers - and whether such alleged failure justified invoking section 263. ISSUE-WISE DETAILED ANALYSIS Issue 1: Validity of section 263 proceedings where show cause replicates ITO's proposal (independent application of mind) Legal framework: Section 263 empowers the Pr. CIT to revise an assessment if it is found to be erroneous and prejudicial to revenue; the exercise of jurisdiction requires satisfaction of the Pr. CIT based on independent application of mind and reasons recorded by the Pr. CIT. Precedent Treatment: No judicial precedents were invoked in the judgment for this point; the Tribunal determined validity on factual appraisal of the show cause and record. Interpretation and reasoning: The Tribunal examined the show cause notice and found it to be substantially a verbatim reproduction of the ITO's letter/proposal. The show cause reflected the ITO's satisfaction rather than an independent satisfaction by the Pr. CIT. The absence of any distinct reasoning, independent analysis or application of mind by the Pr. CIT in issuing the notice was held to demonstrate that the Pr. CIT's satisfaction was not self-generated but derived from the ITO's communication. Ratio vs. Obiter: Ratio - where a Pr. CIT's show cause under section 263 merely reproduces an inferior officer's proposal without independent reasoning, the section 263 action is invalid for lack of independent satisfaction. Conclusions: The show cause and consequent exercise of jurisdiction under section 263 were void ab initio for want of independent application of mind by the Pr. CIT; the section 263 order could not stand on such record. Issue 2: Satisfaction of the twin conditions - erroneous assessment and prejudice to revenue Legal framework: The jurisdiction under section 263 is contingent upon two concomitant conditions: (i) the AO's order is erroneous in law or fact; and (ii) such error is prejudicial to the interests of the revenue. The Pr. CIT must record satisfaction on these aspects. Precedent Treatment: No specific authorities were discussed; the Tribunal assessed whether the necessary satisfaction was independently recorded by the Pr. CIT. Interpretation and reasoning: While the ITO's letter articulated concerns about verification of share application money (lack of addresses, PAN, ITRs, bank statements), the Tribunal found no independent contemporaneous satisfaction recorded by the Pr. CIT demonstrating that both conditions were met. The mere repetition of the ITO's concerns in the show cause could not substitute for the Pr. CIT's own recorded satisfaction on error and prejudice. Ratio vs. Obiter: Ratio - absence of independent recorded satisfaction by the revisional authority means the twin conditions under section 263 are not properly fulfilled, rendering the exercise of power invalid. Conclusions: The Pr. CIT did not properly satisfy the twin conditions on independent consideration; therefore the section 263 order was invalid on this ground as well. Issue 3: Use of section 263 to substitute AO's opinion and invocation of Explanation 2 to section 263(1) Legal framework: Section 263 is corrective, not substitutive; the revisional authority cannot lightly substitute its opinion for that of the AO unless satisfied as per statutory tests. Explanation 2 provides scope in certain circumstances but its conditions must be met and recorded. Precedent Treatment: The Tribunal did not rely on or distinguish any case law in the text regarding substitution of opinion or Explanation 2; analysis was confined to factual sufficiency and reasoning in the record. Interpretation and reasoning: The assessee argued that section 263 cannot be used to substitute the AO's opinion and that Explanation 2 conditions were not satisfied. The Tribunal noted that the show cause invoked the ITO's concerns but did not demonstrate that the statutory conditions for employing Explanation 2 were examined or satisfied by the Pr. CIT. The absence of such consideration meant that the proceeding could not validly substitute the AO's conclusion. Ratio vs. Obiter: Ratio - where the revisional officer does not demonstrate satisfaction of the statutory conditions for invoking Explanation 2 and attempts merely to substitute the AO's view, the revision is impermissible. Conclusions: Invocation of section 263 (including Explanation 2) was improper on the record before the Pr. CIT; substitution of AO's opinion was not justified due to lack of independent satisfaction and absence of recorded scrutiny of the Explanation 2 conditions. Issue 4: Legality of setting aside assessment to AO without recording specific findings of error and prejudice Legal framework: When the revisional authority sets aside an assessment, it must record the nature of the error and how it prejudiced revenue, so that fresh proceedings are properly circumscribed and the assessee is apprised of the specific defects. Precedent Treatment: The Tribunal did not cite authority but applied statutory requirement of reasoned satisfaction for revision and consequential directions. Interpretation and reasoning: The Pr. CIT set aside the assessment for fresh framing but did so without making independent findings articulating the specific error and prejudice caused by the AO's order. The Tribunal treated such setting aside as procedurally defective because it deprived the assessee of a reasoned basis for the revision and indicated absence of proper exercise of revisional power. Ratio vs. Obiter: Ratio - setting aside an assessment under section 263 without recording the error and prejudice amounts to an invalid exercise of jurisdiction. Conclusions: The order to set aside the assessment was invalid because the revisional authority failed to state its own findings on error and prejudice; fresh framing could not be ordered on that defective basis. Issue 5: Adequacy of AO's verification of share application money and whether it justified revision Legal framework: The AO is required to verify genuineness, identity and creditworthiness of parties in respect of receipt of share application money; however, failure to verify may only justify revision if the revisional authority records independent satisfaction of error and prejudice and acts within statutory limits. Precedent Treatment: The Tribunal restricted itself to assessing whether the Pr. CIT acted on independent satisfaction rather than re-adjudicating the factual sufficiency of the AO's verification. Interpretation and reasoning: The ITO and Pr. CIT expressed concern that the assessee did not provide complete addresses, PANs, ITRs or bank statements for contributors of share application money. Nevertheless, the Tribunal observed that these concerns originated with the ITO and were reproduced by the Pr. CIT without additional analysis. The Tribunal therefore declined to sustain section 263 action on the basis of those concerns because the revisional authority had not independently formed and recorded the requisite satisfaction. Ratio vs. Obiter: Obiter/limited ratio - while inadequacy of verification by the AO can constitute an error prejudicial to revenue, such inadequacy must be acted upon by the revisional authority only after independent application of mind and proper recording; absent that, revision is impermissible. Conclusions: Even assuming that the AO's verification might be open to question, the Pr. CIT's replication of the ITO's view without independent reasoning was legally insufficient to sustain section 263 action; therefore the material shortcomings in verification could not validate the revision as conducted. Overall Conclusion and Disposition The Tribunal held that the section 263 proceedings were void because the Pr. CIT's show cause and exercise of revisional power merely mirrored the ITO's proposal and lacked independent application of mind and recorded satisfaction on the twin conditions of error and prejudice. Consequently, the section 263 order and the consequential setting aside of the assessment were invalid; the appeal was allowed and the revision quashed.