2023 (9) TMI 608 - AT - Income Tax

Tribunal quashes tax order, ruling Commissioner failed to prove error and prejudice.

The Tribunal quashed the Principal Commissioner of Income Tax's order under section 263, finding that the Commissioner failed to establish conclusively ... Revision u/s 263 - case was selected for complete scrutiny and A.O. allowed the claim of depreciation for addition to different block of assets without verification - HELD THAT:- PCIT was found to be primafacie satisfied with the submission of the assessee supported with evidence, documents and bills but was keen have it further verified. Ld PCID was of the opinion that the order of Ld AO was erroneous since certain issues which should have been looked into by the Ld AO were not examined by him during the original assessment proceedings u/s 143(3), however the two conditions which were mandatory to be established could not be satisfied by bringing on any finding or recording that could establish that the order of the AO was erroneous as well as prejudicial to the interest of the revenue. Under such circumstances the order of Ld PCIT has been found to be failed on the test as laid down by Hon’ble Apex court while assuming jurisdiction u/s 263 in the case of Malabar Industrial Company Ltd [2000 (2) TMI 10 - SUPREME COURT] We therefore respectfully following the binding principle of law as laid down by Hon’ble SC in the Malabar Industrial Company Ltd.(supra) are inclined to hold that the order of Ld PCIT was lacking in complying with the twin compulsory conditions as mandated u/s 263, consequently the same is bad in law and liable to be quashed and we direct to do so. Appeal of the assessee is allowed. ISSUES PRESENTED AND CONSIDERED 1. Whether the Revisional Authority's exercise of power under section 263 was sustainable where the Assessing Officer had accepted the return after scrutiny and the assessee had produced invoices, bank statements and evidence in support of depreciation claims. 2. Whether the Revisional Authority can enlarge the scope of limited/CASS-selected scrutiny in exercise of revision under section 263. 3. Whether recording of only a prima facie desire for further verification (without specific findings that the assessment order is erroneous and prejudicial to revenue) satisfies the twin conditions necessary for invoking section 263. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Validity of revision under section 263 where AO accepted claim after scrutiny and assessee furnished supporting evidence Legal framework: Section 263 permits the Commissioner to revise an assessment if the order of the Assessing Officer is 'erroneous' and 'prejudicial to the interests of the revenue'; both conditions are mandatory. Precedent Treatment: The Tribunal expressly follows the binding principle laid down in the controlling precedent that both the error and prejudice to revenue must be established before resort to section 263 is permissible. Interpretation and reasoning: The Revisional Authority recorded that the assessee had furnished bills, bank statements and other evidence and that prima facie no adverse inference arose; notwithstanding this, the Revisional Authority directed further verification and set aside the assessment for fresh enquiry. The Tribunal held that such direction amounted to another round of enquiry without demonstration that the AO's order was in fact erroneous and prejudicial to revenue. Mere prima facie satisfaction to verify further is insufficient to satisfy the statutory twin conditions. Ratio vs. Obiter: Ratio - where the AO has considered submissions and documentary evidence and no specific finding is recorded that the AO's order is erroneous and prejudicial, section 263 cannot be validly invoked. Obiter - the Tribunal's characterization of the Revisional Authority's motivation as 'keen to have it further verified' is explanatory but ancillary to the ratio. Conclusion: The Revisional Authority's order under section 263 was unsustainable and is quashed because it failed to establish both error and prejudice to revenue despite the assessee's production of supporting evidence. Issue 2 - Expansion of scope: Whether Revisional Authority can enlarge scope of limited/CASS scrutiny via section 263 Legal framework: The scope of assessment proceedings (including limited scrutiny under CASS) defines issues the AO is to examine; revision under section 263 is not a tool to enlarge or alter the scope absent the statutory prerequisites. Precedent Treatment: The Tribunal reiterates that the Revisional Authority cannot, in revision, enlarge the scope of originally framed/limited scrutiny unless the statutory conditions for revision are satisfied. Interpretation and reasoning: The Tribunal accepted that the case was selected under CASS with identified issues and that the Assessing Officer dealt with the matters raised. The Revisional Authority's attempt to remit the matter for broader verification effectively enlarged the original scope, which is impermissible without establishing error prejudicial to revenue. Ratio vs. Obiter: Ratio - section 263 cannot be used to broaden the scope of assessment scrutiny where the mandatory conditions for revision are not shown. Obiter - comments regarding the meaning of the word 'initially' in the assessment file are clarificatory. Conclusion: The Revisional Authority improperly attempted to enlarge the scope of scrutiny; that action cannot sustain a revision under section 263 in the absence of demonstrable error and prejudice. Issue 3 - Sufficiency of recording prima facie dissatisfaction and direction for further verification to meet twin conditions of section 263 Legal framework: Jurisprudence requires that the Commissioner record satisfaction specifically identifying how the AO's order is erroneous and prejudicial to revenue before invoking section 263. Precedent Treatment: The Tribunal follows the authoritative test that both components (error + prejudice) must be satisfied on the record; mere suspicion, desire for further verification, or absence of adverse inference is inadequate. Interpretation and reasoning: The Revisional Authority's order acknowledged that on prima facie review no adverse inference was drawn from the assessee's documents, yet still remitted the matter for source verification and correct claim of depreciation. The Tribunal found no specific finding demonstrating error or quantifying prejudice; therefore the statutory threshold was not met. Ratio vs. Obiter: Ratio - an order under section 263 must show on its face how the AO's order is both erroneous and prejudicial; directions for further verification alone do not suffice. Obiter - the Tribunal's observation that the Revisional Authority was 'keen' to verify is descriptive not constitutive of jurisdiction. Conclusion: Recording only a prima facie concern and ordering further enquiry does not satisfy the mandatory twin conditions of section 263; the Revisional Authority's satisfaction was not demonstrated and the revision cannot stand. Overall Conclusion and Disposition The Tribunal held that the Revisional Authority's order under section 263 failed to comply with the mandatory requirement of demonstrating that the AO's order was both erroneous and prejudicial to revenue. The Revisional Authority merely directed further verification despite accepting the assessee's documentary submissions and failing to record specific errors or prejudice. Following binding precedent, the Tribunal quashed the revisional order and allowed the appeal.