2023 (9) TMI 888 - AT - Income Tax

Tribunal affirms PCIT's order under Section 263, dismissing appeal due to non-compliance with show-cause notices

Kunj Bihari Dawa Dukan Versus PCIT Raipur - 1

The Tribunal upheld the Principal Commissioner of Income-tax's order under Section 263, finding the appellant's non-compliance with show-cause notices and ... Revision u/s 263 - show-cause notice issued dated 21.12.2020 were not responded by the assessee, therefore PCIT has no material in hand to deliberate upon the issue and to consider the contentions of the assessee - HELD THAT:- Since, the assessee was non-compliant before Learned PCIT and no addition was made or directed to be made by the Learned PCIT, the matter was only restored back to the files of AO which was the only option available with the PCIT, so as to comply with the principles of natural justice. Assessee was provided with the adequate opportunity to explain its case or to comment upon on the reasons recorded for revisionary proceedings wherein the issues were raised by the PCIT so as to establish that the order of AO was not erroneous so far as it is prejudicial to the interest of Revenue in view of Explanation-2 of Section 263 of the Income Tax Act but assessee chooses not to rebut on the same. Under such a scenario since the issue raised in the order under Section 263 of the Act were restored back to the file of AO and the assessee has the opportunity to explain its case and liberty to submit necessary evidence/information before the AO there was no prejudiced caused to the assessee. We, therefore, are of the considered opinion that there was no infirmity in the order of PCIT which calls for any interference. Appeal filed by the assessee is dismissed. ISSUES PRESENTED AND CONSIDERED 1. Whether the revision power under Section 263 can be validly exercised where the Principal Commissioner has issued a show-cause notice and the assessee failed to respond, and the order merely restores the matter to the Assessing Officer for further enquiry. 2. Whether the revision order under Section 263 is sustainable when the Principal Commissioner purportedly relied on Explanation 2 to Section 263 to hold that the assessment order is erroneous and prejudicial to the revenue, without conducting fresh inquiries himself. 3. Whether the requirement of 'opportunity of being heard' under Section 263 was complied with before passing the revisionary order, and whether absence of such opportunity vitiates the revision order. 4. Whether the scope of Section 263 extends to matters (i) for which the reopening under Section 147 was originally made (source of cash deposits and contract receipts) and (ii) to verification of partner capital accounts and admissibility of interest to partners when these were not the stated reasons for reopening. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Validity of exercising power under Section 263 when assessee did not respond to show-cause notice Legal framework: Section 263 permits revision of an assessment where it is concluded that the order is erroneous and prejudicial to the revenue; the Principal Commissioner must give the assessee an opportunity of being heard before passing a revisionary order. Precedent Treatment: The assessee relied on authorities emphasizing that a revision cannot be made without appropriate jurisdictional basis and that natural justice requires opportunity; the Tribunal considered these precedents in context. Interpretation and reasoning: The Tribunal noted the admitted fact that a show-cause notice under Section 263 was issued through ITBA and that the assessee did not respond. Given non-compliance by the assessee, the Principal Commissioner had no material on record to decide the merits and therefore restored the matter to the Assessing Officer for fresh enquiry and afforded the assessee an opportunity before the AO. The Tribunal treated restoration to the AO as the only viable option consistent with natural justice, rather than immediate substantive revisions without evidence. Ratio vs. Obiter: Ratio - where the assessee fails to respond to a Section 263 show-cause notice, the Principal Commissioner may restore the matter to the Assessing Officer for further enquiries rather than make substantive adverse findings without material; restoring the matter does not constitute prejudicial revision absent denial of opportunity. Conclusion: Exercise of power to set aside and direct fresh enquiry was held valid in the circumstances of non-response by the assessee and was not vitiated on that account. Issue 2 - Reliance on Explanation 2 to Section 263 to find assessment erroneous and prejudicial Legal framework: Explanation 2 to Section 263 clarifies circumstances where an assessment may be erroneous and prejudicial; the Principal Commissioner must be satisfied on available material that the order suffers from such infirmity. Precedent Treatment: The assessee argued that reliance on Explanation 2 was improper where AO had examined the issues; case law emphasizing strictness of Section 263 was invoked by the assessee. Interpretation and reasoning: The Principal Commissioner recorded satisfaction that the AO had failed to verify partner capital accounts and admissibility of interest, and hence, in his view, the assessment was erroneous and prejudicial in light of Explanation 2. However, because no response was received to the show-cause, the PCIT directed the AO to make adequate enquiries under Sections 68/69A regarding genuineness of business and source of deposits. The Tribunal observed that the PCIT did not itself make additions but remanded for appropriate enquiries; this remedial action was consistent with the function of Section 263 to correct errors prejudicial to revenue when the record points to inadequate verification by AO. Ratio vs. Obiter: Ratio - Explanation 2 can ground a Section 263 action where material indicates AO omitted relevant verifications (e.g., partner capital and source of deposits); but if substantive findings cannot be made without further material, remand to AO for enquiry is appropriate. Conclusion: Reliance on Explanation 2 to set aside the assessment for further enquiry was sustained as lawful given the identified omissions and absence of material from the assessee before the PCIT. Issue 3 - Compliance with requirement of opportunity of being heard under Section 263 Legal framework: Principles of natural justice require that the assessee be given an opportunity of being heard before the Principal Commissioner passes a revisionary order under Section 263. Precedent Treatment: The assessee cited authorities holding that absence of opportunity renders a revision order void or liable to be set aside. Interpretation and reasoning: The Tribunal found that a show-cause notice was issued and that the assessee did not comply. The PCIT's order itself notes the non-response. By restoring the matter to the AO and directing further enquiries, the PCIT implicitly granted the assessee an opportunity to be heard at the AO stage. The Tribunal concluded no prejudice was caused because the assessee would have the chance to submit evidence and explanations before the AO during the fresh proceedings. Ratio vs. Obiter: Ratio - procedural non-compliance (failure to respond to show-cause) by the assessee does not automatically invalidate a remand order; where the revisioning authority restores the matter to the AO and affords opportunity at reassessment, the requirement of opportunity is effectively preserved. Conclusion: The revisionary order was not invalidated on grounds of lack of opportunity because the assessee's non-compliance deprived the PCIT of material and the remand ensured future opportunity before the AO. Issue 4 - Scope of Section 263 vis-à-vis the original grounds of reopening under Section 147 and verification of partner interest/capital Legal framework: Section 147 permits reopening where income has escaped assessment; Section 263 can examine whether the AO's order is erroneous and prejudicial, potentially beyond the ostensible grounds of reopening if AO failed to make necessary verifications. Precedent Treatment: The assessee argued that the reopening was for verification of cash deposits and contract receipts and that PCIT could not direct enquiries into partner interest/admissibility where it was not a subject of reopening; authorities on limits of Section 263 were cited. Interpretation and reasoning: The Tribunal recorded that the AO had originally examined and accepted the assessee's explanation for deposits and had not made additions. The PCIT observed omission by AO in verifying partner capital accounts and the evidence for interest paid to partners. The PCIT's direction to the AO to enquire into genuineness of business and relevant credit entries under Sections 68/69A was treated as connected to the question whether the deposit entries were genuine and whether related payments were admissible. The Tribunal considered that since the AO's original enquiry might have been incomplete regarding partner accounts and interest claims, the PCIT was justified in directing further investigation even if such points were not the narrow initial grounds of reopening, because they bear upon whether the assessment is erroneous and prejudicial. Ratio vs. Obiter: Ratio - Section 263's corrective scope includes directing further enquiries on related aspects (e.g., partner capital, interest payments) when such aspects are relevant to the genuineness/source of deposits that were the subject-matter of reopening and where AO may have failed to verify material facts. Conclusion: The PCIT's direction to verify partner capital and admissibility of partner interest as part of fresh enquiries was sustainable as connected to the issues of source and genuineness of deposits; the Tribunal did not find the scope exceeded statutory limits. Overall Conclusion The Tribunal upheld the Principal Commissioner's order under Section 263 remanding the matter to the Assessing Officer for fresh enquiry into the genuineness of business, source of cash deposits and related credit entries (including partner capital/interest issues), because the assessee failed to respond to the Section 263 show-cause notice and the PCIT's action only restored the matter for proper examination without making prejudicial additions. The appeal against the revisionary order was dismissed.