2024 (1) TMI 371 - HC - Income Tax

PCIT's Section 263 revision order quashed as AO conducted proper enquiry with notices and hearings

Principal Commissioner Of Income Tax 4 Versus M/s. Mohak Real Estate Pvt. Ltd.

Principal Commissioner Of Income Tax 4 Versus M/s. Mohak Real Estate Pvt. Ltd. - [2025] 474 ITR 313 ISSUES PRESENTED AND CONSIDERED 1. Whether the Principal Commissioner may invoke jurisdiction under Section 263 of the Income Tax Act to revise an assessment where the Assessing Officer has conducted enquiries, issued detailed questionnaires and applied mind before passing an assessment under Section 143(3). 2. Whether an order under Section 263 is sustainable where the revising authority issues a show-cause notice, receives written and oral replies, but does not record consideration of those replies or undertake even a minimal enquiry before concluding that the assessment order is erroneous and prejudicial to the interests of the revenue. 3. Whether a mere difference of opinion between the Principal Commissioner and the Assessing Officer, or an alleged failure to obtain certain documents, without demonstration that the view taken by the Assessing Officer is legally unsustainable, justifies exercise of power under Section 263. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Scope and legal framework of Section 263 of the Income Tax Act Legal framework: Section 263 empowers the Commissioner (or Principal Commissioner) to revise an assessing officer's order where the order is 'erroneous' and the error is 'prejudicial to the interests of the revenue.' Two cumulative conditions must be satisfied: (i) the assessment order is erroneous; and (ii) the error prejudices revenue. Precedent treatment: The Court relied on the established principle that the revisional power is not an appellate power to substitute a different view where the Assessing Officer has adopted a legally sustainable view. Precedents require proper application of mind by the revising authority and recognize that Section 263 cannot be used to correct every mistake or to choose between two tenable views. Interpretation and reasoning: Where the Assessing Officer has conducted enquiries, examined replies to detailed questionnaires, held hearings and applied mind, the order cannot be labelled erroneous merely because the Commissioner disagrees. The revisional power presupposes that the Assessing Officer's view is legally unsustainable or that there was an absence or want of inquiry such that the order is vitiated. Ratio vs. Obiter: The principle that Section 263 cannot be invoked where the Assessing Officer has lawfully adopted one of two possible views is treated as ratio - a governing legal standard for exercise of revisional jurisdiction. Conclusion: Section 263 cannot be validly invoked in cases where the Assessing Officer performed bona fide enquiries and applied mind, unless the Assessing Officer's view is demonstrated to be legally untenable or no enquiry was made. Issue 2 - Requirement of minimal enquiry and recording of reasons by the revising authority Legal framework: The revising authority must carry out at least a minimal enquiry before concluding that an assessment order is erroneous and prejudicial; reasons must be recorded showing consideration of replies and materials relevant to the show-cause notice. Precedent treatment: Earlier decisions require that an order under Section 263 must set out logical grounds and reasons; failure to elucidate why the assessment is erroneous or to undertake a minimal enquiry vitiates the revisional order. The Court follows this approach. Interpretation and reasoning: Where the Principal Commissioner issued a show-cause notice and received written replies and oral representation (including attendance by a chartered accountant and advocate), but the revising order neither discusses the content of those replies nor records any enquiry or reasons for rejecting them, the exercise of jurisdiction is defective. Mere issuance and service of a show-cause notice does not satisfy the requirement of reasoned consideration; the order must reflect engagement with the replies and materials. Ratio vs. Obiter: The requirement that the revising authority must record discussion of the assessee's replies and undertake at least a minimal enquiry is treated as ratio necessary for lawful exercise of Section 263 power. Conclusion: An order under Section 263 that does not record consideration of the assessee's reply to the show-cause notice or undertake even a minimal enquiry is unsustainable. Issue 3 - Distinguishing lack of enquiry from inadequate enquiry and the consequence of differences of opinion Legal framework: A distinction exists between complete absence of enquiry and an enquiry that is merely inadequate; only in exceptional circumstances does inadequacy warrant revision under Section 263. Also, a difference of opinion between the Commissioner and the Assessing Officer is insufficient unless the Assessing Officer's view is legally unsupportable. Precedent treatment: The Court follows precedents holding that where two views are possible and the Assessing Officer has taken one view with application of mind, the Commissioner cannot revise simply because the Commissioner prefers another view. Precedents also caution against invoking Section 263 to remedy every inadequate exercise of discretion. Interpretation and reasoning: The assessment under challenge reflected compliant procedure: statutory notices were responded to, manual scrutiny was conducted due to technical issues with approvals, hearings were held on various dates, a detailed 38-question questionnaire was issued and answered, and the Assessing Officer applied mind. These facts point to an enquiry having been carried out. The revising authority's failure to record any discussion of the replies or to state why the enquiries were insufficient demonstrates that the order did not rise to the level of permissible revision under Section 263. Ratio vs. Obiter: The conclusion that mere disagreement or alleged inadequacy, absent legal unsustainability of the AO's view or absence of enquiry, does not permit revision is part of the core ratio applied to the facts. Conclusion: The Principal Commissioner's action could not be sustained on the basis of a contention that the Assessing Officer failed to obtain particular records when the AO had otherwise conducted enquiries and applied mind; mere difference of opinion or claim of inadequate enquiry did not justify Section 263 revision. Overall Conclusion and Decision Applying the Above Principles Because the assessing process exhibited evidence of enquiry and application of mind, and because the revising authority failed to record consideration of the assessee's responses or to undertake the minimal enquiry required before invoking Section 263, the revisional order was held unsustainable. The Tribunal's setting aside of the revisional order was upheld. The Court found no substantial question of law arising for further consideration.