PCIT cannot invoke section 263 revision without proper notice when AO conducted adequate inquiry during assessment

ITAT Rajkot ruled in favor of the assessee in a revision case under section 263. PCIT contended that the AO erroneously framed assessment under section 143(3) without proper verification of income surrendered during survey operation under sections 69 and 115BBE. ITAT held that AO conducted necessary inquiries and applied due mind during assessment proceedings. The tribunal found PCIT erred by invoking explanation 2 to section 263 without prior reference in the notice. Since assessee justified the source of surrendered income, it could not be treated as deemed income under section 69, making section 115BBE inapplicable. ITAT concluded AO's view was plausible and PCIT cannot substitute it with his own understanding.

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Issues Involved:
1. Whether the assessment framed under Section 143(3) of the Income Tax Act was erroneous and prejudicial to the interest of revenue.
2. Whether the income surrendered during the survey operation should be taxed under Section 69 and at the special rate specified under Section 115BBE of the Income Tax Act.

Summary:

Issue 1: Erroneous and Prejudicial Assessment
The assessee, a partnership firm engaged in the real estate business, was subjected to a survey operation under Section 133A. During the survey, the assessee admitted to receiving on-money and surrendered an unexplained income of Rs. 1,77,66,000/-. This income was offered in the income tax return under the head "business and profession" and accepted by the AO in the assessment framed under Section 143(3). The Principal Commissioner of Income Tax (PCIT) later found that this income should have been taxed under Section 69 and at the special rate under Section 115BBE, without allowing any deductions. The PCIT held the assessment as erroneous and prejudicial to the interest of revenue, directing a fresh assessment.

Issue 2: Taxation under Section 69 and Section 115BBE
The assessee contended that the AO had raised queries regarding the surrendered income during the assessment proceedings, which were duly answered. The income was accepted as business income, not falling under the deeming provisions of Section 69. The Department Representative argued that the income should be treated as deemed income under Section 69 and taxed at the special rate under Section 115BBE, without any permissible expenses. It was emphasized that the AO failed to read the provisions of Section 69 with Section 115BBE(2) and permitted expenses, making the assessment order erroneous.

Tribunal's Findings:
The Tribunal found that the AO had conducted necessary inquiries during the assessment proceedings, as evidenced by the queries raised and answered. The assessee had established that the surrendered income was on-money received in relation to its real estate project, treated as business income. The Tribunal noted that the PCIT did not reference Explanation 2 to Section 263 in the notice and thus erred in holding the assessment order as erroneous and prejudicial. The Tribunal also observed that for Section 69 to apply, there must be a finding that the investments were not recorded in the books, which was not the case here. The surrendered income was justified and could not be treated as deemed income under Section 69, making Section 115BBE inapplicable.

Conclusion:
The Tribunal held that the assessment order was not erroneous or prejudicial to the interest of revenue and quashed the PCIT's order under Section 263. The appeal filed by the assessee was allowed.

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