2024 (4) TMI 1325 - AT - Income Tax

Assessment under section 143(3) not erroneous or prejudicial under section 263 where AO probed under section 142(1)

ITAT AHMEDABAD held that the assessment framed u/s 143(3) was not erroneous or prejudicial to revenue under s263 because the AO conducted inquiries ... Revision u/s 263 - Assessment Order framed u/s 143(3) as erroneous in so far prejudicial to the interest of the revenue on account of non-verification - lack of inquiry v/s inadequate inquiry - as per CIT allowing the exemption u/s 10(38) of the Act, have not considered/carried out certain inquiries by AO - HELD THAT:- We note that the case of the assessee was selected under complete scrutiny through CASS and one of the reasons was being suspicious sale transaction in sale of long-term capital gain shown in return (Penny Stock in ITS). Thereafter, the AO during the assessment proceedings has raised various inquiries about the exemption claimed with respect to long term capital gain. This fact can be verified from the question raised by the AO in the notice issued u/s 142(1) of the Act. Case of the assessee was verified by the AO during the assessment proceedings and thereafter the AO has taken a conscious view that such capital gain does not represent the bogus claim of the assessee. Thus, accordingly we hold that the assessment order cannot held as erroneous in so far prejudicial to the interest of the revenue on account of non-verification. See case of CIT Vs. Sunbeam Auto (D2009 (9) TMI 633 - DELHI HIGH COURT) wherein as made a distinction between lack of inquiry and inadequate inquiry. The Hon'ble court held that where the AO has made inquiry prior to the completion of assessment, the same cannot be set aside u/s 263 of the Act on the ground of inadequate inquiry. In addition to the above, we also note that the AO while calculating the long-term capital gain, has taken one of the possible views and therefore the same cannot be held as erroneous and prejudicial to the interest of the revenue. See Kwality Steel Suppliers Complex [2017 (7) TMI 620 - SUPREME COURT] - Assessee appeal allowed. ISSUES PRESENTED AND CONSIDERED 1. Whether the assessment framed under section 143(3) of the Income Tax Act, 1961, allowing exemption under section 10(38) for long-term capital gains on sale of equity shares, was 'erroneous in so far as prejudicial to the interest of the revenue' within the meaning of section 263 by reason of alleged non-verification and failure to detect purported bogus/accommodation entry transactions in a penny-stock scrip. 2. Whether the Assessing Officer's inquiries (including notice under section 142(1), examination of demat/contract note/STT/bank evidence and office note) amounted to an exercise of 'application of mind' such that the Commissioner (revisionary authority) could not, under section 263, set aside the assessment on the ground that further or more extensive enquiries should have been made. 3. Whether an assessment reflecting one of two possible views (accepting the assessee's documentary explanation and records) can be treated as erroneous and prejudicial to revenue simply because the Commissioner prefers further enquiry or a different view in light of departmental investigation materials alleging share-price manipulation. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Validity of section 263 revision: legal framework Legal framework: Section 263 empowers the Commissioner to revise an assessment if it is 'erroneous in so far as prejudicial to the interest of the revenue.' The power is exercisable where the assessment is not in accordance with law or where there is lack of requisite inquiry; it is not meant for substitution of the Commissioner's judgment where the Assessing Officer has applied his mind and taken a possible view. Precedent Treatment: The Court distinguished between 'lack of inquiry' and 'inadequate inquiry' - only lack of inquiry warrants use of section 263. Authorities establish that if the Assessing Officer has made inquiries and applied mind (even if the inquiry could have been more elaborate), the revisionary power is not attracted; similarly, where two views are possible, the Assessing Officer taking one view does not render the order erroneous simply because the Commissioner prefers another view. Interpretation and reasoning: The Tribunal examined the material on record - the detailed notice under section 142(1), the assessee's written replies, documentary evidence (application/allotment proof, demat certificates, account-payee cheque payments, contract notes, STT payments), and the AO's office note recording scrutiny under CASS. The Tribunal reasoned that these inquiries and documentary verifications show the AO applied his mind to the issue of genuineness of the transactions and the claim of exemption under section 10(38). Ratio vs. Obiter: Ratio - section 263 cannot be invoked where the Assessing Officer has made enquiries, elicited replies and formed a view based on documentary evidence; mere possibility of further enquiry or disagreement by the Commissioner is insufficient. Obiter - references to departmental investigation particulars (e.g., Kolkata investigation suggesting syndicate activity) are treated as material for further enquiry but do not ipso facto render the AO's order erroneous absent demonstrable lack of any inquiry. Conclusion: The Tribunal concluded that the assessment could not be held erroneous in so far as prejudicial to revenue under section 263 for lack of verification, because the AO had made relevant inquiries and relied on documentary evidence supporting the exemption claim; thus the revision order setting aside the assessment was not sustainable. Issue 2 - Sufficiency of AO's enquiries: interpretation of record Legal framework: Sufficiency of inquiry is judged by whether there was an application of mind and factual enquiry sufficient to enable a reasoned conclusion; it is not measured by an exhaustive or ideal enquiry. Section 142(1) notices and documentary verification are standard tools of inquiry. Precedent Treatment: Reliance on precedents distinguishing 'lack' from 'inadequate' inquiry and affirming that if the AO examines accounts, elicits explanations and documents, the Commissioner cannot overturn on ground of inadequacy alone; and precedents holding assessment valid where AO took one of two possible views. Interpretation and reasoning: The Tribunal reviewed the 142(1) notice which explicitly sought particulars on purchase/sale history, demat/physical certificates, source of funds, reasons for purchase/sale, and comments on departmental investigation alleging accommodation entries. The assessee's comprehensive response, supported by exhibits (application forms, share certificates, bank statements, affidavit denying cash element, STT payment evidence), plus the AO's office note concluding no cash/offline transactions and no adverse inference, were treated as sufficient factual enquiry. Ratio vs. Obiter: Ratio - where AO issues specific documentary queries and evaluates received documentary evidence and explanations (including demat records, application/allotment and bank payments), such inquiries constitute requisite verification for purposes of section 263. Obiter - suggestion that further enquiries (e.g., from company directors or stock exchange) could be desirable does not convert a concluded verification into absence of inquiry. Conclusion: The Tribunal held that the AO conducted effective enquiries and placed reasons on record for accepting the assessee's claim; absence of additional enquiries sought by the Commissioner was a matter of difference in opinion, not a legal defect warranting revision under section 263. Issue 3 - Effect of external departmental investigation alleging syndicate/accommodation entries Legal framework: External investigatory findings are relevant material but do not automatically vitiate an assessment where the AO, after specific enquiry, forms a view on the basis of documentary record. The legal test is whether there was lack of inquiry or a decision not in accordance with law. Precedent Treatment: Courts have recognized that mere existence of suspicion or investigation materials does not empower the Commissioner to set aside an otherwise reasoned assessment; the Commissioner must demonstrate that the AO failed to make any inquiry or acted contrary to statutory requirements. Interpretation and reasoning: The Tribunal acknowledged the departmental investigative material alleging share-price manipulation and syndicate activity, but found that the AO was aware of the suspicion (reflected in the 142(1) notice and CASS selection reasons), elicited specific responses addressing those allegations, and examined documentary proofs which negated the presence of cash/offline transactions in respect of the assessee's purchases and sales. The Tribunal treated investigative allegations as grounds for further probing but not as automatic proof of an erroneous assessment where AO had already engaged with the pointed allegations. Ratio vs. Obiter: Ratio - investigative material pointing to a general modus operandi cannot, by itself, justify revision under section 263 if the AO has made targeted inquiries into the assessee's transactions and relied on contemporaneous documentary evidence to accept the assessee's position. Obiter - recommendation that where new incontrovertible material is found, appropriate proceedings may be initiated afresh. Conclusion: The Tribunal concluded that while the departmental investigation raised a red flag, the AO had addressed those concerns in the assessment process; hence that investigation did not render the assessment order erroneous under section 263. Overall Conclusion The Tribunal set aside the revision order under section 263 and restored the assessment, holding that (a) the AO issued specific enquiries under section 142(1) and verified documentary evidence (demat records, share allotment application, bank account pay-ins, contract notes, STT payments), (b) the AO applied his mind and took one of two permissible views, and (c) mere disagreement by the Commissioner or the existence of separate investigatory material does not convert an inquiry-based assessment into an order 'erroneous in so far as prejudicial to the interest of the revenue' within the meaning of section 263.