2024 (4) TMI 139 - AT - Income Tax

PCIT's section 263 revision order quashed for inadequate examination of assessment records and proper due diligence

The ITAT Dehradun quashed the PCIT's revision order under section 263. The PCIT had found the assessment order erroneous and prejudicial to revenue ... Revision u/s 263 - PCIT found the order to be erroneous and prejudicial to the interest of Revenue on account of non-examination of the genuineness of the sundry creditors and allowing 80IC deductions - HELD THAT:- Observations of PCIT that the assessment order was passed without due diligence is not well founded. Apparently, the AO had called for relevant information on regular basis and which were responded by the assessee. The reply, shows that the assessee had provided relevant information including audit report justifying the claim of deduction. We find no force in the contention of ld. DR that the AO may have examined the question of eligibility, but, not the quantum. The two aspects supplement each other. PCIT has concluded the fact of assessment order being passed without due diligence on the basis that although the assessee had furnished balance sheet, Profit & Loss Account and Form No.10CCB, the AO had not enquired from the assessee to comply with the queries raised in this regard. Certainly, the assessment order is silent on some aspects, but, at the same time, the PCIT before whom the assessee had given a detailed explanation of the income from two units and how they were reported in the financials and other relevant evidences available in assessment record have not been examined to give a finding that what was the extent of claim of deduction of the assessee which was left out of the scrutiny of the AO. Merely making a bald allegation of assessing officer not carrying out investigations sufficiently or to say, to the satisfaction of the PCIT, cannot be basis to invoke the provisions of section 263 - Thus PCIT has fallen in error in concluding that the order of the ld.AO was erroneous so far as prejudicial to the interest of the Revenue. Decided in favour of assessee. ISSUES PRESENTED AND CONSIDERED 1. Whether the revisionary authority validly invoked the revision jurisdiction under section 263 by holding the assessment order to be 'erroneous and prejudicial to the interest of revenue' on the ground that the Assessing Officer (AO) passed the assessment without due diligence in relation to deduction claimed under section 80IC (scope: eligibility and quantum). 2. Whether the AO had, in fact, conducted requisite enquiries and verification (including issuing notices and seeking documents) such that the order could not be characterized as passed without due diligence for purposes of section 263. 3. Whether mere silence in the assessment order on certain aspects (e.g., extent of claim) or a difference of view between assessing/revisionary authorities suffices to invoke powers under section 263. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Validity of invoking section 263 (erroneous and prejudicial to revenue) in respect of deduction under section 80IC Legal framework: Section 263 empowers the revisionary authority to revise an assessment if the assessment is 'erroneous and prejudicial to the interest of the revenue.' Explanation 2 to section 263 (clauses (a) and (b) as relied upon) imports the requirement that the AO must have failed to make inquiries or verification or to confront material available on record such that the order is rendered erroneous. Precedent Treatment: The judgment does not rely on or cite precedents for specific tests; no prior decisions are expressly followed, distinguished or overruled in the instant reasoning. Interpretation and reasoning: The Tribunal examined the assessment record and identified multiple indisputable actions by the AO: issuance of repeated notices under section 142(1) specifically asking the assessee to explain 'large deductions claimed u/s 80IA/80IC...' (queries dated 09.09.2019, 23.09.2019, 03.10.2019, 17.10.2019 and 02.12.2019); the assessee's responses supplying audit reports, ledger details, bank statements, details of sundry creditors and undertaking to produce books and vouchers at manual hearing (responses dated 18.09.2019 and 23.10.2019); and an uploaded screenshot of documents on the ITBA portal. The Tribunal found that the AO had called for and received material specifically addressing the claim of deduction and related verifications. The Tribunal rejected the revisionary authority's conclusion that the AO omitted to make necessary enquiries. It held that the AO's examination (including seeking explanations and documentary support) manifested due diligence; further, eligibility and quantum are interconnected and both were addressed through the enquiries and supplied documents. The Tribunal held that a bald allegation that the AO did not investigate sufficiently could not justify exercise of s.263 where the record shows active inquiries and responses. Ratio vs. Obiter: Ratio - Where the assessment record demonstrates that the AO issued repeated and specific enquiries on the claim under section 80IC and the assessee supplied documentary responses (audit report, bank statements, sundry creditor details, offer to produce books/vouchers), the revisionary jurisdiction under section 263 cannot be validly exercised on the sole ground that the AO passed the assessment 'without due diligence.' Obiter - Observations indicating that silence in the assessment order on some aspects is not by itself decisive, and that eligibility and quantum 'supplement each other' may be treated as explanatory reasoning rather than core holding. Conclusions: The Tribunal concluded that the revisionary authority erred in holding the assessment order to be erroneous and prejudicial to the interest of revenue under section 263. The impugned revision order was set aside and the appeal allowed on this ground. Issue 2 - Whether procedural deficiencies (natural justice, limitation, silence in AO's order) justified revision Legal framework: Principles of natural justice require opportunity to be heard before adverse action; limitation and procedural compliance constrain exercise of revisionary powers. Additionally, the statutory test for s.263 requires substantive error prejudicial to revenue, not merely procedural or formal omissions. Precedent Treatment: The judgment does not invoke specific precedent on natural justice or limitation. No authority was applied to support the revisionary order in the record. Interpretation and reasoning: The assessee contended violation of principles of natural justice and that the order was barred by limitation. The Tribunal's analysis focused principally on the material on record showing AO's active enquiries and the assessee's responses; it concluded that the revisionary authority's finding was based on an unsupported factual premise (that AO had not inquired). Because the primary basis for revision was the alleged lack of due diligence, and because that premise was found incorrect, the Tribunal found no need to sustain the revision under the alternative procedural grounds. The Tribunal also held that mere silence in the assessment order concerning some particulars does not ipso facto convert the assessment into an 'erroneous' order under section 263 where the record demonstrates that issues were raised and documents furnished during scrutiny. Ratio vs. Obiter: Ratio - A revision under section 263 cannot be sustained on procedural grounds (alleged violation of natural justice or limitation) where the primary factual basis for revision (lack of AO's due diligence) is not established by the assessment record. Obiter - The remark that a mere bald allegation of insufficient investigation by the AO is inadequate to invoke section 263 is an interpretative clarification. Conclusions: The Tribunal rejected the procedural/contentions as a basis for upholding revision when the record demonstrates regular and specific enquiries and substantive responses. Accordingly, it set aside the revision order rather than remitting for re-examination on limitations or natural justice grounds. Cross-reference The conclusions on Issue 1 and Issue 2 are interdependent: the Tribunal's determination that specific enquiries were issued and responded to (Issue 1) undercut the revisionary authority's factual premise, thereby negating the need to sustain the revision on alternative procedural grounds (Issue 2).