2024 (11) TMI 249 - HC - Income Tax

PCIT cannot use Section 263 revision powers when AO reasonably accepted assessee's share transaction explanation during reassessment

Sipura Developers Pvt Ltd Versus Pr. Commissioner of Income Tax 7

Delhi HC held that PCIT lacked jurisdiction to pass revision order u/s 263 where AO had accepted assessee's explanation regarding share purchase ... Revision u/s 263 - income chargeable to tax commensurate to TDS - as per CIT AO did not raise any query related to this issue during the course of proceedings nor has the assessee given any justification for claim of TDS without declaring the corresponding interest income from securities - PCIT had sought to make an addition u/s 68 on account of a transaction which was not the subject matter of the reasons recorded for reopening the assessee’s assessment for the relevant assessment year HELD THAT:- The powers of the Commissioner u/s 263 of the Act are in the nature of a review and an order under Section 263 of the Act could be passed only if the learned PCIT found that (i) the order passed by the AO is erroneous; and (ii) that it is prejudicial to the interest of the Revenue. Once it is accepted that the AO could not have made any addition to the assessee’s any other income if it was satisfied with the assessee’s explanation regarding the transaction of purchase of shares of FDPL; it would follow that the PCIT could not fault the AO for not making any such addition. Clearly, once the AO accepted the assessee’s explanation regarding the investment made in the shares of FDPL and the amount borrowed from APPL for funding the said purchase, the AO could not proceed to make any addition on any other ground in the reassessment proceedings. Thus, non-addition of any income on account of alleged income from interest commensurate with the TDS deposited by Valtika Limited, or making further enquiries would not confer the learned PCIT with the jurisdiction to pass an order under Section 263 of the Act. Decided in favour of assessee. Issues Involved:1. Whether the Income Tax Appellate Tribunal was correct in upholding the order passed under Section 263 of the Income Tax Act, 1961, by ignoring jurisdictional High Court judgments.2. The validity of reassessment proceedings under Section 147 of the Act.3. The jurisdiction of the Assessing Officer to make additions not related to the reasons for reopening the assessment.4. The powers of the Principal Commissioner of Income Tax (PCIT) under Section 263 to revise the assessment order.Issue-wise Detailed Analysis:1. Tribunal's Decision and Jurisdictional High Court Judgments:The core issue was whether the Tribunal correctly upheld the PCIT's order under Section 263, disregarding the Delhi High Court judgments in CIT vs. Software Consultants and Ranbaxy Laboratories Ltd. vs. CIT. The High Court emphasized that the Tribunal erred by not considering these precedents, which establish that if no addition is made on the basis of the reasons to believe recorded by the Assessing Officer (AO) for reopening the assessment, other unrelated additions cannot be made.2. Validity of Reassessment Proceedings under Section 147:The reassessment was initiated based on the AO's belief that income had escaped assessment due to high-value transactions involving the assessee. However, the AO ultimately accepted the assessee's explanation regarding these transactions and made no additions. The High Court reiterated that under Section 147, if the AO finds that the income he believed had escaped assessment did not, he cannot assess other income unless it is connected to the original reason for reopening.3. Jurisdiction of the AO to Make Additions:The High Court clarified that the AO's jurisdiction under Section 147 is contingent upon the validity of the reasons to believe that income had escaped assessment. If the AO concludes that the initial reasons did not result in escaped income, he lacks jurisdiction to assess other unrelated income. This principle was supported by precedents from the Rajasthan High Court in Commissioner of Income Tax v. Shri Ram Singh and the Bombay High Court in Commissioner of Income Tax v. Jet Airways (I) Limited.4. Powers of the PCIT under Section 263:The PCIT's order under Section 263 was challenged as it sought to revise the AO's assessment, which was not erroneous or prejudicial to the Revenue since the AO had not made any additions based on the original reasons for reopening the assessment. The High Court held that the PCIT's powers under Section 263 are limited to cases where the AO's order is both erroneous and prejudicial to the Revenue. Since the AO could not have made any addition unrelated to the original reasons, the PCIT's order was unsustainable.Conclusion:The High Court concluded that the Tribunal's decision was incorrect, and the PCIT's order under Section 263 was unsustainable. The AO's acceptance of the assessee's explanation regarding the investment in shares and the funds borrowed meant no addition could be made on other grounds. The appeal was allowed, setting aside the orders of both the PCIT and the Tribunal, reaffirming the principles established in the cited High Court judgments.