2025 (2) TMI 191 - AT - Income Tax

AO's failure to investigate rental expenses despite WhatsApp evidence validates PCIT's Section 263 revision powers

ITAT Delhi upheld PCIT's revision under Section 263, finding AO's assessment order erroneous and prejudicial to revenue. AO failed to conduct proper ... Revision u/s 263 - incriminating material existed but was not utilized by the AO - proper enquiry v/s inadequate enquiry - non verification of rental expenses claimed by the company - HELD THAT:- AO did not make any enquiry at all with regard to the rent payment especially in the light of information available with him. The AO never asked for any supporting documents like rent agreement, bills/invoices or any query on the whatsapp chat showing Sh. Kamal Kapoor receiving rental payments in cheque from the assessee and Sh. Amit Katyal receiving cash from Sh Kamal Kapoor against those cheques of rental payment made. We therefore hold that the AO neither examined the issue of rental expenses for the AY 2015-16 nor applied his mind on the issue in light of information available with him. In the instant case the PCIT has clearly demonstrated that the AO did not conduct inquiries or verification which should have been done. This is not a case where the AO has applied his mind and had arrived at a plausible view whereas the PCIT had different view from that of the AO. We are of the considered view that the instant case is one where the AO has not conducted any effective enquiry and has not applied his mind at all which is discernible from the fact that the AO never confronted the assessee with the whatsapp chat and was simply satisfied with the ledger account of Kamal Kapoor in the assessee’s book as explaining the genuineness of the rental payment made. The routine questionnaire issued by the AO cannot be considered as an inquiry required to be conducted by the AO. We therefore, hold that it is writ large on the facts and circumstances of the case that there is absence of any effective inquiry and there is a total non-application of mind by the AO on the incriminating documents available with him. The order passed by the AO would therefore, clearly fall within the meaning of an “erroneous order”. The order is also, undisputedly, prejudicial to the interests of the Revenue inasmuch as it results in loss of the Revenue in the form of tax. We therefore, hold that the assumption of jurisdiction by the PCIT under Section 263 of the Act is valid - Decided against assessee. ISSUES PRESENTED and CONSIDEREDThe primary issue considered was whether the Principal Commissioner of Income Tax (PCIT) was justified in invoking his powers under Section 263 of the Income Tax Act to revise the assessment order for the Assessment Year (AY) 2015-16. The core legal questions included:Whether the assessment order passed by the Assessing Officer (AO) was erroneous and prejudicial to the interests of the Revenue.Whether the AO conducted adequate inquiries or applied his mind regarding the rental expenses claimed by the assessee.Whether the PCIT had the jurisdiction to revise the assessment order under Section 263 based on the alleged lack of inquiry by the AO.Whether the procedural and substantive requirements for invoking Section 263 were met.ISSUE-WISE DETAILED ANALYSISRelevant Legal Framework and PrecedentsSection 263 of the Income Tax Act empowers the PCIT to revise an order passed by the AO if it is erroneous and prejudicial to the interests of the Revenue. The Supreme Court in Malabar Industrial Co. Ltd. established that an order can be deemed erroneous if it is based on incorrect facts or law, or if it is passed without proper inquiry. The Delhi High Court in Pr. Commissioner of Income Tax vs. Ms. Sangeeta Jain emphasized the necessity of adequate inquiry by the AO.Court's Interpretation and ReasoningThe Tribunal found that the AO did not make any specific inquiry regarding the rental expenses of Rs. 72,00,000/- claimed by the assessee, despite having information suggesting that cash was being received by the Director of the assessee company against rental payments. The AO's failure to conduct a detailed inquiry or verification, especially in light of the incriminating WhatsApp chat, rendered the assessment order erroneous.Key Evidence and FindingsThe incriminating evidence included a WhatsApp chat between Amit Katyal and Kamal Kapoor, indicating that cash was received against rental cheques. The AO did not confront the assessee with this evidence or conduct further inquiries to verify the legitimacy of the rental expenses claimed.Application of Law to FactsThe Tribunal applied the principles from Malabar Industrial Co. Ltd. and other precedents to conclude that the AO's lack of inquiry constituted an erroneous order. The failure to verify the rental expenses, despite having evidence suggesting irregularities, was prejudicial to the interests of the Revenue.Treatment of Competing ArgumentsThe assessee argued that the AO had examined the rental expenses and that no incriminating material was found against the company. However, the Tribunal noted that the AO's inquiry was superficial and did not address the specific issues raised by the incriminating evidence. The Department argued that the AO's failure to act on available information justified the PCIT's invocation of Section 263.ConclusionsThe Tribunal concluded that the AO did not conduct the necessary inquiries or apply his mind to the rental expenses claimed by the assessee, making the assessment order erroneous and prejudicial to the Revenue. The PCIT was justified in revising the order under Section 263.SIGNIFICANT HOLDINGSCore Principles EstablishedThe Tribunal reaffirmed the principle that an assessment order can be revised under Section 263 if it is passed without adequate inquiry or verification, rendering it erroneous and prejudicial to the interests of the Revenue. The AO's duty to conduct a thorough investigation when faced with incriminating evidence was emphasized.Final Determinations on Each IssueThe Tribunal held that the PCIT validly exercised jurisdiction under Section 263, as the AO's order was both erroneous and prejudicial to the Revenue due to the lack of inquiry into the rental expenses. The appeal by the assessee was dismissed, upholding the PCIT's revisionary order.