2025 (3) TMI 1337 - AT - Income Tax

ITAT allows appeal against section 263 revision proceedings lacking reasonable basis for fishing enquiries

DCM Shriram Ltd. Versus Principal Commissioner of Income Tax, New Delhi

The ITAT Delhi allowed the assessee's appeal against revision proceedings under section 263. The PCIT had identified 14 issues for scrutiny but claimed ... Revision u/s 263 - case of the Assessee was selected for ‘complete scrutiny’ wherein 14 issues were identified, however, the A.O. examined only three issues thus, AO has not applied his mind on all the 14 issues Claim of profit-linked deduction made u/s 80IA - HELD THAT:-Considering the documents produced by the Assessee, transfer pricing adjustment was also made by the TPO. Consequently, the assessment order was also passed making the very same addition. Thus, the TPO not only examined the issues, but also made substantial adjustment in TPO order. Thus, it is found that the observation of the PCIT that ‘the separate books of accounts and balance sheets of eligible units have not been produced by the Assessee either before the AO or before the PCIT’ is factually incorrect. It is found that all the requisite details were filed by the Assessee before the AO, TPO as well as before the PCIT which could be corroborated from the submission filed by the Assessee, wherein the Assessee has produced all the details pertaining to such claim i.e. Form No. 10CCBs separate books of accounts, Form 3CEB, etc. Deduction u/s 35(2AB) of the Act for Research and Development Expenditure - It is found that A.O. has made exhaustive questionnaires on the issue of deduction u/s 35(2AB) of the Act for research and development expenditure and asked for all the relevant form and agreements, copy of approval from DSIR, Copy of Form 3CM, Form 3CK and 3CL, which were duly submitted to the A.O. during the assessment proceedings and the AO has verified all the documents and submission made by the Assessee. Difference between custom duty paid as per ITR and as per Import Export Data - It is found that it is not a case wherein the AO failed to conduct enquiry rather it is the case wherein the AO has conducted an elaborate enquiry and adopted one of the two views which was plausible view. The question would be as to whether in such circumstances the power u/s 263 of the Act would be invoked or not. The above said question is no longer res-integra and the said issue is well settled in several decisions. The proceedings u/s 263 of the Act cannot be for the purpose of making fishing/roving enquiries w.r.t. variety of issues only with an objective of substituting his views with that of the AO. As could be seen from the various show caused notices issued by the Ld. PCIT, the PCIT is asking the Assessee to substantiate its claim by submitting the various information and documentary evidence. Apart from the same, PCIT has dropped the revisionary proceedings on almost all issues except 3 issues, which shows that proceedings were initiated purely on guess work, surmises and with an intention to draw further information from the Assessee on the issues already settled in the assessment devoid of any basis / reason /information already being considered before issuance of SCN u/s 263 of the Act. The terms and tenure of the initial SCN dated 04.12.2023 does not indicates any concerted efforts on the part of PCIT for examination of assessment records and then forming of any reasonable belief/opinion whereupon the Assessee’s assessment should be considered for revision. Such fishing and roving enquires cannot be permitted while exercising the power conferred u/s 263 of the Act as held by various judicial pronouncements. Appeal of the Assessee is allowed. ISSUES PRESENTED and CONSIDEREDThe core legal questions considered in this judgment include:Whether the Principal Commissioner of Income Tax (PCIT) erred in initiating proceedings under Section 263 of the Income Tax Act against the appellant.Whether the assessment order dated 21.06.2021 was erroneous and prejudicial to the interest of the Revenue.Whether the PCIT failed to appreciate that Section 263 can be applied only when an order is both erroneous and prejudicial to the Revenue.Whether the PCIT mechanically initiated proceedings without substantiating how the AO's conclusions were erroneous and prejudicial to the Revenue.Whether the PCIT erred in holding that the claim of Section 80-1A deduction was beyond his jurisdiction under Section 263.Whether the PCIT ignored the Doctrine of Merger by directing the AO for re-verification of the 80-1A claim.Whether the PCIT erred in concluding that the AO failed to make necessary enquiries regarding specific issues.ISSUE-WISE DETAILED ANALYSISRelevant legal framework and precedents:The legal framework involves Section 263 of the Income Tax Act, which allows the PCIT to revise an assessment order if it is erroneous and prejudicial to the interest of the Revenue. The precedents cited include decisions from the Supreme Court and various High Courts, such as Malabar Industrial Co. Ltd. vs. Commissioner of Income Tax and CIT vs. Sunbeam Auto Ltd., which clarify that not every loss of revenue is prejudicial to the Revenue.Court's interpretation and reasoning:The Tribunal found that the PCIT's invocation of Section 263 was not justified as the AO had conducted detailed enquiries and adopted a plausible view. The Tribunal emphasized that the power under Section 263 cannot be used to substitute the PCIT's opinion for that of the AO without demonstrating that the AO's view was unsustainable in law.Key evidence and findings:The AO had raised specific queries during the assessment proceedings, and the assessee had provided detailed responses and documentation.The issues raised by the PCIT were already addressed during the original assessment proceedings, including the examination by the Transfer Pricing Officer (TPO).The Tribunal noted that the PCIT's observations were factually incorrect, particularly regarding the production of separate books of accounts and balance sheets for eligible units.Application of law to facts:The Tribunal applied the principles established in Malabar Industrial Co. Ltd. vs. Commissioner of Income Tax and other cases to conclude that the AO's order was not erroneous or prejudicial to the Revenue. The Tribunal highlighted that the AO had exercised due diligence and made plausible findings, which were not open to revision under Section 263.Treatment of competing arguments:The Tribunal considered the arguments from both the assessee and the Revenue. The assessee argued that the PCIT failed to demonstrate how the AO's order was erroneous and prejudicial, while the Revenue contended that the AO had not examined all issues. The Tribunal sided with the assessee, finding that the AO had conducted adequate enquiries.Conclusions:The Tribunal concluded that the PCIT's order under Section 263 was not sustainable, as the AO had made a plausible assessment after conducting necessary enquiries. The Tribunal quashed the PCIT's order, allowing the assessee's appeal.SIGNIFICANT HOLDINGSPreserve verbatim quotes of crucial legal reasoning:'The phrase 'prejudicial to the interests of the Revenue' has to be read in conjunction with an erroneous order passed by the Assessing Officer. Every loss of revenue as a consequence of an order of the Assessing Officer cannot be treated as prejudicial to the interests of the Revenue.'Core principles established:The power under Section 263 cannot be used to substitute the PCIT's opinion for that of the AO without demonstrating that the AO's view was unsustainable in law.The proceedings under Section 263 cannot be for the purpose of making fishing/roving enquiries.The PCIT must conduct necessary enquiries or verification to establish that the AO's findings are erroneous and prejudicial to the Revenue.Final determinations on each issue:The Tribunal quashed the PCIT's order under Section 263, finding it unsustainable.The Tribunal held that the AO had conducted adequate enquiries and adopted a plausible view, which could not be interfered with under Section 263.The Tribunal emphasized that the PCIT's order was based on incorrect factual premises and lacked the necessary legal basis to revise the AO's order.