2025 (4) TMI 151 - AT - Income Tax

PCIT cannot revise assessment under section 263 when AO took possible view on legitimate business investments

R.V. Interior Pvt. Ltd. Versus PCIT, Delhi.

ITAT Delhi held that PCIT's revision u/s 263 was unjustified where AO had completed limited scrutiny assessment after verifying large investment increases ... Revision u/s 263 - Revenue submitted that no doubt the case was selected for limited scrutiny, the AO has not asked for right details from the assessee about investment made/held/sold during the year HELD THAT:-Case of the assessee was selected for limited scrutiny and assessee was asked to verify the large increase in investment in unlisted equities and high interest expenses relatable to exempt income u/s 14A. AO has verified the above said aspect from the information submitted by the assessee. The assessee has brought to our notice the various information submitted through ITBA portal, as per which the assessee has addressed the issues raised by the AO in the 143(2) notices. After considering the information made available before him, the AO has accepted the submissions and completed the assessment. It may look cryptic but they had a minimum mandate to scrutinise the issues raised in the CASS selection. PCIT has accepted the information submitted by the assessee on the issues raised by the AO that the assessee has not made any investment on the listed or unlisted shares, which may lead to exempt income. He also accepted that fact that interest expenses are not related to the exempt income. However, he proceeded to question the rationale of making investments in the house properties, utilisation of borrowed funds in the business and he also raised the issue of allowability of interest expenses for investment in the house property. We find it odd to notice such exercises. The assessee has wide range of business and showing healthy turn over. It is normal for the different assessee to make investments other than the business purpose. How can a tax authority interfere in such decisions, as long as it is in the name and control of the assessee, the related expenses have to be allowed as business expenses. It is also unfair to question how the assessee arranges its funds to run the business. PCIT has highlighted the own funds available in the business, he overlooked the other types of funds available in the business like trade payables and other indirect finances. We further observed that he has directed the AO to verify the issues raised by him without giving proper findings and step into the shoes of the businessman, how he must run the business. He has not justified how the interest expenses on the real estate investment cannot be allowed in the income tax provisions. AO has verified the limited scope of selection process and taken one of the possible view based on the material available before him and PCIT may have divergent view and possible other views, the same cannot make the assessment order erroneous and prejudicial to the interest of the Revenue. In this case, the Ld PCIT has invoked Explanation 2 to section 263 in this case wrongly - Decided in favour of assessee. 1. ISSUES PRESENTED and CONSIDEREDThe primary legal question considered was whether the Principal Commissioner of Income Tax (PCIT) was justified in invoking Section 263 of the Income Tax Act, 1961, to revise the assessment order passed by the Assessing Officer (AO) for the Assessment Year 2016-17. This involved examining whether the original assessment was erroneous and prejudicial to the interests of the Revenue due to alleged inadequate verification of certain financial aspects, particularly the increase in investments and the deductibility of interest expenses.2. ISSUE-WISE DETAILED ANALYSISRelevant legal framework and precedents:The legal framework centered around Section 263 of the Income Tax Act, which allows the PCIT to revise any order passed by the AO if it is deemed erroneous and prejudicial to the interests of the Revenue. The explanation to Section 263 was particularly relevant, as it provides conditions under which an order can be considered erroneous.Precedents cited included various judgments from the Supreme Court and High Courts, which clarified that an order cannot be deemed erroneous merely because the PCIT has a different opinion. The courts have consistently held that if the AO has made inquiries and applied their mind, the order cannot be revised under Section 263 simply because another view is possible.Court's interpretation and reasoning:The Tribunal interpreted that the AO had conducted adequate inquiries within the scope of the limited scrutiny that was initiated. The AO had verified the increase in investments and the interest expenses claimed by the assessee, concluding that the investments were made for business purposes and that the interest expenses were allowable.The Tribunal reasoned that the PCIT's invocation of Section 263 was based on a different interpretation of the facts rather than a lack of inquiry or application of mind by the AO. The Tribunal emphasized that the AO's order was not a case of 'no inquiry' but rather one where the AO had taken a plausible view based on the evidence presented.Key evidence and findings:The key evidence considered included the assessee's submissions during the assessment proceedings, which demonstrated that the investments were made in immovable properties and were part of the business operations. The AO had accepted these submissions, and the assessment order reflected this acceptance.The PCIT's findings focused on the alleged inadequacy of the AO's inquiries, particularly concerning the source of funds for investments and the nexus between borrowed funds and investments. However, the Tribunal found that the AO had indeed considered these aspects during the assessment.Application of law to facts:The Tribunal applied the principles established in various judicial precedents to the facts of the case, concluding that the AO's order was not erroneous as it was based on a reasonable inquiry and consideration of the evidence. The Tribunal held that the PCIT's different interpretation of the facts did not warrant a revision under Section 263.Treatment of competing arguments:The Tribunal carefully considered the competing arguments presented by the assessee and the Revenue. The assessee argued that the AO had made adequate inquiries and that the PCIT's revision was based on a mere difference of opinion. The Revenue contended that the AO had failed to make proper inquiries, justifying the revision under Section 263. The Tribunal sided with the assessee, finding that the AO had conducted a sufficient inquiry.Conclusions:The Tribunal concluded that the PCIT's invocation of Section 263 was not justified, as the AO had made a considered decision after adequate inquiry. The Tribunal found that the AO's order was neither erroneous nor prejudicial to the interests of the Revenue.3. SIGNIFICANT HOLDINGSThe Tribunal held that the AO's assessment order was not erroneous, as it was based on adequate inquiry and consideration of the facts. The Tribunal emphasized that a mere difference of opinion by the PCIT does not justify a revision under Section 263. The Tribunal reiterated the principle that an assessment order cannot be revised simply because another view is possible.The Tribunal's core principle established was that the scope of Section 263 is limited to cases where the AO's order is clearly erroneous and prejudicial to the interests of the Revenue. The Tribunal reinforced the idea that the AO's discretion and judgment should be respected when it is based on a reasonable inquiry.The final determination was that the appeal filed by the assessee was allowed, and the PCIT's order under Section 263 was set aside.