2025 (4) TMI 279 - AT - Income Tax

ITAT allows appeal against Section 263 revision finding AO conducted adequate enquiry despite inadequacy claims

Venus Rent A Car Private Limited Versus Pr. Cit, Delhi-7, New Delhi

ITAT Delhi allowed the assessee's appeal against revision order u/s 263. The tribunal found that AO had made due enquiries as evidenced by documents and ... Revision u/s 263 - no due enquiries have been made by the AO - HELD THAT:- We find that on the items mentioned by the Ld. PCIT due enquiries have been made by the AO as reflected in the various documents attached in the Paper Books and the replies of the assessee also duly attached in the Paper Book. We have gone through the same. We find that AO has made enquiry, hence, it cannot be said that AO has not made due enquiries in this case. We refer the decision of Sunbeam Auto [2009 (9) TMI 633 - DELHI HIGH COURT] to the proposition that AO in the assessment order is not required to give detailed reason in respect of each and every item of deduction. If there was any enquiry even inadequate that would not by itself give occasion to the Ld. PCIT to pass order u/s. 263 of the Act, merely because he has different opinion in the matter. Hon’ble Delhi High Court in the case of Anil Kumar Sharma [2010 (2) TMI 75 - DELHI HIGH COURT] has held that there is a distinction between “lack of enquiry” and “inadequate enquiry”. If there was any enquiry, even inadequate, that would not by itself given occasion to the Commissioner to pass orders u/s. 263 of the Act. Examining the present case on the touchstone of the aforesaid cases laws, we find that AO has made due enquiries and replies in this regard were given by the assessee which has been duly reflected in the documents attached in the Paper Books. We note that the Explanation 2 to Section 263 of the Act referred by the Pr. CIT has been inserted by the Finance Act, 2015, which is applicable from the assessment year 2016-17 only. However, the present assessment year being the assessment year 2015-16, hence, applicability of Explanation 2 to Section 263 is not applicable to the present case. The amendment thus cannot empower the PCIT to order for further enquiry as the period is prior to the amendment. So the details were enquired by the AO and duly examined by him, hence, it cannot be said that the order of the AO is erroneous and prejudicial to the interest of revenue. Decided in favour of assessee. ISSUES PRESENTED and CONSIDEREDThe core legal questions considered in this judgment are:1. Whether the Principal Commissioner of Income Tax (Pr. CIT) was justified in invoking the provisions of Section 263 of the Income Tax Act, 1961, to revise the assessment order passed under Section 143(3) for the assessment year 2015-16.2. Whether the assessment order was erroneous and prejudicial to the interests of the revenue, justifying the invocation of Section 263.3. Whether the Assessing Officer (AO) conducted adequate enquiries during the assessment proceedings, and if not, whether this justified the revision of the order under Section 263.ISSUE-WISE DETAILED ANALYSIS1. Invocation of Section 263 by Pr. CITRelevant legal framework and precedents: Section 263 of the Income Tax Act empowers the Pr. CIT to revise an assessment order if it is found to be erroneous and prejudicial to the interests of the revenue. The twin conditions of 'erroneous' and 'prejudicial' must be satisfied for the invocation of this section. The precedents cited include the Supreme Court's decision in Malabar Industrial Co. Ltd. v. CIT, which outlines these conditions.Court's interpretation and reasoning: The Tribunal found that the AO had conducted due enquiries during the assessment proceedings. The Pr. CIT's invocation of Section 263 was based on a perceived lack of enquiry, which the Tribunal found to be incorrect.Key evidence and findings: The Tribunal examined the documents submitted during the assessment proceedings, including audit reports, balance sheets, and detailed replies to notices issued by the AO. These documents demonstrated that the AO had made enquiries into the expenses and other issues raised by the Pr. CIT.Application of law to facts: The Tribunal applied the legal principles from the cited precedents, concluding that the AO had conducted sufficient enquiries. The Tribunal noted that even if the enquiry was inadequate, it would not justify the revision under Section 263 unless there was a complete lack of enquiry.Treatment of competing arguments: The Tribunal considered the arguments from both the assessee and the department. The department argued for further enquiry, while the assessee contended that adequate enquiries had been made. The Tribunal sided with the assessee based on the evidence presented.Conclusions: The Tribunal concluded that the Pr. CIT was not justified in invoking Section 263, as the assessment order was neither erroneous nor prejudicial to the interests of the revenue.2. Adequacy of Enquiries by the AORelevant legal framework and precedents: The distinction between 'lack of enquiry' and 'inadequate enquiry' is crucial. The Delhi High Court's decisions in CIT v. Sunbeam Auto and Anil Kumar Sharma provided guidance on this distinction.Court's interpretation and reasoning: The Tribunal found that the AO had indeed conducted enquiries, as evidenced by the documents and responses submitted during the assessment proceedings. The Tribunal emphasized that an AO is not required to document detailed reasons for every deduction or enquiry.Key evidence and findings: The Tribunal reviewed the notices issued by the AO and the responses provided by the assessee, which included detailed financial documents and explanations.Application of law to facts: The Tribunal applied the principles from the cited cases, determining that the AO's enquiries were adequate. The Tribunal noted that the Pr. CIT's reliance on Explanation 2 to Section 263 was misplaced, as it was applicable from the assessment year 2016-17 onwards.Treatment of competing arguments: The department's argument for further enquiry was countered by the detailed submissions and evidence provided by the assessee, which the Tribunal found satisfactory.Conclusions: The Tribunal concluded that the AO had made adequate enquiries and that the assessment order was not erroneous or prejudicial to the revenue.SIGNIFICANT HOLDINGSPreserve verbatim quotes of crucial legal reasoning: 'If there was any enquiry even inadequate that would not by itself give occasion to the Ld. PCIT to pass order u/s. 263 of the Act, merely because he has different opinion in the matter.'Core principles established: The Tribunal reinforced the principle that for Section 263 to be invoked, the assessment order must be both erroneous and prejudicial to the interests of the revenue. The distinction between 'lack of enquiry' and 'inadequate enquiry' is critical, with the latter not justifying revision under Section 263.Final determinations on each issue: The Tribunal determined that the Pr. CIT's invocation of Section 263 was unjustified, as the AO had conducted adequate enquiries, and the assessment order was neither erroneous nor prejudicial to the revenue. Consequently, the Tribunal quashed the order passed under Section 263.In conclusion, the Tribunal allowed the assessee's appeal, finding that the conditions for invoking Section 263 were not met. The assessment order was upheld as valid, with the Tribunal emphasizing the importance of distinguishing between inadequate and complete lack of enquiry in such cases.