2025 (5) TMI 1959 - HC - Income Tax

CIT cannot revise AO's order under section 263 merely due to disagreement on section 80P(2)(d) deduction without proving legal error

The Principal Commissioner Of Income Tax-1 Versus Kutch District CO. OP. Milk Producers Union Ltd.

Gujarat HC upheld ITAT's decision quashing CIT's revision order under section 263. The court held that CIT failed to establish the AO's order was ... Revision u/s 263 - as per CIT AO had not applied his mind regarding the claim of the Assessee for deduction u/s 80(P)(2)(d) - ITAT quashing the revision order HELD THAT:- In Malabar Industrial Co. Ltd.[2000 (2) TMI 10 - SUPREME COURT] wherein held 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, for example, when an Income Tax Officer adopted one of the courses permissible in law and it has resulted in loss of revenue; or where two views are possible and the Income Tax Officer has taken one view with which the Commissioner does not agree, it cannot be treated as an erroneous order prejudicial to the interests of the Revenue unless the view taken by the Income Tax Officer is unsustainable in law. It has been held by this Court that where a sum not earned by a person is assessed as income in his hands on his so offering, the order passed by the Assessing Officer accepting the same as such will be erroneous and prejudicial to the interests of the Revenue. No substantial question of law. The core legal questions considered in this judgment revolve around the validity and scope of revisionary powers under Section 263 of the Income Tax Act, 1961, specifically:(a) Whether the Income Tax Appellate Tribunal (ITAT) was justified in quashing the revision order passed under Section 263 of the Act by the Principal Commissioner of Income Tax (PCIT), when the original assessment order by the Assessing Officer (AO) was allegedly unsustainable in law;(b) Whether the ITAT erred in quashing the Section 263 order without considering that the order was passed without adequate inquiries or verification, thereby attracting Explanation 2 to Section 263 and rendering the order erroneous and prejudicial to the revenue;(c) Whether the ITAT was justified in ignoring the binding precedent of the jurisdictional High Court which held that interest income from surplus funds invested by a co-operative society in fixed deposits with co-operative banks and nationalized banks does not qualify for deduction under Section 80P(2)(a)(i) and Section 80P(2)(d) of the Act.Issue-wise Detailed Analysis1. Scope and Application of Section 263 of the Income Tax ActThe legal framework governing revisionary powers under Section 263 was central to the dispute. Section 263 empowers the Principal Commissioner or Commissioner to revise an order passed by the AO if it is found to be erroneous and prejudicial to the interests of revenue. Explanation 2 to Section 263 clarifies that an order shall be deemed erroneous and prejudicial if it is passed without making inquiries or verification which should have been made, or if it allows relief without inquiry, or if it is not in accordance with binding judicial decisions or Board instructions.The Court relied heavily on the ITAT's detailed reasoning, which emphasized that the mere inadequacy of inquiry by the AO does not render an order erroneous under Section 263. The AO's discretion to conduct inquiries is not to be supplanted by the PCIT's subjective view of adequacy. The distinction between 'lack of inquiry' and 'inadequate inquiry' was highlighted, drawing on precedents including the Delhi High Court's ruling in CIT vs. Sunbeam Auto, which held that the AO's order cannot be set aside under Section 263 merely because the Commissioner disagrees with the extent of inquiry, unless there was a complete lack of inquiry.Further, the ITAT's reliance on the Bombay High Court decision in Gabriel India Ltd. clarified that revisional powers cannot be exercised to initiate 'fishing and roving inquiries' or to re-open settled issues without prima facie material showing that the tax liability was incorrectly determined.The Mumbai ITAT's view in Sh. Narayan Tatu Rane Vs. ITO was also cited, underscoring that the AO's order is erroneous under Explanation 2(a) only if the AO failed to carry out inquiries or verifications that a reasonable and prudent officer would have made. The PCIT must demonstrate that the AO's inquiries were unreasonable or insufficient in the circumstances.Supreme Court precedents were pivotal. In Principal Commissioner of Income-tax, Surat-2 v. Shreeji Prints (P.) Ltd., the Supreme Court upheld the principle that if the AO's view is plausible and based on detailed inquiries, the PCIT cannot invoke Section 263 to supplant that view. Similarly, in Principal Commissioner of Income-tax 2 v. Shree Gayatri Associates, the Supreme Court dismissed revisionary orders where the AO had conducted detailed inquiries, reinforcing that the Commissioner's disagreement with the AO's conclusion does not justify revision.Applying these principles, the Court found that the AO had indeed conducted inquiries and applied his mind to the claim for deduction under Section 80P(2)(d). The PCIT's order under Section 263 was thus held to be unjustified as it was based on a disagreement with the AO's view rather than any absence of inquiry or legal error.2. Legality of the Deduction Claimed under Section 80P(2)(d)The Revenue contended that the deduction claimed by the assessee, a co-operative society, on interest income from fixed deposits with co-operative banks and nationalized banks was not permissible under Section 80P(2)(d), relying on a binding High Court precedent which held that such interest income does not qualify for deduction.The Court noted, however, that the cited High Court decision pertained primarily to reopening assessments under Section 147 and did not directly address the validity of the deduction claim under Section 80P in the context of revision under Section 263. The ITAT had observed that the AO's order was a plausible view on the facts and law, and that the PCIT could not invoke Section 263 merely to impose a different interpretation.The Court concurred with the ITAT's reasoning that the PCIT's reliance on the precedent was misplaced in the context of Section 263 revision, especially since the AO had made due inquiries and reached a legally sustainable conclusion. The PCIT's factual finding that no inquiry was made was factually incorrect.3. Principles Governing Exercise of Revisional Powers under Section 263The judgment reaffirmed the twin conditions for exercise of Section 263 powers: the order of the AO must be both erroneous and prejudicial to the interests of the revenue. The Court cited the Apex Court's ruling in Malabar Industrial Co. Ltd., which clarified that mere loss of revenue or difference of opinion between the AO and the Commissioner does not satisfy these conditions unless the AO's view is unsustainable in law.It was emphasized that Section 263 is not a tool for the Commissioner to substitute his judgment for that of the AO, but a corrective mechanism for orders that are legally unsupportable and cause revenue prejudice.Conclusions on IssuesOn the first issue, the Court upheld the ITAT's quashing of the Section 263 order, holding that the AO had made sufficient inquiries and applied his mind, and that the PCIT could not revise the order merely because he disagreed with the AO's view.On the second issue, the Court held that Explanation 2(a) to Section 263 was not attracted since there was no lack of inquiry by the AO. The PCIT's order was therefore erroneous and liable to be set aside.On the third issue, the Court found that the PCIT's reliance on the jurisdictional High Court precedent was misplaced in the context of Section 263 revision, as the AO's order was a legally plausible view and the precedent related to reopening assessments rather than revision proceedings.Significant HoldingsThe Court preserved the following crucial legal reasoning verbatim from the ITAT and Apex Court precedents:'An inquiry made by the Assessing Officer, considered inadequate by the Commissioner of Income Tax, cannot make the order of the Assessing Officer erroneous. In view, the order can be erroneous if the Assessing Officer fails to apply the law rightly on the facts of the case. As far as adequacy of inquiry is considered, there is no law which provides the extent of inquiries to be made by the Assessing Officer. It is Assessing Officer's prerogative to make inquiry to the extent he feels proper. The Commissioner of Income Tax by invoking revisionary powers under Section 263 of the Act cannot impose his own understanding of the extent of inquiry.''If there was any inquiry, even inadequate, that would not by itself, give occasion to the Commissioner to pass orders under Section 263 of the Act, merely because he has different opinion in the matter. It is only in cases of 'Lack of inquiry', that such a course of action would be open.''The consideration of the Commissioner as to whether an order is erroneous in so far as it is prejudicial to the interests of the Revenue, must be based on materials on the record of the proceedings called for by him. If there are no materials on record on the basis of which it can be said that the Commissioner acting in a reasonable could have to such a conclusion, the initiation of proceedings by him will be illegal and without jurisdiction.''The Commissioner cannot initiate proceedings with a view to starting fishing and roving enquiries in matters or order which are already concluded. Such action will be against the well-accepting policy of law that there must be a point of finality in all legal proceedings.''The Commissioner has to be satisfied of twin conditions, namely, (i) the order of the Assessing Officer sought to be revised is erroneous; and (ii) it is prejudicial to the interests of the Revenue. If one of them is absent, recourse cannot be had to Section 263(1) of the Act.''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, for example, when an Income Tax Officer adopted one of the courses permissible in law and it has resulted in loss of revenue; or where two views are possible and the Income Tax Officer has taken one view with which the Commissioner does not agree, it cannot be treated as an erroneous order prejudicial to the interests of the Revenue unless the view taken by the Income Tax Officer is unsustainable in law.'The Court's final determination was that no substantial question of law arises in the present appeal, and the appeal filed by the Revenue against the ITAT's order quashing the Section 263 order is dismissed. The AO's assessment order was neither erroneous nor prejudicial to the revenue, and the PCIT's revisionary order was unsustainable in law.