AO's best judgment assessment under Section 144 upheld; revision under Section 263 found improper and set aside

The ITAT Nagpur held that the AO's assessment completed under section 144, exercising best judgment due to inadequate response from the assessee, cannot be deemed erroneous or prejudicial to revenue. The revision under section 263 by the PCIT was improper, as the AO's order under section 144 is absolute and not subject to being set aside merely because the PCIT disagreed with the profit estimation. The conditions for invoking section 263 were absent since the AO had made a considered decision with available material. The appeal against the revision order was allowed.

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ISSUES:

Whether the Principal Commissioner of Income Tax (PCIT) was justified in invoking the revisionary jurisdiction under section 263 of the Income Tax Act, 1961 ("the Act") against an assessment order passed under section 144 read with section 147 and section 144B of the Act.Whether an assessment order passed under section 144 of the Act can be considered "erroneous and prejudicial to the interests of revenue" for the purpose of section 263 when the Assessing Officer has exercised "best judgement" in estimating income.Whether the absence of issuance of notice under section 143(2) by the Assessing Officer renders the assessment order invalid and justifies revision under section 263.Whether the scope of proceedings under section 263 can be enlarged from explanation 2(a) to include explanation 2(b) after issuance of the original notice.Whether the Assessing Officer's estimation of income at 2% of bank credits is justified and whether revision under section 263 can be invoked to enhance the rate of estimation.

RULINGS / HOLDINGS:

The PCIT was not justified in invoking the revisionary powers under section 263 against the assessment order passed under section 144, as the assessment was completed "to the best of his judgement" and such judgement cannot be deemed erroneous merely because the PCIT would have taken a different view.An order passed under section 144 of the Act, where the AO has exercised his "best judgement," cannot be held to be "erroneous and prejudicial to the interests of revenue" within the meaning of section 263, as this would undermine the independence granted to the AO under section 144.The absence of notice under section 143(2) does not invalidate the assessment order passed under section 144, nor does it justify invoking section 263 for revision.The scope of proceedings under section 263 cannot be subsequently enlarged from explanation 2(a) to include explanation 2(b) after the original notice has been issued, as such enlargement is impermissible under law.The estimation of income at 2% of bank credits by the AO under section 144 is a possible view exercised in the best judgement of the AO and cannot be revised or enhanced under section 263 merely because the PCIT disagrees with the percentage applied.

RATIONALE:

The legal framework involves the provisions of sections 144, 147, 144B, and 263 of the Income Tax Act, 1961. Section 144 empowers the AO to complete assessment to the best of his judgement in cases where the assessee fails to comply adequately.Section 263 allows the PCIT to revise an order if it is "erroneous and prejudicial to the interests of revenue," as explained in Explanation 2(a) and 2(b). Explanation 2(a) relates to orders passed without making inquiries or verification that should have been made, and 2(b) relates to orders allowing relief without inquiry.The Court emphasized that an order under section 144 is by nature an estimation made after considering all available material and exercising best judgement, thus not susceptible to being deemed erroneous simply due to disagreement on the estimation rate.The Court rejected the PCIT's attempt to broaden the scope of revision from explanation 2(a) to also include 2(b) after issuance of the original notice, holding that such procedural expansion is impermissible.The decision preserves the statutory independence of the AO under section 144 and limits the revisionary jurisdiction under section 263 to cases where the order is demonstrably erroneous and prejudicial, not merely because a different view could be taken.

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