Section 263 Revision Valid Despite Vivad Se Vishwas Scheme; AO's Acceptance of Improvement Costs Without Enquiry Overruled

The ITAT Pune upheld the revision under section 263, rejecting the assessee's claim that invoking revision was barred by opting for the Vivad Se Vishwas Scheme, 2024. The AO failed to properly investigate the large cost of improvement claimed, which was accepted without enquiry despite the case being selected for scrutiny. The Tribunal found that the cost of improvement forms part of capital gains calculation and the PCIT was justified in revisiting the AO's order. Since the issue under section 263 differed from the matter under the Vivad Se Vishwas Scheme, the revision was valid. The appeal by the assessee was dismissed.

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ISSUES:

Whether the assessment order passed under section 143(3) read with section 144B of the Income Tax Act, 1961, allowing deduction for "cost of improvement" without making proper inquiries or verification, is erroneous and prejudicial to the interest of Revenue under section 263 of the Act.Whether the Principal Commissioner of Income Tax (PCIT) can invoke revision jurisdiction under section 263 on an issue (cost of improvement) beyond the scope of the limited scrutiny conducted by the Assessing Officer (AO) focused on capital gains deduction claims.Whether invocation of revision proceedings under section 263 is barred or precluded by the assessee having filed an application under the Direct Tax Vivad Se Vishwas Scheme (DTVSVS), 2024.Whether the AO fulfilled the statutory obligation to conduct necessary inquiries and verification before allowing the deduction claimed as cost of improvement for the purpose of computing capital gains.Whether the PCIT's order partly setting aside the assessment order for limited reassessment on the issue of cost of improvement is justified.

RULINGS / HOLDINGS:

The assessment order allowing deduction claimed as "cost of improvement" without making proper inquiries or verification is held to be "erroneous and prejudicial to the interest of Revenue" within the meaning of Explanation 2 to section 263 of the Act, as the AO failed to make inquiries which should have been made and allowed relief without inquiring into the claim.The PCIT is empowered to invoke revision jurisdiction under section 263 on the issue of cost of improvement even though the case was selected for limited scrutiny on capital gains deduction claims, as cost of improvement is integrally connected to the computation of capital gains and falls within the scope of scrutiny.The filing of an application under the Direct Tax Vivad Se Vishwas Scheme, 2024, does not bar or preclude the PCIT from invoking section 263 jurisdiction on a different subject matter (cost of improvement) which is not the subject of the appeal or settlement under the scheme.The AO did not discharge the statutory obligation to demand complete documentary evidence or conduct a thorough examination of the nature, genuineness, and capital nature of the cost of improvement claimed, and accepted the claim without necessary inquiries, rendering the assessment order liable to revision.The PCIT's order partly setting aside the assessment order for the limited purpose of examining the cost of improvement and directing the AO to pass a fresh assessment order after due inquiry is upheld as valid and justified.

RATIONALE:

The Court applied the statutory framework of section 263 of the Income Tax Act, 1961, particularly Explanation 2 effective from 01.06.2015, which clarifies that an assessment order is "erroneous in so far as it is prejudicial to the interests of the revenue" if it is passed "without making inquiries or verification which should have been made" or "allowing any relief without inquiring into the claim".Judicial precedents were relied upon, including decisions holding that revision under section 263 is valid where the AO's order is passed without application of mind or proper inquiry, and that failure to make inquiry satisfies the requirement of the order being erroneous and prejudicial to revenue.The Court rejected the contention that the PCIT cannot travel beyond the scope of limited scrutiny since the cost of improvement forms part of the capital gains computation, which was the subject of scrutiny.The Court distinguished the subject matter of the appeal and settlement under the Vivad Se Vishwas Scheme (disallowance under section 54B) from the issue under section 263 (cost of improvement), holding that the scheme does not cover the latter and thus does not bar revision proceedings.The Court emphasized the AO's failure to seek documentary proof such as invoices, work orders, or payment evidence, and failure to verify bank statements or financial records, as a breach of the statutory duty to verify claims before allowing deductions.

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