Explanation 2 to Section 263 Not Applicable Retrospectively; CIT Revision Without Proper Reasoning Quashed

The ITAT Surat held that Explanation 2 to section 263, effective from 1.6.2015, cannot be applied retrospectively to AY 2013-14. The CIT's revision under section 263 was invalid as it lacked proper reasoning and failed to identify any inquiry or verification omitted by the AO. The assessee had furnished detailed replies demonstrating adequate verification by the AO. The CIT did not specify what further inquiries were necessary or point out defects in the assessee's explanations. Consequently, the CIT's order was held to be an invalid exercise of jurisdiction and was quashed. The assessee's appeal was allowed.

---

---

ISSUES:

Whether the order passed under section 143(3) of the Income Tax Act, 1961 was erroneous and prejudicial to the interest of the Revenue within the meaning of section 263 of the Act.Whether Explanation 2 to section 263, inserted by the Finance Act, 2015 w.e.f. 1.6.2015, is applicable retrospectively to assessment year 2013-14.Whether the revisional authority (Pr. CIT) properly exercised jurisdiction under section 263 by setting aside the assessment order without making or causing to be made necessary inquiries or verifications.Whether the Assessing Officer made adequate inquiries and verifications regarding the genuineness of long term capital gains claimed on trading in a penny stock scrip.

RULINGS / HOLDINGS:

The revisional authority's order under section 263 was held to be not sustainable as it was passed without making or causing to be made any inquiry or verification, which should have been made, and without pointing out any defect, lacuna, or infirmity in the details and evidences furnished by the assessee during reassessment proceedings.Explanation 2 to section 263 of the Act, inserted w.e.f. 1.6.2015, cannot be applied retrospectively to the assessment year 2013-14.The Assessing Officer had made adequate inquiries and verifications on the issue of bogus long term capital gains, as demonstrated by the voluminous details and documents furnished by the assessee, which were duly examined and accepted in the reassessment order.The opinion of the revisional authority that the assessment order was erroneous and prejudicial to the interest of the Revenue must be based on reasoned findings after examination of records and considering the assessee's submissions; mere ipse dixit without such basis is not sufficient.The impugned revision order under section 263 was quashed as an invalid exercise of jurisdiction.

RATIONALE:

The revisional jurisdiction under section 263 of the Income Tax Act, 1961, allows the Commissioner to call for and examine the record of any proceeding and revise an order if it is found to be erroneous and prejudicial to the interest of the Revenue, but only after giving the assessee an opportunity of being heard and after making or causing to be made such inquiry as deemed necessary.Explanation 2 to section 263 states that an order shall be deemed erroneous and prejudicial if passed without making inquiries or verification which should have been made; however, this explanation applies prospectively only and cannot be applied retrospectively to assessment years prior to 1.6.2015.The revisional authority must provide reasoned findings and specify the defects or infirmities in the assessment order or in the information furnished by the assessee to justify interference under section 263.The reassessment was conducted on the same issue with detailed examination of documents such as share certificates, bank statements, demat account statements, contract notes, and ledger accounts, which demonstrated the genuineness of the claimed long term capital gains.The absence of any pointed defect or infirmity in the reassessment order or in the evidence furnished negates the basis for revision under section 263.

---