2025 (8) TMI 356 - AT - Income Tax

AO's reassessment under Section 147 upheld; PCIT's revision under Section 263 set aside for incorrect reopening reason

The ITAT Ahmedabad held that the AO's order was not erroneous or prejudicial to the revenue despite no addition being made for accommodation entries. The ... Revision u/s 263 - AO did not make addition on account of accommodation entries, for which the case was reopened u/s. 147, thus the order of the AO was erroneous and prejudicial to the interest of the revenue - HELD THAT:-When the matter on which the case was reopened was duly examined by the AO in the course of assessment proceeding, the stand of the Ld. PCIT that the order of the AO was erroneous and prejudicial at the interest of the revenue cannot be held as correct. PCIT has rather held that the AO did not make addition on account of accommodation entries and, therefore, the order of the AO was erroneous and prejudicial to the interest of the revenue. Merely because the AO did not make addition, the order cannot be held as erroneous and prejudicial to the interest of the revenue. AO didn't make the addition for the reason that no addition was called for in the facts and circumstances of the case. What is relevant is to consider whether the issue on which the case was reopened was duly and properly examined by the AO in the course of re-assessment proceeding or not. AO had made enquiries and duly verified the issues on which the case was reopened in this case. In fact, the reason for which the case was reopened was found to be incorrect and, therefore, the AO did not make any addition. Under the circumstances, the order of the AO cannot be held to be erroneous and prejudicial to the interest of the revenue. Therefore, the order u/s. 263 of the Act passed by the Ld. PCIT is cancelled. Appeal of the assessee is allowed. ISSUES: Whether the Principal Commissioner of Income Tax (PCIT) had jurisdiction to invoke section 263 of the Income Tax Act, 1961, on the ground that the assessment order was erroneous and prejudicial to the interest of the revenue.Whether the assessment order passed under section 147 read with section 144B of the Income Tax Act was erroneous for not making an addition of Rs. 21,26,201/- on account of alleged accommodation entries.Whether the Assessing Officer (AO) conducted proper examination and verification of the transactions related to sale of shares of penny stock companies during reassessment proceedings.Whether the twin conditions for invoking section 263-i.e., the assessment order being erroneous as well as prejudicial to the interest of the revenue-were satisfied in the present case. RULINGS / HOLDINGS: The PCIT did not have valid jurisdiction to invoke section 263 as the AO had duly examined the issue on which the case was reopened, and the assessment order was not 'erroneous and prejudicial to the interest of the revenue.'The AO was justified in not making any addition of Rs. 21,26,201/- because the explanation provided by the assessee regarding the penny stock transactions was satisfactory and supported by evidence, negating the existence of accommodation entries.The AO conducted proper inquiries and verification concerning the sale of shares of Purple Entertainment Ltd. and Shivansh Finsev Ltd., including examination of demat account holdings and capital loss computations, thereby fulfilling the requirement of proper examination under the Act.The twin conditions for invoking section 263 were not met as the assessment order was neither erroneous nor prejudicial to the revenue, and therefore, the order passed under section 263 was set aside. RATIONALE: The legal framework applied includes section 263 of the Income Tax Act, 1961, which permits revision of an assessment order if it is found to be 'erroneous and prejudicial to the interest of the revenue.'The Court emphasized that mere non-addition of a sum does not render the assessment order erroneous if the AO has conducted proper and detailed inquiry and found no basis for addition.The Court relied on the principle that the correctness of the AO's decision after due inquiry cannot be interfered with under section 263 unless the order is found to be erroneous and prejudicial.The Court noted that the reopening of the case under section 147 was based on information regarding accommodation entries, but the AO's verification disproved the existence of such entries, justifying acceptance of the return as filed.No dissent or doctrinal shift was recorded; the decision reaffirmed established principles governing the scope of revision under section 263.