2025 (8) TMI 740 - AT - Income Tax

PCIT failed to address assessee's submissions under section 263, making revision invalid; appeal allowed

Horizon Dwellings Pvt Ltd Versus PCIT, Bareilly, Income Tax Department, Bareilly

Horizon Dwellings Pvt Ltd Versus PCIT, Bareilly, Income Tax Department, Bareilly - TMI 1. ISSUES PRESENTED and CONSIDERED 1. Whether the order passed under section 143(3) of the Income Tax Act, 1961 (the 'Act') was erroneous and prejudicial to the interest of the revenue, thereby justifying revision under section 263 of the Act. 2. Whether the Assessing Officer (AO) conducted adequate inquiry and applied mind before passing the assessment order. 3. Whether the Principal Commissioner of Income Tax (PCIT) was justified in invoking revisional jurisdiction under section 263 of the Act on grounds of alleged lack or inadequacy of inquiry. 4. Whether the PCIT's order under section 263 is sustainable in law when there exists more than one possible view and the AO has taken one such view. 5. Whether the PCIT erred in not considering or discussing the submissions and evidence filed by the assessee during the section 263 proceedings. 6. Whether the PCIT's order under section 263 amounts to substitution of AO's judgment without establishing error or prejudice to revenue. 7. Whether the PCIT's order under section 263 was passed without granting sufficient opportunity to the assessee, violating principles of natural justice. 2. ISSUE-WISE DETAILED ANALYSIS Issue 1 & 2: Adequacy of Inquiry and Application of Mind by the Assessing Officer - Legal Framework and Precedents: The scope of section 263 is limited to cases where the assessment order is erroneous and prejudicial to the interest of the revenue. Explanation 2 to section 263 clarifies that revisionary powers cannot be invoked merely due to inadequate inquiry if some inquiry has been conducted. The Supreme Court and various High Courts have held that mere difference of opinion or inadequacy of inquiry does not justify revision under section 263. (See: Green World Corporation; CIT v. Goyal Private Family Trust; PCIT vs. Shree Gayatri Associates; CIT v. Sunbeam Auto Ltd.; CIT v. Hindustan Marketing and Advertising Co. Ltd.; Malabar Industrial Co. Ltd. v. CIT; CIT v. Gabriel India Ltd.) - Court's Interpretation and Reasoning: The AO recorded in the assessment order that detailed inquiries were made on points of scrutiny such as real estate business with high closing stock, turnover discrepancies, and unsecured loans. Notices under section 142(1) were issued and detailed replies and evidences were furnished by the assessee and considered by the AO. The AO applied mind and passed the assessment order under section 143(3). - Key Evidence and Findings: The assessee produced detailed submissions, confirmations, bank statements, and documentary evidence supporting the genuineness of unsecured loans and sales transactions. These were on record before the AO and were considered. The PCIT acknowledged receipt of these submissions during section 263 proceedings but did not discuss or disprove them. - Application of Law to Facts: Since the AO conducted inquiries, examined evidence, and applied mind, the assessment order cannot be said to be passed without inquiry or application of mind. The distinction between 'lack of inquiry' and 'inadequate inquiry' is critical; the former justifies revision, the latter does not. The AO's inquiry was adequate as per the facts and law. - Treatment of Competing Arguments: The PCIT's order alleged lack of inquiry but failed to specify what further inquiry was necessary or how the AO's inquiry was deficient. The PCIT did not rebut the detailed submissions or evidence filed by the assessee. The PCIT's approach amounted to a mere difference of opinion, which is insufficient to invoke section 263. - Conclusion: The AO's assessment order was neither erroneous nor prejudicial to the interest of revenue due to lack of inquiry. The AO conducted adequate inquiry and applied mind in accordance with law. Issue 3 & 6: Jurisdiction and Validity of Revision under Section 263 - Legal Framework and Precedents: Section 263 empowers the Commissioner to revise an order only if it is erroneous and prejudicial to the interest of the revenue. The power is supervisory, not appellate, and cannot be exercised merely due to difference of opinion or to substitute the AO's judgment. (See: Malabar Industrial Co. Ltd.; CIT v. Gabriel India Ltd.; CIT v. Hindustan Marketing and Advertising Co. Ltd.; CIT v. Max India Ltd.) - Court's Interpretation and Reasoning: The PCIT set aside the assessment order without pointing out any specific error in the AO's order or how it was prejudicial to revenue beyond surmises and conjectures. The PCIT did not demonstrate that the AO's view was unsustainable in law or that the order was erroneous. - Key Evidence and Findings: The record showed that the AO's order was based on detailed inquiry and evidence. No new material or evidence was brought on record by PCIT to justify revision. The PCIT's order was vague and non-speaking, lacking reasons for disagreement with the assessee's submissions. - Application of Law to Facts: The PCIT's order amounted to substitution of opinion and directing a fresh assessment without establishing error or prejudice. The power under section 263 was thus wrongly invoked. - Treatment of Competing Arguments: The assessee contended that the PCIT's order was based on suspicion and surmise without material. The PCIT failed to specify what further inquiry was necessary as required under Explanation 2 to section 263. The PCIT's order was thus legally unsustainable. - Conclusion: The PCIT's exercise of revisional jurisdiction under section 263 was without valid jurisdiction and is liable to be quashed. Issue 4: Existence of Two Possible Views and Effect on Revisionary Jurisdiction - Legal Framework and Precedents: Where two views are possible on a question of law or fact, and the AO adopts one such view, the Commissioner cannot revise the order merely because he disagrees, unless the AO's view is unsustainable in law. (See: PCIT vs. V. Dhana Reddy & Co.; CIT vs. Honda Siel Power Products Ltd.; CIT v. Hindustan Marketing and Advertising Co. Ltd.; Malabar Industrial Co. Ltd.) - Court's Interpretation and Reasoning: The AO had taken a plausible view on issues such as percentage completion method, valuation of properties, and unsecured loans. The PCIT did not demonstrate that the AO's view was unsustainable or erroneous. - Key Evidence and Findings: The AO's conclusions were supported by evidence and submissions. The PCIT's disagreement was insufficient to treat the order as erroneous. - Application of Law to Facts: The mere existence of difference of opinion does not justify revision under section 263. - Treatment of Competing Arguments: The assessee's arguments supported by case law were not rebutted by PCIT with any material showing unsustainability of AO's view. - Conclusion: The PCIT could not validly revise the order where the AO had taken one of two possible views. Issue 5: Non-Consideration of Assessee's Submissions and Non-Speaking Order - Legal Framework and Precedents: Revisionary orders must be speaking and deal with submissions made by the assessee. Failure to do so violates principles of natural justice and renders the order liable to be quashed. (See: CIT v. Hari Iron Trading Co.; CIT v. Vodafone Essar South Ltd.; CIT v. J.L. Morrison (India) Ltd.) - Court's Interpretation and Reasoning: The PCIT acknowledged receipt of the assessee's detailed submissions during section 263 proceedings but failed to discuss or consider them or explain reasons for disagreement. - Key Evidence and Findings: The assessee's written submissions were on record and addressed all points raised by PCIT. The PCIT's order is silent on these submissions. - Application of Law to Facts: The PCIT's failure to consider the submissions renders the order non-speaking and violative of natural justice. - Treatment of Competing Arguments: The PCIT did not dispute the fact of submissions being made or explain their rejection. - Conclusion: The impugned order under section 263 is non-speaking and illegal for failure to consider assessee's submissions. Issue 7: Violation of Principles of Natural Justice - Legal Framework and Precedents: Adequate opportunity of hearing is mandatory before passing an order under section 263. Failure to grant such opportunity vitiates the order. (General principles of natural justice) - Court's Interpretation and Reasoning: The assessee contended that the PCIT passed the order without granting sufficient opportunity to present and argue submissions. - Key Evidence and Findings: The record indicates that notices were issued and submissions were filed, but the PCIT did not address the submissions or provide reasons for rejecting them. - Application of Law to Facts: The absence of a reasoned order on submissions and lack of discussion indicates violation of natural justice. - Treatment of Competing Arguments: The PCIT did not rebut the claim of inadequate opportunity or explain the omission. - Conclusion: The PCIT's order is vitiated by violation of natural justice principles. 3. FINAL CONCLUSIONS - The assessment order passed by the AO under section 143(3) was based on adequate inquiry, application of mind, and consideration of evidence and submissions. - The PCIT failed to establish that the AO's order was erroneous or prejudicial to the interest of the revenue as required under section 263. - The PCIT's order under section 263 amounted to substitution of the AO's judgment without valid grounds and was based on surmises and conjectures. - The PCIT did not consider or discuss the assessee's submissions during section 263 proceedings, rendering the order non-speaking and violative of natural justice. - The PCIT's order was passed without granting adequate opportunity to the assessee, further vitiating the order. - Where two views are possible, the Commissioner cannot revise the AO's order merely due to disagreement. - Accordingly, the revisionary order under section 263 is without jurisdiction and is set aside, and the original assessment order is restored.