2025 (8) TMI 741 - AT - Income Tax

ITAT sets aside PCIT order under Section 263; finds AO's LTCG assessment on shares valid and proper

Chetan Sharma Versus Principal Commissioner of Income Tax (Central), Kanpur

Chetan Sharma Versus Principal Commissioner of Income Tax (Central), Kanpur - TMI 1. ISSUES PRESENTED and CONSIDERED 1. Whether the Principal Commissioner of Income Tax (PCIT) validly assumed jurisdiction under section 263 of the Income Tax Act, 1961, without fulfilling the jurisdictional preconditions prescribed under the said section. 2. Whether the assessment orders for the assessment years 2014-15 and 2015-16 were passed by the Assessing Officer (AO) without conducting proper and adequate inquiries, particularly regarding the claim of Long Term Capital Gains (LTCG) on shares. 3. Whether the PCIT's orders under section 263 overlooked relevant facts and relied on irrelevant or non-existing facts, thereby rendering the orders perverse and illegal. 4. Whether the assessment orders passed under section 153A of the Act, with prior approval under section 153D by the Range Head/Addl. CIT, can be revised under section 263 without revising the prior approval. 5. Whether procedural fairness and principles of natural justice were violated by the PCIT in passing the revisionary orders under section 263, particularly by relying on reports and show cause notices not placed before the AO or the assessee for rebuttal. 6. Whether subsequent developments and materials arising after the assessment orders were passed can form the basis for invoking revisionary jurisdiction under section 263. 7. The scope and limits of the revisional jurisdiction under section 263, including the requirement that the AO's order must be both erroneous and prejudicial to the interest of revenue for such jurisdiction to be validly exercised. 2. ISSUE-WISE DETAILED ANALYSIS Issue 1 & 4: Jurisdiction of PCIT under Section 263 and Effect of Prior Approval under Section 153D Relevant Legal Framework and Precedents: - Section 263 empowers the Commissioner to revise any order passed by the AO if it is erroneous and prejudicial to the interest of revenue, but only after independent application of mind and fulfillment of jurisdictional preconditions. - Section 153A provides for assessment in search cases, and section 153D mandates that no assessment or reassessment shall be passed by an AO below the rank of Joint Commissioner without prior approval of the Joint Commissioner/Addl. CIT (Range Head). - The Manual of Office Procedure (Vol. II) mandates that appraisal reports and investigation findings are for AO's guidance, and major deviations between appraisal reports and assessment must be discussed and recorded. - Judicial precedents hold that when an assessment order is passed with prior approval under section 153D, the Commissioner cannot revise it under section 263 without revising the approval itself. - It is settled law that the jurisdiction under section 263 cannot be invoked on the proposal or behest of the AO without independent examination by the Commissioner. Court's Interpretation and Reasoning: - The assessment orders for AYs 2014-15 and 2015-16 were passed after detailed inquiry and with prior approval of the Range Head under section 153D. - The PCIT's revisionary orders under section 263 were initiated solely on the request of the AO, based on a verification report received post-assessment, indicating lack of independent application of mind by PCIT. - The PCIT did not revise or set aside the prior approval granted under section 153D before revising the assessment orders, which is a jurisdictional defect. - The AO's assessment was under the monitoring of the Range Head, who approved the orders without pointing out any deficiency, implying satisfaction with the inquiries made. - Revising orders already approved under section 153D without revising the approval itself undermines the finality of assessment proceedings and is contrary to the policy of law. Key Evidence and Findings: - Office notes appended by AO confirm that detailed replies and documentary evidence regarding LTCG were furnished and verified. - No deviation note or record indicating departure from the appraisal report was placed on record. - The PCIT failed to revise the approval under section 153D before exercising jurisdiction under section 263. Application of Law to Facts: - Since the assessment orders were passed with prior approval under section 153D, and such approval was not revised, the PCIT lacked jurisdiction to revise the assessment orders under section 263. - The initiation of revisionary proceedings on the AO's request without independent application of mind by PCIT renders the orders invalid. Treatment of Competing Arguments: - The Department argued that deeper inquiries should have been made by AO and thus revision was justified. - The Court rejected this, emphasizing the procedural safeguards and prior approval mechanism, and the need for independent examination by PCIT. Conclusions: - The PCIT's exercise of jurisdiction under section 263 without revising the section 153D approval is invalid. - The revisionary orders are quashed on this ground alone. Issue 2 & 3: Adequacy of Inquiries by AO and Validity of PCIT's Findings Relevant Legal Framework and Precedents: - The AO is required to make inquiries as deemed necessary but is not obligated to give detailed reasons for every item accepted or rejected. - Jurisprudence establishes that mere difference of opinion between AO and Commissioner does not justify revision under section 263 unless the AO's order is erroneous and prejudicial to revenue. - The Supreme Court and various High Courts have held that jurisdiction under section 263 cannot be exercised merely because the Commissioner thinks more inquiry ought to have been made. Court's Interpretation and Reasoning: - The AO issued notices and show cause to the assessee regarding LTCG and received detailed replies with documentary evidence including share transfer certificates, bank statements, and D-mat account statements. - The AO considered statements recorded by the Investigation Wing and the replies submitted by the assessee before passing the assessment order. - The assessment order itself records that the replies and evidence were verifiable and placed on record. - The PCIT's reliance on a SEBI show cause notice dated 01-03-2018, which was not available to AO at the time of assessment, is irrelevant for revising the assessment order. - The PCIT's order overlooked the fact that the AO's inquiries were adequate and that the assessment was one of the possible views permissible in law. Key Evidence and Findings: - Notices dated 25.11.2016 and 07.12.2016 were issued by AO for explanation on LTCG. - Assessee's replies were submitted and considered before passing the assessment order dated 30.12.2016. - No incriminating material was found during search under section 132 related to the LTCG issue. - The PCIT did not conduct any independent inquiry prior to passing the revisionary order. Application of Law to Facts: - The AO made sufficient inquiries and took a legally permissible view. - The PCIT's conclusion that the AO failed to make inquiries is not supported by the record. - The subsequent SEBI show cause notice cannot be the basis for revision under section 263. Treatment of Competing Arguments: - The Department argued that the AO should have conducted deeper inquiries based on investigation reports. - The Court found that the AO had considered relevant materials and that the PCIT's order was based on irrelevant or non-existing facts. Conclusions: - The assessment orders are not erroneous or prejudicial to revenue. - The PCIT's findings are perverse and unsustainable. Issue 5: Violation of Principles of Natural Justice Relevant Legal Framework and Precedents: - Principles of natural justice require that an assessee be given a fair opportunity to rebut all evidence and materials relied upon by the revenue authorities. - Reliance on materials not placed before the assessee or AO during assessment proceedings violates the right to be heard. Court's Interpretation and Reasoning: - The PCIT relied on a report from ITO-II, Investigation Wing, and a SEBI show cause notice, neither of which were placed before the assessee for rebuttal. - The SEBI show cause notice did not mention the assessee or the companies involved in the share transactions. - The assessee was denied an opportunity to respond to these materials, amounting to violation of natural justice. Key Evidence and Findings: - No evidence that the investigation report or SEBI show cause notice was communicated to the assessee during assessment or revision proceedings. Application of Law to Facts: - The failure to provide the assessee an opportunity to rebut these materials invalidates the PCIT's order under section 263. Treatment of Competing Arguments: - The Department did not demonstrate that these materials were placed before the assessee or AO during assessment. Conclusions: - The PCIT's order suffers from procedural infirmity and is liable to be quashed on grounds of violation of natural justice. Issue 6: Reliance on Subsequent Developments for Revision under Section 263 Relevant Legal Framework and Precedents: - Revision under section 263 cannot be based on materials or developments that arise after the assessment order has been passed. - The assessment order must be examined on the basis of materials available at the time of assessment. Court's Interpretation and Reasoning: - The SEBI show cause notice relied upon by PCIT was issued after the assessment order and was not available to AO at the time. - The PCIT's reliance on this subsequent material to hold the assessment order erroneous is legally impermissible. Key Evidence and Findings: - The assessment order was passed on 30.12.2016, while the SEBI show cause notice was dated 01.03.2018. Application of Law to Facts: - The PCIT's order is based on irrelevant considerations and is therefore perverse. Conclusions: - Revision under section 263 on the basis of subsequent developments is not sustainable. Issue 7: Scope and Limits of Revisional Jurisdiction under Section 263 Relevant Legal Framework and Precedents: - Section 263 requires that the order sought to be revised must be erroneous and prejudicial to the interest of revenue. - The Commissioner cannot substitute his own judgment for that of the AO unless the AO's order is unsustainable in law. - Mere difference of opinion or belief that more inquiry could have been made does not justify revision. Court's Interpretation and Reasoning: - The AO's order was one of the possible views permissible in law and was not erroneous. - The PCIT failed to demonstrate that the order was prejudicial to revenue. - The AO conducted inquiries, considered evidence, and the order was approved by Range Head. Key Evidence and Findings: - Detailed replies and documentary evidence were furnished and considered. - No adverse material was found against the assessee during search or investigation. Application of Law to Facts: - The PCIT's order under section 263 is not justified as the AO's order was neither erroneous nor prejudicial. Conclusions: - The revisional jurisdiction under section 263 was wrongly invoked. 3. FINAL CONCLUSIONS - The PCIT's orders dated 26.03.2019 passed under section 263 of the Act for assessment years 2014-15 and 2015-16 are set aside. - The assessment orders dated 30.12.2016 passed by the AO for both assessment years are restored. - The appeals filed by the assessee are allowed accordingly.