2025 (9) TMI 171 - AT - Income Tax

s.263 invocation quashed where assessment under s.147/143(3) not shown to be erroneous or prejudicial to Revenue

Surya Roshni Limited Versus Pr. CIT-7, Delhi

Surya Roshni Limited Versus Pr. CIT-7, Delhi - TMI ISSUES PRESENTED AND CONSIDERED 1. Whether the revisional power under section 263 can be exercised to set aside a reassessment order passed under section 147/143(3) where the Assessing Officer has made inquiries/verification and accepted the assessee's documentary evidence regarding share capital/share premium as genuine. 2. Whether the twin conditions for exercise of jurisdiction under section 263 - that the order is erroneous and is prejudicial to the interests of the revenue - are satisfied where the AO has made inquiries on multiple occasions and reached a conclusion accepting genuineness of transactions. 3. Whether Explanation 2 to section 263 (Finance Act, 2015) empowers the Commissioner to remit the matter for fresh inquiry where inquiries were in fact made but the Commissioner considers the conclusion wrong. 4. Distinction between lack of inquiry (or inadequate inquiry) and a wrong conclusion by the AO, and the permissible scope of revisional jurisdiction where a plausible view was taken by the AO. ISSUE-WISE DETAILED ANALYSIS - 1. Exercisability of section 263 where AO made inquiries and accepted genuineness Legal framework: Section 263 confers revisional powers on the Commissioner subject to twin conditions: (i) the order is erroneous; and (ii) it is prejudicial to the interest of the revenue. Explanation 2 to s.263 (with effect from 01.06.2015) specifies circumstances (including lack of inquiries or verifications) in which an order may be declared erroneous. Precedent treatment: The Court relied on authoritative precedents establishing that where the AO has made inquiries and accepted the assessee's case as a plausible view, such conclusion cannot be branded as erroneous under s.263 (e.g., Pr. CIT vs Shreeji Prints; PCIT vs NYA International; decisions upholding ITAT findings in Clix Finance and related High Court/Supreme Court authorities). Malabar Industrial and subsequent authorities clarify that different permissible views preclude exercise of revisional jurisdiction. Interpretation and reasoning: The Tribunal examined the record and found that the AO raised detailed queries at original assessment (s.142(1)), considered extensive documentary material (company master data, ITR acknowledgements, bank statements, audited financials, ROC filings), proposed rectification under s.154/155 (to which the assessee replied), and again during reassessment under s.148 filed and considered the same material. The AO's reassessment order contains a speaking finding that the documentary evidence sufficed to prove identity, creditworthiness and genuineness and referred to assessment orders passed under s.143(3) in the hands of the investor companies. Given that the AO had applied mind and reached a plausible conclusion after verification, the Tribunal held the revisional power could not be invoked to substitute the Commissioner's view. Ratio vs. Obiter: Ratio - where AO has made detailed inquiries and reached a plausible conclusion accepting transactions as genuine, section 263 cannot be invoked to set aside the order merely because the Commissioner disagrees. Obiter - remarks on procedural permutations (e.g., history of s.154/155 notice) that are factual to the case. Conclusion: The Commissioner's invocation of section 263 to set aside the reassessment order was not sustainable because the AO had made proper inquiries and verification; the AO's conclusion was a possible view and not 'erroneous' in law. ISSUE-WISE DETAILED ANALYSIS - 2. Application of the twin conditions 'erroneous' and 'prejudicial to the interest of the revenue' Legal framework: Both conditions under s.263 must co-exist; 'erroneous' means not in accordance with law; 'prejudicial' requires prima facie material to show tax lawfully exigible has not been imposed. Commissioner's power is quasi-judicial and limited. Precedent treatment: Malabar Industrial Co., Max India, Gabriel India, Vikas Polymers, Amitabh Bachchan and related authorities articulate that mere difference of opinion or choice of a legally permissible view by AO does not render an order erroneous or prejudicial; the Commissioner cannot substitute his judgment without showing the AO's action was legally unsustainable or that there was failure of inquiry. Interpretation and reasoning: The Tribunal applied these principles to the factual matrix: AO's repeated inquiries, documentation and reliance on investor companies' own assessment orders meant the AO's acceptance fell within permissible views. There was no prima facie material that tax lawfully exigible had not been imposed; thus the twin conditions were not satisfied. Ratio vs. Obiter: Ratio - both conditions must be satisfied; the mere existence of an alternative view is insufficient to deem AO's order erroneous/prejudicial. Obiter - discussion of examples of when loss of revenue does or does not amount to prejudice (illustrative). Conclusion: The requisite twin conditions for exercise of section 263 were not fulfilled; the revisional order was therefore unsustainable. ISSUE-WISE DETAILED ANALYSIS - 3. Scope and import of Explanation 2 to section 263 (Finance Act, 2015) Legal framework: Explanation 2 enumerates situations (e.g., order passed without making inquiries or verifications which should have been made) where an order may be treated erroneous and prejudicial. Precedent treatment: Courts have held that Explanation 2 enables the Commissioner to remit where there was a true lack of inquiry; however, it does not empower the Commissioner to remand when inquiries were in fact made and a conclusion, though disputed by the Commissioner, was reached by the AO (PCIT vs NYA; Clix Finance analysis). Interpretation and reasoning: The Tribunal found the factual record established inquiries and verification on three occasions (original assessment, proposed rectification notice, reassessment). Therefore, Explanation 2's limb regarding 'order passed without making inquiries or verifications' did not apply. The Commissioner could not rely on Explanation 2 to remand the matter where the defect alleged was essentially disagreement with the AO's conclusion. Ratio vs. Obiter: Ratio - Explanation 2 cannot be invoked where inquiries/verifications were carried out and the AO reached a considered conclusion; it is intended to address genuine lack of inquiry, not mere disagreement. Obiter - reference to legislative intent behind insertion of Explanation 2. Conclusion: Invocation of Explanation 2 to justify remand was inappropriate on the facts; no ground for revisional interference under that Explanation. ISSUE-WISE DETAILED ANALYSIS - 4. Distinction between lack of inquiry and wrong conclusion; remedial options available to Revenue Legal framework: Distinction recognized in precedents - lack of inquiry may justify remand; a wrong conclusion by AO ought to be corrected on merits (making additions) rather than by remand under s.263; the Commissioner cannot convert revisional jurisdiction into appellate or investigative jurisdiction. Precedent treatment: PCIT vs V. Con Integrated Solutions, PCIT vs NYA International and related authorities emphasise the difference and prescribe that, for wrong conclusions, the Commissioner should make a decision on merits (e.g., addition) if he finds AO's conclusion unsustainable; remand should be reserved for clear failures of inquiry. Interpretation and reasoning: The Tribunal determined the present case demonstrated sustained inquiry and that the AO's acceptance was a considered conclusion. The Commissioner's action constituted an attempt to substitute the AO's view by remand rather than correcting on merits, contrary to precedent which restricts such exercise absent demonstrable lack of inquiry or legal unsustainability of AO's conclusion. Ratio vs. Obiter: Ratio - where AO carried out inquiry but reached a view, Commissioner must either accept the plausible view or, if convinced a wrong conclusion was reached, act on merits (e.g., make addition) rather than order a remand under s.263. Obiter - observations on policy against fishing and roving enquiries. Conclusion: The Commissioner's direction for fresh examination amounted to improper substitution of AO's judgment; remedial course under s.263 was not open on these facts. OVERALL CONCLUSION (COURT'S FINDING) The revisional orders under section 263 setting aside the reassessment orders were quashed. The Tribunal found that the AO had made detailed inquiries and verifications on multiple occasions, had considered extensive documentary evidence and assessment orders of investor companies, and had reached a plausible, sustainable conclusion accepting the genuineness and creditworthiness of the investor companies and the share capital/premium. The twin conditions for exercise of section 263 were not satisfied; Explanation 2 to section 263 did not apply as there was no lack of inquiry; and the Commissioner could not substitute his view for that of the AO. The appeals were allowed and the revisional directions set aside.