2025 (10) TMI 895 - AT - Income Tax

Section 263 revision set aside where assessing officer made sufficient inquiry into disputed loan; commissioner failed minimal enquiry

ITAT Nagpur (AT) set aside the PCIT's revision under section 263, holding the AO had conducted a detailed, satisfactory inquiry into the disputed loan ... Revision u/s 263 - confusion as to the exact quantum of loan - distinction between the failure or absence of investigation and a wrong decision / conclusion - DR submitted that the creditworthiness of the company is doubtful and hence there is a miserable lack of enquiry on the part of the Assessing Officer and accordingly revisionary proceedings has been rightly initiated by the learned PCIT since the creditworthiness of the lender was not examined. HELD THAT:- AO in unequivocal terms have thoroughly elaborated the investigation process in assessment order - We do not find any wrong conclusion has been drawn by the AO. At this juncture, we place reliance on the recent judgment dated 04/04/2025, passed by the Hon’ble Supreme Court in Con Integrated Solutions Pvt. Ltd. [2025 (4) TMI 1137 - SC ORDER (LB)] wherein the Assessing Officer had passed the order after making an elaborate enquiry and has considered the fact from financial statements. There is a distinction between the failure or absence of investigation and a wrong decision / conclusion. A wrong decision / conclusion can be corrected by the Commissioner of Income Tax with a decision on merits and by making an addition of disallowance. In this case, the learned PCIT has held that there is a confusion as to the exact quantum of loan i.e., whether ₹ 40 lakh or ₹ 20 lakh. The Assessing Officer has verified the fact from bank statement, financial statements and other record. The learned PCIT has not conducted any minimal enquiry to dislodge the cogent finding of the Assessing Officer which is impregnable. AO has conducted a detailed and thorough enquiry, examined the financial statements made speaking observation in the order and has taken one of the legally permissible views. In that case, revisional power cannot be exercised just on the ground that inadequate enquiry has been conducted. There may be cases where the AO undertakes a superficial and random investigation that may justify a remote, albeit the Commissioner must record the object failure and lapse on the part of the AO to establish both the error and prejudice caused to the Revenue. The provisions does not authorize or give unfettered powers to the Commissioner to revise each and every order, if in his opinion, the same has been passed without making enquiries or verification which should have been made and for this proposition - See Narayan Tatu Rane v/s ITO [2016 (5) TMI 1162 - ITAT MUMBAI] - Decided against revenue. ISSUES PRESENTED AND CONSIDERED 1. Whether the exercise of revisionary jurisdiction under section 263 was valid where the Assessing Officer (AO) had reopened assessment under section 147 read with section 144B and passed an assessment after conducting inquiries into a loan transaction from a third party. 2. Whether the AO had made 'no inquiry' or an 'inadequate inquiry' into the identity, genuineness and creditworthiness of the lender, and whether such alleged failure justified invoking section 263. 3. Whether reliance by the AO on the order or findings in another assessment (or on investigative reports) without separate verification in the assessee's case amounted to jurisdictional error rendering the assessment erroneous and prejudicial to the interests of revenue. 4. Whether a mere possibility of another view, or a contention that different conclusions could have been drawn, justifies revision under section 263 when the AO has taken one of the legally permissible views after enquiry. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Validity of exercise of revisionary jurisdiction under section 263 where AO reopened and conducted inquiries under section 147 r/w 144B Legal framework: Section 263 empowers the Commissioner to revise an assessment if it is found to be erroneous and prejudicial to the interests of the revenue. The power is limited and is to be exercised when there is either no inquiry or an object failure to make such inquiries as are required by law; it is not a second appeal on facts. Precedent Treatment: The Court refers to authoritative pronouncements distinguishing absence of inquiry from an inadequate inquiry and holding that revisionary powers cannot be used to simply substitute the Commissioner's view for that of the AO where the AO has made inquiries and reached a permissible conclusion. Interpretation and reasoning: The Tribunal examined the AO's assessment order and associated record (show cause notices, 142/133(6) notices, bank statements, lender's reply, audited financial statements) and found that the AO had conducted a detailed enquiry into identity, genuineness and creditworthiness of the lender. The AO: (i) issued and considered notices under sections 142/133(6); (ii) examined bank account entries and investigation report; (iii) obtained and considered the lender's audited financial statements showing substantial net worth; and (iv) recorded reasons for accepting the assessee's contention that loan was Rs. 20 lakhs. The Tribunal held that this constituted substantive inquiry and reasoning by the AO before accepting the transaction and framing the assessment (which resulted in no adverse addition and nil demand). Ratio vs. Obiter: Ratio - where AO has made detailed, documented inquiries and taken one of the legally permissible views, section 263 cannot be invoked merely because the Commissioner considers another view possible. Obiter - observations on the extent and nature of minimal enquiry the Commissioner should conduct before invoking section 263. Conclusions: The exercise of revisionary jurisdiction under section 263 was unsustainable because the AO had made adequate enquiries and taken a permissible view; therefore the impugned section 263 order setting aside the assessment was quashed. Issue 2 - Distinction between 'no inquiry' and 'inadequate inquiry' and the standard for invoking section 263 Legal framework: The distinction is central - section 263 is available in cases of 'no inquiry' or 'object failure' to make requisite inquiries; inadequate but bona fide enquiries that lead to a permissible conclusion do not justify revision. Precedent Treatment: The Tribunal relied on higher authority emphasizing that only absence of inquiry or object failure permits revision and that courts/Tribunals must guard against Commissioners reappraising evidence where AO has reasonably enquired. Interpretation and reasoning: The Tribunal catalogued the AO's procedural steps and documentary verifications demonstrating active, not absent, inquiry: multiple notices, assessee's written submissions, lender's confirmation and audited accounts, bank statement analysis and specific findings (e.g., identification of an investigation report's oversight explaining the 40 lakh/20 lakh discrepancy). The Tribunal observed that the Commissioner did not conduct minimal independent enquiry to rebut the AO's factual findings before invoking section 263. Ratio vs. Obiter: Ratio - section 263 cannot be invoked when AO's enquiries are substantive and documented; mere possibility of a different conclusion or an assertion of inadequacy by the Commissioner is insufficient. Obiter - the Commissioner should, where necessary, conduct minimal enquiry if disputing AO's findings rather than directly invoking revisionary powers. Conclusions: The AO's inquiries were not non-existent; they were substantive. Hence section 263 was wrongly exercised on the basis of alleged lack of inquiry. Issue 3 - Reliance on findings/orders in another assessment or investigation reports without independent verification Legal framework: While investigative inputs and other assessments may inform proceedings, the AO must verify relevant facts in the assessee's own file; similarly, a Commissioner ought not to set aside an assessment solely on the basis of another AO's order without considering whether facts are identical and whether independent enquiry was made. Precedent Treatment: The Tribunal noted precedents cautioning against uncritical adoption of another authority's conclusions and requiring case-specific verification. Interpretation and reasoning: The AO had examined the investigation report and bank records and discovered that an apparent inclusion of another person's transaction in the investigation report explained the 40 lakh figure; this explanation was supported by tracing account entries and lender confirmations. The Tribunal found that the AO did not merely rely on another assessment/order but performed independent verification in the assessee's record. Conversely, the Commissioner relied on the investigatory information alleging the lender to be a shell company without confronting the assessee with that material or independently verifying the same during the section 263 proceedings. Ratio vs. Obiter: Ratio - reliance on others' orders without case-specific verification is impermissible; where AO has in fact verified and recorded reasons, revisional action cannot be sustained on that ground. Obiter - the Commissioner should confront any external adverse material with the assessee and make minimal enquiries before concluding prejudice to revenue. Conclusions: The AO undertook independent verification rather than blind reliance on other orders; the Commissioner's contrary approach (relying on external/investigative material without confronting the assessee) rendered the section 263 action unsustainable. Issue 4 - Whether differing possible conclusions justify revision under section 263 Legal framework: Section 263 is not a forum to reappraise evidence and substitute the Commissioner's view where the AO has reached a legally permissible conclusion after inquiry. Precedent Treatment: The Tribunal relied on authorities that permit revision only in cases of jurisdictional error, lack of inquiry, or palpable omission, not mere difference in opinion. Interpretation and reasoning: The Tribunal emphasized that the AO had considered documentary evidence (bank statements, confirmation, audited accounts) and arrived at a conclusion that the loan was Rs. 20 lakhs and genuine. The Commissioner's remark about 'confusion' over quantum and the allegation of inadequate inquiry did not amount to establishing an object failure or jurisdictional infirmity. The Tribunal observed that correcting a wrong decision on merits is not the function of section 263 where the AO has legitimately exercised discretion after enquiry. Ratio vs. Obiter: Ratio - divergent views alone do not justify exercise of section 263 where AO's conclusion is legally sustainable based on enquiry. Obiter - remarks on how Commissioners must record objective failure, not speculative dissatisfaction, before invoking revisionary powers. Conclusions: A mere possibility of another view or disagreement is insufficient; because the AO's conclusion was supported by enquiry and evidence, section 263 could not be used to substitute the Commissioner's view. The Tribunal therefore allowed the appeal and quashed the section 263 order.