2025 (10) TMI 932 - AT - Income Tax

PCIT's s.263 revision set aside; direction to AO to reopen assessment under section 143(3) quashed for no pointed error

ITAT DELHI - AT set aside the PCIT's s.263 revision and quashed the direction to AO to reopen the NFAC assessment u/s 143(3), finding no pointed error ... Revision u/s 263 - Validity of assessment order u/s 144B - PCIT cancelling the entire assessment order passed earlier u/s 143(3) by the Assessment Unit NFAC and directing the AO to pass fresh assessment order in terms of directions given in the impugned order HELD THAT:- We find that the PCIT has not pointed out any error in the assessment order to conclude that the assessment order is both erroneous and prejudicial to the interest of the Revenue, which is a pre-requisite for invoking revisional Jurisdiction u/s 263 of the Act. PCIT has asked the Assessee to show cause on the issues which are not examined in the assessment proceedings and nowhere in the notice it is mentioned that the proceedings have been initiated u/s 263 of the Act, which gives an inference that the PCIT was only trying to enable the A.O. to make fishing and roving enquiry. PCIT by way of issuing the show cause notice, tried to make enquiries regarding the very same information taken by the NFAC during the assessment proceedings. After gathering the information from the Assessee, PCIT could not also point out any adverse inferences or deficiencies in the explanation of the Assessee bringing on record any error committed by the A.O. which in turn had caused prejudice to the interest of the Revenue. PCIT was of the opinion that A.O. should have made more enquiries and for which no reasons have been assigned as to why those enquiries necessitated particularly based on chequered history and fast information on record. In the present case, approach of the Ld. PCIT is nothing but an attempt to thrust his opinion on the AO to make further fishing and roving enquiries. Assessee provided entire information before the PCIT, which are also filed in the PB before us. The PCIT failed to address any issue which could be determined/termed as erroneous, not brought to tax, so as to cause any prejudice to the interest of the Revenue. Even the non-application of mind of the PCIT is also clear from one fact that the Ld. PCIT alleged in the impugned letter, seeking information from the Assessee before actually initiating an action u/s 263 that the assessee had given a donation of Rs 2.50 crores in cash to the Prime Minister Relief Fund during Covid 19 and which proposition itself is factually incorrect. The assessee submitted the details specifically mentioning in the letter dated 05/04/2024 that payment was given through the banking channel and all evidences were filed. Yet in the impugned order, the PCIT instead of dropping the said query proceeded to remand the same to the AO. Action of the PCIT in invoking provision of Section 263 of the Act is against the settled principles of law and nothing but enabling the A.O. to make fishing and roving enquiries. Assessee appeal allowed. ISSUES PRESENTED AND CONSIDERED 1. Whether the revisional power under Section 263 of the Income-tax Act can be validly exercised by the Principal Commissioner where the assessing officer (AO)/Assessment Unit completed a faceless scrutiny assessment under Section 143(3) read with Section 144B after issuing appropriate notices and considering the replies. 2. Whether the impugned order under Section 263 is sustainable where the revisional authority (PCIT) has not identified any specific error in law or fact in the assessment order nor shown how the order was prejudicial to the interest of the Revenue, but has directed re-examination on multiple additional items. 3. Whether issuance of show-cause notice and exercise of Section 263 jurisdiction in the facts constitutes impermissible fishing and roving enquiries or a permissible revision for failure/absence of necessary enquiries. 4. Whether the faceless assessment regime/NFAC framework ousts or limits the scope of Section 263 revisionary powers of the Commissioner. 5. Whether principles of natural justice were complied with in the initiation and disposal of proceedings under Section 263. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Scope of Section 263 and legal framework applicable to revisionary jurisdiction Legal framework: Section 263 empowers the Commissioner to revise an assessment if the order is 'erroneous in so far as it is prejudicial to the interests of the Revenue'. Explanation 2 (post-2015 amendment) clarifies that an order passed without making enquiries or verification which should have been made can be treated as erroneous. The requirement is cumulative: error + prejudice. Precedent Treatment: The Court relied on established authorities (including the Supreme Court and coordinate Tribunals) holding that mere disagreement with AO's view or a different possible view does not render an order 'erroneous'. Malabar Industrial (SC) and Gabriel India (Bom HC) are applied to emphasize that both preconditions are essential. V-con (Supreme Court) distinction: revision may correct a wrong decision on merits by making additions but mere remand for additional enquiries is impermissible unless there is record of abject failure of investigation. Interpretation and reasoning: The Tribunal applied the two-fold test: (a) was the AO's order not in accordance with law (erroneous)? and (b) did such error cause prejudice to revenue? The assessment record showed issue-specific notices, multiple 142(1) queries, extensive replies and documentary material. The AO considered replies and accepted returned income after examination. The PCIT's show cause did not point to any identifiable legal or factual error in the AO's reasoning or any quantifiable revenue prejudice resulting from the AO's conclusions. Ratio vs. Obiter: Ratio - Section 263 requires specific prima facie material showing error and prejudice; absence of such material makes revision invalid. Obiter - observations on how Explanation 2 should be invoked in faceless assessments where SOP exists. Conclusion: The requisites of Section 263 were not satisfied on the record; initiation of revision/setting aside was not sustainable on the ground that the AO's order was erroneous and prejudicial. Issue 2 - Permissibility of remand versus correction on merits under Section 263 Legal framework: Section 263 empowers the Commissioner to revise an order; jurisprudence distinguishes between (i) remanding for further enquiry where there was failure of inquiry and (ii) exercising revisional power to make additions on merits where AO erred in view. The principle is that the Commissioner cannot step into AO's shoes unless error and prejudice are established. Precedent Treatment: The decision applies the Supreme Court holding (V-con) that where AO conducted inquiries and accepted assessee's contentions, the Commissioner cannot simply remit for re-examination unless there was an abject failure of investigation; if the Commissioner believes an addition is warranted, he must make it on merits rather than merely remanding. Interpretation and reasoning: The PCIT remanded the entire assessment directing fresh examination on several issues without demonstrating abject failure of investigation or identifiable omission that caused revenue prejudice. The Tribunal found remand in such circumstances equates to allowing fishing/roving enquiries, which the authorities have consistently condemned. Ratio vs. Obiter: Ratio - Remand under Section 263 is unsustainable where AO has made enquiries and record lacks material of failure; Commissioner must either point to specific failure or make a substantive revision on merits. Obiter - procedural expectations in faceless assessments. Conclusion: The direction to re-examine all issues by remand was impermissible; if PCIT considered additions necessary he should have recorded error and prejudice and either made the adjustment or shown clear failure of investigation to justify remand. Issue 3 - Fishing and roving enquiries, and evidentiary threshold for invoking Section 263 Legal framework: Revisionary power cannot be used to initiate enquires unrelated to identified errors; there must be prima facie material on record showing lawful tax was not imposed or that order is not in accordance with law. Precedent Treatment: Authorities including Gabriel India, Metacaps and other coordinate decisions were followed to hold that Section 263 cannot be used as a tool for fishing/roving enquiries; initiation must be predicated on material in record warranting revision. Interpretation and reasoning: The PCIT's show cause and order sought information on numerous items (advances, related-party payments, donations, celebration expenses, commissions, trade payables, additions to fixed assets, GST credits) without specifying which verifications were omitted by the AO or how non-verification prejudiced revenue. The assessee had filed voluminous replies and documents and AO had examined flagged issues. There was no prima facie record that any of the unexamined items would lead to undetected tax. The Tribunal concluded the impugned proceeding amounted to impermissible fishing and roving enquiries. Ratio vs. Obiter: Ratio - A revisional proceeding that solicits broad re-verification without pointed prima facie material is invalid as fishing/roving. Obiter - discussion of examples where remand may be justified (i.e., abject failure of AO to inquire). Conclusion: The PCIT's action constituted forbidden roving/fishing enquiries; absence of specific prima facie material made the Section 263 invocation unsustainable. Issue 4 - Effect of faceless assessment (NFAC/SOP) on Section 263 jurisdiction Legal framework: Faceless assessment under Section 144B operates with SOPs specifying processes (e.g., 360-degree checks, structured questionnaires); however, statute contains no express bar on Section 263 being invoked against faceless assessments. Precedent Treatment: The Tribunal observed that whether NFAC's structure limits PCIT's revisional jurisdiction is an academic question where the impugned order failed on merits; cited authorities indicate presumption that official acts are regularly done but do not absolve revisional scrutiny where error and prejudice exist. Interpretation and reasoning: The assessee argued that NFAC's multi-level SOP vetting precludes subsequent allegation of failure to inquire; Tribunal accepted SOP shows thorough process but did not rest decision on jurisdictional immunity. Because the PCIT failed to identify error/prejudice, the face-to-face question of whether NFAC ousts Section 263 remained unnecessary to decide. Ratio vs. Obiter: Obiter - NFAC procedures strengthen presumption of regularity and make prima facie case for absence of failure of inquiry; ratio avoided reaching a definitive rule on ouster of Section 263 by faceless regime. Conclusion: The Tribunal did not decide that faceless assessments are immune from Section 263; rather, it held that on the record no error/prejudice was shown and therefore the revision could not be sustained; the jurisdictional question remains academic in these facts. Issue 5 - Compliance with principles of natural justice in Section 263 proceedings Legal framework: Show-cause notices must be fairly drafted and enable the assessee to rebut allegations; authorities require show-cause to indicate prima facie material so reply is not futile. Precedent Treatment: Cited principles (ORYX and others) that show-cause must manifest an open mind and indicate the basis so the assessee gets effective opportunity to rebut. Interpretation and reasoning: The assessee furnished voluminous replies and documents; the PCIT's notice and order did not identify specific errors or quantify prejudice and in one instance alleged a fact (cash donation) contradicted by submitted bank evidence. The Tribunal found the PCIT had not demonstrated a reasonable basis for revision and the show-cause lacked specificity required for a fair opportunity to rebut on alleged error & prejudice. Ratio vs. Obiter: Ratio - Where a show-cause fails to disclose prima facie basis of alleged error and prejudice, the proceeding may be arbitrary and contrary to natural justice. Obiter - remarks on manner of drafting show-cause in faceless regime. Conclusion: Procedural fairness was compromised because notice/order did not specify errors or prejudice with sufficient clarity; this reinforced the finding that Section 263 invocation was unsustainable. Overall Conclusion and Disposition The Tribunal concluded that the revisional order under Section 263 was unsustainable: the PCIT failed to point to any specific error in the assessment order and to show how it was prejudicial to revenue; the action amounted to authorising fishing and roving enquiries; remand was improper absent proof of abject failure of investigation; natural justice considerations and precedents compelled quashing. Consequently, the order under Section 263 was quashed and the appeal allowed. The ancillary contention on jurisdiction to revise faceless NFAC assessments was left undecided as academic in view of quashing on merits.