2025 (11) TMI 1051 - AT - Income Tax

Order under s.263 quashed as void-ab-initio; AO's s.153C r.w.s. s.143(3) inquiry accepted cost documents and rejects s.68 enhancement as conjectural

ITAT allowed the appeal, quashing the PCIT's revision order under s.263 as void-ab-initio. The Tribunal held the AO had conducted proper inquiry under ... Revision u/s 263 - assessment done u/s 153C r.w.s 143(3) - sale of loose diamonds - enhancement of the income of the appellant u/s 68 - actual cost of acquisition for the purpose of computing capital gains is concerned u/s 45 HELD THAT:- As repeated and reiterated by the assessee in the reply dated 27.05.2022 that the cash so generated by the assessee was ultimately utilized by him towards the funding of the construction activities carried out by him in a nearby area of Sushant Lok, Gurgaon. These funds were further used to trick Mr. Udit Bansal (younger son of the assessee) to keep him motivated towards the construction activities. Apart from that the assessee duly disclosed the gains arose on sale of loose diamonds in the return of income filed on 17.01.2022 and 18.01.2022 for Assessment Year 2017-18, 2018-19& 2019-20 tax whereupon was also paid during the filing of return of income by the assessee. Actual cost of acquisition for the purpose of computing capital gains is concerned under Section 45 the same is required to be considered in its proper perspective as contended by the assessee before the Ld. AO during the reassessment proceeding under Section 153C of the Act, as the assessee computed his taxable capital gains considered his actual cost of loose diamonds to be the cost of acquisition for the purpose of Section 48 & 49 of the Act and paid tax thereon such cost of acquisition cannot be disregarded without proper reasoning as contended by the assessee in the said reply. The assessee therefore, had duly furnished documentary evidences which corroborates the exactitude of the version of the assessee and depicts the true facts of the case. As the assessee has been able to establish that the cost of acquisition of the loose diamonds was Rs. 2,49,00,849/- calculation of fare market value of the capital asset to determine the cost of its acquisition and re-computation of the capital gains thereto was not warranted and without jurisdiction as was the crux of the submission made by the assessee before the Ld. AO and the same was found to have been considered. Enhancement of the income of the appellant u/s 68 passed on conjecture and surmises overlooking the evidences on record which were duly placed before the Ld. AO and also before him and erroneously concluded that the sale of inherited loose diamonds by the appellant neither supported by evidences nor verified by the Ld. AO holding the order under Section 153C r.w.s 143(3) erroneous and prejudicial to the interest of revenue. It is relevant to mention that considering the evidences placed on record by the assessee before the Ld. AO we found that the source of cash found in the course of search which is the issue in the order impugned was duly explained during the course of re-assessment proceeding under Section 153C r.w.s 143(3) of the Act and considering such explanation with corroborative evidences together with inquiries conducted during the assessment proceeding the Ld. AO has doubted the cost of acquisition of diamonds and compared it with the price of gold and further recomputed the cost of acquisition of loose diamonds and ultimately made addition towards sale of inherited loose diamonds in the order of assessment dated 31.05.2022 passed under Section 153C r.w.s 143(3) of the Act for Assessment Year 2017-18. As the fact of inquiry conducted by the Ld. AO is found to be crystal clear from the entire set of documents on record pertains to the assessment done under Section 153C r.w.s 143(3) of the Act by the Ld. AO, exercising revisionary jurisdiction under Section 263 of the Act by the Ld. PCIT holding the same erroneous and prejudicial to the interest of Revenue is a changed opinion without there being any other supporting documents in his hands to justify the same, is found to be arbitrary exercise of power rather beyond his jurisdiction and therefore, liable to be quashed. With the above observation the impugned revisionary order under Section 263 of the Act is found to be void-ab- initio and therefore, quashed. Appeal of assessee allowed. ISSUES PRESENTED AND CONSIDERED 1. Whether the revisionary power under Section 263 of the Income-tax Act can be validly exercised by the Commissioner (PCIT) in respect of an assessment completed under Section 153C read with Section 143(3) after the Assessing Officer has made inquiries, considered evidences and passed assessment, and where approval under Section 153D was obtained. 2. Whether the Assessing Officer had made adequate inquiry and examination of evidences in regard to the claimed sale of loose diamonds (acquisition, existence since 2000-01, sale consideration, and utilization of cash) such that the assessment order could be said to be erroneous or prejudicial to the revenue. 3. Whether recomputation of long-term capital gains by adopting backward-calculated fair market value based on movements in gold prices (instead of the assessee's claimed actual cost of acquisition of diamonds acquired in FY 2000-01) was justified. 4. Whether enhancement of income under Section 68 by treating a specific cash receipt credited in the cash flow statement as unexplained income was sustainable on the record before the Commissioner in revision under Section 263. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Scope and validity of revision under Section 263 after reassessment under Section 153C/143(3) and approval under Section 153D Legal framework: Section 263 empowers the Commissioner to call for and examine records of any proceedings and, if satisfied that an order is erroneous in so far as it is prejudicial to the interests of the revenue, to revise such order. Sections 132, 153C and 153D govern search-linked proceedings and reassessment on materials seized from a searched person, including requirement of satisfaction/approval by specified authorities for proceeding against a person in whose case documents are found. Precedent treatment: The Court referred to earlier decisions (noted in submissions) dealing with applicability of Section 263 post exercise of powers under Section 153C/153D and the principle that revision cannot be exercise to substitute a different view where the AO has made enquiries and reached a considered conclusion. A distinction was drawn from authorities relied upon by parties where the question was whether the prerequisite statutory steps (satisfaction/approval) were undertaken. Interpretation and reasoning: The Tribunal examined whether statutory preconditions and inquiries were complied with prior to the assessment and whether the AO had applied his mind. Record shows issuance of notices under Section 153C, filing of returns, notices under Sections 143(2) and 142(1), replies by the assessee, satisfaction notes of the AO of the searched person and the AO of the assessee, approval under Section 153D and completion of assessment. On the materials, the AO made substantive inquiries, examined documentary evidence (including audited financial statements seized during search), and adjusted income after considering cost of acquisition. The Tribunal concluded that the Commissioner's exercise of revision amounted to a mere change of opinion when AO had conducted inquiries, and there were no fresh supporting materials to justify overthrowing the AO's considered view. The Tribunal found the exercise of Section 263 in those circumstances arbitrary and beyond jurisdiction. Ratio vs. Obiter: Ratio - where an assessment under Section 153C/143(3) is passed after due inquiries, consideration of seized documents and with requisite approval under Section 153D, Section 263 cannot be used to substitute the Commissioner's opinion for that of the AO absent demonstration that the assessment was without inquiry or unsustainable in law. Obiter - references to comparative authority and discussion of procedural timelines. Conclusions: The Tribunal held that the revision under Section 263 was invalid and amounted to change of opinion; the impugned revisionary order was void-ab-initio and was quashed. Issue 2 - Adequacy of AO's inquiry into claimed sale of loose diamonds and source of cash Legal framework: AO's duty is to make such inquiry as is appropriate having regard to materials, seized documents and replies; assessment under Section 153C is permissible where documents found in search have bearing on determination of income. Precedent treatment: The Tribunal relied on the established principle that Section 263 cannot be invoked where the assessing officer has made inquiries and applied his mind; mere disagreement by the Commissioner with conclusions drawn after inquiry does not permit revision. Interpretation and reasoning: The record demonstrates multiple opportunities afforded to the assessee, detailed replies to notices, production of seized audited financial statements and other documents showing acquisition and sale of diamonds, and AO's comparative analysis. The AO doubted cost of acquisition and recomputed capital gains, but he did make inquiries and consider documentary proofs. Therefore, the Tribunal found that lack of inquiry or investigation- a statutory ground to invoke Section 263- did not exist. Ratio vs. Obiter: Ratio - where AO has conducted comprehensive inquiries and considered seized documents and explanations, a Commissioner's revision on ground of alleged lack of inquiry is impermissible. Obiter - detailed recital of documents relied upon by assessee. Conclusions: The Tribunal concluded AO's inquiries were sufficient and that the Commissioner's contrary conclusion was a mere change of opinion; hence revision was unsustainable. Issue 3 - Treatment of cost of acquisition of pre-1.4.2001 assets and methodology of computing FMV Legal framework: Section 55(2) provides that for assets acquired before 1.4.2001 the assessee may opt to adopt either actual cost of acquisition or fair market value as on 1.4.2001 for computation of capital gains. The correctness of choice and evidence supporting actual cost are relevant to tax computation. Precedent treatment: The Tribunal accepted the settled legal position that an assessee may elect actual cost if adequately proved; seized audited financial statements are relevant evidence. Interpretation and reasoning: Assessee produced seized audited financial statements recording acquisition of loose diamonds in FY 2000-01 for specified consideration. The Tribunal noted the law presumes documents found in possession in a search as true in absence of contrary proof and that the AO had entertained the claim and allowed indexation-based computation albeit with some adjustments. The Commissioner's approach of re-computing FMV backward by reference to gold price inflation was criticized as baseless and an unreliable methodology in the absence of affirmative evidence establishing such correlation. The Tribunal emphasized that AO considered the evidence and the assessee's election to adopt actual cost; therefore re-computation by Commissioner in revision without new material was impermissible. Ratio vs. Obiter: Ratio - actual cost of acquisition claimed for pre-2001 asset, supported by seized audited financial statements, cannot be disregarded in revision under Section 263 absent valid reasons or fresh material; adopting an unrelated commodity (gold) indexation to determine FMV is not warranted without justification. Obiter - comment on presumption of correctness of documents found in search subject to rebuttal. Conclusions: The Tribunal held that the assessee had furnished sufficient documentary evidence of acquisition cost and that the Commissioner's proposed re-computation on gold-based methodology was unwarranted; this reinforced the conclusion that revision under Section 263 was improper. Issue 4 - Addition under Section 68 in revisionary order in respect of a cash receipt credited in cash flow statement Legal framework: Section 68 addresses unexplained cash credits; revenue must show that entries are unexplained and assessee's explanation unsatisfactory. Section 263 cannot be used to make additions that are essentially debatable issues already dealt with by the AO after inquiry. Precedent treatment: The Tribunal treated the proposed addition under Section 68 in the impugned revisionary order as founded on conjecture where AO had considered the explanation and evidence; reliance on mere expression of different view by Commissioner was insufficient. Interpretation and reasoning: The Commissioner enhanced income by treating a specific credited amount as unexplained in revision, asserting the assessee failed to explain a Rs. 34,03,566 entry. The Tribunal found that the AO had considered explanations and evidence on source and utilization of cash, and that the Commissioner's conclusion ignored the record of inquiries and materials. Thus the Section 68 enhancement in revision was the product of changed opinion rather than a finding of absence of inquiry or legal unsustainability. Ratio vs. Obiter: Ratio - additions under Section 68 effected through Section 263 are impermissible where AO already examined explanations and documents; mere dissatisfaction by Commissioner does not validate revisionary addition. Obiter - observations on adequacy of material required to treat a cash entry as unexplained. Conclusions: The Tribunal found the Section 68 enhancement in the revisionary order unsustainable and quashed the revisionary direction to recompute income/demand. OVERALL CONCLUSION The Tribunal held that on the materials - notices issued, replies filed, documents seized and considered (including audited financial statements), satisfaction and approvals under search provisions, and substantive inquiries by the AO - the assessment under Section 153C read with Section 143(3) was the product of due inquiry and application of mind. The Commissioner's exercise of revisionary power under Section 263 amounted to a mere change of opinion without fresh material or demonstration that the assessment was impossible or unsustainable in law; accordingly the revisionary order was void-ab-initio and was quashed. Consequential grounds became academic.