THE PR COMMISSIONER OF INCOME TAX, AAYKAR BHAWAB, NOIDA AND ANOTHER vs. M/S SAMPARK MANAGEMENT CONSULTANCY LLP

Facts

The appeal concerns Assessment Year 2017-18. The respondent-assessee, engaged in trading shares and securities, filed its return declaring income of Rs.1,83,99,800/-. Its case was selected for scrutiny due to excess claim of dividend income exemption and a large increase in unsecured loans. The Assessing Officer (AO) issued notices under Section 142(1) and a questionnaire, to which the assessee provided details and documentary evidence. The AO, after examination, found that dividend income from mutual funds (Rs.8,89,01,128/- out of Rs.8,93,38,723/-) was exempt under Section 10(35) and the increase in unsecured loans was from partners. Consequently, the AO accepted the returned income and passed an order under Section 143(3) on 17.12.2019. The Principal Commissioner of Income Tax (PCIT), invoking Section 263, found the assessment order erroneous and prejudicial to revenue, directing the AO to conduct specific inquiries. The assessee appealed to the Tribunal, which allowed the appeal, quashing the PCIT's order.

Held

The Tribunal was correct in allowing the assessee's appeal and quashing the order passed by the PCIT under Section 263. The Tribunal thoroughly examined the record and found that the AO had issued six notices under Section 142(1) along with questionnaires, to which the assessee provided extensive replies (approximately 300 pages) and documentary evidence. The AO discussed each reason for scrutiny, recorded findings based on the evidence, and concluded that no adverse inference could be drawn. The Tribunal itself reviewed the issues of dividend income exemption and unsecured loans, finding that all material was produced before the AO and verified. Therefore, the Tribunal's conclusion that the PCIT's reasons, based on Explanation 2 to Section 263 regarding the AO's failure to make inquiries or verification, were without basis and contrary to the record, was sound. The Tribunal found the PCIT's order to be without jurisdiction. The High Court found no perversity in the Tribunal's findings and no substantial question of law arose.

Key Issues

1. Whether the Tribunal was justified in setting aside the order passed by the Principal Commissioner of Income Tax under Section 263 of the Income Tax Act, 1961, when the PCIT observed that the assessment order was passed without making necessary inquiries or verification, as contemplated by Explanation 2 to Section 263(1)? (Question of law) Assessee's contentions: The assessment was made under Section 143(3) after detailed questionnaire and verification, to which the assessee responded with documents. The AO recorded categorical findings. Therefore, the PCIT's exercise of jurisdiction under Section 263 on the ground of lack of inquiry was rightly set aside by the Tribunal, and no substantial question of law arises. Revenue's contentions: The Tribunal was not justified in setting aside the PCIT's order. The PCIT clearly observed that the assessment order was passed without making inquiries or verification that should have been made, falling under Explanation 2 of Section 263(1). The Tribunal failed to consider that requisite inquiries regarding dividend income were not made by the assessee. Certain documents filed before the PCIT were not found in the assessment record, indicating they were not filed, considered, or taken cognizance of by the AO. This gives rise to substantial questions of law.