CT. RAMANATHAN (HUF),PUDUKKOTTAI vs. PCIT 1, MADURAI

Brief facts of the case are that the assessee filed return of income for AY 2020-21 on 10.01.2021 admitting total income of and agriculture income of from the sale of people and coffee the case was selected for limited scrutiny under CASS to verify the substantial increase Rs.5,17,720/- and in agriculture income of Rs.44,45,784/- from the sale of pepper and coffee. The assessment was completed under section 143(3) r.w.s. 144B of the Income Tax Act, 1961 [‘Act’ in Page - 3 - of 26 short] on 18.07.2022 accepting the total income of Rs.5,17,720/- admitted by the assessee in the return of income for AY 2020-21. Thereafter, the PCIT issued show cause notice u/s 263 of the Act dated 09.01.2025 which is produced as under:

The ld. AR for the assessee has contended as under:

Per contra, the ld.DR Mr. M. K. Biju, CIT relied upon the impugned order of the PCIT and vehemently supported the reasoning of the order.

We have heard the rival submissions and perused the record of the order of the PCIT and submissions of the assessee.

The questionnaire/ Annexure to notice u/s 142(1) dated 05.11.2021 vide DIN ITBA/AST/F/142(1)/2021-22/1036740938(1) is as under:

We find that during the assessment proceedings a detailed enquiry and examination with respect to the issue under consideration was undertaken by the Ld. AO in the course of assessment, even if one were to say that such enquiry was inadequate, the same cannot be a ground for proceedings under Section 263 of the Act. It is a settled principle that there is a distinction between "lack of enquiry' and 'inadequate enquiry. It is only in cases of lack of inquiry that such a Page - 15 - of 26 course of action under section 263 would be open. In this regard, we may refer the following judicial precedents: - Kwality Steel Suppliers SC 395 ITR 1 Complex Virtusa Consulting Services HC-Madras 442 ITR 385 (P.) Ltd. Globus Infocom Ltd. HC-Delhi 369 ITR 14 Sunbeam Auto Ltd. HC-Delhi 332 ITR 167 Mohak Real Estate (P.) Ltd HC-Delhi 161 taxmann.com 388 Clix Finance India (P.) Ltd HC-Delhi 298 Taxman 217 Spectra Shares & Scrips (P) HC-Andra 354 ITR 35 Ltd. Pradesh Chemsworth (P.) Ltd. HC-Karnataka 119 taxmann.com 358 Shriram Properties Limited ITAT-Chennai 2023 (4) TMI 375 Cavinkare (P.) Ltd. ITAT-Chennai 149 taxmann.com 296 Rajkumar Impex Pvt. Limited ITAT-Chennai 2023 (6) TMI 812 FCA Engineering India Pvt. Ltd. ITAT-Chennai ITΑ 684/CHNY/2023 Keller (M) SDN BHD ITAT-Chennai ITA 1319/CHNY/2023 International Seaport Dredging ITAT-Chennai ΙΤΑ1597/CHNY/2024 Pvt. Limited Sindya Securities & ITAT-Chennai 157 taxmann.com Investments (P.) Ltd. 591 Torrent Pharmaceuticals Ltd. ITAT 97 taxmann.com 671 Ahmedabad

We are of the considered view that if a query was raised during original assessment which was responded by the Appellant and issue was allowed in the assessment, even if such enquiry is inadequate, the PCIT was not justified in invoking the provisions of section 263 of the Act. We further add that the PCIT can invoke revisionary jurisdiction under section 263 of the Act only if the order subject to revision, passed by the Ld. AO is both erroneous as well as prejudicial to the interest of the revenue and further, if the Ld. AO had taken one of the plausible views which the Ld. PCTT does not agree with, it cannot be treated as erroneous order prejudicial to the interest of revenue, unless the view taken by the Ld. AO is unsustainable in law.

We may refer recent judgment of the Hon’ble Delhi High Court dated 01.03.2024 passed in in the case of Pr. Commissioner of Income Tax -2, Delhi Vs M/s Clix Finance India Pvt. Ltd. which after considering section 263 of the Act and various settled judgments of the Hon’ble Supreme Court and Hon’ble High Courts held as under:

Vide order dated 06.11.2019, this Court framed the following question of law:- A. Whether, in the facts and circumstances of the case, the Hon'ble ITAT was justified in quashing the order under Section 263 of the Income Tax Act? 17. The brief controversy involved in the present appeal pertains to the invocation of revisional jurisdiction under Section 263 of the Act by the CIT to set aside the original assessment order dated 30.03.2005.

Clause (a) of Explanation 2 to Section 263 of the Act further stipulates that if an order is passed without making an enquiry or verification which should have been made, the same would bestow a revisional power upon the Commissioner. However, the said Clause or any other condition laid down in Explanation 2 does not warrant recording of the said enquiry or verification in its entirety in the assessment order.

Admittedly, in the instant case, the questionnaire dated 02.11.2004, which has been annexed and brought on record in the Page - 18 - of 26 present appeal, would manifest that the AO had asked for the allowability of the claims with respect to the issues in question. Consequently, the respondent-assessee duly furnished explanations thereof vide replies dated 09.12.2004, 20.12.2004 and 06.01.2005. Thus, it is not a case where no enquiry whatsoever has been conducted by the AO with respect to the claims under consideration. However, this leads us to an ancillary question? whether the mandate of law for invoking the powers under Section 263 of the Act includes the cases where either an adequate enquiry has not been made and the same has not been recorded in the order of assessment or the said authority is circumscribed to only consider the cases where no enquiry has been conducted at all.

Reliance can be placed on the decision of this Court in the case of CIT v. Sunbeam Auto Ltd. [2009 SCC OnLine Del 4237], wherein, it was held that if the AO has not provided detailed reasons with respect to each and every item of deduction etc. in the assessment order, that by itself would not reflect a non-application of mind by the AO. It was further held that merely inadequacy of enquiry would not confer the power of revision under Section 263 of the Act on the Commissioner. The relevant paragraph of the said decision reads as under:- We have considered the rival submissions of the counsel on the other side and have gone through the records. The first issue that arises for our consideration is about the exercise of power by the Commissioner of Income-tax under section 263 of the Income-tax Act. As noted above, the submission of learned counsel for the Revenue was that while passing the assessment order, the Assessing Officer did not consider this aspect specifically whether the expenditure in question was revenue or capital expenditure. This argument predicates on the assessment order, which apparently does not give any reasons while allowing the entire expenditure as revenue expenditure. However, that by itself would not be indicative of the fact that the Assessing Officer had not applied his mind on the issue. There are judgments galore laying down the principle that the Assessing Officer in the assessment order is not required to give detailed reason in respect of each and every item of deduction, etc. Therefore, one has to see from the record as to whether there was application of mind before allowing the expenditure in question as revenue expenditure. Learned counsel for the assessee is right in his submission that one has to keep in mind the distinction between "lack of inquiry" and "inadequate inquiry". If there was any inquiry, even Page - 19 - of 26 inadequate that would not by itself give occasion to the Commissioner to pass orders under section 263 of the Act, merely because he has a different opinion in the matter. It is only in cases of "lack of inquiry" that such a course of action would be open. In Gabriel India Ltd. (1993) 203 ITR 108 (Bom), law on this aspect was discussed in the following manner (page 113) ** 23. A similar view was taken by this Court in the case of CIT v. Anil Kumar Sharma [2010 SCC OnLine Del 838], wherein, it was held that once it is inferred from the record of assessment that AO has applied its mind, the proceedings under Section 263 of the Act would fall in the category of Commissioner having a different opinion. Paragraph 8 of the said decision reads as under:- 8. In view of the above discussion, it is apparent that the Tribunal arrived at a conclusive finding that, though the assessment order does not patently indicate that the issue in question had been considered by the Assessing Officer, the record showed that the Assessing Officer had applied his mind. Once such application of mind is discernible from the record, the proceedings under section 263 would fall into the area of the Commissioner having a different opinion. We are of the view that the findings of facts arrived at by the Tribunal do not warrant interference of this court. That being the position, the present case would not be one of "lack of inquiry" and, even if the inquiry was termed inadequate, following the decision in Sunbeam Auto Ltd. (2011) 332 ITR 167 (Delhi) (page 180) : "that would not by itself give occasion to the Commissioner to pass orders under section 263 of the Act, merely because he has a different opinion in the matter." No substantial question of law arises for our consideration.

In Ashish Rajpal as well, this Court was of the view that the fact that a query was raised during the course of scrutiny which was satisfactorily answered by the assessee but did not get reflected in the assessment order, would not by itself lead to a conclusion that there was no enquiry with respect to transactions carried out by the assessee.

Further, the decision of the Hon’ble Supreme Court in the case of Malabar Industrial Co. Ltd., enunciates the meaning and intent of the phrase ’prejudicial to the interests of the Revenue’, in the following words:- ’8.The phrase ‘prejudicial to the interests of Page - 20 - of 26 the Revenue’ is not an expression of art and is not defined in the Act. Understood in its ordinary meaning it is of wide import and is not confined to loss of tax. The High Court of Calcutta in ‘Dawjee Dadabhoy & Co.v.S.P. Jain[(1957) 31 ITR 872(Cal)], the High Court of Karnataka in CITv.T. Narayana Pai[(1975) 98 ITR 422(Kant)], the High Court of Bombay in CITv.Gabriel India Ltd.[(1993) 203 ITR 108(Bom)] and the High Court of Gujarat in CITv.Minalben S. Parikh[(1995) 215 ITR 81(Guj)] treated loss of tax as prejudicial to the interests of the Revenue.

Mr. Abraham relied on the judgment of the Division Bench of the High Court of Madras in Venkatakrishna Rice Co.v.CIT[(1987) 163 ITR 129(Mad)] interpreting ‘prejudicial to the interests of the Revenue’. The High Court held: “In this context, (it must) be regarded as involving a conception of acts or orders which are subversive of the administration of revenue. There must be some grievous error in the order passed by the Income Tax Officer, which might set a bad trend or pattern for similar assessments, which on a broad reckoning, the Commissioner might think to be prejudicial to the interests of Revenue Administration’’. In our view this interpretation is too narrow to merit acceptance. The scheme of the Act is to levy and collect tax in accordance with the provisions of the Act and this task is entrusted to the Revenue. If due to an erroneous order of the Income Tax Officer, the Revenue is losing tax lawfully payable by a person, it will certainly be prejudicial to the interests of the Revenue.

The phrase ‘’prejudicial to the interests of the Revenue‘’ has to be read in conjunction with an erroneous order passed by the Assessing Officer. Every loss of revenue as a consequence of an order of the Assessing Officer cannot be treated as prejudicial to the interests of the Revenue, for example, when an Income Tax Officer adopted one of the courses permissible in law and it has resulted in loss of revenue; or where two views are possible and the Income Tax Officer has taken one view with which the Commissioner does not agree, it cannot be treated as an erroneous order prejudicial to the interests of the Revenue unless the view taken by the Income Tax Officer is unsustainable in law. It has been held by this Court that where a sum not earned by a person is assessed as income in his hands on his so offering, the order passed by the Assessing Officer accepting the same Page - 21 - of 26 as such will be erroneous and prejudicial to the interests of the Revenue. (See ‘Rampyari Devi Saraogiv CIT[(1968) 67 ITR 84(SC)] and in ‘’Tara Devi Aggarwalv.CIT[(1973) 3 SCC 482:1973 SCC (Tax) 318:(1973) 88 ITR 323].) [Emphasis supplied] 26. Recently, the Hon’ble Supreme Court in the case of CIT v. Paville Projects (P) Ltd. [2023 SCC OnLine SC 371], while relying upon Malabar Industrial Co. Ltd., has discussed the sanctity of two-fold conditions for the purpose of invoking jurisdiction under Section 263 of the Act. The relevant paragraph of the said decision reads as under:- Learned counsel appearing on behalf of the assessee has heavily relied upon the decision of this Court in the case of Malabar Industrial Co. Ltd.(supra). It is true that in the said decision and on interpretation of Section 263of the Income Tax Act, it is observed and held that in order to exercise the jurisdiction under Section 263(1)of theIncome tax Act, the Commissioner has to be satisfied of twin conditions, namely, (i) the order of the Assessing Officer sought to be revised is erroneous; and (ii) it is prejudicial to the interests of the Revenue. It is further observed that if one of them is absent, recourse cannot be had to Section 263(1) of the Act. ***’.

Considering the aforesaid judicial pronouncements, it can be safely concluded that inadequacy of enquiry by the AO with respect to certain claims would not in itself be a reason to invoke the powers enshrined in Section 263 of the Act. The Revenue in the instant case has not been able to make out a sufficient case that the CIT has exercised the power in accordance with law. Rather, in our considered opinion, the facts of the case do not indicate that the twin conditions contained in Section 263 of the Act are fulfilled in its letter and spirit.

Notably, the ITAT, while making a categorical finding that the CIT had failed to point out any definite or specific error in the assessment order, has satisfactorily explained both the claims in question in Paragraph 8.2 of its order, which reads as under:- “8.2 In the Impugned Order, the Ld. Commissioner of Income Tax-IV, Delhi held that the AO had not examined the aforesaid two issues properly and, therefore, set aside the issues for Page - 22 - of 26 further inquiries to be conducted by the AO. As regards the first issue is concerned, we note that out of total provision of Rs. 1114.68 lacs, a sum of Rs. 7,60,76,105/- was suo moto added back in the computation of income and a further sum of Rs. 73,46,160- was disallowed by the AO in the original assessment order dated 30.3.2005. Therefore, out of Rs. 1114.68 lacs, Rs. 834.22 lacs already stood disallowed in the original assessment order. The balance amount represented actual write off which was palpably clear from page 2 of the impugned order itself. No deduction on account of any such provision was, therefore, allowed to the assessee. Hence, there is no error or prejudice to the interest of revenue. As regards second issue it was noted that interest rate swap was an actual loss and only the net loss of Rs. 114.05 lacs after setting of gain of interest rate swap was claimed as deduction. However, we find that both these issues were duly examined by the AO vide Questionnaire dated 2.11.2004 (Page 1-2 of the Paper Book) to which replies dated 9.12.2004, 20.12.2004 and 6.1.2005 (Page No. 3-39 of Paper Book-1) were furnished and, therefore, the finding of the Ld. CIT that the issues were not examined properly was not correct. Even the Ld. CIT has not pointed out the definite and specific error in the original assessment order and observed that the inquiry made by the AO was inadequate or improper without first pointing out the error in the original assessment order passed by the AO, particularly because both the aforesaid issues were duly examined at the stage of the original assessment proceedings, hence, the impugned order is beyond jurisdiction, bad in law and void-ab-initio’’.

It is discernible from the aforenoted findings of the ITAT that both the claims were duly examined during the original assessment proceedings itself and neither there was any error nor the same was prejudicial to the interests of the Revenue. Thus, the findings of fact arrived at by the ITAT do not warrant any interference of this Court.

So far as the reliance placed by the CIT on Umashankar Rice Mill is concerned, the same is misplaced, particularly in light of the insertion of Explanation 2 to Section 263 of the Act, brought in place by the Finance Act, 2015. The said amendment markedly specifies various conditions to exercise the authority vested in the Page - 23 - of 26

The Hon'ble Supreme Court in the case of CIT vs. M.Chandra Sekhar [151 ITR 433 (SC)] has held that the presumption that A.O. has considered the details filed by the assessee was "founded" on the principle that an officer entrusted with a judicial or quasi- judicial duty must be presumed to have discharged his duties in a proper and bonafide manner. This view is confirmed by the full bench decision of the Delhi high court in CIT Vs. Kelvinator of India Ltd (256 ITR 1) (Delhi FB), was upheld by the Supreme court in Commissioner of Income Tax Vs. Kelvinator Of India Ltd ( 320 ITR 561)(SC).

The Hon’ble High Court of Bombay in the case of Marico Ltd., vs. ACIT in writ petition No.1917 of 2019 dated 21.08.2019, wherein the Hon’ble High Court has clearly pointed out once a query has been raised by the AO during the assessment proceedings and the assessee has responded to that query, it would necessarily follow that the AO has accepted the assessee’s submission, so as to not deal with that issue in the assessment order.

Hence, in the factual matrix of the present case and in the light of above judgment and cases cited at bar, we are of the considered view that the impugned order is liable to be set aside. In this case every query has been replied by the assessee during assessment proceedings including Rule 7B. A second view cannot be taken in the garb of section 263 on same set of facts which were already categorically discussed earlier and assessment order has been passed. Accordingly, we set aside the impugned order dated 14.02.2025 passed u/s 263 of the Act.

In result, appeal of the assessee is allowed.