Loading judgment…
Facts
The assessee, a builder and property developer, filed their income tax return for AY 2015-16. The Assessing Officer (AO) conducted assessment proceedings under Section 143(3). Subsequently, the Principal Commissioner of Income Tax (Pr. CIT) initiated revision proceedings under Section 263, citing various issues where the AO's assessment was allegedly erroneous and prejudicial to revenue.
Held
The Tribunal held that the Pr. CIT's revisionary orders under Section 263 were unsustainable and legally invalid. The Pr. CIT's objections were based on a change of opinion, speculative concerns, or a failure to appreciate that the AO had conducted adequate inquiries and made a plausible decision. The issues raised by the Pr. CIT were found to be adequately addressed during the assessment proceedings.
Key Issues
Whether the Pr. CIT's revisionary proceedings under Section 263 were justified when the Assessing Officer had conducted adequate inquiries and the Pr. CIT's objections were based on speculation or a change of opinion rather than demonstrable errors in the assessment order.
Sections Cited
263, 143(3), 24(b), 133A, 271(1)(c), 68, 115BBE, 64(1)(iv), 143(2), 142(1), 36(1)(iii)
AI-generated summary — verify with the full judgment below
Order PER KRINWANT SAHAY, A.M: This is an appeal filed by the Assessee against the order of the Pr. CIT, Shimla dt. 19/03/2020 pertaining to Assessment Year 2015-16. 2. In the present appeal Assessee has raised the following grounds of appeal:
1. That order passed u/s 263 of the Income Tax Act, 1961 by the Learned Principal Commissioner of Income Tax, Shimla is against law and facts on the file in as much as he has failed to show as to how the assessment order passed by the Learned Assessing Officer was erroneous in as much as prejudicial to the interest of the Revenue.
2. That order passed u/s 263 of the Income Tax Act, 1961 by the Learned Principal Commissioner of Income Tax is bad in law in as much as the date of order as per the impugned order is 19.03.2020 and which has been signed without mentioning of a DIN. As per the separate order, the Learned Principal Commissioner of Income Tax has mentioned the DIN has been generated on 18.06.2020 which is beyond the specified time limit. From the order passed, it is also not clear as to whether requisite approval was obtained from the Learned Principal Chief Commissioner of Income Tax.
3. That the Learned Principal Commissioner of Income Tax has failed to appreciate that while framing assessment, the Learned Assessing Officer had gone into all the issues in detail mentioned in the impugned order and formed his independent opinion while passing assessment order and the Learned Principal Commissioner of Income Tax has nowhere made out a case that as to how the 2 order passed by him is erroneous in as much as prejudicial to the interest of revenue. Rather he has just made sweeting remarks to make further enquiries.
3. Briefly the facts of the case are that Sh. Balbir Singh Verma, filed his income tax return for the Assessment Year 2015-16 on 10.11.2015, declaring a total income of Rs. 2,35,94,250/- and agricultural income of Rs. 20,27,700/-. Thereafter the case of the assessee was selected for Manual (compulsory) Scrutiny on the basis of parameter at Para 1(ii) of the Manual Compulsory Guidelines of CBDT issued vide Instruction No. 4/2016 dt. 13/07/2016 and notice under Section 143(2) issued on 27.09.2016 and a requisition under Section 142(1) were issued to the assessee on 21.08.2017. The assessment proceedings, conducted under Section 143(3) of the Income Tax Act, 1961, were attended by his authorized representative, Sh. R.K. Kaushal, CA, who provided the relevant details.
3.1 The assessee, a builder and property developer, earned income from house property and salary as a sitting MLA from HP Vidhan Sabha. Key issues examined included deductions claimed under Section 24(b) for interest on borrowed capital, motor car expenses, loans and advances, unsecured loans, and additional income of Rs. 1,25,00,000/- declared post a survey under Section 133A conducted on 04.03.2015. 3.2 Regarding Interest Claimed under Section 24(b) of the Act, the AO observed that the assessee claimed Rs. 39,15,328/- as interest on borrowed capital for seven properties under Section 24(b). The Ld. AO asked the assessee to provide loan agreements and bank certificates related to loan. However, the assessee did not provided the necessary documents and he also failed to submit the certificates that are specifically required under the third proviso to Section 24(b) of the Act.
3.3 The Ld. AO stated that, upon analysis, it was found that the loans taken from Allahabad Bank under the 'AL Bank Rent Scheme' and from UCO Bank under the 'UCO Rent Scheme' were utilized for business or personal purposes, rather than for the acquisition or construction of property. Additionally, no certificate was submitted in support of the loan taken from HDFC Bank.
3 Therefore, the AO disallowed the entire deduction claimed. An alternative claim made by the assessee under Section 36(1)(iii) was also rejected, as the assessee failed to provide sufficient evidence to prove that the loan was used for business purposes. Further, penalty proceedings under Section 271(1)(c) were initiated for furnishing inaccurate particulars of income.
3.4 Regarding Motor Car Expenses the Ld. AO observed that the assessee had claimed expenses related to motor vehicles. These included depreciation, maintenance costs, and insurance for vehicles, one of which was a Toyota Fortuner. The AO suspected that the vehicles might have been used partly for personal purposes and not entirely for business. As a result, and in line with decisions made in previous years, the AO disallowed an amount of Rs.60,000 on an ad-hoc basis from the total claim.
3.5 Regarding the Loans and Advances the Ld. AO observed that the assessee had given loans and advances amounting to Rs.81,45,000, but did not report any interest income from these loans. At the same time, the assessee was paying interest of Rs.16,38,249 on money borrowed from others. Out of this, the AO disallowed Rs.1,38,000 as an expense. This amount was calculated at 12% on Rs.11,50,000, which was a loan the assessee gave for office space. The AO said this disallowance was made because the assessee did not provide any proof that giving the loan was necessary or helpful for their business. This was the same reason for a similar disallowance made in the assessment year 2014–15. 3.6 Regarding the Unsecured Loans the Ld. AO observed that the unsecured loans increased from Rs. 19,69,000/- to Rs. 41,59,323/-, including Rs. 21,90,323/- from the assessee’s wife, Smt. Meena Verma. Despite providing her PAN and a joint bank statement, the assessee failed to submit confirmation or her income tax returns. The AO treated this amount as unexplained cash credit under Section 68 and initiated penalty proceedings under Section 271(1)(c).
4 3.7 Ld. AO stated that a Survey under Section 133A conducted on 04.03.2015 led to an additional income declaration of Rs. 1,25,00,000/-. The AO noted this income might have remained undisclosed without the survey and initiated penalty proceedings under Section 271(1)(c) for concealment.
After reviewing the necessary details, the Assessing Officer assessed the assessee’s total income at Rs. 2,98,98,600/-, Agricultural income remained Rs. 20,27,700/-. During hearing before us, it was stated by Ld. AR that the appellant had filed appeal before the CIT(A) against this assessment order and the said appeal was stated to be still pending disposal before the same authority.
Subsequently, against the order passed by the Ld. AO, the Ld. Pr. CIT, Shimla, issued a revision order under Section 263 of the Income Tax Act, 1961. In the said order, the Pr. CIT examined multiple issues and recorded detailed findings. 5.1 One of the key issues addressed was related to the surrendered income of Rs. 1.25 crores, which had been disallowed and debited in the Profit and Loss Account. The Pr. CIT observed that while the assessee disclosed the surrendered income in the Profit and Loss Account, corresponding debit and credit entries of the same amount were made, effectively neutralizing the impact of the surrendered income. The credit entry was reflected under the head "Closing Stock," with Rs. 80 lakhs attributed to Work in Progress for Dhroov Hotel and Rs. 45 lakhs shown as additional closing stock of flats. The Pr. CIT was of the opinion that such an accounting treatment could potentially allow the assessee to claim the surrendered income as an expenditure in the subsequent financial year, thereby avoiding the associated tax liability. It was also noted that the AO failed to verify or inquire into this treatment, leading the Pr. CIT to conclude that the assessment order was erroneous and prejudicial to the interests of the Revenue, as per Section 263. 5.2 Further, in examining the utilization of a loan amounting to Rs. 5.45 crores, the Pr. CIT found that although the AO had disallowed Rs. 39,15,328/- 5 under Section 24(b) for non-utilization of the loan for property acquisition, no verification of the actual use of the loan had been carried out. Specifically, the AO had not examined bank records from Allahabad Bank, Syndicate Bank, UCO Bank, and HDFC Bank. Due to this lack of verification, the Pr. CIT again found the assessment order to be erroneous and prejudicial to the revenue. 5.3 In another instance, the Pr. CIT reviewed the advances from allottees, amounting to Rs. 6,22,98,250, reported as liabilities by the assessee. Although the assessee submitted party-wise and age-wise details, the AO failed to verify the genuineness or creditworthiness of these advances as required under Section 68, read with Section 115BBE. The absence of independent inquiry led the Pr. CIT to determine that the assessment order was again erroneous and prejudicial to the revenue. 5.4 Upon examining the Balance Sheet and its schedules, the Pr. CIT also found a discrepancy of Rs. 17,50,000 in the closing stock value of four flats. Although the assessee submitted a chart to explain this, the difference remained unexplained, and the AO did not address the issue during assessment. Consequently, the Ld. Pr. CIT observed this lapse as additional evidence indicating that the assessment order was erroneous and prejudicial to the interests of the Revenue.
5.5 While reviewing the agricultural income declared by the assessee, the Pr. CIT noted that the AO had accepted the assessee’s claim based on an agreement with one Mr. Amar Kumar without verifying actual agricultural production, associated expenses, or the basis for cash payments. This lack of proper verification rendered the assessment order erroneous and prejudicial to the revenue as per the Pr. CIT’s findings. 5.6 Regarding investment verification totalling Rs. 3,66,80,337, the Pr. CIT pointed out that the AO failed to verify the investments made in Dhroov Resorts, Bhageshwari Hydro Power Project, and Dhroov Fuel Centre. No inquiry was conducted into the sources of funds or the capitalization of related expenses. The assessee’s responses lacked documentary evidence, 6 and the AO’s failure to thoroughly examine these transactions resulted in an assessment order deemed erroneous and prejudicial to revenue.
5.7 Lastly, the Pr. CIT noted that the assessee had gifted a property to his wife, who was earning rental income from it. Under Section 64(1)(iv) of the Income Tax Act, this income should have been clubbed with the assessee’s total income. However, the AO neither addressed this matter nor verified whether the property was part of the assessee’s stock-in-trade. This oversight was considered by the Pr. CIT as another mistake that rendered the assessment order both incorrect and prejudicial to the interests of the revenue.
Feeling aggrieved by the order of the Ld. Pr. CIT the assessee came up in appeal before us.
During the course of the hearing, the Ld. AR submitted that in the present appeal, the Ld. Pr. CIT had identified seven distinct issues, which were alleged to have been inadequately examined or verified during the original assessment proceedings concluded under Section 143(3) on 28.12.2017. However, five out of these seven issues were subsequently dropped by the Ld. AO in the consequential assessment proceedings carried out pursuant to the order under Section 263. Accordingly, only two issues remain, which continue to have a bearing on the ongoing litigation between the parties which are as under:
1st issue: Survey Surrender of Rs. 1.25 Crore – Income Already Offered to Tax, No Deduction Claimed
In this regard it is submitted that Assessee surrendered Rs.1.25 crore during survey u/s 133A. This income was duly included by Assessee in the Profit & Loss account under the head “Indirect Income”. Since the surrender has been made and income has been enhanced, the assessee was well within its rights to enhance its stock. This he did by enhancing the closing stock on credit side of P&L A/c and balancing it by enhancing the construction cost. This can be seen from the P&L A/c page. This shows that 7 there is one entry of Rs. 1.25 cr on debit side and 2 entries of same amount on credit side which meant that one extra entry of Rs. 1.25 crore on credit side, the assessee has declared the income and also enhanced its stock by that amount. But ultimately the income for the year has been enhanced.
8.1 The fact that Assessee has surrendered this income has been mentioned by the ld. AO at page 7 of it’s order dtd. 28.12.2017 which has not been doubted even by the Ld. Pr. CIT also. The relevant extract from the assessment order is as under :
7. It is observed from records that a Survey u/s 133A of the IT Act was conducted in the case of the assessee on 04.03.2015 and additional income of Rs. 1,25,00,000/- was declared over and above regular income for AY 2015-16.
8.2 The Pr CIT has not even objected the declaration of surrender and its disclosure in the P&L. His only objection is that by enhancing the stock of this year and taking the enhanced value of stock to next year, the appellant has nullified the impact of surrender as it will be allowed the deduction of enhanced stock in the next year. Assessee vide reply dtd. 27.02.2020 in response to the SCN issued by the Ld. Pr. CIT has submitted that he has debited the said amount in construction cost and simultaneously credited the same in closing stock of finished flats, work in progress and capital work in progress in its Trading account. The reply of Assessee is reproduced by the Ld. CIT on page 5-7 of its order.
8.3 The relevant extract of assessee’s reply and final order of Ld. Pr.CIT, on this issue, is as under : Assessee’s reply “Para 2(i) Surrender income of Rs. 1.25 crores disallowed and same amount debited in P&L Account. In this regard, it is respectfully submitted that I had disclosed the surrendered income correctly as I have devoted an amount of Rs. 12500000 in construction cost and simultaneously credited the amount in closing stock of Finished Flats Rs. 4500000, Work in Progress Rs. 5354276 and Capital Work in Progress Rs. 2645714 in the trading Account and in Schedule E-I of Balance sheet respectively, the debit and credit matched here, the item-wise details are as under: Finished Flats:
Site Quantity Pre-Surrendered Post Surrender Surrender Value Value Amount Jakhoo 03 85,25,000 1,10,25,000 25,00,000 Aera Home 02 30,00,000 50,00,000 20,00,000 Subtotal (1) 1,15,25,000 1,60,25,000 45,00,000 Work In Progress: Site Pre-Surrendered Post Surrender Surrender Value Value Amount Jakhoo 26,20,346 26,20,346 - Aera Home 13,23,406 13,23,406 - Dhroov Resort 49,84,500 10338776 53,54,276 Plot enmarked for 92,57,472 92,57,472 - development Subtotal (2) 1,81,85,724 2,45,40,000 53,54,276 Capital Work in Progress: Site Pre-Surrendered Post Surrender Surrender Value Value Amount Dhroov Resort 3,40,34,613 3,66,80,337 26,45,724 Subtotal (3) 3,40,34,613 3,66,80,337 26,45,724 Total Surrender Amount (1+2+3) 1,25,00,000 However, I have shown an amount of Rs. 12500000 in Profit & Loss Account as Income surrendered during survey. Thus, I have correctly shown additional surrendered income of Rs. 12500000. A copy of balance sheet as on 31.03.2015 is enclosed.” Ld. Pr.CIT’s final order “The assessee in his reply had argued that he has correctly shown additional surrender income of RS. 125000000 in his Profit&Loss Account. However, he is silent on specific question raise din show cause notice as there are two entries of Rs. 1.25 crores, one at debit side and one at credit side that nullifies each others. Surrendered income of Rs. 1.25 crores has been shown at credit side of P/L Account under closing stock and out of above Rs. 80,00,000 has been shown as WIP of Dhroov Hotel and the remaining Rs. 45,00,000 as additional closing stook of flats. The said closing stock will become opening stock in the next financial year and the same will be claimed as expenditure in the next FY nullifying the result of surrendered income of Rs. 1.25crores. thus, the assessee shall het benefit of deduction of expense / discrepancy found during survey. The AO did not verify / investigate the issue meaning thereby the assessment order passed by the AO has become erroneous in so far as it is prejudicial to the interest of Revenue to the extent of this issue.” 8.4 In regard to above objection of Ld. Pr.CIT, it is submitted that the closing stock of one year automatically becomes the opening stock of the subsequent year. Merely carrying forward stock does not amount to claiming 9 any deduction against surrendered income. In fact, Assessee has neither reduced any expense nor claimed any set-off against this amount in the subsequent year also. Further, the subsequent year is a separate unit of assessment and objection for next year can not be examined in a preceding year. This was also not appreciated by the Ld. Pr.CIT.
8.5 Further your honour’s kind attention is brought on the fact that neither the ld. AO nor the Ld. Pr.CIT has disputed the inclusion of the surrendered income in the ITR and the P&L account nor alleged any part of this surrender was withdrawn or otherwise reversed in the books.
8.6 Furthermore, it is submitted that the apprehension of the Ld. Pr.CIT that the amount will be claimed as opening stock in the next year is speculative and pertains to a separate assessment year and the same cannot be added in the year in question. If necessary, action can be taken in that year under applicable provisions.
8.7 Therefore, the action of Ld. Pr.CIT is only speculative and is out of context and beyond actual facts and the same deserves to be reversed. Further, this issue has been examined by the Ld. AO as he has recorded a finding in this regard at Para 7 of his order (as mentioned in point 4.2 above). Therefore, the issue having been examined and there is no allegation that this examination carried any legal interpretation or beyond facts, the Ld. Pr.CIT lacked jurisdiction u/s 263. Appropriate relief is prayed.
2nd issue: Advances from Allottees – Nature of Business Explained, Sufficient Enquiry Made, Pr.CIT Cannot Compel AO to Make Further Enquiry.
The Ld. Pr.CIT on page 3 of its order has mentioned that – “The assessee has shown advances from allottees as liability of Rs. 6,22,98,250/- as on 31.03.2015 as against 4,08,86,250/- as on 31.03.2014. From Para 4 of the reply dated 05.10.2017 placed on record, the assessee has furnished party-wise and age wise details of such advances. However, on the assessment records no correspondence is found made related to calling of further details and conducting enquiries so as to ascertain its genuineness and creditworthiness vis-à-vis the provisions of Section 68 r.w.s. 115BBE of the Act. In response to show cause, assessee has stated that he provided the party-wise and age-wise details with regard to said advances, however, no confirmations to provide the genuineness of these 10 advances has been submitted nor did the AO made any attempt to call for further details. Hence, the genuineness of the transactions remained unverified.”
9.1 In regard to this, it is submitted that assessee is a real estate developer operating primarily in Himachal Pradesh, In the regular course of this business, he had received advances from various customers for sale of plots and flats under construction. As per the audited financial statements, total advances from customers as on 31.03.2015 stood at Rs. 6,22,98,250/- as against Rs. 4,08,86,250/- as at close of the preceding year. The Ld. AO was also in the knowledge that assessee is selling plots/ flats, collecting advances, maintaining books on project completion method, his WIP of real estate project as at close of the year was in excess of these advances and was at Rs. 8,09,85,800/-. Assessee furnished detailed party-wise and age-wise lists of advances received, as well as PAN details during the course of assessment proceedings.
9.2 It was submitted before the Ld. Pr.CIT that sale deeds of majority of the advances have now already been executed and only a small sum of about Rs. 68,36,250/- (from 6 persons) is now outstanding. This clearly means that the creditors were business creditors of Assessee and there was bona-fide business transaction with them. Assessee disclosed the identity of the customers and has explained the nature of transactions as business advances for sale of property. These advances were not large or suspicious credits, but small advances ranging from Rs. 10–20 lakhs from various customers, largely based in Himachal Pradesh.
9.3 None of the above-mentioned facts have been doubted by the Ld. Pr.CIT. The Ld. Pr.CIT wrongly held that the Ld. AO should have made further enquiries and he wrongly directed the AO to make further enquiries and the parties should be called in for recording statements and providing confirmations. Even the Ld. Pr.CIT did not have any evidence that any of these advances is bogus cash creditor. It is only on his own presumption that he directed the AO to make further enquiry.
11 9.4 It is a well settled law that the Ld. AO is the final fact finder and it is his prerogative to exercise his judgment regarding the extent of enquiry required in a case. The Ld. Pr. CIT does not have the authority to dictate how detailed the enquiry should be or compel the ld. AO to make additions based on his suspicion. It is only when some evidence is found by the Pr. CIT that he can direct further enquiry. Or he must show that what further enquiry made would have led to definite different result. Reliance in this regard is placed on the law laid by the Hon’ble Bombay High Court in CIT v. Nirav Modi [(2016) 390 ITR 292 (Bom)] (copy of judgment appended from page 14-23 of this synopsis) wherein it was held that if Assessee provides primary documents, and the AO makes a conscious decision based on material available, then the Pr. CIT cannot invoke s. 263 merely because he believes that deeper investigation should have been done. The Hon’ble court clearly defines the boundaries within which the Pr.CIT can exercise revisional powers u/s 263 of the Act. By affirming that as long as the ld. AO conducts reasonable inquiry, the revisional authority cannot second-guess or reopen closed assessments without substantive reasons.
9.5 Similarly, the Hon’ble ITAT Mumbai in Narayan Tatu Rane v. ITO [ITA No. 2690/Mum/2019] observed that once the AO calls for details, examines them and takes a view, it is not open to the Pr. CIT to conclude that the order is erroneous simply because he would have taken a different approach. It was held herein that the Pr. CIT can not expect an AO to conduct enquiry to the hilt, the Pr.CIT should only expect AO to function like a prudent assessing officer and not like a forensic officer. The relevant extract from this decision is as under :
“19. The law interpreted by the High Courts makes it clear that the Ld Pr. CIT, before holding an order to be erroneous, should have conducted necessary enquiries or verification in order to show that the finding given by the assessing officer is erroneous, the Ld Pr. CIT should have shown that the view taken by the AO is unsustainable in law. In the instant case, the Ld Pr. CIT has failed to do so and has simply expressed the view that the assessing officer should have conducted enquiry in a particular manner as desired by him. Such a course of action of the Ld Pr. CIT is not in accordance with the mandate of the provisions of sec. 263 of the Act.
12 21. We are of the view that the assessing officer has taken a plausible view in the facts and circumstances of the case. Even though the Ld Pr. CIT has drawn certain adverse inferences from the document, yet it can seen that they are debatable in nature. Further, as noticed earlier, the Ld Pr. CIT has not brought any material on record by making enquiries or verifications to substantiate his inferences. He has also not shown that the view taken by him is not sustainable in law. Thus, we are of the view that the Ld Pr. CIT has passed the impugned revision orders only to carry out fishing and roving enquiries with the objective of substituting his views with that of the AO. Hence we are of the view that the Ld Pr. CIT was not justified was not correct in law in holding that the impugned assessment orders were erroneous.
In view of the foregoing discussions, we are of the view that the Ld Pr. CIT has failed to show that the impugned assessment orders passed by the assessing officer were not only erroneous but also prejudicial to the interests of the revenue.
In the result, both the appeals filed by the assessee are allowed.”
9.6 It is respectfully submitted that the facts and circumstances of the present case clearly demonstrate that the Ld. AO conducted adequate enquiry, duly examined the materials furnished by Assessee and exercised his judicial discretion to accept the explanation on several issues, while making additions on some issues.
9.7 In Pr.CIT vs V-Con Integrated Solutions Pvt. Ltd. (P&H HC) in dt. 12.09.2024 dismissed the appeal of Revenue by highlighting the scope of s. 263 of the Act. The relevant extract from this decision is reproduced as under: “The scope of Section 263 of the IT Act, is apparently to see whether the concerned Assessing Officer has failed to conduct a proper inquiry, and therefore, committed an error resulting in causing loss to the revenue. Simply by holding that the Assessing Officer was required to make more enquiries, would not be a valid ground for treating the order of the Assessing Officer, as erroneous and prejudicial to the interests of the revenue. The power under Section 263 of the Act cannot be invoked in such circumstances by the Pr.CIT. The order, therefore, passed by the Pr.CIT is not sustainable in the eyes of law and the same has been quashed by the ITAT, which does not warrant any interference by this Court in appeal.”
9.8 The Revenue aggrieved by the above order of the Hon’ble Jurisdictional High court filed SLP before the Hon’ble Apex Court. The position of law, as explained above by the Hon’ble High court, was not only affirmed by the Hon’ble Supreme Court in recent judgment in Pr. CIT v. V-Con Integrated Solutions Pvt. Ltd., SLP (C) Diary No. 13205/2025, dated 04.04.2025, 13 but the Hon’ble Apex Court has gone on further to the extent of holding that the assessee cannot be faulted for the conclusions drawn by the AO once investigation is carried out. The Court emphasized that s. 263 cannot be invoked where the ld. AO has made enquiries and drawn conclusion with which the Pr.CIT disagrees. It was further held that where the Ld. Pr.CIT feels that further enquiries were required by the AO, the Ld. Pr.CIT should himself do those enquiry and then himself make addition and not remand the matter. Exactly the same error has been done in our case also by the Ld. Pr. CIT. The relevant extract from this judgment is reproduced hereunder: “In our opinion, the order passed by the High Court, which upheld the decision of the Tribunal, is correct on facts and in law. This case does not involve a failure by the assessing officer to conduct an investigation. Instead, according to the Revenue, it is a case where the assessing officer having made inquiries erred by not making additions. The assessee does not have control over the pen of the Assessing Officer. Once the Assessing Officer carries out the investigation but does not make any addition, it can be taken that he accepts the plea and stand of the assessee. The power under Section 263 of the Income Tax Act, 1961, can be exercised by the Commissioner of Income Tax, but by going into the merits and making an addition, and not by way of a remand, recording that there was failure to investigate. There is a distinction between the failure or absence of investigation and a wrong decision/conclusion.”
9.9 Identical view has rendered very recently in PCIT v. Kutch District Co- operative Milk Producers Union Ltd. [2025] ITA 666/2024 (Guj High Court), wherein it was held that inadequate enquiry does not empower the Ld. Pr. CIT to revise an assessment u/s 263 unless there is complete absence of enquiry or a demonstrable error in law and that the Commissioner cannot substitute his own subjective notion of what should have been done, in place of what the ld. AO has actually done, so long as there is material to indicate that the AO has applied his mind. The relevant extract from the judgment is reproduced hereunder: “13. In our considered view, this is not a fit case for invocation of Section 263 of the Act. This is for the reason that firstly, we that the assessing officer had examined the issue in detail during course of assessment proceedings, and it is not a case where there was any apparent lack of enquiry on this aspect by the assessing officer. Secondly, the assessing officer had taken a view which is a legally plausible view and it is a well settled law that 263 proceedings cannot be resorted to by the PCIT only with the view to supplant his own view with the view taken by the assessing officer. Further, the decision of 14 KatlaryKariana Supra was on the aspect of reopening of assessment under Section 147 of the Act and not directly on the issue of claim of reduction under Section 80P of the Act. Therefore, once it is seen from the records that the assessing officer had made due enquiries during the course of assessment proceedings on this aspect and had taken a view, which is a legally possible view, then, in our considered view PCIT cannot reason to 263 proceedings only to supplant his own view with the view taken by the Assessing Officer. Further, we observe that the PCIT has also factually erred in observing that there was no enquiry by the assessing officer on this aspect. Accordingly, in light of the facts of the instant case, and the judicial president of the subject, we hold that the order passed by PCIT under Section 263 of the Act is liable to be set aside”
9.10 It is further that Your Honour’s kind attention is drawn to the fact that the issues under consideration were raised by the Audit party of CAG vide their letter dtd. 13.07.2018, the relevant extract whereof is reproduced hereunder:
“Perusal of Profit and Loss Account reveals that additional income surrendered by the assessee was credited in the profit and loss account for AY 2014-15. However, the same account was also debited in the profit and loss account under the ‘Purchase Account-construction cost surrendered’ which was not correct. As per survey report this surrendered amount was in connection with cost of construction of Dhroov Resort (75 lakhs), Flats (45 lakhs) and Dhroov Filling Station (10 lakhs). In this case only cost of construction of flats of Rs. 45 lakhs was admissible. Costs of construction of Hotel ‘Dhrov Resort of Rs. 75 lakhs and ‘Dhroov Filling Station of Rs. 10 lakhs were not revenue expenditure of the assessee and such expenditure needs to be capitalized. Thus construction cost of Rs. 85 lakh claimed as revenue expenditure needs to be disallowed and added back to his taxable income.” a. In response to the above audit objection raised, the ld. AO vide letter dtd. 11.12.2018 and 13.12.2018 addressed to the Audit Officer o/o Principal Director of Audit (Central) and the Ld. Pr.CIT respectively, firmly denied the objection raised by the audit party. It was explained by the AO to audit party that the assessee had correctly accounted for the surrendered amount of Rs. 1,25,00,000/- in its Profit and Loss Account. The ld. AO explained that Assessee has correctly separately disclosed the surrender amount of Rs. 1,25,00,000/- in its profit and loss account and the same matches with Rs. 45 lakhs as additional closing stock of flats and Rs. 80 lakhs on account of WIP of Dhroov Hotel and both these amounts are credited to Profit and Loss account under the heads ‘finished flats for sale’ and work in progress, hence the objection raised may be dropped. b. After thorough verification of the reply submitted by the Ld. AO, the Ld. Pr.CIT, vide letter dtd. 24.06.2019, also accepted the stand of the Ld. AO 15 and recommended the settlement of the audit objection, recording as follows– “in view of the report of the ld. AO, the objection raised may kindly be settled”. c. But even after this, when the audit party did not agree, the Ld. Pr.CIT bowed down to the audit party and initiated proceedings u/s 263. This is acting on the dictates of audit party. This is also amounting to change of opinion where at one stroke, they were defending the assessment order with full arguments that it was correctly passed. But then all of a sudden without any remark or noting of their own, the Ld. Pr.CIT initiates proceedings u/s 263. This is impermissible as held by the Hon’ble ITAT, Chandigarh Bench in the recent case of Vaneet Gupta, in dtd. 20.01.2025, wherein it was held that :
19. After perusing the sequence of events and arguments, we find that there is an 'annotated report' by the A.O. to the CIT (Audit) which have been reproduced above, which clearly demonstrates that the deposit in the ICICI Bank account were duly considered by the A.O., while framing the assessment. The A.O. in his report to the Audit had not agreed to the objection of the audit party as reproduced above. At the time of original assessment proceedings, even the investment in the immovable property were duly taken into consideration by the Assessing Officer. The relevant documents are part of the record of the Assessing Officer as per the clause (b) of Explanation 1 of Section 263 record, shall include and shall be deemed always to have included all records relating to any proceedings under this Act, available at the time of examination by the Principal Commissioner of clearly establishes that even the annotated report as sent by the A.O. to the audit party dated 24.10.2019 had to be considered as a part of the 'record'. Further, we find that though the A.O. has not agreed with the audit objection, the ld. Pr.CIT initiated the proceedings u/s 263 vide notice u/s 263 dated 5/4.03.2021. The only issue raised was about the 'ICICI Bank' account having not been examined by the A.O. The issue was raised by the Audit party and, thus, the Ld. Pr. CIT had only initiated proceedings u/s 263 on the basis of 'Audit objection' and which is not permitted as per the judgment of the Hon'ble Chandigarh Bench, where the judgment of the Hon'ble Punjab & Haryana High Court have been followed in the case of CIT Vs Sohana Woollen Mills, 396 ITR 238 (P&H) d. Hence , there is no independent application of mind by the Ld. Pr. CIT and the show cause notice dtd. 22.01.2020 is issued solely on the basis of objections of audit party. We relied upon the following judgments to demonstrate that provisions of s. 263 of the Act cannot be invoked on the basis of the audit objections : I. Shri Surinder Pal Singh vs. PCIT in II. Ganga Acrowools Limited vs. PCIT in ITA No.196/CHD/2021 III. Jaswinder Singh vs. CIT, 31 taxmann.com 80 (Chandigarh - Trib.)
16 IV. Shri Sartaj Singh vs. PCIT in order dtd. 25.02.2016 9.11 In light of the above factual matrix and binding judicial precedents, it is clear that the Ld. Pr.CIT's attempt to invoke s. 263 was an overreach, especially since the ld. AO had satisfactorily addressed all pertinent issues. It is clear from above that Assessee had fully discharged the onus cast upon him by law and the Ld. Pr.CIT could not have assumed revisional jurisdiction merely because he holds a different view, nor can he direct the ld. AO to conduct further enquiries in a manner that substitutes his discretion. Appropriate relief is prayed.
Per contra, the Ld. DR relied on the order of the Ld. Pr. CIT.
We have heard the rival contention and perused the material available on the record. In the present case, we find that the order passed by the Ld. Pr. CIT, Shimla, is legally unsustainable. The revision was based on the claim that the Ld. AO did not properly inquire into two issues: (1) the accounting of Rs. 1,25,00,000/- surrendered during a survey, and (2) advances of Rs. 6,22,98,250/- received from allottees. However, assessment records clearly show that both issues were duly examined. The surrendered income was declared in the Profit & Loss Account as "Indirect Income" and properly reflected in closing stock under construction costs. This treatment was explained during the assessment and does not indicate any tax evasion. There is no dispute that the surrender of Rs. 1.25 crores made during the survey has been honoured by the assessee by declaring this income as indirect income in his Profit & Loss account. Further, it is a settled law that when the assessee surrenders undisclosed income in creation of a business asset, he is entitled to enhance the value of that business asset. The present appellant before us has done exactly the same only, after he had surrendered the income. This has not been disputed by the Ld. PCIT even in the revisionary order. The Ld. Pr. CIT’s only objection is that the assessee would claim deduction of enhanced closing stock in subsequent years. This objection of Ld. PCIT is totally incorrect. Firstly, on merits, the assessee is infact 17 entitled to claim the deduction of expenditure on account of enhanced closing stock in future years. Secondly, the allowability of expenditure of an item in a subsequent year can not make the assessment order for an earlier year to be subject to revision u/s 263. Thirdly, the Pr. CIT’s concern about future deduction is speculative and outside the scope of Section 263, which applies only when the order is both erroneous and prejudicial to revenue in the same year.
11.1 Regarding advances from allottees, the assessee, being a real estate developer, received these as part of regular business. Detailed records, including PAN and age-wise data, were submitted. The Assessing Officer verified this and found no evidence of fictitious transactions. The Assessing officer had issued a notice specifically raising this issue and the appellant had filed reply to this. All these are customers who had booked properties in the real estate project of the appellant. These are not loan cash-creditors. The Pr. CIT cannot invoke Section 263 simply for wanting a deeper inquiry when sufficient inquiry was already made. During proceedings u/s 263 before the Pr. CIT, appellant explained all this and also filed details that now out of these advances of around Rs. 6.22 crores, sale deeds had been executed to almost all and such sales have been credited to P&L A/c except to only 6 persons whose advance aggregates to only Rs. 65 Lacs. This fact has also not been disputed or objected by the Pr. CIT in his final order u/s 263. Therefore, when all these facts and explanation from the appellant was on record of Ld. PCIT, without finding any objective defects therein, the Pr. CIT could not have passed revisionary order u/s 263 holding the assessment order to be erroneous and prejudicial to the interest of revenue.
11.2 Apart from above, when both the above issues had been enquired by the Assessing officer, the Ld. PCIT could not have invoked his revisionary jurisdiction without pointing out as to what kind of further enquiry should have been made. This view from number of judgments now stands affirmed by the Hon’ble Supreme Court in Pr. CIT v. V-Con Integrated Solutions Pvt. Ltd.(supra).
11.3 Further, the issues raised were based on audit objections that had already been addressed by the Assessing Officer. The Pr. CIT initially agreed with the Assessing Officer’s view but later changed his stance without any new facts or independent analysis. Such a change of opinion is not valid under Section 263, as confirmed by the judgments in CIT v. Sohana Woollen Mills (supra) and Vaneet Gupta vs. PCIT (supra). Therefore, the original assessment under Section 143(3) was neither erroneous nor prejudicial to the revenue. The Pr. CIT’s revisionary order under Section 263 is invalid and is accordingly set aside.
In the result, appeal of the Assessee is allowed.