SHRI DHARMENDRA CHAMPAKLAL SHAH,AHMEDABAD vs. THE PR.CIT-5, AHMEDABAD

आदेश/O R D E R

PER WASEEM AHMED, ACCOUNTANT MEMBER:

The captioned two appeals have been filed at the instance of different Assessee against the separate orders of the Learned Principal Commissioner of Income Tax -5, Ahmedabad, of even dated 20/12/2019 arising in the matter of Assessment Order passed under s. 263 of the Income Tax Act, 1961 (here-in-after referred to as "the Act") relevant to the Assessment Year 2015-2016.

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the assessment framed under section 143(3) of the Act, accepted the return income of the assessee.

5 The learned PCIT from the assessment records found that the assessee purchased shares of M/s Sunrise Asian Limited on 27th November 2011 at a price of Rs. 20 per share and sold the same in the year consideration between July 2014 to December 2014 at a price ranging between Rs. 480 to 490 per share. Accordingly, the assessee has earned long term capital gain of Rs. 10,08,673/- which was claimed as exempted income under section 10(38) of the Act.

5.1 As per the learned Pr. CIT, there was a report from DDIT (Investigation) Kolkata with respect to price manipulation of penny stock but the AO did not consider the same. As per the report of investigation wing of Kolkata, the individuals namely Ms. Sarojini Ramesh kataria and Mr. Ramesh G Kataria were involved in price manipulation because they were connected with entities which were merged with M/s Sunrise Asian Ltd. The SEBI also suspended the trading of M/s Sunrise Asian Ltd during the period October 2012 to September 2015 on being found the instance of manipulation in the impugned shares. Therefore, all the transaction of sale and purchase in the shares of M/s Sunrise Asian Ltd were illegal. However, the AO without verifying these facts carefully, accepted the genuineness of exempted long term capital gain claimed by the assessee merely on strength of primary evidences submitted by him. Thus, the AO erred in not conducting the proper and requisite enquiry despite having the report from DDIT and SEBI available on ITD portal which is prejudicial to the interest of Revenue. The learned Pr. CIT also placed reliance on the judgment of Hon’ble Supreme Court in case of Rajmandir Estate Pvt. Ltd. vs. CIT reported in 245 taxman 127 where validity of order was upheld on the fact that money laundering was gone undetected due to lack of requisite enquiry and non-application mind by AO. Accordingly, the learned Pr. CIT set aside the order of the AO framed under section 143(3) of the Act after invoking the explanation of 2(a) & 2(b) of section 263 of the Act with the direction to make the fresh assessment in view of the above discussion.

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7.1 The learned AR in support of his contention drew our attention on pages 5 and 22 of the paper book where the notice under section 142(1) of the Act was placed. Likewise, the learned AR also drew our attention on pages 6 to 21 and 23 to 32 of the paper book where the reply of the assessee in response to the notice issued under section 142(1) of the Act and annexure thereto was placed. Thus, the learned AR contended that there cannot be said that the assessment order is erroneous and causing prejudice to the interest of revenue in the given facts and circumstances.

9.1 An inquiry made by the Assessing Officer, considered inadequate by the Commissioner of Income Tax, cannot make the order of the Assessing Officer

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erroneous. In our view, the order can be erroneous if the Assessing Officer fails to apply the law rightly on the facts of the case. As far as adequacy of inquiry is considered, there is no law which provides the extent of inquiries to be made by the Assessing Officer. It is Assessing Officer’s prerogative to make inquiry to the extent he feels proper. The Commissioner of Income Tax by invoking revisionary powers under section 263 of the Act cannot impose his own understanding of the extent of inquiry. There were a number of judicial precedent by various High Courts in this regard.

9.2 The Delhi High Court in the case of CIT Vs. Sunbeam Auto 332 ITR 167 (Del.), made a distinction between lack of inquiry and inadequate inquiry. The Hon’ble court held that where the AO has made inquiry prior to the completion of assessment, the same cannot be set aside u/s 263 of the Act on the ground of inadequate inquiry. The relevant observation of Hon’ble Delhi High Court reads as under: “12. ….. 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 inadequate, that would not by itself, give occasion to the Commissioner to pass orders under section 263 of the Act, merely because he has different opinion in the matter. It is only in cases of “lack of inquiry”, that such a course of action would be open. ——— From the aforesaid definitions it is clear that an order cannot be termed as erroneous unless it is not in accordance with law. If an Income-tax Officer acting in accordance with law makes a certain assessment, the same cannot be branded as erroneous by the Commissioner simply because, according to him, the order should have been written more elaborately. This section does not visualise a case of substitution of the judgment of the Commissioner for that of the Income-tax Officer, who passed the order unless the decision is held to be erroneous. Cases may be visualised where the Income-tax Officer while making an assessment examines the accounts, makes enquiries, applies his mind to the facts and circumstances of the case and determines the income either by accepting the accounts or by making some estimate himself. The Commissioner, on perusal of the records, may be of the opinion that the estimate made by the officer concerned was on the lower side and left to the Commissioner he would have estimated the income at a figure higher than the one determined by the Income-tax Officer. That would not vest the Commissioner with power to re- examine the accounts and determine the income himself at a higher figure. It is because the Income-tax Officer has exercised the quasi-judicial power vested in him in accordance with law and arrived at conclusion and such a conclusion cannot be termed to be erroneous simply because the Commissioner does not feel satisfied with the

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conclusion. There must be some prima facie material on record to show that tax which was lawfully exigible has not been imposed or that by the application of the relevant statute on an incorrect or incomplete interpretation a lesser tax than what was just has been imposed. 15. Thus, even the Commissioner conceded the position that the Assessing Officer made the inquiries, elicited replies and thereafter passed the assessment order. The grievance of the Commissioner was that the Assessing Officer should have made further inquires rather than accepting the explanation. Therefore, it cannot be said that it is a case of ‘lack of inquiry’.”

9.3 The Hon’ble Bombay High Court in case of Gabriel India Ltd. [1993] 203 ITR 108 (Bom), discussed the law on this aspect in length in the following manner: “The consideration of the Commissioner as to whether an order is erroneous in so far as it is prejudicial to the interests of the Revenue, must be based on materials on the record of the proceedings called for by him. If there are no materials on record on the basis of which it can be said that the Commissioner acting in a reasonable manner could have come to such a conclusion, the very initiation of proceedings by him will be illegal and without jurisdiction. The Commissioner cannot initiate proceedings with a view to starting fishing and roving enquiries in matters or orders which are already concluded. Such action will be against the well-accepted policy of law that there must be a point of finality in all legal proceedings, that stale issues should not be reactivated beyond a particular stage and that lapse of time must induce repose in and set at rest judicial and quasi-judicial controversies as it must in other spheres of human activity.

9.4 The Mumbai ITAT in the case of Sh. Narayan Tatu Rane Vs. ITO, I.T.A. No. 2690/2691/Mum/2016, dt. 06.05.2016 examined the scope of enquiry under Explanation 2(a) to section 263 in the following words:- “20. Further clause (a) of Explanation states that an order shall be deemed to be erroneous, if it has been passed without making enquiries or verification, which should have been made. In our considered view, this provison shall apply, if the order has been passed without making enquiries or verification which a reasonable and prudent officer shall have carried out in such cases, which means that the opinion formed by Ld Pr. CIT cannot be taken as final one, without scrutinising the nature of enquiry or verification carried out by the AO vis- à-vis its reasonableness in the facts and circumstances of the case. Hence, in our considered view, what is relevant for clause (a) of Explanation 2 to sec. 263 is whether the AO has passed the order after carrying our enquiries or verification, which a reasonable and prudent officer would have carried out or not. It does not authorise or give unfettered powers to the Ld Pr. CIT to revise each and every order, if in his opinion, the same has been passed without making enquiries or verification which should have been made. In our view, it is the responsibility of the Ld Pr. CIT to show that the enquiries or verification conducted by the AO was not in accordance with the enquries or verification that would have been carried out by a prudent officer. Hence, in our view, the question as to whether the amendment brought in by way of Explanation 2(a) shall have retrospective or prospective application shall not be relevant.”

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9.5 The Hon’ble Supreme Court in recent case of Principal Commissioner of Income-tax 2 v. Shree Gayatri Associates*[2019] 106 taxmann.com 31 (SC), held that where Pr. CIT passed a revised order after making addition to assessee's income under section 69A in respect of on-money receipts, however, said order was set aside by Tribunal holding that AO had made detailed enquiries in respect of such on-money receipts and said view was also confirmed by High Court, SLP filed against decision of High Court was liable to be dismissed. The facts of this case were that pursuant to search proceedings, assessee filed its return declaring certain unaccounted income. The Assessing Officer completed assessment by making addition of said amount to assessee's income. The Principal Commissioner passed a revised order under section 263 on ground that Assessing Officer had failed to carry out proper inquiries with respect to assessee's on money receipt. In appeal, the Tribunal took a view that Assessing Officer had carried out detailed inquiries which included assessee's on-money transactions and Tribunal, thus, set aside the revised order passed by Commissioner. The Hon’ble High Court upheld Tribunal's order. The Hon’ble Supreme Court while dismissing the SLP filed by the Department held as under:- “We have heard learned counsel for the Revenue and perused the documents on record. In particular, the Tribunal has in the impugned judgment referred to the detailed correspondence between Assessing Officer and the assessee during the course of assessment proceedings to come to a conclusion that the Assessing Officer had carried out detailed inquiries which includes assessee's on-money transactions. It was on account of these findings that the Tribunal was prompted to reverse the order of revision. No question of law arises. Tax Appeal is dismissed”

9.6 The Supreme Court in the another recent case of Principal Commissioner of Income-tax-2, Meerut v. Canara Bank Securities Ltd[2020] 114 taxmann.com 545 (SC), dismissed the Revenue’s SLP holding that 263 proceedings are invalid when AO had made enquiries and taken a plausible view in law, with the following observations: “Having heard learned counsel for the parties and having perused the documents on record, we see no reason to interfere with the view of the Tribunal. The question whether the income should be taxed as business income or as arising from the other source was a debatable issue. The Assessing Officer has taken a plausible view. More importantly, if the Commissioner was of the opinion that on the available facts from record it could be conclusively held that income arose from other sources, he could and ought to have so

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held in the order of revision. There was simply no necessity to remand the proceedings to the Assessing Officer when no further inquiries were called for or directed”

9.7 From an analysis of the above judicial precedents, the principle which emerges is that 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 Assessing Officer adopts one of the course permissible in law and it has resulted in loss of revenue; or where two views are possible and the Assessing Officer has taken one view with which the Commissioner of Income-tax does not agree, it cannot be treated as an erroneous order prejudicial to the interests of the Revenue unless the view taken by the Assessing Officer is unsustainable in law, or the AO has completely omitted to make any enquiry altogether or the order demonstrates non-application of mind.

9.8 Now coming to the facts of the case before us, we note that the AO during the course of assessment proceedings, has made enquiries on this issue and after consideration of written submissions filed by the assessee and documents / evidence placed on record. Thereafter, the AO framed the assessment under section 143(3) of the Act accepting the return of income. This fact can be verified from the notices issued under section 142(1) of the Act by the AO and submission in reply of such notices. i. Notice dated 07-06-2017: Complete supporting evidences for large value sale transaction in shares and exempt long term capital gains shown in return (Penny Stock tab in ITS) ii. Notice dated 03-11-2017 In respect of long term capital gain, please furnish the copy of demat account ledger account, Profit & loss account in broker book, sale/purchase bills, demat account at the time of purchase of shares or copy of physical share certificate and copy of bank statement from which the sale/purchase transaction have been done.

Reply of the assessee vide letter dated 17-08-2017 Copy of Demat account for the period 01.04.2014 to 31.03.2015.

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Sources of investment for the funding in share transactions.

Reply of the assessee vide letter dated 24-08-2017 4) Copy of demat statement is enclosed herewith. 5) Copy of bank statement reflecting the payment for purchase of shares on 21/09/2011 is enclosed herewith. We are also enclosing the copy of zerox of SS along with share application form, share certificate and other relevant papers 6) Copy of sale bills are also enclosed herewith for your reference. 7} The shares were in demat account in the name of Sunrise Asian Ltd, however as informed the company was formerly known as Akai Asia Ltd and the name was changed on 05/05/2010. 8) The assessee has purchased shares at Rs. 7,50,000 on 21.09.2011 and as far as the source is concerned, it was from Oriental Bank of Commerce, Station Road Branch for a number of shares of 37500 of Conart Traders Ltd. The share certificate has originally been purchased by Shantoshima Tradelink Ltd. (formerly known as Shantoshima Lease Finance & Investment (India) Ltd. and these shares have been subsequently transferred in my name on 27.11.2011. The aforesaid shares have been applied for demat on 12-01.2013 and actually it was transferred to demat account on 15.01.2013

9.9 From the above it is revealed that it is not the case that the AO has not made enquiry. Indeed, the Pr. CIT initiated proceedings under section 263 of the Act on the ground that the AO has not made enquiries or verification which should have been made in respect of exemption claimed under section 10(38) of the Act. It is not the case of the Pr. CIT that the Ld. AO did not apply his mind to the issue on hand or he had omitted to make enquiries altogether. In the instant set of facts, the Ld. AO had made enquiries and after consideration of materials placed on record accepted the genuineness of the claim of the assessee. We thus find no error in the order of Ld. AO so as to justify the initiation of 263 proceedings by the Ld. Pr. CIT. assessee is thus allowed.

9.10 In view of the above and after considering the facts in totality, we hold that there is no error in the assessment framed by the AO under section 143(3) causing prejudice to the interest of revenue. Thus, the revisional order passed by the learned principal CIT is not sustainable and therefore, we quash the same. Hence the ground of appeal of the assessee is allowed.

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Coming to ITA No. 72/Ahd/2020 for A.Y. 2015-16 in the case of Shri Dharmendra Champaklal Shah.

11.1 In the result appeal of the assessee is allowed.

Order pronounced in the Court on 20/07/2022 at Ahmedabad.

Sd/- Sd/- (MADHUMITA ROY) (WASEEM AHMED) JUDICIAL MEMBER ACCOUNTANT MEMBER (True Copy) Ahmedabad; Dated 20/07/2022 Manish