ASIAN HOTELS (NORTH) LIMITED,NEW DELHI vs. PR, CIT, DELHI-1, NEW DELHI

Further ld. PCIT observed that the reasons for selection of the case for scrutiny through CASS was not examined and order is passed in prima facie view, without making enquiries and verification which should have been made. By recording the above reasons, a notice u/s 263 of the Act was issued to the assessee vide letter dated 20.03.2021 and 24.03.2021 as to why provisions of section 263 of the Act should not be initiated. Accordingly, opportunity was granted. In reply, assessee has submitted that the issue on which the case was selected for scrutiny was examined by the AO during the assessment proceedings and assessee also submitted reply vide letter dated 04.09.2018 and further other issues were either explained during assessment proceedings were not asked for by the AO but can be easily explainable. After considering the above submissions, ld. PCIT observed that large increase in sundry creditors and reduction in business income as compared to preceding year, gross total income is less than the value of foreign remittances, large business loss set off against them other heads of income, large cash payments were made for credit card purchases and low income from TCS receipts. Ld. PCIT has discussed this aspect in his order and observed that the assessee has submitted cryptic reply and AO has accepted without making any enquiry in unusual circumstances as discussed in his order and came to the conclusion that the assessment order passed by the AO is without making required enquiries and verification. Accordingly, he invoked Explanation 2 to section 263 of the Act and the AO was directed to make fresh investment de novo in terms of the above observations in the order passed u/s 263 of the Act.

Aggrieved with the above order, assessee is in appeal before us raising following grounds of appeal :- “On the facts and in the circumstances of the case and in law, the learned Principal Commissioner of Income Tax, Delhi - 1 ['PCIT'] has erred in passing the order under section ('u/s') 263 of the Income Tax Act, 1961. ('Act'), setting aside the order passed by the learned Assistant Commissioner of Income Tax, Circle 3(2), Delhi (' AO') and directing him to make a fresh assessment de-novo. Each of the ground is referred to separately, which may kindly be considered independent of each other.

At the time of hearing, ld. AR for the assessee brought to our notice findings of the ld. PCIT at page 4 of the order and submitted that ld. PCIT has observed that the case of the assessee was selected under CASS and the AO has not examined and the order was passed without making enquiries and verification. In this regard, he brought to our notice page 18 of the paper book which is a chart prepared by the assessee to indicate that the issues raised by ld. PCIT and which were already verified by the AO during assessment proceedings and in the chart, assessee has indicated various notices issued by the AO on specific issues raised by ld. PCIT and the response submitted by the assessee for various queries raised by the AO.

Further he submitted that ld. PCIT has raised 11 issues and out of 11 issues, 7th issue was not raised by the AO and rest of all the issues were called for details in the respective notices and the same was verified by the AO. With regard to issue no.7, ld. AR brought to our notice order passed u/s 143(3) read with section 263 of the Act dated 31.03.2022, in the above order giving effect, the AO has not made any addition after due verification. Therefore, all the issues raised by ld. PCIT under consideration are either verified by the AO during assessment proceedings itself and the issue no.7 was deleted by the AO after due verification. Therefore, the observations made by ld. PCIT in revision proceedings are mere observations and it is not proved that it is prejudicial to the interest of Revenue. He submitted that all the issues were duly verified by the AO during assessment proceedings. Therefore, revision proceedings are void ab initio. In this regard, he relied on the decisions of Hon’ble Delhi High Court in the case of PCIT vs. Clix Finance India (P.) Ltd. (2024) 160 taxmann.com 357 (Delhi) and CIT vs. Sunbeam Auto Ltd. (2010) 189 Taxman 436 (Delhi).

On the other hand, ld. DR for the Revenue brought to our notice page 2 of the assessment order wherein criteria for selection of case under CASS was reproduced and the AO has not verified all the issues which were necessary for selection of the case under CASS. Since AO has not verified as per the mandate, the order passed by the AO is falling within the ambit of Explanation 2 to section 263 of the Act and he relied on the findings of ld. PCIT.

Considered the rival submissions and material placed on record. We observed from the detailed submissions and chart submitted by the assessee that ld. PCIT has raised 11 issues which required verification, which the AO has failed to carry out. It is brought to our notice that the AO has issued several notices to the assessee on various dates on all the issues and assessee has submitted relevant information as called for. Based on the submissions made by the assessee, the AO completed the assessment and taken one of the possible views in all the issues for which assessment was initiated. However, ld. PCIT has reviewed the assessment order and according to ld. PCIT, the verification carried out by the AO is not justified and he should have properly verified. Accordingly, he has invoked the Explanation 2 to section 263 of the Act. It is also brought to our notice that as regards issue no.7, no doubt raised by ld. PCIT, however in order giving effect to the revision order, AO has not made any addition after due verification. On careful consideration, we observed that similar issue was came up in the case of Pr.CIT vs. Clix Finance India (P.) Ltd. (supra) and Hon’ble Delhi High Court considered the similar issue and adjudicated as under :- “20. 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 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:- “17. 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 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) ***”

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:-

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 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 CIT v. T. Narayana Pai [(1975) 98 ITR 422 (Kant)], the High Court of Bombay in CIT v. Gabriel India Ltd. [(1993) 203 ITR 108 (Bom)] and the High Court of Gujarat in CIT v. Minalben S. Parikh [(1995) 215 ITR 81 (Guj)] treated loss of tax as 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 as such will be erroneous and prejudicial to the interests of the Revenue. (See Rampyari Devi Saraogi v. CIT [(1968) 67 ITR 84 (SC)] and in Tara Devi Aggarwal v. 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 twofold conditions for the purpose of invoking jurisdiction under Section 263 of the Act. The relevant paragraph of the said decision reads as under:- “27. 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 263 of the Income Tax Act, it is observed and held that in order to exercise the jurisdiction under Section 263(1) of the Income 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.”

Respectfully following the above decision, we are inclined to observe that the AO has duly verified various issues raised by the ld. PCIT and he has taken one of the possible views. Now ld. PCIT has invoked Explanation 2 to section 263 of the Act with a view that AO has passed the order without making an enquiry or verification, is not justified as per various documents submitted before us. Respectfully following the above decision, we are inclined to set aside the order passed u/s 263 of the Act. Accordingly, grounds raised