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Income Tax Appellate Tribunal, INDORE BENCH, INDORE
Before: SHRI VIJAY PAL RAO & SHRI B.M. BIYANI
आदेश / O R D E R
Per B.M. Biyani, A.M.:
Feeling aggrieved by revision-order dated 25.03.2022 passed by learned Pr. Commissioner of Income-Tax-1, Indore [“PCIT”] u/s 263 of Income-tax Act, 1961 [“the Act”], which in turn arises out of assessment-order dated 16.12.2019 passed by learned DCIT/ACIT-2(1), Ujjain [“AO”] u/s 143(3) of the act for Assessment-Year [“AY”] 2017-18, the assessee has filed this appeal on the grounds raised in Appeal-Memo (Form No. 36).
Heard the learned Representatives of both sides at length and case- records perused.
Neena Dadwani, Indore vs. PCIT-I,Indore- Assessment year 2017-18 3. Brief facts of the case are such that the assessee filed return of income of relevant assessment-year which was subjected to ‘limited scrutiny’ to examine “Large deduction claimed u/s 57” and the AO completed assessment u/s 143(3). Subsequently, Ld. PCIT examined the record of assessment-proceeding and viewed that the assessment-order passed by AO is erroneous in so far it is prejudicial to the interest of revenue which attracts revisionary-jurisdiction u/s 263. Accordingly, Ld. PCIT issued show-cause notice dated 12.03.2022 wherein he observed that the assessee has claimed deduction of interest expenditure of Rs. 28,43,841/- to M/s Neena Motors and received interest income of Rs. 21,21,720/- from M/s Prince Motors (a partnership firm where assessee is 50% partner). He further observed that during assessment-proceeding before AO, the assessee has submitted a revised computation of total income and claimed deduction of interest expenditure of Rs. 28,43,841/- against interest income of Rs. 21,21,270/- chargeable under the head “Income from Business” but the same was not allowable since the assessee had taken loan in personal capacity and not for business. The PCIT noted that the AO has not verified this point and passed assessment-order.
By the aforesaid show-cause notice, the assessee was asked to explain as to why the assessment-order may not be revised. In response, the assessee filed a detailed reply which is re-produced in Para No. 3 of revision- order. But the Ld. PCIT was not satisfied with assessee’s submission. Further, he also observed that since the section 263 has been amended and Explanation 2, as reproduced below, had been introduced therein, the assessment-order is deemed to be erroneous-cum-prejudicial to the interest of revenue if the same had been passed without inquiries or verification which should have been made:
“Explanation 2 – “For the purpose of this section, it is hereby declared that an order passed by the Assessing Officer shall be deemed to be erroneous in so far as it is prejudicial to the interest of revenue, if in the opinion of the Principal Commissioner or Commissioner - Neena Dadwani, Indore vs. PCIT-I,Indore- Assessment year 2017-18 (a) The order is passed without making inquiries or verification which should have been made; (b) The order is passed allowing any relief without inquiring into the claim; (c) …. (d) …”
Finally, Ld. PCIT concluded that the AO has not carried out the inquiry/verification which he should have done and hence the assessment- order is erroneous in so far as it is prejudicial to the interest of revenue. Accordingly, Ld. PCIT passed revision-order u/s 263 whereby the assessment-order was set aside to the file of AO with a direction to re-frame assessment after examining the issue raised by him.
6. Aggrieved by such revision-order, the assessee has filed this appeal.
7. By means of various grounds raised in the Appeal Memo which are not being reproduced for the sake of brevity, the appellant-assessee requires us to adjudicate whether or not the revision-order passed by Ld. PCIT u/s 263 is valid in the eyes of law?
Ld. AR initially explained that the assessee committed an error while filing return of income. The assessee inadvertently claimed deduction of interest expenditure of Rs. 28,43,841/- u/s 57 against “Income from other sources” although the same was claimable and allowable as deduction against “Income from Business”. Therefore, when the assessee realised this mistake during assessment-proceeding, he not only pointed out to the AO vide letter dated 26.11.2019 but also submitted a revised computation of total income. But, Ld. AR submitted, there was no change in the total income which stood at Rs. 20,47,200/- in the return of income originally filed by assessee and also in the revised correct computation of total income; there was only modification in the figures of head-wise taxable income.
Then, the Ld. AR submitted that during assessment-proceeding, the AO has made sufficient queries to assessee and the assessee has also filed Neena Dadwani, Indore vs. PCIT-I,Indore- Assessment year 2017-18 submissions qua the issue raised by Ld. PCIT which is very much evident from followings:
(i) The AO raised specific query to assessee vide notice dated 19.06.2019 u/s 142(1) (Page No. 36-38 of Paper-Book) as under:
“7. Please give the justification of claim of section 57 made by you. Please show cause why the proportionate interest should not be disallowed for diversion of interest-bearing funds for non- business purposes” The assessee filed reply dated 16.05.2019 (Page No. 51 to 64) giving details of loan taken from M/s Neena Motors and investment made in M/s Prince Motors. The assessee also explained that interest expenditure paid to M/s Neena Motors had been claimed under the head “Income from Other Source” and the interest income from M/s Prince Motors has been shown under the head “Income from Business”. The assessee also filed computation of total income, Balance-Sheet and copies of Ledger A/cs.
(ii) The AO issued notice dated 06.11.2019 u/s 142(1) (Page No. 42-43 of Paper-Book) raising following query:
“1. In connection with the reply dated 16.05.2019, regarding the nexus not established on the basis of ledger a/c & Balance- Sheet. Required evidence regarding the direct nexus of the loan taken from M/s Neena Motors & Investment made in M/s Prince Motors as there are other investment also as per Balance-Sheet, where this loan might have been used. All the details should be submitted in the order in which they appear. The submission shall be verified and signed by the assessee/authorised signatory in the following format.” The assessee filed reply dated 11.11.2019 (Page No. 65-89 of Paper- Book) giving details of loan taken, investment made and justification of interest deduction. The assessee also filed copy of income-tax return of preceeding AY 2016-17 in which also the interest expenditure was claimed as deduction though against “Income from Business” and not Neena Dadwani, Indore vs. PCIT-I,Indore- Assessment year 2017-18 against “Income from Other Sources” and the same was allowed by department.
(iii) The AO issued notice dated 18.11.2019 u/s 142(1) (Page No. 44-45 of Paper-Book) raising following query:
“1. Please submit a report about establish a nexus of loan taken from M/s Neena Motors and investment made in M/s Prince Motors.” Then, the AO issued notice dated 26.11.2019 u/s 142(1) (Page No. 47- 48 of Paper-Book) raising following query:
“Please refer to this office notice u/s 142(1) dated 18.11.2019 to which no reply/details filed. You are requested to show cause as to why the expenses claimed against the income from other sources should not be disallowed as no nexus has been established between the loan taken from M/s Neena Motors and the investment made in M/s Prince Motors.” The assessee filed a detailed reply dated 26.11.2019 u/s 142(1) again explaining the details of loan taken and investment made. It was further submitted in Para No. 3 of the letter that the interest expenditure is erroneously claimed under the head “Income from Other Source” and the same should have been deducted under the head “Income from Business” earned from M/s Prince Motors. The assessee also filed a revised computation of total income.
Then, the Ld. AR carried us to Page No. 1-2 of assessment-order where the AO has himself made following noting:
“….Thereafter, notice u/s 142(1) with detailed questionnaire issued on 19.06.2019 for compliance on or before 21.06.2019. Notice u/s 142(1) & intimation u/s 129 dated 30.10.2019 issued to the assessee. Notices u/s 142(1) dated 06.11.2019, 18.11.2019 & 26.11.2019 were also issued for necessary compliance. In response to the above notices, the assessee vide reply dated 17.05.2019, 11.11.2019, 13.11.2019, 26.11.2019, 27.11.2019 and 05.12.2019, has furnished the details as per the questionnaire issued.
Neena Dadwani, Indore vs. PCIT-I,Indore- Assessment year 2017-18 The detail furnished are verified. Considering the details filed, the return income is accepted.”
Clearly therefore, Ld. AR contended, the assessee had filed all details / documents during the course of assessment. Therefore, this is not a case of “no enquiry” as understood by Ld. PCIT. Still Ld. PCIT has conducted revision only because the AO has not discussed the impugned issue specifically in assessment-order. Ld. AR submitted that the order passed by PCIT is contrary to the record of proceeding and therefore not in accordance with the law of section 263, hence the same should be quashed.
Per contra, Ld. DR supported the revision-order. He submitted that mere raising queries before assessee and keeping response of assessee in the departmental file cannot be treated as conduct of enquiries by AO. According to Ld. DR, had the AO analysed the replies of assessee, he would have certainly made a detailed noting in the assessment-order but this is not so in present case. He submitted that the assessment-order is silent / cryptic on the issues raised by Ld. PCIT, which clearly demonstrates that the AO has not made enquiries as required and hence Ld. PCIT was constrained to conduct revision-proceeding. Ld. DR submitted that the action of Ld. PCIT is very much in accordance with the mandate of section 263 and must be upheld.
We have heard the rival contentions, perused the material on record and duly considered the facts of the case in the light of applicable legal positions. On a careful consideration of various documents placed in the Paper-Book, as noted in the foregoing discussion, we find that during the course of assessment-proceeding, there were specific queries raised by AO with regard to the issues contemplated by Ld. PCIT and the assessee too made detailed replies / submissions. To this extent, there is no dispute or rebuttal by revenue. Clearly, therefore, it is discernible that the Ld. AO has considered those replies / submissions and thereafter taken a plausible view. Further, the action of AO in accepting the replies / submissions of Neena Dadwani, Indore vs. PCIT-I,Indore- Assessment year 2017-18 assessee does not lack bonafides and cannot be said to be faulty. Thus, everything hinges on the point as to whether the assessment-order can be said to be erroneous-cum-prejudicial to the interest of revenue merely for the reason that the AO has not discussed those issues in the assessment- order or in other words not written his assessment-order as a perfectionist. In our considered view, the writing of assessment-order is a task of AO and the same is neither controlled nor helped by the assessee. In fact, the assessee has no hand or mind in writing the assessment-order. Being so, we are afraid to accept the pleading of Ld. DR that the assessment-order could be said to be erroneous-cum-prejudicial for that reason. We are consciously aware of the decision taken by Hon’ble ITAT, Mumbai in Reliance Payment Solutions Ltd. Vs. Pr. CIT (2022) 136 taxmann.com 277 where the same view was upheld:
“9. Clearly, therefore, as long as the action of the Assessing Officer cannot be said to be lacking bonafides, his action in accepting an explanation of the assessee cannot be faulted merely because it could have been lawful to make mere detailed inquiries or because he did not write specific reasons of accepting the explanation. As for learned PCIT's observations regarding accepting the explanation "without appropriate evidence", there is nothing to question the bonafides of the Assessing Officer or to elaborate as to what should have been 'appropriate' evidence. The fact remains that the specific issue raised, in the revision order was specifically looked into, detailed submissions were made and these submissions were duly accepted by the Assessing Officer. Merely because the Assessing Officer did not write specific reasons for accepting the explanation of the assessee cannot be reason enough to invoke powers under section 263, and non-mentioning of these reasons do not render the assessment order "erroneous and prejudicial to the interest of the revenue". [Emphasis supplied] 14. Regarding introduction of Explanation 2 to section 263, as claimed by Ld. PCIT in his order, we only need to submit that the said Explanation does not give unfettered power to the PCIT to assume revisional-jurisdiction to revise every order of the Assessing Officer to re-examine the issues already examined during assessment-proceeding. It is judicially interpreted in several decisions that the intention of legislature behind introduction of Explanation 2 could not have been to enable the PCIT to find fault with each and every assessment-order in unlimited terms since such an interpretation Neena Dadwani, Indore vs. PCIT-I,Indore- Assessment year 2017-18 would lead to unending litigation and there would not be any point of finality of assessment-proceeding done by Ld. AO.
15. Hon’ble ITAT, Rajkot in M/s Pramukh Realty, Junagadh, dated 30.06.2022, has extensively dealt a case where the AO raised queries during assessment-proceeding and the assessee filed details / documents. After a thorough analysis, the Hon’ble Bench has held that in such circumstances, revision u/s 263 cannot be done. The relevant paragraphs of the decision are reproduced below:
“5. The learned AR before us filed a paper book running from pages 1 to 157 and contended that all the necessary details about the advances received from the parties, sales shown in the financial statement and details of the service tax returns were filed during the assessment proceedings. The learned AR further contended that the assessment was framed by the AO after considering the necessary details and verification and application of mind. The learned AR in support of his contention drew our attention on pages 151 to 153 of the paper book where the copy of the notice under section 142(1) of the Act was placed. Likewise, the learned AR also drew our attention on pages 154 to 157 of the paper book where the reply of the assessee in response to the notice issued under section 142(1) of the Act 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 on account non-verification.
On the contrary, the learned DR before us contended that reconciliation of the amount shown in the service tax return and financial statement was not available before the AO during the assessment proceedings. Accordingly the learned DR vehemently supported the order of the learned PCIT.
We have heard the rival contentions of both the parties and perused the materials available on record. The issue in the present case relates whether the assessment order has been passed by AO without making inquiries or verification with respect to the difference in the figures as discussed above and hence the assessment is erroneous insofar prejudicial to the interest of the Revenue. Thus, requiring revision by Pr. CIT u/s 263 of the Act. 7.1 An inquiry made by the Assessing Officer, considered inadequate by the Commissioner of Income Tax, cannot make the order of the Assessing Officer 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 judgments by various Hon’ble High Courts in this regard. 7.2 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 Neena Dadwani, Indore vs. PCIT-I,Indore- Assessment year 2017-18 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 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.
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’.”
7.3 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 Neena Dadwani, Indore vs. PCIT-I,Indore- Assessment year 2017-18 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.
7.4 The Mumbai ITAT in the case of Sh. Narayan Tatu Rane Vs. ITO, 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 provision 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.”
7.5 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 Neena Dadwani, Indore vs. PCIT-I,Indore- Assessment year 2017-18 the Tribunal was prompted to reverse the order of revision. No question of law arises. Tax Appeal is dismissed”.
7.6 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 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”
7.7 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 causing prejudice 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.
7.8 Now in the facts before us, in the case of the assessee the AO during the course of assessment proceedings, made enquiries on this issue and after consideration of written submissions filed by the assessee and documents / evidence placed on record, framed the assessment under section 143(3) of the Act without making the addition of the amount as note above. This fact can be verified from the notice under section 142(1) of the Act by the AO and submission in reply of the assessee against such notice.
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7.9 From the above it is revealed that it is not the case that the AO has not made any 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 cash deposited during the demonization period. 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 AO had made enquiries and after consideration of materials placed on record accepted the genuineness of the claim of the assessee.
7.10 At this juncture, it is also important to note that the learned PCIT in his order passed under section 263 of the Act has made reference to the explanation 2 of section 263 of the Act. It was attempted by the learned PCIT to hold that there were certain necessary enquiries which should have been made by the AO during the assessment proceedings but not conducted by him. Therefore, on this reasoning the order of the AO is also erroneous insofar prejudicial to the interest of revenue. In this regard, we make our observation that the learned PCIT has also not specified Neena Dadwani, Indore vs. PCIT-I,Indore- Assessment year 2017-18 the nature and the manner in which the enquiries which should have been conducted by the AO in the assessment proceedings. Thus, in the absence of any specific finding of the learned PCIT with respect to the enquiries which should have been made, we are not convinced by his order passed under section 263 of the Act.”
In view of above discussion and for the reasons stated therein, we are persuaded to hold that the facts of the present case do not warrant application of section 263. Therefore, the revision-order passed by Ld. PCIT is not a valid order. We, thus, quash the revision-order and restore the original assessment-order passed by AO. The assessee succeeds in this appeal.
Resultantly, this appeal is allowed.
Order pronounced in the open court on 24.08.2023.