2022 (10) TMI 1203 - AT - Income Tax

Revision u/s 263 - Order erroneous and prejudicial or not? - as per CIT AO made no enquiry with regard to interest income received during the year and treatment same as income from other sources - HELD THAT - The scheme of the IT Act is to levy and collect tax in accordance with the provisions of the Act and this task is entrusted to the Revenue. If due to erroneous order of the assessing officer, the Revenue is losing tax lawfully payable by a person, it will certainly be prejudicial to the interest of the revenue. As held in the case of Malabar Industries Co. Ltd. 2000 (2) TMI 10 - SUPREME COURT , the Commissioner can exercise revision jurisdictional u/s 263 if he is satisfied that the order of the assessing officer sought to be revised is (i)erroneous; and also (ii) prejudicial to the interests of the revenue. AO is not expected to put blinkers on his eyes and mechanically accept what the assessee claims before him. It is his duty to ascertain the truth of the facts stated and the genuineness of the claims made in the return when the circumstances of the case are such as to provoke inquiry. Arbitrariness in either accepting or rejecting the claim has no place. The order passed by the AO becomes erroneous because an enquiry has not been made or genuineness of the claim has not been examined where the inquiries ought to have been made and the genuineness of the claim ought to have been examined and not because there is anything wrong with his order if all the facts stated or claim made therein are assumed to be correct. In the present case, the AO must have made an enquiry with regard to interest income received during the year and treatment same as income from other sources as no business activity has been carried on by the assessee in this assessment year under consideration. Being so, we do not find any infirmity in the order of the Ld. PCIT in invoking the jurisdiction u/s 263 of the Act and in vacating the assessment order passed by the AO for denovo consideration. Decided against assessee.

Summary

Issues Involved:
1. Jurisdiction of invoking provisions of Section 263 of the Income-tax Act.
2. Substitution of the Principal Commissioner's view with that of the Assessing Officer.
3. Refusal to allow the claim for setoff of pro-rata interest paid.

Detailed Analysis:

1. Jurisdiction of invoking provisions of Section 263 of the Income-tax Act:
The primary issue was whether the Principal Commissioner of Income Tax (PCIT) had the jurisdiction to invoke Section 263 of the Income-tax Act, 1961. The scheme of the IT Act is to levy and collect tax in accordance with its provisions. If due to an erroneous order of the assessing officer, the Revenue loses tax lawfully payable, it is prejudicial to the interest of the revenue. The Commissioner can exercise revision jurisdiction under Section 263 if the order of the assessing officer is both erroneous and prejudicial to the interests of the revenue. An order is erroneous if it involves error, deviates from the law, or is based on an incorrect assumption of facts or incorrect application of law. The Commissioner is empowered to initiate suo moto proceedings if the Assessing Officer takes a wrong decision without considering available materials or without making necessary inquiries. The role of the Assessing Officer is not only adjudicatory but also investigative. The Commissioner can regard an order as erroneous if the Assessing Officer fails to make inquiries where warranted. The judgment cited decisions from the Hon'ble Supreme Court, including Malabar Industries Co. Ltd. vs. CIT and others, supporting the view that an order is erroneous if it lacks proper inquiry or application of mind.

2. Substitution of the Principal Commissioner's view with that of the Assessing Officer:
The appellant argued that the PCIT erred in substituting his view with that of the Assessing Officer, who had formed an opinion that the business was in continuance, despite noting no active business operations during the year. The PCIT directed the AO to reassess the net income under "Income from other Sources" instead of "Income from business and profession" as was done in the original assessment. The judgment clarified that the PCIT has the power to correct any arbitrary or erroneous decisions made by the Assessing Officer, especially if no proper inquiry was conducted. The PCIT's action to invoke Section 263 was justified as the AO did not make necessary inquiries regarding the interest income received during the year and its treatment as "Income from other Sources" due to the absence of business activities.

3. Refusal to allow the claim for setoff of pro-rata interest paid:
The appellant contended that the PCIT erred in refusing to allow the claim for setoff of pro-rata interest paid on the amount advanced for partners' drawings against the interest income directed to be assessed under "Income from other Sources." The appellant argued that the interest paid had a direct nexus with the interest income received and hence was deductible under Section 57(iii) of the Income Tax Act, 1961. However, the judgment did not decide on the merits of this issue, as the PCIT had not provided a finding on the merits of the issue raised. The judgment focused on the procedural aspect, affirming the PCIT's jurisdiction to invoke Section 263 and directing a denovo consideration of the assessment by the AO.

Conclusion:
The appeal of the assessee was dismissed, and the order of the PCIT invoking Section 263 of the Income-tax Act was upheld. The judgment emphasized the importance of proper inquiry and application of mind by the Assessing Officer and supported the PCIT's jurisdiction to correct erroneous orders prejudicial to the interests of the revenue. The issue on the merits regarding the setoff of pro-rata interest paid was left open for consideration in the reassessment.