2020 (11) TMI 860 - AT - Income Tax

Revision u/s 263 - order of AO was erroneous since it had been passed without inquiring on the issue in consideration before him in the proceedings u/s. 147 - assessee having availed contrived losses by resorting to Client Code Modification(CCM) - AO had accepted the generic reply of the assessee and not cared to enquire as to under what circumstances such huge number of edits were required to be done in the client codes - HELD THAT - The figure has been incorrectly taken as ₹ 11,58,692.40 instead of ₹ 1,15,86,912.40. Further the 'mtm' markings are not the profits earned by the assessee on account of trading in futures and options, but represent the daily settlement of the unsold trades at their prevailing market price. PCIT we find has neither picked up the correct figures from the statement of accounts submitted by the brokers, nor understood what the figures represented and accordingly arrived at an incorrect finding that the assessee had not reflected true profits, running in crores, earned on trading in futures and options. The vague and illogical show cause notice, the incorrect interpretation of documents by the Ld. Pr. CIT all show the arbitrary manner in which this extraordinary power to revise the order of the AO has been exercised by the Ld. Pr. CIT. Issue on which Ld. PCIT has exercised her powers u/s. 263 as per the show cause notice, is too trivial, involving income of ₹ 2.54 lacs only, to justify exercise of the extraordinary power of revision u/s. 263 of the Act, which has grave and serious consequences, to the prejudice of assesses, of relooking into an already concluded assessment. Since we have found the impugned order of the Ld. Pr. CIT u/s. 263 of the Act, to have been passed in an arbitrary manner, without confronting the assessee with the error in the order of the AO, and based on incorrect appreciation of facts, we have no hesitation in setting aside the order of the Ld. PCIT passed u/s. 263 - Decided in favour of assessee.

Summary

Issues Involved:
1. Jurisdiction of the Principal Commissioner of Income Tax (PCIT) under section 263 of the Income Tax Act.
2. Validity of the assessment order passed under section 147/143(3) of the Income Tax Act.
3. Basis of the PCIT's revisionary powers under section 263.
4. Adequacy of the Assessing Officer's (AO) inquiry and application of mind.
5. Allegations of contrived losses through Client Code Modification (CCM).

Detailed Analysis:

1. Jurisdiction of the PCIT under Section 263:
The assessee challenged the jurisdiction of the PCIT to pass an order under section 263 of the Income Tax Act, arguing that the AO had already exercised his powers under section 147 of the Act. The tribunal noted that the PCIT's exercise of revisionary powers was based on the same grounds as the AO's reassessment proceedings, questioning the basis for considering the AO's order erroneous.

2. Validity of the Assessment Order under Section 147/143(3):
The assessee contended that the AO had passed the assessment order after due inquiry and consideration of all relevant materials and replies. The tribunal examined various documents, including show cause notices and replies, and found that the AO had indeed conducted inquiries and applied his mind before passing the order.

3. Basis of the PCIT's Revisionary Powers under Section 263:
The PCIT found the AO's order erroneous and prejudicial to the interest of the Revenue, citing that the AO did not make any additions despite having information about contrived losses through CCM. The tribunal observed that the PCIT's conclusion was based on the AO's alleged failure to inquire into the matter adequately, despite having specific information.

4. Adequacy of the AO's Inquiry and Application of Mind:
The tribunal noted that the AO had issued show cause notices and received replies from the assessee and the broker, Mansukh Securities & Finance Limited. The AO had considered these replies and the material on record before concluding the assessment. The tribunal found that the PCIT's assertion that the AO had not made proper inquiries was not substantiated by the facts.

5. Allegations of Contrived Losses through CCM:
The PCIT alleged that the assessee had availed contrived losses by resorting to CCM, which reduced the taxable income. The tribunal found that the PCIT's show cause notice did not adequately confront the assessee with this specific allegation. Moreover, the tribunal noted that the PCIT's interpretation of the broker's statements was incorrect and that the alleged profits were not accurately reflected.

Conclusion:
The tribunal concluded that the PCIT had exercised revisionary powers under section 263 in an arbitrary manner, without observing the principles of natural justice or due application of mind. The tribunal found the show cause notice to be vague and illogical and the PCIT's interpretation of the facts to be incorrect. Consequently, the tribunal set aside the order of the PCIT and allowed the appeal of the assessee.