2020 (12) TMI 548 - AT - Income Tax

Revision u/s 263 - AO has passed the assessment order without proper verification/examination of the increase in capital and without making any addition in this regard - non-registration of gift instrument - HELD THAT - By virtue of non-registration of the gift instrument, in the eyes of law, no transfer of flat takes place, then the assessee's capital account will get reduced by the cost of the flat which has been gifted and then will get reflected in the capital account of the donor Ms. Ankita Kejriwal, thereby increasing her capital account and not that of assessee/appellant. In such an event, there will be no prejudice caused to the Revenue, on account of AO not appreciating the legal effect of non-registration of gift instrument. We note from the enquiry conducted by the AO, assessee had furnished the source of the donor for purchasing the property and we note that other than ₹ 20,050/- the source of fund for purchasing the flat flows from the earlier assessment years. Thus, we note that even if the AO finds that the non-registration of the gift deed would result in non-transfer of the flat would not in any case prejudice the revenue. Therefore, the second limb of the jurisdictional requirement i.e. 'prejudicial to the revenue' does not exist and, therefore, the Ld. Pr. CIT lacks jurisdiction to interfere in the order of the assessment passed by the AO. Since the AO has enquired and elicited the relevant information/documents including the source of Ms. Ankita Kejriwal to buy the flat at Bangalore, the AO's action cannot be faulted as an outcome of lack of enquiry. And since there would be no prejudice caused to the revenue, as discussed, we are of the view that in this case, the twin condition is not satisfied as held in Malabar Industries Ltd. 2000 (2) TMI 10 - SUPREME COURT therefore, the revisionary jurisdiction exercised by the Ld. PCIT u/s. 263 of the Ac was without jurisdiction - Decided in favour of assessee.

Summary

Issues Involved:
1. Jurisdiction of the Principal Commissioner of Income Tax (PCIT) to invoke Section 263 of the Income Tax Act, 1961.
2. Validity and implications of the unregistered gift deed under Section 17 of the Registration Act, 1908 and Section 123 of the Transfer of Property Act.
3. Adequacy of the Assessing Officer's (AO) verification and examination of the increase in capital.

Issue-wise Detailed Analysis:

1. Jurisdiction of the Principal Commissioner of Income Tax (PCIT) to invoke Section 263 of the Income Tax Act, 1961:
The core issue is whether the PCIT had the requisite jurisdiction to invoke Section 263. The PCIT believed the AO's assessment order was erroneous and prejudicial to the interest of the revenue due to inadequate verification of the increase in capital. The judgment emphasized the twin conditions laid down by the Supreme Court in Malabar Industries Ltd. vs. CIT, which require the order to be both erroneous and prejudicial to the revenue. The judgment concluded that the AO had conducted sufficient inquiry and verification, including the source of funds for the gifted flat, and thus the AO's order could not be deemed erroneous. Furthermore, since the non-registration of the gift deed would result in no increase in the assessee's capital, there would be no prejudice to the revenue. Therefore, the PCIT lacked jurisdiction to invoke Section 263.

2. Validity and implications of the unregistered gift deed under Section 17 of the Registration Act, 1908 and Section 123 of the Transfer of Property Act:
The PCIT argued that the gift deed was void due to non-registration, rendering the transfer of the immovable property invalid. The judgment acknowledged that non-registration indeed affects the transfer's validity under the Registration Act, 1908, and the Transfer of Property Act. However, it noted that this legal defect would mean the gifted flat would not be added to the assessee's capital, thus causing no prejudice to the revenue. The judgment highlighted that the primary concern was whether the AO had conducted adequate inquiry, not the legal intricacies of the gift deed's registration.

3. Adequacy of the Assessing Officer's (AO) verification and examination of the increase in capital:
The PCIT contended that the AO did not properly verify the increase in capital, specifically the capacity of the daughter (donor) to purchase and gift the flat. The judgment detailed the AO's actions, including issuing statutory notices and examining the donor's source of funds, bank statements, and tax assessments. The judgment found that the AO had conducted a thorough investigation and was satisfied with the explanations and documents provided. Therefore, the AO's order was not a result of non-application of mind or inadequate inquiry.

Conclusion:
The judgment concluded that the AO had performed sufficient verification and that the PCIT's invocation of Section 263 was unwarranted. The AO's order was neither erroneous nor prejudicial to the revenue, and the PCIT's action was beyond the sanction of law. Consequently, the appeal of the assessee was allowed, and the order of the PCIT was quashed.