2021 (7) TMI 142 - AT - Income Tax

Revision u/s 263 - case was selected for scrutiny through CASS - investment in unlisted equities - HELD THAT - In order to buttress this fact the assessee has filed the bank statement as well as mutual funds statements which reflects that the amount has been received from the redemption of mutual funds wherein the copy of statement showing source of investment made in unlisted equities along with relevant bank statement and mutual funds statement are found enclosed. He thereafter drew our attention wherein the details of other investment under non-current investment is given wherein the name of investment in equity instruments are given and from a perusal of the same, we note that the details of investment in quoted shares are given. We note from details viz. name of unquoted and quoted shares along with the number of shares held by the assessee as on 31.03.2015. The entire details of investment made by the assessee is seen to have been filed by the assessee before the AO. So, therefore, the Ld. PCIT's allegation that no details was called for by the AO during the enquiry conducted in respect of huge investment made to the tune in unlisted equity is on wrong assumption of facts and therefore the Ld. PCIT erred on this issue. Disallowance u/s.14A - assessee has suo moto disallowed - This issue has been enquired into by the AO and the assessee has replied to it as aforestated and since the disallowance has been made by the assessee suo moto u/s. 14A read with Rule 8D the fault alleged by the Ld. PCIT is again on wrong assumption of facts. Therefore, the action of the AO cannot be termed as erroneous as well as prejudicial to the revenue for no enquiry on the part of AO - we note that the impugned order of PCIT was without satisfying the condition precedent as stipulated u/s. 263 of the Act that the AO's order dated 19.07.2017 as erroneous as well as prejudicial to the revenue. In the absence of this jurisdictional fact and law, PCIT ought not to have usurped the jurisdiction u/s. 263 to interfere with the assessment order passed by the AO on 19.07.2017. Since the jurisdictional condition precedent has not been satisfied in this case by Ld. PCIT before passing the impugned order, we are inclined to quash the impugned order of Ld PCIT dated 23.03.2020. - Appeal of the assessee is allowed.

Summary

Issues Involved:
1. Validity of the Principal Commissioner of Income Tax (PCIT) invoking revisional jurisdiction under Section 263 of the Income Tax Act, 1961.
2. Alleged failure of the Assessing Officer (AO) to inquire about the source of huge investments in unlisted securities.
3. Alleged failure of the AO to consider disallowance under Section 14A of the Income Tax Act concerning dividend income.

Detailed Analysis:

1. Validity of PCIT's Invocation of Revisional Jurisdiction under Section 263:
The primary issue raised by the assessee was the legality of the PCIT invoking revisional jurisdiction under Section 263 of the Income Tax Act, 1961. The assessee contended that the PCIT did not satisfy the condition precedent for invoking Section 263, which requires the order of the AO to be both erroneous and prejudicial to the revenue.

The tribunal referred to the Supreme Court's ruling in Malabar Industries Ltd. vs. CIT [2000] 243 ITR 83 (SC), which established that for an order to be revised under Section 263, it must be erroneous and prejudicial to the interest of the revenue. The tribunal emphasized that an order could be erroneous if it is based on an incorrect assumption of fact, incorrect application of law, violates natural justice principles, or is passed without application of mind. The tribunal concluded that the PCIT did not meet these criteria, rendering the invocation of Section 263 invalid.

2. Alleged Failure to Inquire About the Source of Investments:
The PCIT noted that the AO did not inquire about the source of a significant investment of ?8.95 crores in unlisted securities. However, the tribunal found that the PCIT himself acknowledged that the investment source was the sale of mutual fund units, as recorded in the assessment records. The tribunal further examined the assessee's replies during the assessment proceedings, which detailed the investments in group companies and the source of funds from mutual fund redemptions. The tribunal concluded that the AO had indeed conducted an inquiry into the source of investments, and the PCIT's claim was based on a wrong assumption of facts.

3. Alleged Failure to Consider Disallowance under Section 14A:
The PCIT also alleged that the AO did not consider disallowance under Section 14A concerning dividend income of ?2.32 crores. The tribunal found that the assessee had made a suo moto disallowance of ?8,65,105 under Section 14A read with Rule 8D, which was evident from the records submitted during the assessment proceedings. The tribunal concluded that the AO had considered the disallowance, and the PCIT's allegation was unfounded.

Conclusion:
The tribunal concluded that the PCIT's order invoking Section 263 was without satisfying the jurisdictional prerequisites of the AO's order being erroneous and prejudicial to the revenue. The tribunal quashed the PCIT's order dated 23.03.2020 and allowed the assessee's appeal. The decision was pronounced in the open court on 23rd June 2021.