2021 (8) TMI 499 - AT - Income Tax

Revision u/s 263 - whether AO conducted sufficient enquiry with regard to unsecured loans taken by the assessee company during the year? - HELD THAT - As specific reply submitted to each of such query by the assessee, independent enquiry conducted by the AO by issuance of notice u/s 133(6) of the Act and are satisfied that the ld. AO has conducted adequate and detailed enquiry to investigate and examine all the unsecured loan taken during the year including the loan taken from cash creditors named in the show cause notice issued u/s 263 of the Act and find that the AO has taken one of the permissible view in law by verifying the identity of the cash creditors, got satisfied with the genuineness of the transactions between the assessee and cash creditors and also satisfied with the creditworthiness of the cash creditors. We further find that this is not a case of no enquiry or inadequate enquiry and also find that Pr. CIT had not carried out any independent enquiry at his end and thus grossly erred in observing that the order of the Ld. AO u/s 143(3) of the Act is erroneous and prejudicial to the interest of Revenue. In the instant case Ld. Pr. CIT failed to show that both conditions exists i.e. neither it has been proved that order is erroneous nor it has been proved to be prejudicial to the interest of revenue. We thus find merit in the contentions of the assessee that the revisionary order passed by the Ld. Pr. CIT in the years under appeal i.e. A.Y. 2013-14 is beyond the scope of section 263 and hence not valid. Thus the action of the Ld. Pr. CIT is contrary to the ratio laid down by binding precedence. We, therefore, quash the impugned order and decide in favour of the assessee.

Issues Involved:
1. Jurisdiction of the Principal Commissioner of Income Tax (PCIT) under Section 263 of the Income Tax Act.
2. Adequacy of the Assessing Officer's (AO) inquiry and application of mind during assessment proceedings.
3. Validity of the PCIT's direction to re-examine all unsecured loans.
4. Compliance with the procedural requirements of Section 263.
5. Interpretation and application of Explanation 2 to Section 263.
6. Principles of natural justice and fair play in the exercise of revisionary powers.

Detailed Analysis:

1. Jurisdiction of the Principal Commissioner of Income Tax (PCIT) under Section 263:
The assessee challenged the jurisdiction of the PCIT under Section 263, arguing that the assessment order was neither erroneous nor prejudicial to the interests of the revenue. The Tribunal noted that for invoking Section 263, both conditions must be satisfied. The PCIT must demonstrate that the AO's order was erroneous and that the error was prejudicial to the revenue. The Tribunal emphasized that an order is not erroneous if the AO has adopted one of the possible views permissible under law.

2. Adequacy of the Assessing Officer's (AO) Inquiry:
The Tribunal observed that the AO conducted a detailed inquiry into the unsecured loans received by the assessee. Notices under Sections 143(2) and 142(1) were issued, and the assessee provided detailed responses, including confirmations, bank statements, and income tax returns of the creditors. The AO also issued notices under Section 133(6) to the creditors, who responded with the necessary information. The Tribunal found that the AO had made a proper application of mind and had conducted adequate inquiries before finalizing the assessment.

3. Validity of the PCIT's Direction to Re-examine All Unsecured Loans:
The Tribunal noted that the PCIT's show cause notice raised doubts about nine specific creditors. However, the impugned order directed the AO to re-examine all unsecured loans amounting to ?21.07 crores. The Tribunal held that the PCIT cannot go beyond the reasons mentioned in the show cause notice and that the direction to examine all unsecured loans was beyond the PCIT's jurisdiction.

4. Compliance with Procedural Requirements of Section 263:
The Tribunal emphasized that the PCIT must conduct an inquiry and record a finding that the AO's order is erroneous and prejudicial to the revenue. In this case, the PCIT did not conduct any independent inquiry and relied on conjectures and surmises. The Tribunal referred to the judgment in D.G. Housing Projects Ltd., which held that the PCIT must himself verify the facts and record a clear finding of error.

5. Interpretation and Application of Explanation 2 to Section 263:
The Tribunal discussed the amended Explanation 2 to Section 263, which deems an order to be erroneous if it is passed without making inquiries or verification that should have been made. The Tribunal held that this explanation does not override the requirement for the PCIT to conduct an inquiry and record a finding of error. The Tribunal cited various judgments, including those in the cases of Narayan Tatu Rane and Amira Enterprises Ltd., which support this interpretation.

6. Principles of Natural Justice and Fair Play:
The Tribunal underscored the importance of adhering to principles of natural justice and fair play in the exercise of revisionary powers. The PCIT's failure to conduct an independent inquiry and the reliance on speculative observations were found to be contrary to these principles. The Tribunal held that the PCIT's order violated the settled legal position and the procedural safeguards enshrined in Section 263.

Conclusion:
The Tribunal quashed the PCIT's order under Section 263, restoring the AO's assessment order. It held that the AO had conducted adequate inquiries and that the PCIT's direction to re-examine all unsecured loans was beyond jurisdiction. The Tribunal emphasized the necessity for the PCIT to conduct an independent inquiry and record clear findings of error and prejudice to the revenue. The appeal was allowed in favor of the assessee.

← Previous Next →