2022 (4) TMI 95 - AT - Income Tax

Revision u/s 263 by CIT - Assessment u/s 153C - applicability of provision of Section 2(22)(e) - HELD THAT - CIT has nowhere in his order pointed out any error in the order passed by the learned AO. It is a fact which staring on us that M/s. Artech Realtors Pvt. Ltd. had carried out the construction activity of the residential premises belonging the Directors in the normal course of its business. Hence the very premise about the applicability of provision of Section 2(22)(e) of the Act itself is clearly in violation of law and such transaction falls within the exception clause. Hence it can be safely concluded that the learned Pr. CIT had proceeded on incorrect application of law while invoking his revisionary jurisdiction under Section 263. Assessee had duly furnished all these details before the learned AO during the course of assessment proceedings in response to the queries raised by the learned AO. Hence it can be safely concluded that the learned AO had indeed made necessary verification on the same and was convinced with the reply given by the assessees. Hence no error could be attributed in the order passed by the learned AO. It also cannot be said that the learned AO had not made any enquiry on this issue. The law is very well settled that the learned Pr. CIT could invoke jurisdiction under Section 263 of the Act only when there is lack of enquiry by the learned AO. Reliance in this regard has been rightly pled by the learned A.R. on the decision in the case of CIT vs. Sunbeam Auto Ltd. 2009 (9) TMI 633 - DELHI HIGH COURT Pr. CIT had merely directed the learned AO to examine the issue flagged by him in the order without pointing out where the order of the learned AO is erroneous. This only tantamount to directing the AO of fishing and roving enquires which is not permissible under Section 263 - Decided in favour of assessee.

Summary

Issues:
Appeal against Section 263 orders for taxability of deemed dividend in shareholders' hands.

Analysis:
1. The appeal challenged Section 263 orders by the Pr. CIT, Cochin, treating the AO's orders as prejudicial to Revenue's interest regarding the taxability of deemed dividend in the hands of shareholders. The residential property construction costs were met by a company where the shareholders were directors with substantial voting power. The AO accepted the plea due to time constraints, leading to revision under Section 263.

2. The Tribunal found that the company, engaged in real estate projects, funded the construction, evident from its Balance Sheet. As the activity was in the normal course of business, falling within the exception clause of Section 2(22)(e) of the Act, it couldn't be considered a loan or advance. The Pr. CIT's invocation of Section 263 for taxability in shareholders' hands was deemed unsustainable.

3. Assessments were framed under Sections 153A and 153C, with no incriminating material found during the search. The issue of material's existence for Section 2(22)(e) addition was dismissed. The Pr. CIT directed a valuation officer for cost determination, leading to a discrepancy in valuations claimed by the assessees and determined by the DVO.

4. The Pr. CIT's invocation of Section 263 was challenged, asserting the AO's orders were not erroneous. The Tribunal noted the construction was part of the company's normal business, hence not falling under Section 2(22)(e). The Pr. CIT's lack of pointing out specific errors in the AO's order was deemed incorrect application of law, leading to quashing of the Section 263 order.

5. The Tribunal emphasized the need for specific errors to invoke Section 263, criticizing the Pr. CIT's directive to the AO without highlighting errors. The order under Section 263 was quashed, and the appeals by the assessees were allowed, emphasizing the importance of proper application of law and due process in tax assessments.