2022 (12) TMI 747 - AT - Income Tax

Revision u/s 263 by CIT - unexplained loan transactions - PCIT s opinion the AO has carried out inadequate enquiry - AO has only accepted the genuineness of transactions on the basis of details/confirmations received in response to notices u/s 133(6) of the Act without issuing any summons to these loan creditors u/s 131 - HELD THAT - In our view the exercise of jurisdiction by the Ld. PCIT for the reason that the AO has carried out the inadequate enquiry and the AO has taken a possible view on the of evidences filed by the assessee and also ones obtained from loan creditors u/s 133(6) with which the ld. PCIT is not agreeing with. In our opinion, where the Ld. PCIT feels that the AO has made inadequate enquiries then the PCIT is duty bound to carry out the necessary enquiry/investigation and pinpointing on the basis of such investigation/enquiry as to how the order framed by the AO is erroneous as well as prejudicial to the interest of the revenue but merely cancelling the assessment on the basis of observations that AO has carried out in adequate enquiry is not permissible under the Act. The case of the assessee finds support from the decision of D.G. Housing Projects Ltd. 2012 (3) TMI 227 - DELHI HIGH COURT In the case of CIT vs. Gabriel India Ltd. 1993 (4) TMI 55 - BOMBAY HIGH COURT as held that in order to invoke the jurisdiction u/s 263(1) of the Act there must be material before the Commissioner to consider that the order passed by the ITO was erroneous insofar as prejudicial to the interest of the revenue. The Hon ble court has held that an erroneous order must be an order which is not in accordance with the law or which has been passed by the AO in undue haste without making any enquiry. The Hon ble Court has further held that the order is said to be prejudicial to the interest of revenue if it is not in accordance with the law in consequence whereof the lawful revenue due to the State has not been realized or cannot be realized. The Hon ble Court held that such a decision of Income Tax Officer cannot be held to be erroneous simply because he has not made elaborate discussion in that regard in the assessment order. Appeal of the assessee is allowed.

Issues Involved:
1. Validity of the exercise of jurisdiction under Section 263 of the Income Tax Act by the Principal Commissioner of Income Tax (PCIT).
2. Whether the assessment order passed under Section 143(3) was erroneous and prejudicial to the interest of the revenue.

Issue-wise
Detailed Analysis:

1. Validity of the exercise of jurisdiction under Section 263 of the Income Tax Act by the Principal Commissioner of Income Tax (PCIT):

The appeal was filed by the assessee against the order of the Ld. Principal Commissioner of Income Tax-2, Kolkata (PCIT) under Section 263 of the Income Tax Act, 1961, for the assessment year 2016-17. The PCIT had set aside the assessment framed under Section 143(3) on the grounds that the Assessing Officer (AO) had made incomplete enquiries regarding unsecured loans amounting to Rs. 42 crores and the interest paid thereon.

The PCIT observed that the AO had only obtained loan confirmations from the parties by issuing notices under Section 133(6) and did not carry out further verification under Section 131 to verify the genuineness of the loans. The PCIT concluded that the AO's failure to make adequate enquiries rendered the assessment order erroneous and prejudicial to the interest of the revenue, invoking Clause (a) of Explanation 2 to Section 263(1).

The assessee contended that the AO had conducted detailed enquiries by issuing notices under Sections 142(1) and 133(6), and had accepted the loan transactions after verifying the evidences provided by the assessee and the lenders. The assessee argued that the PCIT's assumption of jurisdiction under Section 263 was invalid as the AO had exercised due diligence, and the PCIT had not demonstrated how the assessment order was erroneous and prejudicial to the interest of the revenue. The assessee relied on several judicial precedents, including the decision of the Hon'ble Gujarat High Court in JCIT vs. Arvind Jewellers and the Hon'ble Calcutta High Court in PCIT vs. Kesoram Industries Ltd.

2. Whether the assessment order passed under Section 143(3) was erroneous and prejudicial to the interest of the revenue:

The Tribunal observed that the AO had issued detailed notices under Sections 142(1) and 133(6) to verify the loan transactions, and the assessee had furnished all necessary documents, including confirmations, PANs, balance sheets, and bank statements. The AO had accepted the genuineness of the transactions based on the evidences provided by the assessee and the lenders.

The Tribunal noted that the PCIT's main reason for exercising jurisdiction under Section 263 was the AO's failure to issue summons under Section 131. However, the Tribunal held that the PCIT should have conducted further enquiries to establish how the assessment order was erroneous and prejudicial to the interest of the revenue. The Tribunal relied on the decision of the Hon'ble Delhi High Court in ITO vs. D.G. Housing Projects Ltd., which held that the Commissioner must conduct necessary enquiries and establish that the AO's order was erroneous and unsustainable in law before invoking Section 263.

The Tribunal concluded that the PCIT had not demonstrated how the assessment order was erroneous and prejudicial to the interest of the revenue, particularly when the AO had conducted detailed enquiries and obtained confirmations from the loan creditors. The Tribunal held that the PCIT's exercise of jurisdiction under Section 263 was invalid as the twin conditions of the order being erroneous and prejudicial to the interest of the revenue were not satisfied.

Conclusion:

The Tribunal quashed the revisionary proceedings initiated under Section 263 and the consequent order passed by the PCIT. The appeal of the assessee was allowed, and the assessment order under Section 143(3) was upheld. The order was pronounced in the open court on 14th December 2022.

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