2023 (3) TMI 147 - AT - Income Tax

Revision u/s 263 by CIT - Addition u/s.56(2)(viia) - FMV of the share - As per CIT AO during the course of assessment proceedings has not examined the issue of applicability of provisions of Section 56(2)(viia) of the Act on account of investment in unlisted equity shares during the year - benchmark to be adopted whilst dealing with the issue as to whether or not an AO has carried out enquiry or verification - HELD THAT - PCIT has failed to appreciate that a due inquiry and application of mind was in fact exercised by the AO to arrive at its conclusion that no income had escaped assessment. It is crucial to note that the PCIT in its impugned order, contrary to the above stated facts, made the observation that even when the assessee had submitted details of FMV of the shares in question, showing that there was no income arising there from. The AO had examined and accepted the same, there was no error in the Assessment Order to that extant. We find that the ld. PCIT has failed to consider that Section 263 of the Act vests revisionary power in a superior officer and, therefore by the very inherent nature of such power, it does not allow for substitution of the view taken by the AO. The appreciation of the material placed on record before the AO is exclusively within the four corners of its domain and it cannot overlap with exercising revisionary powers u/s 263 on the ground that the AO should have arrived at a different conclusion basis the material on record. Case of the Assessee is squarely covered by the coordinate bench decision in the case of Pawansut Media Services vs. PCIT 2021 (11) TMI 924 - ITAT DELHI wherein on near identical facts, the Tribunal quashed the revisionary order u/s 263. Thus in the present case after examining the Explanation 2 to Section 263, submission of the ld. DR, ratio given by the ld. PCIT to treat the Assessment Order as erroneous so far it is prejudicial to the interest of the Revenue in the present case is concerned, we are of the view that the revisionary powers so conferred cannot be exercised to invalidate the action of AO and the Ld. PCIT was not justified in invoking the provisions of Section 263 of the Act to set aside the assessment order passed by AO u/s 143(3) of the Act. Ergo, the order of ld. PCIT passed u/s 263 is hereby quashed. Assessee appeal allowed.

Issues Involved:
1. Jurisdiction of Pr.CIT under Section 263 of the Income Tax Act.
2. Examination of issues not covered by Limited Scrutiny.
3. Detailed enquiries by AO on "Large Increase in Investment in Unlisted Securities".
4. Expansion of scope of Limited Scrutiny.
5. Error and prejudice to the interests of the Revenue.
6. Computation of purported addition under Section 56(2)(viia).
7. Consideration of ITAT's previous findings and directions.

Detailed Analysis:

1. Jurisdiction of Pr.CIT under Section 263 of the Income Tax Act:
The assessee challenged the jurisdiction of the Pr.CIT under Section 263, arguing that the pre-requisite conditions specified under this section were not satisfied. According to Section 263, the Pr.CIT can revise an order only if it is both erroneous and prejudicial to the interests of the Revenue. The Tribunal noted that the error must be an actual error of fact or law, not based on guesswork. The Tribunal referenced the Supreme Court judgment in Malabar Industrial Co. Ltd. vs. CIT, which stated that an order cannot be considered erroneous if two views are possible and the AO has taken one view.

2. Examination of issues not covered by Limited Scrutiny:
The assessee argued that the Pr.CIT erred in examining issues not covered by the Limited Scrutiny and directing the AO to make a de novo assessment on these issues. The Tribunal found that the scrutiny of share premium and investment in unlisted securities was one of the reasons for the case's selection for limited scrutiny. Hence, the Pr.CIT's examination was within the scope of the limited scrutiny.

3. Detailed enquiries by AO on "Large Increase in Investment in Unlisted Securities":
The Tribunal noted that the AO had made detailed inquiries during the assessment proceedings, including the source of investment, valuation reports under Rule 11UA, and supporting balance sheets. This indicated that the AO had conducted a due inquiry and applied his mind to the issue, which negated the Pr.CIT's claim of lack of inquiry.

4. Expansion of scope of Limited Scrutiny:
The assessee contended that the Pr.CIT expanded the scope of limited scrutiny, which can only be done at the AO's discretion. The Tribunal found that the AO had indeed examined the fair market value (FMV) of investments in unlisted securities, which was within the scope of the limited scrutiny. Therefore, the Pr.CIT's directive for a de novo assessment was not justified.

5. Error and prejudice to the interests of the Revenue:
The Tribunal observed that the Pr.CIT's order was based on a change of opinion rather than an actual error. The AO had conducted a due inquiry and accepted the FMV of investments, indicating no error in the assessment order. The Tribunal cited the Delhi High Court's judgment in PCIT vs. M/s. Brahma Centre Development Pvt. Ltd., which stated that the AO's application of mind is sufficient to negate claims of lack of inquiry.

6. Computation of purported addition under Section 56(2)(viia):
The Pr.CIT initially computed the purported addition at Rs. 135.11 crores, later revising it to Rs. 106.78 crores, and finally to Rs. 136.62 crores. The Tribunal found this arbitrary and noted that the Pr.CIT failed to appreciate the AO's due inquiry and application of mind. The Tribunal referenced the Delhi Tribunal's decision in Pushp Steel and Mining Private Ltd. vs. PCIT, which quashed a similar revisionary order under Section 263.

7. Consideration of ITAT's previous findings and directions:
The assessee argued that the Pr.CIT disregarded the ITAT's previous findings in a related case involving similar share transfer transactions. The Tribunal found that the AO had conducted a due inquiry within the parameters of limited scrutiny, and the Pr.CIT's order for a de novo assessment was not justified.

Conclusion:
The Tribunal quashed the Pr.CIT's order under Section 263, concluding that the AO had conducted a due inquiry and applied his mind to the issues within the scope of limited scrutiny. The Tribunal allowed the assessee's appeal, emphasizing that the revisionary powers under Section 263 cannot be exercised to invalidate the AO's action when due inquiry has been conducted.

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