2024 (7) TMI 1500 - HC - Income Tax

Validity of Revision u/s 263 - non adhering to procedural requirements and non considring reply and the documents of assessee submitted - HELD THAT - Section 263 gives power to the Principal Chief Commissioner or the Officer as it is been prescribed that he may call for and examine the record of any proceeding under this Act, and if he considers that any order passed therein by the AO is erroneous, in so far as it is prejudicial to the interests of the revenue, he may, after giving the assessee an opportunity of being heard and after making or causing to be made such inquiry as he deems necessary, pass such order. The order of the Pr. CIT, therefore, necessarily would require to explain i.e. record reasons to exercise the power under Section 263 of the Act, 1961 to say that the order was prejudicial to the interest of Revenue. However, in case in hand after that proceedings were initiated, the enquiry was conducted and during such enquiry the reply and the documents were placed by assessee. Section 263 makes it incumbent to the Pr. CIT to conduct enquiry. The enquiry means not to shelve the reply and the documents but to deliberate upon it and the same cannot be set aside on the ground that the Officer is not satisfied with reply. The reasons for satisfaction or non-satisfaction are required to be recorded. In the instant case, after going through para 5 of the order, which is the substratum of the entire issue, it is manifest that the said procedure has not been followed. We allow the appeal and answer the question of law in favour of the assessee and remand back the case to the Pr. CIT to reconsider the reply and the documents of assessee.

Summary

Issues:
1. Interpretation of Section 263 of the Income Tax Act, 1961 regarding revision of assessment orders.
2. Proper conduct of enquiry by the Principal Commissioner of Income Tax under Section 263.
3. Adherence to procedural requirements and recording of reasons by the Principal Commissioner of Income Tax.
4. Judicial review of orders passed by the Principal Commissioner of Income Tax and the Income Tax Appellate Tribunal.

Issue 1: Interpretation of Section 263 of the Income Tax Act, 1961
The appellant, an apex body of a cooperative, challenged the revision proceeding initiated by the Principal Commissioner of Income Tax under Section 263 of the Income Tax Act, 1961. The appellant contended that the Assessing Officer did not conduct a proper inquiry regarding the genuineness of the appellant's contentions, leading to the revision order being erroneous and prejudicial to the revenue's interest. The Income Tax Appellate Tribunal upheld the revision order due to the appellant's failure to produce certain documents. However, the High Court scrutinized the provisions of Section 263, emphasizing the necessity for the Principal Commissioner to conduct a thorough inquiry, record reasons for dissatisfaction, and provide the assessee with an opportunity to be heard before passing any order.

Issue 2: Proper Conduct of Enquiry by the Principal Commissioner of Income Tax
The High Court highlighted that the Principal Commissioner of Income Tax must not merely shelve the assessee's reply and documents during the enquiry but must deliberate upon them. The court emphasized that the Principal Commissioner's satisfaction or dissatisfaction must be based on recorded reasons. In this case, the court found that the Principal Commissioner did not follow the required procedure as mandated by Section 263. The court noted that the enquiry should involve a detailed examination of the documents and replies provided by the assessee, rather than dismissing them summarily.

Issue 3: Adherence to Procedural Requirements and Recording of Reasons
The High Court observed that the Principal Commissioner's order under Section 263 must include recorded reasons explaining why the original assessment order was considered prejudicial to the revenue's interest. In this case, the court found that the Principal Commissioner failed to adequately explain the reasons for setting aside the assessment order and did not conduct a proper enquiry as required by law. The court emphasized the importance of procedural adherence and reasoned decision-making in exercising the revisionary powers under Section 263.

Issue 4: Judicial Review of Orders
Upon reviewing the orders of the Principal Commissioner of Income Tax and the Income Tax Appellate Tribunal, the High Court found that the orders did not satisfy the court. The court admitted the appeal based on the question of law regarding the confirmation of the Principal Commissioner's order by the Income Tax Appellate Tribunal without proper consideration of the defence raised by the assessee. Ultimately, the High Court allowed the appeal, directing the Principal Commissioner to reconsider the assessee's reply and documents, conduct a fresh assessment, and pass an order in accordance with the law and on its own merits.