2024 (9) TMI 1190 - AT - Income Tax

Revision u/s 263 - claim of accommodation entry - reliance on statements of third parties for accommodation entries - timelines for completing the assessment u/s 143(3) - HELD THAT - As evident that during the course of 147 proceedings, the assessing officer had duly enquired into this aspect regarding the claim of accommodation entry. Further, from the facts placed on record before us, the principal CIT has not given any specific finding as to how the assessment order was erroneous and it is evident that the principal CIT had taken recourse to 263 proceedings only with a view to extend the timelines for completing/framing of assessment under section 147 of the Act, which is not permissible in law. PCIT before holding the order of the Ld. A.O as erroneous in so far as prejudicial to the interest of revenue should have to conduct necessary enquiries or verification in order to show that the findings given by Ld. A.O is unsustainable in law. in the instant facts, we observe that the principal CIT has not given any independent finding as to how the assessment order is erroneous and hence unsustainable in law. In our considered view, it is a well-settled principle that in order to hold that the assessment order is erroneous insofar as prejudicial to the interests of the revenue, the principal CIT has to give an independent finding as to how on the basis of information available on record, the assessing officer has taken a legally unsustainable view, which is liable to be set aside. However, in the instant facts, no such finding has been given by the principal CIT. We observe that the assessee had given a specific submission to the effect that during the impugned year under consideration, the assessee had not earned any exempt Long term capital gains, but in fact had earned short term capital gains on which due taxes had also been paid, and therefore, there is no basis of assuming that during the impugned year under consideration the assessee had earn any long term capital gains on which no tax had been paid. Appeal of the assessee is allowed.

Issues Involved:
1. Jurisdiction under Section 263 of the Income-tax Act.
2. Adequacy of inquiry conducted by the Assessing Officer (A.O.) during reassessment.
3. Application of Explanation 2 to Section 263 for the Assessment Year 2013-14.
4. Reliance on statements of third parties for accommodation entries.
5. Examination of the assessment order's erroneous nature and prejudice to revenue.

Detailed Analysis:

1. Jurisdiction under Section 263 of the Income-tax Act:

The Assessee contested the jurisdiction assumed by the Principal Commissioner of Income Tax (PCIT) under Section 263, arguing that the reassessment order passed by the Assessing Officer (A.O.) was neither erroneous nor prejudicial to the interest of revenue. The Tribunal noted that the PCIT issued a notice under Section 263 after observing that the A.O. did not adequately examine the issue of accommodation entries and accepted the income declared by the assessee due to the impending time-barring date. The Tribunal referred to the case of Sir Ratan Tata Trust v. DCIT, where it was held that extending assessment timelines indirectly through Section 263 is not permissible.

2. Adequacy of Inquiry Conducted by the Assessing Officer (A.O.) During Reassessment:

The Assessee argued that the A.O. had conducted a full inquiry during reassessment proceedings, specifically examining the accommodation entries from Jignesh Shah and his associates. The Tribunal observed that the A.O. reopened the case under Section 147 based on information regarding accommodation entries and accepted the income declared by the assessee after considering the objections raised. The Tribunal emphasized that the PCIT must provide an independent finding showing how the A.O.'s order is legally unsustainable, which was not done in this case.

3. Application of Explanation 2 to Section 263 for the Assessment Year 2013-14:

The Assessee contended that Explanation 2, inserted w.e.f. 01.06.2015, should not apply to the Assessment Year 2013-14. The Tribunal did not specifically address this argument but focused on the broader issue of whether the PCIT conducted necessary inquiries to establish that the A.O.'s order was unsustainable.

4. Reliance on Statements of Third Parties for Accommodation Entries:

The PCIT relied on statements from Sanjay Shah and Jignesh Shah, who admitted to providing accommodation entries. The Tribunal noted that the Assessee had submitted evidence showing that no long-term capital gains were earned during the year under consideration and that short-term capital gains were duly taxed. The Tribunal found that the PCIT did not verify these submissions independently, which is necessary to hold an assessment order erroneous and prejudicial to revenue.

5. Examination of the Assessment Order's Erroneous Nature and Prejudice to Revenue:

The Tribunal highlighted that the PCIT did not provide a specific finding on how the A.O.'s order was erroneous. It referred to the case of Vinod Bhandari, which established that the PCIT must conduct inquiries or verification to show that the A.O.'s findings are unsustainable in law. The Tribunal also cited the case of Narayan Tatu Rane, reinforcing that the PCIT's opinion must be legal and judicious, not arbitrary.

Conclusion:

The Tribunal concluded that the PCIT failed to provide an independent finding showing the A.O.'s order was erroneous and prejudicial to revenue. The Tribunal set aside the order passed by the PCIT under Section 263, allowing the Assessee's appeal. The decision emphasized the necessity for the PCIT to conduct proper inquiries and provide specific findings before invoking Section 263.

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