2022 (4) TMI 234 - AT - Income Tax

Revision u/s 263 by CIT - claim of exemption u/s 54B towards long term capital gain on sale of land when no such claim u/s 54B - Scope of the amendment made in section 263 w.e.f. 01.06.2015. This amendment relates to Explanation 2 inserted in section 263 of the Act. HELD THAT - The order of the AO may be or may not be wrong. CIT cannot direct reconsideration on this ground but only when the order is erroneous. An order of remit cannot be passed by the CIT to ask the AO to decide whether the order was erroneous. This is not permissible. An order is erroneous, unless the CIT holds and records reason why it is erroneous - CIT must after recording reasons, hold that order is erroneous. The jurisdictional pre-condition stipulated is that CIT must come to the conclusion that the order is erroneous and is unsustainable in law. It was further observed by the Hon ble High Court DG Housing Projects Ltd. 2012 (3) TMI 227 - DELHI HIGH COURT that the material, which the CIT can rely up on includes not only the records as it stands at the time when the order in question was passed by the AO but also records as it stands at the time of the examination by the CIT. Nothing prohibits CIT from collecting and relying new/additional material which evidence to show and state that the order of the AO is erroneous. We find that Ld. PCIT in the present case has not carried out any enquiry of his own and has merely set aside the assessment to the file of the AO to re-examine the issue of claim of deduction u/s 54B towards LTCG on sale of agriculture land since no agriculture income has been reflected in the return of income by the assessee. Therefore, it is contrary to the guidelines as mandated in the Hon'ble Delhi High Court decision in the case of ITO v. DG Housing Projects Ltd. 2012 (3) TMI 227 - DELHI HIGH COURT Therefore, the consideration arrived at by the Ld. PCIT invoking provisions of section 263 of the Act on the issue recorded by him is not justified and cannot be sustained under the facts and circumstances of the present case. The co-ordinate bench of Mumbai ITAT has dealt with Explanation 2 as inserted by the Finance Act, 2015 in the case of Narayan Tatu Rane v. Income Tax Officer 2016 (5) TMI 1162 - ITAT MUMBAI to hold that the said Explanation cannot be said to have overridden the law as interpreted by the Hon'ble Delhi High Court in DG Housing Projects Ltd ( supra ), according to which the Ld. PCIT has to conduct an enquiry and verification to establish and show that the assessment order is unsustainable in law. The co-ordinate bench of Mumbai ITAT ( supra ) has further held that the intention of the legislature could not have been to enable the Ld. PCIT to find fault with each and every assessment order, without conducting any enquiry or verification in order to establish that the assessment order is not sustainable in law, since such an interpretation will lead to unending litigation and there would not be any point of finality in the legal proceedings. The opinion of the Ld. PCIT referred to in section 263 of the Act has to be understood as legal and judicious opinion and not arbitrary opinion. On the issue considered by the Ld. PCIT in the impugned order, no action u/s 263 of the Act is justifiable which cannot be sustained under the facts and circumstances of the present case and judicial precedents dealt herein above. We, therefore, quash the impugned order u/s 263 of the Act and allow the grounds raised by the assessee.

Summary

Issues Involved:
1. Jurisdiction of the Principal Commissioner of Income Tax (PCIT) under Section 263 of the Income-tax Act, 1961.
2. Examination of the claim of exemption under Section 54B of the Income-tax Act.
3. Adequacy of the Assessing Officer’s (AO) inquiry during the assessment proceedings.
4. Validity of the PCIT’s order setting aside the AO’s assessment.

Detailed Analysis:

1. Jurisdiction of the PCIT under Section 263:
The assessee challenged the jurisdiction assumed by the PCIT under Section 263 of the Income-tax Act, 1961. The PCIT invoked Section 263, considering the assessment order erroneous and prejudicial to the interest of the Revenue due to the alleged improper allowance of exemption under Section 54B. The Tribunal examined whether the PCIT had the necessary material on record to justify the initiation of proceedings under Section 263. It was noted that the PCIT must base his consideration on materials available at the time of examination and not on arbitrary or incorrect facts.

2. Examination of the Claim of Exemption under Section 54B:
The PCIT alleged that the assessee claimed an exemption under Section 54B on long-term capital gain (LTCG) on the sale of agricultural land without reflecting agricultural income in the return. However, the Tribunal found that no such claim under Section 54B was made in the return of income filed by the assessee. The Tribunal highlighted that the PCIT's assumption was based on a misconception of facts, as verified from the return of income and computation of income, where no claim under Section 54B was reported.

3. Adequacy of the AO’s Inquiry During the Assessment Proceedings:
The Tribunal observed that the AO had issued notices under Sections 143(2) and 142(1) of the Act and conducted inquiries into the reasons for selecting the case for scrutiny, including the claim of large exempt income and low capital gains. The assessee had provided necessary documents, including details of the sale of property and calculation of capital gain. The Tribunal noted that the AO had made adequate inquiries and taken a permissible view based on the submissions and documents provided by the assessee.

4. Validity of the PCIT’s Order Setting Aside the AO’s Assessment:
The Tribunal held that the PCIT's order setting aside the AO's assessment was based on an incorrect assumption that the assessee claimed exemption under Section 54B without reflecting agricultural income. The Tribunal emphasized that the PCIT must record a clear finding on how the AO’s order was erroneous and prejudicial to the interest of the Revenue. The Tribunal referred to judicial precedents, including the Supreme Court and High Court decisions, which mandate that the PCIT must conduct necessary inquiries and provide cogent reasons for invoking Section 263. The Tribunal concluded that the PCIT had not verified the facts correctly and had not established that the AO’s order was erroneous and prejudicial to the Revenue.

Conclusion:
The Tribunal quashed the PCIT’s order under Section 263, holding that the assumption of jurisdiction was based on incorrect facts and that the AO had conducted adequate inquiries during the assessment proceedings. The appeal of the assessee was allowed, and the assessment order passed by the AO was upheld.