2024 (7) TMI 1229 - AT - Income Tax

Revision u/s 263 - Addition u/s 68 - HELD THAT - Regarding the review by the PCIT, it is a settled law that for exercising revisionary powers u/s 263 of the Act, the order must be both erroneous and prejudicial to the interests of the revenue. This twin condition is highlighted in the decision of Malabar Industrial Co. Ltd. 2000 (2) TMI 10 - SUPREME COURT - The Court held that for an order to be revised under Section 263, it must be shown that the order is erroneous and such error has caused prejudice to the revenue. An incorrect application of law or a failure to make necessary inquiries would render an order erroneous. We noted the contention of the assessee that the AO s inquiry was neither inadequate nor insufficient. AO verified the identity, creditworthiness, and genuineness of the transactions in terms of Section 68 - AO s decision to accept the assessee's submissions after thorough verification cannot be deemed erroneous. We have also reviewed the judicial pronouncements relied upon by the assessee. These judicial precedents establish that revisionary action u/s 263 of the Act is not justified on grounds of inadequate inquiry if the AO has conducted sufficient inquiries and taken a permissible view. PCIT has not demonstrated that the AO's insufficient investigation has led to an erroneous assessment. In our opinion, inadequate inquiry alone does not justify revision unless it results in a prejudicial outcome for the revenue. Thus, if the AO has conducted an inquiry, however minimal, the PCIT must provide concrete evidence of the resultant error and prejudice to the revenue to justify invoking Section 263 of the Act. We hold that the order passed by the AO u/s 143(3) of the Act was neither erroneous nor prejudicial to the interests of the revenue. Therefore, the revisionary action taken by the PCIT u/s 263 of the Act is not justified. Thus, the appeal filed by the assessee is allowed, and the order passed by the Principal Commissioner of Income Tax under Section 263 of the Act is hereby quashed. Appeal of the Assessee is allowed.

Summary

Issues:
Challenge to revisionary powers under Section 263 of the Income Tax Act, 1961 based on alleged errors in assessment order.

Detailed Analysis:

Issue 1: Jurisdiction of PCIT under Section 263
The appeal contested the order passed by the Principal Commissioner of Income Tax (PCIT) under Section 263 of the Income Tax Act, 1961, concerning the assessment year 2018-19. The PCIT proposed revision of the assessment order due to alleged failure in verifying the creditworthiness of two depositors from whom the assessee firm had taken unsecured loans. The PCIT set aside the original assessment order and directed a fresh assessment. The appellant challenged the PCIT's jurisdiction, arguing that the order was passed in the name of a non-existing entity after the firm was converted into a private limited company. However, the tribunal decided to focus on the merit of the PCIT's order rather than the validity of both the AO and PCIT's orders.

Issue 2: Criteria for Revisionary Powers
The tribunal examined the criteria for exercising revisionary powers under Section 263 of the Act, emphasizing the need for an order to be both erroneous and prejudicial to the revenue. Citing legal precedents, the tribunal highlighted that a mere disagreement with the AO's view does not justify revisionary action unless the AO's decision is unsustainable in law. The tribunal noted that the AO had conducted thorough inquiries regarding the unsecured loans, including verifying the identity, creditworthiness, and genuineness of transactions. Legal rulings were cited to support the contention that revisionary action is not warranted if the AO has made sufficient inquiries and taken a permissible view.

Issue 3: Justification for Revisionary Action
The tribunal analyzed various legal judgments to establish that the PCIT's jurisdiction under Section 263 requires demonstrating both error and prejudice. It was emphasized that inadequate inquiry alone does not justify revision unless it leads to a prejudicial outcome for the revenue. The tribunal held that the AO's order was neither erroneous nor prejudicial to the revenue's interests, as the AO had conducted an adequate inquiry and verification process. Consequently, the revisionary action taken by the PCIT was deemed unjustified, leading to the allowance of the appeal and the quashing of the PCIT's order under Section 263.

In conclusion, the tribunal allowed the appeal filed by the assessee, ruling in favor of the assessee against the order passed by the PCIT under Section 263 of the Income Tax Act, 1961.