2025 (1) TMI 328 - HC - Income Tax

Revision u/s 263 - scope of inquiry u/s 263 - no verification done by the AO during the assessment proceedings relating to the explanation to be forwarded by the assessee - audit party Opinion - HELD THAT - Sine-qua non for interference by the CIT u/s 263 of the Act to the assessment order passed by the AO is of satisfaction of certain conditions as noticed above i.e. that the order passed by AO is erroneous and secondly that the order results in prejudice to the revenue. In the present case, it is an admitted position that after the assessment order was passed, audit objections were raised with regard to inquiry said to have been conducted by the AO and the audit - party recorded several major audit objections with respect to the investment made by the assessee in mutual funds/shares. There was no verification done by the AO during the assessment proceedings relating to the explanation to be forwarded by the assessee. We, therefore, are satisfied that the order passed by the CIT un/s 263 of the Act in the facts and circumstances of the case cannot be said to be such which was to be interfered with by the ITAT. The view taken by the ITAT based on the judgment passed in B A Plantation and Industries Ltd. and another. 2006 (12) TMI 101 - GAUHATI HIGH COURT cannot be said to be correct interpretation of Section 263 of the Act and the record relating to any proceedings under the Act available at the time of examination by the Commissioner would also include the audit objections. In CIT vs. P.V.S. Beedies Pvt. Ltd. 1997 (10) TMI 5 - SUPREME COURT held that there can be no dispute that the audit party is entitled to point out a factual error or omission in the assessment. Reopening of the case on the basis of a factual error pointed out by the audit party is permissible under law. Decided in favour of revenue.

1. ISSUES PRESENTED and CONSIDERED

The core legal question in this case is whether the Income Tax Appellate Tribunal (ITAT) was correct in quashing the order passed under Section 263 of the Income Tax Act, 1961, by the Principal Commissioner of Income Tax (CIT). Specifically, the issue revolves around whether the CIT was justified in directing the Assessing Officer (AO) to conduct fresh inquiries regarding the ownership and entitlement of assets purportedly used as sources of income for investment in mutual funds, and whether the original order by the AO was erroneous and prejudicial to the interests of the revenue.

2. ISSUE-WISE DETAILED ANALYSIS

Relevant legal framework and precedents:

Section 263 of the Income Tax Act, 1961, empowers the CIT to revise an order passed by the AO if it is deemed erroneous and prejudicial to the interests of the revenue. The CIT can call for and examine the records of any proceeding and, after giving the assessee an opportunity to be heard, pass an order as justified by the circumstances.

Court's interpretation and reasoning:

The court examined whether the CIT's order under Section 263 was justified. The CIT had based the revision on audit objections indicating that the AO did not conduct necessary inquiries regarding the ownership and entitlement of assets linked to investments. The court noted that the CIT has the authority to examine the record, including audit objections, to determine if the AO's order was erroneous.

Key evidence and findings:

The key evidence was the audit objections raised post-assessment, which highlighted the AO's failure to verify the assessee's claims regarding asset ownership and investment sources. The court found that these objections were valid grounds for the CIT's intervention under Section 263.

Application of law to facts:

The court applied the provisions of Section 263, emphasizing that an order is erroneous if it lacks necessary inquiries or verification. The audit objections constituted a factual basis for the CIT's decision to revise the AO's order, which was deemed both erroneous and prejudicial to the revenue.

Treatment of competing arguments:

The appellant argued that the ITAT erred in interpreting the scope of Section 263, while the respondent contended that the ITAT's decision was correct. The court sided with the appellant, stating that the ITAT misinterpreted the law and failed to consider the audit objections as part of the "record" under Section 263.

Conclusions:

The court concluded that the CIT was justified in exercising powers under Section 263, and the ITAT's order quashing the CIT's decision was incorrect. The court set aside the ITAT's order and directed a fresh adjudication.

3. SIGNIFICANT HOLDINGS

Preserve verbatim quotes of crucial legal reasoning:

"The sine-qua non for interference by the CIT under Section 263 of the Act to the assessment order passed by the Assessing Officer is of satisfaction of certain conditions as noticed above i.e. that the order passed by Assessing Officer is erroneous and secondly that the order results in prejudice to the revenue."

Core principles established:

The judgment reinforces the principle that the CIT can revise an AO's order if it is erroneous and prejudicial to the revenue. Audit objections can be considered part of the record for the purposes of Section 263, and factual errors identified by audit can justify reopening an assessment.

Final determinations on each issue:

The court determined that the ITAT erred in quashing the CIT's order under Section 263. The order passed by the ITAT was set aside, and the case was remanded for fresh adjudication by the ITAT, taking into account the court's findings and the tax effect.

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