2025 (2) TMI 603 - AT - Income Tax

Revision u/s 263 - distinction between lack of inquiry and inadequate inquiry - disallowance of bogus losses on sale of steel scarp - HELD THAT - This is not a case where there was an omission on the part of the AO to examine the aspect of disallowance of bogus losses on sale of steel scarp. AO had put specific questions before the assessee during the course of assessment proceedings and had taken the assessee s reply on record. AO had also discussed this aspect as part of the assessment order and thereafter took a legally plausible view taking into consideration assessee s set of facts. This is not a case where no enquiry has been made by the Assessing Officer during the course of assessment proceedings. It is also not the case of the PCIT that the AO failed to apply his mind to the issues on hand or he had omitted to make enquiries altogether or had taken a view which was not legally plausible in the instant facts. As held by various Courts PCIT cannot in 263 proceedings set aside an assessment order merely because he has different opinion in the matter. In our view Section 263 of the Act does not visualise a case of substitution of the judgment of the PCIT for that of the AO who passed the order unless the decision is held to be wholly erroneous. PCIT on perusal of the records may be of the opinion that the estimate made by the officer concerned was on the lower side and left to the Commissioner he would have estimated the income at a figure higher than the one determined by the Income-tax Officer. That would not vest the Commissioner with power to re-visit the entire assessment and determine the income himself at a higher figure. Appeal of the assessee is allowed.

Summary

ISSUES PRESENTED and CONSIDERED

The core legal questions considered in this judgment include:

• Whether the Principal Commissioner of Income Tax (PCIT) was justified in invoking revisionary powers under Section 263 of the Income-tax Act, 1961, to hold that the assessment order was erroneous and prejudicial to the interest of the revenue.
• Whether the Assessing Officer (AO) conducted adequate inquiry into the genuineness of the transactions involving M/s Yug Tradelink Pvt. Ltd., which were deemed bogus by the PCIT.
• Whether the PCIT was correct in asserting that the AO failed to verify the entries of purchase and sales, thus rendering the assessment order erroneous.
• The scope and applicability of Section 263 in cases where the inquiry by the AO is considered inadequate by the PCIT.

ISSUE-WISE DETAILED ANALYSIS

1. Invocation of Section 263 by the PCIT

Relevant legal framework and precedents: Section 263 of the Income-tax Act empowers the PCIT to revise an assessment order if it is erroneous and prejudicial to the interest of the revenue. The distinction between lack of inquiry and inadequate inquiry is crucial, as established in precedents like CIT Vs. Sunbeam Auto and Gabriel India Ltd.

Court's interpretation and reasoning: The Tribunal noted that the AO had conducted inquiries and obtained responses from the assessee. The PCIT's invocation of Section 263 was based on the belief that the AO's inquiry was inadequate, not absent.

Key evidence and findings: The AO had requested and reviewed details of purchase and sales transactions, including ledger confirmations from M/s Global Metals and M/s Yug Tradelink Pvt. Ltd. The AO disallowed the loss claimed by the assessee after considering the DDIT's report.

Application of law to facts: The Tribunal emphasized that Section 263 cannot be used to substitute the judgment of the PCIT for that of the AO unless the AO's decision was wholly erroneous.

Treatment of competing arguments: The Tribunal considered the PCIT's argument that the AO should have conducted further inquiries but concluded that the AO's actions were within the scope of a reasonable inquiry.

Conclusions: The Tribunal found that the AO had conducted adequate inquiries and that the PCIT's invocation of Section 263 was unwarranted.

2. Adequacy of Inquiry by the AO

Relevant legal framework and precedents: The Tribunal relied on the principle that an AO's order cannot be deemed erroneous due to inadequate inquiry if some inquiry was conducted, as per CIT Vs. Sunbeam Auto and Gabriel India Ltd.

Court's interpretation and reasoning: The Tribunal determined that the AO had made a legally plausible decision based on the inquiries conducted, and that the PCIT's disagreement with the AO's conclusions did not justify revision under Section 263.

Key evidence and findings: The AO had examined the transactions and disallowed the loss based on the DDIT's report, indicating that the transactions were not genuine.

Application of law to facts: The Tribunal noted that the AO's decision was supported by evidence and inquiries, and the PCIT's differing opinion did not render the AO's decision erroneous.

Treatment of competing arguments: The Tribunal addressed the PCIT's concerns about the adequacy of the AO's inquiry but found that the AO's actions were reasonable and within legal bounds.

Conclusions: The Tribunal concluded that the AO had conducted sufficient inquiry, and the PCIT's invocation of Section 263 was not justified.

SIGNIFICANT HOLDINGS

• The Tribunal held that Section 263 proceedings cannot be initiated merely because the PCIT has a different opinion from the AO, especially when the AO has conducted adequate inquiries.
• It was established that the adequacy of an AO's inquiry is a matter of judgment, and the PCIT cannot impose his own standard of inquiry under Section 263.
• The Tribunal emphasized that the AO's decision must be wholly erroneous to justify revision under Section 263, which was not the case here.
• In conclusion, the Tribunal set aside the PCIT's order and allowed the assessee's appeal, reinforcing the principle that Section 263 cannot be used to supplant the AO's judgment with that of the PCIT.