ITAT Quashes Section 263 Revision After AO Examined Claims and Adopted a Permissible View

Suraj Dada Vs PCIT (ITAT Chandigarh)

Section 263 Cannot Replace an AO’s Examined, Permissible View Merely Because the Commissioner Wants Further Enquiry

Background

The Chandigarh Tribunal quashed the revisionary order under Section 263 and restored the original assessment, holding that the Assessing Officer had examined the disputed claims and adopted a permissible view. The Principal Commissioner could not treat the assessment as erroneous merely because he considered further verification necessary or preferred a different conclusion.

The assessee carried on a motor dealership business as proprietor of Dada Motors, alongside insurance and finance activities. Due to advancing age, he inducted his son and grandson into the business through Dada Motor Enterprises LLP.

The assessment was selected for complete scrutiny to examine several matters, including business loss, liabilities, capital gains on property and depreciation. After issuing notices and considering the assessee’s replies and documents, the AO completed the assessment on 27 March 2024, accepting the returned income.

Issues Raised in Revision

The Principal Commissioner questioned three aspects of the assessment.

First, the assessee had transferred the entire stock to the LLP on 11 June 2021, but continued claiming administrative and interest expenditure. These claims resulted in a business loss of approximately ₹5.57 crore, which was set off against other income. The Commissioner considered that expenditure should have been restricted to the period before the transfer or examined for its attribution to the LLP.

Second, he questioned the verification of the cost of improvement claimed while computing a long-term capital loss of approximately ₹25.83 crore on sale of property. He also raised doubts about the asset’s character and whether depreciation had previously been claimed.

Third, he considered that additions and adjustments in the fixed-asset schedule had not been adequately examined.

The assessment was consequently set aside for fresh enquiries.

Enquiry Was Evident from the Assessment Record

The Tribunal examined the notices issued under Section 142(1), the assessee’s replies and the supporting documents.

The AO had specifically called for details concerning the business, succession arrangement, loans, property sale, improvement expenditure and interest. The assessee furnished the succession agreement, audited accounts of both entities, purchase deeds, construction ledgers, loan statements and other relevant records.

The Tribunal therefore rejected the allegation that the claims had been accepted mechanically. The assessment record demonstrated enquiry followed by acceptance of the explanations.

It clarified that an assessment order need not contain an elaborate discussion of every document. Where the record establishes specific examination, absence of detailed reasoning in the final order cannot automatically be equated with absence of enquiry.

Transfer of Stock Did Not Establish Complete Business Closure

On administrative and interest expenditure, the Tribunal found that the assessee’s business had not completely ceased merely because stock was transferred to the LLP.

The financial statements continued to reflect borrowings, debtors and liabilities. The assessee also earned commission and insurance income during the year.

The expenditure included rent, commission, insurance and other administrative costs connected with his activities. Many obligations were contractual or recurring and could not be terminated instantaneously during restructuring.

The Tribunal held that artificially dividing the expenditure solely by reference to the stock-transfer date was unjustified. Interest was also allowable in the assessee’s hands because business activities continued and the borrowings remained with him.

Revenue Prejudice Was Also Examined

The assessee furnished comparative computations showing that shifting the administrative and finance expenditure to the LLP would reduce the combined tax liability by approximately ₹15.64 lakh.

The Tribunal accepted this argument on the facts and held that the proposed adjustment would actually reduce overall revenue. Consequently, the assessment could not be characterised as prejudicial to the Revenue on this issue.

This was an additional finding supporting the conclusion that both statutory conditions for revision were not satisfied.

Property Cost and Fixed-Asset Adjustments

The Tribunal found that the property had been acquired as an investment, developed and let out for earning rental income. The rental receipts were assessed under “Income from house property”, and no depreciation had been claimed on the land or building.

Construction expenditure had been recorded in audited accounts over earlier years and was supported by ledgers, bank borrowings and loan statements. The AO had specifically sought and received explanations concerning these costs.

The fixed-asset adjustments also represented internal transfers of existing assets between branches, rather than fresh acquisitions. Ownership remained with the assessee, and the adjustments had been explained during assessment.

Revision on these grounds was therefore unsustainable.

Principles Governing Section 263

Relying on Malabar Industrial Co. Ltd. v. CIT, 243 ITR 83 (SC), the Tribunal reiterated that an order must be both erroneous and prejudicial to the interests of the Revenue.

A permissible view adopted after enquiry cannot be displaced merely because the Commissioner prefers another view. Section 263 does not confer appellate power to substitute that preference.

The Tribunal distinguished the Revenue’s reliance on CIT v. Paville Projects Pvt. Ltd., M.R. Apparels Pvt. Ltd. and Zuari Maroc Phosphates Ltd., observing that those decisions involved materially different circumstances concerning legally unsustainable conclusions or failure to examine relevant matters.

Decision and Author’s Comments

The Tribunal allowed the appeal, quashed the Section 263 order and restored the assessment.

The practical lesson is that the strongest defence against an allegation of inadequate enquiry lies in the assessment record: specific questions, complete replies and supporting evidence.

The decision does not immunise every assessment in which a notice was issued. Its protection rests on meaningful examination and a legally permissible conclusion. Equally, business restructuring must be assessed through actual continuing activities and obligations; transferring stock does not, by itself, establish that every expense thereafter belongs to the successor entity.

Cases Discussed

• Malabar Industrial Co. Ltd. v. CIT — Supreme Court authority on the twin conditions for revision under Section 263 and the principle that a permissible view cannot be displaced merely because the Commissioner prefers another view.
• CIT v. Paville Projects Pvt. Ltd. — distinguished on the facts concerning a legally unsustainable view and loss of lawful revenue.
• M.R. Apparels Pvt. Ltd. v. PCIT — distinguished because the AO had made specific enquiries in the present case.
• Zuari Maroc Phosphates Ltd. v. PCIT — distinguished as involving failure to make necessary enquiries.
• DG Housing Projects Ltd. — cited in the revisionary order on the distinction between lack of enquiry and inadequate enquiry.
• Nagesh Knitwear Pvt. Ltd. — cited in the revisionary order on the enquiry required of the AO.
• Gee Vee Enterprises — cited in the revisionary order in support of the proposed revision.
• PCIT v. Rinki Shashikant Gandhi — referred to in the Tribunal’s discussion of the application of the principles governing Section 263.
• PCIT v. Clix Finance India (P.) Ltd. — referred to in the Tribunal’s discussion of the application of the principles governing Section 263.

FULL TEXT OF THE ORDER OF ITAT CHANDIGARH

1. By way of this appeal, the assessee assails invocation of revisionary jurisdiction u/s 263 by Ld. Pr. Commissioner of Income Tax, Ludhiana-1 (Pr. CIT) for the Assessment Year (AY) 2022-23 vide impugned order dated 24-03-2026 proposing revision of an assessment as framed by Ld. Assessing Officer (AO) u/s 143(3) r.w.s. 144B of the Act on 27-03-2024 accepting returned income of the assessee.

2. The Ld. AR advanced arguments supporting the assessment order and made out a case of one of the possible views as taken by Ld. AO on the flagged issues during the course of regular assessment proceedings. Reference has been made to various notices issued u/s 142(1) during the course of assessment proceedings and the assessee’s replies thereto. The Ld. AR contended that sufficient explanations and documents were already been furnished by the assessee during the course of regular assessment proceedings itself. It has further been contended that the assessment was framed with due application of mind and therefore, the revision of the assessment was unjustified. Reference has been made to various judicial decisions, the copies of which have been placed on record. The Ld. CIT-DR, likewise, advanced vehement arguments supporting the impugned revisionary order and referred to various case laws. Having heard rival submissions and upon perusal of case records, the appeal is disposed-off as under.

3. From the case records, it emerges that the assessee being resident individual carried its business as proprietor of M/s Dada Motors. The return of income as filed by the assessee was selected for scrutiny under CASS to examine various issues viz. High Creditors / Liabilities, claim of Business Loss, remuneration paid by the firm, capital gains / income on sale of property, depreciation claimed by the assessee. During the course of assessment proceedings, various notices were issued by Ld. AO u/s 142(1) from time-to-time calling for various details from the assessee. The same has been tabulated at Para-3 of the assessment order. The required details and submissions were filed by the assessee vide its replies dated 06.12.2023 and 27.03.2024. It transpired that the assessee acted as proprietor of M/s Dada Motors who was engaged as motor dealers. The assessee earned business income, income from insurance and finance business besides income from house property. Due to old age, the assessee decided to induct his son and grandson into the business and the proprietorship concern became a partnership / LLP under the name & style of M/s Dada Motor Enterprises LLP who started running the same business w.e.f. 01.04.2021. The assessment order takes note of the fact that the assessee submitted computation of income, audited financial statements, copies of bank account statements, copy of sale and purchased deed, sufficient evidences in support of cost of improvement and other documents related to issues as flagged during assessment proceedings. These submissions were examined on test check basis and the returned income of the assessee stood accepted by Ld. AO.

Revisionary Proceedings

4.1 Subsequently, Ld. Pr. CIT, upon perusal of case records, show-caused the assessee on 10.03.2026 flagging the issue that though the assessee transferred entire stock to M/s Dada Motor Enterprises LLP on 11.06.2021, it claimed administrative and interest expenses which resulted into business loss of Rs.557.48 Lacs. The resultant business loss was set-off against rental income and income from other sources. The expenses ought to have been restricted proportionately up-to 11.06.2021 being the period during which the business was carried on by the assessee himself. The Ld. AO did not verify whether the expenses as claimed were attributable to period prior to transfer of business or whether these were allowable in full. The allowability of such expenses and consequential business loss remained unverified.

4.2 The second issue was capital gain on sale of land. While computing capital gains, the assessee claimed cost of improvement for Rs.17.42 Crores stated to be incurred during FYs 2007-08 to 2013-14. To support the same, the assessee furnished ledger account reflecting improvement expenses in the books of accounts and a loan issuance agreement from an NBFC against the said land. However, Ld. AO failed to verify whether the land was a ‘capital asset’ or a ‘business asset’ and whether the assessee had claimed the depreciation on the cost of improvement to the said land. The cost of improvement was accepted without proper verification of supporting documents. The assessee computed capital loss of Rs.25.83 crores which was carried forward to subsequent years. In the absence of proper verification, the allowability of such capital loss remained unverified. Further, Ld. AO did not examine the additions / adjustments made in the depreciation schedule / fixed asset chart as furnished by the assessee. The Ld. AO completed the assessment in a routine and mechanical manner without conducting the necessary enquiries, verification and cross-checks that were required in the facts and circumstances of the case. The failure to make such enquiries has resulted in the issues remaining unverified and unexplained. Accordingly, the assessment was held to be erroneous and prejudicial to the interest of the revenue and proposed to be revised in terms of Section 263.

4.3 The assessee, in its reply dated 17.03.2026 (extracted in the impugned order), furnished issue-wise rebuttal to the flagged issues. It was stated that the assessee was engaged in trading of motor vehicles and due to advance age, it was decided to induct the next generation of family into the business with a view to ensure continuity and smooth management of existing operations. Therefore, the proprietorship concern M/s Dada Motors was converted into LLP namely M/s Dada Motor Enterprises LLP. The entire stock of the proprietorship concern was transferred on 11.06.2021. On the issue of administrative expenses for Rs.142.33 Lacs, the assessee furnished detailed break-up of the same. The same include rent, commission expenses, insurance, legal & professional charges and other administrative expenses which were stated to be fixed and recurring business expenditure and directly relatable to the income earned from commission and insurance business of the assessee. These expenses were stated to be incidental business expenses, statutory expenditure and expenses directly related to assessee’s business operations. The substantial expenditure to the extent of 70% was fixed expenses in nature which were incidental or incurred towards business operations of the assessee. These expenses were not directly linked with the sales arising from the transfer of stock from proprietorship concern to LLP concern. Further, the nature of expenses was such that they could not be stopped overnight. These expenses reflected substantial fall during this year in comparison to earlier year. It was further explained that in the process of restructuring and transfer of business, the close of the existing business operations could not occur instantaneously. There are certain expenses which are necessary to continue to be incurred towards administration, maintenance, statutory compliance, settlement of pending obligations and completion of residual business activities. Accordingly, even after the transfer of the main business operations, such administrative and operational expenses are normally incurred during the transitional phase and could not, therefore, arbitrarily be disallowed or proportionally restricted merely on the basis of date of transfer of stock. Therefore, the aforesaid claim of administrative expenses was genuine, reasonable and wholly incurred for assessee’s business purposes. The allegation made in the show-cause notice was unfounded.

4.4 On the issue of interest expenditure for Rs.535.89 Lacs, the assessee similarly furnished detailed break-up of the same along with documentary evidences including ledger accounts, loan account statements and repayment schedule. It was stated by the assessee that the loans were used for carrying out business activities in the ordinary course of business and the same was an allowable expenditure for the assessee. The interest expenses did not have any direct nexus with sale or operating income of the business. These expenses represent financial cost arising from borrowings undertaken by the assessee and were in the nature of fixed financial obligations. The said expenses could not be said to be directly linked with the transfer of stock to LLP or with the business operations carried on only up-to 11.06.2021. Therefore, the observation in the show-cause notice was factually incorrect and legally untenable. It was reiterated that during the process of restructuring and transfer of business, the closure of the existing business operations could not occur instantaneously rather certain financial obligations continue to subsist during the transitional phase. Therefore, the expenses could not arbitrarily be disallowed merely on the basis of date of transfer of stock. The said expenses were not directly linked with day-to-day business operations of the assessee and the same had reduced substantially in this year in comparison to preceding year which support the claim of the assessee.

4.5 Another submission was of revenue neutrality. If the administrative and interest expenses were transferred to LLP entity, the same would not be prejudicial to the interest of the revenue. Rather, such an adjustment would lead to reduction in overall tax liability thereby demonstrating that the assessment order as passed by Ld. AO had not caused any prejudice to the revenue. The necessary computations, demonstrating such overall tax effect have been tabulated as under: –

Tax Liability if expenses are shifted to LLP:

–

Tax Liability comparison

From comparative analysis, it was evident that if the twin expenses were shifted from M/s Dada Motors to LLP concern, overall tax liability would come down by Rs.15.64 Lacs. Thus, such an adjustment would actually result in loss to the revenue which clearly establishes that the assessment order as passed by Ld. AO could not be said to be prejudicial to the interest of the revenue and the same was not amenable to revision u/s 263.

4.6 On the issue of capital gains computations, it was explained that the land under consideration was sold for Rs.900 Lacs. The said land was acquired for Rs.34.03 Lacs. The assessee constructed building for Rs.16.19 Crores during FYs 2007-08 to 2013-14 on that land. Taking these figures, the capital-loss was computed at a loss of Rs.25.83 Crores. The year-wise indexed cost of improvement was reflected at appropriate places in the Income Tax Return. On the issue of nature of capital asset, it was duly explained that the land was acquired as an investment in FY 2006-07 and the assessee constructed building thereupon. After construction, the property was let out and used solely for earning rental income. The property was never used for business purposes at any point of time. The asset was reflected as an investment in the schedule of fixed asset and the rental income was offered and assessed as ‘income from house property’. No depreciation on the building was ever claimed which was evident from depreciation chart forming part of audited financial statements. In this regard, Ld. AO specifically called for required details and explanation regarding the cost of improvement which were duly been furnished by the assessee along with supporting documents to the satisfaction of Ld. AO. The allegation that the issue was not examined during assessment proceedings was misconceived. Further, the construction expenses were duly accounted for in the audited financial statements during the respective years. In support, copy of ledgers of expenses incurred on improvement of land was also furnished. Considering the fact that the expense records pertain to more than 18 years old, the assessee faced practical difficulty in locating the complete supporting documents. However, the majority of these expenses were incurred out of amounts disbursed through term loans obtained from banks and financial institutions for the purposes of reconstruction. Therefore, the claim of cost of improvement was reasonable, genuine and bona-fide. The copies of bank loan statements along with construction / building ledgers were also furnished.

4.7 On the issue of additions / adjustment of fixed assets, it was explained that the same does not represent any fresh capital expenditure during the year but the addition was on account of transfer of existing assets from one branch of the assessee entity to another branch of the same entity. The said assets were transferred at their original book cost and the ownership of the asset continues to remain with the assessee. The additions merely represent internal classification / transfer of assets within the books of accounts and not indicate acquisition of any new assets. The sales / adjustments in the fixed schedule were duly explained by the assessee with detailed break-up.

4.8 The assessee furnished another detailed reply on 18.03.2026 reinforcing the aforesaid submissions and explanations and assailed the proposed revision of the order.

4.9 The Ld. Pr. CIT observed that fundamental issue was whether administrative and interest expenses were laid out wholly and exclusively for the purposes of the business carried on by the assessee during the relevant previous year. Once the assessee had transferred the entire business undertaking to the LLP on 11.06.2021 and it was no longer carrying on the business thereafter in his individual capacity, the allowability of expenses incurred post such date could not be justified merely on the ground that they were fixed or unavoidable in nature. Further, the fixed expenses such as rent, insurance and professional charges are allowable only if they relate to premises, assets or activities used for the assessee’s own business. However, after the transfer of business, these premises and assets were utilized by the LLP and therefore, the corresponding expenses would be attributable to the LLP concern only. The commission and insurance expenses were directly linked to earning of specific incomes and therefore, the same could not be treated as independent of business operations. The classification of expenses as “fixed” does not override the requirement of establishing a direct nexus with taxable business activity. A perusal of the assessment records reveals that although certain details may have been called for by Ld. AO, there was no discussion, verification or finding in the assessment order regarding the allowability of expenses post 11.06.2021. The AO has failed to examine whether the expenses claimed pertain to the period during which the business was carried on by the assessee and whether such expenses were incurred wholly and exclusively for the purposes of business as required u/s 37(1) of the Act. The Ld. AO has, thus, completely failed to apply correct legal provisions. The failure of Ld. AO to carry out necessary enquiries / verification has rendered the assessment order erroneous and prejudicial to the interest of the revenue within the meaning of Section 263. The argument that the expenses could not be stopped overnight was a general commercial assertion but does not, ipso facto, establish their deductibility under the Act. Each item of expenditure was required to be examined with reference to its nexus with the business activity of the assessee. Once the business is transferred and no business activity is carried on thereafter by the assessee, the expenses incurred beyond such date could not automatically be allowed unless their nexus with business was established. The argument that administrative & interest expenses declined substantially in comparison to the preceding year was irrelevant since the issue was whether the expenditure claimed during the relevant year was allowable in law having regard to the fact that the assessee had ceased to carry on business in his individual capacity after 11.06.2021. Even if the expenses had reduced, the same could not, ipso facto, justify their allowability for the entire year without examining the period to which they pertain and their nexus with the business activity of the assessee. The comparison of expenses with the preceding year was not determinative of allowability under the Income-tax Act, 1961. Each assessment year is a separate unit of assessment and the admissibility of expenditure has to be examined independently for the relevant previous year based on the facts prevailing during that year. In the present case, the relevant distinguishing fact was the transfer of the business undertaking to the LLP during the year, which fundamentally alters the basis on which expenditure could be claimed by the assessee. Therefore, reliance on past trends or comparative ratios does not substitute the requirement of verifying whether the expenditure was incurred wholly and exclusively for the purposes of the business carried on by the assessee during the relevant period and thus, totally irrelevant. It was the duty of the assessee to furnish bifurcation of expenses incurred before and after the transfer of business. It was obligatory for Ld. AO to call for such bifurcation and thereafter, conduct necessary enquiries and verification as regards allowability of expenses in which AO completely failed. On examination of the records, it was further observed that the assessee’s sales as reflected in the accounts were not entirely in the nature of regular business turnover arising from independent third-party transactions but a substantial portion of the figure represents transfer of stock to the LLP consequent to conversion / restructuring of the business. The sales till date of transfer of stock were Rs.62 Lacs approx. Such stock transfer, being in the nature of an internal reorganization of business rather than revenue-generating activity, was not trading turnover for the purpose of justifying expenditure. When the element of real income-generating activity was minimal, the claim of substantial administrative expenses for the entire year assumes greater significance and required stricter scrutiny. Therefore, the contention of the assessee that the expenses are justified based on the level of sales could not be accepted and the underlying premise itself was flawed. Therefore, the purported “reasonableness” was completely disconnected from actual business activity and revenue generation. The Ld. AO failed to examine this crucial aspect and accepted the figures at face value without verifying the true nature of transactions. The failure of Ld. AO to examine the issue and passing the assessment order without due application of mind renders assessment order to be erroneous and prejudicial to the interests of the revenue within the meaning of Section 263. Further, a business restructuring may be a valid commercial decision, however, the allowability of expenditure under the Income-tax Act, 1961 is governed strictly by statutory provisions and not merely by commercial expediency. The test u/s 37(1) remains whether the expenditure was incurred wholly and exclusively for the purposes of the business carried on by the assessee during the relevant previous year. In the present case, business undertaking stood transferred to the LLP on 11.06.2021 and thereafter, the business was carried on by a separate legal entity. Once such transfer had taken place, the assessee could not, as a matter of course, claim expenditure for the period subsequent to such transfer on the ground of restructuring. Once the LLP came into existence and commenced business operations, it is that entity which was required to bear the expenses relating to such operations. Allowing the assessee to claim such expenditure in his individual capacity would amount to permitting a misallocation of expenses between two distinct assessees which is not permissible under law. The Ld. AO failed to carry out such examination and verification.

4.10 Similar observation was made on the claim of interest expenses. Once the business is transferred, the assessee ceased to conduct operations and expenses incurred post-transfer do not relate to the generation of income in the hands of the assessee. Therefore, only those expenses which are directly attributable to the operations, before the transfer, could be allowed in the hands of the assessee. The argument that obligations continue to subsist ignores the statutory requirement of period-wise attribution. The Ld. AO failed to make any computation or verification to segregate expenses applicable prior to 11.06.2021 and those incurred post-transfer. If finance charges do not relate to business operations of the assessee, then such claim of the assessee was liable to be rejected including the period up-to 11.6.2021. If the interest-bearing funds were used to run assessee’s business operations, then in light of the fact that post 11.6.2021, these funds have been used by LLP, the expenses relatable to post-transfer are attributable to the new entity and clearly disallowable here. The erroneous allowance of these expenses for full year had resulted in an inflated business loss which has been set-off against other heads of income, thereby reducing the tax liability and thus, causing prejudice to the interest of the revenue.

4.11 The assessee’s argument that there was no loss of revenue was not tenable in law. Each assessee is a separate taxable entity under the Act and the correctness of assessment has to be examined independently in the hands of each assessee. Therefore, the argument of tax neutrality was held to be devoid of merits.

4.12 It was further observed by Ld. Pr. CIT that mere existence of a notice or query by Ld. AO does not preclude the jurisdiction of the Commissioner to revise an order if it is found to be erroneous or prejudicial. In the fact of the present case, there was no enquiry or application of mind by Ld. AO on the stated issue. The assessment order does not contain any discussion or finding on the issues under consideration nor was there any material on record to demonstrate that Ld. AO examined the allowability of the claim. The absence of any reasoning or verification clearly establishes that this is not a case of inadequate inquiry but a case of complete lack of inquiry. The distinction between “lack of inquiry” and “inadequate inquiry” has been well recognized in judicial precedents and it is settled that where there is a total absence of inquiry, the provisions of Section 263 are fully attracted. Reference was made to various judicial decisions to justify the revision of the order. The same includes the decision of Hon’ble Delhi High Court in the case of DG Housing Projects Ltd. (343 ITR 329), the decision in Nagesh Knitwear Pvt. Ltd. (345 ITR 135), the decision in Gee Vee Enterprises (99 ITR 375) to support the proposed revision of the order. The decisions as quoted by the assessee were held to be distinguishable.

4.13 At para-6 of the impugned order, the observation on the issue of Long-Term Capital Loss has been enumerated. It was alleged that Ld. AO failed to carry out necessary enquiries and verification with respect to nature of asset, allowability and genuineness of cost of improvement, depreciation as claimed on such asset and examination of deprecation schedule and asset records. It was held that the assessment order was passed without due application of mind in a mechanical manner. The genuineness, quantum and allowability of cost of improvement remain unverified. The Ld. AO failed to discharge his duty to conduct proper enquiry. The Long-Term Capital Loss was accepted without verification.

4.14 Finally, the assessment was set aside and Ld. AO was directed to frame fresh assessment after detailed enquiries with opportunity of hearing to the assessee. Aggrieved as aforesaid, the assessee is in further appeal before us.

Our findings and Adjudication

5. From the enumerated facts, it emerges that assessee’s case for this year was subjected to scrutiny under CASS to examine various issues viz. High Creditors / Liabilities, claim of Business Loss, remuneration paid by the firm, capital gains / income on sale of property and depreciation as claimed by the assessee. During the course of assessment proceedings, various notices were issued by Ld. AO u/s 142(1) from time-to-time calling for various details from the assessee. In notice u/s 142(1) dated 23.11.2023, the assessee was required to file detailed note on its business, computation of total income, financial statements, details of unsecured loans, bank statement etc. In reply dated 06.12.2023, it was duly explained by the assessee that he was a proprietor of M/s Dada Motors which acted as dealer of Bajaj Auto Ltd., Mahindra & Mahindra Ltd. & Nissan Motor India Pvt Ltd. As part of incidental activities of this very business, the assessee derived income from insurance and finance business. Along with the reply, the assessee duly furnished business succession agreement dated 01.04.2021 executed between M/s Dada Motors and M/s Dada Motor Enterprises LLP. The copy of certificate of incorporation of M/s Dada Motor Enterprises LLP dated 04.12.2020 was also furnished. The copies of audited financial statements of both the entities were furnished. The complete details of unsecured loans as called for by Ld. AO was also furnished. The copy of purchase deeds dated 04.06.2007 & 18.01.2007 (pertaining to the property as sold by the assessee during this year) was also furnished.

6. Thereafter, Ld. AO issued another show-cause notice on 24.03.2024 requiring the assessee to furnish details of property sold during the year along with sale deed, cost of improvement details, disallowance of interest etc. The assessee, vide its reply dated 27.03.2024, furnished its explanation and various documents which include (i) permission letter from Chief Town Planner, Punjab approving the change of land use from agriculture to industrial / commercial use; (ii) copies of closure agreement with Bajaj Ltd. dated 19.03.2012 to substantiate the fact that warehouse was constructed on the said land which was then given on lease to Bajaj Ltd.; (iii) Copies of the agreement with Nestle India Limited along with sanction letters for the relevant term loan which were taken for construction of development of cold storage facilities; (iv) Ledger extracts of building under construction a/c and building account since 01.04.2007 onwards along with electricity installation and fitting account; (v) Ledger of interest paid on loan from 01.04.2021 to 31.03.2022 substantiating interest and financial charges; (vi) copies of loan statements of the lender entities evidencing the cost of improvement; (vii) Loan ledgers evidencing loan repayment.

7. From above facts, it could be ascertained that detailed queries were raised by Ld. AO on various issues during the course of regular assessment proceedings itself. The assessee furnished detailed explanations as well as documentary evidences in support of its various claims. After due consideration thereof, Ld. AO accepted the returned income and chose not to draw any adverse inference against the assessee. Apparently, Ld. AO was satisfied with the aforesaid explanation of the assessee and chose not to raise any further queries. Under these circumstances, it could be well said that the issues as identified during complete scrutiny proceedings including assessee’s claim of administrative and interest expenditure as well as computation of capital loss on sale of property was duly been enquired / verified by Ld. AO after due examination of complete records including audited financial statements of both the entities and after having been satisfied with assessee’s detailed replies, the claim of the assessee stood accepted by Ld. AO. One the basis of these facts, it could be concluded that Ld. AO had taken one of the possible views in the matter which could not have been revisited by Ld. Pr. CIT u/s 263.

8. So far as the allowability of administration and interest / finance charges for the assessee are concerned, we have perused the audited financial statements of M/s Dada Motors as placed at Page Nos.203 to 210 of the paper-book. Upon perusal of the same, it could be seen that though the assessee has transferred its stock to M/s Dada Motor Enterprises LLP during the year, its business has continued during the year. In the financial statements, the assessee continues to retain loan funds, sundry debtors, loans (liabilities) and current liabilities. The same would, prima-facie, establish that assessee’s business has not completely been discontinued during this year and the same continue as such. Therefore, question of disallowance of administrative and interest expenses in the hands of assessee do not arise. The perusal of administrative expenditure would establish that these expenditures are primarily in the nature of rent, commission, insurance & other administrative expenses. The rent is fixed and recurring business expenditure for the assessee. The commission & interest expense is directly relatable to commission income and insurance income as earned by the assessee during the year and offered to tax by the assessee himself. The other administrative expenditure is directly relatable to business operation of the assessee. A substantial portion of such expenditure is fixed incidental business expenses or incurred towards earning other operating income. The same does not have any relation with the transfer of stock from M/s Dada Motors to LLP concern. The nature of expenses is such that the same are mostly contractual obligations which could not be stopped altogether instantaneously. Therefore, the artificial bifurcation of these expenses between the two entities as proposed by Ld. Pr. CIT, is not, at all, justified. These expenses are incurred for the purpose of assessee’s own business and therefore, allowable in the hands of the assessee himself. Similarly, the interest expenditure is allowable in the hands of the assessee only since the business has continued and loan funds (secured and unsecured loans) have been retained by the assessee. Therefore, there arises no question to transfer these expenses to LLP entity. The contention that during the process of restructuring and transfer of business, the closure of the existing business operations could not occur instantaneously rather certain financial obligations continue to subsist during the transitional phase, is to be accepted. Therefore, these expenses could not arbitrarily be disallowed merely on the basis of date of transfer of stock. The said expenses were not directly linked with day-to-day business operations of the assessee and the same has reduced substantially in this year in comparison to preceding year which duly supports the claim of the assessee. Therefore, impugned revision could not be sustained on this ground.

9. Another submission which is to be accepted is of revenue neutrality. From assessee’s tabulation as extracted at preceding para 4.5, it is amply clear that if the administrative and interest expenses are transferred to LLP entity, the same would not be prejudicial to the interest of the revenue. Rather, such an adjustment would lead to reduction in overall tax liability thereby demonstrating that the assessment order as passed by Ld. AO had not caused any prejudice to the revenue. From comparative analysis, it is clearly evident that if the twin expenses were shifted from M/s Dada Motors to LLP concern, overall tax liability would come down by Rs.15.64 Lacs. Thus, proposed adjustment by Ld. Pr. CIT would actually result in loss to the revenue which clearly establishes that the assessment order as passed by Ld. AO could not be said to be prejudicial to the interest of the revenue and the same was not amenable to revision u/s 263. The twin conditions of Sec.263 remained unfulfilled on this issue.

10. So far as computation of capital loss is concerned, we find that the land was acquired for Rs.34.03 Lacs. The assessee constructed building for Rs.16.19 Crores during FYs 2007-08 to 2013-14 on that land. Taking these figures, the capital-loss was computed at a loss of Rs.25.83 Crores. The year-wise indexed cost of improvement was reflected at appropriate places in the Income Tax Return. On the issue of nature of capital asset, it was duly explained that the land was acquired as an investment in FY 2006-07 and the assessee constructed building thereupon. After construction, the property was let out and used solely for earning rental income. The property was never used for business purposes at any point of time. The asset was reflected as an investment in the schedule of fixed asset and the rental income was offered and assessed as ‘income from house property’. No depreciation on the Land or building was ever claimed which was evident from depreciation chart forming part of audited financial statements. The assessee’s financial statements as placed on record duly support the aforesaid submissions. The cost of construction has regularly been transferred to building account which is carried forward on year-to-year basis in the audited financial statements and therefore, the cost of construction could not be held to be non-genuine or unsubstantiated in this year. Even otherwise, Ld. AO specifically called for required details and explanation regarding the cost of improvement which were duly been furnished by the assessee along with supporting documents to the satisfaction of Ld. AO. The allegation that the issue was not examined during assessment proceedings is clearly misconceived. The construction expenses have duly been accounted for in the audited financial statements during the respective years. In support, the assessee duly furnished copy of ledgers of expenses. Majority of the expenses have been incurred out of amounts disbursed through term loans obtained from banks and financial institutions for the purposes of reconstruction. Therefore, the claim of cost of improvement is to be held as reasonable, genuine and bona-fide. The copies of bank loan statements along with construction / building ledgers has already been furnished and therefore, the revision, on this issue, could not be sustained.

11. So far as the additions / adjustments to fixed assets is concerned, it is undisputed fact that the additions / adjustments does not represent any fresh capital expenditure during the year but the addition is on account of transfer of existing assets from one branch of the assessee entity to another branch of the same entity. The said assets have been transferred at their original book cost and the ownership of the asset continues to remain with the assessee. The additions merely represent internal classification / transfer of assets within the books of accounts and do not indicate acquisition of any new assets. The sales / adjustments in the fixed schedule were duly explained by the assessee with detailed break-up during the course of regular assessment proceedings itself. Therefore, the revision could not be sustained on this score also.

12. In view of the foregoing, we are unable to accept the conclusion of the Ld. Pr. CIT that the assessment order was passed without making requisite enquiries or verifications which ought to have been made. The distinction between “lack of enquiry” and “inadequate enquiry” is well settled. Where the AO has failed to make any enquiry on an issue which required examination, the Commissioner may, subject to satisfaction of the statutory conditions, exercise jurisdiction u/s 263. However, where the AO has made enquiry, called for relevant information and thereafter taken a view on the basis of the material available on record, the mere fact that the Commissioner considers the enquiry insufficient or reaches a different conclusion does not automatically render the assessment order erroneous. In the present case, the record demonstrates that Ld. AO raised specific queries on the flagged issues and took one of the possible views. These queries stood replied by the assessee along with documentary evidences to the satisfaction of Ld. AO. Thus, this is not a case where the Ld. AO mechanically accepted a claim without any enquiry whatsoever. The relevant issue was before the AO, the assessee was required to substantiate the claim, the assessee furnished the requisite explanation and supporting documents and upon due consideration thereof, Ld. AO accepted the claim. The assessment order may not contain an elaborate discussion on every document furnished by the assessee. However, absence of an elaborate discussion in the assessment order cannot, in the facts of the present case, be equated with absence of enquiry when the assessment record demonstrates that the issue was specifically examined.

13. The fundamental requirement for invocation of Section 263 is that the assessment order must be both erroneous and prejudicial to the interests of the Revenue. These two conditions are conjunctive. The Hon’ble Supreme Court in Malabar Industrial Co. Ltd. v. CIT (2000) 243 ITR 83 (SC) has laid down the governing principle that where the AO has adopted one of the permissible views, the order cannot be treated as erroneous merely because the Commissioner prefers another view. The same principle has been reiterated in subsequent decisions. We find that the present case falls within the category where enquiry was made and a view was taken, rather than a case of total absence of enquiry. The AO had before him the relevant facts and material and accepted the assessee’s explanation. The provisions of Sec.263 does not confer appellate jurisdiction upon the Commissioner to substitute his own view for a view already taken by the AO merely because he considers the latter view to be less appropriate. This being so, impugned revision of the order could not be sustained on the facts of present case before us.

14. So far as the decision in CIT v. Paville Projects Pvt. Ltd. reported in (2023) 293 Taxman 38 (SC) (as referred to by Ld. CIT-DR) is concerned, their could be no dispute with the proposition laid down by the Hon’ble Supreme Court that where the assessment order is erroneous in law and such error is prejudicial to the interests of the Revenue, the jurisdiction u/s 263 could validly be exercised. The Hon’ble Supreme Court, while applying the principles laid down in Malabar Industrial Co. Ltd. (supra), held that where the view adopted by the AO was not legally sustainable and had resulted in loss of lawful revenue, the exercise of revisional jurisdiction was justified. However, the ratio of the said decision has to be applied to the facts of each case. This case law cannot be read as laying down a proposition that every assessment order which results in loss of revenue is automatically amenable to revision u/s 263. In the present case, unlike a situation where the AO has accepted a claim without examination, the assessment record establishes that the precise issue was raised by the AO, examined by him and explained by the assessee with supporting documents. The subsequent different opinion by Ld. Pr. CIT cannot, in the circumstances before us, by itself establish that the assessment order was erroneous within the meaning of Sec. 263. On the facts of the present case, we have also concluded that ultimately there would be no loss of revenue on the issue of allowance of administrative and interest expenditure. This case law has already been considered by Hon’ble Gujarat High Court in the case of PCIT v. Rinki Shashikant Gandhi (471 ITR 321) as well as by Hon’ble Delhi High Court in the case of PCIT v. Clix Finance India (P.) Ltd. (473 ITR 650) to take a view favouring the assessee. Accordingly, the reliance placed upon this decision do not advance the case of the Revenue.

15. Another case law as referred to by Ld. CIT-DR is the decision of Hon’ble Apex Court in the case of M.R. Apparels Pvt. Ltd. v. PCIT (170 Taxmann.com 712). Upon study, we find that in this case law, there was complete failure on the part of Ld. AO to examine material facts. The very material as relied upon by Ld. AO was incapable of answering the subsequent event. In the present case, Ld. AO has made sufficient queries on the flagged issues. Thus, this case law is clearly distinguishable on facts.

16. The case law of Hon’ble Apex Court in Zuari Maroc Phosphates Ltd. v. PCIT (476 ITR 5) is also a case where Ld. AO allowed carry forward of loss without making the necessary enquiry and the assessment order was found to suffer from non-application of mind. Therefore, this case law is also distinguishable on facts and do not render assistance to the case of the revenue.

17. Having regard to the totality of facts and circumstances, we would hold that the assessment proceedings were conducted pursuant to complete scrutiny; Ld. AO specifically called for information concerning the issues as flagged in the impugned revisionary order; the assessee furnished the requisite explanation and documentary evidence; Ld. AO, after considering the material available on record, accepted the claim. The present case is therefore one of enquiry followed by acceptance of a claim and not one of complete lack of enquiry. The Ld. Pr. CIT has essentially substituted his own view for the view taken by the Ld. AO. We have also found that ultimately there is no loss to the revenue on one of the issues. We, accordingly, hold that the jurisdiction assumed by the Ld. Pr. CIT u/s 263 of the Act is not sustainable. Consequently, the impugned order passed u/s 263 is hereby quashed and the original assessment order passed by the Ld. AO is restored.

18. The appeal stand allowed.

Order pronounced on 07th October, 2026