Mere inadequate inquiry by AO doesn’t justify revision under Section 263

PCIT 2 Vs Clix Finance India Pvt Ltd (Delhi High Court)

Introduction: In a landmark decision that reinforces the principles of fair assessment and judicious application of revisionary powers under the Income Tax Act, the Delhi High Court has delivered a verdict in the case of PCIT 2 Vs Clix Finance India Pvt Ltd. This ruling is a significant step towards clarifying the circumstances under which the Commissioner of Income Tax (CIT) can invoke revisionary powers under Section 263 of the Income Tax Act, 1961.

Detailed Analysis: The crux of the case involved the CIT’s invocation of Section 263 to revise an assessment order that was allegedly erroneous and prejudicial to the interests of the Revenue. The respondent, Clix Finance India Pvt Ltd, a Non-Banking Financial Company (NBFC), had its income tax return for the Assessment Year 2002-03 scrutinized, leading to a revised assessment by the Assessing Officer (AO). The CIT later deemed this revised assessment to be inadequately inquired and thus, prejudicial to the Revenue’s interest, particularly focusing on two specific claims related to deductions.

However, the Income Tax Appellate Tribunal (ITAT) found that the AO had indeed conducted inquiries into the matters questioned by the CIT and that the respondent had provided satisfactory explanations. Importantly, the ITAT highlighted that an order cannot be deemed erroneous merely due to inadequate inquiry if the AO has indeed inquired into the matters in question. The Tribunal’s decision to set aside the CIT’s order was primarily based on the finding that the necessary inquiries were made, and thus, the original assessment order was neither erroneous nor prejudicial to the Revenue’s interest.

The Delhi High Court upheld the ITAT’s findings, emphasizing the importance of the dual conditions required for the invocation of Section 263: the order must be erroneous, and it must be prejudicial to the interests of the Revenue. The Court also pointed out that the mere inadequacy of an inquiry does not automatically grant the CIT the authority to revise an order under Section 263, especially when the inquiries were indeed made, and responses were provided by the assessee.

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