Alleged Bogus LTCG: AO’s Non-Addition Not Automatically makes order Erroneous

Vipul Kumar Modi Vs PCIT (ITAT Jaipur)

The case of Vipul Kumar Modi vs PCIT (Principal Commissioner of Income Tax) heard by the Income Tax Appellate Tribunal (ITAT) Jaipur, revolves around the critical issues of tax assessments, re-opening of cases, and the powers vested in the PCIT under section 263 of the Income Tax Act, 1961. This case is significant as it delves into the procedural aspects of reassessment and the conditions under which the PCIT can revise an assessment order deemed prejudicial to the interests of the revenue. Here, we provide a detailed analysis of the case, the arguments presented, and the final verdict by the ITAT Jaipur.

Background of the Case

The crux of the case lies in the reassessment proceedings initiated by the Assessing Officer (AO) under section 148 of the Income Tax Act. The reassessment was based on a report from the Directorate of Income Tax (Investigation), Mumbai, which indicated that the assessee, Vipul Kumar Modi, had introduced unaccounted funds into his accounts through bogus Long-Term Capital Gains (LTCG) by trading in penny stocks of M/s Goenka Business and Finance Limited and Ejected Marketing Ltd. The AO issued a notice to the assessee, who then declared a total income of Rs. 16,40,790 and exempt income of Rs. 78,87,360.

Proceedings and Contentions

Assessee’s Participation and AO’s Assessment

The assessee participated in the reassessment proceedings and provided details of the equity share purchases and sales, supported by documents such as purchase bills, sale bills, DP statements, broker ledger accounts, and bank statements. The AO, after examining the provided details, accepted the income declared by the assessee without making any adverse findings or additions regarding the alleged bogus LTCG.

PCIT’s Revision Order

The PCIT, exercising powers under section 263, reviewed the assessment order and found it to be erroneous and prejudicial to the interests of the revenue. The PCIT’s primary contention was that the AO failed to conduct a thorough investigation into the bogus LTCG issue despite having information from the investigation wing. The PCIT argued that the AO did not ask relevant questions or make necessary inquiries, leading to an erroneous acceptance of the assessee’s declared income.

ITAT Jaipur’s Analysis and Verdict

Examination of AO’s Actions

The ITAT Jaipur scrutinized the assessment proceedings and the actions of the AO. It noted that the AO had recorded reasons for reopening the case, issued necessary notices, and obtained information from the assessee. The AO’s order detailed the verification of facts and the reasons for accepting the declared income. The ITAT observed that the assessment was conducted under the faceless regime, ensuring transparency and adherence to procedures without bias.

Application of Section 263

The Tribunal examined the conditions under section 263, which empower the PCIT to revise an assessment order if it is both erroneous and prejudicial to the interests of the revenue. The ITAT emphasized that merely because the AO did not make an addition based on the investigation report, the order does not automatically become erroneous. It highlighted that the AO had duly considered the facts, obtained and verified information, and made a reasoned decision.

Precedents and Judicial Pronouncements

The ITAT referenced several judicial precedents, including the Supreme Court’s decisions in Malabar Industrial Co. Ltd. vs. CIT and CIT vs. Max India Ltd., to underscore that an assessment order cannot be deemed erroneous if the AO has adopted one of the possible legal views. It reiterated that the PCIT’s power under section 263 is not to correct every mistake but to address orders that fail to comply with the law and cause loss to the revenue.

Conclusion and Final Order

The ITAT concluded that the twin conditions for invoking section 263 were not satisfied in this case. The AO’s order was neither erroneous nor prejudicial to the interests of the revenue as it was based on a detailed examination and a reasoned decision. The PCIT’s revision was deemed a mere change of opinion, which is not permissible under section 263. Therefore, the ITAT vacated the PCIT’s order and upheld the AO’s assessment, allowing the assessee’s appeal.

FULL TEXT OF THE ORDER OF ITAT JAIPUR

This appeal is filed by assessee aggrieved from the order of the Learned Principal Commissioner of Income Tax, Jaipur-1 [here in after “Ld. PCIT”] for assessment year 2016-17 dated 27.02.2024 as per provisions of section 263 of the Income Tax Act (hereinafter “Act”). The order of the Ld. PCIT arise from the order passed by the National e-Assessment Centre, Delhi passed u/s 147 read with sections 144B of the Act dated 23.03.2022.

2. The assessee has marched this appeal on the following grounds:-

“1 Ground1. That on the facts and in the circumstances of the case, the Id. Principal Commissioner of Income-tax grossly erred in passing an order u/s. 263 of the Act and in holding that the reassessment order passed by the Id. Assessing Officer u/s. 147 r.w.s. 144B of the Act is found to be erroneous in so far as it is prejudicial to the interest of the revenue.

2 2. That the Id. Principal Commissioner of Income- tax grossly erred in treating the exempt Long-Term Capital Gain earned by the assessee appellant as bogus and failed to appreciate that the ld. Assessing Officer had passed the assessment order after appreciating all supporting documents and evidences submitted by the assessee and therefore the assessment order passed by the ld. Assessing Officer is neither erroneous nor is prejudicial to the interest of the revenue.

3 2.1. That the Id. Principal Commissioner of Income- tax grossly erred in ignoring the detailed submissions made by the assessee in response to notice u/s. 263 and in passing the impugned order on assumptions, presumptions, conjectures and surmises which is bad in law.

4 3. The appellant craves leave to add, alter, modify or amend any ground on or before the date of hearing.”

3. The fact as culled out from the records is that in this case the assessee has filed return of income on 26.10.2016 for the A.Y 2016-17 declaring total income at Rs. 16,40,790/- and the same was processed on 14.04.2017 u/s. 143(1) at the returned income. As per the record it is seen that the information and detailed report provided by the Directorate of Income tax (Inv), Mumbai. As per the information it has been found that the assessee has introduced his own unaccounted funds through the colour of bogus LTCG entry, by trading in penny scrip of M/s Goenka Business and Finance Limited & Ejected Marketing Ltd. The assessee is one of the beneficiaries and has taken accommodation entry. Thus, the assessee has unaccounted income to the extent of Rs. 77,79,200/-in form of cash which he had advanced as cash which he had advanced as cash to obtain accommodation entries. Because of these reasons, after obtaining necessary approval from competent higher authority, notice u /s 148 of the I.T Act 1961 was issued on 31/3/ 2021. In response to the notice the assessee filed return of income on 21/5/2021 declaring total income at Rs. 16,40,790/- and exempt income of Rs. 78,87,360/-. Notice u/s 142(1) of the IT act was issued on 17/12/2021 along with questionnaire and thereby the assessee filed the details of the purchase of equity share and sales of shares along with copy of demate account and bank statement, so as to establish the claim of the as claimed in the return of income. Accordingly, an order dated 23/03/2022 was passed accepting the income returned by the assessee.

4. On culmination of the assessment proceeding the ld. PCIT called for the assessment record for examination. Upon examination of the records the ld. PCIT observed that ld. AO did not examine the issue of bogus long term capital gain properly and failed to make inquires / investigation which was required to be considered and the bogus LTCG claimed was required to be added to the total income of the assessee. Based on this primary observation the ld. PCIT initiated the proceeding u/s 263 of the Act and the assessee was asked to file response vide notice dated 29/01/2024. The assessee filed a detailed reply vide letter dated 20/02/2024. The PCIT considered and perused the reply filed by the assessee but the same was not found tenable and thus he holds as under :

“6.1 Brief facts…..xxxx….

6.2. However, it is observed on perusal of assessment record and case history that the AO did not examine this issue of bogus long term capital gain properly and failed to make inquiry / investigation which was required considering the detailed information received from the Investigation Wing in this case which covered various aspects such as introduction, identification of this penny stock company. detailed modus operand of obtaining of bogus LTCG, parameters for defining / identifying the penny stocks, detailed analysis of company M/s Appu Marketing Limited / Ejecta Marketing Limited, case laws in favour of revenue, action taken by SEBI in this stock etc.

6.3 The AO failed to consider this detailed information received from the Investigation Wing, Mumbai. The AO did not make any inquiry from the penny stock companies, stock exchange, brokers etc. to examine the genuineness and correctness of the claim of long term capital gain made by the assessee. The AO simply accepted reply of the assessee and documents submitted by him without making any inquiry / Investigation / verification of the same.

6.4 Further, it is noticed that the AO issued a query letter dated 17.12.2021 in this case to the assessee as under

“Please refer to the scrutiny assessment proceedings u/s 143(3) / 147 of the Act in your case for the AY2016-17. In this connection notice u/s 148 of the Act was issued on (31/3) / 2021 vide DIN & notice No. ITBA/AST/S/148/2020-21/1032022048(1). Intimation you the reason of assessment. Thereafter. notice u/s 143(2) read with section 147 of the Act and was issued on (21/10) / 2021 requiring you to submit your reply on the date mentioned in the notice. But no response has been made till the due date in compliance of the said notice. Please note that this is a time baring case and limitation matters are involved. You are once again requested to strictly adhere the date and time mentioned in this notice

In this connection of the above, you are requested to furnish the following information/document on the date fixed by virtue of this notice.

With request to the capital gains during the year under consideration, kindly submit the below specified details

1. Documentary evidence to prove that there was a transfer of undertakings.

2. Documentary evidence in respect of purchase cost of undertakings

3. Documentary evidence of sale consideration received from sale of undertaking

4. Method adopted for valuation of undertaking.

5. Report of an accountant in Form No.3CEA as per section 20B(3) of the Act read with Rule 6H of the IT Rules, 1962.

6. Documentary evidence of cost of improvement with supporting Documentary evidence

7. Detailed note on reasoris for incurring losses in sale of undertakings.

8. Stepwise details of calculation of net worth of undertakings.

9 Calculation of capital loss

10. Details of any exemption claimed u/s 54EC, 54EE

11. Copy of bank statement in support of receipt of sale consideration.

You may also furnish any other information/evidences, which you details to submit in support of claims made in the return of income. Please treat it most urgent.”

6.5 On perusal of queries made in the above notice u/s 142(1), it is clear that the questions asked by the AO were not related to the information received from the Investigation Wing. Mumbai, The AO did not make any queries regarding the issue for which the case was reopened i.e. long term capital gain claimed by the assessee on shares of this company. It is noted that the AO made queries regarding slump sale ie. transfer of undertakings, purchase cost of undertakings, sale consideration undertakings, valuations of undertakings, details of calculation of net worth of undertakings. Form 3CA report of accountant in respect of slum sale etc. From this it is clear that the AO failed to make inquiry on the issue for which the case was reopened. The AO accepted the claim of the assessee without any verification on inquiry. The AO erred in accepting the claim of the assessee as genuine ignoring the information received from the Investigation Wing. Thus, the AO failed to consider the material available on record.

7 As discussed above, the AO failed to apply his mind on the material available on record and failed to invoke the applicable provisions of law. This in turn has resulted in passing of an erroneous order by the AO in the case due to non-application of mind to relevant material, an incorrect assumption of facts and an incorrect application of mind to the law which is prejudicial to the interest of the revenue and hence liable for revision under section 263 of the Act. The Hon’ble Supreme Court in the case of Malabar Industrial Limited V/s CIT 243 ITR it has held as under-

“…. An incorrect assumption of facts or an incorrect application of law will satisfy the requirement of the order being erroneous. In the same category fall orders passed without applying the principles of natural justice or without application of mind.”

8 Considering all the facts and circumstances of the case and for the reasons discussed above, the assessment order dated 23/03/2022 for AY2016-17 passed by the AO is held to be erroneous in so far as it is prejudicial to the interest of the revenue for the purpose of section 263 of the Act. The said order has been passed by the AO in a routine and casual manner without applying the applicable sections of the Act The AO has not verified the details which were required to be verified under the scope of scrutiny. The order of the AO is, therefore, liable to revision under the explanation (2) clause (b) and clause (a) of section 263 of the Act. The assessment order is set aside to be made afresh in the light of the observation made in this order. The AO is required to make necessary verification in respect of the observations made in this order after allowing reasonable opportunity to the assessee.”

5. Feeling dissatisfied with the order of the PCIT, the assessee preferred the present appeal on the grounds as reproduced here in above, challenging the order of the PCIT passed u/s. 263 of the Act. Apropos to the ground so raised the ld. AR appearing on behalf of the assessee has placed on record their written submission before ld. PCIT which is extracted in below;

1. The assessee-appellant is an individual and the assessee-appellant filed his income return for the year in question on 26.10.2016, declaring a total income of Rs. 16,40,790/- and the same was processed u/s 143(1) of the Income Tax Act, 1961 on 14.04.2017 at returned income.

2. That a notice u/s 148 of the Act was issued to the assessee on 31.03.2021 and subsequently, the assessee filed his return of income on 21.05.2021 in compliance to the said notice wherein he again declared his total income at Rs. 16,40,790/-.

3. Subsequently, notices u/s 143(2) & 142(1) of the Act were issued to the assessee on 21.10.2021 & 17.12.2021 respectively wherein it was alleged that assessee has introduced his own unaccounted funds through the colour of bogus LTCG entry, by trading in the penny scrip of M/s Goenka Business and Finance Limited & Ejecta Marketing Ltd. The relevant part is reproduced as under:

As per the information, during the investigation proceedings in the case of M/s Goenka Business and Finance Limited & Ejecta Marketing Ltd, it was found by the Investigation Wing that M/s Goenka Business and Finance Limited & Ejecta Marketing Ltd. Is a listed company and the entire shareholding of which is bought by the syndicate to provide accommodation entries to the beneficiaries with the help of the brokers and entry operators. It was also noticed that transactions to provide such accommodation entries are done in three steps i.e. purchase of share at nominal rate, price rigging and final sale of share.

The above information have been analyzed and it has been found that the assessee has introduced his own unaccounted funds through the colour of bogus LTCG entry, by trading in the penny scrip of M/s Goenka Business and Finance Limited & Ejecta Marketing Ltd.

On the basis of the information received, it is found that the assessee is one of the beneficiary and taken accommodation entry as detailed here under:

4. That the assessee filed his reply on 03.01.2022 is pursuance of notice u!s 142(1) dated 17.12.2021 wherein e submitted as under:

• That I have purchased 12500 equity shares of Rs. 10/- each of M/s Appu Marketing and Manufacturing Limited/ Ejecta Marketing Limited (Listed in Bombay Stock Exchange script code 538653) @ 10/-per share total amounting to Rs. 125000/- from M/s Pears Mercantile Private Limited (PAN – AAFCP8292H) on 10.01.2014.
• That the 12500 equity shares of Rs. 10/- has been received in DP Account No. 1201770100000120 with M/s Hem Securities Ltd on 05.02.2014.
• That I have sold 11900 equity shares of Rs. 10/- through M/s Hem Securities Ltd member of Bombay Stock Exchange clearing member No. 248 PAN – AABCH8005N as per details below:-

• That payment against the sale has been received through payee account cheque/RTGS from M/s Hem Securities Ltd. in my bank account with Kotak Mahindra Bank Ltd. on various dates during the year.
• That all the above documents/ papers i.e purchase bill, sale bills, DP Statement, Broker ledger account and Bank Statement are enclosed herewith.
• That All payments were made and received through account payee cheques drawn by the concerned Stock Broker of Bombay Stock Exchange and duly recorded in the bank accounts and regular Books of Accounts. All the shares sold and purchased were transferred through Demat Account of concerned broker. The price at which the shares have been sold on real time basis on the Bombay Stock Exchange. Security Transaction tax has been charged /deducted from the sale proceeds.

5. That the assessee had disclosed all the transactions in his reply and had also produced relevant documents support his transactions including purchase bill, sale bills, DP Statement, Broker ledger account and Bank Statement.

6. That the National Faceless Assessment Centre, New Delhi passed an Assessment Order on 23.03.2022 u/s 147 r.w.s 144B of the Act in which it has accepted the return filed by the assessee and has held as under:

The assessee has submitted concerned documents in support of his reply. After verification of the facts, the income shown in the return filed u/s 148 of the I.T Act is hereby accepted.

7. That the Principal Commissioner of Income Tax, Jaipur-1 reopened the proceedings u/s 263 of the Act vide notice dated 29.01.2024 on the finding that:

“After considering the reply submitted by you, the Assessing Officer did not draw any adverse conclusion of the issue of reopening and accepted income declared by you in the ITR. However, it is observed on perusal of assessment record and case history that the Assessing Officer did not examine the issue of bogus long-term capital gain properly and failed to make inquiry/investigation which was required considering the detailed report of the Investigation Wing in the case. The bogus LTCG thus claimed was required to be added to the total income.

In view of the above-mentioned facts, it appears that the assessment order passed u/s 147 r.w.s. 144B of the I.T. act 1961 in your case for A.Y. 2016-17 dated 23.03.2022 is erroneous in so far as it is prejudicial to the interest of the revenue.

I, accordingly, propose to modify the order on the above issue under the power vested with me u/s 263 of the I.T. Act, 1961.”

8. That it is trite that the exercise of power u/s. 263 of the Act is ousted in case of a debatable issue. An assessment order can be termed as erroneous and prejudicial to the interest of the Revenue, if the Assessing Officer has taken a view which is not legally tenable. Per contra, if two views are available on a particular issue and the AO adopts one of such views, the case goes outside the purview of revisional power exercisable by the PCIT u/s. 263 of the Act. Proceedings u/s. 263 cannot be sustained where the ld. CIT holds a view which was different from that of the Assessing Officer. Section 263 of the Act does not visualize a case of substitution of the judgment of the Revisional Commissioner for that of AO unless the decision of the AO is found to be erroneous.

9. The language used by the legislature in section 263 is to the effect that the CIT may interfere in revision, if he considers that the order passed by the Assessing Officer is erroneous insofar as it is prejudicial to the interest of the revenue. It is quite clear that two conditions must coexist in order to give jurisdiction to the CIT to interfere in revision. The order of the Assessing Officer in question must not only be erroneous but also it must be prejudicial to the interest of the revenue. In other words, merely because the assessment order is erroneous, the CIT cannot interfere. Again, merely because the order of the Assessing Officer is prejudicial to the interest of the revenue, then that is not enough to confer jurisdiction on the CIT to interfere in revision. The CIT cannot assume jurisdiction u/s 263, if the two conditions prescribed under the provisions of Act, viz. (i) the order is erroneous; and (ii) the same is also prejudicial to the interest of the revenue is not satisfied. Each and every erroneous order cannot be the subject matter of revision because the second requirement also must be fulfilled. There must be some prima facie material on record to show that tax which was lawfully exigible has not been imposed or that by the application of the relevant statute on an incorrect or incomplete interpretation, a lesser tax than what was just, has been imposed.

10. The phrase “prejudicial to the interest of the revenue” has to be read in conjunction with an erroneous order passed by the Assessing Officer. Every loss of revenue has to be read in conjunction with an erroneous order passed by the Assessing Officer. Every loss of revenue has a consequence of an order of Assessing Officer cannot be treated as prejudicial to the interest of the revenue. For example, when an Assessing Officer adopted one of the courses permissible in law and it has resulted in loss of revenue or where two views are possible and the Assessing Officer has taken one view with which the CIT did not agree with, it cannot be treated as an erroneous order prejudicial to the interest of the revenue because the view taken by the Assessing Officer is unsustainable in law.

11. The ld. AO has examined that issue as it is evident from the query posed and reply filed by the assessee. Since, in this case ld. AO has clearly conducted the enquiry and revenue did not pin point the error on the part of the assessing officer the order passed after due application of mind cannot be subjected to proceeding u/s. 263 of the Act.

12. The AO while framing the assessment had taken a possible view, and the show cause notice u/s. 263 does not demonstrate the error remain on the part of the ld. AO. In fact, when the ld. AO has conducted the required enquiry and not violated any of the conditions mentioned for revision of order as required by Explanation 2 of Section 263 of the Act, the order passed by the Assessing Officer could not be deemed to be erroneous so as to be prejudicial to the interests of the revenue.

13. We wish to refer and rely upon:

• Hon’ble CIT Vs Manna Trust (Rajasthan High Court), D.B. Income Tax Appeal No. 1/2021, 12/01/2022 has held: We are broadly in agreement with the view of the Tribunal. It is well settled through a series of judgments that power under Section 263 of the Act can be exercised only when twin conditions of the order of assessing officer being erroneous and prejudicial to the interest of revenue are satisfied. The Jurisdiction of the Commissioner under Section 263 of the Act is restricted and cannot be equated with the appellate jurisdiction. The Commissioner does not sit in appeal.
• Hon’ble Calcutta High Court in PCIT v. Kaushalya Dealers (2023) 5 TMI 365 has held: Revision u/s 263 – loss of penny stock – as per CIT AO has not done proper verification – Scope of no enquiry – HELD THAT:- As notice u/s 142(1) was issued. In response to this notice, the assessee had submitted a reply along with the details and documents in support of the transaction in shares and such other details which were called for by the Assessing Officer. Thereafter, another notice under Section 142(1) was issued calling for further information and particulars. This was furnished by the assessee by reply. Thereafter, the assessee had submitted an explanation in respect of allowability of the loss and also explained various queries raised by the Assessing Officer on the said issue.

The copy of the explanation has been filed in the paper book and we find it is an elaborate explanation not only on facts but also setting out various decisions of the High Courts and that of the Tribunal contending that the loss as reported by the assessee was permissible. After such elaborate discussion of the case with the assessee, the Assessing Officer has completed the assessment. Thus, the learned Tribunal rightly held that it is not a case of ‘no enquiry’ or no proper verification but a detailed enquiry had been done by the Assessing Officer. The learned Tribunal has noted the factual position as put forth by the assessee before it in paragraph 6 of the order.

Thus, we are of the view that the twin conditions which are required to be fulfilled before exercising jurisdiction u/s 263 of the Act have not been fulfilled in the facts and circumstances of the case on hand. Decided against revenue.

• Hon’ble PCIT Vs Reeta Lakhmani (Calcutta High Court), ITAT/129/2022, 22/11/2022, 2014-15 has held: Revision u/s 263 – PCIT may have information from the assessment file or through other sources – correctness of the exercise of power under section 263 – contention advanced before us by the revenue is that the assessee could not establish the genuineness of the transactions to prove that it had not indulged in any dubious share transactions meant to account for undisclosed income under the garb of long term capital against (LTCG) to claim exemption under Section 10 (38) – HELD THAT:- In the cases on hand there is nothing on record to show that such an exercise was done by the PCIT. Tribunal after noting several decisions on the subject rendered by the Coordinate Benches of the Tribunal had allowed the assessee’s appeal and set aside the order passed by the PCIT under Section 263 – Tribunal has proceeded to examine the merits of the matter and granted relief.

It is the submission that so far as the merit of the cases are concerned similar issue was tested by this Court in the case of Principal Commissioner of Income Tax Vs. Swati Bajaj [2022 (6) TMI 670 – CALCUTTA HIGH COURT] Though such may be the issue, as pointed out earlier the learned Tribunal had granted relief to the assessee on two grounds the first of which being that the exercise of power under Section 263 of the Act was not in accordance with law.

As could be seen from the substantial questions of law suggested by the revenue, the revenue has not raised any question on the said finding of the Tribunal which goes to show that the revenue had reconciled with the reasoning given by the learned Tribunal in that record. Therefore, a piecemeal challenge to the order passed by the learned Tribunal on one of the grounds on which relief was granted to the assessee is not maintainable.

In more or less identical circumstances in the case of Principal Commissioner of Income Tax, Durgapur Vs. M/s. Sinforte Pvt. Ltd. [2022 (1) TMI 1297 – CALCUTTA HIGH COURT] the court had dismissed the appeal filed by the revenue on the ground that the PCIT in order to exercise jurisdiction under section 263 of the Act exercised jurisdiction at the instance of the assessing officer which is against the provisions of the law. This decision supports the case of the respondent assessee. Hence, for the above reasons, we are of the view that the order passed by the learned tribunal on the first ground, namely with regard to the correctness of the exercise of power under section 263 of the Act has to be affirmed and, accordingly, the appeal filed by the revenue is dismissed.

• Hon’ble ITAT Jodhpur Bench in Gaurav Purohit Vs PCIT (ITAT Jodhpur), I.T.A. No. 40/Jodh/2021, 02/02/2024, 2011-12 has held: Revision u/s 263 – Reopening of assessment – AO completed the assessment on declared income of the assessee – assessee argued that the action of the ld. PCIT is incorrect, once the case of the assessee was re-opened on the issue which of third party information and the ld. AO has completed the assessment after recording the reasons and again on the same very issue the invoking of the provision of 263 is not correct

HELD THAT:- The fact that the assessee has on being asked clearly explained the nature and details of the transaction by submitting the necessary evidence and the content of the reply is also filed in the assessee’s paper book and the revenue did not contradict the figure which the assessee has replied, and the figures referred in the notice of the PCIT.

Thus, it is clear that the AO raised the issue, asked for the details and applied his mind while passing the assessment order. Even in the proceeding u/s. 263 the ld. PCIT did not bring anything on record that how the order of the ld. AO is erroneous and prejudicial to the interest of the revenue what material he relied – He relied on the same material on which the ld. AO has already applied his mind.

In the proceeding before the ld. PCIT the assessee in his reply submitted the profit / loss derived by the assessee and the figures reported in the PCIT notice is same in the assessment order and in the reply to the assessee.

On issue no. 1 the ld. PCIT noted that “ The AO accepted the version of the assessee without properly examining and verifying the ITS details with transactions in the ledger account maintained by the broker and from the bank statement.”, and on issue no. 2 he observed that “ The AO is directed to verify the sales from the ledger account in the books of broker and from the BSE/NSE. As regards claim of the assessee in respect of transactions carried out by other parties by utilizing the PAN of the assessee, the AO is directed to carry out necessary verifications from such other parties and from BSE/NSE. Thus, the bench noted that on both the issue the ld. PCIT has not pointed that how the order is erroneous and prejudicial to the interest of the revenue.

He merely aims to make inquiry as per his will and wishes which could have been done at the time of assessment proceeding as per the supervisor power vested and for that again and again same exercise cannot be done on the assessee. The law does not permit for change of opinion, when the ld. AO on both the issues raised the questions and considered the explanation of the assessee and assessment was completed.

Therefore, we find force in the arguments of the assessee that on the same observation and issue the ld. PCIT cannot direct to make the enquiry what he deem fit.

As decided in Aishwarya Rai Bachchan vs. PCIT [2022 (3) TMI 524 – ITAT MUMBAI] when the very basis of reasons recorded by the Id. AO was ultimately not added by the Id. AO in the re-assessment proceedings, then the primary reason to believe that income of the assessee had escaped assessment fails and such re-assessment cannot be treated as a valid order in the eyes of law. The same is to be declared as void ab initio. Reliance in this regard was rightly placed on the decision of Jet Airways [2010 (4) TMI 431 – HIGH COURT OF BOMBAY] When an assessment framed by the Id. AO is unsustainable in the eyes of law, the said invalid and illegal order cannot be subject matter of section 263 proceedings. On this count also, the revision order passed by the Id. PCIT u/s.263 of the Act deserves to be quashed.

Considering the above discussion we quash the order of the ld. PCIT as the same is not in accordance with the provision of section 263 of the Act. Decided in favour of assessee.

• Hon’ble ITAT Jaipur Bench in Gayatri Devi v. PCIT (2023) 10 TMI 23 has held: It is well settled that the prerequisites to exercise of jurisdiction by the ld PCIT under s. 263 of the Act is that to establish order of the AO is to be erroneous insofar as it is prejudicial to the interest of the Revenue, the PCIT has to satisfy of twin conditions simultaneously, namely (i) the order of the AO sought to be revised is erroneous; and (ii) it is prejudicial to the interests of the Revenue. If any one of them is absent, s. 263 cannot be invoked. This provision cannot be invoked to correct each and every type of mistake or error committed by the AO; it is only when an order is erroneous as also prejudicial to Revenue’s interest, that the provision will be attracted. An incorrect assumption of the fact or an incorrect application of law will satisfy the requirement of the order being erroneous. The phrase ‘prejudicial to the interest of the Revenue’ has to be read in conjunction with an erroneous order passed by the AO. However, every loss of revenue as a consequence of the order of the AO cannot be treated as prejudicial to the interest of the Revenue. For example, if the AO has adopted one of the two or more courses permissible in law and it has resulted in loss of revenue, or where two views are possible and AO has taken one view with which the PCIT does not agree, it cannot be treated as an erroneous order and it is prejudicial to the interest of the Revenue, unless the view taken by the AO is totally unsustainable in law. We draw strength from case of Malabar Industrial Co. Ltd. vs. CIT (2000) 243 ITR 83 (SC) and also from the case of CIT vs. Max India Ltd. (2007) 295 ITR 282 (SC).
• Hon’ble ITAT Kolkata Bench in Mukesh Kumar Agarwalla v. PCIT (2023) 12 TMI 628 has held: Revision u/s 263 – CIT noticed that AO had not properly examined the issue of suspicious sale transaction in shares and exempt LTCG claimed by the assessee – whether the AO has carried out the required examination and verification of the transaction of sale of shares, yielding long term capital gain claimed as exempt which is one of the reasons for selection of the case of the assessee for scrutiny assessment? – HELD THAT:- From the factual matrix of the issue raised by the ld. PCIT, we find that he has not applied his mind to arrive at a consideration which is erroneous in so far as prejudicial to the interest of the revenue, for passing the impugned order u/s 263 of the Act. We observe that in the course of proceedings u/s 263 of the Act before the Ld. PCIT, assessee had furnished the relevant details and explained the issue raised through the show cause notice by the PCIT, supporting its contentions by corroborative documentary evidences. It is well settled law that for invoking the provisions of section 263 both the conditions that the order must be erroneous and prejudicial to the interest of revenue, needs to be satisfied.

Hon’ble Supreme Court in the case of Malabar Industries [2000 (2) TMI 10 – SUPREME COURT] held that this phrase i.e. “prejudicial to the interest of the revenue” has to be read in conjunction with an erroneous order passed by the AO. Their Lordships held that every loss of revenue as a consequence of an order of Assessing Officer cannot be treated as prejudicial to the interest of the revenue. When the AO adopted one of the courses permissible in law and it has resulted in loss to the revenue, or where two views are possible and the AO has taken one view with which the CIT does not agree, it cannot be treated as an erroneous order prejudicial to the interest of the revenue unless the view taken by the AO is unsustainable in law.

Examination and verification of the audited financial statements i.e. Balance Sheet and Profit & Loss account of the assessee, copies of contract notes, DEMAT account and order sheet entries reveal the correct state of affairs in respect of the issue raised in the impugned revisionary proceedings for which both, ld. PCIT and the ld. CIT, DR could not bring any material on record to controvert the verifiable factual position.

In cases where there is inadequate enquiry but not lack of enquiry, again the Ld. Pr.CIT must give and record a finding that the order/enquiry made is erroneous. This can happen if an enquiry and verification is conducted by the Ld. Pr. CIT and he is able to establish and show the error or mistake made by the AO, making the order unsustainable in law.

The matter cannot be remitted for a fresh decision to the AO to conduct further enquiries without a finding that the order is erroneous, the condition or requirement which must be satisfied for exercise of jurisdiction u/s 263 of the Act. In such matters, to remand the matter/issue to the AO would imply and mean that the Ld. Pr. CIT has not examined and decided whether or not the order is erroneous but has simply directed the AO to decide the aspect/question. Assessee appeal allowed.

• Hon’ble ITAT Ahmedabad Bench in Darshan Shivlal Thakkar v. PCIT (2023) 8 TMI 25 has held: Revision u/s 263 by CIT – Addition u/s 68 – exempted u/s 10(38) denied – long-term capital gain shown by the assessee as arising from the sale purchase of the script of a penny stock company – 2nd round of litigation – HELD THAT:- AO during the original assessment proceedings has taken one of the possible views while framing the assessment under the provisions of section 143(3) of the Act. It is the settled position of law that any plausible view taken by the AO during the assessment proceedings cannot render the assessment order as erroneous insofar judicial to the interest of revenue. In holding so we draw support and guidance from the judgement of Embassy Brindavan Developers [2022 (10) TMI 1120 – KARNATAKA HIGH COURT].

All the necessary documents in support of the transactions carried out by the assessee have been duly furnished by the assessee before the authorities below.

Thus we are of the view that there is no infirmity in the assessment order requiring the revision under the provisions of section 263 – Decided in favour of assessee.

• Hon’ble ITAT Delhi Bench in Pooja Mittal v. PCIT (2023) 6 TMI 836 has held: Revision u/s 263 – Bogus LTCG – CIT alleges failure of AO to investigate/verify details filed in respect of suspicious transactions on shares rendering the assessment so made to be erroneous in so far as it is prejudicial to the interest of the revenue – HELD THAT:- One cannot possibly say that the Assessing Officer had sleepwalked on the issues involved. Noticeably, the Pr.CIT himself has not entered into any minimal inquiry on the issues himself, if so considered expedient and there is not even prima facie demonstration of fallacy in the action of the AO which rendered the order erroneous and which also simultaneously caused prejudice to the revenue.

Merely because the expectations of the Revisional Commissioner are purportedly not met, it should not, in our opinion, necessarily trigger revisional action u/s 263 of the Act in every case.

Allegations in the revisional order are not justified and there is no systematic effort on the part of the Pr.CIT to support the allegations. A reference made on behalf of the Revenue in the case of Sudha Eashwar [2020 (1) TMI 771 – ITAT CHENNAI] is governed by its own set of facts. The applicability of Section 263 was not the subject matter of controversy therein.

The shares were transacted through the intermediaries / Stock Brokers duly registered with the SEBI. The Pr.CIT has given undue considerations to the so called abnormal increase in the price by wrongly invoking the principles of preponderance of probabilities. It is trite that the degree or standard of proof required to establish a fact cannot be defined precisely. The drastic increase or decrease in the price of large number of shares in a given year is an ordinary phenomenon in the stock market where price discovery happens depending on host of uncertain factors both internal and external. SEBI is the watchdog for any manipulative actions in the stock market. The assessee has entered into meager transactions of sale of mere 15000 shares held by it and no adverse SEBI report is available implicating the assessee for any concerted or manipulative action which may give rise to any kind of suspicion of any fictions gains.

The order of co-ordinate Bench does not tend to remove the fetters placed on the scope of Section 263 under consideration in the present case. Some inadequacy will not render each and every order erroneous on the touchstone of Section 263 where the extent of inquiry has been questioned by the Revisional Commissioner. The issue requires to be looked in the context and setting of facts in each case. Decided in favour of assessee.

• Hon’ble ITAT Chandigarh Bench in Trivikram Singh Toor v. PCIT (2022) 11 TMI 523 has held: Revision u/s 263 – Reopening of assessment u/s 147 – Long Term Capital Gain from the position of the possibility of it being a sham transaction – HELD THAT:- On giving our thoughtful consideration to the claims and counter claims of the parties before us, we deem it appropriate to first cull out the facts necessary for adjudicating the issue before us namely; can the order passed by the PCIT u/s. 263 exercising the Revisionary Powers be said to be a valid order in the eyes of law on the basis of facts and evidences on record.

In order to examine the said question, we need to set out the relevant and necessary facts on the basis of which the answer to the said question can be determined.

The assessee in the facts of the present case has sold the shares of M/s. CCL International Ltd. which were acquired as a result of amalgamation of M/s. CCL International Ltd. with M/s. AAR Infrastructure wherein the assessee had originally invested a certain amount. It is an accepted fact that the Amalgamation Scheme under the aegis of the Hon’ble Delhi High Court has attained finality. The number of shares received by the assessee as a result of the amalgamation is not the issue for determination in the present proceedings.

AO considering the information noticed that the assessee had sold 750000 shares in M/s. CCL International Ltd. and has not disclosed those in its return dated 02.08.2013. Considering the information after recording reasons and fulfilling the necessary formalities, he issued notice u/s. 148. The assessee filed its return on 26.10.2016 disclosing the sale of transactions. AO recording the reasons for re-opening the assessment in the impugned order dated 27.11.2017 itself required the assessee to explain and justify its claim of Long Term Capital Gain claim made in the revised return in the backdrop of the information of scam in penny stock company. This order is set aside by the ld. PCIT u/s. 263 of the Act.

No contrary evidence has been filed by the Revenue. The suspicions and conjectures in the absence of any evidence have no relevance whatsoever. The argument that subsequently the share price rose and the fact that the assessee sold it at a lesser price on an earlier date is a suspicion which cannot be taken as an evidence that the share price was rigged. This fact in no way discredits the assessee’s claim, infact it only fortifies the fact that assessee had no apparent “insider’s knowledge” or clairvoyance that the share price would rise further. With hindsight most everyday rationale decisions may ultimately appear to be ill-advised actions, however none of us are clairvoyants and hence being incapable of seeing the future we act in the present. Decisions taken in the present are based on available input. What lies in the future is always an estimated guess.

By accepting an estimated addition the broker cleverly evades penal consequences of Detection and discovery of client fund mis­management. These statements of surrender by Brokers it cannot be over emphasized should be treated with utmost caution in the interests of the economic activity in the country and as a safeguard to the trusting citizens who engage and pay for the services of these Brokers.

These surrenders consciously and unscrupulously made invite whimsical consequences for the bonafide investors. How and why the tax department should accept the words of such a manipulative fast thinking person and why the words of such a manipulative person be permitted to be given a precedence over the documents and evidences relied upon by a person relying in good faith on the bonafide of his Broker needs to be seriously introspected upon and addressed by the tax authorities.

Permitting such criminal acts by carelessly accepting the statements/surrenders made by unscrupulous brokers needs to be addressed consciously especially when applied to the clients of such brokers who may have trusted the financial acumen of these brokers. These innocent trusting lambs should not be carelessly allowed to be thrown at the wolves by the manipulative brokers. These surrender statements should be viewed with due care and caution. It is necessary for the tax authorities to examine whether the traded company has actually been barred from the Stock Exchange or was still continuing on the Stock Exchange. For the sake of removing doubts, it is being clarified that the observations are made to the transaction of buy/sale through the D-Mat account on the Stock Exchange in listed companies.

On a careful consideration of the entire facts, circumstances and position of law as discussed in detail in the earlier part of this order and considering the evidences which were filed before the AO and the ld. PCIT and even further elaborated before us by both the parties, we find on facts that the Revisionary order in the peculiar facts and circumstances proceeds entirely on presumptions, conjectures and surmises. The twin conditions as laid down by plethora of decisions from the case of Malabar Industries [2000 (2) TMI 10 – SUPREME COURT], we find are not met. Accordingly, for the reasons given hereinabove in detail, the impugned order is quashed. Appeal of assessee allowed.

It is thus kindly requested that the impugned proceedings initiated u/s 263 of the Act may kindly be dropped.”

6. To support the contention so raised in the written submission, reliance was also placed on the following evidence / records / decisions:

:: I N D E X::

7. The ld. AR of the assessee in addition to the written submission so filed vehemently argued that the case of the assessee was re-opened for verification of the long-term capital gain based on the information received from the investigation wing of the Mumbai unit. The assessee has submitted the all the relevant details that has been called for by the NeAC and based on the submission and after considering the details placed on the record (APB-17-32). In the assessment order the ld. NeAC has discussed the reply of the and upon verification of the details and facts of the case ld. AO / NeAC completed the assessment at the returned income. The ld. PCIT at para 7 trying to impose his view on the matter and intending that the ld. AO should have applied mind as per will and wishes of the PCIT but at the same time PCIT has not pinpointed any error or prejudice in the view of the ld. AO which is taken after calling for the information and verification of the same the assessment is completed. Therefore, invoking of the provision of section 263 is beyond the scope of the provision of section 263 and therefore, the order of the NaFAC is neither erroneous or prejudicial to the interest of the revenue and the twin condition given in the Act is not violated. To drive home to this contention reliance was placed on various judgment but ld. AR specification drawn to our attention to the following case law to decide the issue on hand as to whether the order is in fact erroneous or prejudicial to the interest of the revenue :-

• CIT, Exemption, Jaipur vs. Manna Trust 2022 (1) TMI 693- Rajasthan High Court
• PCIT 2, Kolkata vs. Kaushalya Dealers Pvt. Ltd. 2023 (5) TMI 365-Calcutta High Court
• PCIT 9, Kolkata vs. Reeta Lakhmani & Others 2022 (11) TMI 1177-Calcutta High Court
• Gaurav Purohit vs. PCIT, Jodhpur-1, Jodhpur 2024(2) TMI 336-ITAT Jodhpur
• Gayatri Devi vs. PCIT, Central, Jaipur 2023 (10) TMI 23- ITAT, Jaipur
• Mukesh Kumar Agarwalla vs. PCIT, Guwahati 2023 (12) TMI 628-ITAT, Kolkata
• Darshan Shivlal Thakkar vs. PCIT-1, Ahmedabad 2023 (8) TMI 25-ITAT Ahmedabad

8. On the other hand, ld. DR representing the Revenue has supported the order of the ld. PCIT. He submitted that it is classic case of non-application of mind and since, the ld. AO has not undertaken the verification on the issue for which the case was reopened the observation made by the ld. PCIT is in accordance with the provision of section 263 of the Act. As it is very much clear from the finding of the ld. PCIT that the ld. AO has not applied his mind on the various aspect of the issue for which the assessment was re-opened and there is no finding recorded in the order of the assessment that the ld. AO has examined the issue based on the reasons recorded and that why the order of the ld. PCIT is within the power vested u/s. 263 of the Act.

9. We have heard the rival contentions and perused the material placed on record. The brief facts as emerges from the orders of the lower authority is that as per the record and the information available based in the report of the Directorate of Income tax (Inv), Mumbai, the assessee has introduced his own unaccounted funds through the colour of bogus LTCG entry, by trading in penny scrip of M/s Goenka Business and Finance Limited & Ejected Marketing Ltd. The revenue has alleged that the assessee is one of the beneficiaries and has taken accommodation entry and thus it was alleged that the assessee has unaccounted income to the extent of Rs. 77,79,200/- in the form of cash to obtain accommodation entries. With the information based and after obtaining necessary approval from higher authority ld. AO issued notice u/s 148 of the I.T Act 1961 on 31/3/ 2021. The assessee participated in the re­opening proceeding by first filling the return of income on 21/5/2021 declaring total income at Rs. 16,40,790/- and exempt income of Rs. 78,87,360/-. There upon notice u/s 142(1) of the IT act was issued on 17/12/2021 along with questionnaire and thereby the assessee filed the details of the purchase of equity share and sales of shares along with copy of demate account and bank statement, so as to establish the claim of the income as exempt in the return of income. Based on the details filed and after verifying the same an order dated 23/03/2022 was passed accepting the income returned by the assessee. The ld. PCIT as per the power vested u/s. 263 examined the case records of the assessment in the case of the assessee and it has been observed that the assessment order is found to be erroneous and prejudicial to the interest of the revenue because after submitting the details by the assessee the ld. AO did not draw any adverse conclusion on the issue of re-opening and accepted the income declared by the assessee in the ITR filed. The ld. PCIT further noted that the ld. AO did not examine the issue of bogus long term capital gain properly and failed to make any inquiry / investigation which was required to be done based on the report of the investigation and the Bogus long term capital gain which was required to be added was not done and thus the provisions of section 263 was invoked. The assessee participated in the proceeding and filed a detailed reply which was considered but the contention was not considered and it has been held that the order of the ld. National Faceless assessment unit is erroneous and prejudicial to the interest of the revenue. The assessee has challenged the impugned order before us and has filed a detailed written submission and the ld. DR is also heard. The bench noted that the case of the assessee was re-opened based on information and detailed report provided by the Directorate of Income Tax (Investigation), Mumbai to verify the claim of long term capital gain shown by the assessee in the return of income. The re-assessment proceedings were conducted by the national faceless assessment center. The order of the NFAC record that reasons, issue of notice to the assessee calling for the information and recorded the reasons. Thus, it would be worth while to reproduce the finding of facts recorded in the order of the assessment herein below :

“In this case the assessee has filed return of income on 26.10.2016 for the A.Y 2016-17 declaring total income at Rs. 16,40,790/- and the same was processed u/s 143(3) of the Act on 14.04.2017 at returned income. As per record it is seen that the information and detail report provided by the Directorate of Income tax (inv), Mumbai. As per the information it has been found that the assessee has introduced his own unaccounted funds through the colour of bogus LTCG entry, by trading in penny scrip of M/s Goenka Business and Finance limited & Ejected Marketing Itd. The assessee is one of the beneficiary and taken accommodation entry as detailed here under:

Thus the assessee has unaccounted income to the extent of Rs. 77,79,200/-in form of cash which he had advanced as cash which he had advanced as cash to obtain accommodation entries. For these reasons, after recording necessary reasons and after obtaining approval from competent higher authority, notice u / s 148 of the I.T act 1961 was issued on (31/3) / 2021 vide DIN no. ITBA/AST/148/2020- 21/1032022048 * (1) In response to the notice the assessee filed return of income on (21/5) / 2021 declaring total income at Rs. 16,40,790/- and exempt income of Rs. 78,87,360/-. Notice u/s 142(1) of the IT act was issued on 17/12/2021 along with questionnaire vide ITBA/AST/F/142(1)/2021-22/1037905514(1). In response to the notice the assessee submitted his reply dated: 03.01.2022 which is as under:

I have purchased 12500 equity shares of Rs. 10/- each of M/s Appu Marketing and Manufacturing Limited/Ejecta Marketing limited ( listed in Bombay stock exchange script code 538653) @ 10/- per share total amounting to Rs. 125000/- from M/s Pears Mercantile Private Limited (PAN-AAFCP8292H) on 10.01.2014.

That the 12500 equity shares of Rs. 10/- has been received in DP

account no 1201770100000120 with M/s Hem Security Ltd on 05.02.2014.

That I have sold 11900 equity shares of Rs. 10/- through M/s hem security Itd member of Bombay stock exchange clearing member no. 248 PAN-AABCH8005N. The Payment against the sale has been received through payee account cheque/RTGS from M/s Hem Securities Itd. In my bank account with kotak Mahindra bank Itd on various dates during the year. That all the above documents/papers i.e purchase bill, sale bills,

DP statement, Broker ledger account and Bank statement are enclosed herewith.

The assessee has submitted concerned documents in support of his reply. After verification of the facts, the income shown in the return filed u/s 148 of the IT Act is hereby accepted.”

10. The bench noted in the order of the assessment there is recording of the information, issue of notice u/s. 148, calling for the details based on the issue raised in the notice u/s. 148 of the Act and the clear finding is recorded in the order of the assessment. The assessment is completed as per the faceless regime insisted by the government wherein interference is done without any face and favour. Thus, the assessment is fair and reasonable. Merely the assessment unit has not made any addition the assessment cannot be considered as erroneous or prejudicial, which has been completed in accordance with the law and the ld. AO has after recording all the facet of the matter passed a reasoned order of the assessment. The ld. PCIT has not pointed any mistake or error in the order of the assessment and has not hold that the order is how prejudicial to the interest of the revenue. The ld. PCIT merely noted that the addition is required to be made is not made by the ld. AO. This contention of the PCIT cannot be considered to invoke the provision of section 263 of the Act. The assessee challenged the contentions of the PCIT exercising the power u/s. 263 of the Act stating that the issue that the ld. PCIT has raised has already been enquired upon and the ld. NFAC has applied mind on the aspect of the matter for which the reasons recorded, verification and satisfaction on the information is duly record in the order of the assessee. Therefore, the law does not empower the ld. PCIT to review the order of the NFAC [ld.AO]. On the aspect of the matter the bench noted from the submission of the assessee that the ld. NFAC [ld. AO] has called for the details for which the case was re­opened, examined the details and completed the assessment after recording the satisfaction. Thus, the view taken by the ld. AO based on the information cannot be reviewed by the PCIT without establishing that the order of the ld. AO is erroneous and prejudicial to the interest of the revenue. Both this twine condition is not established from the order of the PCIT. Based on the reasons record, the ld. AO called for the details, details placed on record were examined and the satisfaction on the issue is recorded in the order of the ld. AO. Thus, it is very much clear that the ld. AO has applied mind on the issue and has considered the factual aspect of the claim of the assessee on the long term capital gain reflected in the return of income filed. The bench also noted from the observation of the ld. PCIT that she has raised the objection on the count that the ld. AO should have made the addition based on the report of the Investigation Mumbai. She further noted the questions asked by the assessing officer were not related to the information received from the investigation wing Mumbai. The assessing officer did not make any enquiry regarding the issue for which the case was reopened that is long term capital gain claimed by the assessee on the sales of shares of the company for which the information has been received. Thus, she noted that the ld. AO has erred in accepting the claim of the assessee as genuine ignoring the information received from the Investigation Wing and thus the AO failed to consider the material available on record. Based on these facts and considering the decision of the apex court in the case of Malabar Industrial Ltd. Vs. CIT the order was held to be erroneous and prejudicial to the interest of the revenue. Considering that aspect and in accordance with the explanation (2) clause (b) and clause (a) of section 263 of the Act order of the ld. AO was set aside to reframed.

11. We have gone through the contentions of the rival parties and the order under challenge. The bench noted from the discussion so recorded above that the order of the assessment records the reasons of re-opening, called for the information from the assessee relating the issue under examination, the assessee submitted the details called for and upon examination of the details so placed on record the ld. AO has given his finding as to the income returned by the assessee. Thus, the order of the assessment is passed as per the four corner of the provisions of the law and the ld. PCIT in her order did not placed on record a single reasons pointing out the error in the order of the assessment. She merely noted that based on the report of the Investigation Mumbai addition is required to be made has not been made. This alone observation cannot make the order of the assessment hit by the provision of section of 263 of the Act because it failed on test of order of the assessment being erroneous and prejudicial to the interest of the revenue. Since this twin condition is not satisfied the view taken by the ld. AO is not erroneous or prejudicial and thus, we are of the considered view that the issues which are already raised, verified and settled there cannot be applied the provision of the section 263 of the Act. Not only that, but the order has also been passed in this case by NeAC where there are as much as four units i.e. Assessment unit, Verification unit, technical unit and Review unit and thus, these all units tested order merely the addition is not made cannot hit the provision of section 263 of the Act. The prerequisite for exercising the jurisdiction by the learned Principal CIT under section 263 of the Act is that the order of the AO is established to be erroneous in so far as it is prejudicial to the interest of the Revenue. The ld. PCIT has to be satisfied of twin conditions, namely (i) the order of the AO sought to be revised is erroneous; and (ii) it is prejudicial to the interests of the Revenue. If any one of them is absent i.e., if the assessment order is not erroneous but it is prejudicial to the Revenue, provision of section 263 cannot be invoked. This provision cannot be invoked to correct each and every type of mistake or error committed by the AO; it is only when an order is erroneous as also prejudicial to Revenue’s interest, than the provision will be attracted. An incorrect assumption of the fact or an incorrect application of law will satisfy the requirement of the order being erroneous. The phrase ‘prejudicial to the interest of the Revenue’ has to be read in conjunction with an erroneous order passed by the AO. Every loss of revenue because of the order of the ld. AO not made addition, cannot be treated as prejudicial to the interest of the Revenue. It is pertinent to mention that if the AO has adopted one of the two or more courses permissible in law and it has resulted in loss of revenue, or where two views are possible and AO has taken one view with which the Pr. CIT does not agree, it cannot be treated as an erroneous order and it is prejudicial to the interest of the Revenue, unless the view taken by the AO is totally unsustainable in law for which nothing has been placed on record by the ld. PCIT that view of the ld. AO is totally incorrect. In this process even the AO has no power to review his own order. In this regard, we draw strength from the decision of the Hon’ble Supreme Court in the case of Malabar Industrial Co. Ltd. vs. CIT (2000) 159 CTR (SC) 1: (2000) 243 ITR 83 (SC). We also draw strength from the decision of the Hon’ble Supreme Court in the case of CIT vs. Max India Ltd. (2007) 213 CTR (SC) 266: (2007) 295 ITR 282 (SC) wherein it was held that:

“The phrase ‘prejudicial to the interests of the Revenue’ in s. 263 of the IT Act, 1961, has to be read in conjunction with the expression ‘erroneous’ order passed by the AO. Every loss of revenue as a consequence of an order of the AO cannot be treated as prejudicial to the interests of the Revenue. For example, when the AO adopts one of two courses permissible in law and it has resulted in loss of revenue, or where two views are possible and the AO has taken one view with which the CIT does not agree, it cannot be treated as an erroneous order prejudicial to the Revenue, unless the view taken by the AO is unsustainable in law.”

12. Ergo, despite our deep and careful consideration of the material on record and the findings recorded in the order under challenge, we do not find any incorrectness and incompleteness in the appreciation of facts made by the ld. AO. In the light of these observations, we do not agree on this aspect to this extent with Ld. Pr. CIT. Even before us the ld. DR did not placed on record any other contrary material on the issue which has been decided by the ld. AO and therefore, the view already taken by the ld. AO attain finality in the absence of any error on the part of the ld. AO and thus, we are of the considered view that the law and does not attract the clause (a) or (b) to explanation 2 of section 263 of the Act based on the set of facts of the case. Thus, we note that it is merely a change of opinion of the ld. PCIT which is not permitted in the eyes of the law. In the light of the aforesaid discussion, we hold that the order of the PCIT is not in accordance with the provisions of section 263 of the Act as the twin conditions failed in this case and therefore, we vacate the order of the PCIT passed u/s. 263 of the Act.

In the result, appeal of the assessee is allowed.

Order pronounced in the open Court on 03/06/2024