Revisionary power u/s. 263 not sustainable as there is neither error of law nor of facts

Ajay Agarwal Vs Circle (ITAT Jaipur) 

ITAT Jaipur held that since there is neither error of law nor of facts, the twin condition as required to revise the assessment order is not met out and hence invocation of revisionary power under section 263 of the Income Tax Act is not sustainable in law.

Facts- Post completion of assessment u/s. 143(3), PCIT called for the assessment records in exercise of the powers vested upon and upon verification of the assessment record the ld. PCIT noted that the assessment in the case of assessee for the A.Y 2018-19 passed by the AO is erroneous in so far as it was prejudicial to the interest of revenue as per provisions of section 263 of the Income Tax Act, 1961 as the impugned flat bearing no. 1802, Mantri DSK Pinnacle was a joint property that was observed from the documents available on record, however, entire long term capital loss was claimed by the assessee himself, whereas he was having 50% share in ownership as per agreement to purchase of flat executed on 28.12.2010. Accordingly, the proceedings u/s 263 of the Income Tax Act, 1961 were initiated.

After considering the reply of the assessee as well as the facts and circumstances of the case as stated, the assessment order passed by the Assessing officer under the provisions of section 143(3) of the Act dated 21.06.2021was found erroneous in so far as it was prejudicial to the interest of revenue. Being aggrieved, the present appeal is filed.

Conclusion- Held that the twin condition as required to revise the assessment order is not met out in the present case. Even the amendment made to explanation 2 of section 263 does not confer blind powers and it is held that despite there being an amendment, enlarging the scope of the revisionary power of the ld. PCIT u/s 263 to some extent, it cannot justify the invoking of the explanation 2 in the facts of the present case. There is neither error of law nor of facts. There is no erroneous assumption by the AO of either the facts or of law, as alleged by the ld. PCIT and therefore, the order passed by the ld. Pr. CIT is set aside and the ground of appeal raised by the assessee is allowed. In the result, the appeal of the assessee is allowed.

FULL TEXT OF THE ORDER OF ITAT JAIPUR

By way of a present appeal, the assessee challenges the order of the Commissioner of Income Tax, (IT), Delhi-1,[ for short PCIT] passed u/s 263 of the Act which was passed on 27.03.2024. This order relates to the assessment year 2018-19, which was passed because ld. PCIT while exercising the power vested upon her u/s. 263 of the Income Tax Act, 1961 [ for short Act ] while examining the assessment records of the assessee which made upon the assessee by an order dated 21.06.2021passed by the ACIT/DCIT, Circle (International Tax), Jaipur [ for short AO].

2. In this appeal, the assessee has raised following grounds: –

“1. “On the facts and in the circumstances as well as on the law Ld. CIT (International taxation) erred in making direction u/s 263 of the income tax Act, 1961 to AO to re-compute income of the assessee considering the co-ownership of capital assets sold during the year being a) The case was taken in limited security to examine the claim of large refund. b) The assessment was neither erroneous nor prejudice to the interest of revenue. Therefore, the direction without justification and to be quashed.

2. Assessee deserves right to amend, alter, delete and add any ground of appeal on or before the hearing of appeal.”

3. Succinctly, the fact as culled out from the records is that the assessee filed return of income for Assessment Year 2018-19 on 13.07.2018 declaring total income of Rs. 1,13,290/- and claimed loss of Rs. 1,15,19,069/-, The return of income was processed u/s 143(1) of the Income Tax Act. 1961 (hereinafter referred to as “the Act”) and the case was selected for scrutiny through CASS. The notice u/s 143(2) of the Act was issued by the National e-Assessment Centre on dated 28/09/2019. The case was selected for scrutiny for the verification of refund claim by the assessee. Notice u/s 142(1) of the Act along with questionnaire was issued on issued on 06/02/2020 requiring the assessee to furnish certain information/documents by 21/02.2020. Further, notice u/s 142(1) of the Act along with questionnaire was issued on issued on 17/08/2020 requiring the assessee to furnish certain relevant information/documents by 01/09.2020. In response to the statutory notices, the assessee submitted his reply through ITBA portal on time to time and filed necessary details/ information/documents etc. as required which were examined and placed on record. On verification of the residential status of the assessee, it was found that the assessee is a Non-resident. Therefore, the case was transferred from NeAC to the Circle, International Taxation, Jaipur on dated 26.10.2020. On account of change of incumbency notice u/s 129 of the Act and notice u/s 142(1) of the Act was issued to assessee on 10/04/2021 wherein the assessee was required to furnish certain information/documents relevant to his case by 12/04/2021.

3.1 During the year under consideration, the assessee had sold an immovable property at the sale consideration of Rs. 2,77,22,864/-. As per the 26AS details, the purchaser had deducted TDS of Rs. 98,51,320/- u/s 195 of the Act on the above sale consideration. The aforesaid immovable property was purchased by the assessee through an Agreement for Sale executed on dated 23/12/2010 at the purchase consideration of Rs. 2,77,22,864/-. The assessee had paid Rs. 2,77,22,864/- in installments. Thus, the assessee has claimed indexation for cost of acquisition from the Y. 2010-11 till the final payment made in F. Y. 2017-18. In this case, the assessee Shri Ajay Agarwal e-filed his ITR for the A. Y. 2018-19 on 13.07.2018 u/s 139(1) of the I. T. Act, 1961 declaring total income of Rs. 1,13,290/- and claimed Long Term Capital Loss of Rs. 1,15,19,069/- on sale of immovable property. In his ITR for the A. Y, 2018-19, the assessee has claimed refund of Rs. 98,74,640/- on account of excess TDS deducted by the buyer of the property which the assessee had sold during the year under consideration. In response to the statutory notices, assessee filed necessary details/information/documents etc. through ITBA portal time to time as required which were examined and placed on record.

3.2 During the assessment proceedings, it was gathered that during the year under consideration, the assessee had sold his rights in Flat No. 1802 at MANTRI DSK PINNACLE situated at Hulimavu Village, Arekere Sub- division, Bommanahali Zone, Bangalore. This property was acquired by the assessee in F. Y. 2010-11 through an Agreement for Sale executed on dated 23.12.2010. The long term capital gains declared by the assessee was computed as under:

The aforesaid property was acquired by the assessee through payments made in installments. The assessee claimed indexed cost of acquisition for the various financial years in which installments were paid by him. Considering the submission filed by the assessee so far as well as on examination of documents and other material evidence produced by the assessee, queries were raised by ld. AO. After considering all the submissions as well as information/documents filed by the assessee and on perusal of the record and after going through the submissions as well as documents furnished by the assessee, the AO recorded the finding on facts as stated herein below:

7.1 During the year under consideration e. in F. Y. 2017-18, the assessee had sold the rights in a Flat being residential apartment bearing No. 1802 in 18th Floor in the project known as “MANTRI DSK PINNACLE” situated at Hulimavu Village, Arekere Sub-division, Bommanahali Zone, Bangalore to the purchaser Mrs. Neha Kabra at the sale consideration of Rs. 2,77,22,864/-. The entire consideration was paid by the buyer in the month of March 2018 which is evident from the bank account statement of the assessee. As per the 26AS details, the purchaser had deducted TDS of Rs. 98,51,320/- u/s 195 of the Act on the above sale consideration and deposited the same in to the Central Government Account in same F. Y. 2017-18.

7.2 Though the Memorandum of Understanding between the seller and the buyer was executed on dated 07.05.2018, the entire transaction had been completed during F. Y. 2017-18 which is evident from the documents furnished by the

7.3 The aforesaid immovable property was purchased by the assessee through an Agreement for Sale executed between the owner, developer and the assesse being purchaser on dated 23/12/2010 at the purchase consideration of Rs. 2.77,22,864/-. At the time of execution of agreement, the Flat was under development stage and the payments were linked to the stage of percentage of completion of construction in phased manner. The assessee had paid Rs. 2,77,22,864/- in installments which is evident from the statement of accounts of the builder/developer and bank account statement of the assessee. Thus, the assesse has claimed indexation for cost of acquisition from the F. Y. 2010-11 till the final payment made in F. Y. 2017-18.

 7.4 In consequent to the above sale proceeded. sale of his rights in the which  matter was selected for limited scrutiny thus, it would not be open to Principal Commissioner to pass revisionary order under section 263 on other aspects and remit matter to Assessing Officer for fresh assessment.” We further find that similar view was taken by Coordinate bench of Tribunal in series of decisions as has been relied by ld AR for the assessee.

The ld. AO during the assessment proceedings, on perusal of computation of total income for the A. Y. 2018-19 relevant to F. Y.2017-18 noticed that some payments were made in F.Y 2012-13. However, in the computation of total income, for the purpose of indexation, cost inflation index has been taken for F.Y 2011-12 instead of F.Y 2012-13.

Thus, excess cost of indexation amounting of Rs. 5,81,368/- has been claimed by the assessee. Therefore, the assessee was show caused vide notice u/s 142(1) of the Act on dated 10.04.2021 as to why the excess cost of indexation claimed by you should not be added to the total income.

In response the assessee submitted its reply on dated 13.04.2021. In the reply, the assessee submitted that he computed long term capital gain by indexing cost for two payments wrongly due to oversight and omission.

In view of the above factual position, it is evident that the assessee has wrongly computed excess indexed cost of acquisition to the tune of Rs. 5,81,368/- in the computation of Long-Term Capital Gain which was added to the Long Term Capital Gain income of the assessee.

Accordingly ld. AO completed the assessment u/s 143(3) read with section 144C(3) of the Act on 21.06.2021.

4. On culmination of the assessment proceeding the ld. PCIT called for the assessment records in exercise of the powers vested upon and upon verification of the assessment record the ld. PCIT noted that the assessment in the case of assessee for the A.Y 2018-19 passed by the AO is erroneous in so far as it was prejudicial to the interest of revenue as per provisions of section 263 of the Income Tax Act, 1961 as the impugned flat bearing no. 1802, Mantri DSK Pinnacle was a joint property that was observed from the documents available on record, however, entire long term capital loss was claimed by the assessee himself, whereas he was having 50% share in ownership as per agreement to purchase of flat executed on 28.12.2010. Accordingly, the proceedings u/s 263 of the Income Tax Act, 1961 were initiated by issuing of notice on 13.02.2024 to the assessee affording an opportunity of being heard by fixing the case on 02.2024.

4.1 In response to the said notice issued  AR of the assessee submitted replies on 15.02.2024, 20.02.2024 and 06.03.2024 explaining that entire expenses incurred by the assessee Shri Ajay Aggarwal for purchasing of above said flat and that is why he claimed that expenses and was accordingly correctly allowed in the assessment proceeding after detailed examination of the same. The funds were transferred on 17.01.2012 and 23.01.2012 from his foreign account amounting to Rs. 70,15,655/- and NRE account amounting to Rs. 2,15,07,106/- respectively. Further, the assessee submitted that no amount was paid by his wife for purchase of impugned flat bearing no. 1802, Mantri DSK Pinnacle.

4.2 PCIT considered the replies filed by the assessee but same was not found to be tenable on followings reasons:

(i) The assessee has submitted the documents in respect of his wife i.e copy of ITR filed for the assessment year 2018-19 and an undertaking, whereby it has been submitted that no sale consideration as well as any long term capital loss was booked by her, however, the assessee failed to establish through any documents which suggest that spouse of the assessee did not have any income during the period, when the instalments of impugned flat were paid, whereas the funds were transferred from joint account.

(ii) The assessee did not furnish the bank account statement of his spouse for the relevant period when the funds were transferred to builder for purchase of impugned flat.

(iii) The assessee did not provide the copy of bank accounts statement from where the funds of Rs. 70,15,655/- and Rs. 2,15,07,106/- were transferred.

4.3 After considering the reply of the assessee as well as the facts and circumstances of the case as stated, the assessment order passed by the Assessing officer under the provisions of section 143(3) of the Act dated 21.06.2021was found erroneous in so far as it was prejudicial to the interest of revenue. Therefore, PCIT directed AO to verify that entire payment for purchase of impugned flat was made by the assessee Shri Ajay Agarwal from his own source of funds from the documentary evidences and no payment was made by his spouse as stated by the assessee and that after proper verification the AO should pass the assessment order accordingly.

5. Assessee ,feeling dissatisfied with the order of the PCIT passed u/s. 263 of the Act, filed the present appeal before this tribunal on the grounds as raised here in above. Apropos to the grounds so raised the ld. AR appearing on behalf of the assessee has placed their written submissions which are reproduced here in below;

“Assessee is an individual, who filed his return of income u/s 139(1) claiming refund of Rs. 9874644.00. During the previous year relevant to assessment year, assessee sold a booking of flat for the same consideration on which he booked. Due to indexation the sale of booking resulted long term capital loss. Assessee being NRI, the buyer deducted TDS on sale consideration u/s 195 of the Income Tax Act, 1961. That’s why, the entire TDS was refundable.

The case was selected in scrutiny assessment through CASS to the verification of refund claim. The assessment was made without any addition or disallowance and resultant refund was granted after the assessment.

Thereafter, honourable CIT (International Taxation) Delhi, the jurisdictional Commissioner issued the SCN to propose revision u/s 263 of the I.T.Act, 1961 and finally, he made the direction to revision the order to the AO. That’s why, this appeal is filed.

Ground of Appeal no. 1

“On the facts and in the circumstances as well as on the law Ld. CIT erred in making direction u/s 263 of the income tax Act, 1961 to AO to re-compute income of the assessee considering the co-ownership of capital assets sold by assessee when (a) the case was taken in limited scrutiny, (b) the assessement was neither erroneous nor prejudicial to the interest of revenue and therefore the direction is without jurisdiction and liable to be quashed.”

1.1 Your honour, the case was taken in CASS to the verification of refund claim. (Please see the last sentence of very first para of assessment order.)

1.2 The buyer of flat deducted TDS amounting to Rs. 9874644.00 u/s 195 out of consideration paid to assessee of booking right of flat (Form 26AS is placed 1-5 of paper book )

1.3 Assessee offered Income from capital gain on sale of booking right of flat and taken indexed cost of  (Copy of Computation and ITR V is annexed at page no 6-9 of paper book )

1.4 Due to indexation of cost of acquisition, the computation after assessment u/s 143(3) resulted Long term Capital loss amounting to Rs. 10937701.00 as against the declared loss in ITR filed by assessee of Rs. 11519069.00.

1.5 Assessee filed copies of agreement of booking and sale agreements before AO during the course of assessment proceeding. (Copy of purchase and sale deed are annexed at page no 10-27 of paper book).

1.6 Assessee also filed the copies of all bank statements from which the booking amount and instalments were paid and the sale consideration was credited. (Copies of bank statements are annexed at page no 28-37 and 40-41 of paper book ).

1.7 LD AO examined the sources of booking payment and instalments of booking rightspaid by assessee to ascertain whether the assessee has claimed actual cost or the cost is artificially inflated. Since the scrutiny assessment was to be made specially to examine the refund claim made by assessee, the cost taken in deriving gain to assessee was meticulously examined.

1.8 After, due verification of sale consideration, cost, sources of cost, indexation, Form26AS and bank statements of assessee, the AO assessed the loss from long term capital gain with minor modification due to clerical mistake in ITR in calculating indexation and granted refund to assessee.

1.9 The subject matter of scrutiny assessment is to examine the claim of refund, the AO restricted his inquires to such extent. However, he was satisfied from the evidences and documents produced to him that the booking was made by assessee from his own funds and the amount was paid from his own bank account, the instalments were paid by assessee himself out of his own fund and from his own bank accounts. The entire sale consideration was received by assessee himself and credited in his own bank account. The seller, being satisfied the ownership of booking rights, deducted whole of TDS u/s 195 in the name of assessee. Assessee himself offered the Long Term Capital Loss in his own name and claimed the TDS.

1.10 CIT observed that the booking rights were in joint name with wife of assessee, the capital loss should have been assessed 1/2in both the assessee and his wife.

1.11 Your honour as per guidelines issued by CBDT the AO was not allowed to expand the scope of scrutiny without obtaining prior approval from appropriate authority in case of limited scrutiny cases. Here, the Ld CIT in the garb of revision tried to enhance the scope of scrutiny, which is not permissible in the law.

1.12 I rely upon the case of INCOME TAX APPELLATE TRIBUNAL, SURAT BENCH, SURATITA No.238/SRT/2023 in case of Pretied Chhatrasingh Chauhan Vs. Principal Commissioner of Income Tax. (42-52 of paper book)

In this case honourable ITAT held that, We find that the Coordinate Bench of Delhi High Court in Balbinder Kumar  Vs Pr.CIT (supra) has held that “in case of limited scrutiny, Assessing Officer could not go beyond reason for which matter was selected for limited scrutiny thus, it would not be open to Principal Commissioner to pass revisionary order under section 263 on other aspects and remit matter to Assessing Officer for fresh assessment.” We further find that similar view was taken by Coordinate bench of Tribunal in series of decisions as has been relied by ld AR for the assessee.

Based on the above facts and circumstances, we note that as the case of assessee was selected for ‘limited scrutiny’ purpose to verify the sources of substantial increase in capital, and the Assessing Officer had rightly raised query regarding sources of substantial increase in capital, vide notice u/s 142(1) of the Act and the assessee had also submitted her detailed reply and explanation with supporting evidences, against notice u/s 142(1) of the Act before Assessing Officer. The Assessing Officer, after proper examining and verifying the details and submission along with evidences of the assessee and after satisfying with sources of substantial increase in capital of assessee, had completed the assessment and passed the order u/s 143(3) of the Act. We also note that that an assessment or re-assessment could only be revised u/s 263 of the Act in case it satisfies the twin conditions, viz: order is erroneous as well as prejudicial to the interest of revenue.

In the case of assessee, order passed u/s 143(3) of the Act is neither erroneous nor prejudicial to the revenue, as it was passed after detailed examination and proper verification of all documents of subject matter of limited scrutiny. Therefore, respectfully following the judgment of the Co-ordinate Bench of ITAT Surat in the case of Green Park (supra), we quash the order of ld PCIT.

This case is also covered on identical facts in case of Shri Arun Kumar Palawan Vs. The PCIT, Jaipur-1, Jaipur. Case no ITA No. 144/JP/2022 (page no 53-78 of paper book ) in which it was held that (Page No 25 from last para )“As we have discussed above, in case of limited scrutiny, the AO is duty bound to restrict himself to examine the matters for which matter was selected for limited scrutiny and where the AO takes a view and forms a reasonable belief that some other matters are required to be examined, the same will in effect be traversing beyond the scope of limited scrutiny which is not permissible unless the matter is converted into complete scrutiny and which has not happened during the course of present assessment proceedings. Therefore, the issue of activity of taking loans, i.e. how the amount is utilized, what is the rate of interest paid, what is the rate of interest charged, which are held by the ld PCIT as matters not being examined by the AO, are matters which are not part of the reasons for which the case was selected for limited scrutiny, therefore, no fault lie on the part of the AO resulting in order being held as erroneous and prejudicial to the interest of revenue. As far as matters for which case was selected for limited scrutiny for the reason of “Deduction against income from other sources”, the same has been duly examined by the AO and even the ld PCIT has not recorded any adverse findings in terms of lack of enquiry or inadequate enquiry on part of the AO. In light of aforesaid discussions, we hereby set-aside the order passed by the ld PCIT u/s 263 and the order of the AO is sustained.

In the result, this appeal of the assessee is allowed.

In M/s R.H. Property vs. PCIT, ITA No. 1906/Mum/2019 it was held that,- “As a matter of fact, what cannot be done directly cannot be done indirectly. Accordingly, in terms of our aforesaid observations, we are of the considered view that as the A. Ohan aptly confined himself to the issue for which the case of the assessee was selected for limited scrutiny, therefore, no infirmity can be attributed to his order for the reason, that he had failed to dwell upon certain other issues which were clearly beyond the realm of the reason for which the case of the assessee was selected for limited scrutiny as per the AIR information. We thus not being able to concur with the view taken by the CIT that the order passed by the A.O under Sec. 143(3), dated 10.10.2016 is erroneous, therefore, set aside his order and restore the order passed by the A.O.

Hon’ble ITAT Delhi Bench Delhi in the case of Shri Balbinder Kumar Vs PCIT (ITA No. 485/Del/2020 held that : “when the assessing officer is bound to follow the CBDT instructions and while following such instructions and after verification of the material furnished by the assessee on the aspect covered by the limited scrutiny, is not open for the Ld. PCIT to say that not adverting to the other aspects of the  competition would render the assessment order erroneous and prejudicial to the interest of the Revenue.”

2.1 Further, your honour as per law held by The Supreme Court in celebrated/ leading case of Malabar Industrial Co. Ltd. v. CIT [2000] 243 ITR 832 (SC), held that the prerequisite for the exercise of jurisdiction by the Commissioner suo-motu is that the order of the Income-tax Officer is erroneous in so far as it is prejudicial to the interests of the revenue. The Commissioner has to be satisfied of twin conditions, namely, (i) the order of the Assessing Officer sought to be revised is erroneous; and (ii) it is prejudicial to the interests of the revenue. If one of them is absent – if the order of the Income-tax Officer is erroneous but is not prejudicial to the revenue or if it is not erroneous but is prejudicial to the revenue – recourse cannot be had to section 263(1) of the Act. It can be exercised only when an order is erroneous, the section 263 will be  In view of aforesaid factual and legal discussions, in our considered view, the twin condition as required to revise the assessment order is not meet out in the present case, therefore, the order passed by the ld. Pr. CIT is set aside and the grounds of appeal raised by the assessee are allowed. In the result, this appeal of assessee is allowed.

2.2 Your honour the order of AO was neither erroneous not prejudicial to the interest of revenue.

2.3 During the course of proceeding u/s 263 before Ld CIT (IT), assessee submitted that during the previous year relevant to Y. 2018-19, the assessee sold a booking of a flat in Bengaluru (Karnataka) in the sole capacity. The entire consideration is received by to assessee only and credited to his bank account. TDS on the sale of the property was deducted by the buyer in his name only. (Copies of all the bank accounts through instalments and sale consideration paid and received are enclosed)

2.4 Assessee booked the flat during the year 2010 and paid instalments in the bank account pertaining to and belonging to him. The bank accounts are duly reflected by the assessee in his ITR from year to year page no 81 of paper book . The entire purchase instalments were paid only by  The name of the wife, Smt. Usha Agarwal was also added as co-owner for the sake of the satisfaction of being a spouse. It is also a ritual in Marwari families to purchase the house in a joint name with the wife.

2.5 Being the sole owner, the assessee sold the booking rights, received the consideration in his bank account, claimed the TDS on the sale of the property and declared the Income from Long Term Capital Gain.

2.6 During the course of the assessment proceedings u/s 143(3), the assessee filed various documents to verify the calculation of Capital  Proofs of Purchase, payment of instalments, TDS by him on purchase consideration, sale consideration received, TDS made by the buyer, bank accounts belonging to him. He thoroughly examined the copy of the purchase agreement, sale agreement, and copy of assignment letter and found that the name of the wife is appeared in all the documents but based on investment done by the assessee in entirety, examination of bank accounts through which purchase and sale consideration was passed, deduction of TDS on purchases by the assessee and on sale by buyer and submission made by the assessee, the Ld. AO was satisfied and assessed Long Term Capital gain in the hands of the assessee.

2.7 On the above facts and in the circumstances, the order of assessing officer is not erroneous at all.

2.8 Your hon our, the order is also not prejudicial to the interest of revenue. From the above discussion, it is well established that the funds of the assessee were involved in the purchase of the flat (Booking). In the case if the wife is treated as a joint owner, still the Long-Term Capital Gain or loss as the case may be, is liable to be clubbed in the hand of the husband.

2.9 The case of assessee is well covered under section 64 sub-section 1clause (iv) Which reads as under: –

“In computing the total income of any individual, there shall be included all such income as arises directly or indirectly –

(iv) subject to the provision of clause (i) of section 27 to the spouse of such individual from assets transferred directly or indirectly to the spouse by such individual otherwise than for the adequate consideration or in connection with an agreement to live apart.”

In either case –

1 If we treat it the case of transfer of ½ ownership to wife without consideration, or

2 Treat it the gift

In both circumstances provision to clause (iv) of sub-section 1 of section 64 invoke.

2.10  Co-owners the wife of  Clubbing provisions are applicable in the case. In the above circumstances, facts and documents produced here, it is well proved that this is neither the case of erroneous order nor the case of order being prejudicial to the interest of revenue. Assessee filed verification, ITR, bank statements obtained from both the assessee and his wife.

Prayer

As per facts of the case, the order of AO is not erroneous in so far as it is prejudicial to the interest of revenue. Further, in the concept of limited scrutiny formulated by CBDT, Ld CIT exceeded the jurisdiction. Please quash the direction of CIT to make revision of order.”

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

7. The AR of the assessee in addition to the above written submission so filed vehemently argued that ld. PCIT cannot expand the scope of assessment in the proceeding u/s. 263 of the Act to verify if any investment was made by wife of the assessee or not, when the ld. AO had already considered the issue of investment and verified while allowing the cost of acquisition. The ld. PCIT directed AO to verify the source of fund made by assessee and no payment was made by his spouse. This issue has never been subjected to scrutiny even though ld. AO while granting the benefit of cost of acquisition has already verified the whole amount paid and ncurred. The relevant proof in the hands of the assessee  wherein the payment was considered as cost of acquisition made in various years were considered and was accordingly allowed. Therefore, the order is neither erroneous or prejudicial to the interest of the revenue. Ld. AR of the assessee further submitted that the provisions of section 263 of the Act empowers the ld. PCIT only if the criteria as prescribed under explanation 2 to section 263 of the Act is met with, and while passing the order ld. PCIT failed to demonstrate that criteria mentioned and the provisions even while passing the order. She also argued that ld. PCIT while passing the order did not invoke explanation 2 to section 263 of the Act to hold the order of the ld. AO was erroneous and prejudicial to the interest of the revenue.

8. Per contra, ld. DR representing the revenue heavily relied upon the findings recorded in the order of ld. PCIT.

9. We have heard the rival contentions and perused the material placed on record. The assessee in this appeal has raised solitary ground challenging the directions to the ld. AO in the revision proceeding to re-compute income of the assessee considering the co-ownership of capital assets sold during the year.

The brief facts of the case are that for the year under consideration assessee filed his return of income declaring total income of Rs. 1,13,290/- and claimed loss of Rs. 1,15,19,069/-. The assessee claimed to be non-resident taxpayer. That return of income so filed was selected for scrutiny through CASS for the verification of refund claimed by the assessee. Required notices were issued to the assessee and in response to the statutory notices, the assessee submitted his reply through ITBA portal on time to time. Ld. AO noted that the assessee had sold an immovable property at the sale consideration of Rs. 2,77,22,864/-. As per the 26AS details, the purchaser had deducted TDS of Rs. 98,51,320/- u/s 195 of the Act on the above sale consideration. The aforesaid immovable property was purchased by the assessee through an Agreement for Sale executed on dated 23/12/2010 at the purchase consideration of Rs. 2,77,22,864/-. The assessee had paid Rs. 2,77,22,864/- in installments and that cost was claimed with indexation based on the year-on-year payment. That property was acquired by the assessee in F. Y. 2010-11 through an Agreement for Sale executed on dated 23.12.2010. Upon sale of that property the assessee claimed long-term capital loss of Rs. 1,15,19,069/- wherein the sale consideration was received by the assessee at Rs. 2,72,22864/- and indexed cost of acquisition was claimed at Rs. 3,92,41,933/-. The payment of acquisition of that property was made in installments, ld. AO verified that cost of acquisition claimed by the assessee  and in that process ld. AO noted that the assessee claimed excess cost of indexation amounting of Rs. 5,81,368/- and accordingly was not allowed that much excess claim of the assessee. Thus, it was not the case of the ld. PCIT that the ld. AO had not verified the claim of cost of acquisition, but the ld. PCIT intended to get reverified the fact that the since the property was under joint name the loss claimed was attributable to the wife of the assessee or not, and for that he exercised the power under section 263 of the Act. That action of the ld. PCIT is under challenge in this appeal.

While passing the impugned order ld. PCIT has not appreciated the fact that the case of the assessee was selected for limited scrutiny to examine the claim of large refund. Wherein the based on the scope ld. AO had already examined and verified the cost of acquisition including the details of the source thereof. Now what was proposed by way of direction under section 263 of the Act whereby ld. PCIT aims to expand the scope of scrutiny and same is not permitted. Not only that while passing the order the ld. PCIT has not exposed any of the clause of explanation 2 of section 263 as applicable based on the facts of the case.

The assessee in the written submission serviced a land mark judgment delivered by the apex court in the case of Malabar Industrial Co. Ltd. v. CIT [2000] 243 ITR 832 (SC), where the highest court of the country the prerequisite for the exercise of jurisdiction by the Commissioner suo-motu is that the order of the Income-tax Officer is erroneous in so far as it is prejudicial to the interests of the revenue. The Commissioner has to be satisfied of twin conditions, namely, (i) the order of the Assessing Officer sought to be revised is erroneous; and (ii) it is prejudicial to the interests of the revenue. If one of them is absent – if the order of the Income-tax Officer is erroneous but is not prejudicial to the revenue or if it is not erroneous but is prejudicial to the revenue – recourse cannot be had to section 263(1) of the Act. It can be exercised only when an order is erroneous, section 263 will be attracted.

In view of aforesaid factual and legal discussions, in our considered view, the twin condition as required to revise the assessment order is not met out in the present case. Even the amendment made to explanation 2 of section 263 does not confer blind powers and it is held that despite there being an amendment, enlarging the scope of the revisionary power of the ld. PCIT u/s 263 to some extent, it cannot justify the invoking of the explanation 2 in the facts of the present case. Before referring to that Explanation, one has to understand what the true meaning of the Explanation in the context of application of mind by a quasi-judicial authority was. Even that newly inserted Explanation 2 to Section 263 does not authorize or give unfettered powers to Commissioner to revise each and every order, if in his (subjective) opinion, same has been passed without making enquiries or verification which should have been made. While passing that order ld. PCIT failed to demonstrate that which of the conditions given in that explanation 2 to section is breached by the ld. AO. Thus, in the totality of facts and circumstances, it is not at all a case where the subjected assessment order should be alleged to be erroneous in so far as prejudicial to the interests of the revenue. There is neither error of law nor of facts. There is no erroneous assumption by the AO of either the facts or of law, as alleged by the ld. PCIT and therefore, the order passed by the ld. Pr. CIT is set aside and the ground of appeal raised by the assessee is allowed.

In the result, the appeal of the assessee is allowed.

Order pronounced in the open court on 08/01/2025.