Section 263 should not be exercised at instance of assessing officer

PCIT Vs Reeta Lakhmani (Calcutta High Court)

The case of PCIT vs. Reeta Lakhmani, heard by the Calcutta High Court, is a significant legal precedent involving the interpretation of Section 263 of the Income Tax Act, 1961. This case addresses the procedural and substantive aspects of the exercise of jurisdiction by the Principal Commissioner of Income Tax (PCIT). The judgment, delivered on a series of appeals, scrutinizes the validity of the PCIT’s actions and the genuineness of transactions under the Income Tax Act.

The appeals were filed by the revenue under Section 260A of the Income Tax Act, challenging the orders of the Income Tax Appellate Tribunal (ITAT) for various assessment years. The primary contention was whether the assessee, Reeta Lakhmani, engaged in dubious share transactions to account for undisclosed income under the guise of Long Term Capital Gain (LTCG) and thus claim exemption under Section 10(38) of the Act.

Questions of Law

The revenue raised three substantial questions of law:

1. Genuineness of Transactions: Whether the Tribunal erred in law by not recognizing that the assessee failed to substantiate the genuineness of the transactions.

2. Nature of Transactions: Whether the Tribunal erred in law by allowing the assessee’s claim of exemption under Section 10(38) without holding that the transactions were adventures in the nature of trade and hence taxable as business income.

3. Documentary Evidence and Conduct: Whether the Tribunal overlooked the documentary evidence and the conduct of the assessee in light of the provisions of Section 68.

Arguments and Findings

Genuineness of Transactions: The revenue argued that the assessee could not establish the genuineness of the transactions. However, the Tribunal granted relief to the assessee, emphasizing that the initiation of proceedings under Section 263 by the PCIT was based on a proposal by the assessing officer, which is not in accordance with law. The Tribunal noted that the PCIT must independently apply its mind and record reasons to satisfy the twin conditions for exercising power under Section 263.

Nature of Transactions: The revenue contended that the transactions involving shares of Baviscon Vincom Pvt. Ltd., which later amalgamated with Unno Industries Ltd., were adventures in the nature of trade. The Tribunal, however, focused on procedural lapses by the PCIT and did not find substantial merit in reclassifying the transactions as business income without proper evidence.

Documentary Evidence and Conduct: The Tribunal observed that the PCIT failed to independently evaluate the evidence and merely acted on the assessing officer’s proposal. This procedural flaw led to the Tribunal setting aside the PCIT’s order under Section 263.

Precedent and Comparative Analysis

The case draws parallels with Principal Commissioner of Income Tax, Durgapur vs. M/s. Sinforte Pvt. Ltd., where the court dismissed the appeal on similar grounds. The court highlighted that jurisdiction under Section 263 should not be exercised at the instance of the assessing officer. This precedent reinforced the Tribunal’s decision to set aside the PCIT’s order in Reeta Lakhmani’s case.

Conclusion

The Calcutta High Court’s judgment in PCIT vs. Reeta Lakhmani reaffirms the importance of procedural correctness and independent application of mind by the PCIT while exercising powers under Section 263 of the Income Tax Act. The case underscores the necessity for the revenue authorities to substantiate their claims with robust evidence and follow due process. By dismissing the revenue’s appeal, the court emphasized that procedural lapses and lack of substantial questions of law cannot form the basis for reassessment under Section 263. This judgment serves as a crucial reference for future cases involving similar issues of jurisdiction and procedural propriety in tax matters.

FULL TEXT OF THE JUDGMENT/ORDER OF CALCUTTA HIGH COURT

We have heard learned counsel appearing for the respective parties. We have perused the affidavit filed in support of the petition and found sufficient cause has been shown for condonation of delay.

Accordingly, the application is allowed and the delay in filing the appeal is condoned.

These appeals have been filed by the revenue under Section 260A of the Income Tax Act, 1961 (the Act) challenging the orders passed by the Income Tax Appellate Tribunal in various assessment years. The details of the appeal numbers, case number before the learned Tribunal and the assessment year under consideration are set out in a tabulated form hereunder :

Since the issue involved in all these cases are identical they have been taken together and are disposed of by this common judgment and order. For the sake of convenience and with the consent of the learned Advocates for the parties ITAT /129/2022 is taken as the lead case. The revenue has raised the following substantial questions of law for consideration:

“i] Whether the learned Tribunal has erred in law and failed to appreciate that the assessee could not substantiate the genuineness of the transaction to prove that it had not in dubious share transaction meant to account for undisclosed income in the garb of Long Term Capital Gain [LTGC] to claim exemption under section 10[38] of the Act ?

ii] Whether the learned Tribunal has erred in law while allowing the assessee’s appeal of claim of exemption under section 10[38] without holding that the official transaction of purchase and sale of shares of penny stock companies namely Baviscon Vincom Pvt. Ltd. later amalgamated with Unno Industries Ltd. was adventure in nature of trade, thus same was to be taxed as business income ?

iii] Whether the learned Tribunal has erred in law in overlooking the documentary evidence in depth and in light of conduct of the assessee and other surrounding circumstances in order to see whether the assessee is liable to the provisions of section 68 or not?”

We have heard Mr. Tilak Mitra, learned standing Counsel for appellant/revenue and Mr. Pranit Bag, learned Advocate assisted by Mr. S. Mukhopadhyay, learned Advocate for the respondent.

The 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) of the Act.

On going through the order passed by the learned Tribunal we find that the learned Tribunal had granted relief to the assessee on two grounds firstly as to whether the exercise of jurisdiction by the Principal Commissioner of Income Tax under Section 263 was justified and in accordance with law.

This aspect was considered by the learned Tribunal and after going through the facts of the case it was found that the initiation of the proceedings under Section 263 of the Act was based on a proposal given by the assessing officer and not at the behest of the PCIT. It may be true that the PCIT may have information from the assessment file or through other sources. Nevertheless while exercising powers under Section 263 of the Act the PCIT has to bear in mind the twin conditions are to be conjointly fulfilled. Therefore, before exercise of power under Section 263 it is the PCIT who has to apply its mind to the issue and thereafter record reasons as to how the twin conditions are satisfied and then issue a show-cause notice to the assessee. In the cases on hand there is nothing on record to show that such an exercise was done by the PCIT. Therefore, learned 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 of the Act. Thereafter, the learned Tribunal has proceeded to examine the merits of the matter and granted relief. It is the submission of Mr. Mitra 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 reported in 2022 SCC online page 1572. 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. in ITAT No.104/2019 dated 7.1.2022 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 and the substantial questions of law suggested by the revenue are not required to be decided in the instant case.

For the reasons set out by us above and, accordingly, the same are left open.