It is revealed it is not the case that the AO has not made any enquiry. Indeed the Pr. CIT initiated proceedings under section 263 of the Act on the ground that the AO has not made enquiries or verification which should have been made in respect of disallowance under section 14A read with rule 8D of the Act. It is not the case of the Pr. CIT that the Ld. AO did not apply his mind to the issue on hand or he had omitted to make enquiries altogether. In the instant set of facts, the AO had made enquiries and after consideration of material placed on record accepted the genuineness of the claim of the assessee.
PCIT in his order passed under section 263 of the Act has made reference to the explanation 2 of section 263 of the Act. It was attempted by the learned PCIT to hold that there were certain necessary enquiries which should have been made by the AO during the assessment proceedings but not conducted by him. Therefore, on this reasoning the order of the AO is also erroneous insofar prejudicial to the interest of revenue. In this regard, we make our observation that the learned PCIT has not invoked the explanation 2 of section 263 of the Act in the show cause notice dated 17 January 2022 about the same. Therefore, the opportunity with respect to the explanation 2 of section 263 of the Act was not afforded to the assessee. Thus, on this count the learned PCIT erred in taking the course of such provisions while deciding the issue against the assessee. Secondly, the learned PCIT has also not specified the nature and the manner in which the enquiries which should have been conducted by the AO in the assessment proceedings. Thus, in the absence of any specific finding of the learned PCIT with respect to the enquiries which should have been made, we are not convinced by his order passed under section 263 of the Act.
In view of the above and after considering the facts in totality, we hold that there is no error in the assessment framed by the AO under section 143(3) causing prejudice to the interest of revenue. Thus, the revisional order passed by the learned PCIT is not sustainable and therefore we quash the same.
FULL TEXT OF THE ORDER OF ITAT RAJKOT
The captioned appeal has been filed at the instance of the Assessee against the order of the Learned Principal Commissioner of Income, Rajkot-1, dated 28/02/2022 arising in the matter of assessment order passed under s. 263 of the Income Tax Act, 1961 (here-in-after referred to as “the Act”) relevant to the Assessment Year 2017-18.
2. The only interconnected issue raised by the assessee is that the learned Principal CIT erred in holding the assessment framed under section 143(3) of the Act as erroneous insofar prejudicial to the interest of Revenue under the provisions of section 263 of the Act.
3. The brief facts are that the assessee is a Private Limited Company and engaged in the business of Clearing, forwarding, Handling & storage of liquid Cargo. The assessee has files its original return of income on 01-11-2017 and declared income of Rs. 7,14,60,410/- only. The case of the assessee was selected for complete scrutiny under CASS. The assessment was completed by the AO on 2512-2019 after Disallowing the deduction claimed u/s 80IA(4)(i) of Act for Rs. 4,85,50,551/- only.
4. The PCIT on examination of the case records of the assessee, found that there was an investment in quoted and unquoted shares and mutual funds, which can earn exempt income. The amount of investment as on 01-04-2016 and as on 01-04-2017 was Rs. 4,47,86,678/- and Rs. 4,47,86,478/- respectively. According to the learned PCIT, there should have been disallowance u/s 14A r.w. rule 8D, but the AO failed to do so. It is clear that the AO has not properly examined this issue during the assessment proceedings by the AO. Accordingly, the PCIT initiated the proceedings under section 263 of the Act vide show cause notice dated 04 February 2022.
4.1 The assessee in response to such show cause notice submitted that the issue is covered in assesse’s own case by the appellate authority in the preceding years and there is no change in the facts during the year under consideration viz a viz preceding year. The assessee further submitted before the Ld. PCIT that no new investment was made during the year under consideration and no expenditure incurred in respect of exempt income on such investment.
4.2 However, the ld. PCIT after considering the assessment records and submission of the assessee observed that the assessment has been completed without conducting any inquiry/ verification or incorrect application of law which tantamount that the order is erroneous and also prejudicial to the interest of Revenue. Thus the PCIT accordingly invoked the provision of section 263 read with explanation 2 of the Income Tax Act and held the assessment order as erroneous and prejudicial to the interest of Revenue.
5. Being aggrieved by the order of the learned PCIT, the assessee is in appeal before us.
6. The learned AR before us filed a paper book running from pages 1 to 66 and contended that the assessment was framed by the AO after considering the necessary details and verification and application of mind. The learned AR in support of his contention drew our attention on pages 16 to 24 and page no 25 to 29 where the copy of the notice under section 142(1) of the Act dated 08-01-2019 and 1112-2019 was placed requiring the assessee to justify about the disallowance under section 14A of the Act. Likewise, the learned AR also drew our attention on pages 30 to 34 and pages 35 to 42 of the paper book where the reply of the assessee in response to the notice issued under section 142(1) of the Act as mentioned above was placed. Thus, the learned AR contended that there cannot be said that the assessment order is erroneous and causing prejudice to the interest of Revenue in the given facts and circumstances.
7. On the contrary, the learned DR vehemently supported the order of the authorities below.
8. We have heard the rival contentions of both the parties and perused the materials available on record. The issue in the present case relates whether the assessment order has been passed by Ld. AO without making inquiries or verification with respect to the disallowance under section 14A read with Rule 8D as discussed above and hence the assessment is erroneous insofar prejudicial to the interest of the Revenue and thus requiring revision by Pr. CIT u/s 263 of the Act.
8.1 An inquiry made by the Assessing Officer, considered inadequate by the Commissioner of Income Tax, cannot make the order of the Assessing Officer erroneous. In our view, the order can be erroneous if the Assessing Officer fails to apply the law rightly on the facts of the case. As far as adequacy of inquiry is considered, there is no law which provides the extent of inquiries to be made by the Assessing Officer. It is Assessing Officer’s prerogative to make inquiry to the extent he feels proper. The Commissioner of Income Tax by invoking revisionary powers under section 263 of the Act cannot impose his own understanding of the extent of inquiry. There were a number of judgments by various Hon’ble High Courts in this regard.
8.2 Delhi High Court in the case of CIT Vs. Sunbeam Auto 332 ITR 167 (Del.), made a distinction between lack of inquiry and inadequate inquiry. The Hon’ble court held that where the AO has made inquiry prior to the completion of assessment, the same cannot be set aside u/s 263 of the Act on the ground of inadequate inquiry. The relevant observation of Hon’ble Delhi High Court reads as under:
“12. There are judgments galore laying down the principle that the Assessing Officer in the assessment order is not required to give detailed reason in respect of each and every item of deduction, etc. Therefore, one has to see from the record as to whether there was application of mind before allowing the expenditure in question as revenue expenditure. Learned counsel for the assessee is right in his submission that one has to keep in mind the distinction between “lack of inquiry” and “inadequate inquiry”. If there was any inquiry, even inadequate, that would not by itself, give occasion to the Commissioner to pass orders under section 263 of the Act, merely because he has different opinion in the matter. It is only in cases of “lack of inquiry”, that such a course of action would be open. ———
From the aforesaid definitions it is clear that an order cannot be termed as erroneous unless it is not in accordance with law. If an Income-tax Officer acting in accordance with law makes a certain assessment, the same cannot be branded as erroneous by the Commissioner simply because, according to him, the order should have been written more elaborately. This section does not visualise a case of substitution of the judgment of the Commissioner for that of the Income-tax Officer, who passed the order unless the decision is held to be erroneous. Cases may be visualised where the Income-tax Officer while making an assessment examines the accounts, makes enquiries, applies his mind to the facts and circumstances of the case and determines the income either by accepting the accounts or by making some estimate himself. The Commissioner, on perusal of the records, may be of the opinion that the estimate made by the officer concerned was on the lower side and left to the Commissioner he would have estimated the income at a figure higher than the one determined by the Income-tax Officer. That would not vest the Commissioner with power to reexamine the accounts and determine the income himself at a higher figure. It is because the Income-tax Officer has exercised the quasi-judicial power vested in him in accordance with law and arrived at conclusion and such a conclusion cannot be termed to be erroneous simply because the Commissioner does not feel satisfied with the conclusion. 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.
15. Thus, even the Commissioner conceded the position that the Assessing Officer made the inquiries, elicited replies and thereafter passed the assessment order. The grievance of the Commissioner was that the Assessing Officer should have made further inquires rather than accepting the explanation. Therefore, it cannot be said that it is a case of ‘lack of inquiry’. ”
8.3 The Hon’ble Bombay High Court in case of Gabriel India Ltd.  203 ITR 108 (Bom), discussed the law on this aspect in length in the following manner:
“The consideration of the Commissioner as to whether an order is erroneous in so far as it is prejudicial to the interests of the Revenue, must be based on materials on the record of the proceedings called for by him. If there are no materials on record on the basis o f which it can be said that the Commissioner acting in a reasonable manner could have come to such a conclusion, the very initiation of proceedings by him will be illegal and without jurisdiction. The Commissioner cannot initiate proceedings with a view to starting fishing and roving enquiries in matters or orders which are already concluded. Such action will be against the well-accepted policy of law that there must be a point of finality in all legal proceedings, that stale issues should not be reactivated beyond a particular stage and that lapse of time must induce repose in and set at rest judicial and quasi-judicial controversies as it must in other spheres of human activity.
8.4 The Mumbai ITAT in the case of Sh. Narayan Tatu Rane Vs. ITO, I.T.A. No. 2690/2691/Mum/2016, dt. 06.05.2016 examined the scope of enquiry under Explanation 2(a) to section 263 in the following words:-
“20. Further clause (a) of Explanation states that an order shall be deemed to be erroneous, if it has been passed without making enquiries or verification, which should have been made. In our considered view, this provison shall apply, if the order has been passed without making enquiries or verification which a reasonable and prudent officer shall have carried out in such cases, which means that the opinion formed by Ld Pr. CIT cannot be taken as final one, without scrutinising the nature of enquiry or verification carried out by the AO vis-à-vis its reasonableness in the facts and circumstances of the case. Hence, in our considered view, what is relevant for clause (a) of Explanation 2 to sec. 263 is whether the AO has passed the order after carrying our enquiries or verification, which a reasonable and prudent officer would have carried out or not. It does not authorise or give unfettered powers to the Ld Pr. CIT to revise each and every order, if in his opinion, the same has been passed without making enquiries or verification which should have been made. In our view, it is the responsibility of the Ld Pr. CIT to show that the enquiries or verification conducted by the AO was not in accordance with the enquries or verification that would have been carried out by a prudent officer. Hence, in our view, the question as to whether the amendment brought in by way of Explanation 2(a) shall have retrospective or prospective application shall not be relevant.”
8.5 The Hon’ble Supreme Court in recent case of Principal Commissioner of Income-tax 2 v. Shree Gayatri Associates* 106 taxmann.com 31 (SC), held that where Pr. CIT passed a revised order after making addition to assessee’s income under section 69A in respect of on-money receipts, however, said order was set aside by Tribunal holding that AO had made detailed enquiries in respect of such on-money receipts and said view was also confirmed by High Court, SLP filed against decision of High Court was liable to be dismissed. The facts of this case were that pursuant to search proceedings, assessee filed its return declaring certain unaccounted income. The Assessing Officer completed assessment by making addition of said amount to assessee’s income. The Principal Commissioner passed a revised order under section 263 on ground that Assessing Officer had failed to carry out proper inquiries with respect to assessee’s on money receipt. In appeal, the Tribunal took a view that Assessing Officer had carried out detailed inquiries which included assessee’s on-money transactions and Tribunal, thus, set aside the revised order passed by Commissioner. The Hon’ble High Court upheld Tribunal’s order. The Hon’ble Supreme Court while dismissing the SLP filed by the Department held as under:-
“We have heard learned counsel for the Revenue and perused the documents on record. In particular, the Tribunal has in the impugned judgment referred to the detailed correspondence between Assessing Officer and the assessee during the course of assessment proceedings to come to a conclusion that the Assessing Officer had carried out detailed inquiries which includes assessee’s on-money transactions. It was on account of these findings that the Tribunal was prompted to reverse the order of revision. No question of law arises. Tax Appeal is dismissed ”
8.6 The Supreme Court in the another recent case of Principal Commissioner of Income-tax-2, Meerut v. Canara Bank Securities Ltd 114 taxmann.com 545 (SC), dismissed the Revenue’s SLP holding that 263 proceedings are invalid when AO had made enquiries and taken a plausible view in law, with the following observations:
“Having heard learned counsel for the parties and having perused the documents on record, we see no reason to interfere with the view of the Tribunal. The question whether the income should be taxed as business income or as arising from the other source was a debatable issue. The Assessing Officer has taken a plausible view. More importantly, if the Commissioner was of the opinion that on the available facts from record it could be conclusively held that income arose from other sources, he could and ought to have so held in the order of revision. There was simply no necessity to remand the proceedings to the Assessing Officer when no further inquiries were called for or directed ”
8.7 From an analysis of the above judicial precedents, the principle which emerges is that the phrase ‘prejudicial to the interests of the revenue’ has to be read in conjunction with an erroneous order passed by the Assessing Officer. Every loss of revenue as a consequence of an order of the Assessing Officer cannot be treated as prejudicial to the interests of the revenue, for example, when an Assessing Officer adopts one of the course 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 Commissioner of Income-tax does not agree, it cannot be treated as an erroneous order causing prejudice to the interests of the Revenue unless the view taken by the Assessing Officer is unsustainable in law, or the AO has completely omitted to make any enquiry altogether or the order demonstrates non-application of mind.
8.8 Now coming to the facts before us, we note that in the case of the assessee, the AO, during the course of assessment proceedings, made enquiries on this issue and after consideration of written submissions filed by the assessee and documents / evidence placed on record, and then framed the assessment under section 143(3) accepting the return of income. This fact can be verified from the notice under section 142(1) of the Act by the AO and submission in reply of the assessee against such notice.
i. Notice dated 08-01-2019:
Furnish details of expenses incurred in respect of earning of exempted income and whether disallowance of same is made as per section 14A if not, reason thereof.
Further provide calculation of disallowance as per Rule 8D of the income Tax Rules, 1962
ii. Reply dated 18-01-2019
In the opinion of the management, no expenses are incurred by the assessee against the exempt income as such no expenses can be treated as disallowance u/s.14A. As such no calculation for the same are given.
iii. Notice dated 11-12-2019:
From the perusal of the ITR6 of the assessee company it is noticed that you have earned exempt income of Rs.587/- therefore, it is show causes as to why the appropriate disallowance u/s.14A of the I.T Act, 1961 r.w.r 8d of the I.T Rules, 1962 should not be made and added to the total income of the assessee for the year under assessment.
iv. Reply dated 21-12-2019
As regards justification of non-disallowance u/s.14A of the Income Tax Act, 1961, it is to state that no expenditure in incurred to earn exempt income hence no such disallowance is there.
8.9 From the above it is revealed it is not the case that the AO has not made any enquiry. Indeed the Pr. CIT initiated proceedings under section 263 of the Act on the ground that the AO has not made enquiries or verification which should have been made in respect of disallowance under section 14A read with rule 8D of the Act. It is not the case of the Pr. CIT that the Ld. AO did not apply his mind to the issue on hand or he had omitted to make enquiries altogether. In the instant set of facts, the AO had made enquiries and after consideration of material placed on record accepted the genuineness of the claim of the assessee.
8.10 At this juncture, it is also important to note that the learned PCIT in his order passed under section 263 of the Act has made reference to the explanation 2 of section 263 of the Act. It was attempted by the learned PCIT to hold that there were certain necessary enquiries which should have been made by the AO during the assessment proceedings but not conducted by him. Therefore, on this reasoning the order of the AO is also erroneous insofar prejudicial to the interest of revenue. In this regard, we make our observation that the learned PCIT has not invoked the explanation 2 of section 263 of the Act in the show cause notice dated 17 January 2022 about the same. Therefore, the opportunity with respect to the explanation 2 of section 263 of the Act was not afforded to the assessee. Thus, on this count the learned PCIT erred in taking the course of such provisions while deciding the issue against the assessee. Secondly, the learned PCIT has also not specified the nature and the manner in which the enquiries which should have been conducted by the AO in the assessment proceedings. Thus, in the absence of any specific finding of the learned PCIT with respect to the enquiries which should have been made, we are not convinced by his order passed under section 263 of the Act.
8.11 In view of the above and after considering the facts in totality, we hold that there is no error in the assessment framed by the AO under section 143(3) causing prejudice to the interest of revenue. Thus, the revisional order passed by the learned PCIT is not sustainable and therefore we quash the same. Hence the ground of appeal of the assessee is allowed.
9. In the result, the appeal filed by the assessee is allowed.
Order pronounced in the Court on 10/08/2022 at Ahmedabad.