The Indore bench of Income Tax Appellate Tribunal ( ITAT ) ruled that the Principal Commissioner of Income Tax’s ( Pr. CIT ) order under section 263 of the Income Tax Act, 1961, which had annulled the Assessing Officer’s ( AO ) assessment and mandated a new assessment, was not justified.
Avinash Chalana and Company, the appellant-assessee, partnership firm, filed its income tax return on 29.09.2018 declaring Rs.1,25,28,260 in income. The case was selected for limited scrutiny, focusing on the issues such as investment in immovable property and share capital/other capital. The assessment was completed on 11.02.2021 under sections 143(3) read with 143(3A) and 143(3B) of the Act.
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The Pr.CIT later found that some issues were not reviewed by the AO. Therefore, the Pr. CIT initiated proceedings under section 263 and issued show cause notices on 03.02.2023, 16.02.2023, and 27.02.2023. Since the assessee did not respond, the Pr. CIT canceled the AO’s assessment order and ordered a new assessment, giving the assessee a chance to be heard. The assessee being aggrieved by the impugned order filed an appeal before the tribunal.
The tribunal noted that the assessee had filed its return of income ( ROI ) on 29.09.2018, which was selected for limited scrutiny under the Computer Assisted Scrutiny Selection ( CASS ) and e-assessment scheme 2019. The AO had mentioned the issues taken up for limited scrutiny.
The tribunal noted that the assessee had clarified that its partners, who are regular taxpayers, provided returns, bank statements, and capital account details. The capital introduced into the firm mainly came from the sale of shares in M/s Som Distilleries and Breweries Ltd., which was confirmed by the partners’ Dmat accounts.
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The ITAT observed that the Assessing Officer ( AO ) was satisfied with this evidence, including the partners’ returns and the exempt long-term capital gains. No new evidence was presented by the AO or Pr. CIT to dispute the authenticity of the transactions.
The tribunal noted that the Pr. CIT passed an ex-parte order without considering the assessee’s replies to the notices issued, including a response dated 13.02.2023 and another dated 21.02.2023. The AO had conducted a thorough inquiry into the introduction of capital by the partners and was satisfied with the transactions.
When the AO had thoroughly examined and accepted the assessee’s claim regarding the introduction of capital by the partners, it reflects a logical and reasonable conclusion. Therefore, the case does not fall under the lack of inquiry by the AO. Consequently, Pr. CIT cannot invoke section 263 merely because he disagrees with the AO’s view.
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The tribunal also stated that once the assessee has provided adequate evidence for the partners’ identity, creditworthiness, and transaction genuineness, and no defects were found by the AO or Pr. CIT, setting aside the assessment under section 263 and ordering a fresh assessment is not legally justified and should be quashed.
The two member bench comprising Vijay Pal Rao ( Judicial Member ) and B.M Biyani ( Accountant Member ) contended that an issue not part of the limited scrutiny under CASS cannot be raised in section 263 proceedings. The correct steps would have been for the Assessing Officer AO to expand the scrutiny or use sections 147/148. Thus, the Pr. CIT order is not valid and is set aside.
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