The Ahmedabad bench of the Income Tax Appellate Tribunal ( ITAT ) recently held that Section 263 of the Income Tax Act 1961 is not to be invoked without justifiable reasons for the same.
The assessee, Kaivan Jitendrakumar Shah HUF, filed a return of income on September 22, 2013, declaring a total income of ₹83,72,000 for AY 2013-14.
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The case was reopened by the Assessing Officer (AO) to investigate an alleged accommodation entry of ₹35,04,500, which the assessee was suspected of having received from a paper or dummy company controlled by a known entry operator, Rajiv Shah, part of the Jignesh Shah and Sanjay Shah group.
Upon reopening, a reassessment was completed under Section 147 read with Section 144B of the tax legislature on March 21, 2022. In this reassessment, the income declared by the assessee in the original return was accepted without any additions or disallowances. Later, this reassessment record was reviewed by the Principal Commissioner of Income Tax (PCIT), who found discrepancies.
It was observed that even though the dummy company transactions were the specific reason for reopening the assessment, no addition was made by the AO regarding the same. The PCIT found this failure to address the key issue problematic and deemed the reassessment order erroneous and prejudicial to the interests of the Revenue. As a result, the PCIT passed an order directing the AO to re-examine the issues and complete the assessment afresh, invoking Section 263.
Aggrieved by the PCIT’s order, the assessee appealed before the ITAT.
Before the ITAT, the counsel for the assessee argued that the PCIT had erred in invoking Section 263 of the ITA. The assessee contended that the reassessment order passed by the AO was neither erroneous nor prejudicial to the Revenue’s interest.
The assessee’s representative, Sulabh Padshah, submitted that the AO had indeed scrutinized the issue during the reassessment proceedings. The representative highlighted that the AO had issued a notice under Section 142(1) of the tax statute on January 28, 2022, detailing the reasons for reopening the case.
In response, the assessee submitted a detailed reply on February 24, 2022, denying the receipt of any such accommodation entry from Rajiv Shah or any involvement with the Jignesh Shah and Sanjay Shah group. The AO considered this response and, subsequently, accepted the returned income, thereby not making any additional assessments or disallowances.
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The assessee’s representative also pointed out that a similar issue had arisen in AY 2014-15, where the case was reopened for the same reason, and no additions were made. In that instance, the PCIT had initiated proceedings under Section 263 of the tax legislature but later dropped them, acknowledging that the reopening was based on an incorrect formation of belief. The representative further argued that this precedent further undermined the PCIT’s case for AY 2013-14, as no new facts or adverse evidence had emerged.
In addition to these contentions, the assessee also relied on several judicial precedents, including decisions from the ITAT and High Courts, supporting the argument that an assessment order cannot be deemed erroneous or prejudicial to the interest of the Revenue if the AO has made proper inquiries and applied his mind during the assessment process.
On the other side, the Department, represented by Sudhendu Das, argued that the PCIT was justified in invoking Section 263 of the tax statute because the AO had failed to adequately examine the information available in the Department’s “Insight Portal” regarding the accommodation entry. It was contended that this lack of thorough investigation rendered the reassessment order erroneous and prejudicial to the Revenue.
The bench of Mr TR Senthil Kumar Mr Narendra Prasad Sinha carefully considered the arguments from both sides. The bench observed that the records showed that the AO had indeed scrutinized the issue of the alleged accommodation entry during the reassessment proceedings
The tribunal went on to note that the AO confronted the assessee with the information about the accommodation entry, and the assessee denied any such transaction, and the AO had accepted the assessee’s explanation and completed the reassessment without making any additions.
The tribunal pointed out that the PCIT did not bring any new facts or adverse evidence to justify the revisionary action under income tax Section 263. The tribunal stressed that once the AO has conducted proper inquiries and applied his mind to the issue, the PCIT cannot simply impose his own view or revisit the assessment without any justifiable reasons.
The tribunal cited various judicial precedents, including decisions from the Gujarat High Court and the Delhi High Court, which held that a reassessment cannot be revised under Section 263 of ITA merely because the PCIT holds a different opinion.
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It was noted that the distinction between a “lack of inquiry” and “inadequate inquiry” must be considered. In this case, the tribunal concluded that the AO had conducted a proper inquiry and that there was no “lack of inquiry” that would justify invoking Section 263 of the tax legislature.
In light of these facts, the tribunal ruled that the PCIT’s order was untenable in law, and set aside the same.
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