AO’s Comprehensive Scrutiny Nullifies Alleged Lack of Inquiry u/s. 263: ITAT Sets Aside PCIT Order [Read Order]

The Income Tax Appellate Tribunal (ITAT), Chennai, dealt with the core issue of whether the Principal Commissioner of Income Tax, Madurai (PCIT), was justified in invoking revisionary jurisdiction under Section 263 of the Income Tax Act,1961, in relation to the assessment of rental income disclosed under the head “income from other sources.”

The appellant, Sevugan Pethaperumal, an individual deriving income from salary and other sources, filed his return for the Assessment Year 2020-21, declaring income of ₹2,63,150. The case was selected for limited scrutiny to examine “deduction from income from other sources.”

During assessment proceedings, the appellant disclosed rental receipts of ₹88 lakhs from his property “PY Mahal” let out to Orient Hospital Pvt. Ltd. The Assessing Officer (AO) examined the matter through detailed enquiries, issued multiple notices, and eventually accepted the return under Section 143(3) on 12.09.2022 without making additions.

The appellant, represented by G. Tarun, Advocate, argued that the AO had made comprehensive enquiries into the rental income and its treatment, and all necessary evidence had been placed on record, including submissions, responses to notices, and supporting documents compiled in a paper book. It was contended that once a due enquiry had been made and the AO applied his mind, the revisionary powers under Section 263 could not be invoked.

The Revenue, represented by Bipin C.N., CIT (DR), defended the order of the PCIT, contending that the AO had failed to make requisite and proper enquiries into the treatment of rental income. It was submitted that the income should have been classified under the head “income from house property” instead of “income from other sources,” and the AO’s order was thus erroneous and prejudicial to the interests of the Revenue.

The Bench comprising of George George K Vice President and Amitabh Shukla, Accountant Member, observed that the AO had indeed carried out sufficient enquiries during the limited scrutiny proceedings and had accepted the appellant’s position after due consideration. The Bench held that the distinction between inadequate enquiry and lack of enquiry was vital, and in this case, it was not a matter of no inquiry.

Furthermore, since the case was selected for limited scrutiny, the AO was restricted to verifying deductions from income from other sources, rather than the classification of rental income.

The Tribunal relied on the paper book evidence filed by the appellant, which contained copies of notices issued by the AO, the assessee’s submissions, and supporting documents. These materials demonstrated that the AO had duly investigated the issue, thereby nullifying the PCIT’s stand that there was a lack of inquiry.

Accordingly, the appeal was allowed.

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