Undertaking minimal enquiry and giving reasons necessary before invoking revisionary powers by PCIT under section 263

The case of the assessee was selected for “complete scrutiny” u/s. 143(2) of the Act against which the assessment was completed by the A.O. vide order passed u/s 143(3) read with section 144B of the Act. The PCIT called for the assessment records and observed that the assessee has short deducted/ collected tax at source on various expenditure items. Thus, such expenditures are liable to be disallowed under section 40(a)(ia) of the Act. Therefore, the PCT issued a SCN to the assessee calling upon it to put forth an explanation as to why the assessment order may not be revised under section 263 of the Act. The assessee filed detailed reply with PCIT claiming that there was no instance of short deduction/ short collection of tax.

However, the PCIT by referring to “Explanation-2” of Section 263 of the Act, observed that as the A.O while framing the assessment had failed to conduct proper and correct inquiries, therefore, the same had rendered his order as erroneous in so far it was prejudicial to the interest of the revenue. Accordingly, the PCIT set-aside the order passed by the A.O under section 143(3) of the Act to his file for detailed verification and afresh adjudication after providing an adequate opportunity of being heard and considering the submissions of the assessee. The assessee aggrieved with the order passed by the PCIT has carried the matter in appeal before the Hon’ble Tribunal.

Observations of the Tribunal

• We have thoughtfully considered the order passed by the PCIT u/s. 263 of the Act. The PCIT had without recording a finding that as to on what basis the order passed by the A.O u/s. 143(3) of the Act was being held by him as erroneous, which was, inter alia, a sine-qua-non for exercise of the revisional jurisdiction by him u/s. 263 of the Act, set-aside the same to the file of the A.O. for carrying out necessary verification.
• In other words, the PCIT by aborting the very process of reasoning, based on which, the assessment order passed by the A.O u/s. 143(3) of the Act on the aforesaid issue i.e. short deduction/short collection of tax at source was being held by him as erroneous, had, hushed through the matter and set-aside the same to the latter’s file for carrying out detailed verification.
• Although sub-section (1) of Section 263 contemplates that the revisional authority may, inter alia, after making or causing to be made such inquiry as he deems necessary, pass such order thereon as the circumstances of the case justify, including an order directing a fresh assessment, but the same pre-supposes, viz. (i). after making of inquiry; or (ii). causing to be made such inquiry the revisional authority in the course of the revisional proceedings itself, forms a view that the order passed by the A.O. is erroneous in so far it is prejudicial to the interest of the revenue under Section 263 of the Act. However, the revisional authority is not vested with the jurisdiction, wherein without arriving at a view that the subject order of assessment is erroneous in so far it is prejudicial to the interest of the revenue, he may pass an order under Section 263 of the Act setting aside the assessment order to the file of the A.O. for verifying as to whether or not the same is erroneous and prejudicial to the interest of the revenue. If that is permitted, then such an order of revision would be premature and nothing short of “putting the cart before the horse”, i.e. revising the assessment order without forming a view that the same is found to be erroneous in so far it is prejudicial to the interest of the revenue.
• The PCIT cannot without recording an observation after considering the documents/material/submissions filed by the assessee in the course of the proceedings before him and arbitrarily dispensing with the very process of arriving at an opinion that the order passed by the A.O was erroneous in so far it was prejudicial to the interest of the revenue, summarily set-aside the same to the A.O for carrying out the necessary verification.
• We, thus, based on our aforesaid observations, are of a firm conviction, that as the PCIT had failed to bring the proceedings initiated by him under Section 263 of the Act to a logical end, i.e. the assessment order passed by the A.O u/s. 143(3) of the Act, dated 27.12.2022 as per him was found to be erroneous in so far it was prejudicial to the interest of the revenue, and rather, had aborted in the mid-way the very process for arriving at the aforesaid view, thus, the same had resulted to setting-aside of the assessment order to the file of the A.O – for verifying as to whether or not the assessment order is found to be erroneous in so far it was prejudicial to the interest of the revenue, which is not found as per the mandate of Section 263 of the Act.

Citations

PCIT Vs. Modicare Ltd. ITA No. 759/2016- Delhi High Court

The Hon’ble High Court in its aforesaid order, had observed, that the exercise u/s. 263 of the Act could not have been “Outsourced” by the CIT to the A.O. It was further held by the Hon’ble High Court that the CIT is himself required to undertake minimal inquiry and give reasons for concluding that the assessment order was erroneous and prejudicial to the interest of the revenue.

    PCIT Vs. Delhi Airport Metro Express Pvt. Ltd. ITA No. 705/2017- Delhi High Court

   The Hon’ble High Court, had observed, that for exercising jurisdiction u/s. 263 of the Act, the conclusion that the order of the A.O. is erroneous and prejudicial to the interest of the revenue has to be preceded     by some minimal inquiry.

  DIT Vs. Jyoti Foundation 357 ITR 388 (Del)- Delhi High Court

 Held that an order is not erroneous unless the CIT records reasons why it is erroneous. It was also held by the Hon’ble High Court that an order will not become erroneous because on remitting the same the   A.O. may decide that the order is erroneous.

Verdict of the Tribunal

We, thus, in the absence of any observation of the PCIT that the order passed by the A.O. is found to be erroneous, therefore, are constrained to set-aside the order passed by him under Section 263 of the Act and restore the order passed by the A.O. u/s. 143(3) of the Act allowing the appeal of the assessee.

Disclaimer: 

The above article is based upon the ruling of the Hon'ble ITAT and is meant for educational purposes only. Readers are requested to act diligently and under consultation with a professional before applying the information contained in this article. For any support, mail at: support@taxwink.com