Validity of notice issued u/s 263 based on incorrect grounds or unsupported evidence can be questioned – ITAT
In a recent judgment, ITAT Ahmedabad has held that validity of a revision notice issued u/s 263 the Income Tax Act, 1961 based on incorrect grounds or unsupported evidence can be questioned. CIT must have sufficient evidence to support the claim that the order is erroneous and prejudicial to the interests of the revenue. Mere suspicion or conjecture is not sufficient.
ABCAUS Case Law Citation:
4205 (2024) (08) abcaus.in ITAT
In the instant case, the assessee had challenged the order passed by the Principal Commissioner of Income Tax (PCIT) in exercise of his revisionary jurisdiction under Section 263 of the Income Tax Act, 1961 (the Act) and directing the AO to make addition for alleged cash payment.
The appellant assessee was an individual. The re-assessment proceedings u/s 148 of the Act were initiated on the basis of information on the Insight Portal that the assessee had purchased immovable property and made unaccounted cash payment in addition to agreement value.
The assessee filed his return of income in response to notice u/s 148 of the Act. The notices u/ss. 143(2) and 142(1) of the Act were issued along with the reasons recorded for reopening the assessment proceedings. As per the reasons for reopening, the search at the residential premises of the Accountant of a business group was conducted, where a pocket diary was found and seized. In the said diary there were some details related to of the sale of the plot to the assessee as explained by the said accountant and the partner of the group.
When the Assessing Officer (AO) issued first notice u/s 142(1), the assessee requested for the copy of reasons recorded so as to enable him to clarify the facts and raise his objections. The assessee again sought the basis of forming reason to believe and details of escapement of income. The AO kept issuing notices u/s 142(1) of the Act pointing out the non-compliance of the assessee and requesting the assessee to provide the details as called for
The AO then issued a show cause notice u/s 144 of the Act highlighting the non-compliances to the notices issued earlier and giving draft computation of income making addition u/s 68 of the Act.
The assessee, in reply to this notice u/s 144, once again sought details of documentary evidence on which the AO had relied on. The assessee also furnished the details of bank statement, cash book and copy of purchase deed of immovable property, balance sheet along with schedules, bank account statement, cash book, copy of purchase deed, answer to show-cause notice and details of return of income. On the same day, the assessee also submitted response to the said notice that AO had not given any documentary evidence for cross verification/cross-examination. In the said reply to show-cause notice, the assessee denied that he has paid nay cash which is aligned in copy of reason of reopening.
The AO passed the order u/s 147 r.w.s. 144 of the Act, accepting the return as declared by the assessee.
Subsequently, the PCIT issued a notice u/s 263 of the Act stating that the assessee had made cash payments against the purchase of immovable property over and above the document value and concluded that the AO should have made addition of this amount as unaccounted. He concluded that since the said issue was not verified the order passed by AO was erroneous in so far as prejudicial to the interest of revenue.
In response to the notice u/s 263, the assessee submitted detailed reply explaining the facts. The assessee contended that the AO had applied his mind after considering the reply to notices and then passed his order. He also contended that since the AO could not give any documentary evidence that he had paid any cash against the purchase of immovable property and, therefore, had accepted his returned income. The assessee further stated that any addition made without giving any evidence is bad in law and also against natural justice and placing reliance on several judgments of Hon’ble Supreme Court and Hon’ble High Court wherein it had been repeatedly held that, “before the income tax authorities could rely upon a piece of evidence, they were bound to produce it before the assessee so that the assessee could controvert the statement contained in it by asking for an opportunity for cross examination of the person with reference to the statement made by him.” “The rules of natural justice, require that a party must be given the opportunity to adduce all relevant evidence upon which he relies, and further that, the evidence of the opposite party should be taken in his presence, and that he should be given the opportunity of cross examining the witnesses examined by that party. Not providing the said opportunity to cross-examine witnesses, would violate the principles of natural justice”.
The PCIT, however, set aside the order of the AO and directed the AO to pass a fresh assessment order. While doing so, he produced the details of documents seized during the course of search and drew inference from the impounded documents that the assessee has paid cash.
Before the Tribunal, the assessee argued that the reference of seized document came directly in the order of the PCIT for the first time and, therefore, the decision of the PCIT to review the order of the AO in exercise of his jurisdiction u/s 263 was not valid. It was further contended that details relied upon by the PCIT in assuming his jurisdiction u/s 263 are not related to the assessee as no where there was mention of the plot number and name of the assessee.
The Tribunal observed that assessment was made u/s 147 read with section 144 r.w.s.144B of the Act. Under this section AO makes an assessment to the best of his judgment based on available information if the assessee fails to comply with the notices or fails to provide the required information.
The Tribunal also noted that during the course of the assessment proceedings the AO could not provide any documentary evidence on the basis of which the assessment was reopened even after repeated requests from the assessee and after considering the responses, the AO accepted the declared income and passed the assessment order u/s 147 r.w.s. 144 read with section 144B of the Act.
The Tribunal noted that PCIT issued the notice to assessee. It was evident that there was no mention of name of the assessee in the said impounded document and the PCIT had only inferred from the said document that the assessee had paid cash against purchase of immovable property. The assessee had also denied that he has paid any cash against the said transaction. The PCIT also failed to prove that the cash is paid by the assessee.
In view of the judicial pronouncements, the Tribunal opined the validity of a notice issued under Section 263 of the Act based on incorrect grounds or unsupported evidence can be questioned. If the reasons cited in the notice are factually incorrect or legally unsustainable, the notice can be challenged as invalid. The CIT must have sufficient evidence to support the claim that the order is erroneous and prejudicial to the interests of the revenue. Mere suspicion or conjecture is not sufficient.
The Tribunal further stated it is evident that for the PCIT to invoke Section 263 of the Act, it must be conclusively proven that the AO’s order is both erroneous and prejudicial to the interests of the revenue. In this case, the AO made inadequate inquiries, during the proceedings, the AO could not provide any documentary evidence that formed the basis for reopening the assessment. This lack of evidence, supports the conclusion that the PCIT’s action of setting aside the order of AO and directing him to pass a fresh order is unwarranted. Accordingly, the Tribunal set aside the order passed by the PCIT under Section 263 and ground of appeal of the assessee was allowed.
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