By CA Sombir Singh The Supreme Court of India, in a bench comprising Chief Justice Sanjiv Khanna, Justice Sanjay Kumar, and Justice KV Viswanathan, recently issued an important judgment clarifying the scope of the revisional powers of the Commissioner of Income Tax under Section 263 of the Income Tax Act, 1961. The Court emphasized that such powers cannot be exercised arbitrarily or mechanically, especially in cases where the Commissioner merely believes that the Assessing Officer should have made more inquiries.
The Court made it clear that Section 263 can only be invoked when there is a substantial failure on the part of the AO, and not merely because an alternative line of inquiry was possible.
Key takeaways from the Supreme Court’s order:
- Section 263 powers are not meant for casual remand: The Commissioner cannot remand a case simply because the AO need to make more inquiries. The Court held that a vague assertion that more investigation was needed does not justify revision under Section 263.
- Requirement of abject failure: There must be a clear and recorded finding that the AO failed in his duty to inquire properly, and that such failure caused prejudice to the Revenue.
- Explanation 2(a) to Section 263 cannot applies selectively: It covers cases of no inquiry or verification, but not those where an inquiry was conducted but no additions were made. There is a distinction between a failure or absence of investigation and a wrong decision/conclusion. A wrong decision can be corrected by the Commissioner by making an addition or disallowance based on merits.
- Remand vs. Revision: The power under Section 263 of the Income Tax Act, 1961, can be exercised by the Commissioner of Income Tax, but by going into the merits and making an addition, and not by way of a remand, recording that there was failure to investigate.
- Assessee not responsible for inaction of the AO: The assessee does not control the pen of the Assessing Officer. Once the AO conducts an investigation and chooses not to make any addition, it can be taken that he accepts the plea and stand of the assessee.
- Superficial or sham inquiries: In exceptional cases where the AO’s inquiry is superficial or merely a formality, a remand may be justified but only with proper justification.
- Order of the Commissioner should be detailed: A Commissioner invoking Section 263 must clearly specify the lapses and missing inquiries. Power under section 263 cannot be invoked casually.
- No prejudice = No revision: There must be a demonstrable prejudice to the interest of Revenue, not just procedural dissatisfaction.
Case Title: PCIT-1 Chandigarh vs V-Con Integrated Solutions Pvt Ltd