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Tax Publishers Gouri Shankar Goyal v. PCIT [ITA No. 517/Kol/2019, dt. 12-6-2020] : 2020 TaxPub(DT) 2488 (Kol-Trib.) Explanation 2 to section 263 scope explained. *Facts* Assessee's assessment for assessment year 2014-15 was completed under scrutiny mode. The same was reassessed by Principal CIT alleging that the assessing officer had not inquired certain facts on capital infusion etc thus was erroneous and prejudicial to the interests of the revenue by invoking section 263. Hearing case sheets all pointed to proper inquiry by assessing officer on the doubted topics of Pr. CIT. The Pr. CIT claimed applying retrospective application of explanation 2 to section 263 inserted vide Finance Act, 2015 with effect from 1-4-2015 to reassess the income. On higher appeal to ITAT by the assessee. Held by the ITAT in favour of the assessee. The said explanation 2 inserted does not confer unfettered powers to CIT to invoke section 263 as if such was the intent of law then there would be no finality to assessment proceedings. Though it is a procedural explanation section applicable to assessments which are made after the insertion of the said date, It still has to make good the twin rules of the assessment order requiring to be erroneous and prejudicial to the interests of the revenue. *Applied :* Shri Narayan Tatu Rane v. ITO in ITA Nos. 2690 & 2691/Mum/2016 for assessment year 2007-08 follows wherein it was held as -- "19. The law interpreted by the High Courts makes it clear that the learned Pr. CIT, before holding an order to be erroneous, should have conducted necessary enquiries or verification in order to show that the finding given by the assessing officer is erroneous, the learned Pr. CIT should have shown that the view taken by the assessing officer is unsustainable in law. In the instant case, the learned Pr. CIT has failed to do so and has simply expressed the view that the assessing officer should have conducted enquiry in a particular manner as desired by him. Such a course of action of the learned Pr. CIT is not in accordance with the mandate of the provisions of section 263 of the Act. The learned Pr. CIT has taken support of the newly inserted Explanation 2(a) to section 263 of the Act. Even though there is a doubt as to whether the said explanation, which was inserted by Finance Act, 2015 with effect from 1-4-2015, would be applicable to the year under consideration, yet we are of the view that the said Explanation cannot be said to have over ridden the law interpreted by Hon'ble Delhi High Court, referred above. If that be the case, then the learned Pr. CIT can find fault with each and every assessment order, without conducting any enquiry or verification in order to establish that the assessment order is not sustainable in law and order for revision. He can also force the assessing officer to conduct the enquiries in the manner preferred by learned Pr. CIT, thus prejudicing the independent application o f mind of the assessing officer. Definitely, that could not be the intention of the legislature in inserting Explanation 2 to section 263 of the Act, since it would lead to unending litigations and there would not be any point of finality in the legal proceedings. The Hon'ble Supreme Court has held in the case of Parashuram Pottery Works Co. Ltd. v. ITO (1977) 106 ITR 1 (SC) : 1977 TaxPub(DT) 0725 (SC) that there must be a point of finality in all legal proceedings and the stale issues should not be reactivitated beyond a particular stage and the lapse of time must induce repose in and set at rest judicial and quasi judicial controversies as it must in other spheres of human activity. 20. Further clause (a) of Explanation states that an order shall be deemed to be erroneous, if it has been passed without making enquiries or verification, which should have been made. In our considered view, this provision shall apply, if the order has been passed without making enquiries or verification which a reasonable and prudent officer shall have carried out in such cases, which means that the opinion formed by learned Pr. CIT cannot be taken as final one, without scrutinizing the nature of enquiry or verification carried out by the assessing officer vis-a-case. Hence, in our co vis its reasonableness in the facts and circumstances of the considered view, what is relevant for clause (a) of Explanation 2 to section 263 is whether the assessing officer has passed the order after carrying our enquiries or verification, which a reasonable and prudent officer would have carried out or not. It does not authorise or give unfettered powers to the learned Pr. CIT to revise each and every order, if in his opinion, the same has been passed without making enquiries or verification which should have been made. In our view, it is the responsibility of the learned Pr. CIT to show that the enquiries or verification conducted by the assessing officer was not in accordance with the enquiries or verification that would have been carried out by a prudent officer. Hence, in our view, the question as to whether the amendment brought in by way of Explanation 2(a) shall have retrospective or prospective application shall not be relevant." M/s. Amira Pure Foods Pvt. Ltd. v. PCIT in ITA No. 3205/Del/2017 for assessment year 2014-15, dated 29-11-2017 (Del-ITAT) held as follows :-- "18. The learned counsel for the assessee submitted that even though there has been an amendment in the provisions of section 263 of the Act by which Explanation 2 is inserted, with effect from 1-4-2015 but the same does not give unfettered powers to the Commissioner to assume jurisdiction under section 263 of the Act to revise every order of the assessing officer to re-examine the issues already examined during the course of assessment proceedings. The Hon'ble Mumbai ITAT has dealt with Explanation 2 as inserted by the Finance Act, 2015 in the case of Narayan Tatu Rane v. Income Tax Officer (2016) 70 taxmann.com 227 to hold that the said Explanation cannot be said to have overridden the law as interpreted by the Hon'ble Delhi High Court, according to which the Commissioner has to conduct an enquiry and verification to establish and show that the assessment order is unsustainable in law. The Tribunal has further held that the intention of the legislature could not have been to enable the learned PCIT to find fault with each and every assessment order, without conducting any enquiry or verification in order to establish that the assessment order is not sustainable in law, since such an interpretation will lead to unending litigation and there would not be any point of finality in the legal proceedings. The opinion of the Commissioner referred to in section 263 of the Act has to be understood as legal and judicious opinion and not arbitrary opinion." Editorial Note: the time tested principles held in Malabar Industrial Co. Ltd. v. CIT (2000) 243 ITR 83 (SC) : 2000 TaxPub(DT) 1227 (SC) and reiterated in CIT v. Max India Ltd. (2007) 295 ITR 282 (SC) : 2007 TaxPub(DT) 1548 (SC) for invoking section 263 do not get diluted by any means due to this explanation 2; except that it empowers in genuine cases where proper/diligent inquiry was not done for CIT to invoke section 263 or for further aspects enumerated in the said explanation. To quote Malabar Industrial case -- "The phrase "prejudicial to the interests of the Revenue" has to be read in conjunction with an erroneous order passed by the assessing officer. Every loss of revenue as a consequence of an order of the assessing officer, cannot be treated as prejudicial to the interests of the Revenue, for example, when an Income Tax Officer adopted one of the courses permissible in law and it has resulted in loss of revenue, or where two views are possible and the Income Tax Officer has taken one view with which the Commissioner does not agree, it cannot be treated as an erroneous order prejudicial to the interests of the Revenue unless the view taken by the Income Tax Officer is unsustainable in law".

Tax Publishers

Gouri Shankar Goyal v. PCIT [ITA No. 517/Kol/2019, dt. 12-6-2020] : 2020 TaxPub(DT) 2488 (Kol-Trib.)

Explanation 2 to section 263 scope explained.

Facts

Assessee's assessment for assessment year 2014-15 was completed under scrutiny mode. The same was reassessed by Principal CIT alleging that the assessing officer had not inquired certain facts on capital infusion etc thus was erroneous and prejudicial to the interests of the revenue by invoking section 263. Hearing case sheets all pointed to proper inquiry by assessing officer on the doubted topics of Pr. CIT. The Pr. CIT claimed applying retrospective application of explanation 2 to section 263 inserted vide Finance Act, 2015 with effect from 1-4-2015 to reassess the income. On higher appeal to ITAT by the assessee.

Held by the ITAT in favour of the assessee.

The said explanation 2 inserted does not confer unfettered powers to CIT to invoke section 263 as if such was the intent of law then there would be no finality to assessment proceedings. Though it is a procedural explanation section applicable to assessments which are made after the insertion of the said date, It still has to make good the twin rules of the assessment order requiring to be erroneous and prejudicial to the interests of the revenue.

Applied : Shri Narayan Tatu Rane v. ITO in ITA Nos. 2690 & 2691/Mum/2016 for assessment year 2007-08 follows wherein it was held as --

"19. The law interpreted by the High Courts makes it clear that the learned Pr. CIT, before holding an order to be erroneous, should have conducted necessary enquiries or verification in order to show that the finding given by the assessing officer is erroneous, the learned Pr. CIT should have shown that the view taken by the assessing officer is unsustainable in law. In the instant case, the learned Pr. CIT has failed to do so and has simply expressed the view that the assessing officer should have conducted enquiry in a particular manner as desired by him. Such a course of action of the learned Pr. CIT is not in accordance with the mandate of the provisions of section 263 of the Act. The learned Pr. CIT has taken support of the newly inserted Explanation 2(a) to section 263 of the Act. Even though there is a doubt as to whether the said explanation, which was inserted by Finance Act, 2015 with effect from 1-4-2015, would be applicable to the year under consideration, yet we are of the view that the said Explanation cannot be said to have over ridden the law interpreted by Hon'ble Delhi High Court, referred above. If that be the case, then the learned Pr. CIT can find fault with each and every assessment order, without conducting any enquiry or verification in order to establish that the assessment order is not sustainable in law and order for revision. He can also force the assessing officer to conduct the enquiries in the manner preferred by learned Pr. CIT, thus prejudicing the independent application o f mind of the assessing officer. Definitely, that could not be the intention of the legislature in inserting Explanation 2 to section 263 of the Act, since it would lead to unending litigations and there would not be any point of finality in the legal proceedings. The Hon'ble Supreme Court has held in the case of Parashuram Pottery Works Co. Ltd. v. ITO (1977) 106 ITR 1 (SC) : 1977 TaxPub(DT) 0725 (SC) that there must be a point of finality in all legal proceedings and the stale issues should not be reactivitated beyond a particular stage and the lapse of time must induce repose in and set at rest judicial and quasi judicial controversies as it must in other spheres of human activity.

20. Further clause (a) of Explanation states that an order shall be deemed to be erroneous, if it has been passed without making enquiries or verification, which should have been made. In our considered view, this provision shall apply, if the order has been passed without making enquiries or verification which a reasonable and prudent officer shall have carried out in such cases, which means that the opinion formed by learned Pr. CIT cannot be taken as final one, without scrutinizing the nature of enquiry or verification carried out by the assessing officer vis-a-case. Hence, in our co vis its reasonableness in the facts and circumstances of the considered view, what is relevant for clause (a) of Explanation 2 to section 263 is whether the assessing officer has passed the order after carrying our enquiries or verification, which a reasonable and prudent officer would have carried out or not. It does not authorise or give unfettered powers to the learned Pr. CIT to revise each and every order, if in his opinion, the same has been passed without making enquiries or verification which should have been made. In our view, it is the responsibility of the learned Pr. CIT to show that the enquiries or verification conducted by the assessing officer was not in accordance with the enquiries or verification that would have been carried out by a prudent officer. Hence, in our view, the question as to whether the amendment brought in by way of Explanation 2(a) shall have retrospective or prospective application shall not be relevant."

M/s. Amira Pure Foods Pvt. Ltd. v. PCIT in ITA No. 3205/Del/2017 for assessment year 2014-15, dated 29-11-2017 (Del-ITAT) held as follows :--

"18. The learned counsel for the assessee submitted that even though there has been an amendment in the provisions of section 263 of the Act by which Explanation 2 is inserted, with effect from 1-4-2015 but the same does not give unfettered powers to the Commissioner to assume jurisdiction under section 263 of the Act to revise every order of the assessing officer to re-examine the issues already examined during the course of assessment proceedings. The Hon'ble Mumbai ITAT has dealt with Explanation 2 as inserted by the Finance Act, 2015 in the case of Narayan Tatu Rane v. Income Tax Officer (2016) 70 taxmann.com 227 to hold that the said Explanation cannot be said to have overridden the law as interpreted by the Hon'ble Delhi High Court, according to which the Commissioner has to conduct an enquiry and verification to establish and show that the assessment order is unsustainable in law. The Tribunal has further held that the intention of the legislature could not have been to enable the learned PCIT to find fault with each and every assessment order, without conducting any enquiry or verification in order to establish that the assessment order is not sustainable in law, since such an interpretation will lead to unending litigation and there would not be any point of finality in the legal proceedings. The opinion of the Commissioner referred to in section 263 of the Act has to be understood as legal and judicious opinion and not arbitrary opinion."

Editorial Note: the time tested principles held in Malabar Industrial Co. Ltd. v. CIT (2000) 243 ITR 83 (SC) : 2000 TaxPub(DT) 1227 (SC) and reiterated in CIT v. Max India Ltd. (2007) 295 ITR 282 (SC) : 2007 TaxPub(DT) 1548 (SC) for invoking section 263 do not get diluted by any means due to this explanation 2; except that it empowers in genuine cases where proper/diligent inquiry was not done for CIT to invoke section 263 or for further aspects enumerated in the said explanation.

To quote Malabar Industrial case --

"The phrase "prejudicial to the interests of the Revenue" has to be read in conjunction with an erroneous order passed by the assessing officer. Every loss of revenue as a consequence of an order of the assessing officer, cannot be treated as prejudicial to the interests of the Revenue, for example, when an Income Tax Officer adopted one of the courses permissible in law and it has resulted in loss of revenue, or where two views are possible and the Income Tax Officer has taken one view with which the Commissioner does not agree, it cannot be treated as an erroneous order prejudicial to the interests of the Revenue unless the view taken by the Income Tax Officer is unsustainable in law".