Facts of the Case

The assessee, M/s Rithwik RK Joint Venture, was constituted by two corporate partners to execute infrastructure contract work on a back-to-back basis through sub-contract arrangements. The Joint Venture filed its return declaring nil income, asserting that the work and profits were executed and earned by the individual partners in their respective shares.

The Assessing Officer completed the scrutiny assessment under Section 143(3) accepting the returned income. Subsequently, the Principal Commissioner of Income Tax invoked revisionary jurisdiction under Section 263, holding that the assessment order was erroneous and prejudicial to the interests of revenue due to lack of proper inquiry on multiple issues, including taxability of receipts and discrepancies in accounts. The assessment order was set aside with directions for fresh examination.

Issues Involved

  1. Whether the conditions for invoking Section 263 were satisfied.
  2. Whether the Assessing Officer had conducted adequate inquiry before accepting the returned income.
  3. Whether the Joint Venture itself was liable to tax or the income was taxable in the hands of its partners.
  4. Whether discrepancies in receipts and contractual arrangements required further investigation 

Petitioner’s (Assessee’s) Arguments

  • The Joint Venture was formed solely to secure the contract, while execution was carried out by the partners on a back-to-back basis.
  • The entire receipts were passed on to the partners according to agreed sharing ratios after deduction of tax at source.
  • All relevant documents, agreements, and records were furnished during assessment proceedings.
  • The Assessing Officer had examined the material and adopted a permissible view in accepting nil income.
  • Revision under Section 263 cannot be invoked merely because the Commissioner holds a different opinion.

Respondent’s (Revenue’s) Arguments

  • The assessment order lacked proper examination of critical issues.
  • There were discrepancies in receipts, bank transactions, and contractual arrangements that were not verified.
  • The AO failed to conduct meaningful inquiry regarding taxability of income in the hands of the Joint Venture.
  • Such lack of inquiry rendered the order erroneous and prejudicial to revenue.
  • Therefore, the Pr. CIT rightly exercised revisionary powers under Section 263.

Court Order / Findings (ITAT)

  • For invoking Section 263, the assessment order must be both erroneous and prejudicial to the interests of revenue.
  • If the Assessing Officer fails to conduct necessary inquiries on material issues, the order can be treated as erroneous.
  • Acceptance of claims without verification does not amount to adopting a “possible view.”
  • Several factual issues, including taxability of contract receipts and discrepancies in accounts, required proper examination.

Important Clarification by the Tribunal

  • The doctrine of “possible view” applies only where the AO has conducted adequate inquiry.
  • Absence of inquiry or verification removes protection against revision under Section 263.
  • Joint Venture arrangements must be examined in substance to determine correct tax liability.

Link to download the order  https://itat.gov.in/public/files/upload/1658814898-ita%20nos%20107%20Alld%202016%20Ms%20Rithwik%20RK%20Joint%20Venture.pdf

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