TALLURI SRINIVASULU,NELLORE vs. INCOME TAX OFFICER,WARD -1, NELLORE

IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD BENCHES “A”: HYDERABAD (THROUGH VIRTUAL CONFERENCE) BEFORE SHRI SATBEER SINGH GODARA, JUDICIAL MEMBER AND SHRI LAXMI PRASAD SAHU, ACCOUNTANT MEMBER

ITA No. 162/H/2021 Assessment Year: 2017-18 Talluri Srinivasulu, Nellore Vs Income Tax Officer, Ward - 1, Nellore. PAN – AAUPT9827G (Appellant) (Respondent) Assessee by: Shri M.V. Prasad Revenue by: Shri Balakrishna Date of hearing: 07/09/2021 Date of pronouncement: 17/09/2021

O R D E R PER L.P. SAHU, A.M.: This appeal filed by the assessee is directed against Pr. CIT, Tirupati’s order dated 05/03/2021 for AY 2017-18 involving proceedings u/s 263 of the Income- Tax Act, 1961; in short “the Act” on the following grounds of appeal: “1. On the facts and in the circumstances of the case, the order passed by the learned Pr.C.I.T u/s 263 of the IT Act is abinitio void being bad in law. 2. On the facts and in the circumstances of the case, the learned Pr.CIT erred in setting aside the assessment order dated 15.11. 20 19.

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novo for making enquiries without pointing out how the Assessment order is erroneous. 9. Any other ground or grounds that may be urged at the time of hearing.” 2. Briefly, the facts of the case are that the assessee, a Chartered Accountant by profession, filed his return of income for the AY 2017-18 admitting total income of Rs. 5,55,100/- and agricultural income of Rs. 5,50,000/-. Assessee derives income from house property, from business or profession and from other sources. The case was selected for scrutiny and statutory notices were issued to the assessee, against which, the assessee furnished the details as required by the AO.

2.1 On verification of the above information and the return of income, the AO noticed that the assessee has admitted agricultural income of Rs..28,00,000 for the FY 2015-16 relevant to the AY 2016-17 and Rs.5,50,000/- for the FY 2016-17 relevant to the AY 2017-18. Thus, there was steep decrease in agricultural income shown in ITR for the AY 2017-18 when compared to the AY 2016-17 as against the CASS reason which reflected as "Large agricultural income shown in ITR". However, the agricultural income details were verified and it was noticed that the large yield during the FY 2015-16 was because of receipts on sale of second cutting of Eucalyptus Plantation besides regular agricultural income derived and whereas for the FY 2016-

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17, the assessee had derived only regular agricultural income of Rs.5,50,000/- and had admitted the same.

2.2 The AO observed that the assessee furnished the P & L Account and Balance sheet for the AY 2016-17 along with enclosures, details of additions made to fixed assets, cash flow statement, details of Secured loans and house property income, copy of statements of bank accounts held during the FY 2016-17, copy of client ledger and income tax challans in support of payment. The Books of accounts maintained by the assessee for the AY 2017-18 along with bills and vouchers, are furnished physically in view of its volume and the same are also verified. The cash deposits made by the assessee in two bank accounts during the demonetization period were to the tune of Rs.89,58,370/- i.e. with State Bank of Hyderabad vide current Ale No.62340557654 is Rs. 49,01,870/- and with Andhra Pragathi Grameena Bank vide SB A/c No.91078644686 is Rs. 40,56,500/-. It was explained by the assessee that the sources for the deposits in Andhra Pragathi Grameena Bank were out of the opening cash balances available with the' assessee as on 01.04.2016. As noticed from the Balance sheet as on 31.03.2016, the assessee had cash on hand of Rs.1,60.89,213/-. With regard to deposits in State Bank of Hyderabad, the sources for deposits were the amounts received from his clients towards payment of Income Tax. The copies of Income tax challans paid on behalf of the

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clients, ledger account copy of the clients are verified with reference to the bank account statement. The information filed electronically by the assessee in respect of sources for deposits during demonetization period and high value receipts Nil cash shown from third parties were examined thoroughly with reference to the books of account. Further the decrease in the admission of agricultural income as compared to the previous year was verified.

2.3 In view of the above observations, the AO accepted the returned income and the e-assessment was completed by assessing the income at Rs. 5,55,100/- and agricultural income of Rs. 5,50,000/-.

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3.1 After considering the submissions of the assessee, the Pr.CIT set aside the assessment order with a direction to re- do the assessment de novo in accordance with law after making all necessary inquiries and verification in respect of the issues pointed out in his order and after affording a reasonable opportunity of being heard to the assessee, by observing as under: “26. ……………it is unambiguously clear that the assessment order was passed without making enquiries or verification which should have been made with regard to the Issues which were mandated to be examined when the case was selected for complete scrutiny. As per the provisions of clause (a) of Explanation 2 to section 263(1) Inserted in the statute with effect from 01.06.2015 by the Finance Act, 2015, an order passed by the Assessing Officer shall be deemed to be erroneous In so for as it is prejudicial to the Interests of revenue, If the order has been passed without making inquiries or verification which should have been made. On applying the said provisions to the facts of the case as mentioned above, It Is concluded that the assessment order u/s 143(3) dated 15/11/2019 is required to be treated as an order which is erroneous in so far as it is prejudicial to the interests of revenue on a deemed basis within the meaning of section 263 of the Act.” 4. Aggrieved, the assessee is in appeal before the ITAT. 5. Before us, the ld. AR of the assessee submitted that the issues raised by the Pr. CIT have already been examined in detail by the AO, which is clear from his order dated 15/11/2019. He, therefore, contended that the Pr. CIT is not justified in exercising his revisionary powers u/s 263.

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Further, he submitted that if the AO has arrived at a decision, on which two views are possible, one of the view which is favourable to the assessee is to be taken into consideration. He further submitted that agricultural income was shown in previous year relevant to AY 2016-17 at Rs. 28 lakhs, against which, the Income-tax Inspector was not recorded adverse findings, but, later on the same issue, Pr. CIT exercised his power, which was quashed by the Hon’ble Tribunal accepting the plea of the assessee.

5.1 As regards the cash deposits of Rs. 49,01,870/- made in the current account of SB during the demonetization period, He further submitted that during the demonetization period, the ld. AR submitted that the assessee made the said cash deposits out of amounts paid by his professional clients in cash towards their tax liabilities, since they did not have access to net banking facilities and the tax payments on their behalf were made by the assessee through net banking after depositing the amounts of the clients in his current account. He, therefore, submitted that there is no mala-fide intention to deposit the money during demonetization period in bank account for saving black money, which has been properly examined by the AO. In support of his arguments, the ld. AR relied on various judgments which are placed in the paper book from pages 109 to 391.

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income & expenditure statement, balance sheet, source of cash receipts, bank statements, particulars of agricultural income, agreement in respect to sale of agricultural produce, Dharma Kanta Bills, documents regarding purchase of immovable property during the relevant assessment year, cash book, bank book etc., and thereafter passed the assessment order. Further, from the order of the Ld PCIT itself it is apparent that the ld. AO had also made enquiries by deputing his inspectors regarding the agricultural operations conducted by the assessee and the agricultural income earned by the assessee from the 130 Acres of agricultural land which was under the possession and control of the assessee and his family members. The assessee has also stated before the ld. PCIT that he had produced the Pattadar Pass Book and other relevant documentary evidence for earning agricultural income before the ld. AO. Further, it is evident from the Order of the Ld.PCIT that he has produced the same before him also. Similarly, as regards the Chit Bid amounts received by the assessee, the assessee 5 has produced the bank statements and other relevant documents before the Ld. PCIT and also claimed to have produced before the Ld. AO. With respect to loan received from HDFC bank also the assessee had produced the bank statement before the Ld. PCIT and also claimed to have produced the same before the Ld. AO. In this situation, the ld. PCIT without examining the documents furnished by the assessee setting aside the order of the Ld. AO and directing the Ld. AO to re-do the assessment de novo is not appreciable. It is apparent from the order of the Ld. PCIT itself that the assessee had produced all the requisite documents before him. From the order of the Ld. PCIT and Ld.AO it is apparent that the Ld.AO has not only examined the documents produced by the assessee but also made enquiries through his inspectors and thereafter came to the conclusion that the income declared by the assessee in his return of income is in order. Keeping in view of these facts and circumstances of the case, we are of the view that the order of the Ld.

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PCIT is devoid of merits. Therefore, we hereby set aside the order of the Ld. PCIT and reinstate the order of the Ld. AO.” 7.1 In respect of cash deposits in the bank, the ld. AR of the assessee drew the bench attention to the paper book wherein the bank statements are filed to submit that this issue has already been examined by the AO after taking into consideration of copy of challans and satisfied to the fact that the assessee facilitated to the clients for rendering better services received amounts from clients to pay income tax challans on behalf them and said amounts were not utilized for any other purpose. Therefore, it cannot be said that the assessee’s intention of the cash deposits into the bank was in a malafide nature to make black money into white during demonetization period. Once the AO has taken a view on the issue, on which two views are possible, the view which is taken by the AO, if Pr. CIT 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, as per the ratio laid down by the Hon’ble Supreme Court in the case of Malabar Industries ltd. Vs. CIT, 2000 (243) ITR 83, wherein it has been held as under:

“The unsuccessful assessee is the appellant in this appeal, by special leave, which arises from the Judgment and Order of the Division Bench of the High Court of Kerala in I.T.R.No.15 of 1990 passed on October 22, 1991. By the impugned order the High Court answered the following two questions, referred to

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it at the instance of the appellant, in the affirmative that is against the appellant and in favour of the Revenue:- (1) Whether, on the facts and in the circumstances of the case, that Tribunal was justified in holding that there was evidence before the Commissioner of Income-tax that the assessment order was erroneous and prejudicial to revenue? (2) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that Rs.3,66,649 was a taxable receipt for the assessment year 1983-84? The facts giving rise to these questions may be noticed here. The case relates to the assessment year 1983-84 for which the accounting period of the appellant ended on February 28, 1983. The appellant is a public limited company. It entered into an agreement for sale of the estate of rubber plantation measuring acres 699 of land for consideration of Rs.210 lakhs with M/s. Supriya Enterprises (for short the purchaser) on July 18, 1982. The Agreement provided, inter alia, for payment of the consideration in instalments as scheduled therein. However, the purchaser could not adhere to the schedule and on his request the parties agreed to extension of time for payment of the instalments on condition of his paying compensation/damages for loss of agricultural income and other liabilities in a sum of Rs.3,66,649. Accordingly, the appellant passed a resolution also to that effect on September 25, 1983 and the purchaser paid the said amount. In the annexure to the return filed by it for the assessment in question the amount was noted as compensation and damages for loss of agricultural income. By Order dated October 31, 1985, the Income-tax Officer accepted the same and endorsed nil assessment for that year. The Commissioner of Income-tax having examined the records of the assessment found that the nil assessment order passed by the Income-tax Officer was erroneous and it was prejudicial to the interests of the revenue. He issued notice to the appellant, under Section 263 of the

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Income Tax Act (for short the Act), to show cause why the order of assessment should not be set aside and Rs.3,66,649 should not be assessed under the head income from other sources. After the appellant filed its reply the Commissioner, by order dated February 8/9, 1988, concluded that the said amount was unconnected with any agricultural operation activity and was liable to be taxed under the head income from other sources. Dissatisfied with the Order of the Commissioner, the appellant filed an appeal before the Income-tax Appellate Tribunal, which was dismissed on August 5, 1988. On the application of the appellant under Section 256(1) of the Act, the aforementioned questions were referred to the High Court of Kerala at Ernakulam. Mr. Roy Abaraham, learned counsel for the appellant, urged the very same two contentions which were argued before the High Court, namely, (i) that the exercise of jurisdiction by the Commissioner under Section 263(1) of the Act was not only unwarranted but also illegal; he contended that mere loss of tax could not be treated as prejudicial to the interests of the revenue and that only when the order of the Assessing Officer would affect the administration of the revenue that it could be treated as prejudicial to the revenue; (ii) that the amount of Rs.3,66,649 was in reality agricultural income and, therefore, ought not to have been brought to tax. Mr. Anoop G. Choudhary, learned senior counsel for the respondent, asserted that the Income-tax Officer passed the order without application of mind and inasmuch as it resulted in loss of tax it was also prejudicial to the interests of the revenue, therefore, the exercise of jurisdiction under Section 263(1) of the Act by the Commissioner was justified and legal. He further submitted that the second contention was not open to the appellant as the basic facts found by the Appellate Tribunal were not questioned before the High Court. To consider the first contention, it will be apt to quote Section 263(1) which is relevant for our purpose:- 263. Revision of orders prejudicial to revenue - (1) The Commissioner may call for and examine the

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record of any proceeding under this Act, and if he considers that any order passed therein by the Assessing Officer is erroneous insofar as it is prejudicial to the interests of the revenue, he may, after giving the assessee an opportunity of being heard and 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 enhancing or modifying the assessment, or cancelling the assessment and directing a fresh assessment.” Explanation - x x x A bare reading of this provision makes it clear that the prerequisite to exercise of jurisdiction by the Commissioner suo moto under it, is that the order of the Income-tax Officer is erroneous insofar as it is prejudicial to the interests of the revenue. The Commissioner has to be satisfied of twin conditions, namely, (i). the order of the Assessing Officer sought to be revised is erroneous; and (ii) it is prejudicial to the interests of the revenue. If one of them is absent -- if the order of the Income-tax Officer is erroneous but is not prejudicial to the revenue or if it is not erroneous but is prejudicial to the revenue -- recourse cannot be had to Section 263(1) of the Act. There can be no doubt that the provision cannot be invoked to correct each and every type of mistake or error committed by the Assessing Officer; it is only when an order is erroneous that the section will be attracted. An incorrect assumption of facts or an incorrect application of law will satisfy the requirement of the order being erroneous. In the same category fall orders passed without applying the principles of natural justice or without application of mind. The phrase prejudicial to the interests of the revenue is not an expression of art and is not defined in the Act. Understood in its ordinary meaning it is of wide import and is not confined to loss of tax. The High Court of Calcutta in Dawjee Dadabhoy & Co. Vs. S.P. Jain and Another [31 ITR 872], the High Court of Karnataka in

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Commissioner of Income- tax, Mysore Vs. T. Narayana Pai [98 ITR 422], the High Court of Bombay in Commissioner of Income-tax Vs. Gabriel India Ltd. [203 ITR 108] and the High Court of Gujarat in Commissioner of Income-tax Vs. Smt. Minalben S. Parikh [215 ITR 81] treated loss of tax as prejudicial to the interests of the revenue. Mr. Abaraham relied on the judgment of the Division Bench of the High Court of Madras in Venkatakrishna Rice Company Vs. Commissioner of Income-tax [163 ITR 129] interpreting prejudicial to the interests of the revenue. The High Court held, In this context, it must be regarded as involving a conception of acts or orders which are subversive of the administration of revenue. There must be some grievous error in the Order passed by the Income-tax Officer, which might set a bad trend or pattern for similar assessments, which on a broad reckoning, the Commissioner might think to be prejudicial to the interests of Revenue Administration. In our view this interpretation is too narrow to merit acceptance. The scheme of the Act is to levy and collect tax in accordance with the provisions of the Act and this task is entrusted to the Revenue. If due to an erroneous order of the Income-tax Officer, the revenue is losing tax lawfully payable by a person, it will certainly be prejudicial to the interests of the revenue. 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 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. It has been held by this Court that where a sum not earned by a person is assessed as

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income in his hands on his so offering, the order passed by the Assessing Officer accepting the same as such will be erroneous and prejudicial to the interests of the revenue. Rampyari Devi Saraogi Vs. Commissioner of Income-tax [67 ITR 84] and in Smt. Tara Devi Aggarwal Vs. Commissioner of Income-tax, West Bengal [88 ITR 323]. In the instant case, the Commissioner noted that the Income-tax Officer passed the order of nil assessment without application of mind. Indeed, the High Court recorded the finding that the Income-tax Officer failed to apply his mind to the case in all perspective and the order passed by him was erroneous. It appears that the resolution passed by the board of the appellant- company was not placed before the Assessing Officer. Thus, there was no material to support the claim of the appellant that the said amount represented compensation for loss of agricultural income. He accepted the entry in the statement of the account filed by the appellant in the absence of any supporting material and without making any inquiry. On these facts the conclusion that the order of the Income-tax Officer was erroneous is irresistible. We are, therefore, of the opinion that the High Court has rightly held that the exercise of the jurisdiction by the Commissioner under Section 263(1) was justified. The second contention has to be rejected in view of the finding of fact recorded by the High Court. It was not shown at any stage of the proceedings, the amount in question was fixed or quantified as loss of agricultural income and admittedly it is not so found by the Tribunal. The further question whether it will be agricultural income within the meaning of Section 2(1A) of the Act as elucidated by this Court in Commissioner of Income-tax, West Bengal, Calcutta Vs. Raja Benoy Kumar Sahas Roy [32 ITR 466] does not arise for consideration. It is evident from the Order of the High Court that findings recorded by the Tribunal that the appellant stopped agricultural operation in November 1982 and the receipt under consideration did not relate to any agricultural operation carried on by

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the appellant, were not questioned before it. Though, we do not agree with the High Court that the said amount was paid for breach of contract as indeed it was paid in modification/relaxation of the terms of the contract, we hold that the High Court is justified in concluding that the said amount was a taxable receipt under the head income from other sources. We find no merit in the appeal and dismiss the same with costs.” 7.2 One of the categorical finding of the Hon’ble Supreme Court in the above judgement is, every loss of revenue as a consequence of an order of 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. Therefore, in the case under consideration, the view which has been taken by the AO is one of the courses permissible in law, which cannot be brushed aside by the Pr. CIT u/s 263 of the Act. In view of the above observations, we set aside the order of the Pr. CIT passed u/s 263 of the Act, and restore the order of the AO. Accordingly, the grounds raised by the assessee on this issue are allowed.

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Pronounced in the open court on 17th September, 2021.

Sd/- Sd/- (S.S. GODARA) (L. P. SAHU) JUDICIAL MEMBER ACCOUNTANT MEMBER

Hyderabad, Dated: 17th September, 2021. kv Copy to : 1 Sri Talluri Srinivasulu, D.No. 15/414, Venkataramapuram, Vijaymahal Centre, Nellore – 524 001 2 Pr. CIT, 1st Floor, Aayakar Bhavan, KT Road, Tirupati 3 ITO, Nellore, ITAT, DR, Hyderabad. 4 5 Guard File.