HITEN DHIRAJLAL SHAH,MUMBAI vs. COMMISSIONER OF INCOME TAX, MUMBAI

The assessee is an individual carrying on business as proprietor of a concern engaged, inter alia, in trading/dealing in buttons, tapes, elastics and PU labels. For A.Y. 2018-19, the assessee filed the return of income on 31.10.2018 declaring total income of Rs.45,59,110/-. The assessment was subsequently reopened under section 147 on the basis of information received from the Investigation Wing that the assessee was a beneficiary of alleged bogus purchases of Rs.1,82,44,574/- from M/s Vishal Steel & Alloys.

The Ld. AR submitted that the assumption of revisional jurisdiction under section 263 is contrary to the facts available on record. A paper book has been filed containing the material placed before the revenue authorities, comprising pages 1 to 238 which has been placed on record. The paper book, inter alia, contains the purchase and corresponding sales statement, purchase invoices, ledger account and confirmation of M/s Vishal Steel & Alloys, delivery challans- cum-goods receipt notes, transport bills and relevant bank statements reflecting payments to the supplier.

The Ld. AR further contended that this is not a case where the Ld. AO had accepted the claim without conducting any inquiry. The reassessment itself was initiated specifically on the issue of purchases from M/s Vishal Steel & Alloys. During such reassessment, notices under section 142(1) were issued and the assessee complied with the queries by furnishing the relevant documentary evidence. The assessment order specifically records the issuance of notice under section 142(1), calling for purchase details together with invoices, bills and vouchers, and further records the reply furnished by the assessee.

The Ld. AR contended that after examining the very issue forming the basis of reopening, the Ld. AO adopted a conscious view and made an addition by estimating the profit element at 13% of the disputed purchases. Thus, according to the Ld. AR, the issue now sought to be revised had already been examined and verified by the Ld. AO. The Ld. PCIT cannot invoke section 263 merely because he considers that a higher or the entire addition should have been made.

The Ld. AR relied upon the judgment of the Hon'ble Supreme Court in Malabar Industrial Co. Ltd. v. CIT reported in [2000] 243 ITR 83 (SC) / 109 Taxman 66 (SC). The Hon'ble Supreme Court laid down that the conditions of 3 the assessment order being both erroneous and prejudicial to the interests of the Revenue are cumulative. The relevant paragraph of the order of Hon’ble Supreme Court is reproduced as below:-

Further, where the Assessing Officer adopts one of the courses permissible in law, or where two views are possible and the Assessing Officer adopts one such view, the order cannot be regarded as erroneous merely because the Commissioner does not agree with that view, unless the view adopted by the Assessing Officer is unsustainable in law. The Ld. AR also placed reliance upon the decision of the Coordinate Bench in Navnidhi Steel and Engineering Co. Pvt. Ltd. v. PCIT, ITA Nos. 2580 & 2581/Mum/2018, order dated 25.10.2019. In that case also, reassessments were initiated on information regarding alleged non-genuine purchases; the Assessing Officer called for supporting evidence and estimated the profit element at 12.5%, whereas the PCIT invoked section 263 on the premise that the necessary inquiry had not been conducted and that the entire purchases ought to have been added. The Coordinate Bench found that the Assessing Officer had not overlooked the material and had conducted inquiry into the disputed purchases; therefore, the allegation of lack of inquiry was held to be without basis.

Per contra, the Ld. DR relied upon the impugned revisional order passed by the Ld. PCIT. It was submitted that the supplier, M/s Vishal Steel & Alloys, had been identified in the investigation as being engaged in paper transactions/bogus invoicing and that the notices issued under section 133(6) remained unresponded. The Ld. DR further submitted that the Ld. AO ought to have examined the entire amount of purchases and the applicability of section 69C instead of restricting the addition to 13% of the alleged purchases.

The Ld. DR accordingly supported the finding of the Ld. PCIT that the assessment was completed without proper inquiry and verification and was, therefore, erroneous insofar as prejudicial to the interests of the Revenue within the meaning of section 263 read with Explanation 2 thereto. The impugned order records the PCIT's view that the Ld. AO had taken Rs.1,82,44,574/- for the purpose of the estimated disallowance whereas, according to the PCIT, the amount requiring consideration was Rs.2,15,26,820/-

We have heard the rival submissions and carefully perused the material available on record, including the paper book filed by the assessee and the orders of the authorities below. The limited issue before us is whether the assessment order dated 26.03.2024 could validly be subjected to revision under section 263 on the ground that the Ld. AO had failed to make the requisite inquiry and verification concerning the impugned purchases.

Therefore, this is not a case of lack of inquiry. The Ld. AO had raised specific queries on the very issue for which the assessment was reopened, obtained the assessee's explanation and supporting documents, considered the investigation material and thereafter did not accept the assessee's claim in entirety. He proceeded to make an addition by estimating 13% of the disputed purchases. The fact that the Ld. PCIT considered the inquiry insufficient or was of the view that the entire purchases ought to have been brought to tax cannot, by itself, convert the assessment order into an erroneous order within the meaning of section 263.

The ratio of the Hon'ble Supreme Court in Malabar Industrial Co. Ltd. (supra) is applicable to the jurisdictional requirement under section 263. Both the conditions—(i) the order being erroneous and (ii) such error being prejudicial to the interests of the Revenue—must coexist. A permissible view taken by the Assessing Officer does not become erroneous merely because the revisional authority prefers another view, unless the view adopted by the Assessing Officer is shown to be unsustainable in law. We also find the decision of the Coordinate Bench in Navnidhi Steel and Engineering Co. Pvt. Ltd. (supra) relevant to the controversy before us. The Coordinate Bench, on materially similar circumstances involving alleged non-genuine purchases, observed that where the Assessing Officer had called for evidence, examined the material and thereafter estimated the profit element in the disputed purchases, the assessment could not be treated as erroneous and prejudicial merely because the PCIT considered that further inquiry or a different quantum of addition was warranted. The Coordinate Bench consequently held the exercise of jurisdiction under section 263 to be invalid.

In the present case also, the record demonstrates application of mind by the Ld. AO to the specific issue. The revisional proceedings, in substance, seek to substitute the Ld. PCIT's view regarding the manner and quantum of addition for the view adopted by the Ld. AO after inquiry. In these circumstances, the essential jurisdictional conditions prescribed under section 263 are not satisfied. Explanation 2 to section 263 cannot be applied on the premise of absence of inquiry when the assessment record itself demonstrates that inquiries were specifically made and replies and documentary evidence were examined. Accordingly, respectfully following the ratio laid down by the Hon'ble Supreme Court in Malabar Industrial Co. Ltd. (supra) and the decision of the Coordinate Bench in Navnidhi Steel and Engineering Co. Pvt. Ltd. (supra), the impugned revisional order passed under section 263 is set aside. The grounds raised by the assessee on this issue are allowed.

In the result, the appeal filed by the assessee bearing ITA No.4301/Mum/2026 is allowed.

आयकरआयु� CIT 4. िवभागीय�ितिनिध, आय.अपी.अिध., मुंबई/DR, ITAT, Mumbai 5. गाड�फाइल/Guard file. BY ORDER, //True Copy// (Asstt. Registrar), ITAT, MUMBAI