CUPID DIAMONDS PRIVATE LIMITED,MUMBAI vs. PRICIPAL COMMISSIONER OF INCOME TAX-5, MUMBAI

The Learned Principal Commissioner of Income Tax, Mumbai -5 (PCIT) has erred in passing the order u/s 263 of the Income tax Act, 1961 dated 10/12/2024, without appreciating the fact that the order passed by the AO is neither erroneous nor prejudicial to the interest of the revenue and is against various judicial pronouncements on the subject.

The Learned Principal Commissioner of Income Tax, Mumbai -5 (PCIT) has erred in passing the order u/s 263 of the Income tax Act, 1961 dated 10/12/2024, without appreciating the fact that the provisions of section 263 cannot be revoked when the larger issue is pending before the CIT (A), which is based on the principle of doctrine of merger, according to which there cannot be more than one decree or operative order giving the same subject matter at a given point of time, particularly when the said fact brought to his attention.

The Learned Principal Commissioner of Income Tax, Mumbai -5 (PCIT) has erred in passing the order u/s 263 of the Income tax Act, 1961 dated 10/12/2024 and directing the AO to treat the entire expenses of Rs 9,41,47,312/- as unexplained expenditure under the provisions of section 69C of the Income tax Act when the AO has taken 10% of the same based on various juridical pronouncements including by the juri ictional Bombay High Court and ITAT Mumbai since he has not rejected the books of accounts and has also accepted the corresponding sales.

The Appellant prays that, the order u/s 263 of the Income tax Act, dated 10/12/2024 passed by the PCIT, Mumbai-5 be annulled, squashed and set aside.

Brief facts of the case are that the assessee company is engaged into business of manufacturing and trading of laboratory grown cut and polished diamonds.In the present case, assessee had filed return of income on 23.02.2022 declaring total income of Rs.2,41,89,710/-. The case was selected for Complete Scrutiny for the reason that business Page 3 A.Y. 2021-22 Cupid Diamonds Private Limited purchases need to be verified for their genuineness. The assessment was completed under section 143(3) r.w.s.144B of the Act assessing total income at Rs.3,37,35,741/, after making addition of Rs.95,46,031/- u/s 37 of the Act on account of unverified business purchases.

1 The ld.PCIT on examination of the records found that the AO in order to verify the genuineness of purchases made by the assessee company issued notices u/s.133(6) of the Act to several parties from whom purchases were shown to have been made, out of which the assessee, however, could not prove genuineness and creditworthiness of the purchases totalling Rs.9,41,47,312/- from three of the parties namely R. K. Diam Private Limited, Rupesh kumar Hitendra kumar Khatri and Ketan Hitendra kumar Khatri. Accordingly, the purchases from the said parties were treated as bogus purchases. Enquiries also revealed unverified purchases amounting to Rs.1,31,301/- from K. Chandrakant and Co. International Private Limited since purchases of Rs.72,84,194/- were verified by the said party as against Rs.74,15,495/- claimed by the assessee company. While completing the assessment the AO made total addition of Rs.95,46,031/-which included a sum of Rs.94,14,730/- being 10% of the total bogus purchases of Rs.9,41,47,312/- made from the above referred three parties and Rs.1,31,301/- as unverified purchase from K. Chandrakant and Co. International Private Limited. Page 4 A.Y. 2021-22 Cupid Diamonds Private Limited However, the ld.PCIT observed that since the purchases made from the above referred parties could not be verified, the entire amount of Rs.9,41,47,312/- should have been added to the taxable income since these transactions remained unverified due to failure of the assessee to prove genuineness of the purchases. Further, the entire amount should have been treated as 'unexplained expenditure' and added to total income u/s.69C and taxed at 60% u/s.115BBE of the Act. In view of the above, he concluded that the assessment order passed under section 143(3) r.w.s.144B of the Act was erroneous in so far as it is prejudicial to the interest of the revenue within the meaning of section 263 of the Act. Accordingly, proceedings were initiated and a show cause notice was issued to the assessee company in response to which the assessee has stated that the assessment order passed in the case was neither erroneous nor prejudicial of the interests of the Revenue since the AO had made enquiries about the income of the assessee and called for extensive records and examined the same in detail. It has also been stated that provisions of section 263 cannot be invoked when a larger issue is pending before CIT(A). Further, the assessee also contended that the purchases under reference can neither be termed as bogus nor unverifiable. Page 5 A.Y. 2021-22 Cupid Diamonds Private Limited

2 However, the ld.PCIT claimed that the contention of the assessee that the purchases from three parties could not be accepted in view of the fact that the creditworthiness and genuineness of these parties could not be proved during the course of assessment proceedings. As regards the contention of the assessee that proceedings u/s.263 could not be initiated during the pendency of appeal before the CIT(Appeals), it is stated that the proceedings u/s.263 of the Act and the appeal proceedings before CIT(A) are independent proceedings and there is no bar in the Act that both proceedings cannot run simultaneously. While completing the assessment the Assessing Officer failed to make addition of entire bogus purchase transaction of Rs.9,41,47,312/- but restricted the addition to only 10% of the said amount. In this regard it is stated that the hon'ble Supreme Court in the had dismissed the SLP of the said company against the decision of100% of bogus purchases were added to the total income. Accordingly, after invoking the provisions of section 263 of the Act, the AO was directed to take further necessary action in this regard. In addition, the A.O. was also directed to examine the facts of the case and to initiate penalty as per the provisions of the Act. Page 6 A.Y. 2021-22 Cupid Diamonds Private Limited

Before us, the ld.CIT(DR) relied on the order of ld.PCIT. It is stated that he correctly assumed juri iction as there was no basis for making addition on estimate no basis when the transactions could not be proved. He placed reliance on the decision in the case of Kanak Impex in ITA No.791 of 2021(Bom). Per contra, the ld.AR vehemently contested the revision order by claiming that assessee's case was selected for complete scrutiny for A.Y. 21-22 for verifying genuineness of business purchases and evaluation of low returned income in spite of large turnover from Gems and Jewellery business. The AO sent notices u/s 133(6) of the Act to parties from whom assessee had claimed to have made purchases. During the course of assessment out of the total 17 suppliers, 13 suppliers submitted responses to the notices u/s 133(6) along with necessary documentation including copy of ledgers and other evidence to establish genuineness of purchases. Hence, purchases from the said thirteen parties considered to be genuine and no addition proposed by AO. However, in respect of four parties genuineness of purchasers could not be established. Final disallowance made by AO to the tune of Rs.95,46,031/- .

1 It is contented that the hon'ble Supreme Court in the case of Malabar Industries Ltd. v. CIT (supra) held that twin conditions needs to be satisfied before exercising revisional juri iction u/s 263 of Page 7 A.Y. 2021-22 Cupid Diamonds Private Limited the Act by the PCIT. The twin conditions are that the order of the AO must be erroneous and so far as prejudicial to the interest of the Revenue. In the following circumstances, the order of the AO can be held to be erroneous order, that is (i) if the Assessing Officer's order was passed on incorrect assumption of fact; or (ii) incorrect application of law, or (iii) Assessing Officer's order is in violation of the principle of natural justice, or (iv) if the order is passed by the AO without application of mind. (v) if the AO has not investigated the issue before him; because AO has to discharge dual role of an investigator as well as that of an adjudicator then in aforesaid any event the order passed by the AO can be termed as erroneous order. Coming next to the second limb, which is required to be examined as to whether the actions of the AO can be termed as prejudicial to the interest of Revenue. When this aspect is examined one has to understand what is prejudicial to the interest of the revenue. Their Lordship held when the AO adopted one of the courses permissible in law and it has resulted in loss to the revenue, or where two views are possible and the AO has taken one view with which the CIT does not agree, it cannot be treated as an erroneous order prejudicial to the interest of the Revenue "unless the view taken by the Assessing Officer is unsustainable in law". Thus, in our considered view following Apex Court ruling the Revision orders passed by Ld. PCIT are Page 8 A.Y. 2021-22 him that the some of the parties did not comply with notice u/s 133(6) of the Act. Finally, he rejected the genuineness of the said purchase transaction and made part disallowance at the rate of 10% of the said unverified transactions. Thus, we notice that a detailed enquiry is evident from the assessment order. In this case, during the assessment the AO issued query memos to the assessee, calling upon it to justify the genuneness of the purchase. The assessee responded to the same by giving necessary evidence. On perusal, the AO was not satisfied and he drew an adverse conclusion w.r.t. the said purchase after making due enquiries and investigations. We find that the impugned transaction has been duly examined and consequently the AO disallowed the same Page 9 A.Y. 2021-22 Cupid Diamonds Private Limited although on estimated basis rather than taxing the entire disputed purchases u/s 69C and simultaneous taxing at higher rate with initiation of penalty as well as observed by the ld.PCIT.

1 We further note that the AO by already making the disallowance of the said purchase had caused greater prejudice to the assessee in the assessment. Moreover, the said assessment is challenged before the ld.CIT(A) and the same is pending. While this is so, we are afraid whether the same issue could be the subject matter of revision proceedings u/s 263 of the Act by seeking to look into the very same issue from different perspective. We find that the action of the ld.PCIT is in complete disregard to the specific provisions of clause(c) of Explanation to section 263(1) of the Act, which places a clear embargo on the ld.PCIT with respect to exercise of revisionary juri iction on assessments which have been subject matter of appeal. Reliance in this regard is placed on the decision of the Hon'ble Calcutta High Court in wherein, the hon'ble Court while interpreting the scope of powers of the Commissioner u/s 263 of the Act held that where an appeal is preferred before the Appellate Assistant Commissioner (AAC) and a subject is particularly raised, he cannot revise such an order taking into account an aspect not dealt by the AAC. Page 10 A.Y. 2021-22 Cupid Diamonds Private Limited

Further, we are of the considered opinion that the ld.CIT(A) having conferred with the co-terminus powers with that of the AO has got ample power to even enhance the assessment if circumstances so warrant. Just because the ld.CIT(A) had not exercised his enhancement powers in the instant case, even if it is to be done, that would not confer automatic revisionary power u/s 263 of the Act for the ld.PCIT. In this regard, the reliance placed by the ld AR on the observations of the Hon'ble Supreme Court in the case of Jute Corporation Ltd in 187 ITR 688 and CIT v. Kanpur Coal Syndicate [1964] 53 ITR 225(SC), the Court inter alia held that under section 31(3)(a) in disposing of such an appeal the Appellate Assistant Commissioner may, in the case of an order of assessment, confirm, reduce, enhance or annul the assessment; under clause (b) thereof he may set aside the assessment and direct the Income-tax Officer to make a fresh assessment. The Appellate Assistant Commissioner has, therefore, plenary powers in disposing of an appeal. The scope of his power is co- terminus with that of the Income-tax Officer. He can do what the Income-tax Officer can do and also direct him to do what he has failed to do......." These observations are squarely applicable to the interpretation of section 251(1)(a) of the Act. Even otherwise, an appellate authority while hearing appeal against the order of a Page 11 A.Y. 2021-22 Cupid Diamonds Private Limited subordinate authority has all the powers which the original authority may have in deciding the question before it subject to the restrictions or limitations, if any, prescribed by the statutory provisions. The appellate authority is vested with all the plenary powers which the subordinate authority may have in the matter.

3 Accordingly, we hold that the issue of disallowance of purchase is already the subject matter of appellate proceedings before the ld.CIT(A) and hence the same cannot be the subject matter of re- verification and re-adjudication from different perspective by the ld.PCIT under revisionary juri iction u/s 263 of the Act. Hence, the action of the ld.PCIT in invoking revisionary juri iction u/s 263 of the Act deserves to be quashed on this count also.

4 Moreover, a detailed inquiry made by the AO, cannot make the order erroneous. It is his prerogative to make inquiry to the extent he feels proper. The ld.PCIT by invoking revisionary powers under section 263 of the Act cannot impose his own understanding of the extent of inquiry. There are plethora of judgments by various High Courts in this regard. The hon'ble Delhi High Court in the case of CIT Vs. Sunbeam Auto 332 ITR 167 (Del.), made a distinction between 'lack of inquiry' and 'inadequate inquiry'. The hon'ble court held that where the AO has made inquiry prior to the completion of assessment, Page 12 A.Y. 2021-22 Cupid Diamonds Private Limited the same cannot be set aside u/s 263 of the Act on the ground of inadequate inquiry. It was observed that one has to keep in mind the distinction between "lack of inquiry" and "inadequate inquiry". If there was any inquiry, even inadequate, that would not by itself, give occasion to the Commissioner to pass orders under section 263 of the Act, merely because he has different opinion in the matter. It is only in cases of "lack of inquiry", that such a course of action would be open. The hon'ble Bombay High Court in case of Gabriel India Ltd. [1993] 203 ITR 108 (Bom), discussed the law on this aspect in length in the following manner: "The consideration of the Commissioner as to whether an order is erroneous in so far as it is prejudicial to the interests of the Revenue, must be based on materials on the record of the proceedings called for by him. If there are no materials on record on the basis of which it can be said that the Commissioner acting in a reasonable manner could have come to such a conclusion, the very initiation of proceedings by him will be illegal and without juri iction. The Commissioner cannot initiate proceedings with a view to starting fishing and roving enquiries in matters or orders which are already concluded. Such action will be against the well-accepted policy of law that there must be a point of finality in all legal proceedings, that stale issues should not be reactivated beyond a particular stage and that 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."

5 The hon'ble Supreme Court in the another case of Principal Commissioner of Income-tax-2, Meerut v. Canara Bank Page 13 A.Y. 2021-22 Cupid Diamonds Private Limited Securities Ltd[2020] 114 taxmann.com 545 (SC), dismissed the Revenue's SLP holding that 263 proceedings are invalid when AO had made enquiries and taken a plausible view in law.

6 Moreover, where two views are possible and the AO has taken one view with which the ld.PCIT does not agree, it cannot be treated as an erroneous order causing prejudice to the interests of the Revenue unless the view taken by the AO is unsustainable in law or the AO has completely omitted to make any enquiry altogether or the order demonstrates non-application of mind. Making estimated addition on unproved purchases itself is a debatable issue with various contrary judicial decisions. In such a situation also, the AO having taken one of the plausible views cannot be faulted with.

7 In view of the aforesaid findings,on the facts and circumstances of the case, we are of the considered opinion that in the instant case, ld PCIT erred in invoking revisionary juri iction u/s 263 of the Act on the ground of that the AO failed to apply correct provisions of the Act and failed to add back entire unverified purchases. Moreover, the ld.PCIT has taken one of the plausible views that the impugned purchase should have been taxed under the provisions of section 69C of the Act treating it to be unexplained expenditure. We are afraid, even this view of the ld.PCIT may be subjected to debate as to Page 14 A.Y. 2021-22 Cupid Diamonds Private Limited whether the purchases duly reflected in the books of account could be brought within the purview of this section when the book results have been accepted. It goes without saying that on the facts and the circumstances of the case, the AO did not consider appropriate to initiate penalty proceedings. The ld.PCIT therefore, cannot direct him to take a different course of action than that adopted by the AO. Besides, the issue in hand is still pending for adjudication before the first appellate authority who himself is adequately empowered to take a different view of the matter. Accordingly, we set aside the order of the ld. PCIT quashing the same and allowing the grounds of appeal.

In the result, the appeal of the assessee is allowed. Order pronounced in the open court on 11.08.2025. SANDEEP GOSAIN (न्यायिक सदस्य /JUDICIAL MEMBER) PRABHASH SHANKAR (लेखाकार सदस्य/ACCOUNTANT MEMBER) Place: मुंबई/Mumbai दिनांक / Date 11.08.2025 Lubhna Shaikh / Steno आदेश की प्रतिलिपि अग्रेषित/