NEPAL SINGH RATHOD (HUF),HUBLI vs. PRINCIPAL COMMISSIONER OF INCOME TAX, HUBLI, HUBLI

PER CHANDRA POOJARI, ACCOUNTANT MEMBER:

This appeal by assessee is directed against order of PCIT passed u/s 263 of the Income Tax Act, 1961 dated 23.8.2022 for the assessment year 2017-18. The assessee has raised following grounds of appeal:-

ITA No.400/Bang/2022 Nepal Singh Rathod (HUF), Hubli Page 2 of 33 2. The Learned CIT erred in assuming jurisdiction u/s 263 of Act by issue of notice dt.07.03.2022.

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Page 3 of 33 2. The crux of the above grounds is that Ld. PCIT erred in invoking provisions u/s 263 of the Act though there was proper enquiry by AO vide assessment order u/s 143(3) of the Act dated 20.12.2019.

3.1 The assessee has deposited cash of Rs.1,95,80,000/- during the demonetization period out of which Rs.84,50,000/- was in SBN old currency. During the course of assessment proceedings, the assessee has not submitted the cash book and other relevant details in order to prove the sources for the cash deposited during the demonetization period. Further, as seen from the details filed during the course of assessment proceedings, there was difference in the closing cash balance at the end of Oct 2016 and the opening balance for Nov 2016. This remained to be reconciled. The assessee failed to furnish a satisfactory explanation regarding the irregularities in the month-wise opening and closing cash balances. When the case was selected for verification of the cash deposits during the demonetization period, it was necessary for the AO to examine the source of cash deposited and carry out

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Page 4 of 33 necessary investigation in accordance with law and CBDT guidelines. The AO should have analyzed the bank account and trend of cash receipts and examined the cash sales and the stock register during the specified period. The AO should have also examined the cash sales during the specified period and ascertained the cash in hand as on 8.11.2016 after examination of books, specially by obtaining the cash book. The Assessing Officer has not done so. The AO has not conducted necessary enquiries and has not made the additions required as per law. The assessee has failed to furnish a satisfactory explanation regarding the source of cash deposited in the Bank account and the amount deposited during the demonetization period remained unexplained.

3.2 In view of the above facts, Ld. Principal CIT issued a notice u/s 263 of the Act on 7.3.2022 seeking the assessee to explain why assessment order be not revised u/s 263 of the Act. The assessee contested the notice issued by the Ld. PCIT stating that cash deposits were explained before the AO during the course of assessment. However, Ld. PCIT set aside the assessment order passed u/s 143(2) of the Act holding that it is erroneous so far as prejudicial to the interest of revenue and directed the AO to pass fresh order after examining the cash deposit during the period of demonetization period and conduct necessary enquiries in accordance with law and CBDT guidelines on this regard. Against this, assessee is in appeal before us by way of above grounds.

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Page 5 of 33 cash sales in F.Ys 2015-16 & F.Y. 2016-17, analysis of month-wise cash sales and cash deposits from 1.4.2015 to 8.11.2015, analysis of month-wise cash sales and cash deposited from 9.11.2015 to 30.12.2015, analysis of month-wise cash sales and cash deposited from 1.4.2016 to 8.11.2016, analysis of month-wise cash sales and cash deposits from 9.1.2016 to 30.12.2016, copies of VAT returns, details of cash deposits and source of income during the demonetization period, copies of cash book from assessment year 2017-18, details of closing cash balance in hand as on 31.3.2016, 31.3.2015 and 30.3.2014 and source of cash deposit as reported in SFT 14 and its accounting treatment in books of accounts, details of PAN, address, amount, nature of receipt and date of receipt of cash receipts exceeding Rs.10,000/- during the F.Y. 2016-17. Thus, he submitted that what is the details which are required to be seen by the AO as per Ld. PCIT has already been verified by the AO and he has taken a conscious decision that an amount of Rs.84,50,000/- deposited into bank accounts i.e. SBN old currency has been explained by the assessee at the time of assessment. The Ld. A.R. submitted that the AO duly verified the cash deposit into bank during demonetization period as it is duly explained by the assessee by producing the various records and cash book and there is no question of lack of enquiry or inadequate enquiry as alleged by the Ld. PCIT so as to redo the assessment once again. According to the Ld. A.R., Ld. PCIT has made a general statement that AO has not made verification and he has not followed the CBDT guidelines. The Ld. A.R. submitted that the Ld. AO caused the assessment order after getting due approval from Ld. PCIT, who is in same cadre as in the present Principal CIT, who invoked the jurisdiction u/s 263 of the Act. Further, Ld. A.R. submitted that the Ld. AO has gone through the entire facts and circumstances of the case and as the assessee explained that total deposit into bank account has been sourced by the cash sales as well as from the recovery from the debtor, which

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Page 6 of 33 has been seen from the letter filed by the assessee dated 16.9.2019 with reply to notice issued by AO u/s 142(1) of the Act dated 28.8.2019. He drew our attention to the said letter, which is placed at paper book page 7 to 13. Finally, he relied on the judgement of coordinate bench in the case of (a) Pramod Kesharichand Shah in ITA No.43/SRT/2018 dated 16.3.2021 of Surat Bench of Tribunal (b) M/s. APC Books Vs. ACIT Circle-51(1), New Delhi in ITA No.138/Del/2022 dated 26.5.2022 of Delhi Bench of Tribunal (c) Vanishree Hosalasu Shettar Vs. PCIT Hubli in ITA No.270/Bang/2022 dated 25.7.2022 of Bangalore Bench.

6.1 Thus, he submitted that cash deposit to bank account is exorbitant as compared to cash sales made by the assessee in the

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Page 7 of 33 above table. Hence, the explanation given by the assessee cannot be accepted as the source of deposit to bank account has been duly explained by the assessee before the AO.

‘erroneous, adj. Involving error, deviating from the law’.

The word ‘error’ has been defined at the same page in the same dictionary thus:

‘error No. 1 : A psychological state that does not conform to Objective reality; a brief that what is false is true or that what is true is false’.

At page 649/650 in P. Ramanatha Aiyer’s Law Lexicon Reprint 2002, the word ‘error’ has been defined to mean-

‘Error: A mistaken judgement or deviation from the truth in matters of fact, and from the law in matters of judgement ‘error’ is a fault in judgement, or in the process or proceeding to judgement or in the execution upon the same, in a Court of

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Page 8 of 33 Record; which in the Civil Law is called a Nullityie” (termes de la ley).

Something incorrectly done through ignorance or inadvertence S.99 CPC and S.215 Cr.PC.

‘Error, Fault, Error respects the act; fault respect the agent, an error may lay in the judgement, or in the conduct, but a fault lies in the will or intention.”

7.1 At page 650 of the aforesaid Law Lexicon, the scope of Error, Mistake, Blunder, and Hallucination has been explained thus:

“An error is any deviation from the standard or course of right, truth, justice or accuracy, which is not intentional. A mistake is an error committed under a misapprehension of misconception of the nature of a case. An error may be from the absence of knowledge, a mistake is from insufficient or false observation. Blunder is a practical error of a peculiarly gross or awkward kind, committed through glaring ignorance, heedlessness, or awkwardness. An error may be overlooked or atoned for, a mistake may be rectified, but the shame or ridicule which is occasioned by a blunder, who can counteract. Strictly speaking, Hallucination is an illusion of the perception, a phantasm of the imagination. The one comes of disordered vision, the other of discarded imagination. It is extended in medical science to matters of sensation, whether there is no corresponding cause to produce it. In its ordinary use it denotes an unaccountable error in judgement or fact, especially in one remarkable otherwise for accurate information and right decision. It is exceptional error or mistake in those otherwise not likely to be deceived.” 7.2 In order to ascertain whether an order sought to be revised under Section 263 is erroneous, it should be seen whether it suffers from any of the aforesaid forms of error. In our view, an order sought to be revised under Section 263 would be erroneous and fall in the aforesaid category of "errors" if it is, inter alia, based on an incorrect assumption of facts or an incorrect application of law or non- application of mind to something which was obvious and required application of mind or based on no or insufficient materials so as to

ITA No.400/Bang/2022 Nepal Singh Rathod (HUF), Hubli Page 9 of 33 affect the merits of the case and thereby cause prejudice to the interest of the revenue.

7.3 Section 263 of the Income-tax Act seeks to remove the prejudice caused to the revenue by the erroneous order passed by the Assessing Officer. It empowers the Commissioner to initiate suo moto proceedings either where the Assessing Officer takes a wrong decision without considering the materials available on record or he takes a decision without making an enquiry into the matters, where such inquiry was prima facie warranted. The Commissioner will be well within his powers to regard an order as erroneous on the ground that in the circumstances of the case, the Assessing Officer should have made further inquiries before accepting the claim made by the assessee in his return. The reason is obvious. Unlike the Civil Court which is neutral in giving a decision on the basis of evidence produced before it, the role of an Assessing Officer under the Income- tax Act is not only that of an adjudicator but also of an investigator. He cannot remain passive in the face of a return, which is apparently in order but calls for further enquiry. He must discharge both the roles effectively. In other words, he must carry out investigation where the facts of the case so require and also decide the matter judiciously on the basis of materials collected by him as also those produced by the assessee before him. The scheme of assessment has undergone radical changes in recent years. It deserves to be noted that the present assessment was made under Section 143(3) of the Income-tax Act. In other words, the Assessing Officer was statutorily required to make the assessment under Section 143(3) after scrutiny and not in a summary manner as contemplated by Sub-section (1) of Section 143. Bulk of the returns filed by the assessees across the country is accepted by the Department under Section 143(1) without any scrutiny. Only a few cases are picked up for scrutiny. The Assessing Officer is therefore, required to act fairly while accepting

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Page 10 of 33 or rejecting the claim of the assessee in cases of scrutiny assessments. He should be fair not only to the assessee but also to the Public Exchequer. The Assessing Officer has got to protect, on one hand, the interest of the assessee in the sense that he is not subjected to any amount of tax in excess of what is legitimately due from him, and on the other hand, he has a duty to protect the interests of the revenue and to see that no one dodged the revenue and escaped without paying the legitimate tax. The Assessing Officer is not expected to put blinkers on his eyes and mechanically accept what the assessee claims before him. It is his duty to ascertain the truth of the facts stated and the genuineness of the claims made in the return when the circumstances of the case are such as to provoke inquiry. Arbitrariness in either accepting or rejecting the claim has no place. The order passed by the Assessing Officer becomes erroneous because an enquiry has not been made or genuineness of the claim has not been examined where the inquiries ought to have been made and the genuineness of the claim ought to have been examined and not because there is anything wrong with his order if all the facts stated or claim made therein are assumed to be correct. The Commissioner may consider an order of the Assessing Officer to be erroneous not only when it contains some apparent error of reasoning or of law or of fact on the face of it but also when it is a stereo-typed order which simply accepts what the assessee has stated in his return and fails to make enquiries or examine the genuineness of the claim which are called for in the circumstances of the case. In taking the aforesaid view, we are supported by the decisions of the Hon'ble Supreme Court in Rampyari Devi Saraogi v. CIT (67 ITR 84) (SC), Smt. Tara Devi Aggarwal v. CIT (88 ITR 323) (SC), and Malabar Industrial Co. Ltd's case ( 243 ITR 83) (SC).

7.4 In Malabar Industrial Co. Ltd. case the Hon'ble Court has held as under:

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Page 11 of 33 “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 the orders passed without applying the principles of natural justice or without application of mind.

In our humble view, arbitrariness in decision-making would always need correction regardless of whether it causes prejudice to an assessee or to the State Exchequer. The Legislature has taken ample care to provide for the mechanism to have such prejudice removed. While an assessee can have it corrected through revisional jurisdiction of the Commissioner under Section 264 or through appeals and other means of judicial review, the prejudice caused to the State Exchequer can also be corrected by invoking revisional jurisdiction of the Commissioner under Section 263. Arbitrariness in decision-making causing prejudice to either party cannot therefore be allowed to stand and stare at the legal system. It is difficult to countenance such arbitrariness in the actions of the Assessing Officer. It is the duty of the Assessing Officer to adequately protect the interest of both the parties, namely, the assessee as well as the State. If he fails to discharge his duties fairly, his arbitrary actions culminating in erroneous orders can always be corrected either at the instance of the assessee, if the assessee is prejudiced or at the instance of the Commissioner, if the revenue is prejudiced. While making an assessment, the ITO has a varied role to play. He is the investigator, prosecutor as well as adjudicator. As an adjudicator he is an arbitrator between the revenue and the taxpayer and he has to be fair to both. His duty to act fairly requires that when he enquires into a substantial matter like the present one, he must record a finding on the relevant issue giving, howsoever briefly, his reasons therefor. In S.N. Mukherjee v. Union of India AIR 1990 SC 1984, it has been observed by the Hon'ble Supreme Court as follows:

“Reasons, when recorded by an administrative authority in an order passed by it while exercising quasi-judicial functions, would no doubt facilitate the exercise of its jurisdiction by the appellate or supervisory authority. But the other considerations, referred to above, which have also weighed with this Court in holding that an administrative authority must record reasons for its decision are of no less significance. These considerations show that the recording of reasons by an administrative authority serves a salutary purpose, namely, it excludes chances or arbitrariness and ensures a degree of fairness in the process of decision-making. The said purpose

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Page 12 of 33 would apply equally to all decisions and its application cannot be confined to decisions which are subject to appeal, revision or judicial review. In our opinion, therefore, the requirement that reasons be recorded should govern the decisions of an administrative authority exercising quasi-judicial functions irrespective of the fact may, however, be added that it is not required that the reasons should be as elaborate as in the decision of a court of law. The extent and nature of the reasons would depend on particular facts and circumstances. What is necessary is that the reasons are clear and explicit so as to indicate that the authority has given due consideration to the points in controversy. The need for recording of reasons is greater in a case where the order is passed at the original stage. The appellate or revisional authority, if it affirms such an order, need not give separate reasons if the appellate or revisional authority agrees with the reasons contained in the order under challenge.” 7.5 Similar view was earlier taken by the Hon'ble Supreme Court in Siemens Engg. & Mfg. Co. Ltd. v. Union of India AIR 1976 SC 1785. It is settled law that while making assessment on assessee, the ITO acts in a quasi-judicial capacity. An assessment order is amenable to appeal by the assessee and to revision by the Commissioner under Sections 263 and 264. Therefore, a reasoned order on a substantial issue is legally necessary. The judgments on which reliance was placed by the learned Counsel for the assessee also points to the same direction. They have held that orders, which are subversive of the administration of revenue, must be regarded as erroneous and prejudicial to the interests of the revenue. If the Assessing Officers are allowed to make assessments in an arbitrary manner, as has been done in the case before us, the administration of revenue is bound to suffer. If without discussing the nature of the transaction and materials on record, the Assessing Officer had made certain addition to the income of the assessee, the same would have been considered erroneous by any appellate authority as being violative of the principles of natural justice which require that the authority must indicate the reasons for an adverse order. We find no reason why the same view should not be taken when an order is against the interests of the revenue. As a matter of fact such orders are

ITA No.400/Bang/2022 Nepal Singh Rathod (HUF), Hubli Page 13 of 33 prejudicial to the interests of both the parties, because even the assessee is deprived of the benefit of a positive finding in his favour, though he may have sufficiently established his case.

7.6 In view of the foregoing, it can safely be said that an order passed by the Assessing Officer becomes erroneous and prejudicial to the interests of the Revenue under Section 263 in the following cases: (i) The order sought to be revised contains error of reasoning or of law or of fact on the face of it. (ii) The order sought to be revised proceeds on incorrect assumption of facts or incorrect application of law. In the same category fall orders passed without applying the principles of natural justice or without application of mind. (iii) The order passed by the Assessing Officer is a stereotype order which simply accepts what the assessee has stated in his return or where he fails to make the requisite enquiries or examine the genuineness of the claim which is called for in the circumstances of the case.

7.7 Adverting the facts of present case, during the course of assessment, AO enquired about the cash deposit into bank account at Rs.1,95,80,000/- which was done during the demonetization period, out of which Rs.84.5 lakhs was in SBN old currency. In the notice issued u/s 142(1) of the Act, the AO called for various details, which were furnished by assessee vide his letter dated 16.9.2019 which reads as under:

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Page 20 of 33 7.8 Thus, it is evident from the answer to question No.4 that AO very much enquired about the cash deposited into bank account, which is as follows:-

7.9 Further, it was also seen from answer to question No.4 (viii) with regard to deposit of SBN old currency at Rs.84.5 lakhs.

7.10 The assessee has also explained the source for cash deposit as answer to question No.4(xv) as follows:-

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7.11 The assessee has also specifically reported the SBN transaction to the AO at the time of assessment as seen from page 13 of the paper book

7.12 Hence, the above facts clearly demonstrated that there was an enquiry by AO consequent to which assessee has furnished full details of deposit of cash to bank account and from that angle, it cannot be said that there was no enquiry by AO for re-enquiring the similar thing. The Ld. PCIT cannot direct the AO for making roving enquiry on same set of facts, when the AO has made requisite enquiry before passing assessment order dated 20.12.2019. For this purpose, we rely on the judgement of coordinate bench in the case of Vanishreee Holabasu Shettar cited (supra), wherein held as under:-

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Page 22 of 33 the source for the cash deposit is the sale proceeds of the assessee’s business. The PCIT in his order has stated that the further enquiry would have revealed if the cash deposited in bank a/c out of either unexplained cash or SBNs received after the notified date in violation of law and would have resulted in unexplained income u/s. 69A of the Act. This in our view is not the right reason for revision, as the error envisaged by Section 263 of the Act is not one that depends on possibility as guess work but it should be actually an error either of fact or of law. 10. Further it is factually evident that the assessee has submitted all the relevant details with regard to cash deposits and agricultural income and the AO has in fact made additions with regard to the agricultural income. Merely because the order was not passed elaborately it would not be said that the order of the AO is erroneous and prejudicial to the interests of the Revenue. 11. With regard to the argument of the learned D.R. that the assessee’s case need to be considered in the light of the explanation to Section 263 of the Act, we notice that the Hon’ble Gujarat High Court in the case of Shreeji Prints (P) Ltd. (130 taxmann.com 293 – Guj) while considering the explanation of Section 263 of the Act has held that : -

“4 Being aggrieved by the order passed by the PCIT under section 263 of the Act, 1961, the assessee went before the Tribunal. The Tribunal, after considering the submissions made by the assessee and after considering the scope of power to be exercised by the PCIT under section 263 of the Act, 1961 came to be conclusion that the Assessing Officer has made inquiries in detail about two unsecured loans taken by the respondent assessee and observed as under: "13 In the light of the aforesaid judicial precedents in the present case what has to be seen is whether the AO has made enquiries about two loans taken from GTPL and PAFPL. If the answer is affirmative, then second question arises whether the acceptance of the claim by the AO was a plausible view or on the facts of the finding on the facts that the said funding of the AO can be termed as sustainable in law. We find that vide notice issued u/s.142(1) dated 13-10-2015 placed at Page No. 1 of Paper Book shows the AO vide item no.(iii) has asked the information regarding details of unsecured loan outstanding as on 31-3-2013 and the loans were squared up amounts in the format prescribed therein. In compliance to thereof, the assessee has furnished complete details of the unsecured loans outstanding/ squared up vide para 3 of his letter dated 2-11-2015 placed as Annexure-2 at page 4 of paper book. The assessee has also furnished details consisting of copy of ledger account, copy of acknowledgment of income filed for A.Y. 2012-13 and 2013- 14 and copy of bank statement reflecting the payment received was paid during the financial year 201213 relevant to assessment

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Page 23 of 33 year 2013-14 which are placed at paper book, page 9 to 49 in respect of GTPL as well as PAFPL. This indicate that the assessee has furnished account confirmation of the depositor, acknowledgment of income of the parties, audited balanced sheet and profit and loss account of the parties and bank pass book and bank statement of the parties. During the course of assessee proceedings, form these facts it is clear that the assessee has not only proved the from these facts it is clear that the assessee has not only proved the identity of the lenders but also the genuineness of the transactions and credit worthiness of the lenders. Accordingly, the Ld. AO after verifying the details of unsecured loans being satisfied, accepted the submissions of the assessee which leads to infer that the Assessing Officer had made full enquiries of unsecured loans by raising the queries and calling for the all information in respect of the loan taken along with details evidences in support thereof and the same were also duly replied by the assessee and on receipt of all the details of evidences, the unsecured loans received by the assessee were accepted by the Assessing Officer and the assessment was finalised u/s.143(3) of the Act on 15-3-2016. We also note that there was audit objection in the case of the assessee. The language of audit objection and show-cause notice under section 263 is same meaning thereby that the show cause notice u/s.263 has been issued by the PCIT Without going through assessment records and without exercising his own application of his mind. The assessee has not only filed complete details of Income-tax Return, audited balance sheet, profit and loss account and bank statement. The assessee further explained that both the these unsecured loans stands fully repaid as on the date and there is no capital creation by the assessee on this count. In view of these facts and circumstances, we are of the considered

opinion that the order of the Assessing Officer is not erroneous nor it is prejudicial to the interest of revenue. It was also brought to the notice of the PCIT that entire share capital of GTPL being already tax, all the investment made by the said company recorded in its balance sheet stands explained tax in its hands itself and hence, "there is no question of adding the same amount in the hands of the assessee. As regards loans from PAFPL, it was submitted that assessee company has made voluntary disclosure of income of Rs. 1.5 crore under IDS 2016 in September 2016 and the said loan was repaid before making declaration. In view of these facts and circumstances, we find that the AO has made due enquiries. Since we find that the AO had made enquiries regarding unsecured loans and accepted the claim of the assessee after detailed enquiries." 15 The Pr.CIT had observed that Explanation 2 of section 263 of the Act is clearly applicable and it is clear that the Assessing Officer has passed the assessment order after making enquiries

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Page 24 of 33 for verification which ought to have been made in this case. However, we find that the Pr. CIT has not mentioned in the show-cause notice issued under section 263 that he is going to invoke the Explanation 2 to 263 hence, invocation of Explanation in the order without confronting the assessee is not appropriate and sustainable in law in support of this contention, the ld. Counsel has placed reliance on the following decision: CIT v. Amir Corporation 81 CCH 0069 (Guj.), CIT Mehrotra Brothem -270 ITR 0157 (MP,CIT v. Ganpet Ram Bishnoi - 296 ITR 0292 (Raj.), Cadila healthcare Ltd. v. Cl 7, Ahmedabadh-1 [ITA no. 1096/Ahd/2013 & 910/Ahd/2014], Sri Sal Contractors v. ITO [ITO no. 109Nizag/2002] and Pyare lal Jaiswal v. CIT, Vamnesi [(2014) 41 taxmann.com 27 & (AII Trib.)]. It was contended by the Learned Counsel that clause -(a) & (b) of Explanation 2 of Section 263 are not applicable as the Assessing Officer has made enquiry and verification which should have been made. Further, in the show cause notice, the Explanation- 2 of section 263 was not invoked by the PCIT and it was referred in the order u/s.263 of the Act. Therefore, in the light of decision of the Co-ordinate Bench of Mumbai ga in the case of Narayan Tatu Rane - 70 taxmann.com 227 (Mum. Trt.) [PB 153-1561 wherein held that explanation cannot laid to have over ridden the law as interpreted/the various High Courts where the High Courts have held that before reaching the conclusion that the order of the Assessing Officer is erroneous prejudicial to the interest of Revenue. The CIT himself has to undertake some enquiry to establish that the assessment order is erroneous and prejudicial to the interest of Revenue. The ld. Counsel relied on the decision of M/s. Amira Pure Foods Pvt. Ltd., v. PCIT in ITA No.3205/Del/2017 and Ahmedabad Tribunal in the case of Torrent Pharmaceuticals Ltd. v. DCIT [2018] 97 taxmann.com 671 (Ahd. - Trib.). it is clear from the enquiries made by the Assessing Officer and submissions made by the assessee that the Assessing Officer has taken the plausible view which is valid in the eyes of law. The Assessing Officer was satisfied consequent to making enquiry and after examining the evidences produced by the assessee, he accepted the assessee's claim of loan similar view were also expressed by the Hon'ble Delhi High Court in the case of CIT v. Vodafone Essar South Ltd. [2013] 212 taxman 0184. We observe the Pr.CIT has drawn support from newly inserted Explanation 2 below section 263(1) of the Act introduced by Finance Act, 2015 w.e.f. 1-6-2015 for his action. The Explanation 2 inter alia provides that the order passed without making inquiries or verification 'which should have been made' will be deemed to be erroneous insofar as it is prejudicial to the interest of the Revenue. It is on this basis, the assessment order passed by the AO under section 143(3) of the Act has been set aside with a direction to the AO to pass a fresh assessment order. It will be therefore

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Page 25 of 33 imperative to dwell upon the impact of Explanation 2 for the purposes of section 263 of the Act. The aim and object of introduction of aforesaid Explanation by Finance Act, 2015 was explained in CBDT Circular No. 19/2015 [F.NO.142I14/2015T PL], Dated 27-11-2015 which is reproduced hereunder: "53. Revision of order that is erroneous in so far as it is prejudicial to the interests of revenue. 53.1 The provisions contained in sub-section (1) of section 263 of the Income-tax Act, before amendment by the Act, provided that if the Principal Commissioner or Commissioner considers that any order passed by the Assessing Officer is erroneous in so far as it/s prejudicial to the interests of the Revenue, he may, after giving the assessee an opportunity of being heard and after making an enquiry pass an order modifying the assessment made by the Assessing Officer or cancelling the assessment and directing fresh assessment. 53.2 The interpretation of expression "erroneous in so far as it/3 prejudicial to the interests of the revenue" has been a contentious one. In order to provide clarity on the issue, section 263 of the Income-tax Act has been amended to provide that an order passed by the Assessing Officer shall be deemed to be erroneous in so far as it is prejudicial to the interests of the revenue, if, in the opinion of the Principal Commissioner or Commissioner. (a) the order is passed without making inquiries or verification which, should have been made; (b) the order is passed allowing any relief without inquiring into the claim; (c) the order has not been made in accordance with any order, direction or instruction issued by the Board under section 119; or (d) the order has not been passed in accordance with any decision, prejudicial to the assessee, rendered by the jurisdictional High Court or Supreme Court in the case of the assessee or any other person. 53.3 Applicability: This amendment has taken effect from 1st day of June, 2015." "17 We thus find merit in the plea of the assessee that the Revisional Commissioner is expected show that the view taken by the AO is wholly unsustainable in law before embarking upon exercise of revisionary powers. The revisional powers cannot be exercised for directing a fuller inquiry to merely find out if the earlier view taken is erroneous particularly when a view was already taken after inquiry. If such course of action as interpreted

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Page 26 of 33 by the Revisional Commissioner in the light of the Explanation 2 is permitted, Revisional Commissioner can possibly find fault with each and every assessment order without himself making any inquiry or verification and without establishing that assessment order is not sustainable in law. This would inevitably mean that every order of the lower authority would thus become susceptible to section 263 of the Act and, in turn, will cause serious unintended hardship to the tax payer concerned for no fault on his part. Apparently, this is not intended by the Explanation. Howsoever wide the scope of Explanation 2(a) may be, its limits are implicit in it. It is only in a very gross case of inadequacy in inquiry or where inquiry is per se mandated on the basis of record available before the AO and such inquiry was not conducted, the revisional power so conferred can be exercised to invalidate the action of AO. The AO in the present case has not accepted the submissions of the assessee on various issues summarily but has shown appetite for inquiry and verifications. The AO has passed after making due enquiries issues involved impliedly after due application of mind. Therefore, the Explanation 2 to section 263 of the Act do not, in our view, thwart the assessment process in the facts and the context of the case. Consequently, we find that the foundation for exercise of revisional jurisdiction is sorely missing in the present case. 18 In the light of above facts and legal position, we are of the considered view that the AO had made detailed enquiries and after applying his mind and accepted the genuineness of loans received from GTPL and PAFPL, which is also plausible view. Therefore, we find that twin conditions were not satisfied for invoking the jurisdiction under section 263 of the Act. The case laws relied by the ld. CIT(D.R.) are distinguishable on facts and in law hence, by the ld. Counsel as well and we concur the same hence not applicable to present facts of the case. Therefore, in absence of the same, the ld. CIT ought to have not exercised his jurisdiction under section 263 of the Act. Therefore, we cancel the impugned order under section 263 of the Act, allowing all grounds of appeal of the Assessee." 5. The Tribunal has found that in the order passed by the PCIT, Explanation 2 of section 263 of the Act, 1961 is made applicable. The Tribunal observed that the PCIT has not mentioned in the show cause notice to invoke the Explanation 2 of section 263 of the Act 1961. Therefore, by invocation of Explanation in the order without confronting the assessee and giving an opportunity of being heard to the assessee is not appropriate and sustainable in law. 6. Thus, the Tribunal has considered in detail the aspect of revisional power to be exercised by the PCIT in the facts of the case and has given a finding of facts that the Assessing Officer has made inquiries in detail and after applying mind, accepted the genuineness of loans received by the respondent assessee from the aforesaid two companies and such view of the Assessing Officer is a plausible view, and therefore, the same

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Page 27 of 33 cannot be said to be erroneous or prejudicial to the interest of the Revenue.” 12. The SLP against the above order of the Hon’ble High Court was dismissed by the Hon’ble Supreme Court, thereby the issue that the explanation (2) to Section 263 of the Act could be invoked only in a very gross case of inadequacy in enquiring or where the mandatory enquiries are not conducted has reached finality. In view of the above discussion, we are of the considered view that the PCIT is not justified in setting aside the order or the AO for examining afresh. Accordingly the directions of the PCIT are quashed.”

7.13 Further, in the case of CIT Vs. Sunbeam Auto Ltd. (332 ITR 167), wherein Hon’ble Delhi High Court has held as under:-

“Held, dismissing the appeal, (i) that the Assessing Officer allowed the claim on being satisfied with the explanation of the assessee. Such decision of the Assessing Officer could not be held to be erroneous simply because in his order he did not make an elaborate discussion in that regard. The Assessing Officer had called for explanation on the very item from the assessee and the assessee had furnished its explanation. This fact was conceded by the Commissioner himself in his order. This showed that the Assessing Officer had undertaken the exercise of examining as to whether the expenditure incurred by the assessee in the replacement of dies and tools was to be treated as revenue expenditure or not. Therefore, it could not be said that it was a case of lack of inquiry. The accounting practice followed for a number of years had the approval of the income-tax authorities. Even for future assessment years, the very same accounting practice was accepted.”

7.14 Further, coordinate bench in the case of Om Sai Co-operative Credit Souharda Sahakari Niyamit Vs. PCIT in ITA No.454/Bang/2022 dated 27.7.2022 has held as under:

“13. We have considered the rival submissions and perused the material on record. The PCIT has set aside the order u/s. 143(3) mainly on the premise that the assessee has not established that Specified Bank Notes (SBNs) deposited were out of receipts prior to demonetization and therefore an adverse inference was drawn that the receipts/SBNs were received after demonetisation which is contrary to public policy and in violation of law. We notice that this observation of PCIT is without any basis as the AO has done a thorough analysis of the details submitted by the assessee and has brought out his findings clearly in the order u/s. 143(3) which is reproduced below:-

“2.1 Subsequently, notice under section 142(1) was issued by my predecessor calling for information requisitioned for scrutiny of the case

ITA No.400/Bang/2022 Nepal Singh Rathod (HUF), Hubli Page 28 of 33 through e-proceeding. The undersigned has issued notice /letter under section 129 due to abolishing of ITO, ward-2, Gadag post. In response to notice u/s 142(1) the assessee to furnish information relating to cash receipts, cash deposits and withdrawals in the format prescribed and the assessee filed some of the information through e-proceeding. Since the assessee has deposited cash in SBNs during demonetization period, letters under section 133(6) of the I.T. Act, 1961 were also issued to the banks calling for account extract for the period 1.4.2015 to 31.3.2017 as well as copies of pay in slips for the cash deposit in SBNs during demonetization period. Accordingly, banks information received is placed on record after due verification. The assessee have submitted all the details on 06.06.2019, 21.07.19 & 13.12.2019 and also filed proforma report along with details of SBNs bankwise/branchwise which were deposited during demonetization period. It was found that the assessee has deposited cash amounting to Rs.1,61,59,405 with Corporation Bank, Bank of India, Bank of Maharashtra, during 10.11.2016 to 30.12.2016. The assessee have filed details of denomination of SBNs deposited and also details of cash receipt, deposit and withdrawals in the proforma. The same are placed on record after due verification. Copies of Bank Statements have also been filed along with detailed Audit Report. Cash Book & other relevant proofs were also produced. Thus, taking into consideration all the material available on record, assessee’s submissions as well as financial statements, proofs & explanations are accepted.” 14. Further our attention was drawn to the submission before the AO at page 58 of the PB where the opening cash balance as per cash book was shown as 178,74,731 and as per the break-up of SBN, the assessee had deposited Rs.61.15 lakhs in Rs.1000 denomination and Rs.78.16 lakhs in Rs.500 denomination. These submissions are duly verified and accepted as per AO’s order. Given this, we see no merit in the inference of the PCIT that the deposits are made out of SBN received post demonetisation and that the AO has not verified these details. 15. The Karnataka High Court in the case of Cyber Park Development & Construction Ltd. (supra) has held that –

“4. We have considered the submissions made by learned counsel for the parties and have perused the record. Before "proceeding further, it is apposite to take note of the relevant extract of section 263 of the Act, which reads as under: "263. Revision of orders prejudicial to revenue.— (1) The Commissioner may call for and examine the record of any proceeding under this Act, and if he considers that any order passed therein by the Assessing Officer is erroneous in so far 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

ITA No.400/Bang/2022 Nepal Singh Rathod (HUF), Hubli Page 29 of 33 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."

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Page 30 of 33 Shreeji Prints (P) Ltd. [2021] 282 Taxman 464 (SC) with regard to invoking the revisional powers in the light of Explanation 2 to section 263 has made the following observations:-

"17 We thus find merit in the plea of the assessee that the Revisional Commissioner is expected show that the view taken by the AO is wholly unsustainable in law before embarking upon exercise of revisionary powers. The revisional powers cannot be exercised for directing a fuller inquiry to merely find out if the earlier view taken is erroneous particularly when a view was already taken after inquiry. If such course of action as interpreted by the Revisional Commissioner in the light of the Explanation 2 is permitted, Revisional Commissioner can possibly find fault with each and every assessment order without himself making any inquiry or verification and without establishing that assessment order is not sustainable in law. This would inevitably mean that every order of the lower authority would thus become susceptible to section 263 of the Act and, in turn, will cause serious unintended hardship to the tax payer concerned for no fault on his part. Apparently, this is not intended by the Explanation. Howsoever wide the scope of Explanation 2(a) may be, its limits are implicit in it. It is only in a very gross case of inadequacy in inquiry or where inquiry is per se mandated on the basis of record available before the AO and such inquiry was not conducted, the revisional power so conferred can be exercised to invalidate the action of AO. The AO in the present case has not accepted the submissions of the assessee on various issues summarily but has shown appetite for inquiry and verifications. The AO has passed after making due enquiries issues involved impliedly after due application of mind. Therefore, the Explanation 2 to section 263 of the Act do not, in our view, thwart the assessment process in the facts and the context of the case. Consequently, we find that the foundation for exercise of revisional jurisdiction is sorely missing in the present case.”

17.In the facts and circumstances of the present case, it cannot be said that the AO did not carry out enquiry or verification which ought to have been done. The adverse inference drawn by the PCIT from the documents are debatable as the PCIT has out brought any material on record to substantiate his adverse inference. The Bombay High Court in the case of Grasim Industries Ltd. v. CIT (2010) 321 ITR 92 (Bom) has considered the scope of revision proceedings initiated u/s. 263 of the Act and held as under:-

“'Section 263 of the Income-tax Act, 1961 empowers the Commissioner to call for and examine the record of any proceedings under the Act and, if he considers that any order passed therein, by the Assessing Officer is erroneous in so far as it is prejudicial to the interests of the Revenue, to pass an order upon hearing the assessee and after an enquiry as is necessary, enhancing or modifying the assessment or

ITA No.400/Bang/2022 Nepal Singh Rathod (HUF), Hubli Page 31 of 33 cancelling the assessment and directing a fresh assessment. The key words that are used by section 263 are that the order must be considered by the Commissioner to be "erroneous in so far as it is prejudicial to the interests of the Revenue". This provision has been interpreted by the Supreme Court in several judgments to which it is now necessary to turn. In Malabar Industrial Co. Ltd. v. CIT [2000] 243 ITR 83, the Supreme Court held that the provision "cannot be invoked to correct each and every type of mistake or error committed by the Assessing Officer" and "it is only when an order is erroneous that the section will be attracted". The Supreme Court held that an incorrect assumption of fact or an incorrect application of law, will satisfy the requirement of the order being erroneous. An order passed in violation of the principles of natural justice or without application of mind, would be an order falling in that category. The expression "prejudicial to the interests of the Revenue", the Supreme Court held, it is of wide import and is not confined to a loss of tax. What is prejudicial to the interest of the Revenue is explained in the judgment of the Supreme Court (headnote) :

"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." The principle which has been laid down in Malabar Industrial Co. Ltd. [2000] 243 ITR 83 (SC) has been followed and explained in a subsequent judgment of the Supreme Court in CIT v. Max India Ltd. [2007] 295 ITR 282.'” 18. In the instant case, the AO has verified the details and applied his mind to come to the conclusion that no addition is warranted towards the cash deposited by the assessee during the demonetization period. On the other hand, the PCIT has arrived at a view that the cash was deposited out of SBN received post demonetization and proper enquiries ought to have been made by the AO which is clearly a difference of opinion which cannot be a reason for revision u/s. 263 of the Act. 19. The Bombay High Court in the case of Gabriel India Ltd. (1993) 203 ITR 108 has explained as to when an order can be termed as erroneous as follows:-

“From the aforesaid definitions it is clear that an order cannot be termed as erroneous unless it is not in accordance with law. If an income tax

ITA No.400/Bang/2022 Nepal Singh Rathod (HUF), Hubli Page 32 of 33 officer acting in accordance with the law makes a certain assessment, the same cannot be branded as erroneous by the Commissioner simply because, according to him, the order should have been written more elaborately. This section does not visualise a case of substitution of the judgment of the Commissioner for that of the Income-tax Officer, who passed the order, unless the decision is held to be erroneous. Cases may be visualised where the Income tax officer while making an assessment examines the accounts, makes enquiries, applies his mind to the facts and circumstances of the case and determines the income either by accepting the accounts or by making some estimate himself. The Commissioner, on perusal of records, may be of the opinion that the estimate made by the officer concerned was on the lower side and left to the Commissioner he would have estimated the income at a figure higher than the one determined by the Income tax officer. That would not vest the Commissioner with power to examine the accounts and determine the income himself at a higher figure. It is because the Income tax officer has exercised the quasi judicial power vested in him in accordance with law and arrived at a conclusion and such a conclusion cannot be termed to be erroneous simply because the Commissioner does not feel satisfied with the conclusion There must be some prima facie material on record to show that the tax which was lawfully exigible has not been imposed or that by the application of the relevant statute on an incorrect or incomplete interpretation a lesser tax than what was just has been imposed.”

ITA No.400/Bang/2022 Nepal Singh Rathod (HUF), Hubli Page 33 of 33 7.15 In the present case also, the facts are similar to those cases considered by the Tribunal cited (supra). Respectfully following the above judgements, we are inclined to annul the order of Ld. PCIT passed u/s 263 of the Act.

Sd/- Sd/- (N.V. Vasudevan) (Chandra Poojari) Vice President Accountant Member

Bangalore, Dated 28th Sept, 2022. VG/SPS

Copy to: 1. The Applicant 2. The Respondent 3. The CIT 4. The CIT(A) 5. The DR, ITAT, Bangalore. 6. Guard file By order

Asst. Registrar, ITAT, Bangalore.