VIMALA DEVI A. KANUNGA,HUBLI vs. THE PRINCIPAL COMMISSIONER OF INCOME TAX, HUBLI

The assessee, an individual engaged in wholesale business of textile materials, filed her return of income for the Assessment Year 2017-18 declaring a total income of Rs.5,46,640/-. The case of the assessee was selected for limited scrutiny under CASS to verify cash deposited in Bank Accounts of tRs.70,43,000/- during the demonetization period. The details of the cash deposited in 5 Bank Accounts of the assessee are given by the Assessing Officer (AO) in paragraph – 4 of his Assessment Order. In paragraph – 6 of the Order of the Assessment, the AO has recorded the fact that she had called details from the Bank and fond that Rs.63,43,000/- were old currencies that were demonetized that had been deposited by the assessee in her bank account. The assessee explained that the source of cash was cash received on sales made during the course of business. The AO called for the monthly purchases and sales of the assessee and in paragraph 7 of the order recorded the fact that on perusal of the details of purchases and sales, it was evident that purchase and sales during October, 2016, was three fold than other months. The AO compared cash sales, cash purchases, cash deposits, withdrawals during demonetization period. She found that cash receipts from debtors had doubled and cash sales increased five times in October, 2016. She drew a table in this regard which is at para 8.1 of Assessment Order and drew a conclusion that cash purchases and sales increased unusually from the months of May, 2016 to October, 2016, to enable assessee to explain cash deposit in the Bank Account. The AO thereafter added a sum of Rs.39,49,710/- to the total income of the assessee with the following remarks:

The PCIT in exercise of powers under section 263 of the Act was erroneous and prejudicial to the interest of the Revenue for the following reasons:

A show cause notice (SCN) under section 263 of the Act dated 07.03.2022 was issued by the AO.

The assessee in reply to the same by her letter dated 14.03.2022 submitted that in respect of the addition made by the AO in the Order of Assessment, the assessee prepared appeal before CIT(A). Pending disposal of the said appeal, the assessee opted to settle the dispute under Direct Tax Vivad Se Viswas Act, 2020 (VSV Scheme) and filed necessary forms and made payment of taxes as per the said Act. Therefore, settled issue cannot be reopened under section 263 of the Act. The assessee also submitted that the AO made proper and necessary enquiry before completing the assessment and hence no action is warranted on the grounds stated in the SCN under section 263 of the Act.

The PCIT however proceeded to hold that the order of the AO was erroneous and prejudicial to the interest of the Revenue because the AO did not make adequate and required enquires. The following were the conclusions of the PCIT in this regard:

On the question when the dispute is settled under VSV Scheme, the PCIT held that the same would be valid only to the extent of addition made by the AO and not the entire cash deposit in the Bank Account. Therefore the action under section 263 of the Act to the extent of the cash deposits that remains unexplained less the addition settled under VSV Scheme is valid.

The PCIT also without notice to the assessee directed AO to verify any contravention of provisions of section 40A(3) of the Act. This direction was not valid because this was not part of SCN under section 263 of the Act and the PCIT did not put the assessee on notice about his intention to revise the order of AO on this ground also.

The final conclusion of the PCIT was as follows:

Aggrieved by the order of the PCIT, the assessee is in appeal before the Tribunal. We have heard the rival submissions. The learned Counsel for assessee reiterated stand of the assessee which is in line with the reply to the SCN under section 263 of the Act. She relied on decision of Madras High Court in the case of Gopalakrishnan Rajkumar Vs. PCIT (2022) 40 taxmann.com 349 (Mad.) wherein the Hon’ble Court held that when disputes are settled under VSV Scheme, no proceedings under section 263 of the Act can be initiated on the same. Reliance was placed on decision of Bombay High Court in the case of PCIT Vs. M/s. Universal Music India Pvt. Ltd., of 2018, judgment dated 19.04.2022 for the proposition that the PCIT in exercise of his powers under section 263 of the Act cannot take up issues not stated in SCN under section 263 of the Act unless he puts the assessee on notice on the said issue. The learned DR relied on the order of the PCIT and reasons given in the impugned order.

We have carefully considered the rival submissions. We have already set out as to how and what enquiries the AO made while completing the assessment. The case was picked up for limited scrutiny of cash deposits in Bank Account during demonetization period. The AO examined cash purchases and sales and came to a conclusion that purchases and sales from May, 2016 to October, 2016, were inflated and to the extent of such inflation, the AO drew an adverse inference. The PCIT is of the view that the addition should have been on actual purchases and sales proved by the assessee and not on an adhoc basis. The law is well settled that power under section 263 of the Act cannot be exercised to substitute the view of the PCIT with that of the AO when the view taken by the AO was a possible view. It is equally well settled that the PCIT cannot invoke powers under section 263 of the Act directing a fishing or raving enquiry. In a case where enquiry is directed to be made by the PCIT, he must give a finding as to how the enquiry made by the AO was wrong. In this regard, the law has been stated by the Hon’ble Bombay High Court in the case of CIT Vs. Gabriel India Pvt. Ltd., 203 ITR 108 (Bombay). In the present case, the enquiry made by the AO was proper and the AO has drawn proper conclusions on material available before her. The view taken by the AO was a possible view rather a very pragmatic view. The PCIT may not agree with that view. However, the powers under section 263 of the Act cannot be exercised to substitute the view of the PCIT with that of the AO. On the facts of the case, we are satisfied that the power under section 263 of the Act was not properly exercised and hence we quash the said order. Since we have quashed the order on merits, we do not wish to go into the question regarding VSV Scheme and its effect on the power under section 263 of the Act. We also hold that the question of invoking the provisions of section 40A(3) of the Act does not arise firstly because the limited scrutiny was only to verify cash deposit in Bank Account. Secondly, the issue was not subject matter of SCN under section 263 of the Act nor was the assessee put on notice regarding the said issue by the PCIT in the proceedings under section 263 of the Act.