VANISHREE HOLABSU SHETTAR,GULEDGUDD vs. PRINCIPAL COMMISSIONER OF INCOME TAX, HUBLI

Per Padmavathy S., Accountant Member This appeal by the assessee is against the order of the Principal Commissioner of Income Tax (PCIT) Hubli passes u/s. 263 of the Income Tax Act, 1961 (the Act) dated 25.03.2022 for AY 2017-18.

“1. The order passed by the learned Principal Commissioner of Income Tax, Hubballi, passed under section 263 of the Act is so far as it is against the Appellant is opposed to law, weight of evidence, natural justice, probabilities, facts and circumstances of the Appellant's case.

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“The assessee has deposited cash of Rs.39,59,349/- in Specified Bank Notes (SBNs) during demonetisation period in her bank accounts. The AO has observed that the source of this deposit is out of sale proceeds of business. Details relating to source of cash deposits were never inquired / verified by the Assessing Officer. and the assessment order has been passed without verifying the source of cash deposited during the period of demonetisation. The assessee had filed her return of income for the assessment year under consideration on 27.12.2017 declaring total income of Rs 16,94,120/-, The VAT returns for the period April 2016 to December 2016 have been filed only on 16.01.2017. Apart from this, bank statements do not show any credits or withdrawals made on account of business carried out. The Assessing Officer

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ought to have examined whether the assessee was carrying out any business, however, the Assessing Officer did not carry out any enquiry with regard to nature of business carried out, and the source of cash deposited in bank account during the period of demonetisation. The AO did not make necessary inquiries about the source of cash deposited during the demonitisation period. If cash was deposited in bank accounts out of either unexplained cash, or SBNs received after the notified date in violation of law, when they had ceased to be legal tender, then this deposit was liable to be treated as unexplained and added to income u/s 69A read with section 115BBE. 3. When the case was selected for scrutiny for examining cash deposited during the demonetization period and high agriculture income it was necessary for the Assessing Officer to examine the source of cash deposited and carry out necessary investigation in accordance with law and CBDT guidelines. The AO should have also analysed 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 by obtaining the cash book. The Assessing Officer has not done so. The Assessing Officer has not conducted necessary inquiries and has not made the additions required as per law. The assessee failed to furnish a satisfactory explanation regarding the source of cash deposited in the bank accounts and this amount remained unexplained, but no such addition has been made in the assessment order.” 4. The assessee is in appeal before the Tribunal against the order of the PCIT.

i) The AO has made enquiries and accepted the documents filed during the course of assessment and has passed the order after proper application of mind. ii) The revision order is passed only based on the belief of the PCIT that the further enquiry would reveal the undisclosed

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income of the assessee which is an opinion different from that of the AO. When two opinions are formed then there cannot be any scope for revision. iii) The impugned issue of revision i.e. the cash deposits during the demonetization period has been verified in detail by the AO which is evident from the notice calling for details – Query No. 6 in page 54 of paper book and Query No. 18 in page 56 of paper book. The assessee has filed the details as called for before the AO which is in page 60 and page 64 onwards. iv) The assessee has submitted before the AO the financial statements as well as the entire ledger accounts of sales, cashbook, etc. v) The AO has done proper verification of the details submitted which is evidenced from the addition made towards agriculture expenses and also the mention of verification of cash deposited during demonetization period by stating that : “During the demonetization period, the assessee has deposited Rs.40,24,349/-. Out of this, Rs.10,65,000 were deposited in the loan account of Veerpulakeshi Co-operative Bank Limited, Rs.5,48,349/- were deposited in Housing loan account of Bapuji Pattin Souharda Sahakari Limited and the remaining amount is deposited in saving and current account. The cash is deposited out of the sale proceeds of her business. vi) The details of cash deposited as stated in the order of the AO is supported by the entries in the books of accounts submitted before the AO which proves that there are verified by the AO. vii) Reliance in this regard is placed on the following decisions: - CIT v. Sunbeam Auto Ltd. [2011] 332 ITR 167 (Del) Malabar Industrial Co. Ltd. v. CIT [2000] 243 ITR 83 (SC)

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CIT v. Cyber Park Development & Construction Ltd. [2021] 276 Taxman 460 (Kar) CIT v. Anil Kumar Sharma [2011] 335 ITR 83 (Del) PCIT, Surat v. Shreeji Paints (P) Ltd. [2021] 282 Taxman 464 (SC) Narayan Tatu Rane v. ITO [2016] 70 taxmann.com 227 (Mum Trib) 6. The learned D.R. submitted that the AO has verified only the agricultural income of the assessee and made the addition and there is nothing mentioned in the order to claim that the business income of the assessee is verified. The learned D.R. relied on the order of the PCIT which according to the learned D.R. clearly elaborates the reason as to why the order of the AO is erroneous and prejudicial to the interest of the Revenue. The learned D.R. also submitted that the case law relied by the learned A.R. cannot be applied if the same is prior to the insertion of explanation to Section 263 of the Act. The learned D.R. further submitted that the AO’s order does not mention any thing about the verification of the cash deposits made during demonetization period which proves that the AO has not examined the same which he ought to have done and to that extent the order is erroneous and prejudicial to the interest of the Revenue.

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in this regard drew out attention to the cash book where the cash deposit entries are accounted (page 202, 203 & 209 of PB) substantiating the submissions made before the AO as given below:-

Sl. Name of the Bank Type Account Amount No. of A/c Number 1. Gayatri Credit Co-op. Society CC 84 13,11,000 2. Bapooji Pattin Souharda Society HL 2102973 5,48,349 Ltd. 3. Basaveshwar Bank SB 9365 10,00,000 4. Shri Veerpulikeshi Coop Bank Ltd. SB 2436 1,00,000 5. Shri Veerpulikeshi Coop Bank Ltd. Loan 366 10,65,000

“263. (1) The Principal Commissioner or] 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 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 1.]—For the removal of doubts, it is hereby declared that, for the purposes of this sub-section,— (a) an order passed on or before or after the 1st day of June, 1988 by the Assessing Officer shall include— (i) an order of assessment made by the Assistant Commissioner or Deputy Commissioner or the Income-tax Officer on the basis of the directions issued by the Joint Commissioner under section 144A; (ii) an order made by the Joint Commissioner in exercise of the powers or in the performance of the functions of an Assessing

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Officer conferred on, or assigned to, him under the orders or directions issued by the Board or by the 17-18[Principal Chief Commissioner or] Chief Commissioner or 17-18[Principal Director General or] Director General or 17-18[Principal Commissioner or] Commissioner authorised by the Board in this behalf under section 120; (b) "record" shall include and shall be deemed always to have included all records relating to any proceeding under this Act available at the time of examination by the 17-18[Principal Commissioner or] Commissioner; (c) where any order referred to in this sub-section and passed by the Assessing Officer had been the subject matter of any appeal filed on or before or after the 1st day of June, 1988, the powers of the 17-18[Principal Commissioner or] Commissioner under this sub-section shall extend and shall be deemed always to have extended to such matters as had not been considered and decided in such appeal. Explanation 2.—For the purposes of this section, it is hereby declared 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 which is prejudicial to the assessee, rendered by the jurisdictional High Court or Supreme Court in the case of the assessee or any other person.]

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(2) No order shall be made under sub-section (1) after the expiry of two years from the end of the financial year in which the order sought to be revised was passed. (3) Notwithstanding anything contained in sub-section (2), an order in revision under this section may be passed at any time in the case of an order which has been passed in consequence of, or to give effect to, any finding or direction contained in an order of the Appellate Tribunal, 20[National Tax Tribunal,] the High Court or the Supreme Court. Explanation.—In computing the period of limitation for the purposes of sub-section (2), the time taken in giving an opportunity to the assessee to be reheard under the proviso to section 129 and any period during which any proceeding under this section is stayed by an order or injunction of any court shall be excluded.” 9. From the plain reading of the provisions it is clear that the twin conditions i.e. order being erroneous and order being prejudicial to the interest of the Revenue should be satisfied in order to invoke Section 263 of the Act. There is no dispute that u/s. 263 of the Act, the PCIT does have the power to set aside the assessment order and send the matter for a fresh assessment if he is satisfied that further enquiry is necessary and the assessment order is prejudicial to the interest of the Revenue. However before setting aside the matter the PCIT must have some material which would enable to form prima facie opinion that the order passed by the AO is erroneous in so far as it is prejudicial to the interest of the Revenue. In the given case the AO has given a clear finding with respect to the cash deposits done by the assessee during the demonetization period stating that 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

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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.

“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

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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 2012- 13 relevant to assessment 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

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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 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 Saí 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

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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 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

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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 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

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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

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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 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.

Pronounced in the open court on this 25th day of July, 2022..

Sd/- Sd/- ( GEORGE GEORGE K. ) ( PADMAVATHY S. ) JUDICIAL MEMBER ACCOUNTANT MEMBER

Bangalore, Dated, the 25th July, 2022.

/Desai S Murthy /

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Copy to:

By order

Assistant Registrar ITAT, Bangalore.