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Facts
The assessee deposited Rs. 45,00,000 in cash during the demonetization period. The PCIT initiated proceedings under section 263, holding that the Assessing Officer (AO) had not conducted proper inquiries to examine the source of these deposits. The PCIT revised the assessment order, directing the AO to make fresh assessment.
Held
The Tribunal held that the AO had conducted necessary inquiries and examined the evidence, including books of accounts and bank statements, and applied his mind judiciously. Therefore, the assessment order could not be considered erroneous or prejudicial to the revenue. The PCIT's order under section 263 was found to be unsustainable.
Key Issues
Whether the PCIT was justified in invoking Section 263 to revise the assessment order when the AO had conducted sufficient inquiries and the order was not erroneous or prejudicial to the revenue. Whether the delay in filing the appeal should be condoned.
Sections Cited
263, 143(3), 44AB, 131, 253(5)
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Income Tax Appellate Tribunal, “B’’ BENCH: BANGALORE
Before: SHRI WASEEM AHMED & SHRI KESHAV DUBEY
PER KESHAV DUBEY, JUDICIAL MEMBER:
This appeal at the instance of the assessee is directed against the order of the ld. PCIT, Hubli dated 25.3.2022 vide DIN & Order No. ITBA/REV/F/REV5/2021-22/1041505209(1) passed u/s 263 of the Income Tax Act, 1961 (in short “The Act”) for the assessment year 2017- 18.
The assessee has raised the following grounds of appeal:
Vanigota Sugar Trading Company, Vijaypur Page 3 of 19 3. At the outset, there is a delay of 937 days in filing the appeal before this Tribunal. Before us, the ld. A.R. of the assessee drew our attention to an affidavit in original dated 6.3.2025 filed by the assessee stating therein the reasons for delay in filing the appeal, which are reproduced below for ease of convenience and reference:
We have perused the above Affidavit along with the copy of the Order dated 05/12/2024 of the ITAT, Panaji Bench, Panaji filed by the assessee to justify the delay and we are satisfied that there is no malafide intention on the part of the assessee in filing the appeal belatedly before us. It is to be noted that u/s 253(5) of the Act, the Tribunal may admit the appeal filed beyond the period of limitation where it has established that there exists a sufficient cause on the part of the assessee for not presenting the appeal within the prescribed time. The explanation therefore, becomes relevant to determine whether the same reflect 4.1 While considering a similar issue the Apex Court in the case of Collector, Land Acquisition v. Mst. Katiji and Ors. (167 ITR 471) laid down six principles. For the purpose of convenience, the principles laid down by the Apex Court are reproduced hereunder:
(1) Ordinarily, a litigant does not stand to benefit by lodging an appeal late.
(2) Refusing to condone delay can result in a meritorious matter being thrown at the very threshold and cause of justice being defeated. As against this, when delay is condoned, the highest that can happen is that a cause would be decided on merits after hearing the parties. (3) 'Every day's delay must be explained' does not mean that a pedantic approach should be made. Why not every hour's delay, every second's delay? The doctrine must be applied in a rational, commonsense and pragmatic manner.
(4) When substantial justice and technical consideration are pitted against each other, the cause of substantial justice deserves to be preferred, for the other side cannot claim to have vested right in injustice being done because of a nondeliberate delay. (5) There is no presumption that delay is occasioned deliberately, or on account of culpable negligence, or on account of mala fides. A litigant does not stand to benefit by resorting to delay. In fact, he runs a serious risk. (6) It must be grasped that the judiciary is respected not on account of its power to legalise injustice on technical grounds but because it is capable of removing injustice and is expected to do so.
4.2 When substantial justice and technical consideration are pitted against each other, the cause of substantial justice deserves to be preferred, for the other side cannot claim to have vested right for injustice being done because of nondeliberate delay. Therefore, we have to prefer substantial justice rather than technicality in deciding the issue. As observed by Apex Court, if the application of the assessee for condoning the delay is rejected, it would amount to legalize injustice on technical ground when the Tribunal is capable of removing injustice and to do justice. Therefore, this Tribunal is bound to remove the injustice Vanigota Sugar Trading Company, Vijaypur Page 8 of 19 by condoning the delay on technicalities. If the delay is not condoned, it would amount to legalizing an illegal order which would result in unjust enrichment on the part of the State by retaining the tax relatable thereto. Under the scheme of Constitution, the Government cannot retain even a single pie of the individual citizen as tax, when it is not authorized by an authority of law. Therefore, if we refuse to condone the delay, that would amount to legalize an illegal and unconstitutional order passed by the lower authority.
4.3 Further, in the case of People Education & Economic Development Society Vs/ ITO reported in 100 ITD 87 (TM) (Chen), wherein held that “when substantial justice and technical consultation are pitted against each other, the cause of substantial justice deserves to be preferred for the other side cannot claim to have vested right in injustice being done because of non-deliberate delay”.
4.4 The next question may arise whether delay was excessive or inordinate. There is no question of any excessive or inordinate when the reason stated by the assessee was a reasonable cause for not filing the appeal. We have to see the cause for the delay. When there was a reasonable cause, the period of delay may not be relevant factor. In fact, the Madras High Court in the case of CIT vs. K.S.P. Shanmugavel Nadai and Ors. (153 ITR 596) considered the condonation of delay and held that there was sufficient and reasonable cause on the part of the assessee for not filing the appeal within the period of limitation. Accordingly, the Madras High Court condoned nearly 21 years of delay in filing the appeal. When compared to 21 years, 937 days cannot be considered to be inordinate or excessive. Furthermore, the Chennai Tribunal by majority opinion in the case of People Education and Economic Development Society (PEEDS) v. ITO (100 ITD 87) (Chennai) (TM) condoned more than six hundred days delay. Therefore, in our opinion, by preferring the substantial justice, the delay of 937 days has to be
Now the brief facts of the case are that the ld. PCIT on examination of records noted that the assessee firm had deposited cash in SBNs of Rs.45,00,000/- during the demonetization periods in its current bank account. The ld. PCIT was of the opinion that when the case was selected for scrutiny specifically for examining cash deposited during the demonetization period it was necessary for AO to examine the source of cash deposited and carry out necessary investigation in accordance with law. Further, the ld.PCIT was of the opinion that the AO should have analyzed the bank account and trend of cash receipts along with cash sales and the stock register during the specified period. Further, the AO ought to have also examine the cash sales and ascertained the cash in hand as on 08.11.2016 after examination of books, specially by obtaining the cash book. As the AO had not conducted necessary enquiries and thus order passed by the AO is erroneous and prejudicial to the interest of revenue and accordingly the show cause notice was issued on 14.03.2022 giving the assessee an opportunity to explain why the assessment order shall not be revised u/s. 263 of the Act.
5.1 The ld. PCIT held that as the assessee has failed to furnish satisfactory explanation regarding the source of cash deposited in the bank accounts during the demonetization period not only during the assessment proceedings but even in response notice u/s. 263 of the Act, the amount of unexplained cash deposits should have been added to the assessee income. Considering these facts, the ld. PCIT held that the assessment order is erroneous and prejudicial to the interest of revenue in terms of section 263 of the Act and accordingly, set-aside the assessment order and directed the AO u/s. 263 of the Act to make the fresh assessment in accordance with law.
Vanigota Sugar Trading Company, Vijaypur Page 10 of 19 6. Aggrieved by the revisionary order passed u/s. 263 of the Act dated 25.03.2022, the assessee has filed the present appeal before this Tribunal. The assessee has also filed a paper book comprising 63 pages containing therein various documents/records/statements /notices/order/confirmation/ return/statements relied upon by the assessee firm.
Before us, the ld. A.R. of the assessee vehemently submitted that the ld. PCIT ought to have appreciated that the cash deposits of Rs.45,00,000/- were out of the sale proceeds of the assessee which were duly recorded in the books of accounts and duly taken into the consideration while computing the income under the act. Further, ld.A.R. submitted that source of deposit of cash of Rs.45,00,000/- in the bank account had also been examined by the ADIT (Inv), Unit-II, Belagavi and also by the AO during the course of assessment proceedings and therefore the impugned order passed U/s 263 was uncalled for and unwarranted. Lastly the ld.A.R. submitted that as the twin conditions for invoking provisions of section 263 of the Act are not satisfied and therefore the order passed by ld.PCIT is illegal and bad in law.
The ld.D.R. on the other hand supported order of the ld. PCIT and submitted that as the AO had not examined the source of cash deposited during demonetization period & therefore the ld. PCIT has correctly held that the AO has not conducted necessary enquiries and accordingly not made the additions required as per law.
We have considered the rival contentions and perused the order of the ld. PCIT as well as of the AO. According to provisions of section 263 of the act, the ld. PCIT may call for and examine the record of any proceeding under the Income Tax Act and if he considers that any order passed therein by the AO is erroneous in so far as it is prejudicial to the interests of the revenue, the ld. PCIT may after giving the assessee an Vanigota Sugar Trading Company, Vijaypur Page 11 of 19 opportunity of being heard and after making or causing to be made such inquiry as he deems necessary, pass an order enhancing or modifying the assessment or cancelling the assessment and directing a fresh assessment. Further, the Hon’ble Supreme Court has held that the pre- requisite to exercise of jurisdiction by the commissioner suo moto under it, is that the order of the Assessing Officer is erroneous in so far as it is prejudicial to the interest of revenue. The commissioner has to be satisfied with twin conditions, namely ( i ) the order of the AO sought to be revised is erroneous; and (ii) it is prejudicial to the interest of Revenue. If one of them is absent – if the order of the AO is erroneous but is not prejudicial to the revenue or if it is not erroneous but is prejudicial to the revenue- recourse can not be had to section 263(1) of the Act. [Malabar Industrial Co. Ltd v. CIT (2000) 243 ITR 83.] 9.1 Further, the term ‘erroneous’ has not been defined under the Act. The Apex Court in the above case also held that 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 orders passed without applying the principles of natural justice or without application of mind. Further, the phrase 'prejudicial to the interests of the revenue' is not an expression of art and is also not defined in the Act. The various High Courts had treated loss of tax as prejudicial to the interests of the revenue. If due to an erroneous order of the AO the revenue is losing tax lawfully payable by a person, it will certainly be prejudicial to the interests of the revenue. 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. There must be some grievous error in the Order passed by the AO, which might set a bad trend or pattern for similar Vanigota Sugar Trading Company, Vijaypur Page 12 of 19 assessments, which on abroad reckoning, the Commissioner might think to be prejudicial to the interests of Revenue Administration. Further, what is erroneous and prejudicial to the interest of the revenue is judicially tested by plethora of decisions however, the scope was further extended by introduction of explanation 2 to section 263 which is inserted by the Finance Act, 2015 with effect from 01/06/2015. This explanation empowers the PCIT from 01.06.2015 to invoke the provision of section 263 to the assessment order to be erroneous in so far as it is prejudicial to the interest of the revenue, if, in the opinion of the Principal CIT,- (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 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.”
No doubt clause (a) of the above explanation deems the order to be erroneous and prejudicial to the interest of the revenue in case order is passed without making enquiries or verification which should have been made in the opinion of the Principal Commissioner or Commissioner. In the present case, the ld. PCIT held that the assessing officer had not conducted necessary inquiries and has not made the additions required as per law thereby invoked clause (a) of the Explanation-2 of section 263 of the Act.
9.2 The Hon’ble High Court of Delhi in the case of Commissioner of Income-tax-XIII v. Ashish Rajpal reported in (Del-HC) (2010) 320 ITR 674 had magnificently extracted the parameters and principles laid down by the Courts which govern the exercise power by the Commissioner under the provisions of section 263 of the Act-
(i) The power is supervisory in nature, whereby the Commissioner can call for and examine the assessment records.
(ii) The Commissioner can revise the assessment order if the twin conditions provided in the Act are fulfilled, that is, that the assessment order is not only erroneous but is also prejudicial to the interest of the revenue. The fulfilment of both the conditions is an essential prerequisite. [See Malabar Industrial Co. Ltd. v. CIT [2000] 243 ITR 83 (SC)].
(iii) An order is erroneous when it is contrary to law or proceeds on an incorrect assumption of facts or is in breach of principles of natural justice or is passed without application of mind, that is, is stereo- typed, inasmuch as, the Assessing Officer, accepts what is stated in the return of the assessee without making any enquiry called for in the circumstances of the case, that is, proceeds
(iv) The expression "prejudicial to the interest of the revenue" while not to be confused with the loss of tax will certainly include an erroneous order which results in a person not paying tax which is lawfully payable to the revenue. [See Malabar Industrial Co. Ltd.'s case (supra)].
(v) Every loss of tax to the revenue cannot be treated as being "prejudicial to the interest of the revenue". For example, when the Assessing Officer takes recourse to one of the two courses possible in law or where there are two views possible and the Commissioner does not agree with the view taken by the Assessing Officer which has resulted in a loss. [See CIT v. Max India Ltd. [2007] 295 ITR 282 (SC)].
(vi) There is no requirement of issuance of a notice before commencing proceedings under section 263 of the Act. What is required is adherence to the principles of natural justice by granting to the assessee an opportunity of being heard before passing an order under section 263. [See Electro House's case (supra)].
Vanigota Sugar Trading Company, Vijaypur Page 15 of 19 (vii) If the Assessing Officer acts in accordance with law his order cannot be termed as erroneous by the Commissioner, simply because according to him, the order should have been written 'more elaborately'. Recourse cannot be taken to section 263 to substitute the view of the Assessing Officer with that of the Commissioner. [See CITv. Gabriel India Ltd. [1993] 203 ITR 108 (Bom.)].
(viii) The exercise of statutory power under section 263 of the Act is dependent on existence of objective facts ascertained from prima facie material on record. The evaluation of such material should show that tax which was lawfully exigible was not imposed. [See Gabriel India Ltd.'s case (supra)].
9.3 Now, in the light of the above principles laid down by the Hon’ble Apex Court & Hon’ble Delhi High Court, we should first examine the facts of the present case. From the facts obtained it is quite clear that the assessee is a partnership firm engaged in the wholesale trading of kirana items. During the period under consideration the assessee declared net profit of Rs.76,781/- on the gross turnover of Rs.17,60,44,507/-. It is an undisputed fact that the books of accounts of the assessee firm were audited as per the provisions of section 44AB of the Act and the assessee firm had also filed the audit report in the prescribed Form No.3CB & 3CD which were test checked by the AO. Further, during the course of assessment proceedings, the AO observed in his order that various details were called for and examined and 9.4 Before us, the assessee firm by way of paper book also produced the details of submissions made in response to notices u/s. 142(1) of the Act (placed at page 4-5 of PB) in which we find that the assessee firm had submitted the audit report along with copy of VAT returns, VAT audit report, Bank statement as well as bankers certificate to justify that the cash deposits were made out of the sales proceeds. Further, we take a note of the fact that the during the course of assessment proceedings, the assessee also produced the books of accounts viz. cash book, ledger, journal book, purchase and sale register, invoices and sale bills, stock register and other relevant documents for verification. We are of the considered opinion that the Assessing officer performs quasi judicial function, applies his mind judiciously based on facts and circumstances of the case for the purpose of protecting the interest of revenue and accordingly the Assessing Officer applied his mind judiciously in accepting the Returned Income of the assessee Firm while Passing order U/s 143(3) of the Act after calling for the Books of Accounts, documents/information, Bills & vouchers during the course of the Assessment Proceedings. Therefore, in our view this is not the case where the Assessing Officer has not made the inquiry and completed the assessment by just accepting the return filed by the assessee. If the Assessing Officer had made the inquiry and duly considered the evidence as submitted and on the basis of such inquiry he has taken the view in favour of the assessee, that does not empower the Principal Commissioner of Income Tax to invoke the jurisdiction u/s 263 of the Act unless the view taken by the Assessing Officer is unsustainable in law. The assessee does not have any control over the pen of the Assessing Officer. Once the Assessing Officer carries out the investigation but does not make any addition, it can be taken that he accepts the plea and stand Vanigota Sugar Trading Company, Vijaypur Page 17 of 19 of the assessee. Thus, where the enquiry had been conducted and the A.O had reached a particular conclusion, though reference to such enquiries had not been made in the order of Assessment, it was apparent from the record, without anything to show how and why the enquiry conducted by the A.O was not in accordance with the Law, the invocation of jurisdiction by the Commissioner was unsustainable. [ CIT Vs Ganpat Ram Bishnoi 296 ITR 292 (Raj)] 9.5 Further, we also observed that on the same issue of the depositing Rs.45,00,000/- in current account of State Bank of India, the ld. Assistant director of Income Tax (Investigation), Unit-2, Belagavi had also issued summons u/s. 131 of the Act in which the assessee in its reply dated 31.12.2018 submitted the details as per the proforma along with copies of audit reports by stating that the amount deposited of Rs.45,00,000/- forms part of the total sales declared in the trading account amounting to Rs.17,60,44,507/-. Further, the closing stock declared in the trading account amounting to Rs.2,24,26,686/- is arrived at after deducting the sales made of Rs.45,00,000/- and therefore, the amount of Rs.45,00,000/- deposited in the bank forms part of the books of accounts of the firm and the financial statements based on which the return of income is filed. We observed that the same issue of Rs.45,00,000/- deposited during the demonetization period was once considered by the ld. ADIT(INV.) and another during the course of assessment proceedings & now the ld.PCIT on the very same issue invoked the revisionary powers u/s. 263 of the Act by stating that the AO has not conducted necessary enquiries which in our opinion is unjustified.
9.6 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 Vanigota Sugar Trading Company, Vijaypur Page 18 of 19 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. In Sirpur Paper Mills Ltd. v. ITO [1978] 114 ITR 404 (AP) his Lordship observed as under- “The Department cannot be permitted to begin fresh litigation because of new views they entertain on facts or new versions which they present as to what should be the inference or proper inference either of the facts disclosed or the weight of the circumstances. If this is permitted, litigation would have no end, 'except when legal ingenuity is exhausted'. To do so, is '. . . to divide one argument into two and to multiply the litigation”.
9.7 In view of the above facts and circumstances, we hold that the AO being quasi-judicial authority has passed the assessment order after considering the books of accounts and after calling for the details as observed in his Order cannot be held to be erroneous and prejudicial to the interest of the revenue and hence the order passed ld. PCIT u/s. 263 of the Act is not sustainable and hence quashed.
In the result, the appeal of the assessee is allowed.
Order pronounced in the open court on 15th Sep, 2025