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Facts
The assessee firm deposited Rs. 55,00,000/- in cash during the demonetization period, claiming it was out of sale proceeds recorded in their books. The PCIT invoked Section 263 of the Income Tax Act, holding the assessment order erroneous and prejudicial to revenue for not adequately investigating the source of these deposits.
Held
The Tribunal held that the Assessing Officer (AO) had conducted sufficient inquiries and considered the evidence presented by the assessee, including books of accounts and audit reports. Therefore, the PCIT's invocation of Section 263 was not sustainable as the twin conditions of the order being erroneous and prejudicial to revenue were not met.
Key Issues
Whether the PCIT was justified in invoking Section 263 to revise an assessment order where the AO had conducted inquiries and accepted the assessee's explanation regarding cash deposits.
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 ld. PCIT, Hubli dated 25.3.2022 vide DIN & Order No.ITBA/REV/F/REV5/2021-22/1041507523(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:
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 Sha Pratapchand Pukhraj and Company, Vijayapur Page 4 of 19 assessee stating therein the reasons for delay in filing the appeal, which are reproduced below for ease of convenience and reference:
We are of the considered opinion 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 reflects sufficient and reasonable cause on the part of the assessee in not filing the Sha Pratapchand Pukhraj and Company, Vijayapur Page 8 of 19 appeals within the prescribed time. 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 having heard learned counsel for the respective parties, it is perceived that the explanation offered in the condonation application as well as in affidavit is plausible and sufficient cause being shown by the assessee, which prevented them from filing the appeal within the specified period u/s 253 of the Act and accordingly we inclined to condone the delay and admit the appeal for adjudication.
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.55,00,000/- during the demonetization periods in its current bank account. During the course of assessment proceedings, the assessee firm claimed that the cash deposits of Rs.55,00,000/- in SBNs was made out of sale proceeds of the firm. The ld. PCIT is of the opinion that the AO did not conduct necessary investigation into the assessee’s claim which is contrary to the admission of unexplained cash deposits, during inquiry by the ld. ADIT(Inv.) Further, the AO failed toverify closing balance as on 08.11.2016 and did not inquire into the source of SBNs of Rs.55,00,000/-. The AO has accepted the explanation of the assessee without making any enquiry and thus the order passed by the AO is erroneous and prejudicial to the interest of revenue and hence show cause notice was issued on 14.03.2022 giving the assessee an opportunity to explain why the assessment order be not revised u/s. 263 of the Act.
5.1 In the opinion of the ld. PCIT, the assessee has failed to furnish any satisfactory explanation regarding the sources of cash deposited in the bank accounts during the demonetization period not only during the assessment proceedings but even in response Sha Pratapchand Pukhraj and Company, Vijayapur Page 9 of 19 notice u/s. 263 of the Act and accordingly the ld. PCIT held that the amount of unexplained cash deposits should have been added to the income of theassessee. Considering these facts, the ld. PCIT held that the assessment order is erroneous and prejudicial to the interest of revenue interms of section 263 of the Act and accordingly set-aside the assessment order and directed the AO to the make the fresh assessment in accordance with law after considering the above.
Aggrieved by the revisionary order passed u/s. 263 of the Act dated 25.03.2022, the assessee firm has filed the present appeal before this Tribunal. The assessee has also filed paper book comprising 103 pages containing therein various documents/ records/ statements/ confirmation/ order/ notices/ chart/ registers/ ledger in support of its case.
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.55,00,000/- were made out of the sale proceeds of the assessee which were duly recorded in the books of accounts and duly taken into consideration while computing the income under the Act. Further, ld. A.R. of the assessee submitted that the source of deposit of cash amounting to Rs. 55,00,000/- in the bank account had already been examined by the ld. ADIT(Inv.) Unit-1, Belgaum and also by the AO during the course of assessment proceedings and therefore, the impugned order passed u/s. 263 of the Act was uncalled for and unwarranted. Lastly the A.R. submitted that as the twin conditions for invoking provisions of section 263 of the Act are not satisfied & therefore the order passed by ld. PCIT is illegal and bad in law.
The ld. D.R. on other hand supported the order of the ld. PCIT and submitted that as the AO had not examined the sources Sha Pratapchand Pukhraj and Company, Vijayapur Page 10 of 19 of cash deposited during the demonetization period and also not ascertained the cash in hand as on 08.11.2016, the ld. PCIT has correctly held that the AO had not conducted the 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. PCITmay 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. PCITmay after giving the assessee an 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 cannot be had to section 263(1) of the Act. [Malabar Industrial Co. Ltd v. CIT (2000) 243 ITR83.] 9.1 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 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 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 PrincipalCIT, - (a) the order is passed without making inquiries or verification which should have beenmade;
(b) the order is passed allowing any relief without inquiring into the claim; Sha Pratapchand Pukhraj and Company, Vijayapur Page 12 of 19 (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 holds that the assessing officer did not conduct necessary inquiries and had not made the additions required as per law and accordingly 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 Sha Pratapchand Pukhraj and Company, Vijayapur Page 13 of 19 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 with 'undue haste'. [See Gee Vee Enterprises v. Addl. CIT [1975] 99 ITR 375 (Delhi)].
(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 Sha Pratapchand Pukhraj and Company, Vijayapur Page 14 of 19 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)].
(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 faciematerial 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 thebusiness of wholesale trading in kirana goods. During the period under consideration, the assessee declared net profit of Rs.2,40,650/- on the gross turnover of Rs.39,98,82,581/-. It is an undisputed fact that books of account of assessee firm were audited as per the provisions of section 44AB of the Act and the assessee firm had 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 various details were called for and examinedas observed by the AO in his order and accordingly accepted the return of income while passing the order u/s. 143(3) of the Act.
9.4 Before us, the assessee firm by way of paper book also produced the details of submissions made in response to the notices u/s. 142(1) of the Act (placed at page-6 of PB) in which we find that the assessee has submitted the audit report along with the copy of VAT returns, bank statements as well as banker’s certificate to justify that the cash deposits were made out of the Sha Pratapchand Pukhraj and Company, Vijayapur Page 16 of 19 sale proceeds. Further, we take note of the fact that during the course of assessment proceedings, the assessee produced the books of accounts viz. cash books, ledger, journal book, purchase and sale register and daily stock register and other relevant documents for verification. Therefore, we do not agree with the contentions of the ld. PCIT that the AO failed to verify the closing cash balance as on 08/11/2016 and did not inquire into the source of SBNs of 55 lakhs. 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. The ld. PCIT in our view has merely stated that the AO has not conducted the necessary enquiries, which is not correct as per the facts and circumstances of this case.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 favor 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 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 Sha Pratapchand Pukhraj and Company, Vijayapur Page 17 of 19 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 depositing Rs.55,00,000/- in current account, the ld. ADIT(Inv.) Unit-I, Belgaum had also issued summons u/s. 131 of the Act in which assessee in its reply dated 29.11.2018& filed on 03/12/2018 submitted the details as per the proforma along with the copy of the audit report, copy of sales bill,and reiterated that the amount of Rs.55,00,000/- deposited on 10.11.2016 and on 11.11.2016 were out of sales effected by the firm during that period. Further, the assessee submitted that they maintained day- to-day stock register, cash book, ledger and they have issued proper sales bills as required under the Karnataka VAT Act. Further, the closing stock declared in the trading account amounting to Rs.2,74,72,322 arrived after deducting the sales made of Rs.55,00,000/- and therefore, the amount of Rs. 55,00,000/- deposited in the bank forms part of the books of account of the firm and the financial statements based on which the return of income was filed. We observed that the same issue of Rs.55,00,000/- deposited during the demonetization period was once considered by ld. ADIT(Inv.) and another during the course of assessment proceeding and now the ld. PCIT on very same issue again invoked the revisionary powers u./s 263 of the Act by stating that the AO had not conducted necessary enquiries which in our considered opinion is unjustified& uncalled for.
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- Sha Pratapchand Pukhraj and Company, Vijayapur Page 18 of 19 accepted policy of law that there must be a point of finality in all legal proceedings, that stale issues should not be reactivated beyond a particular stage and that lapse of time must induce repose in and set at rest judicial and quasi-judicial controversies as it must in other spheres of human activity. InSirpur 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.