BHANWARLAL CHAMPALAL KANUNGA,UNJHA vs. THE PR. CIT, AHMEDABAD-3, AHMEDABAD

On going through the material so furnished, the Assessing Officer issued a show cause notice dated 16.09.2022 specifically requiring the assessee to explain, inter alia, why the production of jeera had allegedly doubled for the year even though the land under ownership had marginally decreased when compared with the earlier year, and why agricultural income had increased. The assessee furnished further reply on 19.09.2022 together with documents. After verifying the details placed on record, the Assessing Officer completed the assessment under section 143(3) read with section 144B on 23.09.2022 at the returned income of Rs. 63,44,860. In the body of the assessment order it is recorded that the assessee had submitted ledgers, confirmations and bank statements in support of loans, and in respect of agricultural income had submitted ledger copies for the year together with copies of sale bills and bank statements highlighting the transactions; the balance sheet and copies of personal capital account with bank statement were also filed. The Assessing Officer recorded that the details and documents submitted by the assessee were duly verified and found satisfactory and that there was no adverse inference in the case.

Subsequently, the PCIT of Income-tax-3 examined the assessment record and issued a show cause notice under section 263 dated 22.01.2025 proposing to revise the assessment on the 4 premise that the Assessing Officer failed to make proper inquiries into the claim of large exempt agricultural income without any corresponding agricultural expenditure shown in the books. The show cause proceeded on the footing that, having regard to the materials referred to in the record, necessary verification was required on the location of the land stated to be at Sanchor, Rajasthan, the nature and type of crop, the total quantity of crop produced, the turnover and the agricultural market in which the produce was sold, the source of agricultural expenses, and the genuineness of the agreement said to have been entered into with one Shri Govindbhai Purshottambhai Patel for carrying out agricultural activities on a sharing ratio. The assessee filed a detailed reply on 31.01.2025 objecting to the assumption of jurisdiction, pointing out the inquiries actually made by the Assessing Officer through notices under section 142(1) and the replies with annexures, and further explaining that as per the arrangement with the cultivator the expenses were borne by the cultivator and that the assessee’s share was 59 percent of the produce which was duly accounted and reflected in the return.

The PCIT, after considering the reply, passed the impugned order dated 27.03.2025 under section 263 holding that the assessment order was erroneous in so far as it was prejudicial to the interests of the Revenue. In reaching this conclusion, the PCIT recorded, inter alia, that during the year the assessee had claimed exempt agricultural income of Rs. 1,16,77,893/- without showing any agricultural expenditure. Reference was made to a copy of an 5 Agreement to Sale dated 02.04.2016 for purchase of agricultural land with standing crop at Sanchor, Rajasthan for a consideration of Rs. 66 lakhs stated to be paid in cash; the PCIT doubted the bonafides and genuineness of this document because it was neither registered nor notarised and only written on Rs. 20 stamp paper. It was further noticed that the assessee had claimed to have entered into an agreement dated 09.06.2017 with Shri Govindbhai Purshottambhai Patel for carrying out agricultural activities, packing and delivery, and that as per the assertion the assessee was entitled to 59 percent share in the produce while 41 percent was retained by the cultivator. The PCIT observed that, despite opportunity, the assessee did not furnish verifiable details such as the complete identification and PAN of the said cultivator, the crop-wise 7/12 or Khasra Girdhawri abstracts evidencing crops grown and quantities, the market details and confirmations of sales, and that the sale bills produced were unsigned and handmade. The order also compares the yield declared by the assessee with the average yield of cumin as per the Spices Board of India for 2019-20. Taking the total area of land under cultivation at 157.64 acres and applying the average yield of 4.942 quintals per acre, the PCIT observed that the production as per the assessee’s figures at 2,092.63 quintals was far higher than what the official average would suggest. A comparison was also drawn with A.Y. 2018-19 where, despite land area of 163.53 acres, the assessee had declared lower agricultural income.

The PCIT finally set aside the assessment with a direction to the Assessing Officer to make a de novo assessment after proper inquiry and to allow the assessee adequate opportunity of being heard. It is also recorded that penalty proceedings under section 271AAC(1) are to be initiated separately.

Aggrieved by the order of PCIT, the assessee is in appeal before us raising following grounds of appeal: 1.1 The order passed Us. 263 passed on 27.03.2025 by Pr. CIT-3, A'bad. holding the assessment order passed u/s 143(3) on 23.09.2022 by AO as erroneous and prejudicial to the interest of Revenue in respect of agricultural expenses not accounted in the books, meaning it has been incurred out of undisclosed income by Id.
PCIT is wholly illegal, unlawful and against the principles of natural justice.

The learned Authorised Representative (AR) appearing for the assessee submitted that the Assessing Officer (AO) had conducted detailed inquiries during the course of assessment proceedings by issuing multiple notices under section 142(1) dated 06.11.2021 and 06.09.2022, in which specific queries were 8 raised regarding the assessee’s claim of agricultural income and the absence of agricultural expenses. The assessee had duly furnished comprehensive replies dated 30.11.2021, 15.09.2022 and 19.09.2022 along with voluminous documentary evidence including copy of the sale agreement, cash flow statement, sale bills of agricultural produce, ledger accounts, balance sheet, capital account, and bank statements evidencing inflow and outflow. These were all examined by the AO and only thereafter the assessment was framed under section 143(3) on 23.09.2022 by accepting the returned income.

The AR drew our attention to the specific show cause notice dated 16.09.2022 issued by the AO, wherein the assessee was asked to explain why the jeera production had allegedly doubled in comparison with earlier year despite marginal decrease in land area. The assessee submitted a reply on 19.09.2022 explaining that as per the agreement with Shri Govindbhai Purshottambhai Patel, the expenses of cultivation were borne by the cultivator and the assessee’s share of 59% of produce was duly accounted. The reply was supported with evidences. After considering the same, the AO accepted the claim. Thus, it cannot be said that the AO failed to examine the issue; rather, he applied his mind to the materials furnished, took a plausible view, and completed the assessment.

The AR further submitted that the ld. PCIT has misdirected himself in invoking section 263 on the ground that no agricultural

The AR also argued that the ld. PCIT has travelled beyond jurisdiction by drawing conclusions on merits, such as doubting the genuineness of agreement to sale dated 02.04.2016 and alleging that the sale bills are handmade and unsigned. It was emphasised that the AO had called for these very documents, examined them, and taken a considered view. Once the AO has made inquiries, the revisional jurisdiction cannot be exercised merely to substitute the PCIT’s opinion for that of the AO.

The AR placed reliance on the following judicial precedents:

We have carefully considered the rival submissions of both sides, perused the impugned order passed by the ld. PCIT, the assessment order and material placed on record. It is not in dispute that the assessee had declared agricultural income of Rs. 1,16,77,688/- for the year under consideration. We note that the Assessing Officer issued multiple notices under section 142(1),

The contention of the ld. PCIT is that the AO had failed to make adequate enquiries in respect of (i) location of land, (ii) nature and type of crop produced, (iii) total quantity of crop produced, (iv) turnover, and (v) the agricultural market in which the produce was sold. On this premise, the ld. PCIT has invoked clause (a) of Explanation 2 to section 263 of the Act, treating the assessment order as deemed to be erroneous in so far as prejudicial to the interests of the Revenue, and set aside the order with direction to make de novo assessment.

The ld. AR, on the other hand, demonstrated from the record that specific enquiries were raised by the AO, replies were furnished on multiple occasions with supporting documents, and the AO applied his mind before accepting the agricultural income

Having given our thoughtful consideration, we note the settled position of law that the jurisdiction under section 263 can be exercised only when the twin conditions are satisfied, namely: (i) the order of the AO is erroneous, and (ii) it is prejudicial to the interests of the Revenue. We have taken note of judicial precedents relied on by the ld. AR which cite various judgements. In case of Malabar Industrial Co. Ltd. [2000] 243 ITR 83, the Hon’ble Supreme Court has held that if the AO adopts one of the courses permissible in law and it has resulted in loss of Revenue, or where two views are possible and the AO has taken one view with which the Commissioner does not agree, the assessment order cannot be treated as erroneous unless the view taken by the AO is unsustainable in law. Similarly, in case of CIT v. Gabriel India Ltd. [1993] 203 ITR 108, the Hon’ble Bombay High Court held that the Commissioner cannot initiate proceedings with a view to substitute his judgment for that of the AO. The Delhi High Court in CIT v. Sunbeam Auto Ltd. [332 ITR 167] has also laid down that “inadequate enquiry” does not confer jurisdiction under section 263; only “lack of enquiry” would do so.

We have also perused the Paper Book filed by the assessee which has been duly placed before us. At page 33 thereof is a 13 copy of the notice issued by the Assessing Officer under section 142(1) dated 06.11.2021, wherein specific queries have been raised with regard to the assessee’s claim of agricultural income, the source of agricultural expenditure, details of crop-wise production, mode of cultivation, details of land holdings and supporting documentary evidence such as sale bills and market confirmations. Further, at pages 48 to 83 of the Paper Book are copies of the assessee’s replies together with annexures filed in response to the said notice, which inter alia contain details of sale of agricultural produce, cash flow statements, and supporting ledgers. Again, at pages 168 to 173 of the Paper Book are placed the subsequent submissions filed before the Assessing Officer on 19.09.2022 (in reply to notice dated 16.09.2022). A conjoint reading of these documents clearly evidences that the Assessing Officer had specifically raised questions relating to the assessee’s claim of agricultural income and expenditure, and the assessee had filed replies along with supporting documents which were part of the assessment record. This, in our view, establishes that the Assessing Officer had indeed conducted inquiries on the issue and applied his mind before completing the assessment.

In the present case, the assessment records unmistakably show that enquiries were in fact made by the AO. The notices under section 142(1) specifically raised queries relating to the assessee’s claim of agricultural income, and the assessee filed replies along with documents. The AO also issued a show cause notice questioning the high yield of jeera and increase in 14 agricultural income despite reduction in landholding. After considering the explanations and documents, the AO accepted the claim. Thus, this is not a case where the AO passed the assessment order without any enquiry at all. At best, it may be a case of inadequate enquiry or acceptance of explanation which, in the opinion of the ld. PCIT, was not sufficient. However, as per the ratio of the judicial precedents referred above, inadequacy of enquiry cannot be equated with “no enquiry” so as to render the order erroneous and prejudicial to the Revenue.

We also find merit in the contention of the assessee that the ld. PCIT has erred in drawing comparison with AY 2017-18 where agricultural income was partly disbelieved in proceedings under section 263. The facts of AY 2017-18 and the year under consideration are distinct. Each assessment year is separate and independent, and the outcome of one year cannot be imported mechanically into another year without independent enquiry into the facts of the relevant year.

Explanation 2 to section 263, no doubt, expands the scope of revision by deeming an order erroneous if passed without making inquiries which should have been made. But once it is demonstrated from record that inquiries were indeed made and AO has taken a possible view, Explanation 2 does not empower the Commissioner to reappraise evidence and substitute his own opinion.

We accordingly set aside the impugned order passed by the ld. PCIT under section 263 and restore the assessment order framed under section 143(3).

In the result, the appeal of the assessee is allowed.