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Facts
The assessee received Rs. 6.70 crores as share capital from three companies, which the Assessing Officer (AO) treated as bogus accommodation entries and added to the total income. The AO also failed to add back the commission paid for these entries.
Held
The Tribunal held that the Principal Commissioner (PCIT) erred in initiating proceedings under Section 263 of the Act. Since the CIT(A) had deleted the addition related to the alleged bogus share capital, the matter was considered merged, and the PCIT could not initiate revisionary proceedings on the same issue.
Key Issues
Whether the PCIT can initiate revisionary proceedings under Section 263 of the Act when the issue has already been decided by the CIT(A) and the assessment order has merged with the CIT(A)'s order.
Sections Cited
143(3), 147, 68, 263, 263(1)
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Income Tax Appellate Tribunal, “B” BENCH, AHMEDABAD
Before: SMT. ANNAPURNA GUPTA & SHRI SIDDHARTHA NAUTIYAL
(Assessment Year: 2010-11) Blueray Trading Pvt. Ltd., Vs. Principal Commissioner of 306, Snehadisha, Nr. Dnyansadhana Income Tax (Central), College, Parab Wadi, Thane-400604 Ahmedabad [PAN No.AAFCM8859D] (Appellant) .. (Respondent) Appellant by : Shri K C Thaker, A.R. Respondent by: Shri V. Nandakumar, CIT DR Date of Hearing 25.02.2025 22.05.2025 Date of Pronouncement O R D E R
PER SIDDHARTHA NAUTIYAL - JUDICIAL MEMBER:
This appeal has been filed by the Assessee against the order passed by the Ld. Principal Commissioner of Income Tax (Central), (in short “Ld. PCIT”), Ahmedabad vide order dated 30.03.2021 passed for A.Y. 2010- 11.
The Assessee has taken the following grounds of appeal:-
“1. The Ld. PCIT (Central), Ahmedabad erred in law and on facts in holding that the order u/s 143(3) r.w.s. 147 of the Act dated 27.11.2017 passed by the AO is erroneous and prejudicial to the interest of the revenue.
2. The Ld. PCIT (Central), Ahmedabad erred in law and on facts in not appreciating that the order of the AO got merged with the order of the CIT(A) and he cannot exercise his revisionary powers in terms of Expl. 1(c) to Section 263(1) of the Act.”
The brief facts of the case are that for the impugned year under consideration, the assesee filed return of income declaring total income at Rs. 1,03,630/-. Subsequently, the assessment of the assessee was completed under Section 143(3) r.w.s. 147 of the Act wherein share capital Blueray Trading Pvt. Ltd. vs. PCIT Asst. Year –2010-11 - 2– amounting to Rs. 6.70 crores received by the assessee from paper / shell companies having no business activities, was added to the total income of the assessee.
During the course of assessment proceedings, the Assessing Officer observed that the assessee company had received share capital of Rs. 6.70 crores from three companies namely Prabhav Industries Ltd., Shri Ganesh Spinners Ltd. and Juliet Merchants Pvt. Ltd. The Assessing Officer was in possession of information that the aforesaid companies are bogus / paper companies, managed and controlled by Shri Shirish Chandrakant Shah of Mumbai. Therefore, the Assessing Officer made addition of Rs. 6.70 crores under Section 68 of the Act, by treating the share capital introduced as bogus accommodation entry received through the companies controlled by Shri Shirish Chandrakant Shah. Further, the Assessing Officer observed that Shri Shirish Chandrakant Shah, in his statement had admitted that he was in the business of providing accommodation entries to the beneficiaries and he had charged commission ranging from 2.5% to 5%. The Assessing Officer in the assessment proceedings added the bogus share capital (including share premium) amounting to Rs. 6.70 crores in the hands of the assessee.
Subsequently, the PCIT initiated 263 proceedings on the ground that while the Assessing Officer in the assessment proceedings had added bogus share capital amounting to Rs. 6.70 crores in the hands of the assessee, however, the commission paid by the assessee for arranging such accommodation entry, which was not disclosed by the assessee in it’s books of accounts, was also required to be added back to the income of the assessee, which was not done by the Assessing Officer. The PCIT observed that the commission paid @ 5% of Rs. 6.70 crores comes to Rs. Blueray Trading Pvt. Ltd. vs. PCIT Asst. Year –2010-11 - 3– 33.50 lakhs. Accordingly, the PCIT initiated 263 proceedings on account of failure on part of the Assessing Officer to add back this undisclosed out of books commission expenses in the assessment order under Section 143(3) of the Act, thereby making the assessment order as being erroneous in so far as prejudicial to the interest of the Revenue.
During the course of 263 proceedings, the assesse submitted that the impugned additions made by the Assessing Officer amounting to Rs. 6.70 crores as bogus / accommodation entries have been deleted by Ld. CIT(A) in the appellate order. Accordingly, it was submitted that since the subject matter of alleged accommodation entries were considered by both the Assessing Officer and Ld. CIT(A) and the assessment order made by the Assessing Officer got merged with the order of Ld. CIT(A), then the question of PCIT exercising revisional jurisdiction under Section 263 of the Act to once again examine the very same issue and disallow the corresponding alleged out of books expenses, does not arise at all. However, PCIT did not agree with the contention of the assessee that since Ld. CIT(A) has deleted the addition of Rs. 6.70 crores made by the Assessing Officer and therefore, the question of paying alleged out of books commission expenses on accommodation entries does not arise in the instant case. The PCIT was of the view that the Ld. CIT(A) while passing the appellate order and allowing the relief to the assessee has not appreciated the nature of transaction of share capital received by the assessee from paper / shell companies by way of accommodation entries and did not comprehend the situation in light of the statements of Shri Shirish Chandrakant Shah and Directors of the companies from whom the share capital was claimed to have been received. Further, the PCIT noted that since the Department has filed appeal before the Tribunal in the matter, which is pending adjudication therefore, there is no restriction on Blueray Trading Pvt. Ltd. vs. PCIT Asst. Year –2010-11 - 4– the PCIT in initiating 263 proceedings, in the instant facts. Accordingly, the PCIT set-aside the assessment order as being erroneous, in so far as prejudicial to the interest of the Revenue.
The assessee is in appeal before us against the aforesaid order passed by Ld. PCIT holding the assessment order is being erroneous in so far as prejudicial to the interest of the Revenue.
Before us, the Counsel for the assessee submitted that in this case when Ld. CIT(A), in a detailed speaking order, taking into consideration the totality of the facts of the assessee’s case had deleted the addition made on account of bogus share capital, therefore, there was no question of initiating 263 proceedings in respect of commission paid for availing bogus accommodation entries towards bogus share capital. The Counsel for the assessee submitted that when Ld. CIT(A) has itself given complete relief to the assessee in respect of bogus share capital, there is no question of initiating 263 proceedings, in respect of a subject matter, which had merged with the order of Ld. CIT(A). The Counsel for the assessee also placed reliance on several judicial precedents on the “Doctrine of Merger” and submitted that in the instant facts, Ld. PCIT had erred in facts and in law initiating 263 proceedings.
In response, Ld. D.R. placed reliance on the observations made by Ld. PCIT in the 263 order.
We have heard the rival contentions and perused the material on record.
Blueray Trading Pvt. Ltd. vs. PCIT Asst. Year –2010-11 - 5– 11. Before proceeding with the matter, it would be useful to reproduce the provision of Clause (c) of Explanation 1 to sub-section 263 of the Act which reads as under:
“(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 [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.” 11.1 From bare reading of the aforesaid provision, in our considered view once the relevant part of the assessment order is the subject matter of appeal before the Ld. CIT(A), then to that extent proceedings cannot initiated under Section 263 of the Act. The aforesaid provision empowers the Principal CIT only to exercise revisionary power under Section 263 of the Act only with respect to those matters which have not been considered and decided in appeal by the Commissioner of Income Tax (Appeals). In the instant case, we are of the considered view that the payment of commission is directly linked to receipt of alleged bogus share capital by the assessee from paper / shell companies. However, when Ld. CIT(A) in appeal against the assessment order has himself held that the alleged bogus share capital is genuine looking into the instant facts and addition on this account has been deleted by Ld. CIT(A), then in our considered view, there is no question of initiating 263 proceedings with respect to commission paid towards bogus share capital, when such share capital have been held to be genuine by Ld. CIT(A). In the case of Commissioner of Income Tax vs. Nirma Chemicals Works Pvt. Ltd. 182 Taxman 183 (Gujarat), the Hon’ble Gujarat High Court held that the assessee company claimed relief under Section 80-I of the Act. The Assessing Officer allowed claim of the assessee partially by reworking / reducing the relief available. In appeal, Commissioner (Appeals) allowed the Blueray Trading Pvt. Ltd. vs. PCIT Asst. Year –2010-11 - 6– assessee's claim in entirety. Thereafter, Principal Commissioner passed an order under Section 263 disallowing the claim under Section 80-I on the ground that new industrial undertaking of the assessee was formed by reconstruction / splitting up of old business. In appeal, the assessee challenged jurisdiction of Principal Commissioner to exercise powers under Section 263 on ground that order of Assessing Officer having been merged with order of Commissioner (Appeals), it could not be revised under Section 263 of the Act. The Tribunal rejected the assessee's contention holding that Commissioner (Appeals) had not considered the issue regarding eligibility under Section 80-I and therefore, there was no merger of assessment order on that issue. In further appeal, Gujarat High Court held that when deduction under Section 80-I of the Act was granted by Assessing Officer after disallowing a part of the claim which was carried in appeal before Commissioner (Appeals), requirement of fulfilment of conditions stipulated by sub-Section (2) of Section 80-I was very much subject matter of appeal and therefore, prohibition imposed by Explanation (c) to Section 263 would be applicable to instant case. While passing the order, the Gujarat High Court made the following observations:
“Therefore, when the deduction under section 80-I was granted by the Assessing Officer after disallowing a part of the claim which was carried in an appeal before the Commissioner (Appeals), the appellate authority was duty bound to examine whether the claim made by the assessee was in accordance with and subject to the provisions of section 80-I. The requirement of fulfilment of conditions stipulated by sub-section (2) of section 80-I was, therefore, very much subject-matter of the appeal in relation to the income from warehousing which had been disallowed by the Assessing Officer. [Para 19] The stand of the revenue, that the assessment order was silent as regards eligibility or otherwise of section 80-I, could not, thus, be accepted. The entire section lays down a complete codified scheme in itself for deciding not only eligibility but also for computation of relief to which the assessee is entitled. When the section talks of profits and gains derived from an industrial undertaking, the requirement is in relation to the industrial undertaking to which the section applies and which fulfils all the conditions laid down in sub-section (2) of section 80-I. It is not possible to Blueray Trading Pvt. Ltd. vs. PCIT Asst. Year –2010-11 - 7– read the provisions in any other manner whatsoever. Hence, the contention, that the eligibility or otherwise under section 80-I was never the subject-matter of appeal, was required to be rejected. The Tribunal, thus, committed an error, in law, in coming to the conclusion that the prohibition imposed by the Explanation (c) to section 263 would not be applicable. [Para 20]”
In the case of CIT(E) vs. Slum Rehabilitation Authority 107 taxmann.com 18 (Bombay), the assessee filed its return of income claiming benefit under Section 11 claiming itself to be engaged in charitable activity. The Assessing Officer was of view that assessee was not a Local Authority within the meaning of Section 10(20), and further, in view of nature and activities carried out by the assessee and its legal status, assessee's claim for exemption under Section 11 could not be entertained. However, Commissioner (Appeals) allowed assessee's claim and granted exemption under Section 11. Subsequently, the Principal Commissioner initiated revision proceedings under Section 263 of the Act on the ground that by virtue of Section 2(15) of the Act, activities of assessee could not be considered as charitable in nature and thus, he directed assessment to be made afresh after considering proviso to Section 2(15) of the Act. The Tribunal was of view that on principle of merger, it was not open for the Principal Commissioner to revise the order of assessment in revisionary proceedings. In further appeal the Bombay High Court held that when the Assessing Officer disallowed the claim of the assessee for benefit of exemption under Section 11 of the Act and Commissioner (Appeals) allowed the said claim of the assessee, it being a case of merger of assessment order with the order of Commissioner (Appeals) the Commissioner in exercise of revisional jurisdiction under Section 263 of the Act, could not disallow assessee’s claim of exemption.
13. The Gujarat High Court in case of Haryana Paper Distributors (P.) Ltd. vs. Pr. CIT [2018] 95 taxmann.com 152 (Guj.) was concerned Blueray Trading Pvt. Ltd. vs. PCIT Asst. Year –2010-11 - 8– with a notice issued by the Commissioner for exercising revisional powers under Section 263 of the Act. It was a case in which the Assessing Officer had doubted the genuineness of the purchases shown by the assessee. The assessee contended that the purchases were genuine and in any case if such purchases are not believed to be genuine, the profit from such dealing should be calculated at the rate of 4% of the turnover. The Assessing Officer accepted the assessee's later contention, made additions at 4% of the GP on the purchases and granted adjustment of the already offered GP @ 1.79% and made limited additions. The assessee carried the matter in appeal before the Commissioner (Appeals) and argued that the entire addition should be deleted. When such appeal was pending, the Principal Commissioner issued a notice for revision of the order of assessment on the ground that the Assessing Officer having held that the entire purchases were bogus, he erred in limiting the addition only to a small portion of the same on gross profit rate. When this show cause notice was pending, the Appellate Commissioner decided the assessee's appeal against the order of assessment and held that the Assessing Officer could not have made the addition of Rs. 9.57 lacs on GP basis. In such background, the assessee challenged the notice of revision issued by the Commissioner of Income Tax. The High Court while quashing the 263 notice observed as under:-
“12. Equally importantly, the issue itself had travelled before the Appellate Commissioner at the hands of the assessee. To the extent, the Assessing Officer rejected the assessee's request for making no additions, the assessee carried the matter in appeal. Appellate Commissioner deleted even the limited additions made by the Assessing Officer. The limited additions made by the Assessing Officer and the larger additions proposed by the Commissioner in the impugned notice are inextricably inter linked. The Commissioner argues that the entire purchases were bogus. The Assessing Officer accepted the purchases as genuine but added certain amount on the premise that the assessee's profit from such dealings would have been higher than disclosed. The entire issue was at large before the Appellate Commissioner. It is well known that the Commissioner (Appeals) while hearing the assessee's appeal has powers to even enhance the assessment. If he was of the opinion that not only limited additions made by the Assessing Officer but much larger additions were justified, he could have certainly exercised such powers, of Blueray Trading Pvt. Ltd. vs. PCIT Asst. Year –2010-11 - 9– course after putting the assessee to notice. In this context, we may refer to clause (c) of Explanation 1 to sub-section (1) of section 263 of the Act. As is well known sub-section (1) of section 263 of the Act empowers the Principal Commissioner or the Commissioner to call for and examine the record of any proceeding and revise the same if he considers that the order passed therein by the Assessing Officer was erroneous insofar as it is prejudicial to the interest of the Revenue. Clause (c) of Explanation 1 of sub- section (1) provides that for removal of doubts it is hereby declared that, for the purpose of the said sub-section,— "(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 [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.]"
Clause (c) of Explanation 1 may be worded in a manner as suggesting the extent of the powers of the Commissioner for taking an order in revision, its effect is of circumscribing such powers in cases where the order passed by the Assessing Officer has been subject matter of any appeal and such subject matter has been considered and decided in such appeal. This provisions thus statutorily recognizes the principle of merger and avoids any conflict of opinion between two quasi judicial authorities of the same rank. This issue has been considered at length by Division Bench of this Court in case of CIT v. Nirma Chemicals Works (P.) Ltd. [2009] 182 taxmann.com 183/309 ITR 67 (Guj). It was held as under: "20. The stand of the revenue that the assessment order was silent as regards eligibility or otherwise of section 80-I of the Act cannot thus be accepted. As noted hereinbefore the entire section lays down a complete codified scheme in itself for deciding not only the eligibility but also for the computation of the relief to which the assessee is entitled. When the section talks of profits and gains derived from an industrial undertaking the requirement is in relation to the industrial undertaking to which the section applies and which fulfills all the conditions laid down in sub- section (2) of section 80-I of the Act. It is not possible to read the provisions in any other manner whatsoever. Hence, the contention that the eligibility or otherwise u/s.80-I of the Act was never the subject matter of Appeal requires to be rejected. The Tribunal thus committed an error in law in coming to the conclusion that the prohibition imposed by Explanation (c) to section 263 of the Act would not be applicable."' 14. Accordingly, in light of our observations in the preceding paragraphs and in view of the assessee’s set of facts, we are of the considered view that this is not a fit case for initiating proceedings under Section 263 of the Act since assessment order in the instant facts merged with the order of Ld. Commissioner (Appeals) and accordingly, the PCIT has erred in facts and in law in initiating proceedings under Section 263 of the Act.
In the result, the appeal of the assessee is allowed. This Order pronounced in Open Court on 22/05/2025