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Facts
The assessee, Avon Cycles Ltd., filed its return of income for AY 2021-22, which was assessed under Section 143(3) r.w.s. 144B. The PCIT initiated proceedings under Section 263, opining that the assessment order was erroneous and prejudicial to revenue, citing five issues. The assessee contested this, arguing that all issues were examined by the AO.
Held
The Tribunal held that the PCIT's order was unsustainable on the issues of discrepancy in professional/technical fees, outstanding credit from District Magistrate, notional interest, and reconciliation of sales with Form 26AS, as these were examined by the AO. However, the Tribunal upheld the PCIT's order regarding the verification of stock valuation.
Key Issues
Whether the PCIT was justified in invoking Section 263 to set aside the AO's order when the issues raised were allegedly examined by the AO during assessment proceedings.
Sections Cited
147, 148, 143(3), 263, 142(1), 69C, 41(1), 145A
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Income Tax Appellate Tribunal, DIVISION BENCH, ‘A’ CHANDIGARH
Before: SHRI LALIET KUMAR & SHRI KRINWANT SAHAY
ORDER
PER LALIET KUMAR, JM
This appeal filed by the assessee is directed against the order of the Principal Commissioner of Income Tax, Ludhiana-1 (hereinafter referred to as the "PCIT"), dated 27.03.2025, passed under section 263 of the Income Tax Act, 1961 (the "Act") for the Assessment Year 2021-22.
The assessee has raised the following substantive grounds of appeal: “
1. That Ld. PCIT -1, Ludhiana, erred in law and on facts in assuming the jurisdiction to invoke the provisions of section 263 of the Act to set aside the order passed by the Assessing Officer (National Faceless Assessment Centre, Delhi) when the order was neither erroneous nor prejudicial to the interest of revenue. The order passed by Ld. PCIT(1), Ludhiana, being illegal unjustified and against the provisions of section 263 may be annulled.
2. That Ld. PCIT (1) erred in law and on facts in setting aside the order of Assessing Officer (National Faceless Assessment Centre, Delhi) by applying the different approach on the same set of facts on the issues already considered by the Assessing Officer.
ITA 705/CHD/2025 A.Y. 2021-22 2 3. The order passed u/s 263 by PCIT(1), Ludhiana, may be cancelled and that of Assessing Officer be restored. 3. That Ld. PCIT erred in law and on facts in setting aside the order of Assessment with a view to fishing and roving enquiries without pointing out or determining any error which was prejudicial to the interest of revenue in the order of Assessing Officer. The order passed u/s 263 by PCIT-1, may be set aside.
4. That the appellant craves leaves to add, amend, alter, modify or substitute all or any of the above mentioned grounds of appeal
before the appeal is finally heard and disposed off.
5. Hence this appeal.
3. Briefly, the facts of the case are that the assessee is a limited company engaged in the manufacturing of cycles. The return of income for AY 2021-22 was filed, and the assessment was completed u/s 143(3) r.w.s. 144B on 26.12.2022. Subsequently, the Ld. PCIT examined the records and formed an opinion that the assessment order was erroneous insofar as it was prejudicial to the interest of the revenue. The PCIT issued a show-cause notice (SCN) on 05.03.2025, highlighting five issues: i. Discrepancy in Professional/Technical fees (Rs. 2.84 Cr not claimed in P&L). ii. Outstanding credit of Rs. 41.63 Lakhs in the name of "District Magistrate". iii. Notional interest of Rs. 1.84 Cr not verified. iv. Reconciliation of sales with Form 26AS (Sales to Govt of TN). v. Verification of Stock Valuation. 3.1 The assessee after receiving the Show Cause Notice from the Pr. CIT has submitted the detailed reply to the Show Cause Notice on 10.03.2025 and given a justification for each and every point raised by the ld. PCIT. The reply of the assessee is available at page 3 of the Paper Book which is as under : We have deducted TDS u/s 194J on amount of Rs. 4,42,88,238/- during the year under consideration. We are enclosing herewith reconciliation of expense heads in which we ITA 705/CHD/2025 A.Y. 2021-22 3 have debited these charges. There is no difference of any amount which can be treated as income/expenditure through undisclosed sources within the provisions of section 69C of the Act. It may be mentioned that specific query of details of TDS deducted (Query no. 16 notice dated 19.10.2022). We had filed complete details running into 267 pages vide our reply dated 17.11.2022 submitted on 18.11.2022 which was duly considered and accepted by the Ld. AO at the time of original assessment proceedings. Page 1 The amount of Rs. 41,63,805/- is amount receivable (not payable) from District Magistrate, Malda, West Bengal against sales made by us in earlier years. The amount is still recoverable and efforts are being made to realize the outstanding amount. (Copy of account of this party is enclosed). Hence this is not a case of a liability not payable which can be subject to tax, rather it is a trade debt receivable. Page 2-22 The notional interest of Rs. 1,84,15,696/- has been shown as income in the P&L account as per the provisions of IND-AS as per mandatory accounting principles. However this income is not taxable during the year and will be subject to tax at the time of maturity. We are enclosing complete details of calculation of notional interest along with source of investments made during the year. As regards notional interest on security deposits and margin money, the notional interest is not taxable and the income is booked as per IND- AS only. During the assessment proceedings we had filed detailed computation of income where this item has been specifically mentioned and explained. Page 23-35 As regards reconciliation of Form 26AS, we clarify that out total sales of the assessee company during the year were Rs. 709,05,88,098/- and out of sales of Rs. 77,93,38,769/- were made to State Government of Tamil Nadu, Karnataka and etc. who have deducted TDS on this sale. During the assessment proceeding while submitting reconciliation of 26AS we have given the heads of income where the income on which TDS has been deducted is included. Therefore there is no difference of any sale figure vis-à-vis 26AS or balance sheet of ITR. The Ld. AO has duly examined and accepted the reconciliation of items in form 26As with financial statements / ITR.
5. During the assessment proceedings, we were asked to provide the details of opening and closing stock along with basis of valuation which was duly responded vide our reply dated 17.11.2022 submitted on 18.11.2022. The Ld. AO was satisfied with our reply and accepted the same at the time of framing the assessment under section 143(3). The assessee company humbly prays that during the assessment proceedings u/s 143(3) the Ld. AO has asked for all the details of item pointed out by your goodself in your notice. The details were duly filed by us and examined by the Ld. AO at the time of assessment proceedings u/s 143(3). Since the Ld. AO had made all enquiries which were duly replied by the assessee, the order u/s 143(3) cannot be treated as erroneous and prejudicial to the interest of the revenue within the meaning of Explanation 2 to sub-section 263 of the Act. Therefore you are requested to kindly drop the proceeding initiated u/s 263 of the Act.
ITA 705/CHD/2025 A.Y. 2021-22 4 3.2 However, the ld. PCIT was not satisfied with the reply and thereafter, ld. PCIT had passed the impugned order thereby asking the ld. AO to redo the assessment and our attention was drawn to paragraph No.8 of the order passed by the ld. PCIT which is to the following effect :
Therefore, considering the entire gamut of facts and in the circumstances of the case and also relying upon the judgments as discussed above, I am of the firm opinion that the Assessing Officer's failure in not examining the impugned issues mentioned in para 6 by way of enquiries/verification that were required in this case, has rendered the assessment order, dated 26.12-2022, passed u/s 143(3) r.w.s. 144B of income Tax Act. 1961 by the AO in the case of the present assessee, erroneous in so far as it is prejudicial to the interest of the revenue. Both the conditions specified u/s 263 of the Act are satisfied in this case and it is a fit case to invoke provisions of Explanation 2 to the said section. Therefore, as per. the provisions of section 263 of the Income Tax Act, I hereby set aside the impugned assessment order dialed 26 12.2022, passed u/s 143(3) r.w.s. 144B of Income Tax Act, 1961. Needless to state, the Assessing Officer shall give the assessee reasonable opportunity of being heard and pass a speaking order after taking into consideration the explanation and supporting evidence submitted by the assessee. The assessment order dated 26.12.2022, passed u/s 143(3) r.w.s. 144B Income Tax Act, 1961 is being set aside for the limited purpose on the issues as mentioned above in para 5.
The PCIT, vide the impugned order, held that the AO failed to make necessary inquiries and set aside the assessment order, directing a fresh assessment.
Feeling aggrieved by the order of the Ld. PCIT the assessee preferred in appeal before the Tribunal for the grounds mentioned hereinabove. 5.1 The ld. AR hadsubmitted that in the present case, the ld. AO has passed a detailed elaborate order after complying the requisite formalities and issuing the notice, questionnaire to the assessee and thereby made the addition in the hands of the assessee to the tune of Rs.1,18,812/-. It was submitted that the issue which was flagged by the ld. PCIT in 263 proceedings were already examined by the Assessing Officer.
Now, the assessee is in appeal before us on the ground mentioned herein above.
ITA 705/CHD/2025 A.Y. 2021-22 5 7. During the course of hearing the Ld. Counsel for the assessee, Sh. Ashish Aggarwal, submitted that the original assessment was framed after detailed scrutiny. Specific questionnaires were issued regarding TDS, expenses, and stock details, to which the assessee had replied vide letter dated 17.11.2022.The ld. AR had drawn our attention to the submission filed before us and the reply of the assessee to each and every query raised by the PCIT with reference to the documents filed before the PCIT. The submission of the assessee read as under : a) Alleged difference of Rs. 2,84,19,238/- on account of expenditure ofprofessional and technical fees amounting to Rs. 4,42,88,238/- as per form3CA/3CD being TDS deducted u/s 194J vis-a-vis amount of Rs.1,58,59,051/- under the head legal and professional charges in the Profitand Loss account.
The Ld. AO during the assessment proceedings vide notice u/s 142(1) dated 19.10.2022 raised a specific query (Query no. 16) (Paper Book page reference no. 44)
16. Provide details of TDS deducted and deposited for relevant expenses debited to P&L account and also file copy of TDS return along with challans The assessee company vide reply dated 17.11.2022 at point no. 16 (Paper Book page reference no. 47 and 54) filed complete details of TDS deducted and deposited along with copies of TDS Returns and Challan.
Being satisfied with the reply the Ld. AO did not draw any adverse inference against the assessee.
The Ld. Pr. CIT has wrongly pointed out that the AO has not examined this issue when complete details of TDS deducted and deposited during the year were specifically asked for and filed by the appellant during the original assessment proceedings. Under no circumstance the order of Ld. AO can be treated as erroneous. Further Ld. Pr. CIT has nowhere mentionthat how this is prejudicial to the interest of the revenue. During the proceedings u/s 263 before Ld. Pr. CIT, the appellant had filed complete reconciliation of legal and professional expenses debited to P&L account with expenses on which TDS has been deducted u/s 194J. The Ld. Pr. CIT did not make any enquiry and has failed to establish that the assessment order is erroneous and prejudicial to the interest of revenue. b) The Ld. Pr. CIT has alleged that the assessee shown huge credit amount of Rs. 41,63,805/- outstanding in the name of District Magistrate for past three years and the Ld. AO has failed to point out this discrepancy during assessment proceedings and failed to examined and verify this issue.
ITA 705/CHD/2025 A.Y. 2021-22 6 During the proceedings u/s 263, it was pointed out to the Ld. Pr. CIT that the amount of Rs. 41,63,805/- is a debit balance on account of receivable from District Magistrate Malda (West Bengal) against sales made (Paper Book page reference no. 3 and 6 to 26). Also during the original assessment proceedings the Ld. AO had raised a specific query no. 14 (Paper Book page reference no. 43 and 44) asking for details of sundry debtors and creditors in a specific format which was duly replied vide reply dated 17.11.2022 at point no. 14 (Paper Book page reference no. 47).
It is surprising as to how a debit amount shown under the head debtors receivable can be treated as income. The appellant filed the copy of account of the debtor District Magistrate Malda (West Bengal) showing balance of Rs. 41,63,805/- before the Ld. Pr. CIT. The Ld. Pr. CIT did not make any enquiry and has failed to establish that the assessment order is erroneous and prejudicial to the interest of revenue. c) The Ld. Pr. CIT in para 5.3 of his order has stated:
"Regarding "Notional interest of Rs. 1,84,15,696/-
, the assessee has submitted that the said amount has been shown as income in the P&L account as per the provisions of IND-AS as per mandatory accounting principles. Further, assessee has submitted that this income is not taxable during the year and will be subject to tax at the time of maturity. The assessee has further enclosed complete detailsof calculation of notional interest along with source of investments made during the year From the above it is clear that the Ld. Pr. CIT has acknowledged that the assesses has filed complete details of notional interest but has failed to make any enquiry and has also failed to establish that the assessment order is erroneous and prejudicial to the interest of revenue. d) The Ld. Pr. CIT has wrongly alleged that there is a difference in sales figure in form 26AS and ITR filed.
During the course of assessment proceeding the Ld. AO vide query no. 7 (Paper Book page reference no. 42) had specifically asked for reconciliation of income as per Financial and 26AS which was duly replied vide reply dated 17.11.2022. (Paper Book page reference no. 47 and 53).
During the proceedings u/s 263 vide assessee's reply dated 10.03.2025 (Paper Book page reference no. 3 and 4) this fact was explained to Pr. CIT but Ld. Pr. CIT has failed to make any enquiry and has also failed to establish that the assessment order is erroneous and prejudicial to the interest of revenue. e) The Ld. Pr. CIT has alleged that the AO has not examined the stock of theassessee company. During the course of assessment proceeding the Ld. AO vide query no. 17 (Paper Book page reference no. 44) had asked for details of opening and closing stock and the basis of valuation of closing stock. The assessee vide reply dated 17.11.2022 duly replied to this query and tiled details of opening and closing stock (Paper Book page reference no. 47 and 55). The Ld. AO in para 2.2 of the assessment order dated
ITA 705/CHD/2025 A.Y. 2021-22 7 26.12.2022 after examination of details and evidencesfiled did not draw any adverse inference against the assessee. This fact was mentioned to the Ld. Pr. CIT vide reply 10.03.2025 hut the Ld. Pr. CIT failed to make any enquiry and has also failed to establish that the assessment order is erroneous and prejudicial to the interest of revenue.
7.1. Besides that, the ld AR had orally submitted regarding the District Magistrate account: The Ld. Counsel pointed out a glaring factual error in the PCIT’s order. The amount of Rs. 41,63,805/- was a debit balance (Receivable) representing sales made to the District Magistrate, Malda, and not a credit balance (Payable). Therefore, section 68 or cessation of liability u/s 41(1) could not apply. The PCIT invoked jurisdiction on a non-existent issue. Similarly, regarding Professional Fees, the difference alleged by the PCIT was merely a presentation issue. The assessee had deducted TDS on the full amount, and the reconciliation of expenses was available on record. Lastly, regarding Notional Interest: This income was recognized purely due to Ind-AS compliance and is not taxable under the Income Tax Act. The computation of income filed clearly showed this exclusion, which the AO accepted.
8. Per contra, the Ld. DR relied upon the order passed by the lower authorities and made issue-wise submissions.
We have heard the rival contention of the parties and perused the material available on the record. 9.1. We deal each issues raised by the ld. PCIT separately. 9.2 The first issue raised by the Ld. PCIT was with respect to the alleged difference of Rs. 2,84,19,238/- on account of expenditure of professional and technical fees. 9.3 In this regard the Ld. AR had drawn our attention to query no. 16 raised by the assessee vide letter dt. 19/10/2022 and the reply given by the assessee on 17/11/2022. Whereby the assessee has filed complete details of TDS
ITA 705/CHD/2025 A.Y. 2021-22 8 deducted and deposited alongwithhe copies of challan and TDS returns. In this regard the Ld. PCIT has noted down in the order in para 5.1, which is as under:
5.1 I have gone through the reply of the assessee. Vide its reply dated 10.03.2025, regarding difference of Rs. 2,84,19,238/- on account of expenses for professional or technical fees, the assessee has submitted the reconciliation of expense heads in which expenses have been debited. However, on perusal of assessment record and reply of the assessee, it is found that neither the AO has examined this issue during assessment proceedings nor the assessee has given any submission in respect of this issue. Thus, the AO failed to make inquiry or verification to examine the reconciliation of the figures.
9.4 Per contra, the Ld.DR relied upon the order of the lower authorities. 9.5 We have heard the rival contention of the parties and perused the material available on the record. The conjoint reading of the query raised by the Assessing Officer, reply given by the assessee, documents filed by the assessee and the findings recorded by the PCIT, it is clear that the finding of the Ld. PCIT is contrary to record as the Assessing Officer has not only raised the query but the assessee has filed the reply and the supporting documents in this regard. Therefore, in our considered opinion the finding of the Ld. PCIT with respect to the difference of Rs. 28419238/- is contrary to record and is not sustainable. Therefore, the order passed by the Ld. PCIT on issue no. 1 is not sustainable. The second issue raised by the PCIT is with respect to Sundry Creditors. 10. 10.1 In this regard in para 5.2 the Ld. PCIT has recorded as under: “ 5.2 Further during the assessment proceedings the assessee has submitted list of sundry creditors as below:
ITA 705/CHD/2025 A.Y. 2021-22 9
ITA 705/CHD/2025 A.Y. 2021-22 10 During this revision proceeding, on perusal of the given list, it was observed that huge credit amounting to Rs. 41,63,805/- is outstanding in name of "District Magistrate" for past three years (from 31.03.2018 to 31.03.2021) and no detail regarding the District Magistrate is reflected in the list. Neither any inquiry in this regard is made by the A.O. during the assessment proceedings. Regarding this issue, during revision proceeding, the assessee has submitted that the amount of Rs. 41,63,805/- is amount receivable (not payable) from District Magistrate, Malda, West Bengal against sales made by the assessee in earlier years. And the amount is still recoverable and efforts are being made to realize the outstanding amount. However, on perusal of the assessment and reply filed by the assessee, it is found that the AO has not examined the list of sundry creditors provided by assessee during assessment proceedings. Thus, the AO failed to point out this discrepancy during assessment proceedings and failed to examine and verify this issue.
10.2 The Ld. AR in this regard submitted that the amount of Rs. 41,63,805/- is a debit balance on account of trade receivable from District Magistrate Malda, and therefore, there cannot be a loss to the Revenue. Further, the Assessing Officer in the letter dated 19/10/2022 atS.No. 14 (page 43 ,44 ) had raised the specific query in this regard. The same was duly replied by the assessee vide letter dt. 17/11/2022. 10.3 The Ld. DR relied upon the order passed by the lower authorities. 10.4 We have heard the rival contention of the parties and perused the material available on the record. We find that despite the assessee submitting the specific reply before the Ld. PCIT and examinedthe issue by the Assessing Officer, the Ld. PCIT held that the order passed by the Assessing Officer is erroneous. We failed to appreciate how a debit balance (trade receivable) can affect payment of taxes by the assessee or in other words effect adversely the income of the assessee and further how the debit balance on account of trade receivable would erroneous and prejudicial to the interests of the revenue. Once the debit balance is shown, then the assessee has factored in the said amount in its P&L, and therefore, there cannot be any possible tax evasion by ITA 705/CHD/2025 A.Y. 2021-22 11 the assessee. In view of the above, we do not find any reason to sustain the order passed by the Ld. PCIT and accordingly we are of the opinion that issue no. 2 raised by the PCITwith respect to sundry creditors is factually incorrect and is not sustainable in the eyes of the law. Accordingly, the order of the PCIT with respect to sundry creditors is unsustainable and is quashed.
The third issue raised by the Ld. PCIT was with respect to the notional interest of Rs. 18415696/-. 11.1 In this regard the Ld. PCIT has recorded his finding as under: 5.3 Regarding "Notional interest of Rs. 1,84,15,696/-", the assessee has submitted that the said amount has been shown as income in the P&L account as per the provisions of IND-AS as per mandatory accounting principles. Further, assessee has submitted that this income is not taxable during the year and will be subject to tax at the time of maturity. The assessee has further enclosed complete details of calculation of notional interest along with source of investments made during the year. However, on perusal of the reply submitted by assessee and the assessment record, it is found that during the assessment proceedings, AO has not examined the details of parties from whom the notional income has been received and also has not examined the source of fund on which this interest was received. Thus, the AO failed to examine and verify this issue.
11.2 In this regard the Ld. AR relied upon the written submission.
11.3 On the other hand, the learned Departmental Representative (DR) submitted that the issue of notional interest of Rs. 1,84,15,696/- was not examined by the Assessing Officer (AO), and therefore, the AO had no occasion to form an opinion on it. Since the assessment was subject to complete scrutiny, it was incumbent upon the AO to examine this issue. The failure of the AO to do so is deemed to be an error and renders the order prejudicial to the interests of the Revenue. The DR further argued that whether the issue is ultimately in favor of or against the assessee can only be determined after the AO has examined it. In the absence of any such examination, it cannot be said that the AO has applied their mind to the matter. 11.4 The Ld. DR relied upon the order passed by the lower authorities. It was submitted that non-examination of the issue by the Assessing Officer would
ITA 705/CHD/2025 A.Y. 2021-22 12 render the order of the Assessing Officer as erroneous and prejudicial to the interest of the revenue. 11.5 We have heard the rival contentions of the parties and perused the material available on record. The issue at hand concerns the treatment of "notional interest" recognised in the Profit & Loss account by the assessee in compliance with the mandatory provisions of IND-AS. It is the assessee's submission that such notional interest is taxable only at the time of maturity, not in the year of accrual/entry under accounting standards.Undoubtedly, the Assessing Officer (AO) did not specifically examine this aspect in the assessment order. No specific query was raised regarding the taxability of the notional interest or the source of the underlying security deposit during the assessment proceedings. In effect, the AO accepted the computation of income without explicitly verifying the taxability of this receipt under the provisions of the Income Tax Act.Ideally, the failure to raise a specific query regarding such a significant exclusion might constitute a "lack of inquiry," which typically empowers the Pr. Commissioner of Income Tax (PCIT) to invoke jurisdiction u/s 263 of the Act.However, it is settled law that for jurisdiction under Section 263 of the Act to be validly invoked, the twin conditions—that the order is erroneous and that it is prejudicial to the interest of the Revenue—must be cumulatively satisfied. We failed to perceivehow an entry of notional interest, which is required to be accounted for mandatorily under IND-AS, could be subjected to tax in the year under consideration, which albeit is not the year of maturity. In our opinion, the notional interest income is taxable only upon maturity, which has not been disputed by the Ld. PCIT, furthermore, it has not been demonstrated on record that the non-examination of this issue, per se, resulted in any evasion of taxes. Consequently, once it is established that the notional interest is not liable to be taxed in the current year, the mere failure to raise a specific query cannot be characterised as an act prejudicial to the interest of the Revenue.Once it is established that the notional interest is not liable to be taxed in the current year (and is taxable only upon maturity), the ITA 705/CHD/2025 A.Y. 2021-22 13 mere failure of the AO to raise a query cannot be termed as an act "prejudicial to the interest of the Revenue.The AO is obliged to examine issues that have actual tax implications; non-examination of an issue / innocuousissuethat bears no immediate tax impact would not render the assessment order erroneous and prejudicial. Accordingly, we set aside the Ld. 's finding. PCIT with respect to notional interest of Rs. 1,84,15,696/- and held that the order of the PCIT on this issue is not sustainable.
The Ld. PCIT has examined the following issue with respect to reconciliation of Form 26AS and in this regard the finding of the PCIT was recorded in para 5.4 as under:
5.4 Regarding reconciliation of Form 26AS, the assessee submitted that total sales of the assessee company during the year was Rs. 709,05,88,098/- and out of this, sales of Rs. 77,93,38,769/- was made to State Government of Tamil Nadu, Karnataka and etc., who have deducted TDS on this sale. However, from perusal of reconciliation statement of income as per financials and Form 26AS provided by assessee during assessment proceedings, it has been observed that total sales amounting to Rs. 77,93,38,769/- is made to State Government of Tamilnadu, on which certain tax was deducted. There is a difference in the sale figure in 26AS form and ITR which need to be verified. The AO should examine that the assessee booked his turnover with the TDS amount or without it. Thus, AO failed to examine and verify this issue also.
12.1 In this regard, the Ld. AR had drawn our attention to query no. 7 at page 42 of the paper book whereby the Assessing Officer has specifically asked the reconciliation of income. The assessee has duly replied to the same. The reply is available at page 47 & 53 of the paper book. The Ld. PCIT despite the above said has recorded that the Assessing Officer has not made any inquiry in this regard. 12.2 Per contra, the Ld. DR relied upon the order passed by the lower authorities. 12.3 We have heard the rival contention of the parties and perused the material available on the record. The assessee vide its reply dt. 10/05/2025 had submitted that there is no difference in sale figures vis-à-vis Form 26AS or balance sheet, and the documents were also filed before the Ld. PCIT. However,
ITA 705/CHD/2025 A.Y. 2021-22 14 the above-mentioned finding recorded by the PCIT clearly shows that the PCIT failed to identify any defect in the reconciliation. In our considered opinion the PCIT must point out the defect after examining the record and thereafter conclude that the order passed by the Assessing Officer is prejudicial to the interest of the Revenue. In fact, on examination, we do not find any variation in the Form 26AS balance sheet and figures of sale, and therefore, there is no reason to uphold the order passed by the Ld. PCIT and accordingly we have no hesitation to set aside the order passed by the Ld. PCIT in respect to alleged reconciliation of Form 26AS. As a result, the order passed by the PCIT on the reconciliation of Form 26AS vis-à-vis sales vis-à-vis the balance sheet is unsustainable, and we set it aside.
The last issue raised by the PCIT is with respect to stock valuation. In this regard the finding of the PCIT is as under:
5.5 Regarding "Stock Valuation", the assessee submitted that during the assessment proceedings, it was asked to provide the details of opening and closing stock along with basis of valuation which was duly responded vide its reply dated 17.11.2022 submitted on 18.11.2022. However, from perusal of assessment record, it is observed that the case was specifically opened for verification of stock valuation. During the assessment proceedings, the assessee has only provided the figure of stock as on 31.03.2021 and 31.03.2020. However, during the assessment proceedings, the AO has not called for the stock register, quantitative tally of stock and valuation of the same for examination. Further, the AO has not tallied the stock register with the purchase and sales made during the assessment proceedings. Thus, as per assessment record, the AO has not examined this issue during assessment proceedings and failed to make inquiry or verification which should have been made in this regard. 5.6 In view of the above, it is evident that the Assessing Officer has not examined vital facts highlighted above having significant bearing on taxability of income of the assessee. There is no question of Assessing Officer taking possible view. Thus, the order is passed without making enquiries or verification on the issues mentioned above which should have been made thereby is erroneous in view of the provisions of Explanation 2(a) to the section 263. An order can be said to be prejudicial to the interests of the Revenue if it is not in accordance with the law in consequence whereof the lawful revenue due to the State has not been realized or cannot be realized. The assessee has failed to explain the above mentioned issues. Thus, the order is prejudicial to the interests of revenue. Therefore, the twin conditions get satisfied and therefore, the assessment would fall in the category of erroneous and insofar as prejudicial to the interest of the revenue. 13.1 The Ld. AR has drawn our attention to page 47 at Sr.No. 17 whereby the Assessing Officer has called for the details of the stock. The assessee vide his reply which is available at page 47 and 55 of the paper book has provided the complete details. At page 47 at S.NO. 17 it was mentioned as under:
ITA 705/CHD/2025 A.Y. 2021-22 15 “17. Detail of opening and closing stock is enclosed. For basis of valuation of stock, please refer accounting policy, mentioned at Sr.No. 1(i) of Balance Sheet as at 31 March, 2021 attached at Sr.No. 4.” Similarly at page 55 of the paper book the assessee has provided the following details.
13.2 Ld. AR submitted that once information in respect of opening and closing stock balance has been provided by the assessee and the AO after considering the reply has decided the issue, then it cannot be said that the order passed by the AO is prejudicial to the interests of the Revenue. 13.3 The ld. DR had drawn our attention to the assessment order, where the primary reason for complete scrutiny was mentioned as stock valuation. Further the ld. DR had drawn our attention to the question posed by the AO at page 44 at Sr.No. 17, which was mentioned as under : “17. Please provide the details of opening and closing stock quantity & quality wise and basis of valuation of closing stock, supported with documentary evidence.”
13.4 It was submitted that the AO has called for the details of opening and closing stock, quantity and quality-wise, the basis of closing stock and the supporting documents. However, the information supplied by the assessee was grossly inadequate. The Ld. DR after referring to page 55 of the paper book (supra) submitted that quantity and quality-wise details of the stock have not ITA 705/CHD/2025 A.Y. 2021-22 16 been provided by the assessee and submitted that how the Assessing Officer has verified the valuation of the closing stock . It was pointed out that, as against the inventory of finished goods of 10.05 Cr at the opening stock as on 01.04.2020, there has been a steep hike, and the closing stock was reported as 57.24 Cr. Thus, there is an increase of 47 Cr during the assessment year. Similarly, with respect to inventory brought out component cycles, the opening stock was 21 Cr and the closing stock was 35.51 Cr. In sum and substance, the opening stock which was 50.4 Cr had increased to 114.90 Cr during the year and this aspect has not been examined by the Ld. Assessing Officer. 13.5 The Ld.DR submitted that AO was duty-bound to examine the quantity and quality-wise of the stock of the assessee, and failure to examine the qualitative and quantitative aspects of the stock has a tax implication. Therefore the order passed by the Assessing Officer is prejudicial and erroneous. 13.6 The ld. AR, in rebuttal to the closing stock has submitted that the assessee is following SAP method and all the documents were provided by the assessee to the AO and there was no failure on the part of the assessee. Further, the assessee relied upon decision of the Co-ordinate Bench in the case of GAIL India Ltd.. Our attention was drawn to paragraph 5.3 wherein the stock valuation was considered by the PCIT to the following effect. It was submitted that once the AO has formed an opinion, there is no reason to substitute the AO's opinion for the PCIT's. 13.7 We have heard the rival contentions of the parties and perused the material available on record. About the issue of stock valuation, the assessee submits that the details of opening stock and closing stock were provided at page 55 of the Paper Book in response to the specific query raised by the Assessing Officer (AO). However, the AO failed to appreciate that the case was selected specifically to verify stock valuation. While the assessee provided quantitative details and the closing stock figure, the AO failed to examine the ITA 705/CHD/2025 A.Y. 2021-22 17 valuation method adopted by the assessee. In fact, the AO did not call for the Stock Register and failed to verify whether the valuation (Cost or Net Realisable Value) was consistently applied in accordance with the provisions of Section 145A of the Act. In our view, merely accepting the figures provided by the assessee without further inquiry or adequate inquiry as to the basis of valuation defeats the very purpose of scrutiny selection. Thus, in our considered opinion, the assessment order falls within the ambit of "lack of inquiry" as envisaged under Explanation 2 to Section 263 of the Act. 13.8 In view of the foregoing, we are of the opinion that the issue of stock valuation flagged by the Ld. PCIT is required to be upheld. The reliance placed by the assessee on the decisions of the Coordinate Bench in the cases of CEIGALL and Rico Auto is misplaced and legally unsustainable, as the said decisions were rendered on different sets of facts. The Tribunal has recorded that, in the case of CEIGALL, the Assessing Officer had specifically reconciled the opening and closing stock. However, in the present case, while the Assessing Officer called for quantitative details, he failed to examine the qualitative basis of the opening and closing stock. It is incumbent upon the Assessing Officer to examine the same to ensure compliance. Therefore, the decision in the case of CEIGALL is not applicable to the facts of the present case. Furthermore, the other decisions relied upon by the assessee do not pertain to the specific issue of stock valuation or the validity of jurisdiction under Section 263, and therefore, the said decisions are also distinguishable.
In light of the above discussion, we set aside the order of the Ld. PCIT with respect to the following issues: i. Discrepancy in Professional/Technical fees (Rs. 2.84 Cr not claimed in P&L). ii. Outstanding credit of Rs. 41.63 Lakhs in the name of "District Magistrate".