DHARAM CHAND AGARWAL,KANPUR (UTTAR PARDESH) vs. PRINCIPAL COMMISSIONER OF INCOME TAX, KANPUR- I

BECAUSE the order passed by Pr. CIT is contrary to the provisions of section 263 of the Act and the view taken by the Id. Pr. CIT comes in direct conflict with the judicial precedents.

BECAUSE the order appealed against is contrary to the facts, law and principles of natural justice.

BECAUSE each ground taken in appeal is mutually exclusive and without prejudice to each other.

The appellant craves leave to add, delete or modify any of the grounds before or at the time of hearing of appeal.”

The facts of the case are that the ld. PCIT observed after perusal of assessment records, that the case of the assessee had been reopened under section 148 of the Income Tax Act on account of the fact that a survey action under section 133A had been carried out on 9.10.2015 in the case of M/s Sukuma Exports Ltd. Mumbai and during the course of this survey proceedings, various incriminating documents had been found and impounded which contained the ledger extracts of Dharam Chand Agarwal A.Y. 2016-17 various entities related to sales and purchases in the books of M/s Sukuma Exports Ltd,. Among these was a ledger of M/s Bengal Agency, on perusal of which it was found that M/s Sukuma Exports Ltd. had entered into a sale and purchase transaction with M/s Bengal Agency, a proprietary concern of the assessee in that M/s Sukuma Exports Ltd., had sold sugar on 14.05.2015 with Invoice No.110 for a sum of Rs. 6,81,96,33/- against which payment had been made of Rs. 7,81,96,330/- . Subsequently M/s Sukuma Exports Ltd., had on 16.05.2015 transferred a sum of Rs. 1 Crore to ‘settlement on sale’ account while M/s Bengal Agency had transferred the same advanced amount to, ‘purchase account’ on 31.03.2016. The ld. AO had opined that the same showed that M/s Bengal Agency had increased purchases by Rs. 1 Crore and reduced its gross profits by Rs. 1 Crore. Furthermore, he held that the assessee had not corrected this wrong action through disclosure in the ITR and or paid the taxes thereon for A.Y. 2016-17. The ld. PCIT observed that on a perusal of the assessment records, she found that the ld. AO had failed to make an addition of Rs. 1 Crore on account of inflated purchases while completing the assessment. Accordingly, notice under section 263 of the Act was issued to the assessee on 18.03.2024. In response to this notice, the assessee filed a reply on 29.03.2024 through e-proceeding. A copy of the said submission is placed in the paper book of the assessee. The ld. PCIT extracted a portion of the submission made before her in which the assessee had submitted that the statement of accounts of M/s Dharam Chand Agarwal in the books of the supplier had revealed that the supplier had debited Rs. 100 Lacs in the assessee’s account by crediting settlement on sale (income). Simultaneously, in the books of accounts of the assessee, the account of the supplier M/s Sukuma Exports Ltd. had been credited by debiting purchase account of the assessee of the assessee i.e. expenses account. Thus, the same had been taxed in the hands of the supplier leaving no scope for it to be taxed again in the hands of the assessee as no income had been taxed twice. The ld. PCIT considered this submission and held it to be unacceptable, because in her opinion, the supplier i.e. M/s Sukuma Exports Ltd., had credited Rs. 100 Lacs in settlement on sale account and not in income account. On the other hand, the Dharam Chand Agarwal A.Y. 2016-17 assessee had inflated his purchases for Rs. 100 Lacs and thus reduced net profit by the same account. Accordingly, there was no double taxation and since it was clear that the assessment order passed by the ld. AO was erroneous in so far as it was prejudicial to the interest of Revenue, the ld. PCIT in exercise of her powers under section 263 of the Act set aside the assessment order passed by the ld. AO and directed that a fresh assessment be framed after considering all facts of the case and the observations made by her and after providing an opportunity for the assessee to be heard.

The assessee is aggrieved at this order under section 263 passed by the ld. PCIT. Sh. Pradeep Kumar Kapoor, C.A. (hereinafter referred to as the ld. AR) submitted that the assessee was a Sugar Trader, who was running a Trade in the name of M/s Bengal Agency. He had purchased sugar from wholesalers for which he had made an advance of Rs. 7.81 Crores and the seller had drawn up the bill of Rs. 6.81 Crores and placed a sum of Rs. 1 Crore in settlement of sale account. It was submitted that this was because there was a dispute on the quality of the sugar being supplied. The assessee had debited the expenditure to profit and loss account. It was submitted that the case had been reopened under section 148 on this ground but after examining the issue, the ld. AO did not make any addition on this account. The ld. AR drew our attention to page 3 of the assessment order passed under section 147 r.w.s. 144B of the Income Tax Act to demonstrate that the AO had enquired into the matter and arrived at a conclusion that a sum of Rs. 1 Crore was not required to be taxed. The ld. AR submitted that the ld. PCIT had passed an order under section 263 only on account of the fact that the AO had not made the addition. She had not stated that no enquiry had been done. However, the ld. AO had accepted the assessee’s explanation after thorough enquiry. Therefore, it was submitted that no case was made out for declaring the order erroneous or prejudicial to Revenue. The ld. AR also drew our attention to the judgment of the ITAT Mumbai Bench in the case of Aishwarya Rai Bachchan vs. PCIT-8, Mumbai (2022) 135 taxman.com 335 (Mumbai-Trib) wherein the Mumbai Bench of the Tribunal had held that the PCIT could not revise an order where the Dharam Chand Agarwal A.Y. 2016-17 very basis of the reasons recorded by the AO to reopen the case was not added back in the re-assessment proceedings, because the primary reason to believe that the income of the assessee had escaped assessment had failed and therefore, such re-assessment order could not be treated as a valid order in the eyes of law. Since the order passed by the ld. AO was unsustainable in law, the said invalid and illegal order could not be the subject matter of proceedings under section 263 of the Act. For the said decision, the Coordinate Bench had placed reliance on the decision of the Hon’ble Bombay High Court in the case of CIT vs. Jet Airways (I) Ltd., (2010) 195 taxman 117. The ld. AR also invited our attention to the decision of the ITAT Lucknow ‘A’ Bench in the case of Inder Kumar Bachani (HUF) vs. ITO-3(4), Kanpur (2006) 99 ITD 621 (Luck) wherein the Lucknow Bench of the Tribunal had held that where the assessment order passed under section 147 r.w.s. 143(3) was itself illegal and void, the ld. CIT had no justification to invoke jurisdiction under section 263 against such void and non-est order. The ld. AR also placed reliance on the judgment of the ITAT Delhi Bench ‘G’ in the case of Shobhit Goel (HUF) vs. PCIT, Faridabad in wherein the Coordinate Bench had held that the validity of an order passed under section 263 of the Act on the ground that re- assessment order from which the said proceedings emerged was non-est, can be challenged in appellate proceedings under section 263 of the Act and had proceeded to declare the proceedings under section 263 as invalid, on account of their considered opinion, that the notice issued under section 148 in the case of that assessee was bad in law and consequently the order passed under section 147 r.w.s. 144B was invalid. Therefore, on the strength of these judgments, the ld. AR submitted that the order under section 263 was deserving of being quashed.

We have duly considered the facts and circumstances of the case and the legal precedents cited by the ld. AR. We must first take up ground no. 1 of the assessee’s appeal which challenges the order under section 263 of the Act on account of the assessee’s contention that there were infirmities in the initiation and conclusion of the re-assessment proceedings and therefore, the same could not have been subjected to revision under section 263 of the Act. For this proposition, the ld. AR has relied upon the decision of the Coordinate Bench in the case of Aishwarya Rai Bachchan vs. PCIT-8, Mumbai (supra). In the said judgment, the Coordinate Bench has relied upon the judgment of the Hon’ble Bombay High Court in the case of CIT vs. Jet Airways (I) Ltd., (supra) which was the jurisdictional High Court for the Mumbai Bench. However, we note that the judgment of the Hon’ble Mumbai High Court in the aforesaid case does not represent the settled Dharam Chand Agarwal A.Y. 2016-17 law on the said subject. Contrary view has been taken by several Courts in the cases of Majinder Singh Kang vs. CIT (2012) 344 ITR 358, CIT vs. Mehak Finvest (P.) Ltd., (2014) 52 taxman.com51; Balbir Chand Maini vs. CIT (2011) 12 taxman.com 276 (Pun. & Har.) and N. Govinda Raju vs. ITO (2015) 60 taxman.com 333. Furthermore, in the case of Pr. CIT vs. Jakhotia Plastics (P.) Ltd. (2018) 94 taxman.com 89, the Hon’ble Delhi High Court held that the interpretation of the expression, ‘and also’ given by the Hon’ble Bombay High Court in the case of CIT vs. Jet Airways (I) Ltd., (2010) 195 taxman 117, which was followed in Ranbaxy Laboratories Ltd., vs. CIT (2011) 12 taxman.com 74 (Delhi) and CIT (Exemption) vs. Monarch Educational Society (2017) 79 taxman.com 43 (Delhi), to mean that if item of escaped income on the basis of which reasons were recorded for issue of notice under section 148 was not added in the assessment, then addition in respect of, “other item of income” discovered during reassessment proceedings would be invalid, was not free from doubt as such interpretation undermined the essential objective of section 147 and, “unduly restricts and narrows it”. It was further held that the interpretation given by the Hon’ble Karnataka High Court in the case N. Govinda Raju vs. ITO (2015) 60 taxman.com 333 (Karnataka) was a more accurate one. Accordingly, the Hon’ble Delhi High Court referred the matter to a Full Bench of the Hon’ble High Court and the SLP filed by the assessee in the matter was dismissed by the Hon’ble Supreme Court. Therefore, since the judgment of the Hon’ble Bombay High Court in the matter of Jet Airways (I) Ltd., does not represent settled law on the subject, it cannot be the basis to hold that the assessment proceedings were invalid and therefore, could not be the subject matter of a proceeding under section 263. We further note that even otherwise, the issue in Jet Airways (I) Ltd., was not the validity of the assessment order but whether any addition could be made on, “other item of income” which did not form the basis of reasons recorded and sanction obtained for, if the item of income on which the reasons were recorded and sanction was obtained was not assessed in the re-assessment order. Similarly, the other view by the Hon’ble Karnataka High Court and the Punjab & Haryana High Court in the cases of N. Govinda Raju vs. ITO Dharam Chand Agarwal A.Y. 2016-17 (supra) and Majinder Singh Kang vs. CIT (supra) also concerned whether other items of income discovered during the course of re-assessment could be added irrespective of whether the main item of income, which was the basis of reopening and sanction was not added to the total income. Thus, nothing emerges from the order of the Hon’ble Bombay High Court in Jet Airways (I) Ltd., from which it could be concluded that the final order passed by the Assessing Officer in closure of proceedings initiated by issue of notice under section 148, would be invalid and bad in law, only because no addition had been made on account of the subject on which the reasons to believe were drawn up and sanction accorded. We also note that in the case of New Jagat Textiles Mills (P.) Ltd., vs. CIT (2006) 282 ITR 399 (Guj), the Hon’ble Gujarat High Court has held that if the assessee fails to file return as required by a notice under section 139(2), the ld. AO is bound to make an assessment of the total income or loss of the assessee to the best of his judgment under section 144 of the Act. Taking analogy from the same, if the assessee responds to the notice under section 148 and files a return of income and the ld. AO subsequently issued notices under section 143(2) and 142(1) to conduct an assessment, then there is no infirmity in his decision to pass an order to conclude such proceedings, even if it be to accept the income returned by the assessee. Such an order cannot be called invalid only because the addition was not made and therefore, it cannot be said that the jurisdiction of the Commissioner to initiate proceedings under section 263 is ousted only because the addition was not made on the issue on which the case was reopened. It must be remembered that section 263 of the Income Tax Act is a provision that empowers the revenue authorities to re-visit and rectify any procedural shortcomings or erroneous decisions made by Assessing Officers and therefore, the failure to make an addition on account of incorrect appreciation of facts or law or on account of inadequate enquiry would be a subject open to the jurisdiction of the Commissioner under section 263. It is pertinent to point out that in the matter of New Jagat Textiles Mills (P.) Ltd., vs. CIT (supra), the Hon’ble Gujarat High Court held that even a note in the order-sheet dropping a proceeding was both erroneous and prejudicial to the revenue’s Dharam Chand Agarwal A.Y. 2016-17 interest and therefore, could validly be the subject matter of a proceedings under section 263. In view of the aforesaid legal precedents and discussion, we therefore, hold that there is no merit in ground no.1 that seeks to challenge the proceedings under section 263 on account of alleged infirmities in the underlying order passed under section 147 r.w.s. 144B and accordingly, we dismiss this ground as not maintainable.

However, to examine the issue on merits, it is seen on examination of the paper book filed by the assessee that there are certain emails that were exchanged between the parties between 8th May, 2015 and 20th April, 2016, which throw light upon a dispute relating to the quality of the sugar supplied and consequently a demand for refund of an advance of Rs. 1,10,00,000/- and a rejection of the said demand alongwith a claim for a further Rs. 7 Lacs by way of payments. It is also seen from the paper book submitted by the assessee that the copy of the bank account statement of HDFC bank in A/c No. 05288170000028 highlighting payments to M/s Sukuma Exports Limited, copy of the purchase register, copy of the stock register of sugar, copy of railway receipts evidencing inward delivery of sugar, copy of Tax Invoice No.110 for purchases made from M/s Sukuma Exports Limited and a copy of the ledger account of M/s Sukuma Exports Limited were also filed before the ld. AO and were part of the assessment records. In the circumstances, it cannot be said that the ld. AO did not examine the issue. We also note that from a perusal of the assessment order that the ld. AO has discussed the fact of payments made to the supplier and noted that after considering all the facts of the case and the email communications between the seller and the assessee, he was determining the total income of the assessee at the amount of returned income. Hence it is quite clear that not only were these materials placed before the Assessing Officer, but they were examined by him and after examination he had come to a considered decision that the addition was not required to be made. It appears that vide its letter dated 25th February, 2022, the assessee had pointed out that the supplier had supplied sugar of an inferior quality on account of which the assessee had asked for a refund of Rs. 100 Lacs sent in advance but the supplier Dharam Chand Agarwal A.Y. 2016-17 had denied the claim and they had instead asked for a sum of Rs. 7 Lacs more to square up the transaction, leaving the assessee with no option except but to write off the excess consideration transferred to the supplier. The supplier had offered this amount to tax as part of income from ‘settlement on sale’ and the assessee has claimed this amount as an expenditure in his books. The evidence with respect to the transactions have also been furnished before the ld. AO, as listed above. In the circumstances, as pointed out by the assessee, there does not appear to be any reason to hold that the ld. AO had not enquired into the matter and nor has it been alleged so. Instead, the ld. PCIT has questioned the failure to add this amount of Rs. 1 Crore that had been given as advance and subsequently shown as purchases. We note that since there was nothing further left to be enquired into, the order of the ld. PCIT restoring the matter back to the file of the ld. Assessing Officer was uncalled for. The ld. PCIT has not pointed out what enquiries the AO did not do and how the failure to do such enquiries rendered the order prejudicial to Revenue. While it is true that the reply of the assessee to the notice of the PCIT, focused more upon what the PCIT could not do rather than in placing the facts of the case before her, the fact remains that in view of the information furnished and the contemporaneous evidences placed on record in the form of emails that demonstrated the dispute on account of quality of supply and the amount that remained to be refunded to the assessee, the decision of the AO to accept the submission of the assessee that it was forced to write off the advance of Rs. 1 Crore is not unreasonable. We are therefore in agreement with the ld. AR that where the ld. AO, after making enquiries, has taken a view that an addition was not required to be made on a particular issue, the PCIT was not justified in revising the said order only because she did not agree with the findings of the ld. AO consequent to the enquiry. We believe that before the order could be held to be prejudicial to the Revenue, it had to be shown that the advance of Rs. 1 Crore that had been written off, and thereafter debited to the profit and loss account, was not required to be written off and since the ld. PCIT could not bring any material on record to point out any error in the decision of the Assessing Officer, we are of the opinion that the Dharam Chand Agarwal A.Y. 2016-17 power under section 263 was not properly exercised in the matter and no case was made out for revision. We note that a similar view has been taken by the Hon’ble Bombay High Court in the matter of CIT Central-3 vs. Nirav Modi (2017) 390 ITR 292 (Bom). Therefore, we quash the order of the ld. PCIT on this account. Accordingly, ground nos. 2 to 8 are accordingly allowed. Ground No. 9 has not been demonstrated in argument and is therefore dismissed, ground nos. 10 and 11 do not require a decision and are therefore, dismissed as infructuous.

In the result, the appeal of the assessee is partly allowed. Order pronounced on 31.12.2025 in the Open Court.