LIBERTY SHOES LTD,LIBERTY PURAM G.T.KARNAL ROAD KUTAIL DISTT KARNAL vs. PCIT ROHTAK HARYANA, DCIT KARNAL HARYANA

That the orders of the learned PCIT Rohtak in mentioning that orders dated 27.3.2023 u/s 143(3) r.w.s 144B for asstt. year 2018- 19 is partly set aside under Para 8 Page 18 of the Orders is erroneous, illegal and uncalled for.”

Ld.AR for the assessee submits that case of the assessee was selected for complete scrutiny and during the course of assessment proceedings, AO has made detailed inquiries and verifications of the items shown in the Balance sheet and the expenses claimed in the Profit & Loss Account by issue various notices from time to time and the assessee was asked to file the details. Ld.AR drew our attention to page 63 of the Paper Book which is the reply filed in response to show cause notice before PCIT wherein the assessee has specifically pointed out that each and every allegation made by PCIT to hold the assessment order as erroneous and prejudicial to the interest of revenue were examined by the AO and necessary replies were already filed before the AO who after considering the said replies taken a plausible view.

Ld. AR submits that ld. PCIT has doubted the genuineness of the deposits received of INR 20,67,15,734/- and further observed that AO has failed to verify the obligations of INR 92,19,43,164/-. Ld.AR submits that with respect to the security deposits, it is submitted before the AO that the assessee is a Private Limited company, engaged in the business of manufacturing and trading of all types of footwear and had taken securities from the vendors/wholesalers in accordance with the policies and agreements and the said amount is duly disclosed in the balance sheet and the respective Note No.14 to the financial statement was referred in this regard. Ld.AR submits that the financial statements were produced before the AO who after examining the same was of the view that these deposits were taken as securities against the supplies which were received under normal course of business and were adjusted against the outstanding payables of the customers/vendors therefore, there is nothing abnormal in accepting securities deposits which is common practice in this line of trade. Ld.AR drew our attention to the reply submitted before the AO during the course of assessment proceedings dated 07.02.2022, wherein the details of the securities deposits were submitted before the AO. The said reply is available at pages 99 to 103 of the Paper Book.

Regarding second allegation of ld. PCIT of non-verification of long term maturity of finance lease obligations of INR 92,19,43,164/-, ld.AR submits that AO has made specific query on this issue vide notice dt. 29.06.021, available at pages 77 to 84 of the Paper Book, and the assessee has filed the reply vide letter dated 26.07.2021, available at page 89 to 92 of the Paper Book. As per ld. AR in the said assessee submitted all the details alongwith list of creditors before the AO. Further, details were filed vide reply to show cause notice before the AO on 07.02.2022 wherein at Point No.3, the assessee has filed the details of the long-term finance lease. Thus, it cannot be said that the AO has not made any enquiry or verification on this issue for which the order could be held as erroneous and prejudicial to the interest of revenue.

Regarding increase in trade payables and short-term borrowings, Ld.AR submits that AO had made query this regard which was replied vide letter dated 29.06.2021 and 13.12.2021 which were replied by the assessee in terms of the reply filed on 26.07.2021 and 07.02.2022. Finally, the AO in the order in para 4.2 at page 3 observed that “The assessee also furnished party wise details of creditors whose outstanding balance as on 31.03. 2020 was more than 1 Crore at page no 306 to 307. Submissions filed by assessee were analyzed and Nothing adverse was found on this issue for AY 2020-21.

It is thus, submitted by Ld.AR that AO has made verification of the facts and after due application of mind reached to the conclusion that the same were in order and therefore, it cannot be said that AO has not made any query or verification of the trade payables.

Regarding short-term borrowings, Ld.AR submits that same were forming part of the final accounts and the assessee filed the details of the interest paid on long term and short term borrowings which were for the purpose of the business only and during the course of assessment proceedings, necessary details were also filed. Ld. AR submits that interest was paid on the working capital and the borrowings utilized in acquiring capital assets. Since the borrowed funds were used wholly and exclusively for the purpose of business and reached tot eh conclusion that the interest claimed was for the business and disallowed the interest u/s 14A of the Act pertaining to investments earning exempt income, therefore, it cannot be said that the assessment order is erroneous and pre-judicial to the interest of the revenue. Ld. AR thus requested the order of PCIT holding the assessment order is erroneous and pre-judicial to the interest of the revenue deserves to be reversed.

On the other hand, Ld. CIT DR vehemently supported the orders to the AO and submits that the assessee has failed to file all the relevant details before the AO and the therefore, ld. PCIT after examining the facts of the case, reached to the conclusion that the AO has not made any proper verification and investigation in the matter. He therefore, prayed that Ld. PCIT has rightly held the assessment order as erroneous and pre-judicial to the interest of the revenue and requested to confirm the order of ld. PCIT passed us/ 263 of the Act.

Heard both the parties and perused the material available on record. From the perusal of revision order of PCIT, we find that ld. PCIT has not specified the error in the assessment order. He observed in para 6 of the order that the AO has passed the assessment order without making proper inquiries or verification which should have been made and thus the order erroneous and prejudicial to the interest of revenue. However, what kind of inquiries were remained to be made or verification which was not done by the AO has not been pointed out in the revision order. Ld. PCIT has taken resort to Explaination-2 of section 263 of the Act to hold the assessment order pre-judicial and erroneous to the interest of the revenue. Ld. PCIT failed to appreciate that the AO has made the inquiries with respect to all the issues raised by ld. PCIT, more particularly, when few reasons for selection of scrutiny are “(i) claim of any other amount allowable as deduction in Schedule ‘BP’ and (ii) high creditors / liabilities.”

From the perusal of the query letters issued from time to time which are available in the Paper Book pages 77 to 88, we find that AO has made specific inquiries on the issues for which ld. PCIT alleged that no inquiry/verification was made. The assessee filed replies on various dates alongwith relevant details which all replies were filed on 26.07.2021, 11.01.2022, 07.02.2022 and 04.03.2022 during the course of assessment proceedings and available in the paper book placed before us. It is further observed that assessee has filed all the details relevant to the issues raised such as security deposits, long term maturity of finance-lease obligation, Trade payables and short-term borrowings and payment of interest vis-a- vis its allowability.

It is further observed that AO in the assessment order in para 4.1 at page after considering the submissions of the assessee on the issue of “claim of any other amount allowable as deduction in Schedule BP”, has observed that “Submissions filed by assessee were analyzed and Nothing adverse was found on this issue for AY 2020- 21”. This examination /verification includes deduction claimed of interest paid and nothing adverse was found. It is further observed that AO has already considered the interest paid to earn exempt income and made disallowance u/s 14A of the Act therefore, we find no error in the order of the AO on this issue.

Likewise in para 4.2 regarding high creditors/liabilities including the trade payables and short-term borrowings vis-à-vis increase in inventories, AO after examination of the details filed concluded that “submissions filed by the assessee were analyzed and nothing adverse was found on this issue for AY 2020-21”. This further established that the Ao has made proper enquiries and verification and take no adverse inference.

The Hon’ble Supreme Court in the case of Pr. CIT vs Shreeji Prints (P.) Ltd. reported in [2021] 130 taxmann.com 294 (SC) has held as under:- “Section 69, read with section 263, of the Income-tax Act, 1961 - Unexplained investments (Unsecured loans) - Assessment year 2013-14 - Assessee-company had received unsecured loans from two different companies - Commissioner noting that said loans were shown as investment in assessee's name in balance sheet of respective companies exercised revisionary powers and passed an order without giving an opportunity to assessee of being heard, invoking Explanation 2 to section 263 - High court by impugned order held that since Assessing Officer has made inquires in details and accepted genuineness of loans receive by assessee, such view of Assessing Officer was a plausible view and same cannot to be considered erroneous or prejudicial to interest of revenue - Whether SLP against said impugned order was to be dismissed – Held, Yes”

Hon’ble Supreme Court in the case of PCIT vs NYA International, while dismissing the SLP filed by the Revenue in Special Leave Petition (civil) Diary No.1845/2025 the Hon’ble Court vide order dated 17.02.2025 has made following observations:- “Delay condoned. This special leave petition is misconceived and is completely contrary to the law pertaining to Section 263 of the Income Tax Act, 1961. The notice under Section 148 of the 1961 Act referred to two reasons. The first reason was with regard to non-declaration of the account in ING Vysya Bank with a credit of Rs.70,13,43,319/- (Rupees seventy crores thirteen lakhs forty three thousand three hundred and nineteen only). The second reason was with regard to the claim of deduction under Section 10AA of the 1961 Act. It is accepted that a reassessment order under Section 148 read with Section 143(3) of the 1961 Act was passed. Addition was not made for the first reason. In the given facts, the assertion by the Revenue that inquiry and verification in re the bank account was not made is ex-facie incorrect. This being the position, this is not a case of failure to investigate, but as no addition was made, the Revenue can argue that it is a case of wrong conclusion and decision in the re-assessment proceedings. Therefore, to exercise jurisdiction under Section 263 of the 1961 Act, the Commissioner of Income Tax should have examined the merits and only on reaching a finding that the re-assessment order was erroneous and prejudicial to the interest of the Revenue made an addition. This is not a case of 'no inquiry and verification', but as made out by the Revenue, a case of wrong conclusion. The difference between the two situations is clear and has different consequences. This being the position, the High Court was right in dismissing the appeal preferred by the Revenue. The special leave petition is dismissed in the above terms. Pending application(s), if any, shall stand disposed of.”

The hon’ble Delhi High Court in the case of PCIT vs. Clix Finance India Ltd. reported in [2024] 473 ITR 650 (Delhi) while concurring to the findings of the Tribunal, made following observations: “27. Considering the aforesaid judicial pronouncements, it can be safely concluded that inadequacy of enquiry by the AO with respect to certain claims would not in itself be a reason to invoke the powers enshrined in Section 263 of the Act. The Revenue in the instant case has not been able to make out a sufficient case that the CIT has exercised the power in accordance with law. Rather, in our considered opinion, the facts of the case do not indicate that the twin conditions contained in Section 263 of the Act are fulfilled in its letter and spirit.

So far as the reliance placed by the CIT on Umashankar Rice Mill is concerned, the same is misplaced, particularly in light of the insertion of Explanation 2 to Section 263 of the Act, brought in place by the Finance Act, 2015. The said amendment markedly specifies various conditions to exercise the authority vested in the Commissioner under Section 263 of the Act, leaving no ambiguity in the interpretation of the said provision.

In view of the aforesaid, the appeal preferred by the Revenue is dismissed alongwith the pending application(s), if any.”

The Hon’ble Supreme Court in the case of PCIT vs. V. Con Integrated Solutions Private Ltd. reported in [2025] 173 Taxmann.com 473 (SC) while dismissing the SLP of the assessee observed as under:- “In our opinion, the order passed by the High Court, which upheld the decision of the Tribunal, is correct on facts and in law. This case does not involve a failure by the assessee officer to conduct any investigation. Instead, according to the Revenue, it is a case where the assessing officer having made inquiries erred by not making additions. The assessee does not have control over the pen of the Assessing Officer. Once the Assessing Office carries out the investigation but does not make any addition, it can be taken that he accepts the plea and stand of the assessee. In such cases, it would be wrong to say that the Revenue is remediless. The power under Section 263 of the Income Tax Act, 1961, can be exercised by the Commissioner of Income Tax, but by going into the merits and making an addition, and not by way of a remand, recording that there was failure to investigate. There is a distinction between the failure or absence of investigation and a wrong decision/conclusion. A wrong decision/conclusion can be corrected by the Commissioner of Income Tax with a decision on merits and by making an addition or disallowance There may be cases where the Assessing Officer undertakes a superficial and random investigation that may justify a remit, albeit the Commissioner of Income Tax rust record the abject failure and lapse on the part of the Assessing Officer to establish both the error and the prejudice caused to the Revenue.”

It is further observed that in the instant case, ld. CIT(A) invoked the provisions of Explanation-2 of section 263 which conferred power to the PCIT/CIT to give directions to the AO for making fresh examination and verification, which is inserted by Finance Act, 2015 in Section 263 with effect from 01.06.2015. As per this Explanation, to declare an order to be erroneous in so far as it is prejudicial to the interest of the revenue, if in the opinion of appropriate authority- (i) the order was passed without making inquiries or verifications which should have been made; (ii) the order is passed allowing any relief without inquiring into the claim; (iii) the order is not in accordance with any direction or instructions etc. issued by the Board u/s 119; or (iv) the order was not in accordance with binding judicial precedent.

In the instant case, the ld. PCIT has given direction to the AO for making further examination and verification on the issue of borrowings, trade payable and allowability of interest as business expenditure. As per the provisions of Section 263 of Income Tax Act, 1961, the PCIT/CIT is vested with the supervisory powers of suo-moto revision of any order passed by the Assessing Officer. For the said purpose, the appropriate authority may call for and examine the record of any proceedings under the Act and may proceed to revise the same provided two conditions are satisfied- (i) the order of the assessing officer erroneous; and (ii) it is prejudicial to the interest of the revenue.

If one of the condition is absent i.e. if the order of the Income- tax Officer is erroneous but is not prejudicial to the revenue or if it is not erroneous but it is prejudicial to the revenue, action cannot be taken u/s 263 of the Act as has been held by Hon’ble Supreme Court in Malabar Industrial Co. Ltd. vs. CIT reported in (2000) 243 ITR83 (SC) and followed by Hon’ble Delhi High Court in the case of CIT vs Vikas Polymers reported in 194 Taxman 57(Delhi).

The Hon’ble Supreme Court in Malabar Industrial Co. Ltd. (supra) has held that the phrase 'prejudicial to the interests of the revenue' must 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 interest of the revenue. For example, when an Income-tax Officer adopted one of the courses permissible in law and it has resulted in loss of revenue; or where two views are possible and the Income-tax Officer has taken one view with which the Commissioner does not agree, it cannot be held as an erroneous order which is prejudicial to the interest of the revenue, unless the view taken by the Income-tax Officer is unsustainable in law. This principal has been again reiterated by Hon’ble Court in its subsequent judgment in the case of CIT vs Max India Ltd. reported in 295 ITR 282 (SC).

The Hon’ble Delhi High Court in CIT V/s Vikas Polymers (supra), further observed that as regards the scope and ambit of the expression "erroneous", Hon’ble Bombay High Court in CIT vs. Gabriel India Ltd. reported in (1993) 203 ITR 108 (Bom) held with reference to Black's Law Dictionary that an "erroneous judgment" means "one rendered according to course and practice of Court, but contrary to law, upon mistaken view of law; or upon erroneous application of legal principles" and thus it is clear that an order cannot be termed as "erroneous" unless it is not in accordance with law. If an Income-tax Officer acting in accordance with law makes a certain assessment, the same cannot be branded as "erroneous" by the Commissioner simply because, according to him, the order should have been written differently or more elaborately. The Section does not visualize the substitution of the judgment of the Commissioner for that of the Income-tax Officer, who passed the order unless the decision is not in accordance with law. Further, each and every erroneous order cannot be the subject matter of revision because the second requirement also must be fulfilled. There must be material on record to show that tax which was lawfully leviable has not been imposed as held in Gabriel India Ltd.(supra). However, the expression "prejudicial to the interest of the revenue", as held by the Supreme Court in the Malabar Industrial Co. Ltd. (supra), is not an expression of art and is not defined in the Act and, therefore, must be understood in its ordinary meaning. The Commissioner's exercise of revisional jurisdiction under the provisions of Section 263 cannot be based on whims or caprice. It is trite law that it is a quasi-judicial power hedged in with limitation and not an unbridled and unchartered arbitrary power. The exercise of the power is limited to cases where the Commissioner on examining the records comes to the conclusion that the earlier finding of the Income-tax Officer was erroneous and prejudicial to the interest of the revenue and that fresh determination of the case is warranted. There must be material to justify the Commissioner's finding that the order of the assessment was erroneous insofar as it was prejudicial to the interest of the revenue.

The Hon’ble Delhi High Court, in the case of Vikas Ploymers (supra) further observed that there is a fine though subtle distinction between "lack of inquiry" and "inadequate inquiry". It is only in cases of "lack of inquiry" that the Commissioner is empowered to exercise his revisional powers by calling for and examining the records of any proceedings under the Act and passing orders thereon. In Gabriel India Ltd. (supra), it was expressly observed: - "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-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 [Parashuram Pottery Works Co. Ltd. vs. ITO, (1977) 106 ITR 1 (SC)]. It was further observed as under: - "From the aforesaid definitions as it is clear that an order cannot be termed as erroneous unless it is not in accordance with law. If an Income-tax Officer acting in accordance with law makes a certain assessment, the same cannot be branded as erroneous by the Commissioner simply because, according to him, the order should have been written more elaborately. This section does not visualize a case of substitution of the judgment of the Commissioner for that of the Income tax Officer, who passed the order unless the decision is held to be erroneous. Cases may be visualized where the Income-tax Officer while making an assessment examines the accounts, makes enquiries, applies his mind to the facts and circumstances of the case and determines the income either by accepting the accounts or by making some estimate himself. The Commissioner, on perusal of the records, may be of the opinion that the estimate made by the officer concerned was on the lower side and left to the commissioner he would have estimated the income at a figure higher than the one determined by the Income-tax Officer. That would not vest the Commissioner with power to re-examine the accounts and determine the income himself at a higher figure. It is because the Income-tax Officer has exercised the quasi judicial power vested in him in accordance with law and arrived at conclusion and such a conclusion cannot be termed to be erroneous simply because the Commissioner does not feel satisfied with the conclusion. x x x x There must be some prima facie material on record to show that tax which was lawfully exigible has not been imposed or that by the application of the relevant statute on an incorrect or incomplete interpretation a lesser tax than what was just has been imposed.

The Hon’ble Supreme Court in the case of CIT vs Amitabh Bachchan reported in 69 Taxmann.com 170 held that the power of appeal and revision is contained in Chapter XX of the Act which includes section 263 that confers suo-motu power of revision in the Commissioner. The different shades of power conferred on different authorities under the Act has to be exercised within the areas specifically delineated by the Act and the exercise of power under one provision cannot trench upon the powers available under another provision of the Act. In this regard, it must be specifically noticed that against an order of assessment, so far as the revenue is concerned, the power conferred under the Act is to reopen the concluded assessment under section 147 and/or to revise the assessment order under section 263. The scope of the power/jurisdiction under the different provisions of the Act would naturally be different. The power and jurisdiction of the revenue to deal with a concluded assessment, therefore, must be understood in the context of the provisions of the relevant sections. While doing so, it must also be borne in mind that the legislature had not vested in the revenue any specific power to question an order of assessment by means of an appeal. Regarding applicability of Section 263, what has to be seen is that a satisfaction that an order passed by the Authority under the Act is erroneous and prejudicial to the interest of the revenue is the basic precondition for exercise of jurisdiction under section 263. Both are twin conditions that have to be conjointly present. Once such satisfaction is reached, jurisdiction to exercise the power would be available subject to observance of the principles of natural justice which is implicit in the requirement cast by the section to give the assessee an opportunity of being heard. Further, there could be no doubt that so long as the view taken by the Assessing Officer is a possible view, the same ought not to be interfered with by the Commissioner under Section 263 merely on the ground that there is another possible view of the matter. Permitting exercise of revisional power in a situation where two views are possible would really amount to conferring some kind of an appellate power in the revisional authority. This is a course of action that must be desisted from.

The Hon’ble Bombay High Court in Moil Ltd. Vs. CIT reported in 81 Taxmann.com 420 has observed that if a query is raised during the assessment proceedings which was responded to by the assessee, the mere fact that the query was not dealt with in the assessment order then it would not lead to a conclusion that no mind has been applied to it and the Assessing Officer is not expected to raise more queries, if he was satisfied about the admissibility of claim on the basis of the material and the details supplied.

In the instant case, Ld. Pr. CIT invoked the Explanation 2 section 263 of the Act to hold the order passed is without making enquiries and verification. However, as observed above in the present case, detailed enquiries and verifications were made and after considering the submissions of the assessee, AO drawn the conclusion which is forming part of the order and reproduced herein above where the AO has not taken any adverse view.

In view of these facts and detailed discussion made herein above, in our considered opinion, Ld. Pr. CIT has failed to appreciate the fact that proper enquiry and examination was made in the instant case and therefore, there is no error in the order of the AO thus, it is neither erroneous nor pre-judicial to the interest of the Revenue. Accordingly, we quash the order passed by Ld. Pr. CIT u/s 263 of the Act wherein the assessment order was held as erroneous and pre- judicial to the interest of the Revenue. Hence, Grounds of appeal raised by the assessee are allowed.

In the result, the appeal of the assessee is allowed. Order pronounced in the open Court on 29.01.2026.