Loading judgment…
Facts
The assessee, engaged in jewellery business, filed a revised return for AY 2017-18. The case was selected for scrutiny due to a large cash deposit (Rs.49,06,000/-) during demonetization. The Assessing Officer (AO) passed an order under Section 143(3) by rejecting the books and estimating the Gross Profit (GP), making an addition of Rs.14,77,417/-. Subsequently, the PCIT initiated revision proceedings under Section 263, deeming the AO's order erroneous and prejudicial for not making proper inquiries into the cash deposit and failing to tax it under Section 115BBE.
Held
The Tribunal found that the AO had conducted a detailed inquiry, calling for explanations and examining evidence, and partially accepted the assessee's claims by enhancing the GP. Distinguishing between 'lack of inquiry' and 'inadequate inquiry', the Tribunal held that if the AO had undertaken some inquiry and taken a reasonable, plausible, and legally sustainable view, the PCIT could not invoke Section 263 merely on a difference of opinion. Citing Supreme Court precedents, the Tribunal concluded that the PCIT's finding that the AO's order was erroneous and prejudicial was incorrect.
Key Issues
Whether the PCIT correctly invoked revisional powers under Section 263, and if the AO's assessment order was erroneous and prejudicial to the revenue, considering the extent of inquiry conducted by the AO regarding cash deposits during demonetization.
Sections Cited
263, 143(3), 142(1), 115BBE, 68, 119, 133(6), 144A, 92CA
AI-generated summary — verify with the full judgment below
Before: SHRI SANJAY GARG & SHRI BIJAYANANDA PRUSETH
आदेश / O R D E R PER BIJAYANANDA PRUSETH, AM: These appeals by the assessee emanate from the orders passed under section 263 of the Income-tax Act, 1961 (in short, ‘the Act’) by the learned Principal Commissioner of Income Tax, Valsad [in short, ‘ld. PCIT’], dated 16.03.2024 for assessment year (AY) 2017-18. 2. Grounds of appeal
1. raised by the assessee are as under: “1. Learned Pr.CIT erred in passing an order u/s 263, when the jurisdictional conditions were not satisfied.
2. Learned Pr.CIT erred in assuming jurisdiction u/s 263 even though a detailed inquiry was carried out by the Assessing Officer on the issue pertaining to the cash deposits made by the appellant during the year under consideration.
3. The learned Pr. CIT erred in assuming jurisdiction u/s 263 merely on the basis of difference of opinion with the Assessing Officer.
/AY.2017-18 Bharatkumar Ranchodbhai Soni 4. On the facts and in the circumstances of the case as well as low on the subject, the learned Pr.CIT has erred in invoking his powers/authority under section 263 of the Income Tax Act,1961, and the order passed by him u/s 263 is without jurisdiction.
On the facts and in the circumstances of the case as well as law on the subject, the learned Pr.CIT has failed to appreciate that the assessment order passed byLd.AO Ward 1, Navsari, u/s 143(3) of the Act dated 30.12.2019 (hereinafter referred to as the AO) was neither erroneous nor prejudicial to the interest of the revenue and thus the very invocation of power under section 263 is wholly illegal and beyond jurisdiction.
6. On the facts and in the circumstances of the case as well as law on the subject, the learned Pr.CIT has erred in invoking powers under section 263 and passing order holding the assessment order to be “erroneous” and “prejudicial” without even justifying, which of the two phraseology used in section 263 is applicable and as to how the order of assessment is erroneous causing loss to the revenue.
7. On the facts and in the circumstances of the case as well as law on the subject, the learned Pr.CIT has erred in stating that AO has failed to make proper enquiry into the facts of the proceeding u/s143(3) and is erroneous as well as prejudicial to the interest of Revenue and in cancelling the assessment with the direction to the AO to reframe the assessment.
On the facts and in the circumstances of the case as well as law on the subject, the learned Pr.CIT has failed to appreciate that assessment in accordance with the law and the learned Pr.CIT could not have held the said order to be erroneous and prejudicial to the inters of Revenue within the meaning of Section 263 of the Act.
9. On the facts and in the circumstances of the case as well as law on the subject, in any event, in response to the notice under Section2 63, the appellant had made detailed submissions on the issue that had been taken up in the notice u/s 263 and for the reason that the learned Pr.CIT has failed to carry out his statutory obligation to deal with the decide such issue, the order under Section 263 stands wholly vitiated and the same deserves to be quashed.
10. For various reasons and on different grounds, the order u/s 263 passed by the Pr.CIT is bad in fact and law of the case and requires to be set aside.
On the facts and circumstances of the case as well as law on the subject, the learned Principal Commissioner of Income Tax has erred in passing the impugned revision order u/s263 of the IT Act, 1961, by holding that the original assessment order passed by the Ld. AO Ward 1, Navsari, u/s 143(3) of the Act dated 30.12.2019 is erroneous and prejudicial to the interest of the revenue.
/AY.2017-18 Bharatkumar Ranchodbhai Soni 12. On the facts and circumstances of the case as well as law on the subject, the learned Principal Commissioner of Income-tax has failed to appreciate that the assessment order was neither erroneous nor prejudicial to the interest of the revenue and thus order u/s263 is bad in law, illegal, ultra vires, in excess of and/or in want of jurisdiction and otherwise void.
It is therefore prayed that the original assessment order u/s 143(3) of the Act was passed after full satisfaction of the LD. A. Hence, the impugned revision order passed u/s 263 may please be quashed.
Above grounds of appeal
s are without prejudice to and are independent of each other.
15. Appellant craves permission to add, amend, revise, substitute or delete any or all ground(s) of the appeal, if deemed necessary at the time of hearing of the appeal.”
3. Facts of the case in brief are that assessee filed revised return of income for AY.2017-18 on 30.10.2017, declaring total income of Rs.10,12,150/-. The assessee is engaged in jewellery business during the year under consideration. The case was selected for scrutiny under CASS on the issue of “Large cash deposit during demonetization period”. The Assessing Officer (in short, ‘AO’) issued notice u/s 143(2) on 09.08.2018 and notices u/s 142(1) on 29.01.2019, 04.10.2019, 18.12.2019. The AO also issued show cause notice dated 23.12.2019. Thereafter, order u/s 143(3) was passed on 30.12.2019 by making addition of Rs.14,77,417/- by estimating the gross profit (GP) at 6.74% instead of 4.24% shown in the return of income. The total income was determined at Rs.24,89,570/- against the returned income of Rs.10,12,150/-. 3.2 Subsequently, the ld. PCIT called for the record and examined the same. He found that the order passed by the AO u/s 143(3) of the Act was erroneous and prejudicial to the interests of revenue u/s 263 of the Act on the grounds that /AY.2017-18 Bharatkumar Ranchodbhai Soni no proper inquiries or verifications of the cash deposit was made by the AO. The AO allowed relief without making inquiry into the claim of the assessee. The assessee had deposited cash of Rs.49,06,000/- on 10.11.2016 in his bank account maintained with Central Bank of India. Out of the said deposit, Rs.47,06,000/- was deposited in the form of Specified Bank Notes (SBN). The assessee had submitted that the cash deposited during demonetization period was part of the business receipt and sales. The opening cash balance as on 01.04.2016 was Rs.6,80,737/- and the closing cash on hand on 31.10.2016 was Rs.23,06,985/-. In this period, assessee had shown cash receipt of Rs.81,11,810/- from sales and cash withdrawals of Rs.9,48,000/-. However, in the period from 01.11.2016 to 08.11.2016, assessee had shown substantial cash receipt of Rs.28,01,542/- from cash sales. These cash were deposited during the demonetization period. The assessee had not explained the reason for abnormal increase in cash sales in this period with supporting documentary evidence. The AO had asked assessee to give name and complete address of parties from whom / to purchases and sales exceeding Rs.1,00,000/- was made during the year. The assessee has only submitted photocopy of sale bills on which only names of the parties were mentioned but no addresses were available. Hence, the AO has not verified the genuineness and creditworthiness of the sales as claimed by the assessee. Further, assessee has not verified the cash deposit as per the Instruction of CBDT vide No.3/2017, dated 21.02.2017, 04/2017 dated 03.03.2017, SOP dated 15.11.2017 and 05.03.2019 and internal guidance note issued vide /AY.2017-18 Bharatkumar Ranchodbhai Soni F.No.225/145/2019-ITA-II, dated 13.06.2019. The whole cash deposit of Rs.49,06,000/- was unexplained, which should have been taxed u/s 115BBE of the Act. However, the AO wrongly accepted the above unexplained amount as inflated sales and applied GP @ 6.74%. Thus, the order was against the interest of revenue. In view of these facts, the ld. PCIT issued show cause notice u/s 263 of the Act on 17.03.2022 to the assessee. Since assessee did not respond the above notice, the ld. PCIT passed u/s 263 of the Act on 27.03.2022, directing to AO for making fresh assessment after making proper inquiries on the impugned issue. The ITAT set aside the above order and restored it to the file of ld. PCIT because the 263 order was passed without granting fair and proper opportunity to the assessee. Hence, another show cause notice was issued by the ld. PCIT on 18.12.2023, requesting assessee to submit reply on the issue stated above. The assessee filed reply on 22.12.2023, which is at pages 5 to 23 of the revision order u/s 263 of the Act. In the submission, the assessee stated that he had furnished all details regarding the source of the cash deposit to the AO from time to time. The main increase in cash sales was due to ensuing festival of Diwali. The assessee has given the details of the notices and show cause notice issued by the AO from time to time and the replies furnished by him. It was accordingly submitted that the AO has taken a possible view, with which the ld. PCIT does not agree. Further, the assessment order pertaining to cash deposit during demonetization period were passed after obtaining necessary approval from the JCIT, Navsari u/s 144A of the Act. Thus, two offices have applied their mind /AY.2017-18 Bharatkumar Ranchodbhai Soni before passing the assessment order. It was also submitted that the impugned cash deposit was made from opening cash balance at the beginning of demonetization period, which, in turn was out of cash sales made by the assessee and earlier cash withdrawals. Since the AO has taken a reasonable, plausible and legally sustainable view, the order cannot be treated as erroneous. Further, every loss of revenue as a consequence of the order of AO cannot be treated as prejudicial to the interests of revenue, if the AO has taken one plausible view with which the ld. PCIT does not agree. It was also submitted that if an inquiry was made by AO, which has been considered to be inadequate by the ld. PCIT, the same cannot make the order of AO erroneous. The assessee had also relied on the decisions in case of Malabar Industrial Co. Ltd. vs. CIT, 243 ITR 83 (SC), CIT vs. Sunbeam Auto Ltd., 332 ITR 167 (Del), CIT vs. Gabriel India Ltd., 203 ITR 108 (Bom) and a plethora of decisions where the Hon’ble Courts have allowed relief to the assessee on similar facts. Accordingly, it was requested not to invoke provisions of section 263 of the Act.
The ld. PCIT considered the submission of the assessee and held that the order passed by the AO on 30.12.2019 was without making any independent inquiry on the purchaser parties whose names were reflected in the sale bills but proper addresses were not given. The assessee also did not give reasons or details that there was similar abnormal increase in the corresponding period of the immediately preceding assessment year. The ld. PCIT also observed that the AO has not accepted explanation of the assessee and therefore he rejected the /AY.2017-18 Bharatkumar Ranchodbhai Soni books of account and added GP on turnover to cover up abnormal rise in cash sale and corresponding cash deposit. If genuine sales are the source of cash deposit, the assessee should have provided sale bills with verifiable address or other evidence in support of his claim. Instead of treating the cash deposit as unexplained, the AO made addition by estimating the GP on the cash sales by treating the same as inflated sales. The ld. PCIT, therefore, observed that the AO failed to appreciate the correct interpretation of law on the issue. He has relied on the decision in case of CIT vs. Nagesh Knitwear Pvt. Ltd. & Ors., 345 ITR 135 (Del). He has also relied on decisions of Hon’ble Supreme Court in case of Malabar Industrial Co. Ltd. (supra) and held that the order is both erroneous and prejudicial to the interests of revenue. The AO should have added Rs.49,06,000/- u/s 68 of the Act, which he failed to do. He held that the order passed u/s 143(3) on 30.12.2019 by the AO is erroneous in so far as prejudicial to the interests of revenue u/s 263 of the Act. He directed AO (i) to conduct proper and meaningful inquiry about the source of cash deposit of Rs.49,06,000/- vis-à-vis cash sales and cash books, (ii) verify sale bills and make independent inquiry by issuing notice u/s 133(6) and (iii) record statements of purchase parties on random basis and verify whether sales are genuine or not.
5. Aggrieved by the order of PCIT, the assessee filed appeal before the Tribunal. The learned Authorized Representative (ld. AR) of the assessee filed two paper books containing 497 and 43 pages respectively, which includes written replies to the AO during the original assessment proceedings u/s 143(3), notices /AY.2017-18 Bharatkumar Ranchodbhai Soni u/s 142(1) including the questionnaire on the impugned cash deposit of Rs.49,00,000/-, reply of assessee to the AO in response to various notices u/s 142(1) and the show cause notice and reply to the notice u/s 263 issued by the ld. PCIT. The ld. AR submitted that during the original assessment proceedings u/s 143(3), the appellant had filed reply explaining that the cash deposit was out of the cash sales made during the year. The sales upto October, 2016 was Rs.26,02,122/- and during the period 01.11.2016 to 08.11.2016, it was Rs.28,01,452/-. The appellant had provided all necessary details to substantiate the source of the cash deposit during the assessment proceedings. The appellant had also furnished stock register, audited books of account, copy of VAT returns filed before VAT Authority, cash bill, sales register for October and November, 2016 wherein names and addresses of the customers to whom cash sales are duly reflected. The AO duly compiled cash sales of FY.2015-16 and 2016-17 respectively and noted that cash sales in FY.2015-16 was Rs.1,54,85,211/- whereas it was Rs.1,11,07,682/- in FY.2016-17. The AO rejected the books of account and estimated additional income @ 2.5% of total turnover and accordingly added Rs.14,77,417/- to the total income. The ld. AR submitted that the AO has taken a reasonable, plausible and legally sustainable view, which cannot be branded as erroneous. Once the AO has taken a view with which the ld. PCIT does not agree, it cannot be said that the order passed by the AO is erroneous and prejudicial to the interests of revenue. For this, the ld. AR relied on the decision in case of Aryan Arcade Ltd. vs. PCIT, 412 ITR 277 (Guj.) and CIT /AY.2017-18 Bharatkumar Ranchodbhai Soni vs. Nirma Chemicals Works Pvt. Ltd., 309 ITR 67 (Guj.). The ld. AR also relied on the decisions in case of Malabar Industrial Co. Ltd. (supa) and Sunbeam Auto Ltd. (supra). He also relied on the decision of ITAT, Surat in case of K. N. Diamond vs. PCIT, in where the Tribunal held that if the AO has taken a view, which is not unsustainable in law, merely because the ld. PCIT had another view, the same cannot lead to revision of the assessment order u/s 263 of the Act. In view of the above factual and legal submissions, the ld. AR submitted that the order of ld. PCIT is not liable to be sustained.
On the other hand, learned Commissioner of Income-tax – Departmental Representative (ld. CIT-DR) supported the order of ld. PCIT and submitted that it is procedurally correct. He has discussed as to how the order of AO is erroneous and prejudicial to the interests of revenue. He submitted that the AO failed to examine the source of cash deposit made by the assessee during the demonetization period.
We have heard both parties and perused the materials available on record. We have also deliberated the case laws relied upon by both sides. The appellant has submitted that the PCIT erred in invoking jurisdiction u/s 263 of the Act by holding that order of the AO u/s 143(3) of the Act is erroneous and prejudicial to the interests of revenue. Before deciding the ground, it would be proper to reproduce section 263 of the Act to appreciate scope and admit of the said section:
/AY.2017-18 Bharatkumar Ranchodbhai Soni “263. (1) The [Principal Chief Commissioner or Chief Commissioner or Principal Commissioner] or] Commissioner may call for and examine the record of any proceeding under this Act, and if he considers that any order passed therein by the [Assessing] Officer [or the Transfer Pricing Officer, as the case may be,] is erroneous in so far as it is prejudicial to the interest of the revenue, he may, after giving the assessee an opportunity of being heard and after making or causing to be made such inquiry as he deems necessary, pass such order thereon as the circumstances of the case justify, [including,- (i) An order enhancing or modifying the assessment or cancelling the assessment and directing a fresh assessment; or (ii) An order modifying the order under section 92CA; or (iii) An order cancelling the order under section 92CA and directing a fresh order under the said section]. ********* Explanation 2.—For the purposes of this section, it is hereby declared that an order passed by the Assessing Officer [or the Transfer Pricing Officer, as the case may be,] shall be deemed to be erroneous in so far as it is prejudicial to the interests of the revenue, if, in the opinion of the Principal [Chief Commissioner or Chief Commissioner or Principal] Commissioner or Commissioner,— (a) the order is passed without making inquiries or verification which should have been made; (b)the order is passed allowing any relief without inquiring into the claim; (c)the order has not been made in accordance with any order, direction or instruction issued by the Board under section 119; or (d)the order has not been passed in accordance with any decision which is prejudicial to the assessee, rendered by the jurisdictional High Court or Supreme Court in the case of the assessee or any other person.” 7.1 It is clear from a plain reading of section 263 of the Act that the PCIT or the CIT may call for and examine the records of any proceedings under the Act. If he considers that any order passed by the AO or the TPO is erroneous in so far as it is prejudicial to the interests of revenue,he is required to give assessee an opportunity of being heard and after making or causing to be made such enquiry as he deems necessary, he may pass such order thereon as the circumstances of the case justify including enhancing or modifying the assessment order, cancelling the assessment and directing a fresh assessment. Explanation 2 was /AY.2017-18 Bharatkumar Ranchodbhai Soni inserted below sub-section (1) with effect from 01.06.2015 to declare as to what shall be deemed to be “erroneous in so far as it is prejudicial to the interest of revenue”. The instances which would fall in the above category are:(i) the order is passed without making inquiries and verification which should have been made; (ii) the order is passed allowing the relief without inquiring into the claim; (iii) the order has not been made in accordance with any order, direction, or instruction issued by the Board u/s 119 of the Act; or (iv) the order has not been passed in accordance with any decision which is prejudicial to the assessee, rendered by the jurisdictional High Court or the Supreme Court in the case of the assessee or any other person. 7.2 Let us examine the assessment order u/s 143(3), dated 30.12.2019 in the background of statutory provisions discussed above. The AO issued notices u/s 143(2) of the Act on 09.08.2018. Subsequently, he issued notices u/s 142(1) of the Act on 29.01.2019 wherein name and complete address of parties with whom purchases and sales exceeding Rs.1,00,000/- were made during the year. He also asked assessee to give details of opening stock, purchases, sales and closing stock. The assessee filed reply on 01.08.2019, giving details of parties, with whom transactions of Rs.1,00,000/- or more were made during the year. The assessee also gave month-wise opening stock, purchase, sales and closing stock for the entire year. Thereafter, AO issued another notice u/s 142(1) and enclosed an Annexure asking the assessee to submit cash book along with proper and complete narration of the entries and the evidences for such entries. He also /AY.2017-18 Bharatkumar Ranchodbhai Soni requested assessee to submit details of cash deposit during demonetization period as per Annexure A, which is at page 17 to 20 of the paper book. The assessee filed reply the said query vide reply dated 15.10.2019, which is at pages 21 to 25 of the paper book. Thereafter, another notice u/s 142(1) was issued on 18.12.2019, enclosing therein an Annexure to submit various details in respect of 13 items (page 26 to 30 of the paper book). The assessee filed reply which is at pages 31 to 33 of the paper book. The AO thereafter issued final show cause notice on 23.12.2019, which is at page 34 to 37 of the paper book. In response, the assessee filed reply dated 26.12.2019, which is at page 38 and 39 of the paper book. The assessee submitted that there are no defects in the books of account and no addition is warranted. After considering all these replies of the assessee, the AO has passed the assessment order by estimating the GP of the year @ 6.74% as against 4.24% shown by the assessee. He enhanced the GP by 2.5% on the total turnover of Rs.5,90,96,661/- and added Rs.14,77,417/- to the total income.
8. Against the above factual background, let us see whether the order of the AO is erroneous and prejudicial to the interests of revenue within the meaning of section 263 of the Act. A bare reading of the section reveals that the PCIT can call for and examine the record of any proceedings under the Act and if he considers that any order passed by the AO is erroneous in so far as it is prejudicial to the interests of the revenue, he may after giving opportunity of hearing and after making or causing to be made such inquiry as he deems necessary, pass such /AY.2017-18 Bharatkumar Ranchodbhai Soni order as the circumstances of the case justify. The Hon’ble Supreme Court in the case of Malabar Industrial Co. Ltd. (supra) held that every loss of revenue as a consequence of an order of the AO cannot be treated as prejudicial to the interests of revenue. When an AO adopts one of the courses permissible in law and it results in loss of revenue or when two views are possible and the AO has taken one view with which the Commissioner does not agree, it cannot be treated as erroneous order prejudicial to the interests of revenue unless the view taken by the officer is unsustainable in law. In the subsequent decisions, the same principles have been affirmed by the Hon’ble Supreme Court.The Hon’ble Court in case of CIT vs. Greenworld Corporation, 314 ITR 81 (SC) held that the jurisdiction u/s 263 can be exercised only when both the following conditions are satisfied i.e., (i) the order of the AO should be erroneous and (ii) it should be prejudicial to the interests of revenue. These conditions are conjunctive. An order of assessment passed by the AO should not be interfered with only because another view is possible. The Hon’ble Apex Court in case of Max India Ltd. vs. CIT, 295 ITR 282 (SC) held that the Commissioner has to be satisfied of the twin conditions as stated above. If one of them is absent, recourse cannot be had to Section 263 of the Act. We find that the impugned issue of cash deposit of Rs.49,06,000/- was duly considered by the AO at the time of assessment proceedings. He has certainly examined the above issue by calling for the details from the assessee from time to time and after examination of the replies and evidences submitted by the assessee, he has partly accepted the explanation of /AY.2017-18 Bharatkumar Ranchodbhai Soni the assessee and made addition by enhancing the GP by 2.5% of the total turnover. Thus, the AO has duly considered the issue, applied his mind and taken a considered view. Hence, in view of the decisions of Hon’ble Supreme Court cited supra, the decision of the ld. PCIT to invoke provisions of section 263 of the Act cannot be sustained.
The impugned issue can also be analysed from another angle. In the instant case, as stated above, the AO had called for the explanation on the subject issue from the assessee and assessee had furnished its explanation and details, which clearly shows that the AO had undertaken the exercise of examining as to whether any addition is called for in respect of cash deposit of Rs.49,06,000/-during demonetization period. It is clear that the AO was not completely satisfied with the assessee’s explanation and therefore, he rejected the books of account and made addition by enhancing the GP rate by 2.5%. The grievance of the PCIT is that the AO should have made further inquiry in respect of the impugned issue and added the entire cash deposit, rather than enhancing the GP rate. Therefore, it could not be said that it was the case of “lack of inquiry”. There is a distinction between “lack of inquiry” and “inadequate inquiry”. If there was any inquiry, even inadequate, that could not, by itself, give occasion to the PCIT to pass order u/s 263 of the Act merely because he has different opinion in the matter. It is only in cases of lack of inquiry that such a course of action could be opened. In the present case, the AO has duly examined the facts and formed an opinion that the GP shown by the assessee was on the /AY.2017-18 Bharatkumar Ranchodbhai Soni lower side and it has to be estimated on par with the GP of the preceding assessment year. Hence, the AO has adopted one of the plausible views on the subject issue. In view of the above facts and decisions cited supra, the decision of PCIT that the order passed by AO was erroneous and prejudicial to the interests of revenue u/s 263 of the Act is not correct. Accordingly, we set aside the order passed u/s 263 of the Act by the PCIT.
In the result, the appeal of the assessee is allowed. Order is pronounced under provision of Rule 34 of ITAT Rules, 1963 on 05/06/2025.