SAHADE vs. INH VAJESINH VAGHELA,RAJKOTVS.PCIT, RAJKOT-1, RAJKOT, RAJKOT

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ITA 313/RJT/2024Status: DisposedITAT Rajkot10 December 2025AY 2018-195 pages
AI SummaryAllowed

What did the Tribunal hold?

The Tribunal held that the Principal Commissioner of Income Tax (PCIT) had wrongly invoked the revisionary power under section 263 of the Income Tax Act, 1961. The Tribunal found that the assessee had submitted a paper book containing details of staff salary payments, which were also available before the PCIT during the proceedings. Crucially, the Tribunal noted that the Assessing Officer (AO) had examined the details of cash payments towards staff salary and had issued a notice under section 142(1) of the Act, to which the assessee had furnished all required information. The Tribunal further observed that the salary payments of Rs. 5,85,000/- were made in cash, but each individual salary payment to an employee did not exceed Rs. 20,000/-. Therefore, the individual payments did not exceed the prescribed limit under section 40A(3) of the Act. Consequently, the Tribunal quashed the order passed by the PCIT dated 29.03.2024, finding no justification for the revision. All grounds of appeal were disposed of accordingly.

What were the facts?

The assessee, Shri Sahadev Vajesinh Vaghela, filed a return of income for Assessment Year (AY) 2018-19 declaring a loss. The Assessing Officer (AO) finalized the assessment under section 143(3) r.w.s. 143(3A) & 143(3B) of the Income Tax Act, 1961, accepting the returned income. The AO observed that the assessee made cash payments of Rs. 5,85,000/- towards staff salary, exceeding Rs. 10,000/- in aggregate, which appeared to be in violation of section 40A(3) of the Act. The Principal Commissioner of Income Tax (PCIT) initiated proceedings under section 263 of the Act, issuing a show cause notice alleging that the AO's order was erroneous and prejudicial to the interest of the revenue due to non-application of mind and lack of inquiry regarding the staff salary payment. The PCIT set aside the assessment order and directed the AO to pass a fresh assessment order.

What were the issues?

1. Whether the order passed by the PCIT under section 263 of the Income Tax Act, 1961, setting aside the assessment order dated 12.04.2021, is bad in law, invalid, and requires to be quashed, as it was allegedly arrived at without proper application of mind and inquiry regarding staff salary payments made in violation of section 40A(3) of the Act. Assessee's Contentions: The assessee argued that the PCIT erred in law and on facts in concluding that the AO's order was erroneous and prejudicial to the revenue. The assessee contended that all relevant details regarding staff salaries were provided in the paper book, and the AO had examined these details, including issuing a notice under section 142(1) and receiving replies. The assessee also submitted that individual salary payments did not exceed Rs. 20,000/-, thus not violating the prescribed limit under section 40A(3). Revenue's Contentions: The revenue, through the learned CIT(DR), relied on the order of the PCIT, stating that the AO did not conduct an inquiry into the cash payments towards staff salary.

Which sections of the Income-tax Act were involved?

Section 40A(3),Section 143(3),Section 143(3A),Section 143(3B),Section 263,Section 142(1)

AI-generated summary — verify with the full judgment below

Income Tax Appellate Tribunal, RAJKOT BENCH, RAJKOT

Before: DR. ARJUN LAL SAINI & SHRI DINESH MOHAN SINHA

For Appellant: Shri Mehul Ranpura, Ld. A.R
For Respondent: Shri Sanjay Punglia, Ld. CIT(DR)
Hearing: 09/10/2025Pronounced: 10/12/2025

Appellant by : Shri Mehul Ranpura, Ld. A.R. Respondent by : Shri Sanjay Punglia, Ld. CIT(DR) Date of Hearing : 09/10/2025 Date of Pronouncement : 10/12/2025 आदीश/ O R D E R PER DINESH MOHAN SINHA, JM:

Captioned appeal filed by the assessee, pertaining to Assessment Year (AY)-2018-19, is directed against the order passed by the Principle Commissioner of Income Tax [(in short “Ld. PCIT”] vide order dated 29.03.2024, which in turn assessment order passed by Income Tax Department/Assessing Officer under section 143(3) r.w.s. 143(3A) & 143(3B) of the Income Tax Act, 1961 (in short “the Act”), vide order dated 12.04.2021. 2. Grounds of appeal raised by the assessee are as follows:

“1 The grounds of appeal mentioned hereunder are without prejudice to one another.

2. The order passed by Pr. Commissioner of Income-tax, Rajkot-1 [hereinafter referred as to the “PCIT"] is bad in law, invalid and requires to be quashed, the same may kindly be quashed.

3. The Ld. PCIT erred in law and on facts in arriving at a conclusion to the effect that the assessment order passed by the AO was erroneous as well as prejudicial to the interest of the revenue on the ground that the AO has not applied his mind and not conducted any inquiry in respect of staff salary Rs. 5,85,000/- paid in violation of provision of section 40A(3) of the Act. The order passed by PCIT requires to be quashed and may kindly be quashed.

4. The learned Pr. CIT erred on facts as also in law in setting aside the assessment order dated 12.04.2021 passed u/s. 143(3) of the Income Tax Act, 1961 directing the AO to pass a fresh assessment order. The order passed u/s 263 of the Act by the learned Pr. CIT is totally unjustified on facts as also in law therefore the same may kindly be quashed.

5. Your Honour's appellant craves leave to add, to amend, alter, or withdraw any or more grounds of appeal on or before the hearing of appeal.”

3. Brief facts of the case are that the Assessee had filed his return of income for A.Y. 2018-19 on 31/10/2018 declaring total income of Rs.NIL (loss of Rs.9,46,780/-). The case was selected for complete scrutiny. The Assessment was finalised 143(3) r.w.s. 143(3A) & 143(3B) of the I.T. Act, 1961 on 12.04.2021 accepting returned income. The AO was observed that during the year under consideration cash payments in excess of Rs. 10,000/- aggregating to Rs.5,85,000/- towards staff salary was made by the assessee, which shows violation of provisions of section 40A(3) of the Act. it is seen that none of the above payments are covered under exceptions provided under Rule 6DD of the IT Rules. Accordingly, the amount of Rs. 5,85,000/- is required to be disallowed and added to the total income of the assessee, in view of provisions of section 40A(3) of the Act.

4.

The Ld. PCIT has issued a show cause notice u/s 263 of the Income-tax Act, 1961 dated 07.02.2024 on the basis of record perused and noticed that during the year cash payments in excess of Rs. 10,000/- aggregating to Rs.5,85,000/- towards staff salary was made by the assessee, which shows violation of provisions of section 40A(3) of the Act, that none of the above payments are Page 2 of 5 covered under exceptions provided under Rule 6DD of the IT Rules. Accordingly, the amount of Rs. 5,85,000/- is required to be disallowed and added to the total income of the assessee, in view of provisions of section 40A(3) of the Act. Considering such facts, notice u/s 263 of the Income-tax Act, 1961 on Dt 08.02.2024 was issued and duly served upon the assesse.

5.

In response to the notice, the A.R. of the assessee submitted the relevant document. and the submission regarding contention which was raised by the Ld. PCIT in the notice The reply of the assessee was not acceptable.

6.

The Ld.PCIT noted that the duty of the Assessing Officer to collect all relevant information relating to the income of the assessee for the purposes of assessement and proper application of law is to be made while making the assessment. since the twin conditions, namely, (i) the order of the Assessing Officer sought to be revised is erroneous; and (ii) it is prejudicial to the interests of the Revenue, are satisfied, the assessment order dated 12.04.2021 was set aside and the Ld. PCIT directed to the AO to pass a fresh assessment order after making necessary enquiry.

7.

That the assessee filed an appeal against the impugned order dated 29.03.2024 passed by the Ld. PCIT before this Tribunal. 7.1. During the course of hearing, the Ld. AR submitted that the entire details of the assessee in paper-book submitted (page no. 41) regarding staff salaries as asked for notice dated 23.12.2022. 7.2. On the contrary, the Ld. Sr. DR for the revenue stated that the AO did not conducted enquiry, however, the Ld. DR relied on the order of the Ld. PCIT.

8.

We have heard rival contention of both the party and gone through the submission put forth on record. The Ld. PCIT in the proceeding u/s. 263 of the Act observed that assessee has failed to prove cash payment towards staff salary consider to section 40A(3) r.w.r. 6DD of the I.T. rule. The assessee submitted before the Bench, a paper book containing 43 pages 1. Show Cause Notice u/s.263 of the Income-tax Act, 1961 dated 07.02.2024 2. Written Submission filed before Ld. CIT. 3. Copy of notice issued u/s. 142(1) of the Act dated 23.12.2020 by AO 4. Copy of replies dated 25.09.2021 filed before the AO. 5. Copy of Audit Report alongwith Audited Financial Statement 6. Copy of account of Staff Salary to explain the details of cash payment towards staff salary, however, all these documents of paper book was available before the ld. PCIT during the course of proceedings. We also find that for assessment year 2018-19 the assessing officer has examined the details of cash book towards the staff salary. The AO has issued notice dated 23.12.2020 in the notice column 7 detail about cash payment and compliance of TDS, the assessee has furnished all details/information regarding cash payment, TDS and amount payable ask form the assessee. We note that the assessee has made a salary payment of Rs. 5,85,000/- during the year in cash, we further note that each salary payment to the employee was not more than the Rs.20,000/- (copy of detail salary payment in placed on record.) that is, less than the thrashed limit of Rs.20,000/- section 40A(3) of the Act, as the individual payment does not exceed the prescribed limit as fixed by law.

9.

Accordingly, considering the above facts and circumstances of the case, we have no hesitation in holding that the Ld. PCIT had wrongly invoked the revisionary power u/s. 263 of the Act, we have no option but to quashed the order passed by the Ld. PCIT on dated 29.03.2024. All grounds of appeal

disposed off accordingly.

10. In the result, the appeal of the assessee is allowed. Page 4 of 5 Order is pronounced in the open court on 10/12/2025

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