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Facts
The assessee, a partnership firm, filed its return for AY 2017-18. The assessment was finalized accepting the returned income. Later, the Principal CIT (PCIT) initiated proceedings under Section 263, alleging that the assessee made large cash payments violating Section 40A(3) and that the Assessing Officer (AO) failed to conduct proper inquiry.
Held
The Tribunal held that the AO had conducted sufficient inquiry during the reassessment proceedings and that the issue of cash payments exceeding Rs. 10,000/- had already been examined in the original assessment. Therefore, the PCIT's action under Section 263 was not justified.
Key Issues
Whether the PCIT was justified in invoking Section 263 when the AO had already conducted sufficient inquiry and examined the issue of cash payments in the original assessment.
Sections Cited
263, 147, 144B, 40A(3), 40A(3A), 6DD, 142(1)
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Income Tax Appellate Tribunal, RAJKOT BENCH, RAJKOT
Before: DR. ARJUN LAL SAINI & SHRI DINESH MOHAN SINHA
आदेश/ORDER Per, Dr. A. L. Saini, AM: By way of this appeal, the assessee has called into question correctness of impugned order passed by the learned Principal Commissioner of Income Tax under section 263 of the Income tax Act, 1961, in the matter of assessment under section 147 r.w.s. 144B of the Act for the assessment year 2017-18, on the following grounds:
“1.The order u/s. 263 of the Act is bad in law.
2.The learned Pr. CIT has erred in law as well as on facts in not considering the submissions of the appellant on the strength of which the re-assessment order was neither erroneous nor prejudicial to the interest of revenue and therefore, the provisions of Section 263 of the Act were not applicable to the case of the appellant. 3.The learned Pr. CIT has erred in law as well as on facts in setting aside the re- assessment order passed by the Ld. A.O. u/s 147 and directing de-novo assessment regarding verification of violation of section 40A(3) in respect of cash payments made to agriculturists for purchasing agricultural produce.”
Succinctly, the factual panorama of the case is that assessee before us is a partnership –firm. The Assessee had filed its return of income for assessment year (A.Y.) 2017-18, on 24/11/2017, declaring total income of Rs. 1,30,440/-. The Assessment was finalized u/s 147 r.w.s 144B of the Income-tax Act, 1961, on 24/03/2022 accepting returned income of Rs. 1,30,440/-.
Later on, the learned Principal Commissioner of Income Tax ( in brief, ld.PCIT), has exercised his jurisdiction under section 263 of the Income tax Act, 1961. On verification of case records, it was noticed by the learned PCIT that on several occasion, the assessee has paid huge cash in excess of Rs. 10,000/- in a single voucher, in violation of provision of section 40A(3) of the Act. The total of such cash payment comes to Rs. 42,92,475/-. It was noticed by the learned PCIT that none of these payments were covered by exceptions provided under rule 6DD of IT Rules. The AO did not make any inquiry in this regard during the assessment proceedings. Hence, the order is passed without making inquiries or verification which should have been made. In view of above facts, it was found by ld.PCIT that the assessment order passed by the A.O. u/s 147 r.w.s 144B of the Income-tax Act, 1961, on 24/03/2022 is erroneous and prejudicial to the interest of the revenue. Therefore, notice u/s 263 of the Income-tax Act, 1961, dated 21.02.2024 was issued and duly served upon the assessee. In the notice, the learned PCIT stated that assessee`s case for A.Y. 2017-18 was reopened on the basis of information available with Department that during the demonetization period, assessee had deposited aggregate cash of Rs. 11,50,000 in bank account No. 8120100000217 maintained with Co-operative Bank. However, on verification of cash book revealed that during the period from 18.12.2016 to 30.03.2017, assessee had made payment of Rs. 42,92,475/- in cash in excess of Rs. 20,000/ towards various expenses in contravention of provisions of section 40A(3)/40A(3A) of the IT Act. On further verification, it was also seen by ld. PCIT that none of the above payments are covered under exceptions provided under Rule 6DD of the IT Rules. Accordingly, the amount of Rs. 42,92,475/- is required to be disallowed and added to total income of the assessee in view of provisions of section 40A(3)/40A(3A) of the Income-Tax Act. The AO has failed to make disallowance of Rs. 42,92,475/- u/s. 40A(3A) of the IT Act. Therefore, assessment order passed was 147 r.w.s. 144B of the Act, on 24/03/2022 by the Assessing Officer in respect of AY 2017-18, appears to be erroneous and prejudicial to the interest of the revenue. 5.In response to such notice of ld.PCIT, the assessee has filed his reply on 05.03.2024. The assessee submitted before the learned PCIT that partnership -firm ( assessee under consideration) is doing the business of manufacturing of Urad Papad. To make urad papad, the basic raw material urad dal itself is an agricultural produce. The firm has purchased urad form agriculturists and paid the cash against the purchase of that particular agricultural produce. The payment is covered under rule 6DD clause (d) sub clause (i) of The Income Tax Rules, 1962 which states that no disallowance under clause (a) of sub-section (3) of section 40A shall be made and no payment shall be deemed to be the profits and gains of business or profession under clause (b) of sub-section (3) of section 40A where any payment in a sum exceeding twenty thousand rupees is made otherwise than by an account payee cheque drawn on a bank or account payee bank draft.The assessee furnished the confirmation letter from Agriculturists and Copy of AADHAR for identity proof and 7/12, 8A to prove that they are farmers.
However, learned PCIT rejected the above contention of the assessee and held that the assessing officer has made no enquiry to find out if the persons to whom the payments were made were actually the cultivator, grower or producer of the item purchased. Hence, in terms of Explanation 2(a) to section 263 of the Act, the assessment order passed u/s 147 r.w.s. 144B dated 24.03.2022 is erroneous in for as it is prejudicial to the interests of revenue.
Aggrieved by the order of the ld PCIT, the assessee is in appeal before us.
Learned Counsel for the assessee, vehemently argued that in the re- assessment proceedings, no addition was made by the assessing officer, in respect of the main reasons recorded by the assessing officer to reopen the assessee`s case, therefore, reassessment proceedings initiated by the assessing officer is itself bad in law. Moreover, the issue pertaining to section 40A(3) of the Act, cash payment exceeding to Rs. 10,000/-, has already been examined in the original assessment proceedings, by the assessing officer, therefore there should not be error in the order passed by the assessing officer in subsequent re assessment proceedings. Once the issue has been examined in the original assessment proceedings, then there should be end of litigation on that issue.
Learned Counsel for the assessee, further submitted that even during the reassessment proceedings under section 147 of the Act, the assessee has submitted relevant documents and evidences before the assessing officer, which were considered by the assessing officer properly. The ld. Counsel submitted that assessing officer has issued notice u/s 142(1) of the Act dated 21st December, 2021 which is placed at paper book page no. 9 wherein pertinent questions were raised by the assessing officer.In response to the above notice, the assessee submitted detailed reply, before the assessing officer which is placed at page no. 12 of the paper book. Therefore, the Ld. Counsel stated that sufficient inquiry was conducted during the reassessment proceedings, about the issue raised by the learned PCIT, therefore, order passed by the assessing officer is neither erroneous nor prejudicial to the interest of the revenue, hence, order passed by the ld. PCIT may be quashed.
On the other hand, the Ld. DR for the Revenue has primarily reiterated the stand taken by the ld.PCIT, which we have already noted in our earlier para and is not being repeated for the sake of brevity.
We heard both sides in detail and also perused the records of the case including the paper book filed by the assessee. We note that assessee is engaged in producing the urad papad and the basic raw material for urad papad, is urad dal itself, which is an agricultural produce. The assessee- firm has purchased urad form agriculturists and paid the cash against the purchase of that particular agricultural produce. We also find that assessing officer has issued notice u/s 142(1) of the Act dated 21st December, 2021 which is placed at paper book page no. 9 wherein pertinent questions were raised by the assessing officer. In response to the above notice, the assessee submitted detailed reply, before the assessing officer which is placed at page no. 12 of the paper book. Therefore, it is not a case of ‘no enquiry’ as alleged by the learned PCIT. Therefore, in the assessee`s case under consideration, we find that even during the reassessment proceedings under section 147 of the Act, sufficient enquiry was conducted by the assessing officer. Moreover, the issue pertaining to section 40A(3) of the Act, that is, cash payment exceeding to Rs. 10,000/-, has already been examined in the original assessment proceedings, by the assessing officer, therefore, it was not necessary for the assessing officer, to examine the same again in the reassessment proceedings, under section 147 of the Act.
Based on the facts, narrated above, we find that order passed by the assessing officer should not be erroneous and for that let us take the guidance of judicial precedents laid down by the Hon’ble Apex Court in Malabar Industries Ltd. vs. CIT [2000] 243 ITR 83(SC) wherein their Lordship have held that twin conditions needs to be satisfied before exercising revisional jurisdiction u/s 263 of the Act by the CIT. The twin conditions are that the order of the Assessing Officer must be erroneous and so far as prejudicial to the interest of the Revenue. In the following circumstances, the order of the AO can be held to be erroneous order, that is (i) if the Assessing Officer’s order was passed on incorrect assumption of fact; or (ii) incorrect application of law; or (iii)Assessing Officer’s order is in violation of the principle of natural justice; or (iv) if the order is passed by the Assessing Officer without application of mind; (v) if the AO has not investigated the issue before him; then the order passed by the Assessing Officer can be termed as erroneous order. Coming next to the second limb, which is required to be examined as to whether the actions of the AO can be termed as prejudicial to the interest of Revenue. When this aspect is examined one has to understand what is prejudicial to the interest of the revenue. The Hon’ble Supreme Court in the case of Malabar Industries (supra) held that this phrase i.e. “prejudicial to the interest of the revenue’’ has to be read in conjunction with an erroneous order passed by the Assessing Officer. Their Lordship held that it has to be remembered that every loss of revenue as a consequence of an order of Assessing Officer cannot be treated as prejudicial to the interest of the revenue. When the Assessing Officer adopted one of the courses permissible in law and it has resulted in loss to the revenue, or where two views are possible and the Assessing Officer has taken one view with which the PCIT does not agree, it cannot be treated as an erroneous order prejudicial to the interest of the revenue “unless the view taken by the Assessing Officer is unsustainable in law”.
Taking note of the aforesaid dictum of law laid down by the Hon’ble Apex Court (supra), we find that in the original assessment proceedings, the assessing officer had already took the plausible view, about the issue raised by the learned the ld. PCIT. Therefore, order passed by the assessing officer, in reassessment proceedings, under section 147 of the Act, is neither erroneous nor prejudicial to the interest of the revenue. Since the order of the Assessing Officer cannot be held to be erroneous as well as prejudicial to the interest of the revenue, in the facts and circumstances narrated above, the usurpation of jurisdiction exercising revisional jurisdiction by the Principal CIT is ‘’null’’ in the eyes of law and, therefore, we are inclined to quash the very assumption of jurisdiction to invoke revisional jurisdiction u/s 263 by the Principal CIT. Therefore, we quash the order of the Principal CIT dated 30.03.2024 being ab initio void.
In the result, appeal filed by the assessee, is allowed.