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Facts
The assessee company challenged an order passed by the Principal Commissioner of Income Tax (PCIT) under Section 263 of the Income Tax Act, 1961, which revised an earlier assessment order. The PCIT initiated proceedings due to concerns about the genuineness of substantial share capital and unsecured loans introduced by the assessee in its first year of incorporation, arguing that the 'source of the source' was not adequately verified by the Assessing Officer.
Held
The Tribunal noted that while the assessee failed to prove the 'source of the source' for share capital, the PCIT's order was passed without affording the assessee adequate opportunity to be heard, violating principles of natural justice. The Tribunal also held that the doctrine of merger did not apply as the CIT(A) had dismissed the appeal on limitation grounds without deciding on merits.
Key Issues
Whether the PCIT's revision order under Section 263 was justified due to inadequate verification of the 'source of source' for share capital, and whether principles of natural justice were violated by not providing sufficient opportunity to the assessee to be heard.
Sections Cited
263, 68, 115BBE, 143(3), 143(3A), 143(3B), 250, 249(3), 2(7A)
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, RAJKOT BENCH, RAJKOT
Before: DR. A. L. SAINI, AM & SHRI DINESH MOHAN SINHA, JM
(िनधा�रण वष� / Assessment Year: (2018-19) (Physical Hearing) Fusion Granito Pvt. Ltd. बनाम/ Principal Commissioner of Income Revenue Survey No.555/P1/91, Tax-1, Vs. Nr. Khokhra Hanuman Temple, 2nd Jetpar Road, Morbi-363641 Rajkot, Floor, “Aayakar Bhawan”, Race Course Ring Road, Rajkot-360001 �ायीलेखासं./जीआइआरसं./PAN/GIR No.: AADCF 0696 B (अपीलाथ�/Appellant) (��थ� /Respondent) अपीलाथ� ओर से/ Appellant by Shri Bandish Soparkar, AR ��थ� की ओर से/Respondent by Shri Praveen Verma, CIT DR सुनवाई की तारीख/Date of Hearing 24/06/2025 घोषणा की तारीख /Date of Pronouncement 10/09/2025 आदेश / O R D E R Per Dr. Arjun Lal Saini, A.M By way of this appeal, the assessee has challenged the correctness of the order passed by the Learned Principal Commissioner of Income Tax - 1, Rajkot [in short ‘Ld. PCIT’], dated 27.03.2023, under section 263 of the Income Tax Act, 1961 [hereinafter referred to as the ‘Act’] for the Assessment Year (AY) 2018-19.
Grievances raised by the assessee, which, being interconnected, will be taken up together, are as follows: “1. The revision order u/s 263 of the Act dated 28.03.2023 is bad in law. 2. The Hon’ble Pr. CIT-1, Rajkot has erred in law as well as on facts in completing the revision proceedings u/s 263 of the Act hurriedly in short span of time (effectively just a week only) without providing reasonable opportunity to furnish the complete submissions and an opportunity of being heard to the appellant even after specific requests thereof in gross violation of the settled principles of natural justice.
The Hon’ble Pr.CIT-1, Rajkot has erred in law as well as on facts in passing a cryptic order u/s 263 of the Act bereft of any justifiable reasoning without even controverting the legal submissions of the appellant as to the non-application of Section 68 of the Act to the capital receipts prior to the commencement of income generating activities.
The Hon’ble Pr.CIT-1, Rajkot has erred in law as well as on facts in not considering the submissions of the appellant in true perspective on the strength of which the 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.
The Hono’ble Pr.CIT-1, Rajkot has erred in law as well as on facts in setting aside the assessment order passed by the ld. National e-Assessment Centre u/s 143(3) r.w.s. 143(3A) (3B) of the Act dated 18.01.2021 and directing de-novo assessment to make proper inquiries with respect to fresh equity share capital to the extent of Rs.9,93,75,000/-, without controverting the submissions of the appellant in any manner.
The Hon’ble Pr.CIT-1, Rajkot has erred in law as well as on facts in setting aside the assessment order passed by the ld. National e-Assessment Centre u/s 143(3) r.w.s. 143(3A) (3B) of the Act, dated 18.01.2021 and directing de-novo assessment to make proper inquiries with respect to fresh unsecured loans to the extent of Rs.2,65,53,000/-, without controverting the submissions of the appellant in any manner. The appellant craves leave to add, alter, amend, delete or withdraw one or more grounds of appeal
.”
3. The relevant material facts, as culled out from the material on record, are as follows. The assessee had e-filed return of income for assessment year (AY) 2018-19, on 21.09.2018, declaring loss of Rs.4,33,27,151/-. Thereafter, the assessee`s case was selected for complete scrutiny through CASS for the reasons to verify the following Viz: (i) introduction of large capital or share capital in the year of incorporation (ii) purchase shown in the ITR is less than the invoice value of imports shown in the export import data and (iii) large squared up loans during the year. The assessment was completed u/s 143(3)
4. Later on, the Learned Principal Commissioner of Income Tax - 1, Rajkot [in short ‘Ld. PCIT’], exercised his jurisdiction under section 263 of the Income Tax Act, 1961. On verification of records, it was observed by ld PCIT that the assessee had introduced huge amount in the company in the form of share application money amounting to Rs.12,50,00,000/-. One of the reasons for selection of case under scrutiny was introduction of large capital or share capital. Perusal of records revealed that the assessee had not submitted details about source of the source to prove the genuineness of the share capital so introduced. The share capital and unsecured loans received by the assessee from 37 persons and out of 37 persons, some 20 persons did not have sufficient creditworthiness to make such huge capital and unsecured loan and the total amount of such investment comes to Rs.12,59,28,000/- (Rs.2,65,53,000/- unsecured loan + Rs.9,93,75,000/- share capital). Their capital contribution is as high as 6 to 49 times their income. Further analysis revealed that some of the bank accounts of investors contained cash deposits, which are immediately invested in the assessee-company. It was further seen that, in some case, the bank statements of the investors have no any major transactions other than the transaction with the assessee-company. The ld.PCIT noted that although this inquiry is applicable to all the 37 persons, however, in the 20 cases (mentioned in the notice issued vide letter dated 19.03.2023), it was clear that there is no creditworthiness to make such huge lending/investment. The total amount of such investment in the company from 20 persons comes to Rs.12,59,28,000/- (Rs.2,65,53,000/- unsecured loan + Rs.9,,93,75,000/- share capital). As per the proviso to Section 68 of the Act, it is mandatory (as per law) to verify the source of the source of share capital Fusion Granito Pvt. Ltd. and the assessing officer failed to verify the source of the source of the capital contributed and hence, there is clear violation of section 68 of the Act and therefore, the aggregated amount of Rs.12,59,28,000/- was required to be disallowed u/s 68 r.w.s. 115BBE of the Act and added to the total income of assessee while finalizing the assessment proceedings u/s 143(3) of the Act which has not been done.
Therefore, ld.PCIT noted that above facts are sufficient to reach to a conclusion that the assessing officer has passed the assessment order without making proper enquiry and verification on the above issue. It is thus, apparent that the order passed by the assessing officer in assessee’s case for assessment year (AY) 2018-19, u/s 143(3) r.w.s. 143(3A) & 143(3B) of the Act, dated 18.01.2021 is erroneous in so far as it is prejudicial to the interest of revenue to the above extent. Considering such facts, a notice u/s 263 of the Act was issued on 09.03.2023 which is reproduced in page no.-3 to 6 of the revision order under section 263 of the Act.
In response to the notice issued by Ld.PCIT, u/s 263 of the Act, the assessee submitted its reply stating that during the assessment proceedings asssessee submitted reply party-wise, and assessing officer examined the issue. Therefore, order passed by the assessing officer is neither erroneous nor prejudicial to the interest of the revenue. However, the Ld.PCIT rejected the contention of assessee and held that assessing officer has not examined the source of the source of the share capital, as per the provisions of section 68 of the Act, in respect of share capital. Therefore, it is apparent that assessing officer has not verified any details relating to transactions in violation of provisions of Section 68 of the Act. The assessing officer has not considered this fact and passed the assessment order without making any further Fusion Granito Pvt. Ltd. disallowance in this regard. Therefore, learned PCIT noted that the impugned order was passed by the then assessing officer without making enquiries or verification, which should have been made. Thus, this case is covered by clause(a) of Explanation 2 to section 263 of the Act also. Therefore, learned PCIT held that the assessment order passed by the assessing officer u/s 143(3) r.w.s. 143(3A) & 143(3B) of the Act dated 18.01.2021 is erroneous and prejudicial to the interest of the Revenue. Hence, ld.PCIT set-aside the order u/s 143(3) r.w.s. 143(3A) & 143(3B) of the Act dated 18.01.2021 and directed the assessing officer to make fresh assessment order.
Aggrieved by the order of Ld. PCIT, the assessee is in appeal before us.
The Learned Counsel for the assessee, argued that proceedings u/s 263 of the Act are bad and illegal inasmuch as the very issue was examined at the time of original scrutiny assessment. The assessing officer has carried out through inquiry into the specific issue of share capital and loan and asked for voluminous data from the assessee. Crucially, it is also not the case of the PCIT that there is lack of enquiry or inadequate inquiry. The PCIT is also using the very same material that the assessee supplied to the assessing officer, but PCIT is coming to a different conclusion based on the very same documents. Therefore, action of PCIT is not according to the powers given u/s 263 of the Act. Satisfaction in the case of Section 68 is to be of the assessing officer (as defined u/s 2(7A) of the Act. If the assessing officer sought information and found the reply of the assessee satisfactory, then the PCIT u/s 263 cannot substitute his own view overriding the assessing officer’s satisfaction. Besides, this is first year incorporation, hence there cannot be any addition u/s 68 of the Act. Based on these facts, learned Counsel for the assessee contended that order passed by the learned PCIT may be quashed.
Fusion Granito Pvt. Ltd.
On the other hand, Learned Departmental Representative (Ld. DR) for the Revenue submitted that first of all the assessee has failed to prove source of source, in respect of share capital, as the assessment in the year under consideration is the assessment year 2018-19, wherein source of source is required to be proved. The Ld. CIT-DR pointed out that in the notice issued u/s 263 of the Act, the Ld.PCIT especially mentioned that assessee failed to prove the source of the share capital introduced. About ‘source of the source’ the assessing officer did not make inquiry to examine the source of the source, nor the assessee has submitted any documents about the source of source. The Ld.CIT-DR also submitted that Ld.PCIT has quoted a plethora judgment of Hon’ble Supreme Court and various Hon’ble High Courts and passed a speaking order, therefore order passed by Ld.PCIT should be confirmed. To support his submission, Ld.CIT-DR for the Revenue relied on following judgments: (i) M/s Qutone Ceramic Pvt.Ltd [ITA No.09/Rjt/2021 dated 30.09.2024] (ii) Shine Cot Spin Pvt. Ltd. v. PCIT [76/Rjt/2023 dated 30.07.2024
The Ld.DR for the Revenue further submitted that the “source of the source” means, in case of share capital, who has invested money in the assessee-company, needs to explain the source of that person from whom he has received the loan or the cash, which he has deposited in his bank account before the issuance of cheque towards purchase of shares. The “source of the source” has not been examined by PCIT, as well as by AO as the assessee did not submit the documents and evidences to prove the source of the source. Therefore, the order passed by the Assessing Officer is erroneous as well as prejudicial to the interest of Revenue.
The ld.DR also submitted that ld.PCIT has passed the order under section 263 of the Act, in the assessee`s case on 27.03.2023 and subsequently, the Commissioner of Income tax (appeals), in the assessee`s case passed the order on 27.03.2025, u/s. 250 of the Income Tax Act, 1961, therefore, order passed by the learned PCIT has been merged with the order of the Commissioner of Income tax (appeals). The findings u/s. 250 of the Income Tax Act, 1961 are as follows:
“The Fusion Granito Private Limited, for Assessment Year 2018-19, vide order dated 27.03.2025 u/s. 250 of the Income Tax Act, 1961 passed by the Ld. CIT(A). 6.1.2 The Commissioner of Income-tax (Appeals) may admit belated application on sufficient cause being shown. Application for condonation of delay in filing the appeal, giving the reasons for the delay, along with necessary evidences should be filed with Form No. 35 (i.e., form of appeal). The Commissioner of Income-tax (Appeals) can condone the delay in filing the appeal if genuine reason exists for delay. No doubt, the CIT (A) one should be liberal in dealing with the application for condonation of delay. However, one must at the same time keep in mind that condoning of the delay should not result in accrued rights of the other party being defeated by setting the clock back. In Prashant Projects Ltd. Vs. DCIT (2013) 37 taxmann.com 137, the Hon'ble ITAT, Mumbai had culled out the following principles to be kept in mind before condoning delay: "2.4 After considering the above referred judgments, we are of the opinion that delay can be condoned only if there is no gross negligence or deliberate inaction or lack of bona fide. Secondly, assessee should furnish acceptable and cogent reasons sufficient to condone delay. These are the pre-requisites for condoning delay. Besides the above referred basic principle of condonation delay certain other general principles on the subject, culled out from various case laws, can be summarized as under: (i) If sufficient cause for excusing delay is shown, discretion is available to the FAAs to condone the delay and admit the appeal. (ii) The expression 'sufficient cause' is not defined, but it means a cause which is beyond the control of an assessee. For invoking the aid of the section any cause which prevents a person approaching the FAA within time is considered sufficient cause. In doing so, it is the test of reasonable man in normal circumstances which has to be applied. The test whether or not a cause is sufficient is to see whether it could have been avoided by the party by the exercise of due care and attention. In other words, whether it is bona fide cause, inasmuch as nothing shall be deemed to be done bona fide or in good faith which is not done with due care and attention. What may be sufficient cause in one case may be otherwise in another. What is of essence is whether it was an act of prudent or reasonable man. [AshutoshBhadra v. Jatindra Mohan Seal AIR 1954 Cal.238 and Hisaria Plastic Products v. CST AIR 1980 All.
Subsequent decision of a Court cannot constitute sufficient cause. (iii) In every case of delay, there is some lapse on the part of the assessee. If there are no mala fides and it is not put forth as part of a dilatory strategy, the FAA should consider the application of the assessee. But when there is reasonable
ground to think that the delay was occasioned otherwise than a bona fide conduct, then the FAA should lean against acceptance of the explanation. (iv) Section 249(3) of the Act is discretionary in nature and the assessee cannot seek condonation of delay under this provision as a matter of right, but has to satisfy the FAA by explaining the sufficient cause for the delay. (v) Just because there is merit in the appeal filed by the assessee, any amount of delay, however, negligently caused, cannot be condoned. (vi) Requirement of sufficient cause for delay cannot be ignored and it becomes very important and significant when the delay is inordinate and abnormal. (vii) In the matter of J.B. Advani& Co. (P.) Ltd. v. CIT [1969] 72 ITR 395 Hon'ble Supreme Court had held that explanation of delay for the entire period is necessary. In other words what is expected of the appellant in such matters is to show that delay was occasioned due to some sufficient cause. The cause pleaded should not only be a probable one but it should be real and sufficiently explained reasonable. It would not be any sort of assertion that would amount to sufficient cause and would justify the condonation of delay. The cause pleaded must fit in the facts and circumstances of the given case and the explanation offered regarding the delay occasioned by such cause should appeal to reasons so as to get judicial approval. In short in matters of delay it is neither practicable nor desirable to explain minute- to-minute/hour-to-hour delay, but delay has to be (viii) When an application for condonation of delay is made; to consider whether a sufficient cause has been made out by the assessee; the order of the FAA should disclose that he had applied his mind to the question raised before it. Due exercise of judicial discretion is a pre-condition for allowing/refusing an application filed for condoning delay. (ix) The application for condonation of delay should contain substantially all the relevant material and as far as possible it should be supported by affidavit, showing that there is sufficient cause for condonation. (x) If the delay is not vitiated by any error of law it should be condoned. (xi) Any event, cause or circumstance arising after the expiry of the limitation period cannot constitute a sufficient cause. (xii) It is said that non-filing of appeal before the FAA, before the end of limitation period, creates a vested right in favour of the Revenue. As a result of not filing of an appeal by an assessee, Department, gets a legitimate and undisputed right over the tax-revenue accruing to it in pursuance of the order of the AO. This right cannot be disturbed in a light-hearted manner. (xiii) In the cases of belated appeals matters have to be essentially analysed in the facts of each case-no general formula can be or should be applied, so as to ensure that an otherwise genuine cause of justice is not defeated by adherence to technical precedence. (xiv) Condonation of delay, though an equitable relief, however, cannot be accorded merely on sympathy or compassion and the grounds offered have to be evaluated to test whether the party in default had been guilty of conscious and deliberate inaction, culpable negligence and inexcusable indifference to the period of limitation mandatorily prescribed by law." 6.1.3 Thus, no case of condonation is made out for explaining the delay in this hopelessly time-barred appeal. The appeal is, accordingly, liable to be dismissed on the ground of delay.
Fusion Granito Pvt. Ltd. 12. Therefore, ld DR stated that since the order passed by the learned PCIT has been merged with the order of the Commissioner of Income tax (appeals), hence, present appeal of the assessee may be dismissed.
We have heard both the parties and carefully gone through the submissions put forth on behalf of the assessee along with the documents furnished and the case laws relied upon, and perused the facts of the case including the findings of the ld. PCIT and other material brought on record. We note that the doctrine of merger means that once a higher appellate authority passes an order, the lower authority’s order gets merged into the higher authority’s order and ceases to exist independently. However, merger applies only to the extent an appellate authority has actually examined and adjudicated upon the matter. If the appeal is not admitted, or dismissed on technical grounds, there is no merger. The CIT(A) dismissed assessee’s appeal only on limitation (delay in filing appeal), without adjudicating on merits. As per settled law, dismissal of appeal as time-barred is not a decision on merits, but only on admissibility. When appeal is dismissed in limine (for being late, defective, or incompetent), merger does not take place.The original order continues to hold the field, since there has been no judicial examination on merits by the appellate authority by ld.CIT(A). The doctrine of merger would not apply in this case, because the CIT(A) dismissed the appeal on limitation without deciding on merits. Hence, the order of PCIT u/s 263 does not merge with the CIT(A)’s order. Hence, we do not agree with the arguments advanced by the learned DR for the revenue to the effect that doctrine of merger applies to the assessee`s case, under consideration, hence, we reject the arguments of learned DR for the revenue.
Fusion Granito Pvt. Ltd.
However, we note that assessee has miserably failed to prove the source of the source, in respect of the share capital before learned PCIT. The assessee needs to prove ‘source of the source’, even if, it is a first year of commencement of business of the assessee, as mandated by the provisions of section 68 of the Act. We also make it clear that in case of unsecured loan source of the source is not applicable to the assessee under consideration for A.Y. 2018-19. However, we note that assessee could not prove the source of the source about share capital, because assessee was not given adequate opportunity of being heard, during the revision proceedings, under section 263 of the Act, which is clearly getting reflected in the grounds of appeal raised by the assessee, before us, which is reproduced below for ready reference:
2. The Hon’ble Pr. CIT-1, Rajkot has erred in law as well as on facts in completing the revision proceedings u/s 263 of the Act hurriedly in short span of time (effectively just a week only) without providing reasonable opportunity to furnish the complete submissions and an opportunity of being heard to the appellant even after specific requests thereof in gross violation of the settled principles of natural justice. 15. We note that the Hon’ble Supreme Court in M.S.Gill vs The Chief Election Commission 1978 AIR SC 851 held “The dichotomy between administrative and quasi-judicial function vis-à-vis the doctrine of natural justice is presumably obsolescent after Kraipak (A.K. Kraipak vs UOI AIR 1970 SC 150) which makes the water-shed in the application of natural justice to administrative proceedings. The rules of natural justice are rooted in all legal systems and are not any new theology. They are manifested in the twin principles of nemo judex in parte sua (no person shall be a judge in his own case) and audi alterem partem (the right to be heard). It has been pointed out that the aim of natural justice is to secure justice or to put it negatively to prevent miscarriage of justice. We note that it is settled law that principles of natural justice and fair play require that the affected party is granted sufficient opportunity of being heard to contest his case. Therefore, without delving much deeper into the merits of the case, in the interest of justice, we restore the matter back to the file of Ld. PCIT to examine source of the source in respect of share capital and only source in respect of unsecured loan for de novo adjudication and pass a speaking order after affording sufficient opportunity of being heard to the assessee, who in turn, is also directed to contest his stand forthwith. Therefore, we deem it fit and proper to set aside the order of the ld. PCIT and remit the matter back to the file of the ld. PCIT to adjudicate the issue afresh on merits. For statistical purposes, the appeal of the assessee is treated as allowed.
In the result, the appeal filed by the assessee is allowed for statistical purposes, in above terms.
Order is pronounced in the open court on 10/09/2025