M/S. SIMERO VITRIFIED P. LTD. ,MORBI vs. THE PR. CIT-3 , RAJKOT
Facts
Simero Vitrified (P) Ltd. filed its return for AY 2016-17, reporting a loss and claiming Investment Allowance u/s 32AC. The Assessing Officer (AO) completed the assessment u/s 143(3), allowing the claimed loss. Subsequently, the Principal Commissioner of Income-tax (PCIT) initiated revision proceedings u/s 263, deeming the AO's order erroneous and prejudicial to the revenue due to insufficient inquiries into fresh share capital, unsecured loans, trade creditors, and the investment allowance claim. The PCIT set aside the original assessment and directed a de-novo assessment.
Held
The Income Tax Appellate Tribunal (ITAT) observed that the assessee was not given adequate opportunity to furnish all required documents, particularly concerning the 'source of the source' of investments and loans, during the PCIT's revision proceedings. Upholding principles of natural justice, the ITAT set aside the PCIT's order and remitted the entire matter back to the PCIT for de-novo adjudication. The PCIT was directed to conduct proper inquiries after allowing the assessee a full opportunity to be heard and submit all necessary evidence.
Key Issues
Whether the PCIT's revision order under Section 263 was valid, given the AO's alleged lack of inquiry into share capital, unsecured loans, trade creditors, and investment allowance (Section 32AC), and whether the assessee was afforded sufficient opportunity to present its case during the revision proceedings.
Sections Cited
263, 143(3), 32AC, 68, 142(1), 147, 148, 271(1)(C), 274
AI-generated summary — verify with the full judgment below
आदेश / O R D E R Per Bench: By way of this appeal, the assessee has challenged the correctness of the order dated 13.08.2019, passed by the Learned Principal Commissioner of Income-tax (in short “Ld PCIT”) under section 263 of the Income-tax Act, 1961 (hereinafter referred to as 'the Act'), for the assessment year 2016-17.
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2 .Grievances raised by the assessee, which, being interconnected, will be taken up together, are as follows:
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 submission of the appellant that the order passed by the AO u/s. 143(3) was either erroneous nor prejudicial to the interest of revenue and 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 in facts in cancelling the assessment order passed by he AO u/s 143(3) and directing de-novo assessment regarding verification of fresh share capital, unsecured loan, trade creditors and claim of investments allowances u/s. 32AC of the Act.
Succinctly, the factual panorama of the case is that assessee before us is a private limited company and engaged in the business of manufacturing of vitrified tiles. The Return of Income has been e-filed by the assessee, on 10/09/2016 for assessment year (A.Y.) 2016-17, reporting loss of Rs. 5,68,00,829/-, which was later revised on 09/03/2018, declaring total loss of Rs. 13,97,40,413/-, claiming Investment Allowance u/s 32AC of the Income Tax Act. The case has been selected for Complete Scrutiny (CASS) specifically to examine the followings: 1) Whether outward foreign remittance is from disclosed sources and appropriate withholding and reporting obligation have been complied with; 2) Whether investment and income relating to properties are duly disclosed; 3) Whether receipt of foreign remittance has been correctly offered for tax and, 4) Whether sundry creditors are genuine.
The Assessment order u/s 143(3) for the assessment year (A.Y.) 2016-17 was passed by DCIT, Morbi Circle, Morbi, being the Assessing Officer (AO), on 21/12/2018, allowing the loss claimed of Rs. 13,97,40,413/- to be carry forward to subsequent years.
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Later on, Learned Principal Commissioner of Income-tax (in short “Ld PCIT”) exercised his jurisdiction under section 263 of the Income-tax Act, 1961. On verification of the assessment records, it was noticed by the learned PCIT that 68,54,519 equity shares have been issued at Rs. 10 each raising equity share capital by Rs. 6,85,45,190/-. The seventeen persons/ entities have subscribed to the Share Capital of Rs. 6,85,45,190/-. The fresh unsecured loans of Rs.14,41,45,054/-have also been raised during the year from 83 persons/entities of which 13 happen to be shareholders also. In this regard, copies of ITR, Bank Statements and Confirmation from the Shareholders and 19 Loan Providers, submitted during assessment proceedings, are available on record. However, Ld. PCIT noted that no confirmations in respect of remaining 64 loan providers are found on record. Further, in respect of share capital, no balance sheet or any other suitable explanation regarding the nature or source of the sum invested by the shareholders is available on record.
The ld PCIT based on the details submitted during the assessment proceeding, a chart summarizing party- wise documents was prepared, during the review process, which was enclosed as Annexure. On perusal of the said chart reveals that some shareholders claimed to have invested amounts of about 10-15 times of their returned income. Sr.No.19 of the chart where Rasilaben H Adroja invested Rs. 42,25,450/-, as share capital and given Rs.1,98,300/-, as unsecured loan whereas her returned income for AY 2016-17, is only Rs. 3,16,790/-, is one such glaring example. Sl. No.10. 16 etc. are also similar examples. Even in such glaring instances, the AO did not examine the nature and source of the shareholders / loan providers. The ld PCIT noted that first proviso to section 68 of the Act, clearly provides that in respect of share capital, explanation offered by the assessee-company shall be deemed to be not
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satisfactory unless the shareholder offers explanation about the nature and source of such investment and the AO is satisfied about such explanation. First proviso to section 68 of the Act is as under:
"Provided that where the assessee is a company (not being a company in which the public are substantially interest), and the sum so credited consists of share application money, share capital, share premium or any such amount by whatever name called, any explanation offered by such assessee-company shall be deemed to be not satisfactory, unless- a) The person, being a resident in whose name such credit is recorded in the books of such company also offers an explanation about the nature and source of such sum so credited; and b) Such explanation in the opinion of the Assessing Officer aforesaid has been found to be satisfactory" The ld PCIT noted that in the assessee`s case, neither balance sheet of any Share holder nor any explanation of the shareholders is available on record explaining the nature and source of their investment recorded in the books of assessee-company. It is thus seen that the AO accepted the claim of genuineness of Share Capital Investment without making inquiries or verification of the claim, as prescribed in clause (a) & (b) of first proviso to sec.68 of the Act.
The ld PCIT further, noticed from the bank statements of the Share Holders/ Loan Providers that there is huge amount of cash deposit/ DD/ cheque amount that is used as the source for share investment as well as for giving loans to the assessee-company. In most of these cash was deposited, which is unaccounted money of the assessee and/ DD / Cheques have been taken for the purpose of Share Investment/Unsecured loan. For example, in the case of Vishal H Adroja HUF (Sr. No. 23 of the Chart), where total cash deposit is of Rs. 9,00,000/-, in the bank account from which investment was made towards Share Capital, in the assessee-company. Similarly, Sl. No. 10, 19 etc. are some
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such similar examples where frequent amount from cash deposit / DD / cheque have been used for investment in the assessee- company. The above point to glaring and obvious mismatch/discrepancies between the source of income/funds and the capacity/creditworthiness for making investment in the Share Capital, as well as in providing loans. These glaring discrepancies/mismatches should have raised the antenna of the AO and he should have conducted necessary enquiries/verifications. However, the AO accepted the share capital investment and loans without carrying out inquiry/verification that should have been done. It is evident from the facts of the case that the AO, who is duty bound to verify and enquire/investigate the identity and credit-worthiness of the creditor /shareholder and ascertain whether the transaction is genuine, or these are bogus entries of name-lenders, has failed to conduct verifications/inquiries that should have been done and accepted the share capital as well as the unsecured loans as genuine.
The Ld.PCIT noticed that trade payables of Rs. 11,61,51,118/-,have been reported as on 31/03/2016. In this regard, the AO vide notice dated 18/07/2018, at sr. no. 14. asked to "Furnish full name, complete address, PAN, copies of ledger accounts, confirmation and contra accounts of all parties from whom purchases exceeding Rs. 1 lakhs have been made during the period under consideration." In response, it has been requested to refer page no. 1005- 1017(F-3) of the online submission, where a table has been submitted containing names, amount outstanding at the year end, total amount involved, address and nature of transaction of creditors whose outstanding amount is more than Rs. 1 lakhs (total 100 entries amounting Rs. 10,01,73,667/-). However, out of 100 creditors, contra confirmations from only 11 creditors (amounting Rs. 2,99,42,176/-) are available physically on the record.
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The ld PCIT also noticed regarding the claim of Investment Allowance u/s 32AC of the Income Tax Act, 1961, vide letter dated 10/12/2018, following calculation has been submitted:
From the above working, it can be seen that entire electrification expense of Rs. 4,25,00,454/-, is considered for Plant and Machinery. In reality, it cannot be so because a certain portion of the same would have been incurred for electrification of the Factory also. Further, on perusal of the online submission uploaded during the assessment proceedings, it is seen that no vouchers in support of newly purchased Plant & Machinery were submitted. The AO has failed to examine the Bills/ Vouchers and inquire into this aspect of the claim during the assessment proceedings which has also rendered the order erroneous within the meaning of section 263 of the Income tax Act, 1961.
Therefore, ld.PCIT noticed from the above facts that the AO passed the assessment order without making inquiries or verifications which should have been made. The ld.PCIT also stated that issue under consideration is covered by the, Explanation 2 to section 263 of the I.T. Act.
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Therefore, learned PCIT, issued a show- cause notice, under section 263 of the Act, to the assessee, to explain the transactions. In response to the notice under section 263 of the Act, the assessee submitted its reply before the learned PCIT, which is reproduced by the ld.PCIT in his revision order. However, after going through the reply of the assessee, the learned PCIT, has dealt with the issue and concluded as follows:
(1) The AO mentioned in para-2 of the assessment order that the submission/details filed by the assessee have been verified. However, there is no evidence on record that the AO carried out any verification/enquiries with regard to the share capital/unsecured loan introduced during the year. It appears that this sentence has been written as a matter of routine, since not an iota of verification/ enquiries conducted by the AO is available on record.
(2) The glaring examples of huge investment when compared to meager income returned as mentioned in para-3 of the SCN and as evident from the fact that the investment/loan given to the assessee- company is dis- proportionally high to the income returned, called for verification/ enquiry by the AO. The averment by the assessee that most of the shareholders have filed ITR under presumptive scheme/do not have business income, but still made huge investments/ given loans, should have raised antenna of the AO to make requisite enquiries/verification.
(3) As regards few instances of cash deposits in the bank accounts before issuance of cheque to the assessee company by the shareholders/ unsecured creditor, the averment that it is presumed that the AO must
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have gone through the facts and would have been satisfied, is mis-placed and mis-leading since no verification/enquiry was conducted in these cases also by the AO.
(4) The contention that the facts of NRA Iron & Steel P.Ltd. (Supra) is different from that of the assessee and therefore the case law is not applicable, is mis-placed and mis-conceived since the Hon'ble Supreme Court laid down the broad parameters and the contours of the obligation of the assessee, the duties of the AO and the conclusion upon enquiries/investigations. These principles are applicable to all cases of share capital introductions, irrespective of having collected share premium or not. (5) The contention that the AO has verified the identity, genuineness and creditworthiness of the shareholder/lender and merely because the assessment order does not contain the investigations, it cannot be said that the AO has not made investigations, is mis-paced and fallacious, as no enquiry/verification has been carried out by the AO in the share capital/unsecured loan introduced in the year.
(6) As regards the genuineness of sundry creditors, the fact remains that out of 100 creditors whose outstanding amount is more than Rs. 1 lac, confirmations from only 11 creditors were furnished.
(7) Regarding the claim of investment allowances u/s 32AC, the fact remains that no vouchers/bills in support of newly purchased P&M/c were submitted to the AO and therefore, without even verifying the investment bills/vouchers, allowance of Rs.8,29,39,584/- was allowed. As regards the
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claim that part of the electrical expenses were taken to factory/building on which no deduction u/s.32AC was claimed, it is seen that no such explanation/bifurcation was available on record.
The ld.PCIT therefore held that the averments made by the AR during Revision proceedings have been dealt with and rebutted in seriatim, in the above mentioned paras. Even a cursory look to the SCN along with the Chart enclosed therein reveals that the AO failed to conduct any enquiries whatsoever with regard to the introduction of new share capital/unsecured loan, which he is duty bound, as per the provisions of section 68 of the Act.
Therefore learned PCIT observed that 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 passed u/s 143(3) dated 21/12/2018, therefore was set aside by ld PCIT with the direction to make proper enquiries/verification in respect of share capital introduced during the year under consideration, unsecured loans (squared up or not) raised during the year and the trade creditors. The AO shall carry out inquiries about the various layers through which the money has been rotated and landed as share capital to the assessee-company. The AO is directed to summon the share applicants and examine them regarding the source of the money in their hands either through cash or through cheque and the veracity and genuineness of huge loans taken by them, without making interest payment for years together, for investing/ giving loans to the assesses- company and others. The Trade creditors shall also be properly verified. Further, the bills/ vouchers of the new Plant & M/c installed, on which investment allowance u/s 32AC has been claimed and the bifurcation of the electrification expenses shall be also verified. Subsequent to the inquiries & verification of all relevant aspects of the
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case, the AO shall pass a speaking order, after affording proper opportunity of being heard to the assessee.
Aggrieved by the order of the learned PCIT, the assessee is in appeal before us
13.We have heard both the parties and carefully gone through the submission put forth on behalf of the assessee along with the documents furnished and the case laws relied upon, and perused the fact of the case including the findings of the ld CIT(A) and other materials brought on record.Learned Counsel for the assessee submitted that assessing officer has made due inquiries, in the course of the assessment proceedings and the assessee has furnished various evidence to discharge the onus under the Law. Thus, it is not a case of lack of inquiry as assumed by the Id. PCIT. That there is a clear difference between 'lack of inquiry' and 'inadequate inquiry'. The Id. PCIT cannot revise the assessment order u/s. 263 of the Act merely because he has a different opinion regarding the extent of inquiries than that is made by the assessing officer during the course of the assessment proceedings. The Law is settled that if the assessing officer has made inquiries, the PCIT cannot revise the assessment order u/s. 263 of the Act, merely because he either has a different view or he is not satisfied with the extent of the inquiries made by the assessing officer. The Ld. Counsel also placed reliance on several judicial pronouncements, which we have gone through.
14.Learned Counsel for the assessee also submitted before the Bench that learned PCIT had issued notice, electronically, and it was not possible for the assessee to provide all the documents and evidences, electronically, however to the extent possible, the assessee tried to furnish the details and documents before the learned PCIT. The details and documents, which were not provided
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to the ld. PCIT, during revision proceedings, were already provided before the assessing officer in physical form. Before assessing officer, some of the documents were submitted electronically, and some documents physically, therefore all the documents, which were physically filed before the assessing officer were on the record of the learned PCIT. By submitting these documents and details, assessee has proved the identity, creditworthiness, and genuineness of the share capital and loan transactions and other transactions noticed by the learned PCIT, therefore, order of the learned PCIT may be quashed.
On the other hand, ld DR for the Revenue, took us through, the appeal effect order passed by the assessing officer, under section 143(3) r.w.s. 263 of the Act, vide order dated 24.09.2021, and stated that even assessee failed to prove the source of the transactions in the appeal effect order. The entire appeal effect order of the assessing officer is reproduced below:
“The assessee is a Company e-filed its return of income for the A.Y 2016-17 on 10- 09-2016 declaring total loss of (-) Rs. 5,68,00,829/- as per normal provisions and income of Rs. 98,46,820/- as per the provisions of section 115JB of Income Tax Act, 1961. Thereafter, on 09.03.2018, assessee Company filed revised ITR declaring total loss of (-) Rs. 13,97,40,413/- The case was selected through 'CASS' for Scrutiny and assessment u/s 143(3) was completed on 21.12.2018 on revised returned income after providing consideration to the provisions of section 115JB of IT Act, 1961. 2. Thereafter, Pr. Commissioner of Income Tax-3, Rajkot found some discrepancies in passed assessment and on the basis of their judgement, order for revision u/s 263 was passed on 13.09.2016 and AO was directed to re-assess the income of the assessee depicting the following issues: (a) Share Capital introduced during the year under consideration; (b) Unsecured Loans (squared up or not) raised during the year; (c) Sundry Creditors, and (d) Sustainability of claim u/s 32AC 3. Accordingly, a notices u/s 142(1) of the Income Tax Act, 1961 dated 03-02-2021 along with questionnaire were issued to the assessee for calling details/explanations regarding above relating the raised issues in its justification.
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In its response assessee company failed to furnish any written submission and documentary evidence relating the raised issues in its justification. On 30.07.2021 a response was received asking the reasons u/s 148 r.w.s. 147 for reassessment. Since the reassessment has no relation with provisions of section 148 and 147, the reply becomes null and void. 5. Show cause notice was issued to the assessee on 11-09-2021 and the date of compliance has been fixed as 16-09-2021. In compliance of the above, the assessee filed his reply on 16-09-2021. The assessee has submitted his reply of more than 600 pages. Earlier, the assessee was issued notices under section 142(1) on 23-07-2021, 05-09-2021 and 06-09-2021 and asked to produce the necessary documents/details related to the case, but the assessee did not give any reply. And the required documents were not produced in compliance with the above notices. Now that the time barred period of the case is very near, the assessee has deliberately submitted documents more than 600 pages along with his written reply, so that their duly third- party verification and creditworthiness of the parties cannot be done. Doing so by the assessee to be a strategy and a question arises on the intention of the assessee. Since the assessee has knowingly not furnished his reply in compliance with the notices issued earlier and has furnished the reply/documents/details in bulk in the final stages of the time barring of the case, the main issues of verifications relating to his case such as fresh introduction of share capital, fresh unsecured loans accepted, data relating additional creditors and depreciation etc. could not be examined and third- party verification could not be done. The assessee has not cooperated in getting the verifications related to the case. Therefore, in view of the above circumstances, reply of the assessee is rejected. 6. There after no material reply or documentary evidence was from assessee's side. Considering the documents and information available on online records, following addition has made: i) Fresh introduction of share capital worth of Rs. 6,85,45,190/-. Since no documents were placed in support of creditworthiness of shares subscribers. Therefore, the entire amount of Rs. 6,85,45,190/-must be treated as unexplained cash credits u/s 68 and added back to the assessee's total income. Penalty u/s 271(1)(C) is initiated on these amounts for concealment of income. ii) Fresh unsecured loans accepted of Rs. 14,41,45,054/- (squared up or not as in 31a of Form 3CD). Since no documents were placed in support of creditworthiness of lenders. Therefore, the entire amount of Rs. 14,41,45,054/-/-must be treated as unexplained cash credits u/s 68 and added back to the assessee's total income. Penalty u/s 271(1)(C) is initiated on these amounts for concealment of income. iii) Since the data relating additional creditors was not available on online record and assessee fails to prove the genuineness and creditworthiness of creditors, Addition of Rs. 10,45,44,677/- (Note no. 8 of Audited Balance Sheet 8961513+102646471-78782-6984525) must be treated as unexplained cash credit u/s 68 of the Act, and added in the income of the assessee's total income. Penalty u/s 271(1)(C) is initiated on these amounts for concealment of income.
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iv) Disallowance of additional depreciation of Rs.63,75,068/- claimed u/s 32AC of the Act on electrification of Plant & Machinery worth Rs.4,25,00,454/- must be treated as unexplained expenses u/s 68 and added back to the assessee's total income. Penalty u/s 271(1)(C) is initiated on these amounts for concealment of income. Assessed at Rs. 18,38,69,580/- under section 263/143(3) of the income tax Act, 1961. Issue notice of demand accordingly after charging the interest as per income tax Act, 1961. Allow credit of prepaid taxes after proper verification. Penalty notice issued u/s 274 r.w.s. income. 271(1)(C) of the income tax Act, separately for concealment of
16.Therefore, Ld DR for the Revenue submitted that even in appeal effect order u/s 263 r.w.s 143(3), passed the assessing officer, wherein also the assessee did
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not submit the required documents and evidences to prove the second degree of evidences, that is, to prove the source of the source, even assessee does not have entire documents to prove the source ( first degree evidence), therefore ,the appeal of the assessee should be dismissed at this stage.
We note that learned Counsel submitted before us that some of the documents physically filed before the assessing officer were not filed before the learned PCIT, during the revision proceedings, under section 263 of the Act, therefore we are of the view that one more opportunity should be provided to the assessee to plead his case before the ld. PCIT, with the direction to the assessee to submit all the documents and evidences to prove the source of the source and the evidences filed physically by the assessee before the assessing officer, should also be provided to learned PCIT.
18.As per Ld. CIT(DR) for the revenue, the assessee has miserably failed to prove the source of the source, in respect of the share capital, as per the mandate of the provision of section 68 of the Act. In the assessee’s case under consideration, the assessment year involved, is the assessment year 2016-17. Therefore, as per the proviso to section 68 of the Act, the assessee needs to explain the source of the source. However, the assessee has failed to prove the source of the source, as necessary documents and evidences were not filed by the assessee. As per ld DR balance-sheet and confirmation of certain shareholders are not available. The assessee has not submitted the entire documents and evidences to prove the first decree evidences, wherein the only the source is to be proved. However, the second decree evidences, which is known, as source of the source, have never been submitted by the assessee before the Ld.PCIT. As per ld DR for the Revenue, the assessing officer had never raised the question in the notice u/s. 142(1) of the Act, regarding source of the source and the assessee has also not submitted the documents to prove the 14
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source of the source. As per ld DR even the first decree evidences, to prove the source have not been submitted properly. Out of 100 only 11 confirmations were provided, therefore the assessee has not submitted entire documents and evidences before ld.PCIT.
19.The Ld. Counsel for the assessee submitted that it was not possible to provide all the details and documents to Ld. PCIT electronically, as the details are in bulk. However, the assessee has provided sample copy of documents and evidences before the Ld. PCIT. The Ld. Counsel of the assessee submitted that later on, the assessee has submitted physically, all the details and documents, to prove the source of the source, before the assessing officer.
Therefore, considering the above facts, we are of the view, that this matter should be remitted back to the file of the Ld. PCIT with the direction to the assessee to submit all details and documents to prove the source of the source and other transaction also. We have considered the submissions of both the parties and noted that entire documents and evidence were not furnished by the assessee even before the assessing officer or before the Ld. PCIT. Some of the documents to prove the first decree of evidences are to be submitted before the Ld. PCIT. We also find that the second decree evidences to prove the source of the source in respect of share capital have not been furnished by the assessee before the Ld. PCIT. Therefore, we are of the view that one more opportunity should be given to the assessee to furnish the required documents and evidences to prove the source of the source before the Ld. PCIT. 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 15
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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. 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 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 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 of the assessee is allowed for statistical purposes.
Order is pronounced on the open court ion 22 /05/2025.
Sd/- Sd/- (DINESH MOHAN SINHA) (DR. ARJUN LAL SAINI) JUDICIAL MEMBER ACCOUNTANT MEMBER Rajkot (True Copy) िदनांक/ Date: 22 /05/2025 Copy of the Order forwarded to 1. The Assessee 2. The Respondent 3. The CIT(A) By Order, 4. Pr. CIT
Assistant Registrar/Sr. PS/PS ITAT, Rajkot
