DHARAM SINGH ,U.P vs. PR. CIT BAREILLY , U.P

the assessee filed his return of income on 20.06.2017 declaring

income of Rs.7,98,864/-. Assessee’s case was selected for

scrutiny to verify “large turnover shown in Income Tax Return,

but Audit Report not filed”. The Assessing Officer issued notices

under sections 142(1) and 143(2) of the Act from time to time

calling upon the assessee to furnish various details. As observed

by the Assessing Officer, in response to such notices, the assessee

furnished replies, documents, books of account, bills and

vouchers etc., which were verified on test check basis. While

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verifying the books of account and documents filed by the

assessee, the Assessing Officer made the following disallowances:

(i) Disallowance of car running and repair Rs. 8,839/- & maintenance expenses (ii) Disallowance of Depreciation Rs.83,923/-

income was determined at Rs.8,91,626/-. Accordingly, the

assessment was completed under section 143(3) of the Act. After

completion of assessment, as aforesaid, learned PCIT called for

and examined the assessment records. While doing so, he was of

the view that in course of assessment proceedings, the Assessing

Officer has not verified/examined certain issues, such as, cash

deposited in the bank account during the demonetization period

and the taxability of scrap sales of Rs.7,46,000/-. He further

observed that in course of assessment proceedings, the assessee

did not furnish Form 3CA of the Audit Report. Whereas, without

taking Form 3CA on record, the Assessing Officer completed the

assessment. Thus, he was of the view that the Assessing Officer,

having not examined/inquired into the aforesaid issues,

assessment order is erroneous and prejudicial to the interest of

Revenue. Therefore, he issued a show-cause notice under section 3 | P a g e

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263 of the Act, requiring the assessee to explain as to why the

assessment order should not be revised. In response to the show-

cause notice, the assessee furnished a detailed reply objecting to

the initiation of proceedings under section 263 of the Act. It was

the say of the assessee that at the time of assessment

proceedings, since, the Assessing Officer has made a detailed

inquiry with regard to the cash deposited during demonetization

period, the assessment order cannot be treated as erroneous and

prejudicial to the interest of Revenue on the ground that the

Assessing Officer has not examined the issue.

assessee submitted that since the amount in dispute has been

disclosed by the assessee, there is no question of non-disclosure.

Learned PCIT, however, was not convinced with the submissions

of the assessee. He observed that as per Explanation 2 to Section

263 of the Act, the revisionary authority can exercise jurisdiction

under section 263 of the Act, if he is of the view that the

Assessing Officer has passed the assessment order without

making inquiries or verification which he should have made.

Thereafter, relying upon certain judicial precedents, learned PCIT

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ultimately concluded that the Assessing Officer, having not

examined the issues discussed by him, the assessment order is

erroneous and prejudicial to the interest of Revenue. Accordingly,

he proceeded to set aside the assessment order with a direction to

the Assessing Officer to frame the assessment de novo after

providing reasonable opportunity of being heard to the assessee.

counsel for the assessee submitted, in course of assessment

proceedings, the Assessing Officer has specifically inquired into

the cash deposits made by the assessee in his bank accounts

during the financial year relevant to the assessment year in

dispute. In this context, he drew our attention to the notices

issued under section 142(1) of the Act along with the

questionnaire attached to such notices. He submitted, in

response to the queries raised in the notices and questionnaire,

the assessee furnished reply along with documentary evidences

from time to time starting from 27.02.2019 and thereafter. In this

context, he took us through all the notices issued under sections

142(1)/143(2) of the Act and the replies given in response thereof.

He submitted, the Assessing Officer, in fact, has conducted

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thorough inquiry not only with regard to the cash deposits made

during demonetization period, but all other issues raised by the

revisionary authority in the notice issued under section 263 of the

Act. He submitted, insofar as the allegation of learned PCIT that

the assessee has not furnished the Audit Report in Form 3CA

during the assessment proceedings and non-disclosure of scrap

sales etc. are concerned, these are frivolous issues as Form 3CA

is not applicable to the assessee and so far as receipts from scrap

sales are concerned, the assessee has disclosed them in its

audited financial statements.

the details of inquiry conducted by him in course of assessment

proceedings and the result of such inquiry in the order-sheet

maintained in the assessment record. In this context, he drew our

attention to the copies of the order-sheets placed in the paper-

book. He submitted, the questionnaire issued by the Assessing

Officer, replies by the assessee along with documentary evidences

and the order-sheet entries clearly establish the fact that in

course of assessment proceedings, the Assessing Officer has

conducted full-fledged inquiry not only with regard to cash

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deposits in the bank account, but various other issues. He

submitted, without properly examining the materials on record,

learned PCIT has recorded an erroneous finding of fact that in

course of assessment proceedings the Assessing Officer has not

examined the issue of cash deposits in the bank accounts by

calling for the cash books, bank statement etc.

the assessee has not filed his Audit Report along with his return

and without examining it the Assessing Officer has accepted the

trading results shown in the Income Tax Return. He submitted,

the aforesaid finding of fact by learned PCIT is contrary to facts

and materials on record as the assessee had submitted the audit

report in course of assessment proceedings. Thus, he submitted,

power under section 263 of the Act has been exercised without

properly examining the materials on record, which according to

him, vitiates the proceedings. He submitted, when the materials

on record reveal that the Assessing Officer has conducted

thorough inquiries on the issues and after verifying all materials

brought on record has passed the assessment order, then such

order cannot be treated as erroneous and prejudicial to the

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interest of Revenue. He submitted, Explanation 2 to section 263

of the Act does not authorize the revisionary authority to declare

the assessment order as erroneous and prejudicial to the interest

of Revenue by merely observing that in the opinion of the

revisionary authority the Assessing Officer has not conducted

inquiry, which he should have made. He submitted, before

applying Explanation 2 to section 263 of the Act, the revisionary

authority must prove on record that the Assessing Officer has not

conducted necessary inquiry. He submitted, since, in the facts of

assessee’s case the Assessing Officer has conducted detailed

inquiry on all the issues, including the issue on which the

proceeding under section 263 of the Act was initiated, the

assessment order cannot be held as erroneous and prejudicial to

the interest of Revenue, so as to empower the revisionary

authority to revise it.

relied upon the observations of learned PCIT.

materials on record. We have also applied our mind to the judicial

precedents relied upon by the parties. However, in our view, the

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issue is purely factual. This is so because, learned PCIT has

invoked his jurisdiction under section 263 of the Act to revise the

assessment order, alleging that the Assessing Officer has not

made inquiry with regard to the cash deposits made during

demonetization and further he has not examined non-disclosure

of income from scrap sales.

jurisdiction under section 263 of the Act, being the last fact

finding authority, it is necessary for us to factually verify the

nature of inquiry conducted by the Assessing Officer in course of

assessment proceedings. From the materials placed before us, it

is observed that after assessee’s case was selected for scrutiny,

the Assessing Officer on 11.08.2018 issued a notice under section

143(2) of the Act, calling upon the assessee to produce the

evidences on which he may like to rely to support the return of

income filed for the assessment year under dispute. On

04.09.2018, the Assessing Officer issued a notice under section

142(1) of the Act along with a questionnaire raising queries on

various issues and calling upon the assessee to furnish his reply

on the issues raised along with supporting evidences. In item nos.

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6 to 10 of the questionnaire attached to the notice issued under

section 142(1) of the Act, the Assessing Officer had specifically

called upon the assessee to furnish the bank account statements

and cash deposits made in the bank account from 01.04.2016 to

31.03.2017 in a specific format and also to explain the source of

such cash deposits. In the said questionnaire, the Assessing

Officer has also called upon the assessee to furnish details of

month-wise sales and purchases. He has further called upon the

assessee to explain substantially high volume of purchases

compared to low profit rate declared for the year.

return filed for the relevant financial year with details of stock

inventory. On 16.01.2019, the Assessing Officer issued another

notice under section 142(1) of the Act calling for identical

information. Additionally, he has also brought it to the notice of

the assessee that since the assessee had failed to furnish the

Audit Report as required under section 44AB, the penalty

proceedings under section 271B would be initiated. In response to

the said notice, the assessee furnished its reply by providing all

necessary information relating to the details of bank accounts

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held, cash deposits made during the year with the source thereof.

It was explained by the assessee that the cash deposits made in

the bank account were out of cash sales. The assessee also

furnished the month-wise purchase/sale statements along with

VAT returns. The assessee also explained the substantially high

purchase turnover and reasons for low profit. Even, the assessee

furnished its audited financial statement as required under 44AB

of the Act. Subsequently, the Assessing Officer issued more

notices under section 142(1) of the Act from time to time calling

for various other details and the assessee furnished its reply with

supporting documents.

beginning from 11.08.2018 to 07.06.2019, a period of almost one

year, the Assessing Officer has conducted thorough inquiry by

issuing a notice under section 143(2) as well as notices under

section 142(1) of the Act with questionnaire calling upon the

assessee not only to furnish the details of cash deposits in the

bank account, but also explain the source thereof. The Assessing

Officer has also called upon the assessee to explain the reason for

low profit compared to the turnover. It is a matter of record that

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the assessee has responded to each of the queries raised by the

Assessing Officer in the questionnaire by explaining the source of

cash deposits as well as various other details called for. Not only

the Assessing Officer has conducted threadbare inquiry on

various issues by issuing number of notices to the assessee, but

he has also conducted discreet inquiries from third parties,

including the banks, wherein, the assessee has held account by

issuing notices under section 133(6) of the Act. The result of such

inquiries has been meticulously noted down by the Assessing

Officer in the order-sheet maintained in the assessment record.

Extracts of the order-sheet entries maintained by the Assessing

Officer in the assessment record are reproduced hereunder for

better clarity:

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a clear insight to the detailed inquiry conducted by the Assessing

Officer to ascertain not only the source of cash deposits made in

the bank account, but various other issues, which came up for

consideration in course of assessment proceedings. The order- 17 | P a g e

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sheet entries further reveal that to verify authenticity of assessee’s

claim that the cash deposits made in the bank accounts were out

of cash sales, the Assessing Officer has taken up inquiry with the

parties, from whom, the assessee claimed to have made

purchases. He has also sought information from Commissioner of

Sales Tax, Deputy Commissioner of GST, creditors, concerned

banks etc. Thus, in sum and substance, facts on record reveal

that the Assessing Officer has conducted deep inquiries on

various issues including deposits made in the bank account

during the previous year, which also includes the demonetization

period. In contrast, in the show-cause notice issued under section

263 of the Act, learned PCIT has observed as under:

“NOTICE FOR THE HEARING M/s/Mr/Ms Subject: Notice for Hearing in respect of Revision proceedings u/s 263 of the THE INCOME TAX ACT, 1961-Assessment Year 2017-18. In this regard, a hearing in the matter is fixed on 11/02/2022 at 12:08 PM. You are requested to attend in person or through an authorized representative to submit your representation, if any alongwith supporting documents/information in support of the issues involved (as mentioned below). If you wish that the Revision proceeding be concluded on the basis of your written submissions/representations filed in this office, on or before the said due date, then your personal attendance is not required. You also have the option to file your submission from the e-filing portal using the link: incometaxindiaefiling.gov.in Please refer to the above, 18 | P a g e

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On perusal of assessment record, it has been observed that during the year under consideration, the assessee is engaged in the business of "Agro-based industries" and deposited cash during demonetization period (from 09.11.2016 to 31.12.2016) amounting Rs. 91,00,000. Assessee had also availed C.C. Limit of Rs. 1.75 Cr from the bank. On perusal of assessment record, it is observed that cash book and bank account statements from the assessee were not been obtained and copy of bank accounts for the relevant period not placed on file. It means that huge cash deposits made by the assessee were not been examined. Assessee had not filed his audit report along with his ITR, but trading results declared by the assessee in his ITR were accepted.

As per Profit and Loss account, Sales by the assessee was shown at Rs. 11,09,59,501. A copy of "scrap sales" account placed on records shows sale at Rs.7,46,000. Further, the assessee had also not collected the tax at source (TCS) on scrap sales under provision of section 206 of the I.T. Act, 1961, In Form No. 3CD in Colmn. No. 34 (a) "Whether the assessee is required to deduct or collect tax as per provision of Chapter XVII-B or Chapter XVII-BB, if yes please furnish" was filled as "NIL".

Perusal of assessment record depicts the details of G.P. and N.P. from A.Y. 2015-16 to 2017-18 as under:- A.Y G.P.% Net Profit (in N.P. % Rs.) 2015-16 2.23% 6,43,737 0.53% 2016-17 3.42% 7,35,682 0.69% 2017-18 3.14% 9,13,366 0.83%

On perusal of above chart, it is observed that the scrap sales amounting Rs.7,46,000/- has not been included in the sales.

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cause notice reproduced above, learned PCIT has observed that

on perusal of assessment record, he found that the cash book and

bank account statements from the assessee were not obtained

and copy of bank account for the relevant period not placed on

file. These facts led him to conclude that the cash deposits made

by the assessee were not examined by the Assessing Officer. If the

aforesaid observations of learned PCIT are kept in juxtaposition to

the order-sheet entries of the Assessing Officer as well as the

questionnaires along with notices issued under section 142(1) of

the Act and replies furnished by the assessee, there can be two

conclusions. Firstly, without making any inquiry the Assessing

Officer has misstated the facts and made false entries in the

order-sheets. Secondly, learned PCIT has not examined the

records properly. Keeping in view the details of inquiry conducted

by the Assessing Officer, which is manifest from the materials

brought on record in the form of notices issued under section

142(1) and 143(2), the order-sheet entries, replies filed by the

assessee, it is not possible under any circumstances to conclude

that the Assessing Officer has misstated the facts or has recorded

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false order-sheet entries. Therefore, the only conclusion one can

reach is, the allegations made by the PCIT that the Assessing

Officer has not conducted any inquiry with regard to cash

deposits during demonetization period, is not based on materials

on record, or rather, contrary to materials on record. The

materials on record certainly make it clear that learned PCIT has

initiated proceedings under section 263 of the Act mechanically

without properly examining the assessment records. Even, with

regard to the alleged non-disclosure of scrap sales, the materials

on record clearly reveal that there, in fact, is no such non-

disclosure of scrap sales. The Audited financial statement

furnished in course of assessment proceedings clearly indicate

that the scrap sales, indeed, were shown by the assessee.

are, the order sought to be revised must be erroneous and at the

same time prejudicial to the interest of Revenue. Unless, these

twin conditions are satisfied, section 263 of the Act cannot be

invoked. In the facts of the present case, learned PCIT has put

much emphasis on Explanation 2 to section 263 of the Act. In our

view, Explanation 2 to section 263 of the Act does not invest

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unbridled power with the revisionary authority so as to empower

him to invoke revisionary jurisdiction arbitrarily. The words

appearing in Explanation 2(a) to the effect that “the order is

passed without making inquiries or verification which could have

been made”, certainly do not mean that on mere allegation that in

the opinion of the revisionary authority the Assessing Officer has

not made inquiries or verifications which should have been made,

revisionary power can be invoked. Allegation of lack of enquiry by

the Assessing Officer has to be substantiated based on record and

cannot be conjured out of thin air.

record clearly reveal that the Assessing Officer has conducted

thorough inquiry on various issues, including the issues on which

learned PCIT has exercised jurisdiction under section 263 of the

Act. After satisfying himself with the result of enquiry, the

Assessing Officer has completed the assessment. That being the

factual position emerging on record, the assessment order cannot

be held to be erroneous and prejudicial to the interest of Revenue

merely on the allegation that the Assessing Officer has not made

inquiry and verification with regard to cash deposits as well as

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scrap sales. In absence of any material brought on record by the

revisionary authority to establish the lack of inquiry, mere

allegation would not suffice.

record, we are of the view that exercise of jurisdiction under

section 263 of the Act in the present case is invalid, hence,

unsustainable, as the assessment order cannot be held to be

erroneous and prejudicial to the interest of Revenue. Accordingly,

we quash the impugned order passed under section 263 of the

Act and restore the assessment order.

Order pronounced in the open court on 18th June, 2024

Sd/- Sd/- (NAVEEN CHANDRA) (SAKTIJIT DEY) ACCOUNTANT MEMBER VICE-PRESIDENT Dated: 18th June, 2024. RK/- Copy forwarded to: 1. Appellant 2. Respondent 3. CIT 4. CIT(A) 5. DR Asst. Registrar, ITAT, New Delhi

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