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Facts
The assessee's case was reopened for the Assessment Year 2018-19 due to purchases from M/s Radha Kanheya Exports, found to be a non-genuine entity. The AO disallowed these purchases as bogus under Section 37(1) of the Income Tax Act. The Principal Commissioner of Income Tax (PCIT) initiated revision proceedings under Section 263, holding the assessment order erroneous for not invoking Section 69C and Section 115BBE.
Held
The Tribunal held that Section 69C applies when the source of expenditure is unexplained, not when the expenditure is found to be related to a bogus entity. The AO had already disallowed the purchases as bogus under Section 37(1), and invoking Section 69C was not appropriate. Therefore, the assessment order was neither erroneous nor prejudicial to the Revenue.
Key Issues
Whether the PCIT was justified in invoking Section 263 to direct the AO to invoke Section 69C and 115BBE when the AO had already disallowed the purchases as bogus under Section 37(1)?
Sections Cited
263, 147, 143(3), 69C, 115BBE, 37(1)
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, DELHI BENCH ‘G’: NEW DELHI
(ASSESSMENT YEAR 2018-19) Joginder Kumar & Sons HUF PCIT, 352/6, Near S D Modern School, Rohtak. Panipat-132103. Vs. PAN- AACHJ6257L (Appellant) (Respondent) Assessee by Shri Dhurv Goel, CA Department by Shri Pradumna Kumar Singh, Sr. DR Date of Hearing 04.09.2025 Date of Pronouncement 27.11.2025 O R D E R
PER MANISH AGARWAL, AM:
This appeal is filed by the assessee against the order of the Ld. Principal Commissioner of Income Tax, Rohtak (‘the PCIT’ in short) passed u/s 263 of the Income Tax Act, 1961 dated 21.03.2025 wherein the ld. PCIT held the assessment order as erroneous and prejudicial to the interest of the Revenue in terms of Explanation 2 of section 263 and direct the AO to conduct fresh enquiries and passed the speaking order.
Brief facts of the case are that the assessee into the business of trading and manufacture of handloom items in Panipat and case of assessee was reopened u/s 148 vide notice issued on 29.03.2022. The reason for reopening was that the assessee had purchased blankets from M/s Radha Kanheya Exports which was found to be a non-genuine entity. Accordingly, based on the statements of one Sh. Rajesh Mittal Joginder Kumar & Sons HUG vs. PCIT managing and controlling the above stated entity, the AO disallowed the purchases of Rs.53,04,000/- as not genuine in terms of the order passed u/s 147 r.w.s. 143(3) of the Act on 27.03.2023. Against the said order, assessee has filed an appeal before the Ld. CIT(a) which is pending for adjudication till date. In the meantime based on the audit objections raised by the ITO-4, Karnal that AO should have made the disallowance towards the bogus purchases u/s 69C of the Act and further observed that the tax on such purchases should have been charged at the special rate as prescribed u/s 115BBE of the Act. Thereafter, the AO forward a proposal to the PCIT for initiation of proceedings u/s 263 of the Act in terms of the letter dated 11.07.2024. Upon receipt of the said letter, the Ld. PCIT initiated proceedings u/s 263 and vide show cause notice dated 29.07.2024 asked the assessee as to why not the assessment order be held as erroneous and prejudicial to the interest of revenue since the AO has failed to invoke the provisions of section 69C r.w.s. u/s 115BBE of the Act. Upon receipt of the reply, the ld. CIT(A) held the assessment order as erroneous and prejudicial to the interest of the Revenue and direct the AO to make enquiries and disallowed the purchases u/s 69C of the Act and charge tax at the special rates of tax as prescribed in section 115BBE of the Act.
3. Against the said order passed u/s 263 by the ld. PCIT, the assessee is in appeal before the Co-ordinate Bench wherein all the ground of appeal taken with respect to the action of the PCIT in holding the assessment order erroneous and prejudicial to the interest of the Revenue. Before us, the Ld. AR submits that the AO has made the addition by holding the purchases as bogus against which first appeal is pending before the ld. CIT(A). As per ld. AR, the AO has taken a plausible view by disallowing the purchases after making proper and adequate enquiries with. He states that such purchases were duly recorded in the books of accounts maintained in regular course thus the immediate source of such purchases cannot be doubted solely Joginder Kumar & Sons HUG vs. PCIT for the reason that the supplier was found non-existent. The provisions of section 69C of the Act can be invoked where the assessee has not been able to explain the source of the expenditure. He thus, submits that the provisions of section 69C cannot be invoked on the facts of the present case and, therefore, the assessment order is neither erroneous nor prejudicial to the interest of the Revenue. For this ld. AR placed reliance on the judgment of the Co-ordinate Bench of ITAT, Rajkot Bench in the case of Shashikant Bhavajjibhai Rajpara vs. PCIT in vide order dated 22.03.2023 and also in the case of the Coordinate Bench of the ITAT Rajkot in the Vijubha Jitubha Jadeja vs. PCIT in vide order dated 02.08.2023 wherein the Co-ordinate Bench has held that once the AO has disallowed the bogus expenditure u/s 37(1), the CIT(A) cannot direct to invoke the provisions of section 69C and further u/s 115BBE of the Act in the order passed u/s 263 of the Act. He thus prayed for quashing of the order of the ld. PCIT. The Ld. AR also placed on the reliance on the judgment of Hon’ble Punjab & Haryana High Court in the case of CIT vs. Sohana Woollen Mill [2008] 296 ITR 238 (P&H) wherein it is held that on the basis of mere audit objection, the order of AO cannot be held as erroneous and prejudicial to the interest of Revenue. Ld. AR prayed accordingly.
4. On the other hand, the Ld. CIT-DR vehemently supported the orders of Ld. PCIT and submit that in the instant case, the assessee has failed to justify the purchases made and Ld. CIT(A) has rightly direct the AO to invoke the provisions of section 69C r.w.s. 115BBE of the Act and, therefore, the order of Ld. PCIT deserves to be upheld.
5. Heard both the parties and perused the material available on record. In the instant case, case of the assessee reopened u/s 147 of the Act for the reason that Joginder Kumar & Sons HUG vs. PCIT purchases made from M/s Radha Kanhaya Exports of Rs. 53,04,000/- is bogus and thereafter, the AO referred to the statements of person managing and controlling that firm and accordingly disallowed the purchase of Rs.53,04,000/- by holding the same as bogus purchase. The Ld. PCIT in terms of the show cause notice dated 29.07.2024, based on the audit objection by the ITO, issued the show cause notice which reads as under: NOTICE FOR THE HEARING M/s/Mr/Ms Subject: Notice for Hearing in respect of Revision proceedings u/s 263 of the Income Tax Act, 1961-Assessment Year 2018-19. In this regard, a hearing in the matter is fixed on 12/08/2024 at 11:00 AM. 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 1. Kindly refer to the Assessment order for AY 2018 19 passed u/s 147 r.w.s. 144B of the Action 27.03.2023.
2. The return of income for A.Y. 2018-19 was filed by you on 29.10.2018 declaring total income of Rs. 16,22,290/-. The case was reopened u/s 147 of the Income Tax Act, 1961. The assessment u/s 147 of the Income Tax Act, 1961 was completed on 27.03.2023 at assessed income of Rs 62,26,290/- by making addition of Rs.53,04,000/- on account of bogus purchases. 3 Upon examination of the assessment records for A.Y. 2018-19, it has been observed that:- i) The addition of Rs. 53,04,000/- has been made on account of bogus purchases which is covered u/s 69C of the Income Tax Act, 1961 and tax as per section 1158BE of the Income Tax Act, should have been charged. However, on perusal of the assessment order and computation of income, it has been observed that the addition has been made without mentioning the relevant section i.e. 69C of the Income Tax Act, 1961 and tax has been charged a normal rates. ii) The relevant provision of section 69C is produced as under:
Joginder Kumar & Sons HUG vs. PCIT “69C Where in any financial year an assessee has incurred any expenditure and he offers no explanation about the source of such expenditure or part thereof, or the explanation, if any, offered by him is not , in the opinion of the Assessing Offertory the amount covered by such expenditure or part thereof at the case may be may se deemed to be the income of the assessee by such for such financial year. Provided that notwithstanding anything standing contained in any other provision of this Act such unexplained expenditure which deemed to be he income of the assessee shut not be allowed as a deduction under any head of income. (iii) Further, the provisions of section 1158BE of Income Tax Act. 1991 reproduced as under:- “115BBE (1) Where the total income of the assessee- (a) Includes any income referred to in section 68, section 19, section 64 section 698. section 6PC, section 690 and reflected in the return of income furnished under section 139 or (b) Determined by the Assessing Officer includes any income referred to in section 68 section 69, section 69A, section 69B, section 69C, Section 69D if such income is not covered under clause (a) the income tax payable shall be the aggregate of (i) the amount of income tax calculated on the income referred to in clause (a) and clause (b), at the rate of sixty percent, and (ii) the amount of income tax with which the assessee would been chargeable had his total income been reduced by the amount of income referred to in clause (i).” A plain reading of the above section, it is crystal clear that the bogus purchases should have been added under section 69C of the Act and required to be taxed as per provisions of section 1158BE of the Income Tax Act, 1961. However, the FAO has failed to do so.
In view of the above observations, the assessment order passed u/s 147 of the IT Act 1961 on 27.03.2023 by the FAD, is erroneous in so far as it is prejudicial to the interest of the revenue in terms of section 263(1) of the Income Tax Act, 1961.
As per provisions of section 263 of the Income Tax Act, 1961, you are hereby given an opportunity to file your reply/objections, if any, to the proposed action on or before 12.08.2024. You may submit your reply along with supporting documentary Joginder Kumar & Sons HUG vs. PCIT evidence, if any, through e-mail at rohtak.pcit@incometax.gov.in or via post to Olo the Pr. Commissioner of Income Tax, First Floor, Aayakar Bhawan, Near Mansarovar Park, Rohtak-124001, by the above date which shall be duly considered before taking final decision in the matter.
From the perusal of the above stated notice, it could be seen that Ld. PCIT has alleged that the purchases held as bogus should be disallowed u/s 69C of the Act. The relevant provisions of section 69C are also reproduced in the show cause notice as reproduced herein above. From the perusal of section 69C, it is observed by us that provisions of section 69C are applicable where assessee incurred any expenditure for which he has failed to offer any Explanation or the Explanation given was not found satisfactorily by the AO.
6.1 However, in the instant case, it is not the allegation of the AO that source of purchases made from M/s Radhe Kanheya Exports was not explained rather the AO alleged the said party is bogus thus the purchases made from that party is not genuine and nowhere in the assessment order, AO raised any doubts about the source of such purchases. Therefore, he invoked the provisions of section 37(1) of the Act and disallowed the purchases made by the assessee. This being so, the provisions of section 69C of the Act are not applicable on the facts of the instant case.
6.2 The Co-ordinate Bench of ITAT, Rajkot in the case of Shashikant Bhavajjibhai Rajpara vs. PCIT (supra) has made following observations: “7. We have considered the above contentions made by the ld counsel for the assessee, we find merit in the same. As per the ld Pr. CIT the disallowance of Rs. 29 30,229/- made by the AO came within the purview of section 69C of the Act. We have gone through the provision of section 69C of the Act and also disallowance made by the AO in his assessment order which is reproduced above. As is evident from bare perusal of the order of the AO, disallowance related to expenses incurred by the assessee in relation to subcontractor which were not found to be genuine. Section 69C on the other hand, brings to tax the disallowance related to expenses incurred by the assessee, source of which remain unexplained. Therefore, purview and scope of section 69C is totally Joginder Kumar & Sons HUG vs. PCIT different from the disallowance of expenses found to be not genuine. The basic premise with the Id. Pr. CIT therefore for finding error in the order of the AO, that the disallowance made by him of contractors' expense came under the purview of section 69C of the Act is found to be untenable in law. This finding of error, as a consequence whereof, that the same not being subjected to tax at a special rate provided under section 1158BE of the Act also as a result does not survive.” 6.3 Further this view is followed by the Co-ordinate Bench of ITAT, Rajkot in the case of Vijuba Jutubha Jadeja vs. PCIT reported in [2023] (9TMI 206).
7. It is further seen that in the instant case, the 263 proceedings were initiated only after audit wing of the department has raised an objection which was accepted by the Assessing Officer and a proposal was made to Ld. PCIT for initiation of proceedings u/s 263 of the Act. The Hon’ble Punjab & Haryana High Court in the case of CIT vs. Sohana Woollen Mill (supra) has held as under:
A reference to the provisions of Section 263 of the Act shows that jurisdiction thereunder can be exercised if the CIT finds that the order of the AO was erroneous and prejudicial to the interest of Revenue. Mere audit objection and merely because a different view could be taken, were not enough to say that the order of the AO was erroneous or prejudicial to the interest of the Revenue. The jurisdiction could be exercised if the CIT was satisfied that the basis for exercise of jurisdiction existed. No rigid rule could be laid down about the situation when the jurisdiction can be exercised. Whether satisfaction of the CIT for exercising jurisdiction was called for or not, has to be decided having regard to a given fact situation.
Therefore, in view of the above discussion, in our considered view for disallowance of purchases claimed in the Profit & Loss account held as bogus, provisions of section 69C of the Act could not be invoked and, therefore, the assessment order is neither erroneous nor prejudicial to the interest of revenue for not invoking the provisions of section 69C r.w.s. 115BBE of the Act. Accordingly Joginder Kumar & Sons HUG vs. PCIT we quash the revisionary order passed by ld. PCIT u/s 263 of the Act. Thus, all the grounds of appeal taken by the assessee are allowed.
In the result, the appeal of the assessee is allowed.
Order pronounced in the open Court on 27.11.2025.