BHAGAT MARKETING PVT LTD,AHMEDABAD vs. PCIT-1, AHMEDABAD

O R D E R

PER SIDDHARTHA NAUTIYAL - JUDICIAL MEMBER:

2. The Assessee has taken the following grounds of appeal:-

“1. The Ld. Pr.CIT erred in passing revision u/s.263 of the Income Tax Act, 1961 (the ''Act") revising assessment order passed u/s.143(3) on the issue of addition of alleged bogus purchases without appreciating that assessment order u/s. 143(3) is neither erroneous nor prejudicial to the interest of revenue as during assessment proceedings, Ld. AO had specifically raised queries pertaining to alleged bogus purchases and after considering the evidences produced by the appellant, addition of 12.5% of alleged bogus purchases in accordance with law and thus revision under section. 263 is nothing but a change of opinion and hence order u/s. 263 is bad in law.

4. The Ld. Pr.CIT has erred in not considering the fact mentioned in para 3 that the AO had passed the e assessment order u/s. 147 r.w.sec. 144B of the Act on 27-3-2022 determing total income of Rs. 1,13,02,1517- by making addition of Rs. U3.12.210/- being suppressed profit of Rs. U3.12.210/- @ 12.5% of unproved purchases of Rs. 9,04,97,678/-from Varia Aluminium as against returned loss of Rs. 10.059/- and assessed total income u/s. 143(3) of the Act of Rs. U3.02.151/- raising demand of Rs. 37,36,830 + lnt. us.234A,B of Rs-2683812/- totalling to Rs. 6420642 and tax paid Rs. 12073/- net payable Rs.64,08.589/-, assessed u/s 147 r.w.sec. 144B of the IT.Act. Against the order of the learned, your appellant has filed an appeal on 18-6-2022 vide Ack. No. 67963/730180622.

5. The Ld. Pr.CIT has erred in not considering the fact mentioned in para 2 that your appellant had never purchased material as mentioned by you amount worth Rs. 9,04,97,678/-. Your appellant had prepared bill for two times but both the time, after inspection of the material dispatched at our factory was not as per our specifications hence your appellant had never taken material delivery from the company. Your appellant had written a letter dated 26-9-2017 to the income-tax Officer Ward 4(1)(2) Ahmedabad in reply filed on 26-9-2017 to notice issued to us. Copy of the said letter were furnished during the course of above reassessment proceedings vide page 38a and 38b. Sales and purchases register page 45 to 50. Sales tax department form 217 audit report by state Govt. was also enclosed page 51 to 67. We have stated in the submission that No purchase sale transaction with Varia Alluminium Pvt. Ltd. had been made. In support of the same, the copy of a/c. of Varia Alluminium Pvt. Ltd. for the period 16-17, 17-18, 18-19 & 19-20 were also furnished during the course of proceedings u/s. 263 of the Act.

5. The appellant craves liberty to add, alter, amend any of the grounds of appeal

.”

3. The brief facts of the case are that for the assessment year (AY) 2016-17, the assessee filed return of income on September 11, 2017, declaring a total loss of Rs. (-)10,059/-. An assessment order under Section Bhagat Marketing Pvt. Ltd. vs. PCIT Asst.Year –2016-17 - 3– 147 r.w.s 144B of the Income-tax Act, 1961 was passed on March 27, 2022, determining the assessed income at Rs. 1,13,02,151/-. The Assessing Officer (A.O.) made an addition of Rs. 1,13,12,210/-, which constituted 12.5% of alleged non-genuine purchases amounting to Rs. 9,04,97,678/-. The case of the assessee was reopened based on information indicating that the assessee had purchased goods from M/s. Varia Aluminium Pvt. Ltd. though the assessee claimed that it returned the goods back to M/s Varia Aluminium due to poor quality; however, no entries regarding the return were found in either the assessee's or Varia Aluminium's records. Consequently, the A.O. classified Rs. 9,04,97,678/- worth of purchases as bogus purchases. On going through the case records, PCIT observed that despite recognizing the dubious nature of these transactions, the A.O. only added a fraction of the alleged bogus purchases, resulting in what was deemed an erroneous and prejudicial order. On February 16, 2024, a notice under Section 263 of the Income-tax Act was issued by PCIT to the assesse seeking justification for why the assessment order dated March 27, 2022, should not be revised. In response, the assessee reiterated its position, asserting that no transactions with Varia Aluminium had occurred and supported this claim with documentation. After reviewing the submissions, PCIT highlighted the core issue of the assessment's basis, which stemmed from a survey conducted on Varia Aluminium Pvt. Ltd., where a significant debit balance for the assessee was discovered. This finding led the A.O. to presume purchases were made, despite the absence of corresponding entries in the assessee’s books. The Principal Commissioner directed the A.O. to thoroughly examine the survey findings and assess the total alleged transaction amounting to Rs. 9,04,97,678/- under Section 69C of the Act, Bhagat Marketing Pvt. Ltd. vs. PCIT Asst.Year –2016-17 - 4– emphasizing that the A.O. should not simply apply a suppressed profit rate but instead account for the full extent of the bogus purchases, as supported by legal precedents, particularly the Supreme Court's ruling in the N.K. Proteins case. The Principal CIT highlighted that the A.O.’s failure to recognize and rectify the erroneous assessment constituted a significant underassessment, leading to a loss of tax revenue. Consequently, it was held that the assessment order is erroneous and prejudicial to the Revenue's interests, thus requiring a revision. Accordingly, Principal CIT invoked Section 263 of Act, setting aside the prior assessment order and instructing the A.O. to pass a fresh order in accordance with the law.

4. The assessee is in appeal before us against the aforesaid order passed by PCIT holding the assessment order to be erroneous and prejudicial to the interest of the Revenue. Before us, the Counsel for the assessee submitted that the assessee operates in the trading of stainless steel and that the assessee had provided comprehensive documentation, including the computation of income, audited balance sheet, profit and loss accounts, and detailed bank account statements before the Assessing Officer. During hearings, the A.O. raised queries regarding purchases from M/s. Varia Aluminium Pvt. Ltd. The Counsel for the assessee submitted that it had not made purchases amounting to Rs. 9,04,97,678/-, as after having inspected the materials, the assessee had found them to be unsatisfactory and therefore never accepted delivery. A letter dated September 26, 2017, was submitted to the Income Tax Officer, along with relevant supporting documents, including sales and purchases registers and a State Government Audit Report. The A.O. subsequently issued the assessment order on March 27, Bhagat Marketing Pvt. Ltd. vs. PCIT Asst.Year –2016-17 - 5– 2022, under Section 147 read with Section 144B, which determined a total income of Rs. 1,13,02,151/- by adding Rs. 1,13,12,210/-, equivalent to 12.5% of the alleged unverified purchases from M/s. Varia Aluminium. The assessee's returned loss was Rs. 10,059/-, and the resulting tax demand amounted to Rs. 64,08,589/- after considering taxes already paid. The Counsel for the assessee submitted that the transactions had not resulted in actual purchases or sales, nor had any payments been made related to the disputed amount. Before us, the Counsel for the assessee drew our attention to para 2 of the notice under Section 263 of the Act and submitted that the principal CIT has itself noted the assertion of the assessee is that the assessee company has never purchased material from M/s. Varia Aluminium Pvt. Ltd. Therefore, when the contention of the assessee has all throughout been that it has not made any purchases from M/s. Varia Aluminium Pvt. Ltd., then there can be no question of any additions on account of bogus purchases. The Counsel for the assessee attention to the audited accounts of the assessee, wherein M/s. Varia Aluminium Pvt. Ltd. has been shown as a debtor. Therefore, the Counsel for the assessee submitted that when once M/s. Varia Aluminium Pvt. Ltd. has been shown as a debtor, then there is no question of making any payment to M/s. Varia Aluminium Pvt. Ltd. either by way of cash or by way of cheque and therefore, this is not a case of fraudulent purchases, since the assertion of the assessee has all throughout being that no purchases have in fact been made from M/s. Varia Aluminium Pvt. Ltd.

Bhagat Marketing Pvt. Ltd. vs. PCIT Asst.Year –2016-17 - 6– 6. We have heard the rival contentions and perused the material on record. Before us, there are two primary contentions of the Counsel for the assessee. Firstly, the counsel for the assessee submitted that he has not made any purchases from M/s. Varia Aluminium Pvt. Ltd. and therefore, there is no question of making any additions so far as bogus purchases are concerned. The second contention of the Counsel for the assessee is that even if the purchases were to be considered as bogus, the assessing officer took a legally plausible view and made a disallowance/addition of 12.5% and added the same to the income of the assessee during the course of assessment proceedings. Thirdly, it was also submitted that the assessing officer had made due enquiries during the course of assessment proceedings and the assessee had also filed reply to the queries made by the assessing officer and hence, evidently in the instant facts there is no lack of enquiry on the part of the assessing officer. Further it was submitted before us that the additions made by the assessing officer are also pending adjudication before Ld. CIT(Appeals) since the assessee has filed appeal against the order passed by the assessing officer. On going to the facts of the instant case, we shall not be commenting specifically on whether the assessee had in fact made purchases in the first instant or not. The issue of whether purchases were made in the first instance by the assessee from M/s. Varia Aluminium Pvt. Ltd. is pending adjudication before Ld. CIT(Appeals). However, we do observe that the assessee has all throughout maintained that no purchases has been made by the assessee from M/s. Varia Aluminium Pvt. Ltd. But at the same time, on going through the contents of the assessment order, it is also observed that no records in the form of any accounting entries etc. has been found in either the books of the assessee or Bhagat Marketing Pvt. Ltd. vs. PCIT Asst.Year –2016-17 - 7– in the books of M/s. Varia Aluminium Pvt. Ltd. which confirmed that the goods which were supplied by M/s. Varia Aluminium Pvt. Ltd. have been returned back by the assessee on the ground that the same were defective and not meeting the quality standards. However, we are not specifically delving into this issue, but the purchases were considered to be bogus as alleged, then whether the assessing officer took a legally plausible view that only 12.5% of bogus purchases should be added to income of the assessee. The PCIT was of the view that the entire bogus purchases should be added to the income of the assessee and not only 12.5% of such bogus purchases, and therefore, the assessment order is erroneous insofar as prejudicial to the interests of the Revenue.

When an Income Tax Officer adopted one of the courses permissible in law and it has resulted in loss of revenue or where two views are possible and the Income Tax Officer has taken one view with which the Commissioner does not agree, it cannot be treated as an erroneous order prejudicial to the interest of the Revenue unless the view taken by the Income Tax Officer is unsustainable in law.

Section 263 of the Act confers power to examine an assessment order so as to ascertain whether it is erroneous and prejudicial to the interest of the revenue but does not confer jurisdiction upon the CIT to substitute his opinion for the opinion of the Assessing Officer. The words prejudicial and erroneous have to be read in conjunction and therefore, it is not each and every error in an assessment that invites exercise of powers under Section 263 of the Act, but only orders that are erroneous and prejudicial to the interest of the revenue.

Bhagat Marketing Pvt. Ltd. vs. PCIT Asst.Year –2016-17 - 8– 9. In a decision rendered by Delhi High Court in the case of CIT Vs. Sunbeam Auto 332 ITR 167 (Del.), wherein, while considering the distinction between lack of inquiry and inadequate inquiry, the Hon'ble Court held that where the AO has made inquiry prior to the completion of assessment, the same cannot be set aside u/s 263 on the ground of inadequate inquiry:

“12. We have considered the rival submissions of the counsel on the other side and have gone through the records. The first issue that arises for our consideration is about the exercise of power by the Commissioner of Incometax under section 263 of the Income-tax Act. As noted above, the submission of learned counsel for the revenue was that while passing the assessment order, the Assessing Officer did not consider this aspect specifically whether the expenditure in question was revenue or capital expenditure. This argument predicates on the assessment order which apparently does not give any reasons while allowing the entire expenditure as revenue expenditure. However, that by itself would not be indicative of the fact that the Assessing Officer had not applied his mind on the issue. There are judgments galore laying down the principle that the Assessing Officer in the assessment order is not required to give detailed reason in respect of each and every item of deduction, etc. Therefore, one has to see from the record as to whether there was application of mind before allowing the expenditure in question as revenue expenditure. Learned counsel for the assessee is right in his submission that one has to keep in mind the distinction between "lack of inquiry" and "inadequate inquiry". If there was any inquiry, even inadequate, that would not by itself, give occasion to the Commissioner to pass orders under section 263 of the Act, merely because he has different opinion in the matter. It is only in cases of "lack of inquiry", that such a course of action would be open. --------- From the aforesaid definitions it is clear that an order cannot be termed as erroneous unless it is not in accordance with law. If an Income-tax Officer acting in accordance with law makes a certain assessment, the same cannot be branded as erroneous by the Commissioner simply because, according to him, the order should have been written more elaborately. This section does not visualise a case of substitution of the judgment of the Commissioner for that of the Income- tax Officer, who passed the order unless the decision is held to be erroneous. Cases may be visualised where the Income-tax Officer while making an assessment examines the accounts, makes enquiries, applies his mind to the facts and circumstances of the case and determines the income either by accepting the accounts or by making some estimate himself. The Commissioner, on perusal of the records, may be of the opinion that the estimate made by the officer concerned was on the lower side and left to the Commissioner he would have estimated the income at a figure higher than the one determined by the Income-tax Officer. That would not vest the Commissioner with power to re-examine the accounts and determine the income himself at a higher figure. It is because the Income-tax Officer has exercised the quasi-judicial power vested in him in accordance with law and arrived at Bhagat Marketing Pvt. Ltd. vs. PCIT Asst.Year –2016-17 - 9– conclusion and such a conclusion cannot be termed to be erroneous simply because the Commissioner does not feel satisfied with the conclusion. There must be some prima facie material on record to show that tax which was lawfully exigible has not been imposed or that by the application of the relevant statute on an incorrect or incomplete interpretation a lesser tax than what was just has been imposed.