SHAH JITENDRAKUMAR MAFATLAL HUF,ELLISBRIDGE, AHMEDABAD vs. PCIT, AHMEDABAD-1, AHMEDABAD

This appeal has been filed by the Assessee against the order passed by the Ld. Principal Commissioner of Income Tax, (in short “Ld. PCIT”), Ahmedabad-1, Ahmedabad vide order dated 13.03.2024 for Assessment Year 2014-15.

The Assessee has taken the following grounds of appeal:-

The brief facts of the case are that a return of income for the Assessment Year 2014-15 was filed on September 29, 2014, declaring a total income of ₹12,25,450/-. Order under section 147 read with section 144B of the Income-tax Act, 1961 (Act), was passed on March 22, 2022 accepting the income as per the original assessment order under section 143(3) of the Act dated December 26, 2016, at the figure of ₹12,25,450/-. However, the Principal CIT upon reviewing the records, observed that the assessee had obtained accommodation entries of a sum of ₹47,50,000/- from an entry operator named Jignesh Shah. The case of the assessee was reopened u/s 147 of the Act based on specific information about these accommodation entries. Despite this, the Assessing Officer (A.O.) did not make any additions related to these accommodation entries, and therefore, the assessment order was erroneous and prejudicial to the interests of the Revenue. The assessee submitted that the A.O. had verified the issue before passing the assessment order under section 147 read with section 144B of the Act and had not made any additions. The assessee also claimed that the case was both reopened and subsequently closed with the permission of the relevant office. After reviewing the submissions of the assessee, Principal CIT was of the view that though the case of the assessee was reopened with the permission of the relevant office, the closure of the proceedings was solely under the jurisdiction of the Faceless Assessing Officer/Assessing Officer, with no involvement from the office of the Principal CIT. The Principal CIT was of the view that the assessee had obtained accommodation entry of ₹47,50,000/- through the sale of penny stock scrips of Safal Herbs Ltd. Principal CIT was of the view that once the case was reopened based on this information available with the Ld. Assessing Officer, he was required to verify the details and make the necessary additions regarding the accommodation entries. The failure to do so rendered the A.O.'s order erroneous and prejudicial to the interests of the Revenue. Consequently, the impugned order passed by the A.O. was set aside, and the A.O. was directed to make a fresh assessment after considering the accommodation entries of ₹47,50,000/- obtained by the assessee through transactions in the penny stock scrips of Safal Herbs Ltd., which was managed by Jignesh Shah and his group. Given the circumstances, Principal CIT held that the A.O. had erred by not adequately verifying the issue of accommodation entries, leading to an erroneous assessment order that was erroneous and prejudicial to the interest of the Revenue.

The assessee is in appeal before us against the aforesaid order passed by Principal CIT u/s 263 of the Act. Before us, the Ld. Counsel for the assessee submitted that both the notice and the order issued under section 263 of the Income-tax Act are invalid and liable to be set aside. It was submitted before us that the order u/s 263 of the Act does not satisfy the twin conditions required for invoking section 263 viz. that the assessment order must be both erroneous and prejudicial to the interests of the revenue. The Ld. Counsel for the assessee submitted that there is no error in the order passed under section 147 of the Act, as it was issued after thorough verification of details and submissions by the assessee, and after due application of mind by the Assessing Officer. The case was reopened and order u/s 147 of the Act was passed on the basis of information available to the A.O. at that time, and therefore, the order cannot be deemed erroneous under the meaning of section 263. The Ld. Counsel for the assessee relied on several judicial decisions to support this contention. The Ld. Counsel for the assessee further submitted that this is not a case where the A.O. failed to conduct an inquiry, as provided in Explanation 2 of Section 263, which was inserted with effect from June 1, 2015. The A.O. clearly made due inquiry based on the recorded reasons, and took into consideration the detailed reply filed by the assessee, and thereafter passed the order without making any addition. Since due inquiry was conducted by the Assessing Officer, Explanation 2 of Section 263 is not applicable, particularly as the case pertains to AY 2014-15, prior to the insertion of Explanation 2. The PCIT, therefore, wrongly interpreted and applied Explanation 2. To support this argument, the Ld. Counsel for the assessee relied on several decisions in support of his contention. The Ld. Counsel for the assessee also submitted that the PCIT’s notices under section 263, dated 09-02-2024 and 26-02- 2024, stated that the assessee had received accommodation entries of ₹47,50,000/- from Jignesh Shah, and that the A.O. should have added this bogus transaction as unexplained cash credit under section 68 read with section 115BBE of the Act. However, in the order passed under section 263, the PCIT made a contradictory claim, stating that the assessee had sold shares of a penny stock company operated by Jignesh Shah and his group. This change in the PCIT's stance renders the entire proceeding under section 263 null and void. The Ld. Counsel for the assessee argued that the PCIT introduced a new contention in the order passed under section 263, which is self-contradictory and was never communicated to the assessee before passing the order, making the proceeding illegal and unjustifiable. In the 263 order there is no finding as to how the assessment order was erroneous and prejudicial to the Revenue. Accordingly, the Ld. Counsel for the assessee submitted that in light of the above facts and judicial precedents on the subject, the order passed under section 263 is liable to be quashed and set aside.

In response, Ld. DR placed reliance on the observations made by the Principal CIT in the 263 order.

We have heard the rival contentions and perused the material on record. On going through the facts of the instant case, there are certain noteworthy points which need to be mentioned before proceeding to adjudicate on this issue. In the original assessment order dated 23-12-2016, it has been specifically mentioned that the reason for scrutiny selection is “suspicious transactions relating to long-term capital gain on shares as per inputs from the investigation wing”. Accordingly, during the course of original assessment proceedings, the assessing officer, on the basis of return of income and submissions and evidences filed by the assessee and discussions during the course of assessment proceedings, and after specifically inquiring into the aspect of bogus long-term capital gain on sale of shares of Safal Herbs Ltd, assessed the total income, without making any addition is and accepting the return of income as filed by the assessee. Therefore, evidently, the issue regarding accommodation entry regarding sale of shares of Safal herbs Ltd was to be enquired the course of original assessment proceedings and no additions were made by the assessing officer. Thereafter, the case of the assessee was reopened under section 147 of the Act and from a perusal of “reasons recorded”, the case of the assessee was reopened on the basis that the assessee had made transactions as fictitious loan (entry operator beneficiaries) of Jignesh Shah for a sum of ₹ 47,50,000/-. In the order passed under section 147 of the Act, the assessing officer observed that notice under section 148 had been issued upon the assessee on the basis of information that the assessee has entered into Shah Jitendrakumar Mafatlal HUF vs. PCIT Asst.Year –2014-15 - 7– transactions as fictitious loan entry operator beneficiary amounting to ₹ 47,50,000/- of Jignesh Shah. In the reassessment proceedings, the assessee raised a specific objection that the assessee had not taken any loan from Jignesh Shah in any manner and accordingly, the reassessment proceedings which have been initiated are bad in law. The assessing officer accepted the contention of the assessee and no variation in the income of the assessee was made in the order passed under section 147/148 of the Act. Thereafter again, Principal CIT issued notice under section 263 of the Act with the observation that the case of the assessee was reopened under section 147 of the Act on the ground that the assessee had taken accommodation entries amounting to ₹47,50,000/- from Jignesh Shah. Further, Principal CIT proceeded to hold that from the information available on record, assessee had received accommodation entry of ₹47,50,000/- from Jignesh Shah during the year under consideration and therefore, the assessing officer should have added that the bogus transaction as unexplained cash credit under section 68 r.w.s. 115BBE of the Act. On going through the instant facts, it is observed that firstly Principal CIT initiated 263 proceedings on the presumption that reassessment u/s 147 of the Act was initiated on the assessee on the ground that the assessee had taken accommodation entries of ₹ 47,50,000/- from Jignesh Shah, whereas in the 147 proceedings, the issue was whether the assessee had taken fictitious loan (entry operator beneficiary) from Shri Jignesh Shah for a sum of ₹ 47,50,000/-. Therefore, evidently the factual basis mentioned in the 263 notice itself is apparently flawed. Secondly, we observe that the issue regarding alleged bogus accommodation entry had been examined both during the course of original assessment proceedings (refer original assessment order passed dated 23- 12-2016 u/s 143(3) of the Act) and again during the course of 147 proceedings (refer notice under section 147 of the Act dated 04-02-2022) wherein the issue for consideration was whether the assessee had made transactions as fictitious loan (entry operator beneficiaries) of Jignesh Shah amounting to ₹ 47,50,000/-. Therefore, it is seen that evidently the same issue has been again raised by the Principal CIT, when this issue had earlier been examined by the assessing officer of both during the course of original assessment proceedings and also in the course of 147 proceedings, and after thorough examination, no addition was made on this issue in the hands of the assessee. It is well settled law that recourse cannot be made to 263 proceedings, only with a view to enhance the scope of assessment / reassessment proceedings. It is evident from the facts placed on record that the issue regarding accommodation entry has been examined in detail both during the course of assessment as well as reassessment proceedings under section 147 of the Act, and again the Principal CIT has initiated proceedings under section 263 of the Act, to enquire into the same issue by observing that there was lack of enquiry on the part of the assessing officer. In our considered view, the Department has at various stages of proceedings (both during the course of regular assessment under section 143 (3) as well as under section 147 of the Act) have examined this issue and therefore, the contention of the principal CIT that there was lack of adequate enquiry, cannot be accepted. In the case of Sir Ratan Tata Trust v. DCIT 122taxmann.com273 (Mumbai - Trib.), the ITAT held that if receipt of some inputs at last minute from a third party cannot result in an extension of time for completion of assessment under section 143(3) directly, it cannot be done by way of invoking Section 263 either. The Tribunal made the following observations while passing the order on this aspect:

Secondly, we observe that in the order passed by the principal CIT under section 263 of the Act, there is no specific finding to the effect as to where and in what manner, the order passed by the assessing officer under section 147 of the Act is erroneous insofar as prejudicial to the interests of the revenue. It is a well settled law that in order to hold that the assessment order is erroneous insofar as prejudicial to the interest of the revenue, the principal CIT is required to give a specific finding as to on what basis the conclusion has been arrived at as to why the assessment order is erroneous and prejudicial to the interest of the revenue. However, on going through the contents of the order passed under section 263 of the Act, it is observed that there is no finding in the 263 order as to why the order passed under section 147 of the Act is erroneous, insofar as prejudicial to the interest of revenue. The ITAT in the case of Vinod Bhandari 116 Taxmann.com 264 (Indore ITAT)held that Commissioner before holding order of Assessing Officer as erroneous and prejudicial to interest of revenue should have to conduct necessary enquiries or verification in order to show that findings given by Assessing Officer are unsustainable in law. The Hon'ble Mumbai ITAT has dealt with Explanation 2as inserted by the Finance Act, 2015 in the case of Narayan Tatu Rane v. ITO [2016] 70 taxmann.com 227 to hold that the said Explanation cannot be said to have overridden the law as interpreted by the Hon'ble Delhi High Court, according to which the Ld. PCIT has to conduct an enquiry and verification to establish and show that the assessment order is unsustainable in law. The Tribunal has further held that the intention of the legislature could not have been to enable the ld. PCIT to find fault with each and every assessment order, without conducting any enquiry or verification in order to establish that the assessment order is not sustainable in law, since such an interpretation will lead to unending litigation and there would not be any point of finality in the legal proceedings. The opinion of the Ld. PCIT referred to in section 263 of the Act has to be understood as legal and judicious opinion and not arbitrary opinion. The law interpreted by the Hon'ble courts makes it clear that Ld. PCIT before holding the order of the Ld. A.O as erroneous in so far as prejudicial to the interest of revenue should have to conduct necessary enquiries or verification in order to show that the findings given by Ld. A.O is unsustainable in law. Similar view was taken by the Hon'ble Delhi High Court in the case of D.G. Housing Projects Ltd. wherein the Hon'ble Court after referring to judgments of Hon'ble High Court in the case of Addl. CIT v. Gee Vee Enterprise [1975] 99 ITR 375 (Delhi), Sunbean Auto Ltd. (supra), Malabar Industries held in favour of the assessee confirming the order of the Tribunal observing as follows:-

Thirdly, we observe that the principal CIT has given a specific finding that once the proceeding under section 147 of the Act have been initiated to verify information regarding accommodation entry, then the assessing officer was duty bound to verify the information and make addition on account of accommodation entry. However, in our considered view, Principal CIT has erred in facts and in law in giving attention to the assessing officer to make an addition in the hands of the assessee. Firstly, we observe that the 263 order has not pointed out to any specific infirmity/lack of enquiry by the assessing officer and has also not pointed out as to how the order passed under section 147 of the Act is erroneous and prejudicial to the interest of revenue and secondly, in the 260 order, the principal CIT has given a specific direction/finding that the assessing officer should have made additions on account of accommodation entry, taken by the assessee during the impugned year under consideration. Accordingly, in view of the facts highlighted before us, we hold that the order passed under section 263 by principal CIT is liable to be set aside for the reason that firstly, the 263 order there is no specific finding by the principal CIT as to how the assessment order is erroneous insofar as prejudicial to the interest of revenue and secondly, from the facts placed on record the issue for which 263 proceedings have been initiated by the principal CIT have already been examined by the Department in detail, both during the course of original assessment proceedings as well as reassessment proceedings under section 147 of the Act and therefore, there is no lack of enquiry as alleged in the 263 order.

In the result, the appeal of the assessee is allowed. This Order pronounced in Open Court on 29/08/2024