M/S. S.R. FERRO ALLOYS,JHABUA vs. THE PCIT, BHOPAL

This appeal by the Assessee is directed against the order dated 30.03.2021 of Pr. Commissioner of Income Tax, passed u/s 263 of the Income Tax Act for A.Y.2015-16. The assesse has raised following grounds of appeal:

“1. That the order of the Ld. Pr. Commissioner of Income Tax, Indore w's 263 of the Act is illegal, void and without jurisdiction. 2. That the Ld. Pr. Commissioner of Income Tax, Indore has wrongly invoked provision of Section 263 of the Act without looking into factum that The assessment order was framed w's 143(3) after making due enquiry and was not erroneous or prejudicial to the interest of revenue.

SR Ferro Alloys Page 2 of 55 3. That The Ld. PCIT has erred in law and on facts in holding that the sufficient inquiries were not made to ascertain the genuineness and credit worthiness of the loan creditor (M/s Nikita Multitrade Pvt. Ltd) in respect of unsecured loan undertaken by the Assessee in the Assessment Year 2015-16.

4. The Ld. PCIT has erred in ignoring the records of the assessment proceedings while passing the impugned order. It is submitted that in case the authority had perused the records of the assessment proceeding, it would have considered the merit in Appellant's submission that detailed enquiry and investigation was made by the LD AO qua unsecured loan taken from M/s Nikita Multitrade Pvt. Ltd.

5. The Learned PCIT has erred in concluding that the assessment order passed by the AO is prejudicial to the interest of the revenue and is erroneous in the nature.

6. That the impugned order is contrary to the extant judicial position wherein it has been settled that the revisionary power by the LD PCIT/ CIT can be held to be correct only if the LD CIT examines and verifies the transactions under question by himself and arrives at a finding on merits that the concerned order erroneous and prejudicial to the interest of revenue. However, in the instant case, the LD PCIT has at the foremost, failed to even examine and verify whether the interest of revenue has been prejudiced. An examination of the order of PCIT reveals that it is without any merits and does not even venture out to ascertain the interest of revenue or any supposed prejudice/error.

7. That there is a distinction between "lack of enquiry" and "inadequate enquiry". In the present case the Assessing Officer collected necessary details, examined the same and then framed the assessment us. 143(3) of the Act. Since the Assessing Officer had investigated/examined the issue and applied his mind towards the whole record made available by the assessee during assessment proceedings and uncontrovertedly, necessary details/reply to the questionnaire were filed/produced by the assessee and the same were examined by the Assessing Officer, therefore, the present case is not a case of lack of enquiry by the Assessing Officer and thus section 263 cannot be invoked by the Pr. CIT.

8. That Explanation 2 to s. 263 inserted w.e.f. 01.06.2015 does not override the law as interpreted by the various High Courts whereby it is held that the CIT cannot treat the AO's order as being erroneous and prejudicial to the interest of revenue without himself conducting an enquiry and recording a finding. If the Explanation is interpreted otherwise, the CIT will be empowered to find fault with each and every assessment order and also to force the AO to conduct enquiries in the manner preferred by the CIT, thus prejudicing the mind of the AO as has been done in the present case. Thus the entire order w/s Page 2 of 55 SR Ferro Alloys Page 3 of 55 263 is vitiated and bad in law on account of the failure of the Pr. CIT to himself first make an inquiry and only then to arrive at any fault in the assessment order.

9. That for the purposes of exercising jurisdiction u/s 263, the conclusion of the CIT that the order of the AO is erroneous and prejudicial to the interests of the Revenue has to be preceded by some minimal inquiry. If the PCIT is of the view that the AO did not undertake any inquiry, it becomes incumbent on the PCIT to conduct such inquiry. The second option available u's 263 (1) of sending the entire matter back to the AO for a fresh assessment can be exercised by the PCIT only after he undertakes an inquiry himself and not otherwise. Thus the present order w/s 263 is vitiated on this ground alone.”

2. The assesse has also raised additional grounds vide application dated 10.10.2023 filed under Rule, 11 of ITAT, Rules 1963 as under:

1.A. Whether on the facts and circumstances of the case the Ld. PCIT in justified in holding that the Assessment order passed by the Ld. AO is erroneous or prejudicial to the interest of revenue in respect to issue i.e. Verification of unsecured loan which was not a reason for selection of the case for limited scrutiny under CASS ? B. Whether PCIT was justified in passing the Order u/s 263 of the Act on the issue which was not covered under limited scrutiny under CASS?”

3.1 On the other hand, Ld. DR though objected to the admission of additional grounds however, he has not disputed the fact that additional

SR Ferro Alloys Page 4 of 55 grounds raised by the assesse are arising from the impugned order of the Pr. CIT.

3.2 Having considered the rival submission and careful perusal of the relevant record, at the outset, we note that the assesse has already raised ground no.1 challenging the validity of the impugned order passed by the Pr. CIT u/s 263 of the Act. The additional grounds raised by the assesse are only specifying the reasons for challenging the validity of the impugned order. We further note that this is first appeal against the impugned order passed u/s 263. Therefore, there is no legal impediment in raising the legal grounds against the impugned order. Accordingly in view of the judgment of Hon’ble Supreme court in case of NTPC vs. CIT (Supra). The additional grounds raised by the assesse are admitted for adjudication. Since the additional grounds raised by the assesse and ground no.1 of the original grounds are raising an issue of validity of impugned order passed u/s 263 of the Act therefore, these are taken up together for adjudication.

Ground No.1 with Additional grounds

4. The Ld. Sr. Counsel has submitted that the case of the assesse was selected for limited scrutiny through CASS on two issues namely: i. mismatch in amount paid to related persons u/s 40A(2)(b) reported in Audit Report & ITR ii. High interest expenditure against new capital 4.1 Thus, the Ld. Sr. counsel has submitted that when the case was selected for limited scrutiny on those two issues then the Pr. CIT has no jurisdiction to invoke the provisions of section 263 on the ground that AO has not properly examined the disallowance of interest expenditure on account of interest free advances given by the assesse and secondly on the issue of verification of identity and genuineness of the unsecured loans taken by the assesse. He has further submitted that though in the show cause notice u/s 263 the Pr. CIT has taken up two issues regarding Page 4 of 55

SR Ferro Alloys Page 5 of 55 disallowance of interest and questioning the unsecured loans shown by the assessee however, the issue of disallowance of interest was dropped by the Pr. CIT and the impugned order was passed only on the issue of failure on the part of the AO to examine and verified the identity and genuineness of the unsecured loans. Since this issue was not part of the limited scrutiny therefore, the Pr. CIT had no jurisdiction to invoke the provisions of section 263 to hold the order of the AO is erroneous for want of proper inquiry on this issue. He has relied upon the decision of this tribunal dated 28.07.2023 in case of Parth Developers Manawar Dist. Dhar vs. Pr. CIT in ITANo.419/Ind/2022 and submitted that this tribunal has decided an identical issue by holding that when an issue was not subject matter of limited scrutiny taken up through CASS then the AO is not supposed to go beyond the subject matter of scrutiny while passing assessment order without converting the limited scrutiny into complete scrutiny. Ld. Sr. Counsel has thus submitted that by considering this fact the Tribunal has held that in case the AO proceeded within the scope of limited scrutiny the same cannot be held to be erroneous for lack of enquiry. The Tribunal has referred the CBDT, instruction no.5 of 2016 dated 14.07.2016 wherein it has been clarified that the scope of limited scrutiny cannot be expended without conversion of the same into complete scrutiny and that too after following the procedure prescribed in the circular. When it was not open to the AO to take up any issue which is not subject matter of the limited scrutiny then the order of the AO would not be held as erroneous for lack of inquiry. He has also relied upon the decision of this Tribunal in case of Sahita Construction Company vs. Pr. CIT dated 07.02.2022 in ITANo.119/Ind/2021 and submitted that an identical issue has been considered by the Tribunal in light of the CBDT, circular on the limited scrutiny and held that when an issue was not subject matter of the limited scrutiny then the Commissioner erred in assuming jurisdiction u/s 263 and holding the assessment order as erroneous and prejudicial to the interest of the revenue for want of proper inquiry on the part of the AO.

SR Ferro Alloys Page 6 of 55 4.2 Ld. Sr. Counsel then relied upon the judgment of Hon’ble Calcutta High Court in case of Pr. CIT vs. Naga Dhunseri Group Ltd. 146 taxmann.com 424 and submitted that the Hon’ble High Court has held that Pr. CIT cannot make a roving enquiry in guise of a limited scrutiny and as such instruction issued by the CBDT is binding on the department. He then relied upon the judgment of Orissa High Court in case of PCIT vs. Shark Mines & Minerals (P.) Ltd. 151 taxmann.com 71 and submitted that the Hon’ble High Court has held that it was not open to the Pr. CIT while exercising suo motu revisional power under section 263 of the Act to find fault with the assessment order of the AO on the ground of its being erroneous on an issue which was not subject matter of limited scrutiny. Thus, the Ld. Sr. Counsel has submitted that the impugned order passed by the Pr. CIT is invalid without jurisdiction. In support of his contention he has relied upon following decisions: i.Agrawal Promoters vs. PCIT (ITANo.1708/Chd/2017 (ITAT, Chandigarh) ii. Mrs. Sonali Bhavsar vs. PCIT (ITANo.742/Mum/2019 (ITAT, Mumbai) iii. Rakesh Kumar vs. CIT (ITANo.6187/Ind/2015 ITAT, Delhi)

4.3 On the other hand, Ld. DR has submitted that the assessment order passed by the AO u/s 143(3) in case of the assesse is completely silent about any enquiry conducted on the issue of verification and examination of the identity, creditworthiness of the loan creditors and genuineness of the transactions of unsecured loan shown by the assesse. Therefore, on the face of the assessment order it is clear that the AO has passed the impugned order without conducting proper inquiry on the issues which were prominent and apparent on record. The primiary onus is on the assesse to establish the identity and creditworthiness of the creditors and genuineness of the transactions. The AO ought to have called supporting documents and details for verification and examination of the identity, creditworthiness of the creditors and genuineness of the transactions. The assesse has shown a huge amount of unsecured loan and Pr. CIT has prima facie noted that the loan creditor M/s Nikita Multi Trade Pvt. Ltd. is not engaged in any substantial business activity. Therefore, it was Page 6 of 55

SR Ferro Alloys Page 7 of 55 incumbent upon the AO to conduct the necessary inquiry as required u/s 68 of the Act. Failure of the AO to conduct necessary and proper inquiry renders the order passed by the AO as erroneous so far as prejudicial to the interest of the revenue. He has relied upon the explanation (2) to section 263(1) of the Act. He has relied upon the impugned order of the Pr. CIT.

SR Ferro Alloys Page 8 of 55 Vidhya Niketan Samiti during the assessment years 2007-08 to 2013-14 as partners’ capital was sufficient to advance the said amount. The Pr. CIT dropped the first issue of disallowance of interest on account of interest free advance after considering the reply of the assessee and then proceeded to pass the impugned order only on the second issue regarding the non-examination and verification of the identity, creditworthiness of the creditor and genuineness of the transactions by the AO. The Pr. CIT itself has reproduced the reasons for selection of the case for limited scrutiny under CASS and therefore, there is no dispute that this issue of verification and examination of the transactions of unsecured loan shown by the assesse was not subject matter of the limited scrutiny undertaken by the AO through CASS. The Hon’ble Calcutta High Court in case of Pr. CIT vs. Naga Dhunseri Group Ltd. (supra) while considering an identical issue has held in para 5 to 9 as under:

“5. If that is the undisputed factual position, we find the reasoning given by the learned Tribunal is fully justified. That apart, the learned Tribunal has rightly pointed out that the CBDT has issued instructions as to the manner in which the limited scrutiny should be carried out. In CBDT Instruction No. 7 of 2014, dated 26th September, 2014, the relevant portion of the said Instruction reads as follows:- "3. The reason(s) for selection of cases under CASS are displayed to the Assessing Officer in AST application and notice u/s 143(2), after generation from AST, is issued to the taxpayer with the remark "Selected under Computer Aided Scrutiny Selection (CASS)". The functionality in AST is being modified suitably to flag the reasons for scrutiny selection in AIR/CIB/26AS cases. This functionality is expected to be operationalised by 15th October, 2014. Further, the Assessing Officer while issuing notice under section 142(1) of the Act which is enclosed with the first questionnaire would proceed to verify only the specific aspects requiring examination/verification. In such cases, all efforts would be made to ensure that assessment proceedings are completed expeditiously in minimum possible number of hearings without unnecessarily dragging the case till the time- barring date."

6. A bare reading of the of the above Instruction clearly shows that the PCIT cannot make a roving enquiry in the guise of a limited scrutiny and as such the instruction issued by the CBDT is binding on the Department.

SR Ferro Alloys Page 9 of 55 7. Thus, we find that on facts the learned Tribunal has granted relief in favour of the assessee.

8. The learned counsel appearing for the respondent points out that the PCIT in its order has relied upon a decision of the Learned Single Bench of the High Court of Kerala in the case of Sunrise Academy of Medical Specialties (India) (P) Ltd. v. ITO [2018] 94 taxmann.com 181.

9. On a reading of the said order, we find that the said order supports the case of the assessee rather than the revenue. Thus, we find there is no question of law much less substantial question of law arising for consideration in this appeal.” 5.2 The Hon’ble High Court has upheld the order passed by the Tribunal holding that the instruction issued by CBDT to explain the manner in which limited scrutiny to be completed by the AO and therefore, once the AO has completed the assessment take up through CASS for limited scrutiny then the Pr. CIT cannot make a roving inquiry in guise of a limited scrutiny and as such instruction issued by the CBDT is binding on the department. Similarly the Hon’ble Orissa High Court in case of Pr. CIT vs. Shark Mines & Minerals (P. ) Ltd. (supra) has held in para 8 to 11 as under:

“8. In the impugned order, the ITAT distinguished its own decision in Sri Sushanta Kumar Choudhury (supra) as under: "12. Coming to the issue of the decision of Co-ordinate Bench of this Tribunal in the case of Sri Sushant Kumar Choudhury (supra) the facts in the said case were that the Pr. CIT mentioned that the order of the AO is erroneous insofar as he did not ask for permission for complete scrutiny and to that extent, the assessment order was erroneous and prejudicial to the interest of the Revenue. In the present case, there is no such averment by the Pr. CIT. Even assuming such averment is there, the order of revision would be unsustainable insofar as the issue raised by Pr. CIT is in no way connected to the issues that have been raised in the limited scrutiny assessment. Thus, the decision in the case of Sri Sushanta Kumar Choudhury (supra) is clearly distinguishable. Therefore, the prayer of the ld. CIT DR that the matter be referred to Larger Bench also does not survive insofar as the facts of the present case and in the said decision in the case of Sri Sushanta Kumar Choudhury (supra) is fully distinguishable."

9. Indeed, the Court finds that the Madras High Court has while affirming the decision of the ITAT in Smt. Padmavathi (supra) taken Page 9 of 55 SR Ferro Alloys Page 10 of 55 the view that while exercising suo motu revisional power under section 263 of the Act, the CIT cannot travel beyond the scope of the issues which form part of the 'limited scrutiny' in the original Assessment Order. This Court concurs with the above view.

10. What persuades this Court to reach this conclusion is the requirement in law that if the AO has to go beyond the scope of the issues for which 'limited scrutiny' has to be undertaken by him, he has to seek prior permission of the superior officer in terms of the CBDT Instruction No. 7/14 dated 26th September, 2014 and Instruction No. 20/15 dated 19th December, 2015. Consequently, it was not open to the Pr. CIT while exercising suo motu revisional power under section 263 of the Act to find fault with the assessment order of the AO on the ground of its being erroneous on an issue not covered by the 'limited scrutiny' when the AO could not have possibly examined such issue. To reiterate, in the present case, the limited scrutiny was in respect of excess disallowance under section 40A(3) of the Act whereas the SCN under section 263 was regarding the FIFO method of valuation of closing stock adopted by the Assessee. These were, as rightly noted by the ITAT, unconnected issues and the assessment order could not have been held to be "erroneous and prejudicial to the interest of Revenue" when the AO could not have travelled beyond the issues forming subject matter of the 'limited scrutiny.' 11. The Court is unable to find any error having been committed by the ITAT in coming to the above conclusion. No substantial question of law arises. The appeal is accordingly dismissed.” 5.3 Thus, Hon’ble High Court has held that it was not open to the Pr. CIT while exercising suo motu revisional power u/s 263 of the Act to find fault with the assessment order on the ground of its being erroneous on an issue not covered by the limited scrutiny when the AO could not have possibly examined such issue. The coordinate Bench of this Tribunal in case of M/s. Sahita Construction Company vs. Pr. CIT(supra) has considered an identical issue in para 8 to 11 as under:

“8. Now first we need to examine that “whether the ld. AO was required to examine the issue for payment to contractors and tax deducted thereon” Perusal of records shows that assessee’s case was selected for limited scrutiny through CASS for verification of “contract receipts/fees mismatch, sales turnover mismatch and tax credit mismatch”. The issue of payment to contractors and tax deducted thereon was never a part of reasons for the limited scrutiny. Therefore, there was no occasion for the Ld. AO to examine this issue for payment to contractors. It is well settled that in case of limited Page 10 of 55 SR Ferro Alloys Page 11 of 55 scrutiny matter Ld. AO has to work within the parameters observed by the Central Board of Direct Taxes; instruction dated 29.12.2015 and various other circular issued in this behalf. Since the assessee’s case was selected for limited scrutiny on certain issues and Ld. AO has examined these issues and framed the assessments and the issue of examination of payment to contractors was not a part of the limited scrutiny reasons, in our considered view, Ld. Pr. CIT erred in assuming jurisdiction u/s 263 of the Act and also erred in holding that assessment order is erroneous and prejudicial to the interest of revenue.

9. We find that our view is supported by the decision of Coordinate Bench Delhi in the case of Rakesh Kumar vs. CIT ITANo.6187/Del/2015 dated 20.12.2018 which has adjudicated the similar issue observing as follows:

On the 2nd Issue the learned CIT has held that the AO has failed to verify the cash payment made for purchase of goods which are not in conformity with the provisions of section 40A (3) of the income tax act. It is apparent from the audit objection filed before us at page number 30 of the paper book that the case of the assessee was selected for the scrutiny to verify only the cash deposit in the bank account of the assessee. The issue before us is whether assessing officer has made any enquiry with respect to the above purchases. Though, learned assessing officer has obtained the explanation of the assessee with respect to the purchases made by the assessee in cash, whether the learned assessing officer is required to make any such enquiry or not is also an issue. This because of the reason that the learned assessing officer was only required to verify the cash deposit in the bank account of the assessee. In this respect instruction dated 29/12/2015 issued by the central board of direct taxes is very relevant. Apparently the selection of the scrutiny in case of the assessee was also only on the parameters of AIR information. According to para number 2 (iii) the scope of enquiry should be limited only on that aspect only. In such cases, the assessing officer are also directed to confine themselves by questionnaire only to the specific issues pertaining to AIR data and further the wider scrutiny in those cases can only be conducted as per the guidelines and procedures stated in instruction number 7/2014. Therefore according to us when the learned assessing officer was not required to enquire on those issues such as purchases in cash more than specified sum, the learned CIT was not correct in holding that the learned assessing officer has not made due inquiries on that ground as the verification of the purchases exceeding specified limit in cash was not an issue before the assessing officer. Naturally, he should not have made any enquiry on that aspect. Even though the learned assessing officer has raised the specific questions on that aspect and verified the requisite detail. Therefore, it cannot be said that the order of the learned

SR Ferro Alloys Page 12 of 55 assessing officer is erroneous and prejudicial to the interest of the revenue on this ground also.

10. In view of this, according to us the order of the learned CIT in assuming jurisdiction under section 263 of the income tax act holding that the order of the learned assessing officer passed under section 143 (3) of the act is erroneous and prejudicial to the interest of the revenue is not correct. Accordingly, the order passed by the learned CIT is unsustainable.

10. In the above referred decision Tribunal has held that when the assessment is taken up for limited scrutiny, Ld. Pr. CIT/CIT cannot hold the assessment order as erroneous and prejudicial to the interest of revenue in respect of issue which was not a reason for selection of the case for limited scrutiny. Similar view also taken in the following decision: (i) The Deccan Paper Mills Co. Ltd. v. CIT [1013 & 1035/Pun/2014 - order dated 10.10.2017], ITAT Pune Benches. (ii) M/s.Aggarwal Promoters v. Pr.CIT [1708/Chd/2017 - order dated 16.04.2019] ITA Chandigarh Benches. (iii) Sanjeev Kr. Khemka v. Pr.CIT [1361/Kol/2016 - order dated 02.06.2017] ITAT Kolkata Benches. (iv) M/s. R & H Property Developer Pvt.Ltd. v. Pr.CIT [1906/Mum/2019 - order dated 30.07.2019] ITAT Mumbai Benches. (v) Mrs.Sonali Hemant Bhavsar v. Pr.CIT [742/Mum/2019 - order dated 17.05.2019] ITAT Mumbai Benches.

11. We, therefore, respectfully following the judicial precedents and the finding of Coordinate Bench Delhi in the case of Rakesh Kumar (supra) hold that Ld. Pr. CIT erred in assuming revisionary powers u/s 263 of the Act. The impugned order of Ld. Pr. CIT is quashed. Thus in our considered view assessment order dated 11.09.2017 u/s 143(3) of the Act is neither erroneous nor prejudicial to the interest of revenue and the same is restored. All the grounds raised by the assessee are allowed.” 5.4 In the above case the Tribunal has held that the Pr. CIT erred in assuming jurisdiction u/s 263 of the Act and also erred in holding that the assessment order is erroneous and prejudicial to the interest of the revenue on an issue which was not subject matter of limited scrutiny. Similar view has been taken of this Tribunal in case of M/s. Parth Developers Manawar Dist. Dhar vs. Pr. CIT (supra) in para 15 to 17 as under: Page 12 of 55 SR Ferro Alloys Page 13 of 55 “15. Having held that the provision of section 43CB are not applicable for the year under consideration the question arises is whether the AO can go beyond the subject matter of limited scrutiny while passing the assessment order. The answer to this question is certainly not without converting the limited scrutiny into complete scrutiny. Therefore, in case the AO proceeded within the scope of limited scrutiny and not taken up any issue beyond the scope of limited scrutiny the same can be held to be erroneous for lack of inquiry. The CBDT issued instruction No.5 of 2016 dated 14.07.2016 and specifically clarified the scope of limited scrutiny in para 4 as under: “4. It is further clarified that in cases under Limited Scrutiny, the scrutiny assessment proceedings would initially be confined only to issues under Limited Scrutiny and questionnaires, enquiry. investigation etc. would be restricted to such issues. Only upon conversion of case to 'Complete Scrutiny' after following the procedure outlined above, the AO may examine the additional issues -besides the issue(s) involved in 'Limited Scrutiny'. The AO shall also expeditiously intimate the taxpayer concerned regarding conducting Complete Scrutiny' in such cases.”

4. In view of discussion in the preceding paragraphs it is once again reiterated that the Assessing Officers should abide by the instructions of CBDT white completing limited scrutiny assessments and should be scrupulous about maintenance of note sheets in assessment folders.” Page 13 of 55 SR Ferro Alloys Page 14 of 55 17. Thus, it is not open to the AO take up any issue which is not subject matter of the limited scrutiny until and unless the limited scrutiny is controverted into complete scrutiny. Hence not conducting an inquiry on the issue beyond subject matter of limited scrutiny would not be considered as lack of inquiry on the part of the AO so as to render the order of the AO erroneous so far as prejudicial to the interest of revenue. Even otherwise the Project Completion Method of accounting is well recognized and accepted method and if the assesse is following this method regularly and consistently then the revenue cannot force the assessee to adopt different method not mandated by statute. The coordinate bench of this tribunal in case of Ashoka Hi-tech Builders (P.) Ltd. vs. DCIT (supra) after following the binding precedents of Hon’ble Supreme Court and various High Courts has held as under “28. Now the issue as to whether a person is mandatorily required to adopt percentage completion method o The method of accounting is governed by section 145 of the Act and as per section 1482) of the Act the income is to be computed in accordance with either cash or mercantile system of accounting to be regularly employed. This sub- section further empowers Central Government to notify the accounting standards to followed by any case of assessee or in respect of clause from time-to-time and sub-section 3 of section 145 empowers the Assessing Officer to make the assessment of the assessee in the manner provided under section 144, in case he is not satisfied about the correctness or completeness of the assessee or where the method of accounting have not been regularly followed by the assessee, Once the assessee followed accounting regularly the Assessing Officer is bound to assess the income of the assessee on the basis of such method of accounting On perusal of the provision of section 145 shows that it nowhere empowers the authorities to assess the income on the basis of method of accounting followed by another assessee nor does it empower the authorities to thre upon the assessee to adopt the method of accounting followed by mother assessee. In the instant appeal both the lower authorities have rejected the books of account of assessee and applied the percentage completion method adopted by the developer JSM DPL and computed the income accordingly. Whether soch action of the revenue authorities is justified or not needs to be examined in light of the jurisdictional pronouncements.

SR Ferro Alloys Page 17 of 55 220 Taxman 3 (Mag) (Guj.) and CIT v. Umang Hiralal Thakkar [2014] 42 Laxmann.com 194/226 Taxman 28 (Mag.) (Guj) and therefore this court is are of the opinion that the view taken by the Tribunal and the Commissioner of Income Tax is not correct. Issue decided in favour of assesssee.

Ashoka Hi-Tech Builders Pvt.Ltd &686/Ind/2016

"In the present case, it is not the Assessing Officer's case that the appellant is not reporting or under reporting its income. In fact, I find in the subsequent assessment year, i.e. the assessment year 2007- 08, the appellant has disclosed substantial income from the projects undertaken in the business proprietary concerns, viz, M/s. Neelkanth Enterprises, M/s. Ghanshyam Enterprises and M/s. Swaminarayan Enterprises. In the subsequent year, i.e. the assessment year 2007- 08 the profit declared from the projects run by these three proprietary concerns ranges from 43 per cent to 46 per cent. The Supreme Court in the case of Sanjeev Woolden Mills v. CIT (supra), has clearly held that to attract the proviso to secti9on 145(1) of the Act, the Assessing Officer should be of the view that the accounts are correct and complete but the method employed is such that the income cannot be Page 17 of 55

SR Ferro Alloys Page 18 of 55 property deduced there from. The choice of method of accounting regularly employed by the assessee lies with the assessee but the assessee would be required to show tat he has followed the chosen method regularly. The Department is bound by the assessee's regular method would not be rejected as improper merely because it gives the assessee the benefit in certain years or that as per the Assessing Officer, the other method would have been more preferable. If the method adopted does not afford true picture of profit, it would be rejected, but then such rejection should be based on cogent evidence and should be done with caution.

In the present case, the appellant has declared substantial profits on the basis of project completion method in the subsequent years. In construction, the project completion method and percentage completion methods, both have also been recognized by the Central Board of Direct Ashoka Hi-Tech Builders Pvt.Ltd &686/Ind/2016 Taxes in the instruction No.4 of 2009 dated June 30, 2009. Therefore, the Assessing Officer is not considered justified in bringing to tax the profit of Rs.1,66,70,811 in the year under consideration, particularly when such profits have already been offered to tax by the appellant in the assessment year 2007-08. The addition of Rs.1,66,70,811 are directed to be deleted".

SR Ferro Alloys Page 19 of 55 and not with the learned Assessing Officer provided the Ashoka Hi- Tech Builders Pvt.Ltd &686/Ind/2016 system chosen by the assessee is consistently followed by him and such system is not a defective system. In our considered view, provisions of AS7 cannot override the provisions of section 145 in so far as the computation of business income under the Income Tax Act for the purpose of determining income is concerned. In the instant case, we find that the learned Assessing Officer has brought no material on record to show that the system of accounting adopted by the assessee for the year under appeal was not consistently followed y the assessee or the system adopted was a defective system. In our considered view, even a project completion method is also a recognized system of accounting. Simply the Institute of Chartered Accountants of India has recommended the percentage completion method does not mean that project accounting or the same is a defective system of accounting. The learned Commissioner of Income- tax (Appeals) has recorded a finding after pursuing the assessment records of the subsequent years that the assessee has offered for taxation its income in the subsequent year as per the consistent system of accounting followed by the assessee. The learned Departmental representative could not point out any error in the above finding of the learned Commissioner of Income-tax (Appeals). In view of the above discussion, we do not find any error in the order of the learned Commissioner of Income-tax (Appeals) and therefore, the same is upheld and the appeal of the Revenue is dismissed.

It is reported that the decision of Appellate Tribunal in the case of Vraj Developers (supra) has attained the finality as the said decision is not challenged by the Department before higher forum. In view of the above and more particularly, when it has been found that the assessee is consistently following the accounting system of percentage completion method, which is permissible and accepted by ICAI and the Central Board of Direct Taxes with respect to construction work, it cannot be said that the learned Appellate Tribunal has committed any error/ or Ashoka Hi-Tech Builders Pvt.Ltd &686/Ind/2016 illegality, which call for the interference of this court. We see no reason to see to interfere with the impugned judgment and order passed by the learned Commissioner of Income tax (Appeals) deleting the addition of Rs.1,66,70,881 which was made by the Assessing Officer on rejecting the accounting system on percentage completion method followed by the assessee. No question of law much less any substantial question of law arise in the present appeal. Hence, the present appeal deserves to be dismissed and is accordingly dismissed."

SR Ferro Alloys Page 20 of 55 completion method and the assessing officer rejected the method of project completion adopted by the assessee on observing that 8% of the total project has been incurred up to the relevant assessment year the income should have declared on the percentage completion method. The Co-ordinate Bench decided in favour of the assessee holding that the results declared by the assessee on the basis of method of accounting consistently followed and the entire profit of the project has been offered in subsequent assessment year therefore there is no justification in rejecting the method of accounting followed by the assessee and substituting the same by adopting accounting AS-7 issued by ICAI and followed it for accounting.

38. Similarly Hon'ble High Court of Punjab & Haryana in the case of Commissioner of Income Tax (Central), Gurgaon V. Principal Officer, Hill View Infrastructure (P) Ltd (2017) 81 taxmann.com 58 (Punjab & Ashoka Hi-Tech Builders Pvt.Ltd &686/Ind/2016 Haryana) order dated 13.8.2015 confirmed the view taken by the Tribunal deciding in favour of the assessee relating to the issue of the project completion method adopted by the assessee vis-à-vis percentage completion method applied by us, the Assessing Officer observing as follows; "The assessee in reply to the query raised by the Assessing Officer had inter alia claimed that it had been consistently following method of booking of the revenue on the completion of the flat when full payment had been made to it by the person concerned and possession was delivered to him. It was pointed out that neither Accounting standard 9 (AS 9) or Accounting Standard 7 (AS 7) issued by the Institute of Chartered Accounts of India has been recognized by the Act and in such circumstances, there was no guidance or strict procedure for adopting a particular accounting standard under the /act and it depends upon facts and circumstances of each case. In other words, the assessee was entitled to adopt Project Completion method for determining its income which was being regularly followed by it. Though the Assessing Officer had rejected the plea of the assessee, but the CIT(A) while accepting the appeal of the assessee made the following observations:-

"It is however not the AO's case that the profits have been distorted by following the project completion method. The impugned order is also silent as regards the position of the books of account. In other words the books have not been rejected, nor any defects pointed out. In the case of CIT vs. Bilahari Investment (P) Ltd (2008) 299 ITR 1 SC, the Apex Court held that the completion contract method adopted by the assessee for chit discount consistently over the years, is not required to be substituted by percentage completion method. In CIT v Manish Buildwell (P) Ltd (2011) 245 CTR 397 (Del), it was enunciated that project completion method is one of the recognized methods of accounting. That Ashoka Hi-Tech Builders Pvt.Ltd ITA Page 20 of 55

SR Ferro Alloys Page 21 of 55 No.121/Ind/2016 &686/Ind/2016 it cannot be said that the project completion method followed by the assessee would result in deferment of payment of taxes.

Therefore, considering the discussion above, I do not find any merit on the part of the AO to have worked out the income by applying the percentage completion method".

The Tribunal affirmed the order of the CIT(A). It was concluded that project completion method and percentage completion method are accepted standards of accounting and the assessee has option to adopt any one of them. The relevant findings recorded by the Tribunal read thus:-

"We have heard the rival contentions and perused the record. The issue arising in the present appeal before us is in relation to the method to be applied for recognizing the revenue generated by the assessee in the course of carrying on the business of real estate developers. The case of the assessee is that it is following one of the accepted accounting standards approved by ICAI for recognizing the revenue generated by it. The assessee had followed project completion method which had been consistently followed by the assessee for the preceding years also. The Assessing Officer on the other hand, had applied percentage completion method to compute the income in the hands of the assessee. The Commissioner of Income Tax (Appeals) had allowed the claim of the assessee.

Both the methods of accounting are i.e. project completion method and percentage completion method is accepted standards of accounting and either of the methods can be applied by the assessee. In the facts of the present case before us, the assessee had chosen to compute its income on the basis of project completion method i.e. recognizing the income on the completion of the project and not from year to year whereas the case Ashoka Hi-Tech Builders Pvt.Ltd &686/Ind/2016 of the revenue was that it should account for the income as it is generated in the hands of the assessee i.e. from year to year on the basis of the work completed being relatable to the revenue generated from year to year.

The Hon'ble Supreme Court in CIT Vs. Bilahari Investment (P) Ltd (supra) had held that "recognition/identification of income under the 1961 Act is attainable by several methods of accounting. It may be noted that the same result could be attained by any one of the accounting methods. Completed contract method is one such method. "It was further held that "Every assessee is entitled to arrange its affairs and follow the method of accounting which the Department has earlier accepted. It is only on those cases where the department records a finding that the method adopted by the assessee results in SR Ferro Alloys Page 22 of 55 distortion of profits, the Department can insist on substitution of the existing method".

Applying the above said principles to the facts of the present case we find that the assessee before us has been following the systematic method of accounting from year to year which has been accepted by the department and no defects have been pointed out by the department in the method of accounting adopted by the assessee and thus, there is no reason to reject the same.

The Hon'ble Delhi High Court in CIT v Manish Buildwell (P) Ltd (supra) had held that "It is well settled that the project completion method is one of the recognized methods of accounting. It cannot be said that the projection completion method followed y the assessee would result in deferment of the payment of the taxes which are to be assessed annually under the IT Act. AS-7 issued by the ICAI also recognizes the position that in the case of construction contracts, the assessee can follow either the project completion method or the percentage completion method."

Ashoka Hi-Tech Builders Pvt.Ltd &686/Ind/2016 Where the assessee was following a particular method of accounting consistently, which has been accepted by the department from year to year and in the absence of any defect being pointed out by the Assessing Officer that by following such method, income had escaped assessment, we find no merit in the order of the Assessing Officer in holding that percentage completion method should be applied to the assessee for the year under consideration. It is the prerogative of the assessee to arrange its affairs in such a manner and follow any recognized method of accounting to compute its profits. In view thereof, we find no merit in the order of the Assessing Officer in recomputing the income in the hands of the assessee. Upholding the order of Commissioner of Income Tax (Appeals), we dismiss ground of appeal raised by the revenue".

The Delhi High Court in CIT v Manish Build Well (P) Ltd (2011) 16 taxmann.com 27(2002) 204 Taxman 106 noted that project completion method is one of the recognized methods of accounting. It was held as under:-

It is well settled that the project completion method is one of the recognized methods of accounting. It cannot be said that the project completion method followed by the assessee would result in deferment of the payment of the taxes which are to be assessed annually under the IT Act The assessee respondent had been consistently following one of the recognized methods of accountancy, i.e project completion method, for computation of its income. In the absence of any prohibition or Page 22 of 55

SR Ferro Alloys Page 23 of 55 restriction under the Act for doing so, it cannot be held that the approach of the CIT(A) and the Tribunal was erroneous or illegal in any manner so as to call for interference by this Court. No substantial question of law arises. Consequently, finding no merit in these appeals, the same are dismissed."

Ashoka Hi-Tech Builders Pvt.Ltd &686/Ind/2016

"Lastly, there is a concept in accounts which is called the concept of contract accounts. Under that concept, two methods exist for ascertaining profit for contracts, namely, "completed contract method" and "percentage of completion method". To know the results of his operations, the contractor prepares what is called a contract account which is debited with various costs and which is credited with revenue associated with a particular contract. However, the rules of recognition of cost and revenue depend on the method of accounting. Two methods are prescribed in Accounting Standard No.7. They are "completed contract method" and "percentage of completion method".

"Recognition/identification of income under the 1961 Act is attainable by several methods of accounting. It may be noted that the same result could be attained by any one of the accounting methods. The completed contract method is one such method. Similarly, the proceedings of completion method is another such method.

Ashoka Hi-Tech Builders Pvt.Ltd &686/Ind/2016 Under the completed contract method, the revenue is not recognized until the contract is complete. Under the said method, costs are accumulated during the course of the contract. The profit and loss is established in the last accounting period and transferred to the profit and loss account. The said method determines results only when the contract is completed. This method leads to objective assessment of the results of the contract.

The On the other hand, the percentage of completion method tries to attain periodic recognition of income in order to reflect current performance. The amount of revenue recognized under this method is determined by reference to the stage of completion of the contract. The stage of completion can be looked at under this method by taking into Page 23 of 55

SR Ferro Alloys Page 24 of 55 consideration the proportion that costs incurred to date bears to the estimated total costs of contract.

The above indicates the difference between the completed contract method and the percentage of completion method." (underlining ours)

SR Ferro Alloys Page 25 of 55 that it should be consistently adopted and in case of any deviation the effect of profit or loss should be offered to tax as the case may be. Revenue has not disputed this fact that assessee has offered the impugned advances to tax in the subsequent years i.e. from financial year 2014-15 based on sale deed registered which proves that there has been no loss to the revenue. Mere postponement of tax as a result of method employed by assessee has not been viewed adversely by courts so long as the method is regularly and consistently employed as held by Hon'ble Apex Court in the case of Excel Industries Ltd (2013) 358 ITR 295.”

5.5 Therefore, when the issue of examination of the identity, creditworthiness of the creditors and genuineness of the transactions was not subject matter of the limited scrutiny then the order of the AO cannot be held as erroneous so far as prejudicial to the interest of revenue on the ground that lack of inquiry. Accordingly by following various judgments cited above of Hon’ble High Courts as well as of this tribunal we hold that the impugned order of Pr. CIT passed u/s 263 is invalid for want of jurisdiction.

6. Ground No.2 to 10 are regarding challenging the impugned order of ld. Pr. CIT on the ground that when the assesse has produced all the relevant records to establish the identity and creditworthiness of the creditor as well as genuineness of the transaction and the AO after considering relevant evidence was satisfied with the explanation and claimed of the assesse then the Pr. CIT is not justified in passing the impugned order and remanding the matter back to the AO for fresh order. The Ld. Sr. Counsel has submitted that the AO has issued notice u/s 142(1) dated 21st September 2017 along with questionnaire in the Annexure thereto. He has referred to query no.11 as per Annexure to notice u/s 142(1) and submitted that the AO asked the assesse to file details and established the identity, creditworthiness of the lender and genuineness of the transactions. He has then referred to the reply filed by the assessee dated 21.11.2017 and submitted that the assessee has furnished the relevant record to establish the identity, creditworthiness of the creditor/lenders and genuineness of the transactions. He has referred the reply dated 27.11.2017 along with confirmation from the lenders and copy Page 25 of 55

SR Ferro Alloys Page 26 of 55 of bank statements of the lender M/s Nikita Multi Trade Pvt. Ltd. Ld. Sr. Counsel then referred to the block assessment in case of lender for A.Y.2008-09 to 2013-14 passed on 16.03.2014 against which the assesse preferred an appeal before the Ld. CIT(A) which was allowed by the CIT(A) vide order dated 27.06.2019. The Ld. Sr. Counsel has submitted that the AO disallowed the claim of depreciation which was allowed by the CIT(A) and addition made by the AO was deleted. Further for the assessment year 2014-15 the assessment of the lender company was completed u/s 143(3) by DCIT, Central Circle, Bhopal. Thus, the Ld. Sr. Counsel has submitted that M/s Nikita Multi Trade Pvt. Ltd. is being assessed by the same AO who has passed the order in case of the assesse. He has thus submitted that identity and creditworthiness of the creditors cannot be doubted when the creditor was also subjected to scrutiny assessment for A.Y.2008-09 to 2014-15 by the same AO and there was no question raised by the AO regarding the loan given by the M/s Nikita Multi Trade Pvt. Ltd. to the assessee. The assesse produced all the supporting documents including the Tally books of account of the loan creditors, assessments orders passed u/s 143(3) as well as block assessments, bank account statements to prove the creditworthiness and genuineness of the transactions. Even in the reply to show cause notice u/s 263 the assesse explained all these facts and also produced relevant records before the Pr. CIT. However, the Pr. CIT without conducting any inquiry or verifying the record has set aside the order of the AO for fresh assessment on this issue which is contrary to the law and the jurisdiction of the Pr. CIT. When the transaction of the loan given by M/s. Nikita Multi Trade was not doubted by the AO while passing block assessment as well as assesse u/s 143(3) then the said transactions in the case of the assesse cannot be doubted. The AO was satisfied with the reply and record furnished by the assessee to establish the identity and creditworthiness of the creditor as well as genuineness of the transactions. Therefore, once the AO was satisfied with the reply and record furnished by the assesse to establish the identity and creditworthiness of the creditors as well as genuineness of the transactions then Page 26 of 55

SR Ferro Alloys Page 27 of 55 the Pr. CIT cannot be asked the AO to again conduct an enquiry and decide the issue afresh. In support of his contention he has relied upon following decisions: i.Meerut Roller Flour Mills Pvt. Ltd. vs. CIT 110 taxmann.com 170 (All) ii. Pr. CIT, Surat vs. Shreeji Prints P. Ltd. iii. J.G. International Nodia vs. P CIT dated 05.05.2022 passed in by Hon’ble Delhi ITAT iv.M/s. Citystar Ganguly Projects Ltd. vs. PCIT Kolkata 31.10.2018 in ITANo.1103/Kol/2019 passed by the Hon’ble Kolkata ITAT,) v. ITO vs. D.G. Housing Project Ltd. 20 taxmann.com 587 vi. Maa Narmada Agrotech and Infrastructures Ltd. dated 11.07.2023 ITANo.117/Ind/2022 6.1 Hence the Ld. Sr. counsel has submitted that when all the relevant evidence and details are already produced before the AO as well as before the Pr. CIT which goes to establish the identity and creditworthiness of creditor as well as genuineness of the transactions as accepted by the AO then without considering and conducting a minimum inquiry by the Pr. CIT the order of the AO cannot be held to be erroneous and set aside for fresh adjudication.

7. On the other hand, Ld. DR has submitted that since the order of the AO is completely silent about any inquiry conducted on this issue therefore, the Pr. CIT is justified in invoking the provisions of section 263 of the Act and passing the impugned order. He has relied upon the impugned order of Pr. CIT.

SR Ferro Alloys Page 28 of 55 “Further it was also noticed from the Audit report of the assessee that the assessee had claimed to have taken unsecured loan of Rs.3,86,98,893/- from M/s Nikita Multi Trade Pvt. Ltd. It is settled legal position that to verify the unsecured loan one has to establish the identity of the creditor, the genuineness of the transaction and the creditworthiness of the creditor, the onus of which is on the assessee. The AO could have called for the supporting documents for verification of the lender and his creditworthiness and the genuineness of the transactions involved. In view of the aforesaid, proceedings u/s 263 of the Income Tax Act, 1961 were initiated. Accordingly, the assessee was given an opportunity of being heard vide this office letter bearing DIN ITBA/COME/17/2020-21/1031564309(1) dated 17/03/2021 sent via speed post and sent on registered e-mail.” 8.1 Thus, the Pr. CIT has observed that the AO could have called for supporting documents for verification of the lender and his creditworthiness and the genuineness of the transaction involved while passing assessment order. At the outset, we note that the AO has issued notice u/s 142(1) dated 21st September 2017 whereby 22nd quarries were raised by the AO. The query no.11 was raised in respect of loan transactions and assessee was asked to furnish the details of the loan received by it during the year under consideration in the proforma given by the AO. The AO asked the assessee to furnish the copy of ITR and balance sheet of lender, bank account of the lenders in support of the unsecured loans. The assesse was also asked to furnish any other information to establish the identity and creditworthiness of the lender and genuineness of the transactions. In reply to this query no.11 the assesse vide letter dated 21.11.2017 has furnished the relevant details in respect of all the six loan creditors which are as under:

S.no Name and PAN Amount Date & Details of Rate of Address of Mode of squared-up Interest the Lender Receiving amount MINES Division 1. Nikita AACCN7334F 380 Lacs Jan & Feb NIL 12% Multitrade – 15, RTGS Pvt Ltd, (Ledger

Mumbai Enclosed) 2. Sureshchand AEZPJ2697F 30 Lacs 11/02/15 NIL 12% Jain, Cheque Meghnagar (Ledger Enclosed) 3. Chirayu AAEFC8960H Op.Bal. No loan EntireAmount 11% Medicose, accepted along with As on during the interest Bhopal year. repaid during 01/04/14 the year. was Rs. 178.71 Lacs 4. Rajendra ADDPM9696F Op. Bal. as No loan Rs.89.74 NIL Singh Nayak on accepted Lacs 01/04/14 during the repaid,Closing was Rs. year. Balance as on 348.73 31/03/2015 Lacs was Rs258.99 lacs 5. J K Singh ANBPS2770H Op. Bal as No loan Entire NIL on accepted amount 01/04/14 during the repaid during was year. the year. Rs.370.22 Lacs 6. Nilesh AAPPU4496H Op. Bal as No loan Rs. 59.73 Lacs NIL. Upadhyay on accepted repaid, 01/04/14 during the Closing was Rs year Balance as on 49.73 Lacs 31/03/2015 was Rs. 10/- Lacs 8.2 The assessee has further submitted the confirmation of the loan creditor apart from these relevant records. It is also matter of fact and record that the loan creditor M/s Nikita Multi Trade Pvt. Ltd. was subjected to scrutiny assessment for A.Y.2014-15 vide order dated 16.09.2016 wherein the AO has made disallowance on account of depreciation. Similarly for the assessment years 2009-10 to 2013-14 there

SR Ferro Alloys Page 30 of 55 was a block assessment in case of M/s Nikita Multi Trade Pvt. Ltd. which was also subject matter before the Pr. CIT and the disallowance made by the AO on account of depreciation was deleted. Therefore, the assesse as well as M/s. Nikita Multi Trade Pvt. Ltd. have been assessed by the same AO and hence the identity and financial statements of M/s Nikita Multi Trade Pvt. Ltd. cannot be doubted being subjected to scrutiny assessment. From the balance sheet of M/s Nikita Multi Trade Pvt. Ltd. it is manifest that the said company was having sufficient funds in the reserves and surplus of more than Rs.50 crore to lend the money of Rs.3.8 crores to the assesse. The transactions of the loan is duly reflected in the bank account of the assesse as well as bank account of M/s. Nikita Multi Trade Pvt. Ltd. which shows that there was no prior deposit of any cash in the bank account of the said lender company. Therefore, there is nothing on record to doubt the genuineness of the transactions. All these records were before the Pr. CIT as it is clear from the impugned order that the Pr. CIT has referred to the trading account of the lender company wherein the said company has claimed depreciation which was disallowed by the AO. It is pertinent to note that the disallowance of depreciation by the AO in the scrutiny assessment of the lender company would not epso facto lead to the conclusion that the transactions of loan between the lender company and assesse is not genuine. The Pr. CIT has not even verified the balance sheet and bank account statement of the lender company to come to prima facie conclusion that the transactions are not genuine. Once the relevant evidences produced by the assesse discharge its onus to prove the identity and creditworthiness of the creditor as well as genuineness of the transactions then in absence of any contrary fact or material brought on record the acceptance of the said transactions by the AO is a plausible view based on the documentary evidence. Once the AO has taken a plausible and possible view which is not found to be contrary to the facts/record or to law then the Pr. CIT is not permitted to exercise the revisionary powers u/s 263 of the Act just to set aside the order of the AO for re-adjudication of the same. It is settled proposition of law that if the AO is satisfied with the supporting evidences produced by the assessee in response to the show Page 30 of 55

SR Ferro Alloys Page 31 of 55 cause notice issued u/s 142(1) then it is not necessary for the AO to give elaborate finding on the issue. Though the issue of verification of unsecured loan was not subject matter of limited scrutiny however, it is evident from the show cause notice issued u/s 142(1) that the AO has raised queries about this issue which was duly replied by the assesse with supporting evidence and therefore, it is not a case of complete lack of inquiry on the part of the AO. In fact the AO has conducted an inquiry and verified the relevant details and material produced by the assesse in support of the transactions of unsecured loan. Thus the Pr. CIT while passing the order u/s 263 cannot remand the matter back to the AO for passing the fresh order as it will lead to the conclusion that the Pr. CIT himself was not sure about the correctness of the claim of the assesse which was accepted by the AO. Even otherwise when the assessment order passed by the AO cannot be held as erroneous for want of inquiry then it is essential on the part of the Pr. CIT to give conclusive finding that order passed by the AO is not sustainable either it is contrary to the facts or to the law. The Hon’ble Allahabad High Court in case of Meerut Roller Flour Mills (P.) Ltd. vs. CIT(supra) while considering the jurisdiction of the Pr. CIT u/s 263 of the Act as held in para 13 to 22 as under:

“13. We have heard counsel for the parties and perused the material on record.

14. As it is undisputed, that Assessing Officer after the case was selected for scrutiny had issued notice under Section 143(2) of the Act and also notice under Section 142(1) with 28 queries to the assessee, which was replied by him along with the documentary evidence, and the Assessing Officer being satisfied passed the order under Section 143(3) of the Act on 15.12.2009. The CIT while exercising power under Section 263 of the Act, partially accepted the reply submitted by the assessee as regards the investment in share capital holding that the outstanding unsecured loans of six persons to be adjusted against the share application money account, but as regards the unsecured loans and creditors, it directed the Assessing Officer to examine, call for requisite details, confirmations and examine them properly and relegated the matter back to him. While passing the said order the CIT relied upon the decision of the Apex Court in case of SR Ferro Alloys Page 32 of 55 Malabar Industrial Company Ltd. (supra). Paragraph Nos. 6, 7, 8, 9 and 10 of the said judgment are extracted hereinasunder:-

"6. A bare reading of this provision makes it clear that the pre- requisite to exercise of jurisdiction by the Commissioner suo moto under it, is that the order of the ITO is erroneous insofar as it is prejudicial to the interests of the revenue. The Commissioner has to be satisfied with 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. If one of them is absent - if the order of the ITO is erroneous but is not prejudicial to the revenue or if it is not erroneous but is prejudicial to the revenue- recourse cannot be had to Section 263(1).

7. There can be no doubt that the provision cannot be invoked to correct each and every type of mistake or error committed by the Assessing Officer; it is only when an order is erroneous that the section will be attracted. An incorrect assumption of facts or an incorrect application of law will satisfy the requirement of the order being erroneous. In the same category fall orders passed without applying the principles of natural justice or without application of mind.

The phrase 'prejudicial to the interests of the revenue' is not an expression of art and is not defined in the Act. Understood in its ordinary meaning, it is of wide import and is not confined to loss of tax. The High Court of Calcutta in Dawjee Dadabhoy & Co. v. S.P. Jain [1957] 31 ITR 872, the High Court of Karnataka in CIT v. T. Narayana Pai [1975] 98 ITR 422, the High Court of Bombay in CIT v. Gabriel India Ltd. [1993] 203 ITR 208 and the High Court of Gujarat in CIT v. Smt. Minalben S. Parikh [1995] 215 ITR 81/ 79 Taxman 184 treated loss of tax as prejudicial to the interests of the revenue.

8. Mr. Abraham relied on the judgment of the Division Bench of the High Court of Madras in Venkatakrishna Rice Co. v. CIT [1987] 163 ITR 129 interpreting 'prejudicial to the interests of the revenue'. The High Court held, "In this context, it must be regarded as involving a conception of acts or orders which are subversive of the administration of revenue. There must be some grievous error in the Order passed by the ITO, which might set a bad trend or pattern for similar assessments, which on abroad reckoning, the Commissioner might think to be prejudicial to the interests of Revenue Administration". In our view, this interpretation is too narrow to merit acceptance. The scheme of the Act is to levy and collect tax in accordance with the provisions of the Act and this task is entrusted to the revenue. If due to an erroneous order of the ITO, the revenue is losing tax lawfully payable by a person, it will certainly be prejudicial to the interests of the revenue.

SR Ferro Alloys Page 33 of 55 9. The phrase 'prejudicial to the interests of the revenue' has to be read in conjunction with an erroneous order passed by the Assessing Officer. Every loss of revenue as a consequence of an order of Assessing Officer cannot be treated as prejudicial to the interests of the revenue, for example, when an ITO adopted one of the courses permissible in law and it has resulted in loss of revenue; or where two views are possible and the ITO has taken one view with which the Commissioner does not agree, it cannot be treated as an erroneous order prejudicial to the interests of the revenue unless the view taken by the ITO is unsustainable in law. It has been held by this Court that where a sum not earned by a person is assessed as income in his hands on his so offering, the order passed by the Assessing Officer accepting the same as such will be erroneous and prejudicial to the interests of the revenue- Rampyari Devi Saraogi v. CIT [1968] 67 ITR 84 (SC) and in Smt. Tara Devi Aggarwal v. CIT, [1973] 88 ITR 323 (SC).

10. In the instant case, the Commissioner noted that the ITO passed the order of nil assessment without application of mind. Indeed, the High Court recorded the finding that the ITO failed to apply his mind to the case in all perspective and the order passed by him was erroneous. It appears that the resolution passed by the board of the appellant- company was not placed before the Assessing Officer. Thus, there was no material to support the claim of the appellant that the said amount represented compensation for loss of agricultural income. He accepted the entry in the statement of the account filed by the appellant in the absence of any supporting material and without making any inquiry. On these facts, the conclusion that the order of the ITO was erroneous is irresistible. We are, therefore, of the opinion that the High Court has rightly held that the exercise of the jurisdiction by the Commissioner under Section 263(1) was justified."

16. Similarly, this Court in case of Anand Kumar Jain (supra) while interpreting the language of Section 263 had held that where the Assessing Officer passes an order without application of mind or an Page 33 of 55

SR Ferro Alloys Page 34 of 55 incorrect statement of fact or incorrect application of law, then the order so passed would be erroneous. But in the present case, Assessing Officer after issuing notice and raising certain queries to the assessee passed the assessment order which cannot be called as erroneous.

18. Similarly, the case relied upon by the Department in case of Bhagwan Das (supra) also is not applicable in the present case, as in the case in hand the Assessing Officer after duly putting the assessee under notice and requiring him to produce all the relevant documents had passed the assessment order.

19. The argument of the counsel for the assessee that mere non- discussion and non-mentioning about the reply in the order of the assessing authority would not lead to an assumption that there was no application of mind and the order is erroneous. In Krishna Capbox (P.) Ltd. (supra), this Court held as under:-

9. The Tribunal further considered the question whether discussion of queries and reply received from assessee, in assessment order, is necessary or not. Relying on two judgments of Delhi High Court in CIT Vs. Vikash Polymers [2012] 341 ITR 537/ [2010] 194 Taxman 57 and CIT v. Vodafone Essar South Ltd. [2012] 28 taxmann.com 273/ [2013] 212 Taxman 184 (Delhi), it held that once inquiry was made, a mere non discussion or non- mention thereof in assessment order cannot lead to assumption that Assessing Officer did not apply his mind or that he has not made inquiry on the subject and this would not justify interference by Commissioner by issuing notice under Section 263 of the Act.

10. In Vikash Polymers (supra) relevant part of the observations in this regard read as under (page 548 of 341 ITR):

SR Ferro Alloys Page 35 of 55 "This is for the reason that if a query was raised during the course of scrutiny by the Assessing Officer, which was answered to the satisfaction of the Assessing Officer, but neither the query nor the answer was reflected in the assessment order, that would not, by itself, lead to the conclusion that the order of the Assessing Officer called for interference and revision."

The lack of any discussion on this cannot lead to the assumption that the Assessing Officer did not apply his mind.

12. Learned counsel for the Department could not place any other authority before this Court wherein any otherwise view has been taken. On the contrary, learned counsel for assessee has placed before us a decision of Bombay High Court in Income Tax Appeal No.296 of 2013 (CIT v. Fine Jewellery (India) Ltd.) [2015] 372 ITR 303/230 Taxman 641/55 taxmann.xom 514 (Bom.) decided on February 3, 2015, wherein also Bombay High Court, following its earlier decision in Idea Cellular Ltd. Vs. Dy. CIT [2008] 301 ITR 407 (Bom.) has taken a similar view and said as under (page 307 of 372 ITR):

......if a query is raised during assessment proceedings and responded to by the assessee, the mere fact that it is not dealt with in the Assessment Order would not lead to a conclusion that no mind had been applied to it.

20. In case of Mahendra Kumar Bansal (supra), this Court held that merely because the order of the ITO is not lengthy, it would not establish that the assessment order passed under Section 143(3) of the Act is erroneous and prejudicial to the intrest of the revenue. Relevant Para Nos. 11,12 and 14 are extracted hereinasunder:-

"11. In the case of Goyal Private Family Specific Trust [1988] 171 ITR 698, this court has held that the order of the Income-tax Officer may be brief and cryptic, but that by itself is not sufficient reason to brand the assessment order as erroneous and prejudicial to the interests of the Revenue and it was for the Commissioner to point out as to what error was committed by the Income-tax Officer in having reached to its conclusion and in the absence of which proceedings under Section 263 of the Act is not warranted.

12. In the case of Belal Nisa [1988] 171 ITR 643 the Patna High Court has held that where the Income-tax Officer had not carried out the necessary enquiry enjoined by section 143(1) of the Act the Commissioner is within his power in taking action in terms of Section SR Ferro Alloys Page 36 of 55 263(1) of the Act. Similar view has been taken in by the Patna High Court in the case of Smt. Kaushalya Devi [1988] 171 ITR 686.

8.3 Once the AO has raised the query which was replied by the assessee along with documentary evidence and consequently the assessment order was passed by the AO then the same cannot be held as erroneous and prejudicial to the interest of the revenue unless the Commissioner exercising the power u/s 263 bring on record to show that the order of the AO was passed without application of mind or based on incorrect facts or incorrect application of law. The Hon’ble Supreme Court in case of Pr. CIT vs. Shreeji Prints P. Ltd. (supra) while upholding the order of the Hon’ble Gujarat High Court as well as this Tribunal has observed in para 5 to 7 as under: Page 36 of 55

SR Ferro Alloys Page 37 of 55 “5 The Tribunal has found that in the order passed by the PCIT, Explanation 2 of section 263 of the Act. 1961 is made applicable. The Tribunal observed that the PCTT has not mentioned in the show cause notice to invoke the Explanation 2 of section 263 of the Act 1961. Therefore, by invocation of Explanation in the order without confronting the assessee and giving an opportunity of being heard to the assessee is not appropriate and sustainable in law. 6 Thus, the Tribunal has considered in detail the aspect of revisional power to be exercised by the PCIT in the facts of the case and has given a finding of facts that the Assessing Officer has made inquiries in detail and after applying mind, accepted the genuineness of loans received by the respondent assessee from the aforesaid two companies and such view of the Assessing Officer is a plausible view, and therefore, the same cannot be said to be erroneous or prejudicial to the interest of the Revenue 7 In view of such finding of facts arrived by the Tribunal, no questions of law much less of any substantial questions of law arise out of the impugned order passed by the Tribunal.”

8.4 The Hon’ble High Court of Delhi in case of ITO vs. Hon’ble D.G. Housing Project Ltd. (supra) has thoroughly examined the provision of section 263 and particularly lack of inquiry on the part of the AO and held in para 16 to 20 as under:

“16. Thus, in cases of wrong opinion or finding on merits, the CIT has to come to 198 conclusion and himself decide that the order is erroneous, by conducting necessary enquiry, if required and necessary, before the order under Section 263 is passed. In such cases, the order of the Assessing Officer will be erroneous because the order passed is not sustainable in law and the said finding must be recorded. CIT cannot remand the matter to the Assessing Officer to decide whether the findings recorded are erroneous. In cases where there is inadequate enquiry but not lack of enquiry, again the CIT must give and record a finding that the order/inquiry made is erroneous. This can happen if an enquiry and verification is conducted by the CIT and he is able to establish and show the error or mistake made by the Assessing Officer, making the order unsustainable in Law. In some cases possibly though rarely, the CIT can also show and establish that the facts on record or inferences drawn from facts on record per se justified and mandated further enquiry or investigation but the Assessing Officer had erroneously not undertaken the same. However, the said finding must be clear, unambiguous and not debatable. The matter cannot be remitted for a fresh decision to the Assessing Officer to conduct further enquiries Page 37 of 55 SR Ferro Alloys Page 38 of 55 without a finding that the order is erroneous. Finding that the order is erroneous is a condition or requirement which must be satisfied for exercise of jurisdiction under Section 263 of the Act. In such matters, to remand the matter/issue to the Assessing Officer would imply and mean the CIT has not examined and decided whether or not the order is erroneous but has directed the Assessing Officer to decide the aspect/question.

17. This distinction must be kept in mind by the CIT while exercising jurisdiction under Section 263 of the Act and in the absence of the finding that the order is erroneous and prejudicial to the interest of Revenue, exercise of jurisdiction under the said section is not sustainable. In most cases of alleged "inadequate investigation", it will be difficult to hold that the order of the Assessing Officer, who had conducted enquiries and had acted as an investigator, is erroneous, without CIT conducting verification/inquiry. The order of the Assessing Officer may be or may not be wrong. CIT cannot direct reconsideration on this ground but only when the order is erroneous. An order of remit cannot be passed by the CIT to ask the Assessing Officer to decide whether the order was erroneous. This is not permissible. An order is not erroneous, unless the CIT hold and records reasons why it is erroneous. An order will not become erroneous because on remit, the Assessing Officer may decide that the order is erroneous. Therefore CIT must after recording reasons hold that the order is erroneous. The jurisdictional precondition stipulated is that the CIT must come to the conclusion that the order is erroneous and is unsustainable in law. We may notice that the material which the CIT can rely includes not only the record as it stands at the time when the order in question was passed by the Assessing Officer but also the record as it stands at the time of examination by the CIT [see CIT v. Shree Manjunathesware Packing & Products Camphor Works [1998/ 231 ITR 53/98 Taxman 1 (SC)]. Nothing bars/prohibits the CIT from collecting and relying upon new/additional material/evidence to show and state that the order of the Assessing Officer is erroneous.

“9. We have considered the rival submissions as well as relevant material on record. The Pr. CIT issued show cause notice u/s 263 on 25.02.2022 and passed the impugned order on 15.03.2022. The assessee was given only seven days to file the reply to the show cause notice. In compliance to the show cause notice the assessee filed reply and also requested the Pr. CIT to allow the assessee to produce the voluminous record in the physical form but due to paucity of time as the limitation was gone to expire on 31.03.2022 the Pr. CIT passed the impugned order without considering the explanation and replied filed by the assessee whereby the assessment order was set aside and matter was remanded for de novo assessment. Therefore, at the outset it appears to be a case of violation of principal of natural justice. The issue taken up by the Pr. CIT in the show cause notice are reproduced in the impugned order in para 2 as under: “2. Subsequent to the assessment, assessment records were examined and certain discrepancies were noticed. Accordingly a detailed show cause notice was issued by the undersigned on 25.02.2022 mentioning as under- 01. On perusal of the relevant case records, it is observed that the return of income in the case of the assessee for AY 2017-18 was filed on 29.10.2017 declaring total income of Rs. 74,73,400/- The case was selected for complete scrutiny. In the case of the assessee notice u/s 143(2) was issued on 23.08.2018 and notice u/s 142(1) was issued on 31.10.2019 02. In response, replies were filed by the assessee and after considering the submissions made the assessee, the assessing officer after disallowing Rs 75.000/- u/s 14A and Rs. 1,20,000/- under the head Tipper Transportation Expenses passed assessment order on 26.12.2019 at assessed income of Rs 76,68,400/- 03. On examination of the assessment records, following discrepancies are noticed 03.1 On examination of the case records, it was found that as per 26AS of the assessee for the period under consideration, the total receipts of the assessee was Rs. 24.06,84,479/- However on perusal of the P&L Account it was found that the assessee has shown receipts of Rs. 22,08,86,852/- only. Thus, the assessee had suppressed his receipts to the tune of Rs. 1,97,97,627/- during the year under consideration and the assessing officer while passing assessment order has overlooked this suppression of receipts.

SR Ferro Alloys Page 41 of 55 03.2 Further on the perusal of the balance sheet as on 31.03.2017, it was noticed that the assessee company has shown trade payable and trade receivable at Rs. 5,26,24,158/- and Rs. 6,65,46,869/- respectively. During the course of assessment proceedings neither the assessee company filed the details regarding trade payables and trade receivables nor the assessing officer conducted any enquiry/investigation regarding t trade payables and trade receivables. 03.3 On perusal of the P&L account of the assessee company for the period under consideration, it was found that the assessee had claimed Rs: 11.85,50,529/- under the head Material Consumed expenses as against total turnover of Rs. 22,08,86,850/- during the year under consideration whereas during the previous year turnover of the company was Rs. 10,35,02,751/- and the assessee company has claimed Rs. 2,08,15,446/- under the same head. thus, it is clear that turnover of the company just doubled but surprisingly the expenses under the same head was increased by six times approximately. The assessing officer has not verified these expenditures during the course of assessment proceedings neither the assessee had furnished supporting documents in support of his claim. Similarly, Rs. 33,92,359/- was claimed as site expenses which almost three times from the amount which was claimed in previous year, Rs. 50,17,438/- was claimed under the head electricity expenses however no such expense was claimed during the previous year, Rs. 10,32,070/- was claimed as freight expenses which is almost five times of the amount which was claimed during the preceding year, Rs. 2,63,53,247/- was claimed as Food & Refreshment expenses which is four times of amount which was claimed during the previous year. During the assessment proceedings the assessing officer has not examined that whether exorbitant increase in these expenses are justified and genuine or not. 03.4 On further perusal of the P&L account of the assessee company, it was noticed that the assessee had debited Rs. 5,94,59,303/- under the head Changes in inventories of finished goods, work-in-progress and Stock-in- trade" During the course of assessment proceedings neither the assessee has furnished explanation nor the assessing officer has sought any explanation as to why this amount had been debited in P&L account. Therefore, the assessment order passed by the AO is erroneous in the sense that it is prejudicial to the interest of revenue.

10. Therefore, various points were raised by the Pr. CIT in the show cause notice but the show cause notice was issued at the fage end of the limitation period to pass the revision order u/s 263 of the Act. The sole ground for setting aside the order passed by the AO is lack of inquiry on the part of the AO in respect of these issues. However, we find that the AO issued show cause notice u/s 142(1) and specifically asked the assessee to furnish details and evidence in respect of these issues as taken up by the Pr. CIT while invoking provision of section 263 of the Act. For ready reference we reproduced the notice issued by the AO u/s 142(1) dated 06.12.2019 along with annexures as well as notice dated 24.12.2019 as under: X x x x x x x x x x X x x x x x x x x xx 11. As it is apparent from the annexures to show cause notice issued by the AO u/s 142(1) that the AO issued a detailed questionnaire to the assessee for providing the necessary details, record and evidence. The AO even given a specific format in respect of each details to be provided by assessee which covered all these issues as raised by the Pr. CIT in the show cause notice issued u/s 263 of the Act. The assessee duly complied with the show cause notice issued by the AO by filing to detail reply along with relevant details and documents which runs into 100 of the pages, therefore, for the sake of brevity we are not reproduced the reply and documents filed by the assessee before the AO. However, on-going through the reply filed by the assessee it is manifest that the assessee has given all these details and explanation as sought by the AO in the show cause notice issued u/s 142(1) of the Act. The AO even issued a second show cause notice dated 22.12.2019 asking the details regarding unsecured loans along with explanation in respect of disallowance u/s 14A r.w. Rule 8D. Finally the AO has Page 42 of 55

SR Ferro Alloys Page 43 of 55 made disallowance only u/s 14A and no disallowance or addition was made in respect of the other issues as raised in the show cause notice issued u/s 142(1) of the Act. Thus, it is clear that the AO has conducted an inquiry on these issues and was satisfied with the reply and explanation filed by the assessee along with supporting evidence. Hence it is not a case of complete lack of inquiry on the part of the AO while passing the assessment order and therefore, the assessment order cannot be held to be erroneous so far as the prejudicial to the interest of the revenue on the ground of lack of inquiry. Though the commissioner has jurisdiction to invoke the provision of section 263 even when the AO has conducted inquiry and taken a view but the said jurisdiction and power of commissioner is restricted only in the case, where the view taken by the AO is absolutely wrong and against provision of law. No such allegation has been made by the Pr. CIT in the impugned order that the view taken by the AO in allowing the claims and accepting the explanation of the assessee is absolutely not permissible under the law. Even otherwise we find that the assessee has duly explained discrepancies in the total receipts declared by the assessee in comparison to the receipts appearing in form 26AS and explained the reasons with supporting evidence that the said difference is due to the time difference in recognizing the revenue by the assessee and booking of expenditure by the contractee. It is matter of record that the assessee filed the reconciliation before the AO as well as before the Pr. CIT. Therefore, it was incumbent upon the Pr. CIT to verify the details produced by the assessee as well as reconciliation of difference in the receipts and to give a finding about the correctness of the claim of the assessee. The assessee has given the relevant details and explained difference of Rs.1.97 cr being the income already declared by the assessee in the preceding year with the supporting bills and TDS which was deducted by the payee in the preceding year as well as for the year under consideration. Therefore, if the TDS details for two years are taken into consideration it goes to prove that only because of the difference of time in deducting the TDS by contractee the discrepancies appears in respect of the receipts as shown in the form 26AS and turnover declared by the assessee. All these details were produced by the AO and this is a recurring issue as already examined before the AO in the preceding assessment years. The AO did not feel any need to give an elaborate finding on this issue. The assessee has produced copies of the assessment order passed u/s 143(3) for A.Ys.2014-15 & 2015-16 wherein an identical issue was considered by the AO and after examining of the record and explanation of the assessee the AO accepted the claim of the assessee. Once it is a recurring issue and already examined in the preceding years and AO has duly conducted an inquiry by issuing show cause notice u/s 142(1) which was duly replied by the assessee with relevant record then the AO was not expected to give an elaborate finding on this issue. Similarly on the other issues when the AO has issued show cause notice and the assessee produced Page 43 of 55

SR Ferro Alloys Page 44 of 55 relevant details and supporting evidence in respect of the expenses incurred which were subjected to TDS wherever applicable and the extra expenditure was incurred for the year was specifically explained by the assessee giving the specific reasons of consumption of electricity in development of site in the remote rural area as well as the expenditure incurred on acquiring equipment of machinery require for carrying out construction work. All these details were available with the AO as filed by the assessee, therefore, this case is certainly does not fall in the category of lack of inquiry on the part of the Assessing Officer. Coordinate Bench of this Tribunal in case of Rakesh Khandelwal vs. Pr. CIT (Supra) while considering an identical issue has held as under:

“8. Therefore, it is not the case where there was no enquiry at all by the A.O. The assessee had furnished certain evidences, which the assessing officer has gone through. There is no dispute that the Ld. Principal CIT can exercise the revisionary jurisdiction u/s 263 of the Act. If he considers that any order passed by the A.O. is erroneous in so far as it is prejudicial to the interest of the revenue. Explanation (2) to section 263 of the Act further clarifies that an order passed by the A.O. shall be deemed to be erroneous in so far as it is prejudicial to the interest of the revenue, if in the opinion of the Principal Commissioner or Commissioner (a) the order is passed without making enquiries or verification which should have been made (b) the order is passed allowing any relief without enquiring into the claim (c) the order has not been made in accordance with the order, direction or instruction issued by the Board u/s 119 or (d) order has not been passed in accordance with any decision, which is prejudicial to the assessee rendered by the jurisdictional High Court or Supreme Court in the case of the assessee or any other person. In the present case, Principal CIT has revised the order on the ground that the A.O. has failed to make enquiries or verification, which should have been made. Ld. Principal CIT has not specified that what enquiries the A.O. has not made. There is no material suggesting that the Principal CIT has expressed his view about insufficiency of enquiry on the material placed on record. The issue regarding whether the assessment order is erroneous or prejudicial on the ground of insufficiency of enquiry has been dealt by the Hon'ble Delhi High Court in the judgement of ITO Vs. DG Housing Projects Ltd. (2012) 20 Taxmann.com 587, which has been followed by this Tribunal in various cases. Hon'ble High Court while adverting to the issue held that in cases of wrong opinion for finding on merit, the CIT has to come to the conclusion and himself decide that order is erroneous, by conducting necessary enquiry, if required and necessary before the order u/s 263 of the Act is passed. In such cases, the order of the A.O. will be erroneous because the order passed is not sustainable in law and the said finding must be recorded CIT cannot remand the matter to the assessing officer to decide whether the findings recorded are erroneous. In cases where there is inadequate enquiry but not lack of enquiry, again the CIT Page 44 of 55

SR Ferro Alloys Page 45 of 55 must give and record a finding that the order/enquiry made is erroneous. This can happen if an enquiry and verification is conducted by the CIT and he is able to establish and show the error or mistake made by the A.O. making the order unsustainable in law. In some cases, possibly though rarely, the CIT can also show and establish that the facts on record or inferences drawn from facts on record per se justified and mandated further enquiry or investigation but the A.O. had erroneously not undertaken the same. However, the said finding must be clear, unambiguous and not debatable.

The matter cannot be remitted for a fresh decision to the A.O. who conduct further enquiries without a finding that the order is erroneous finding that order is erroneous the condition or requirement which must be satisfied for exercise of jurisdiction u/s 263 of the Act. In such matters, to remand the matter/issue to the A.O. would imply and mean the CIT has not examined and decided whether or not the order is erroneous but has directed the A.O. to decide the aspect/question. The Hon'ble Court further held that this distinction must be kept in mind by the CIT while exercising jurisdiction u/s 263 of the Act and in the absence of the finding that the order is erroneous and prejudicial to the interest of revenue, exercise of jurisdiction under the said section is not sustainable. In most cases of alleged "inadequate investigation", it will be difficult to hold that the order of the A.O., who had conducted enquiries and had acted as an investigator, is erroneous, without CIT conducting verification/enquiry.

The order of the A.O. may be or may not be wrong. CIT cannot direct reconsideration on this ground but only when the order is erroneous. An order of remit cannot be passed by the CIT to ask the A.O. to decide whether the order was erroneous. This is not permissible. An order is erroneous, unless the CIT held and records reason why it is erroneous.

An order will become erroneous because on remit, the A.O.may decide that order is erroneous. Therefore, CIT must after recording reasons, hold that order is erroneous the jurisdictional pre-condition stipulated is that CIT must come to the conclusion that the order is erroneous and is unsustainable in law. It was further observed that the material, which the CIT can rely includes not only the records as it stands at the time when the order in question was passed by the A.O. but also record as it stands at the time of the examination by the CIT. Nothing appears/prohibits CIT from collecting and relying new/additional material which evidence to show and state that the order of the A.O. is erroneous. We find that Ld. CIT in the present case has not carried out any enquiry of his own has merely set aside the assessment to the file of the A.O. to re- examine issue of source of cash deposited by the assessee. Therefore, Page 45 of 55

SR Ferro Alloys Page 46 of 55 it is contrary to the guidelines as mandated in the Hon'ble Delhi High Court in the case of ITO Vs. DG Housing Projects Ltd. (supra) coupled with the fact that the assessee during the assessment proceedings had submitted evidences in support of sale of jewelleries and receipt of gift. Moreover, the issue of examination of source of gift was not subject matter of the scrutiny.

Therefore, the decision of the Ld. CIT invoking provisions of section 263 of the Act is not justified and cannot be sustained under the facts and circumstances of the present case. We therefore, set aside the impugned order and allow the grounds raised by the assessee.”

“5. We have considered the rival submissions as well as the relevant material on record. We have carefully perused the assessment order passed by the AO under section 143(3), show cause notice issued by the ld. PCIT under section 263 of the Act as well as the impugned order passed under section 263. It is manifest from the record that the case of the assessee was taken up for limited scrutiny as per the notice issued under section 143(2) dated 19.09.2016, the relevant part of the said notice listing the issues identified for examination are as under :-

" This is for your kind information that the return of income for Assessment Year 2015-16 filed vide ack. No. 134831180300316 on 30/03/2016 has been selected for Scrutiny. Following issues have been identified for examination :- i. Purchase of Property ii. Deduction claimed under the head Capital Gains

2. In view of the above, we would like to give you an opportunity to produce, or cause to be produced, any evidence which you feel is necessary in support of the said return of income on 26/09/2016 at 11:00 AM in the Office of the undersigned."

Thus it is clear that the case was selected for limited scrutiny on the issue of purchase of property and deduction claimed under the head Capital Gains. Both these issues are inter-connected as the deduction under section 54F was claimed by the assessee in respect of purchase of property and construction of residential house on the said Page 46 of 55

SR Ferro Alloys Page 47 of 55 land. The AO, thereafter issued notice under section 142(1) dated 14.07.2017 along with a questionnaire. These facts are also evident from the assessment order in para 1 and 2 as under :-

" Thereafter, the case was transferred to the office of the undersigned from the ITO Ward 4(1) Jaipur on 26.05.2017 and due to change of incumbent of charges, notice u/s 142(1) along with questionnaire issued on 14.07.2017 fixing the case of hearing on 20.07.2017 which was duly served upon the assessee on 15.07.2017. In response thereto, the CA/AR of the assessee Sh. Ajay Jain attended the proceedings from time to time and furnished required details/documents and also produced books of accounts, which were examined on test check basis. The case was discussed with him.

Thus in response to the notice issued under section 142(1), the assessee attended the proceedings through her A/R and also furnished the required details/documents as well as books of account which were examined by the AO. There is no dispute that the AO has conducted the enquiry on the issue for which the case was selected for scrutiny and after satisfying himself the AO finally concluded that the assessee earned the income from capital gain and interest. The details and records produced before him were examined and thereafter the returned income is accepted. Thus it is not a case of lack of enquiry on the part of the AO. Though the AO has not discussed the issue in elaborate manner, but once he was satisfied with the supporting evidences produced by the assessee he has accepted the claim. The ld. PCIT has invoked the provisions of section 263 by issuing the show cause notice dated 4th February, 2019 at pages 16 & 17 of the paper book as under :-

Xxxxxxxxxxxxx Thus it is clear from the show cause notice issued under section 263 that the ld. PCIT has invoked the provisions of section 263 only on the issue of allowability of deduction under section 54F in respect of the investment made by the assessee towards cost of agricultural land and construction of house. The sole ground for initiating the proceedings under section 263 by the ld. PCIT is that in his view the claim of deduction in respect of agricultural land is not admissible. As apparent from the show cause notice that the scope of proceedings under section 263 was limited Smt. Lata Phulwani, Jaipur.only on the issue of allowability of deduction under section 54F in respect of the agricultural land acquired by the assessee and used for construction of house. There was no allegation Page 47 of 55

SR Ferro Alloys Page 48 of 55 by the ld. PCIT about the lack of enquiry on the part of the AO while passing the assessment order. Even otherwise, it is clear from the assessment order that the case was selected for limited scrutiny only on the issue of investment made in the agricultural land and deduction under section 54F of the IT Act. Therefore, the question of lack of enquiry does not arise when the AO has taken up the scrutiny and issued the notice under section 142(1) along with a questionnaire calling for all the details relevant to the acquisition of the land as well as of construction of house. It is also not in dispute that the assessee produced the relevant details and evidences and specifically the purchase documents for acquiring the agricultural land as well as the valuation report towards the cost of construction. The ld. PCIT has also not doubted the facts as brought on record by the assessee and considered by the AO while passing the assessment order. The provisions of section 263 were invoked by the ld. PCIT due to the reason that he has a different view regarding the allowability of deduction under section 54F in respect of the investment made for purchase of agricultural land and construction of house. There is no quarrel on the point that lack of enquiry renders the order of the AO as erroneous so far as prejudicial to the interests of the revenue. However, when there is no allegation and even otherwise it is manifest from the record that this is not a case of lack of enquiry on the part of the AO but the AO after satisfying himself about the claim of deduction under section 54F consequent upon the examination and verification of the concerned details, evidences and books of account produced by the assessee, allowed the claim of the assessee. Further, though the ld. PCIT has not alleged that there is inadequate enquiry on the part of the AO, however, even in case there is inadequate enquiry on the part of the AO, the ld. PCIT can give a concluding finding while passing the revision order after considering the complete record as well as conducting a necessary enquiry. In this case the assessee has contended before the ld. PCIT that the claim of deduction under section 54F is eligible even if the residential house is constructed on the agricultural land. The crux of the argument of the assessee has been reproduced by the ld. PCIT in para 5 of the impugned order. Thus the assessee has cited various decisions in support of her claim. The ld. PCIT has turned down the contentions of the assessee and has gone further to verify the facts by conducting an enquiry. This exercise of the ld. PCIT in conducting the enquiry to find the facts is beyond the scope of the proceedings initiated under section 263 by issuing the show cause notice dated 4th February, 2019. In the said show cause notice, the ld. PCIT has raised only one issue i.e. purely a view regarding the allowability of the deduction under section 54F in respect of the investment made for construction of house on agricultural land. Whereas in the proceedings under section 263 the ld. PCIT has travelled beyond the scope of proceedings as initiated vide show cause notice dated 4th February, 2019. Therefore, the proceedings which are beyond the SR Ferro Alloys Page 49 of 55 scope of the revisional proceedings, are not permissible as not an issue involved in the show cause notice.

6. Further, once it is not a case of lack of enquiry or inadequate enquiry as per the show cause notice issued under section 263 of the Act, then conducting a further enquiry on the factual aspects of the investment made in purchase of agricultural land and construction of the house is beyond the jurisdiction of the ld. PCIT as assumed by issuing show cause notice under section 263. The finding of the ld. PCIT in the revision order ought to have been confined on the issue of allowability of deduction under section 54F. Since the ld. PCIT was not agreeing with the view of the AO regarding the claim of deduction under section 54F, at the outset, he was required to give a concluding finding on the issue. On the contrary, the ld. PCIT has remitted the issue to the AO in para 7 as under :-

"

Thus while passing the revision order, the ld. PCIT himself was not sure about the correctness of the claim and has remanded the matter to the record of the AO for passing a fresh order. Hence he has not given a concluding finding whether the order of the AO allowing the claim of deduction under section 54F after conducting an enquiry is absolutely against the provisions of law. Once it is not a case of lack of enquiry on the part of the AO, the said order cannot be held to be erroneous unless the ld. PCIT holds and records the reason why it is erroneous. The pre-condition for invoking the jurisdiction under section 263 is that the ld. PCIT must come to the conclusion that the order of the AO is erroneous and is unsustainable in law. When the order passed by the AO is not erroneous for want of an enquiry, then it is incumbent upon the ld. PCIT to give a concluding finding and reasons that the order is not sustainable in law. An identical issue was considered by the Hon'ble Jurisdictional High Court in case of CIT vs. Ganpat Ram Vishnoi, 296 ITR 292 (Raj.) in para 7 to 12 as under :-

" 7. In this connection, it would be relevant to refer to the material which was relied by the Tribunal to set aside the order of the CIT. The Tribunal noticed that as per the record of the proceedings; on 16-10- 1995, the Assessing Officer required the assessee to produce documents or material in relation to 10 different items, which Page 49 of 55 SR Ferro Alloys Page 50 of 55 included the details of capital contributed by partners, details of purchases made in excess of Rs. 20,000 with evidence, confirmation of unsecured loans, amongst other matters, which the Assessing Officer desired to enquire into. The assessee has produced desired information by 15-11-1995. There-after, the case was adjourned to 22-11-1996 and 1-12-1995. On 5-12-1995, the Assessing Officer studied the sundry creditors, unsecured loans and desired to furnish affidavits of unsecured loans and details of interest paid and the case was adjourned to 19-1- 1996. On 19-1-1996, the Assessing Officer again required the assessee to furnish the details of partners capital accounts and also to produce voucher for expenses and the matter was adjourned for 23-1-1996. On 23-1-1996, the case was discussed and finalised. After that, assessment was completed by passing assessment order. These matters clearly indicate that the Assessing Officer particularly made reference to the matters, which the CIT has opined were not inquired. Thus, according to the Tribunal, the foundation to exercise power under section 263 of the Income-tax Act, was not existing.

8. We are of the opinion in the aforesaid circumstances on the finding reached by the Assessing Officer, no question of law really arises for consideration in this appeal.

9. It is true that in a given case not holding of any enquiry, which is relevant for assessment may indicate non-application of mind by Assessing Officer or furnish the ground for taking action under section 263 by the CIT. In this connection, reference may be made in the case of Malabar Industrial Co. Ltd. v. CIT [2000] 243 ITR 831 (SC), wherein the CIT opined that the has passed the order of "nil" assessment without application of mind. The High Court accepted this part of the assertion made by the CIT in his order that the ITO has failed to apply his mind to the case in all perspectives and the order passed by him was erroneous. The High Court has also found that the assessment order was passed without application of mind. The High Court rightly held that the exercise of jurisdiction by the CIT under section 263(1) was justified.

11. Undoubtedly, the jurisdiction under section 263 is wide and is meant to ensure that due revenue ought to reach the public treasury and if it does not reach on account of some mistake of law or fact Page 50 of 55 SR Ferro Alloys Page 51 of 55 committed by the Assessing Officer, the CIT can cancel that order and require the concerned Assessing Officer to pass a fresh order in accordance with law after holding a detailed enquiry. But when enquiry in fact has been conducted and the Assessing Officer has reached a particular conclusion, though reference to such enquiries has not been made in the order of the assessment, but the same is apparent from the record of the proceedings, in the present case, without anything to say how and why the enquiry conducted by the Assessing Officer was not in accordance with law, the invocation of jurisdiction by the CIT was unsustainable. As the exercise of jurisdiction by the CIT is founded on no material, it was liable to be set aside. Jurisdiction under section 263 cannot be invoked for making short enquiries or to go into the process of assessment again and again merely on the basis that more enquiry ought to have been conducted to find something.

12. The finding of the Tribunal that the ITO had passed assessment order after relevant enquiries and considering the aspects of the matter required by the CIT to be considered by him is a finding of fact and on the basis of which, the jurisdiction assumed by the CIT being non-existent must be held to be not sustainable. Consequently, the appeal fails and is hereby dismissed."

Thus the Hon'ble High Court has held that the ld. CIT can cancel the order of the AO and require the concerned AO to pass a fresh order in accordance with the law after holding a detailed enquiry. But when the enquiry in fact has been conducted and the AO has reached a particular conclusion, though reference to such enquiries has not been made in the order of assessment, but the same is apparent from the record of the proceedings, the invocation of jurisdiction by the ld. CIT was unsustainable. A similar view has been taken by the Hon'ble Delhi High Court in case of ITO vs. D.G. Housing Projects Ltd. 343 ITR 329 in para 18 as under :-

"18. It is in this context that the Supreme Court in Malabar Industrial Co. Ltd. v. Commissioner of Income Tax, [2000] 243 ITR 83 / 109 Taxman 66 (SC), had observed that the phrase 'prejudicial to the interest of Revenue' has to be read in conjunction with an erroneous order passed by the Assessing Officer. Every loss of Revenue as a consequence of an order of the Assessing Officer cannot be treated as prejudicial to the interest of Revenue. Thus, when the Assessing Officer had adopted one of the courses permissible and available to him, and this has resulted in loss to Revenue; or two views were possible and the Assessing Officer has taken one view with which the CIT may not agree; the said orders cannot be treated as an erroneous order prejudicial to the interest of Revenue unless the view taken by the Assessing Officer is unsustainable in law. In such matters, the CIT must give a finding that the view taken by the Assessing Officer is unsustainable in law and, therefore, the order is erroneous. He Page 51 of 55

SR Ferro Alloys Page 52 of 55 must also show that prejudice is caused to the interest of the Revenue."

The Hon'ble High Court has laid out a fine distinction between the orders where no enquiry has been made by the AO from the order based on inadequate enquiry. Therefore, where the AO has made an enquiry and taken a possible/permissible view, then the said order cannot be treated as erroneous and prejudicial to the interests of the revenue unless the view taken by the AO is unsustainable in law. The Hon'ble Supreme Court in case of Malabar Industrial Co. Ltd. vs. CIT, 243 ITR 83 (SC) has held that an order of ITO cannot be treated as prejudicial to the interests of the revenue if the ITO adopted one of the course permissible in law and it has resulted in loss of revenue or two views are possible and the ITO has taken one view with which the ld. CIT does not agree, it cannot be treated as an erroneous order prejudicial to the interests of the revenue unless the view taken by the ITO is unsustainable in law. As it is clear from the impugned order that the assessee has relied upon various decisions and further the assessee has also relied upon the recent decision of the Coordinate Bench of this Tribunal in case of Shri Rajendra Kumar Sharma vs. JCIT in wherein the Tribunal has held in paras 4 & 5 as under :-

"4. We have heard and considered the rival contentions and perused the material placed on record. From the record, we found that the assessee claimed deduction of Rs. 83,54,434/- u/s 54F from the LTCG declared by it. The assessee made investment of Rs. 1,15,00,000/- in purchase of land and constructed residential house thereon. The area of land was 4090 Sq.mt. and construction thereon is of 1504 Sq. ft. The A.O. on these facts issued a show cause notice to assessee as given in assessment order to which assessee replied which is given in page -- 6 of assessment order. The A.O. on following grounds denied the claim of assessee: (a) The land is agricultural and not residential. (b) The construction of residential house without approval of plan by Govt. Authority. (c) The assessee has also not submitted any electricity and water connection evidence. (d) The land was registered in the name of assessee on 28-3-13 i.e. beyond the period specified in Section 54F (4) and so assessee not complied conditions laid down therein. The agreement to purchase land executed on 2-6-2011 claimed by assessee has no evidentiary value as payment of consideration shown in cash. (e) The bills for construction are lacking details and contain no detail of work done and each payment made therefor was in cash for less than Rs. 20,000/-. (f) The Inspector physically verified the property and found there is only boundary wall with gate and on whole land there was little Page 52 of 55

SR Ferro Alloys Page 53 of 55 construction, with walls and Tin shed roofing and construction is about 700-800 Sq.ft as against 1504 Sq.ft. construction claimed by assessee. The Ld. A.O. in assessment order gave scanned photographs stated to have been taken by Inpsector on site visit.

The A.O. thus concluded that investment was purely in land and not a residential house as required u/s 54F of I. T. Act, 1961 and so assessee is not entitled to claimed deduction u/s 54F. As per our considered view, benefit of Section 54F cannot be denied on the ground that land on which construction done was agriculture in nature. Reliance is placed on the judgements in case of Vishnu Trading Co. 259 ITR 724 (Raj.), Narendra Mohan Uniyal 34 SOT 152 (Del.), Shyam Sunder Mukhija Vs. ITO 38 ITD 125 (JPR) and ACIT Vs. Om Prakash Goyal (2012) 53 SOT 158 (JPR). In the case of Narendra Mohan Uniyal (Supra) it is held that "It is crystal clear from the plain reading of ss. 54 and 54F that exemption is allowable in respect of amount invested in the construction of a residential house. There is no any rider under s. 54F that no deduction would be allowed in respect of investment of capital gains made on acquisition of land appurtenant to the building or on the investment on land on which building is being constructed. When the land is purchased and building is constructed thereon, it is not necessary that such construction should be on the entire plot of land, meaning thereby a part of the land which is appurtenant to the building and on which no construction is made, there is no denial of exemption on such investment. In this connection reference may be made to Cir. No. 667 dated 18- 10-1993 (204 ITR (ST) 103) issued by CBDT which has clarified that for the purpose of computing exemption u/s 54 or 54F, the cost of the plot together with cost of the building will be considered as cost of new asset, provided the acquisition of the plot and also the construction thereon are completed within the period specified in these sections. There is no need of approval of plan from competent authorities if construction is within limits on agricultural land and it is not a condition laid down in Section 54F for construction of residential house. The construction on land is meant for residential house. The assessee could complete the construction of the residential house within three years and if any facility lacking in the constructed residential house the same could be completed within in that period. There is water supply from well and temporary electric connection in the residential house constructed by assessee. The construction of residential house is 1553.50 Sq.ft. and not having proper bills for construction cannot be taken adversely against him for purposes of Section 54F. These facts are evident from the valuation report of Regd. Valuer a copy of which is submitted. The Inspector of department furnished vague details without any physical inspection of building and took only photographs. The assessee has only to invest net sale consideration in purchase or construct a residential house and therefore registration or legal ownership is not necessary which is evident from Circular No. 471 dated 15-10-1986 issued by Page 53 of 55

SR Ferro Alloys Page 54 of 55 CBDT and from judgements of Balraj Vs. CIT 254 ITR 22 and CIT Vs. Laxmi Chand 211 ITR 804 and various other judgements on the issue. Thus, agreement to purchase copy of which submitted proves domain and control of assessee on the land in the hands of assessee and satisfies the connotation of purchase of land for construction of residential house. WE found from the record that the assessee had invested Rs. 1,15,00,000/-in construction of residential house and, therefore entitled to claimed deduction u/s 54F. The Ld. A.O. is wrong and has erred in law in disallowing the claimed deduction of Rs. 83,54,434/- u/s 54F the Act, which deserves to be allowed.

5. We found that in the previous year relevant to the above said assessment year the assessee invested a sum of Rs.1,15,00,000/- in purchase of land for construction of a residential house. The deduction u/s 54F amounting to Rs.83,54,434/- has been claimed on account of said investment in the land; copy of the agreement to purchase and registered purchase deed were verified before the A.O.. The assessee got constructed a residential house in the F.Y. 201213 i.e. within the statutory time limit allowed by the Act i.e. before the due date of February, 2014. Copy of bills for construction of house alongwith Map of the house was filed before the A.O.. The total area of land is about 4090 sq.mtr. and the constructed area is about 1504 sq.ft. No approval is required for construction of the above said residential house. C o p y o f r e g i s t e r e d s a l e d e e d i s a l s o f i l e d before the A.O. We found that it was a residential unit, therefore, the assessee is entitled for claim of deduction U/s 54F of the Act amounting to Rs. 83,54,434/-."

Thus it is clear that the Tribunal has referred and relied upon various decisions on the point of allowability of deduction under section 54/54F of the Act in respect of the investment made in construction of house on agricultural land. Therefore, the view taken by the AO is a possible view though may not be the only view. Further once the issue of allowability of deduction under section 54F is a debatable issue and the AO has taken a possible view, then the ld. PCIT is not permitted to invoke the provisions of section 263 merely because he does not agree with the view of the AO. Hence in the facts and circumstances of the case as well as the foregoing discussion about the settled principles of law laid down in various decisions, we hold that the impugned order passed by the ld. PCIT is not sustainable and the same is liable to be set aside.”

Order pronounced in the open court on 09.11.2023