M/S. RADHE EXIM PVT. LTD. ,RAJKOT vs. THE PR. CIT-1, RAJKOT, RAJKOT

आदेश/O R D E R

PER WASEEM AHMED ACCOUNTANT MEMBER: The captioned appeal has been filed at the instance of the Assessee against the order of the Learned Principal Commissioner of Income Tax-1, Rajkot, (in short “Ld.Pr.CIT” arising in the matter of assessment order passed under s.263 of the Income Tax Act 1961 (here-in-after referred to as "the Act") relevant to the Assessment Year 2016-17.

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established but the AO accepted the return income without properly examining this aspect. Thus, the learned PCIT proposed to hold the assessment order of the AO as erroneous insofar prejudicial to the interest of Revenue by issuing show cause notice dated 23-12-2020.

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particularly when a view was already taken after inquiry and that that such revision should be restricted to a very gross case of inadequacy is also misplaced in the facts of the case. As demonstrated above, the AO, though he was supposed to verify the above aspects of the assessment, has not carried out any independent inquiry and has accepted the contentions of the assessee on its face value and as such, it is a case of complete lack of inquiry and is not a case of inadequate inquiry. In the facts of the case as discussed herein above, the decisions cited by the assessee are misplaced. 15. This indicates that the AO failed to make the relevant vital inquiries as to whether the depositors / subscribers are genuine and verifiable, whether the depositors are creditworthy, etc. Perusal of the case records reveals that there is nothing on record to show that the AO has ever confronted the assessee on these issues and had the Assessing Officer examined all the above issues, he should have made some noting either in the order sheet or any kind of reference would have been made in the submissions made by the assessee. Therefore, it is not a case of inadequate inquiry but a clear cut case of lack of inquiry The lack of inquiry or verification at the relevant time by the AO would constitute prejudice to the interest of revenue and would involve error of fact a and law which are vital to the issue on which the case was selected for scrutiny 16. The Assessing Officer is both an investigator and an adjudicator. If the Assessing Officer as an adjudicator decides a question or aspect and makes a wrong assessment which is unsustainable in law, it can be corrected by the Commissioner in exercise of revisionary power. As an investigator, it is incumbent upon the Assessing Officer to investigate the facts required to be examined and verified to compute the taxable income. If the Assessing Officer fails to conduct the said investigation, he commits an error and the word 'erroneous' includes failure to make the enquiry. In such cases, the order becomes erroneous because enquiry of verification has not been made and not because a wrong order has been passed or merits. In this case the AO has not conducted the critical enquiry and nothing is on record to show that any verification of details to establish the genuineness of the claim as made by the assessee has been carried out by the Assessing Officer. Th order of the Assessing Officer is silent and the claims have been allowed without any inquiry, examination or independent verification from outside agencies. 17. As mentioned above in the assessee’s case, the AO while completing the assessment did not conduct such enquiry as was essential on the facts and circumstances of the case and therefore the order passed by the AO was erroneous in as much as it was prejudicial to the interest of revenue. Therefore, this is a case of absolute lack of inquiries by the AO and not a case of inadequate inquiries. Reliance is placed on the following case laws wherein it has been held that proceedings u/s.263 can be justified where there is lack of inquiries on the part of the A.O.

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10.1 An inquiry made by the Assessing Officer, considered inadequate by the Commissioner of Income Tax, cannot make the order of the Assessing Officer as erroneous insofar prejudicial to the interest of the Revenue. In our view, the order can be erroneous if the Assessing Officer fails to apply the law rightly on the facts of the case. As far as adequacy of inquiry is considered, there is no law which provides the extent of inquiries to be made by the Assessing Officer. It is Assessing Officer’s prerogative to make inquiry to the extent he feels proper. The Commissioner of Income Tax by invoking revisionary powers under section 263 of the Act cannot impose his own understanding of the extent of inquiry. There were a number of judgments by various Hon’ble High Courts in this regard.

Delhi High Court in the case of CIT Vs. Sunbeam Auto 332 ITR 167 10.2 (Del.), made a distinction between lack of inquiry and inadequate inquiry. The Hon’ble court held that where the AO has made inquiry prior to the completion of assessment, the same cannot be set aside u/s 263 of the Act on the ground of inadequate inquiry. The relevant observation of Hon’ble Delhi High Court reads as under: “12. ….. There are judgments galore laying down the principle that the Assessing Officer in the assessment order is not required to give detailed reason in respect of each and every item of deduction, etc. Therefore, one has to see from the record as to whether there was application of mind before allowing the expenditure in question as revenue expenditure. Learned counsel for the assessee is right in his submission that one has to keep in mind the distinction between “lack of inquiry” and “inadequate inquiry”. If there was any inquiry, even inadequate, that would not by itself, give

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occasion to the Commissioner to pass orders under section 263 of the Act, merely because he has different opinion in the matter. It is only in cases of “lack of inquiry”, that such a course of action would be open. ——— From the aforesaid definitions it is clear that an order cannot be termed as erroneous unless it is not in accordance with law. If an Income-tax Officer acting in accordance with law makes a certain assessment, the same cannot be branded as erroneous by the Commissioner simply because, according to him, the order should have been written more elaborately. This section does not visualise a case of substitution of the judgment of the Commissioner for that of the Income-tax Officer, who passed the order unless the decision is held to be erroneous. Cases may be visualised where the Income-tax Officer while making an assessment examines the accounts, makes enquiries, applies his mind to the facts and circumstances of the case and determines the income either by accepting the accounts or by making some estimate himself. The Commissioner, on perusal of the records, may be of the opinion that the estimate made by the officer concerned was on the lower side and left to the Commissioner he would have estimated the income at a figure higher than the one determined by the Income-tax Officer. That would not vest the Commissioner with power to re-examine the accounts and determine the income himself at a higher figure. It is because the Income-tax Officer has exercised the quasi-judicial power vested in him in accordance with law and arrived at conclusion and such a conclusion cannot be termed to be erroneous simply because the Commissioner does not feel satisfied with the conclusion. There must be some prima facie material on record to show that tax which was lawfully exigible has not been imposed or that by the application of the relevant statute on an incorrect or incomplete interpretation a lesser tax than what was just has been imposed. 15. Thus, even the Commissioner conceded the position that the Assessing Officer made the inquiries, elicited replies and thereafter passed the assessment order. The grievance of the Commissioner was that the Assessing Officer should have made further inquires rather than accepting the explanation. Therefore, it cannot be said that it is a case of ‘lack of inquiry’.”

10.3 The Hon’ble Bombay High Court in case of Gabriel India Ltd. [1993] 203 ITR 108 (Bom), discussed the law on this aspect in length in the following manner: “The consideration of the Commissioner as to whether an order is erroneous in so far as it is prejudicial to the interests of the Revenue, must be based on materials on the record of the proceedings called for by him. If there are no materials on record on the basis of which it can be said that the Commissioner acting in a reasonable manner could have come to such a conclusion, the very initiation of proceedings by him will be illegal and without jurisdiction. The Commissioner cannot initiate proceedings with a view to starting fishing and roving enquiries in matters or orders which are already concluded. Such action will be against the well-accepted policy of law that there must be a point of finality in all legal proceedings, that stale issues should not be reactivated beyond a particular stage and that lapse of time must induce repose in and set at rest judicial and quasi-judicial controversies as it must in other spheres of human activity.

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10.4 The Mumbai ITAT in the case of Sh. Narayan Tatu Rane Vs. ITO, I.T.A. No. 2690/2691/Mum/2016, dt. 06.05.2016 examined the scope of enquiry under Explanation 2(a) to section 263 in the following words:- “20. Further clause (a) of Explanation states that an order shall be deemed to be erroneous, if it has been passed without making enquiries or verification, which should have been made. In our considered view, this provison shall apply, if the order has been passed without making enquiries or verification which a reasonable and prudent officer shall have carried out in such cases, which means that the opinion formed by Ld Pr. CIT cannot be taken as final one, without scrutinising the nature of enquiry or verification carried out by the AO vis-à-vis its reasonableness in the facts and circumstances of the case. Hence, in our considered view, what is relevant for clause (a) of Explanation 2 to sec. 263 is whether the AO has passed the order after carrying our enquiries or verification, which a reasonable and prudent officer would have carried out or not. It does not authorise or give unfettered powers to the Ld Pr. CIT to revise each and every order, if in his opinion, the same has been passed without making enquiries or verification which should have been made. In our view, it is the responsibility of the Ld Pr. CIT to show that the enquiries or verification conducted by the AO was not in accordance with the enquries or verification that would have been carriedout by a prudent officer. Hence, in our view, the question as to whether the amendment brought in by way of Explanation 2(a) shall have retrospective or prospective application shall not be relevant.”

The Hon’ble Supreme Court in recent case of Principal Commissioner of 10.5 Income-tax 2 v. Shree Gayatri Associates*[2019] 106 taxmann.com 31 (SC), held that where Pr. CIT passed a revised order after making addition to assessee's income under section 69A in respect of on-money receipts, however, said order was set aside by Tribunal holding that AO had made detailed enquiries in respect of such on-money receipts and said view was also confirmed by High Court, SLP filed against decision of High Court was liable to be dismissed. The facts of this case were that pursuant to search proceedings, assessee filed its return declaring certain unaccounted income. The Assessing Officer completed assessment by making addition of said amount to assessee's income. The Principal Commissioner passed a revised order under section 263 on ground that Assessing Officer had failed to carry out proper inquiries with respect to assessee's on money receipt. In appeal, the Tribunal took a view that Assessing Officer had carried out detailed inquiries which included assessee's on-money transactions and Tribunal, thus, set aside the revised order passed by Commissioner. The Hon’ble High Court upheld Tribunal's order. The Hon’ble Supreme Court while dismissing the SLP filed by the Department held as under:-

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“We have heard learned counsel for the Revenue and perused the documents on record. In particular, the Tribunal has in the impugned judgment referred to the detailed correspondence between Assessing Officer and the assessee during the course of assessment proceedings to come to a conclusion that the Assessing Officer had carried out detailed inquiries which includes assessee's on-money transactions. It was on account of these findings that the Tribunal was prompted to reverse the order of revision. No question of law arises. Tax Appeal is dismissed” Principal 10.6 The Supreme Court in the another recent case of Commissioner of Income-tax-2, Meerut v. Canara Bank Securities Ltd[2020] 114 taxmann.com 545 (SC), dismissed the Revenue’s SLP holding that 263 proceedings are invalid when AO had made enquiries and taken a plausible view in law, with the following observations: “Having heard learned counsel for the parties and having perused the documents on record, we see no reason to interfere with the view of the Tribunal. The question whether the income should be taxed as business income or as arising from the other source was a debatable issue. The Assessing Officer has taken a plausible view. More importantly, if the Commissioner was of the opinion that on the available facts from record it could be conclusively held that income arose from other sources, he could and ought to have so held in the order of revision. There was simply no necessity to remand the proceedings to the Assessing Officer when no further inquiries were called for or directed” 10.7 From an analysis of the above judicial precedents, the principle which emerges is that 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 the Assessing Officer cannot be treated as prejudicial to the interests of the revenue, for example, when an Assessing Officer adopts one of the course permissible in law and it has resulted in loss of revenue; or where two views are possible and the Assessing Officer has taken one view with which the Commissioner of Income-tax does not agree, it cannot be treated as an erroneous order causing prejudice to the interests of the Revenue unless the view taken by the Assessing Officer is unsustainable in law, or the AO has completely omitted to make any enquiry altogether or the order demonstrates non-application of mind.

10.8 Now in the facts before us, in the case of the assessee the AO during the course of assessment proceedings, made enquiries on issue of credit of unsecured

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loan and after consideration of written submissions filed by the assessee and documents / evidence placed on record, and then framed the assessment under section 143(3) accepting the genuineness of such unsecured loans. This fact can be verified from the notice under section 142(1) of the Act by the AO and submission in reply of the assessee against such notice. i. Notice dated 04-07-2018:

Statement showing details of unsecured loan accepted/repaid during the relevant previous year along with copies of accounts, contra accounts acknowledgments of return of income and bank statement of depositors are attached at Page 165 to 185 ii. Notice dated 26-10-2018:

With regard to unsecured loans given by Hi-Can Industries Pvt. Ltd (PAN AACCH2331N) and RNG Finlease Ltd (PAN AAACR9073P), the assessee was asked to show how they were capahle of lending so much amount while having a low returned income. That is, the assessee was asked to show the creditworthiness of both the lenders. The assessee replied that both of these companies have share capital of Rs.6.25 crores and Rs.26.22 crore respectively, which is more than amount lent. But, the assessee gave no satisfactory reply. When asked to submit other accounts and details of the lenders, there was no reply from the assessee. As the assessee failed to prove the creditworthiness of the lenders, explain why the unsecured loans given by Hi-Can Industries Pvt. Ltd (PAN AACCH2331N) and RNG Finlease Pvt. Ltd (PAN AAACR9073P) should not be added to total income u/s.68. ii. Reply dated 12-09-2018

3.0 Since vide notice dated 26 10 2018 you still not satisfied with the creditworthiness of the lenders, we at the outset submit that the income of an assessee in particular has hardly any concern with the capacity to lend particularly the share capital and reserve of the company is substantial as compared to loaned amount An assessee may have substantial wealth/capital, FDRs, but the returned income may be at moderate figure or even sometimes below the maximum not chargeable to tax but returns filed for the purpose of continuity and seeking refunds from TDS, which cannot be a reason to hold

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that the assessee has no capacity to lend the money or to obtain FDRS However, for the purpose of records we attach at Page 5 & 6, the audited balance sheet and schedule 16 in the case of Hi-can as on 31.03.2015 wherein the loan and advance outstanding at Rs. 52.09 lacs in the case of the assessee reflect. Since the account is squared up during the year it is obviously did not appear in the in the audit report for the year under assessment. 4.0 As regards the unsecured loans from RNG the copy of audit report u/s 44AB of the Act as on 31.03.2016 is attached at Page 7 to 25. It may be seen from the schedule 10 that RNG had advanced an amount of Rs. 13.80 crores as on 31.03.2015 in which assessee's balance is Rs 1.45 cores only which in term of percentage comes around 10 % of total advances of the lender. This proves that the lender is a non banking finance company engaged in the business of providing finances 5.0 As regards the creditworthiness of the lenders Hi-can, and RNG, it to state that in the case of M/s Radhe Renewable Energy Development Pvt. Ltd, an associate company of the assessee had taken loan of Rs. 15.00 lees and Rs. 57.50 lacs respectively in AY 2015- 16 The assessee M/s Radhe Renewable Energy Development Pvt. Ltd vide its letter dated 11.05 2017 vide para 5 had discharged the onus lies on it in respect of query related to unsecured loans which was found explained by the Ld. DCIT. Circle 1(2), Rajkot Copy of letter dated 11.05.2017 and the assessment order is attached at Page 26 to 39. Similarly in the earlier year AY 2014-15 M/s Radhe Renewable Energy Development Pvt. Ltd obtained similar unsecured loans from these two entities which was stand explained. Thus, in the case of both the lenders, the creditworthiness has been established beyond doubt as available on records which is possession of the department. Can a creditor ask more details from the lender than what is furnished above? It is good gesture on the part of the lender to make available the details of its financial statements as furnished above in the assessment proceedings in progress of the debtor and not in it own case. 10.9 From the above it is revealed it is not the case that the AO has not made any enquiry. Indeed the Pr. CIT initiated proceedings under section 263 of the Act on the ground that the AO has not made enquiries or verification which should have been made in respect of credit worthiness and genuineness of the lender. It is not the case of the Pr. CIT that the Ld. AO did not apply his mind to the issue on hand or he had omitted to make enquiries altogether. In the instant set of facts, the AO had made enquiries and after consideration of materials placed on record accepted the genuineness of the claim of the assessee.

10.10 At this juncture, it is also important to note that the learned PCIT in his order passed under section 263 of the Act has referred to the explanation 2 of section 263 of the Act. It was attempted by the learned PCIT to hold that there were certain necessary enquiries which should have been made by the AO during the assessment proceedings but not conducted by him. Therefore, on this reasoning the order of the AO is also erroneous insofar prejudicial to the interest

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of revenue. In this regard, we make our observation that the learned PCIT has not invoked the explanation 2 of section 263 of the Act in the show cause notice dated 23-12-2020 about the same. Therefore, the opportunity with respect to the explanation 2 of section 263 of the Act was not afforded to the assessee. Thus, on this count the learned PCIT erred in taking the course of such provisions while deciding the issue against the assessee. Secondly, the learned PCIT has also not specified the nature and the way the enquiries which should have been conducted by the AO in the assessment proceedings. Thus, in the absence of any specific finding of the learned PCIT with respect to the enquiries which should have been made, we are not convinced by his order passed under section 263 of the Act.

10.11 In view of the above and after considering the facts in totality, we hold that there is no error in the assessment framed by the AO under section 143(3) causing prejudice to the interest of revenue. Thus, the revisional order passed by the learned PCIT is not sustainable and therefore we quash the same. Hence the ground of appeal of the assessee is allowed.

Order pronounced in the Court on 16/10/2023 at Ahmedabad.

Sd/- Sd/- (T.R SENTHIL KUMAR) (WASEEM AHMED) JUDICIAL MEMBER ACCOUNTANT MEMBER (True Copy) Ahmedabad; Dated 16/10/2023 Manish