HARSAHAIMAL SHIAMLAL JEWELLERS PVIVATE LIMITED,BAREILLY vs. PCIT(CENTRAL), BAREILLY

This is an appeal filed against the order under section 263 of the Act, passed by the ld. PCIT, Central ,Lucknow on 17.02.2022, setting aside the orders of the ld. Assessing Officer, passed under section 143(3) of the Income Tax Act on 29.07.2019. The grounds of appeal preferred, are as under:-

The facts of the case are, that the case of the assessee was selected for complete scrutiny through CASS. The reason for scrutiny was, “large value cash deposit during demonetization period”. The ld. AO records that the assessee furnished computation of income, balance-sheet, income and expenditure account, bank statements, ledger accounts, details of investments, TDS details and other required details of the case from time to time. He further records that, during the course of scrutiny, the assessee furnished the replies to all the queries raised online and the case was discussed with the ld. AR, whenever required. Ongoing through the details, the ld. AO found that, of the various details claimed to the profit & loss accounts, expenses under the head shop expenses, canteen expenses, patwa expenses and travelling expenses had been incurred mostly in cash, while under patwa expenses, they had been incurred completely in cash. He came to a conclusion that these expenses were not open for verification, since they have been incurred in cash and documented through self-made vouchers. Therefore, he made a disallowance of Rs.2,50,000/- on this account and added the same to the returned income of the assessee. The ld. PCIT called for the case records and after perusal of the same, came to the conclusion that the assessment under section 143(3) of the /Lkw/2022 A.Y. 2017-18 Harsahaimal Shiamlal Jewellers P. Ltd. Income Tax Act that was done on 29.07.2019, was erroneous, in so far as it was prejudicial to the interest of Revenue on the following issues:- i. The ld. AO had not followed the guidelines issued by the CBDT vide internal guidance note for assistance of AOs for verification of cash deposits and framing of assessments in demonetization related cases issued on 13.06.2019 vide F. No.225/145/2019-ITA-II and accordingly, had not issued relevant queries raised for examination of cash deposits during the demonetization period and the queries raised by him were of a general in nature. ii. Even the information collected had not been examined properly to verify whether the cash deposits have actually accrued from the cash sales of the assessee company and thus there were no in depth enquires to ascertain cash in hand. iii. Besides routine queries, no concerted efforts had been made to examine the books of accounts. iv. No third party enquiries had been made and the ld. AO had accepted all the balances in the balance-sheet and P&L account and accepted all the submissions of the assessee.

Thereafter, the ld. PCIT reproduced the provisions of section 263 and made particular reference to explanation 2 of the said section, as inserted w.e.f. 1.06.2015. He also quoted from numerous case laws in support of his decision to hold that the failure on the party of the ld. AO to conduct necessary enquires in the circumstances of the case make the order erroneous and prejudicial to the interest of Revenue and that, when the officer was expected to make enquiry of a particular item of income and did not make an enquiry, as expected that would be a ground for the 6 /Lkw/2022 A.Y. 2017-18 Harsahaimal Shiamlal Jewellers P. Ltd. Commissioner to revise order because such an order would also be erroneous and prejudicial to the interest of Revenue. 3.1 The ld. CIT also referred to the judgment of Hon’ble Supreme Court in the case of CIT vs. Amitabh Bachchan (384) ITR 200, wherein the Hon’ble Supreme Court had held that section 263 did not require any specific show cause notice detailing the specific grounds on which the revision was tentatively proposed, or required the Commissioner to confine himself to the notice, foreclosing consideration of any other issue or question of fact, but gave the Commissioner powers to exercise his jurisdiction on consideration of all relevant facts. The ld. PCIT held that all the judgments referred to by him were now in explicit in the section itself and the judgments which state that once an enquiry is made, the order is insulated from the provisions of section 263, will no longer be applicable by virtue of explanation 2 to section 263, as inserted w.e.f. 1.06.2015. Thereafter, on account of the grounds cited earlier in the order, the ld. PCIT held that the order passed by the ld. AO on 29.07.2019 under section 143(3) of the Income Tax Act, for the assessment year 2017-18 was erroneous and prejudicial to the Revenue and he accordingly set it aside to the ld. AO, for passing a fresh order, after considering the issues highlighted by him and after giving the assessee an opportunity to be heard.

The assessee is aggrieved at this order under section 263 and has accordingly filed this appeal. Shri Rakesh Garg, Advocate (hereinafter referred to as the ld. AR) referred to the paper book filed by him and submitted that the ld. PCIT, Bareilly had erred in initiating and Ld PCIT Central Lucknow had also erred in completing the revisionary proceedings under section 263, with total disregard to the facts and circumstances of the case, which made the said order untenable in the eyes of law. It was submitted that he had failed to appreciate that the original assessment order had been passed by the ld. AO after considering all the issues mentioned in his show cause notice and after making due enquiries and thus the case was not one if lack of /Lkw/2022 A.Y. 2017-18 Harsahaimal Shiamlal Jewellers P. Ltd. enquiry by the ld. AO. The ld. AR submitted that, in fact, it was not even a case of inadequate enquiry. The ld. AO had raised the relevant questions and the assessee had replied to them. He pointed out that no evidence had been placed on record that any amount of sales or purchases, as presented by the assessee before the ld. AO were false. There had not been a case of rejection of books of accounts and the ld. PCIT had not demonstrated how the order was erroneous and prejudicial the Revenue. He submitted a summary of number of case laws upon which he relied, all of which stated that the revision proceedings could not be valid if a query had been raised and replied to. The ld. AR further submitted that entire exercise of section 263 had been based on suspicion, assumptions and presumptions. The ld. PCIT had drawn assumptions, without reference to the facts as they existed. No adverse inference could be drawn with regard to the assessee not submitting all the specified bank notes immediately after demonetization, because the banks were not accepting notes to that extent and the assessee had deposited almost all the notes within ten days of demonetization. Therefore, since the time period was reasonable, it was incorrect to doubt the cash position as on 8.11.2016 solely on this basis. It was further submitted that the details of the enquiries raised by the ld. AO could be seen from page 48 of the paper book. The ld. AR took us through the questionnaire issued by the ld. AO wherein the ld. AO had required the assessee to file i. copies of ledger of ledger accounts held by the assessee. ii. To substantiate the deposits that they are related to business transaction iii. To furnish copies of ledger accounts or confirmation in case the receipt of money was from existing debtors, gifts, unsecured advances, loan or any other matter other than business consideration. iv. A chart of month wise total purchase and total sale of trading for both financial years A.Y. 2015-16 and A.Y. 2016-17. v. Annual VAT statement Form No. 52 alongwith Form No. 23 (Audit Report) and various annexures as submitted under U.P. VAT Act and the copy of VAT order under section 28 or provisional order. vi. Verification of turnover and deposits during the demonetization with reference to /Lkw/2022 A.Y. 2017-18 Harsahaimal Shiamlal Jewellers P. Ltd. cash book. vii. Details regarding TDR. viii. Details regarding previous assessments under section 143(3). viii. Description of amounts offered for taxation under section 115BBE. ix. Copy of ledger account of recipient under section 40A(2)(b).

The ld. AR also took us through the reply filed by the assessee on 5.11.2018, in response to such notice which was placed on pages 51 and 56 of the paper book and pointed out that he had submitted a copy of the income tax return filed, computation of income, audit report and financial statements for the ready reference of the ld. AO. Further, copies of all bank accounts statements held by the assessee company during the current year had been furnished along with copies of accounts from the books of accounts, explaining the nature of all debit and credit entries in the said bank accounts. The ld. counsel also pointed out that the detailed explanation of cash deposited by the company during the demonetization period had been submitted by producing complete cash book from 9.11.2016 to 30.12.2016. Besides this, the assessee had submitted a statement of month wise cash deposits done by the assessee during the year in each bank account held by the assessee company and also the details of cash withdrawn by the assessee company from each of the bank accounts. Further to the above, the ld. counsel pointed out that the assessee had furnished complete details of month wise sales and purchases for the Financial Years 2015-16 and 2016-17, along with copy of monthly VAT returns acknowledgment. It had also furnished Form 52 (consolidated return for 20.06.2017) along with form 23 (for VAT audit report) for the ready reference of the ld. AO. The assessee had also furnished the details of time deposit made by the assessee company under the Prime Minster’s Gareeb Kalyan Yojna and also its income tax order for the preceding assessment year. It had also furnished the details of income offered for taxation under section 115BBE, details regarding payments made to persons specified under section 40A(2)(b) and details regarding squared up loans and other loans taken during the year. Subsequently, the ld. counsel took us through the second notice issued by the ld. AO on 27.07.2019 which was placed at 9 /Lkw/2022 A.Y. 2017-18 Harsahaimal Shiamlal Jewellers P. Ltd. pages 57 and 58 of the paper book and pointed out that, in response to that the assessee had furnished the balance confirmation with specific persons, copies of TDS returns, details regarding donations, details regarding unsecured loans, details of statutory payments and additions to fixed assets, confirmations for purchases made by the assessee company and ledgers and documentary evidences of all expenses, which had been called for by the ld. AO vide his notice dated 27.07.2019. It was, therefore, submitted that everything that had been called for by the ld. AO had been submitted by the assessee and it was only after satisfying himself of the correctness and completeness of the assessee’s statements, that the ld. AO had passed the assessment order, wherein he had not made any additions on account of the cash deposited during the demonetization period. It was further submitted that the books of accounts had not been rejected by the ld. AO and therefore, on the basis of the compendium of case laws (40 in number) that the ld. AR submitted, it was submitted, that since the ld. AO had made proper enquiries, there was no reason for the ld. PCIT to order the proceedings under section 263, holding the order to be erroneous or prejudicial to Revenue. It was pointed out that the Courts have consistently held, that where the enquiries had been done, and the ld. AO had taken one of the two views permissible in law, with which the Commissioner did not agree, that could not be treated as an erroneous order, prejudicial to the interest of Revenue unless the view of the ld. AO was completely unsustainable in law. It was also submitted that the ld. PCIT had to give reasons as to why the order passed by the ld. AO was erroneous and in the present case, the ld. PCIT had not given any reason as to why the order was erroneous and prejudicial to Revenue. It was submitted that the Courts had consistently held that where orders had been passed without enquiry, it could held that the orders were erroneous but where the orders are passed after enquiry, the order could not be regarded as erroneous merely because the revisionary authority felt and was of the opinion that further enquiry / investigation was required, or deeper or further scrutiny should be undertaken. In /Lkw/2022 A.Y. 2017-18 Harsahaimal Shiamlal Jewellers P. Ltd. such cases, the Commissioner was required to record a finding that the order or enquiry made was erroneous and that could only happen if an enquiry or verification was conducted by the Commissioner and he was able to establish and show that the error or mistake made by the ld. AO made the order unsustainable in law. The Commissioner could not ask the ld. AO to re-investigate the matter to decide whether his order was erroneous. The ld. AR took us through a number of judgments in which the Hon’ble Courts had held that an assessment order could not be held to be erroneous, if in the opinion of the ld. PCIT, the order should have been more elaborate or that further enquiry should have been made. For reasons of brevity, the details of the case laws submitted by the ld. AR in his compendium have not been recounted but the general thrust of arguments of the ld. AR were, that when the ld. AO had conducted an enquiry and satisfied himself that there was nothing amiss, the Commissioner did not have the power to order revisionary proceedings only because he believed that more enquiries should have been done or because the ld. AO should have come to different conclusions. It was submitted in view of the provisions of Explanation 2 of section 263, it was incumbent to point out what more enquiries the ld. AO ought to have conducted and that the powers of revision under section 263 could not be exercised for redoing the investigation. Rather the ld. PCIT ought to have done the investigation himself, before restoring the matter to the ld. AO. It was also submitted that a plain reading of the order of the ld. PCIT, which show that it was based on surmises, conjecture and suspicion without an iota of evidence to show what was recorded in the books of accounts of the assessee was incorrect or false in any way and surmises, conjecture and suspicion, could not be a basis to invoke section 263.

In conclusion, it was submitted that the order of the ld. PCIT was even otherwise bad in law because adequate opportunity had not been provided to the assessee and the assessee’s submission had not been considered by him before passing the order. Our attention was invited to paragraph 2 on page 5 of the ld. 11 /Lkw/2022 A.Y. 2017-18 Harsahaimal Shiamlal Jewellers P. Ltd. PCIT’s order in which the ld. PCIT had recorded his satisfaction that the assessee had not furnished any submission in response to the notices issued on 3.12.2020 and 28.01.2021. Thereafter, our attention was invited to page 360 of the second paper book filed by the assessee, in response to the notice dated 28.01.2021 filed vide acknowledgement no. 155405791100222. It was submitted that the detailed reply filed vide this acknowledgment was contained from page no. 338 to page no. 358 of the first paper book, which was on the records of the Department, but had not been considered by the ld. PCIT before passing his order under section 263. It was further submitted that the notice issued by the ld. PCIT, Central, Lucknow on 4.02.2022 was not shown on the portal of the assessee under the heading, “revision proceedings under section 263 (Income Tax)” but mentioned as, “issue letter” on the e-proceedings tab of the portal of the assessee company. It was submitted that the assessee company had furnished a reply to the notices on 10.02.2022 which was the date set for compliance by notice issued on 4.02.2022. But the same was not reflected in the, “revision proceedings” window. The technical error was on the part of the Income tax Department, in issuing the notice, since the notice was not issued under the correct head on the portal and this led to the ambiguity, leading to the reply, that was furnished by the assessee, not being reflected on the portal of the correct authority. It was further informed that the response had been duly filed on 10.02.2022 and each and every point had been responded to in full detail. Since the notice issued by the ld. PCIT was not reflected in the revision proceedings under section 263 (Income Tax), the reply filed by the assessee should have been transferred to the appropriate PCIT. Our attention was invited to a petition that was filed vide acknowledgment no. 229718461180222, enclosing the response filed, acknowledgment of response filed and an application filed under section 154 requesting the ld. PCIT to reverse his order and pass the same only after due consideration of the response filed by the assessee company.

On the other hand, Shri S.H. Usmani, CIT DR (hereinafter referred to as the “ld. DR” appearing on behalf of the Revenue relied upon the orders of the ld. PCIT and submitted that there were good reasons for the ld. PCIT to initiate action under section 263. He submitted that the suspicious circumstances leading to the deposit of Rs. 18.84 Crores of tax had been spelt out by the ld. PCIT in his order which included an 84% increase in the volume of cash generated in the two month period as compared to and only 8 or 9 percent increase during the year. It was submitted that the assessee had not been able to substantiate the cash in hand held by him prior to demonetization as the ld. AO did not conduct any enquiry with regard to the same. Ld. CIT DR took us through paragraphs 4 to paragraph 18 of the ld. PCIT’s order and pointed out that the ld. PCIT had identified the shortcomings and errors committed by the ld. AO during the course of investigation. The ld. PCIT had pointed out that the ld. AO had not followed the guidelines laid down in the approach note of the CBDT issued vide F. No. 225/145/2019-ITA-2 dated 13.06.2019 and raised relevant queries before the completion of the assessment proceedings. He had observed that the AO accepted all the submissions of the assessee as true and correct without any further verification or enquiry, not issued any relevant queries for the examination of cash deposits, not properly examined the information collected to verify whether cash deposits have accrued from the cash sales of the assessee company and not made any efforts to examine the books of accounts. Further the ld. PCIT had held that third party enquiries had not been undertaken by the ld. AO and in-depth enquiries had not been made to ascertain the cash in hand as on 8.11.2016. Therefore, in view of the amended Explanation 2 to section 263, the order was deemed to be erroneous and prejudicial to the Revenue. The ld. CIT DR also made a prayer that the entire demonetization exercise was an attempt to identify and bring to tax black money at an enhanced rate and accounting jugglery should not be allowed to confuse the purpose of demonetization.

We have duly considered the facts and circumstances of the case. At the very first instance, we notice that the ld. PCIT has passed the order under section 263, without considering the submission made by the assessee, in response to the notices issued on 3.12.2020 and 28.01.2021. Ongoing through the second paper book filed by the assessee and the acknowledgments contained therein, there is no doubt regarding the fact that the assessee did submit a response to the notices dated 3.12.2020 and 28.01.2021 vide acknowledgment no. 155405791100222. The order of the ld. PCIT does not take this reply into consideration. Furthermore, a perusal of acknowledgment no. 229718461180222 reveals that the notice that was issued by the ld. PCIT on 4th February, 2022 was issued under the, “issue letter” proceeding and not under, “revision proceedings under section 263 (Income tax)”. Thus, it appears that due to some technical glitch, the replies filed by the assessee were not seen or considered by the ld. PCIT, before passing the order under section 263. The failure to consider the response of the assessee that had been duly filed before adjudicating upon the matter, renders the order of the ld. PCIT legally unsustainable on the ground of violation of principles of natural justice. The Hon’ble Supreme Court in the case of Amitabh Bachchan 384 ITR 0200 (SC) has held as under:- “10. Reverting to the specific provisions of Section 263 of the Act what has to be seen is that a satisfaction that an order passed by the Authority under the Act is erroneous and prejudicial to the interest of the Revenue is the basic pre- condition for exercise of jurisdiction under Section 263 of the Act. Both are twin conditions that have to be conjointly present. Once such satisfaction is reached, jurisdiction to exercise the power would be available subject to observance of the principles of natural justice which is implicit in the requirement cast by the Section to give the assessee an opportunity of being heard. It is in the context of the above position that this Court has repeatedly held that unlike the power of reopening an assessment under Section 147 of the Act, the power of revision under Section 263 is not contingent on the giving of a notice to show cause. In fact, Section 263 has been understood not to require any specific show cause notice to be served on the assessee. Rather, what is required under the said provision is an opportunity of hearing to the assessee. The two requirements are different; the first would comprehend a prior notice detailing the specific grounds on which revision of the assessment order is tentatively being proposed. Such a notice is not required. What is /Lkw/2022 A.Y. 2017-18 Harsahaimal Shiamlal Jewellers P. Ltd. contemplated by Section 263, is an opportunity of hearing to be afforded to the assessee. Failure to give such an opportunity would render the revisional order legally fragile not on the ground of lack of jurisdiction but on the ground of violation of principles of natural justice. Reference in this regard may be illustratively made to the decisions of this Court in Gita Devi Aggarwal vs. Commissioner of Income Tax, West Bengal and others 1 and in The C.I.T., West Bengal, II, Calcutta vs. M/s Electro House 2. Paragraph 4 of the decision in The C.I.T., West Bengal, II, Calcutta vs. M/s Electro House (supra) being illumination of the issue indicated above may be usefully reproduced hereunder..........."

In considering a similar situation, the Courts have held that where proceedings were initiated under section 263 and in the course of such enquiry, replies and documents were placed by the assessee but not considered, it would be in the fitness of things to remand the matter back to the Commissioner to reconsider the reply and the documents of the assessee. In the case of Chhattisgarh State Minor Forest Produce (Trading & Development) Cooperative Federation Limited vs. PCIT (2024) 165 taxman.com 222 (Chhattisgarh), the Hon’ble High Court of Chhattisgarh opted to remand the matter back to the ld. PCIT where the ld. Commissioner did not consider the documents placed by the assessee during the course of proceedings. Since it is evident that the assessee had furnished a reply in which it had detailed the extensive enquiries conducted by the AO before passing the order and also raised legal issues that it claimed , ousted the jurisdiction of the Commissioner in the given facts of the case , it was incumbent upon the ld. PCIT to consider the reply furnished by the assessee before coming to any conclusion that the ld. AO had not followed the guidelines as laid down by the CBDT, had not examined the books of accounts, had not bothered to verify the cash balance or conduct relevant enquiries before the completion of assessment proceedings. Since, the ld. PCIT has recorded his findings even without considering the replies of the assessee, his order is violative of the principles of natural justice. We therefore deem it appropriate to set aside the order of the ld. PCIT and remand the matter back to him for fresh consideration regarding the necessity of revision, after considering the /Lkw/2022 A.Y. 2017-18 Harsahaimal Shiamlal Jewellers P. Ltd. replies of the assessee filed in response to the notices issued by him, the arguments preferred by the assessee during the course of this appeal and also after giving the assessee due opportunity of being heard in the matter. As we are remanding the matter back to the file of the ld. PCIT for fresh consideration of the issues, in the light of submissions made by the assessee, it is not necessary to pronounce judgment on the individual grounds of appeal