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Facts
The assessee claimed purchases from Kanheya Exports, which the AO disallowed and treated as un-genuine expense u/s 37. The PCIT invoked Section 263, holding the AO's order was erroneous and prejudicial, suggesting disallowance u/s 69C and penalty u/s 115BBE.
Held
The Tribunal held that the AO had taken a possible view and conducted adequate enquiry. The disallowance was correctly made u/s 37 as the nature and source of expense were not doubted, only genuineness. Section 263 action was held invalid as the PCIT sought to impose their view.
Key Issues
Whether the PCIT was justified in invoking Section 263 to revise the AO's order, considering the AO had taken a possible view and conducted proper enquiry?
Sections Cited
263, 147, 144B, 148, 37, 69C, 115BBE, 143(3)
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Income Tax Appellate Tribunal, DELHI ‘A’ BENCH,
Before: SHRI SATBEER SINGH GODARA, & SHRI NAVEEN CHANDRA
This appeal by the assessee is preferred against the order of the Pr. CIT, Rohtak dated 21.03.2025 framed u/s 263 of the Income-tax Act, 1961 [the Act, for short] pertaining to Assessment Year 2018-19.
The sum and substance of the grievance of the assessee is that the assessment order dated 27.03.2023 framed u/s 147 r.w.s. 144B of the Act is neither erroneous nor prejudicial to the interest of the Revenue.
Representatives of both the sides were heard at length. Case records carefully perused. Relevant documentary evidence brought on record duly considered in light of Rule 18(6) of the ITAT Rules.
Briefly stated, the facts of the case are that the case of the assessee was reopened u/s 148 of the Act on the basis of the allegation that the assessee had claimed purchases from Kanheya Exports which was not a genuine entity. During the course of scrutiny assessment proceedings, the assessee furnished audited books of account, ledger accounts, purchase bills, bank statement and certificate from the auditor. The Assessing Officer also conducted physical verification from supplier and collected statement from the controller of the entity.
Finally, the Assessing Officer held the expenses of Rs. 2,14,810/- claimed by the assessee to be not genuine and disallowed the same u/s 37 of the Act.
Assuming jurisdiction conferred upon by provisions of section 263 of the Act, the PCIT issued a show cause notice to the assessee stating that the disallowance was to be made u/s 69C and not section 37 and higher rate of 60% as per section 115BBE of the Act was applicable Page 2 of 7 instead of normal rates and thus the assessment order was prejudicial to the interest of the Revenue.
Reply of the assessee did not find any favour with the PCIT, who was of the firm belief that the assessment order dated 27.03.2023 is not only erroneous but also prejudicial to the interest of the Revenue and set aside the order for fresh adjudication. The PCIT was of the view that the decision of the Hon'ble Supreme Court in the case of N K Proteins was not followed by the Assessing Officer, Assessing Officer failed to conduct proper enquiry and normal rate of tax was incorrectly charged by the Assessing Officer instead of special rate of 60 u/s 115BBE.
Before us, the ld counsel of the assessee argued that the assessment order was not erroneous as the Assessing Officer has taken a possible view and conducted adequate enquiry. The ld AR further contended that there is no mandate in law that all the disallowance of business expense is to be made u/s 69C only. The ld AR argued that the reliance on the decision of NK Protein is not entirely correct and that the PCIT failed to point out enquiry not conducted by the AO. The ld AR relied on the decision taken by hon’ble Supreme Court in CIT vs Amitabh Bachchan 384 ITR 200; Malabar Industrial Co Ltd 243ITR 83 Hon’ble Rajkot ITAT Bench in the case of Shashikant Bhavajjibhai
Page 3 of 7 Rajpara vs PCIT, ITA 59/RJT/2022 (dated 22.3.2023) and Vijuba Jutubha Jadeja vs PCIT, ITA 105/RJT/2022 (dated 2.8.2023).
Per contra the ld DR heavily relied on the order of the PCIT.
We have heard the rival submissions and have perused the materials on record. All that we have to see is whether the Assessing Officer has examined the issues considered by the PCIT in holding that the assessment order is erroneous and prejudicial to the interest of the Revenue. The quarrel is in respect of directions of the PCIT to the Assessing Officer to conduct required enquiry and pass fresh assessment order.
In our considered opinion, in this case, the Assessing Officer disallowed 100% purchases and PCIT has not doubted the same. Only issue is whether disallowance should be u/s 37 or 69C. Against this, Assessing Officer gave specific finding that as per his opinion, disallowance should be u/s 37 of the Act. Thus, possible view has been taken by Assessing Officer and in such cases, Courts have taken consistent view that action u/s 263 is invalid. The our view is fortified by the Hon'ble Supreme Court decision in case of Malabar Industrial Co Ltd and CIT vs Amitabh Bachchan (supra). The Assessing Officer has accepted a possible view and the PCIT wants to impose his view on the Page 4 of 7 possible view taken by the Assessing Officer, which is against the cannons of law.
We are further of the considered view that Section 37 of the Act is specific provision which disallows business expense when it is found to be not wholly and exclusively for business. In contrast, section 69C applies where the explanation of assessee regarding nature and source of expense was not satisfactory to Assessing Officer. In this case, the nature of expense i.e. purchases and source of expense i.e bank payments are not doubted. Only doubt was regarding genuineness of expense and thus disallowance has been correctly made u/s 37 by AO.
Our views are fortified by Hon’ble Rajkot ITAT Bench in the case of Shashikant Bhavajjibhai Rajpara vs PCIT, ITA 59/RJT/2022 (dated 22.3.2023) and Vijuba Jutubha Jadeja vs PCIT, ITA 105/RJT/2022 (dated 2.8.2023) where it was held that if purchase is held to be bogus then it is case of "no expense" and in such a position, disallowance cannot be u/s 69C of the Act.
We also find that the PCIT’s observation that the Assessing Officer has incorrectly ignored to apply ratio laid down by Hon’ble Supreme Court in c/o NK Proteins Ltd [2017] 84 taxmann.com 195 (SC) is not valid. The said decision was a non-speaking order where the Hon'ble Supreme Court dismissed SLP filed by the assessee against the order of Page 5 of 7 the Hon'ble Gujarat High Court and it is a settled law that such an order does not get binding force not covered under the doctrine of merger finds force. The question before Gujarat High Court was regarding quantum of addition of bogus purchases i.e. 100% or 25% and section of disallowance (s.69C or s.37) was never in dispute.
We also find that the Assessing Officer had, in re-assessment u/s 143(3)/147 conducted physical verification from supplier, collected statement of alleged controller of supplier, considered reply of assessee and thereafter passed order disallowing expense u/s 37 of the Act. Thus, observation of PCIT that there is lack of enquiry on the part of AO, is not justified. We further find that the PCIT has failed to point out enquiry not conducted by Assessing Officer.
Considering the facts of the case in hand, in totality, in light of the judicial decisions discussed hereinabove, we set aside the order of the PCIT and restore that of the Assessing Officer dated 27.03.2023 framed under section 147 r.w.s 144B of the Act. allowed. Page 6 of 7 Order pronounced in open court on 26.08.2025.