2024 (12) TMI 695 - AT - Income Tax

Revision u/s 263 - unexplained and bogus purchases - addition of only 10% of purchases made by CIT - HELD THAT - We noted that the PCIT has simpliciter carried out unnecessary exercise by obtaining the information from the AO s order in assessment records which are entirely considered by the AO in his original assessment u/s. 143(3) - PCIT without appreciating the fact that the assessee has achieved a turnover of Rs. 132, 12, 33, 622/- (Net of GST) proposed to make a disallowance of entire purchases of Rs. 102, 43, 73, 377/- is against the basic principal of business. Assessee cannot sell the goods without purchases and hence the AO s action of reasonable disallowance cannot be disapproved under the garb of Section 263 of the Act. Therefore the view taken by the AO after considering the entire details furnished by the assessee sought obtained and duly considered during the assessment proceedings cannot be termed as erroneous to invoke the powers u/s. 263 of the Act. The factual matrix stares in the face of the record in the light of the legal requirement of a satisfaction that for invoking the powers u/s. 263 of the Act necessarily presupposes the statutory satisfaction that although there is some error with regard to the completed assessment but the order passed by the officer has to be erroneous in so far as prejudicial to the interest of the Revenue. The plain language of the provision is more than abundantly clear that it is not every error or mistake that should induce the PCIT to resort to exercise the powers u/s. 263 of the Act. Where the factual matrix shows that it is a marginal situation and when by a careful and cautious judgment the AO has considered the issue in hand the exercise of the power u/s. 263 by the PCIT is not proper. Though the provisions of section 263 vests power in PCIT in subjective terms the PCIT has blindly considered the issue of purchases as a reason for invoking the powers of section 263 - Appeal of the assessee is allowed.

Summary

Issues Involved:
1. Legality of the revision order passed by the Principal Commissioner of Income Tax (PCIT) under section 263 of the Income Tax Act.
2. Determination of whether the assessment order passed by the Assessing Officer (AO) was erroneous and prejudicial to the interest of the Revenue.
3. Appropriateness of disallowing 90% of purchases by the PCIT when the AO had already disallowed 10%.

Detailed Analysis:

1. Legality of the Revision Order under Section 263:
The core issue in this case was whether the PCIT was justified in invoking section 263 of the Income Tax Act to revise the assessment order. The assessee contended that the PCIT's order was contrary to law, facts, and circumstances, and opposed to the principles of equity, natural justice, and fair play. The PCIT's revision was based on the assertion that the AO's order was erroneous and prejudicial to the Revenue's interest. However, the Tribunal found that the AO had conducted a detailed investigation into the purchases, which were the subject of scrutiny. The AO had disallowed 10% of the purchases based on the available evidence and explanations provided by the assessee. The Tribunal concluded that the PCIT's order lacked the necessary justification to invoke section 263, as the AO had already exercised due diligence in the assessment process.

2. Erroneous and Prejudicial to the Interest of the Revenue:
For the PCIT to exercise jurisdiction under section 263, it must be shown that the AO's order was both erroneous and prejudicial to the interest of the Revenue. The Tribunal emphasized that these conditions are conjunctive and must coexist. In this case, the Tribunal noted that the AO had made a reasoned decision to disallow 10% of the purchases after considering the entire details furnished by the assessee. The Tribunal referenced the legal precedent that an order is not erroneous merely because another view is possible. The Tribunal found that the AO's order was neither erroneous nor prejudicial to the Revenue, as the AO had already considered and addressed the issues during the assessment.

3. Disallowance of 90% of Purchases:
The PCIT directed the AO to verify the balance 90% of the purchases, arguing that the AO had not fully examined the issue. However, the Tribunal observed that the AO had already scrutinized the purchases and made a disallowance based on the evidence presented. The Tribunal highlighted that the assessee had achieved a substantial turnover, which would not have been possible without corresponding purchases. The Tribunal found that the PCIT's directive to disallow the entire 90% of purchases was against the basic principles of business and lacked a sound basis. The Tribunal concluded that the AO's action of disallowing 10% was reasonable and should not be overturned under section 263.

Conclusion:
The Tribunal quashed the revision order passed by the PCIT, allowing the appeal of the assessee. The Tribunal held that the AO's order was neither erroneous nor prejudicial to the interest of the Revenue, and the PCIT had overstepped by attempting to substitute his judgment for that of the AO. The Tribunal emphasized the importance of adhering to the legal standards for invoking section 263 and upheld the AO's original assessment.