2025 (3) TMI 1423 - AT - Income Tax

Revision u/s 263 - lack of enquiry regarding genuineness of the source of cash deposit and in old SBNs during demonetization period - HELD THAT - No information has been brought on record that the figure of SBNs that was obtained by the AO from the assessee was inaccurate or incomplete. Nothing has been brought on record to show that the assessee did not make the sales that it claimed to have made. Assessee in the course of its reply to the Ld. PCIT had submitted that the nature of the trade is such that sales are unverifiable being mostly made in cash and bills are not drawn up and even if bills are drawn up the names and address of the parties are not recorded in such bills and it has brought on record instances of the cases where the Hon ble Courts and Tribunal have held that since liquor trade is a controlled commodity lack of bills will not make a difference to determining sales because the sales are determined with regard to the quantity of purchases and the closing stock. We observe that the AO has verified the purchases from the figure recorded in Form 26AS and also obtained statement of closing stock from the assessee. Thus failure to produce sales vouchers does not materially alter the fact that sales were duly explained by the utilization of stock. Therefore we are not able to agree with the PCIT that the AO had not done enquiries with regard to the genuineness of the cash deposits that were sought to be explained out of cash sales. AO did not enquire about the details of licences issued to the assessee for trading of liquor - As license fees were duly recorded in the books of account of the assessee and these books of accounts have been produced before the AO. Thus the source of payment of licence fees stood explained from the books of accounts in which no infirmity has been pointed out. As observed that the payment of licence fee for the running of excise shops is not immediately relevant to the reasons for selection of the case for scrutiny. Therefore even though the books of accounts have been produced and examined and to that extent the license fee has been considered by AO this observation of the PCIT would not in our opinion constitute an item of lack of inquiry given the reasons for selection of case for scrutiny. AO had failed to obtain the ledgers/confirmation from the parties through which the assessee had made purchases - The assessee has submitted that the liquor is a controlled commodity and all purchases were made from distilleries and excise was paid by the assessee to the distilleries during the purchases of liquor from them. It was the distiller which was deposited the excise to the credit of the Government on the amount of liquor distilled/manufactured. Since the entire extent of purchases stood confirmed by Form 26AS of the assessee further verification from the distilleries with regard to the extent of purchase was not necessary. We would agree that for this reason the failure to cross verify the purchases from the distilleries cannot support the conclusion of the PCIT that the purchases stood unverified. PCIT has held that enquiries have not been made was the failure to examine the genuineness and creditworthiness of persons who have been given unsecured loans to the assessee and sundry creditors - Examination of expenses primarily pertains to the second issue on which account the case was picked up for scrutiny i.e. abnormal increase in sales with lower profitability and we find that the AO vide his notice dated 24.03.2019 has examined the gross profit/net profit shown in corresponding turnover for the current year and the past year wherein he has asked the assessee to furnish details of turnover gross profit G.P ratio net profit and N.P ratio and after such examination the AO has observed that net profit ratio of the assessee was much higher than previous years and therefore the AO has not drawn any adverse inference on this account. Therefore we are not able to agree with the PCIT that the AO has not examined the major expenses incurred by the assessee. Payment of rent expenses in cash stating that the said issue had not been examined by the AO - We note that vide his notice dated 04.07.2019 the AO had asked for details of TDS liability discharged on payment of rent salary and vide his notice dated 20.12.2019 he has asked the assessee to furnish a copy of rent agreement and the details of TDS made along with documentary evidences. We further notice that in response to these notices the assessee furnished copies of rent agreement to the AO along with ledger accounts and stated that TDS wherever necessary was deducted and deposited in Central Government Account. This is not a case where Explanation-2(a) of Section 263 of the Act is applicable because all enquiries which in the opinion of the Ld PCIT ought to have been made were made by the Assessing Officer albeit in not exactly the same manner as desired by the Ld. PCIT but very substantially and towards verifying the very same set of facts. After considering the facts of the case and the law as laid down by the courts we hold that the Ld. PCIT was not justified in holding that the order of the AO was erroneous and prejudicial to revenue and therefore we quash the order of the Ld. PCIT u/s 263 of the Act and restore the order of the Ld. AO passed u/s 143(3) of the Act. Accordingly all the grounds of appeal of the assessee are allowed.

Summary

ISSUES PRESENTED and CONSIDERED

The core legal questions considered in this judgment include:

• Whether the Principal Commissioner of Income Tax (PCIT) was justified in initiating revisionary proceedings under Section 263 of the Income Tax Act, 1961, against the original assessment order passed under Section 143(3) for the Assessment Year 2017-18.
• Whether the original assessment order was erroneous and prejudicial to the interest of the revenue, justifying the invocation of Section 263 by the PCIT.
• Whether the Assessing Officer (AO) conducted adequate inquiries during the original assessment proceedings, particularly concerning large cash deposits during the demonetization period, unsecured loans, sundry creditors, and other expenses.
• Whether the PCIT's direction for a de novo assessment was valid under the circumstances.

ISSUE-WISE DETAILED ANALYSIS

1. Justification of Revisionary Proceedings under Section 263

The legal framework under Section 263 of the Income Tax Act allows the PCIT to revise an assessment order if it is deemed erroneous and prejudicial to the interest of the revenue. The Court examined whether the PCIT's invocation of this section was justified.

The Court noted that the PCIT initiated revisionary proceedings on the grounds that the AO's original assessment lacked adequate inquiry into several key areas, including cash deposits during the demonetization period and the genuineness of unsecured loans and sundry creditors. The PCIT argued that these omissions rendered the assessment erroneous and prejudicial to the revenue.

The Court, however, found that the AO had conducted inquiries into the relevant issues during the original assessment, albeit not in the manner desired by the PCIT. The AO had verified cash deposits, examined purchases against Form 26AS, and scrutinized unsecured loans and sundry creditors. The Court emphasized that the PCIT cannot invoke Section 263 merely because they hold a different opinion on the adequacy of the AO's inquiries.

2. Adequacy of Inquiries by the Assessing Officer

The Court analyzed whether the AO conducted sufficient inquiries during the original assessment proceedings.

• Cash Deposits during Demonetization: The AO had verified cash deposits with ITS data and examined the books of accounts, which were audited as per Section 44AB. The Court found that the AO had made necessary inquiries to verify the genuineness of cash deposits.
• Unsecured Loans and Sundry Creditors: The AO had obtained details and confirmations of unsecured loans and sundry creditors. The Court noted that the AO had verified these aspects and found no reason to question their genuineness.
• Other Expenses: The AO had scrutinized major expenses, including rent expenses, and found them to be in order. The Court observed that these inquiries were relevant to the reasons for the case being picked up for scrutiny.

The Court concluded that the AO had conducted adequate inquiries, and the PCIT's assertion of lack of inquiry was not substantiated.

3. Validity of PCIT's Direction for De Novo Assessment

The Court considered whether the PCIT's direction for a de novo assessment was valid.

The Court referred to judicial precedents, emphasizing that if the AO had conducted inquiries and arrived at a conclusion, the PCIT could not direct further inquiries merely because they held a different view. The Court highlighted that the PCIT must conduct their own inquiries to demonstrate that the original assessment was erroneous, rather than remanding the matter to the AO for further examination.

The Court found that the PCIT had not conducted independent inquiries to substantiate their claim of inadequate inquiry by the AO. As such, the direction for a de novo assessment was deemed invalid.

SIGNIFICANT HOLDINGS

The Court held that the PCIT was not justified in invoking Section 263 of the Income Tax Act, as the AO had conducted adequate inquiries during the original assessment proceedings. The Court emphasized that the PCIT could not invoke revisionary powers merely because they disagreed with the AO's conclusions or believed further inquiries were necessary.

The Court quashed the PCIT's order under Section 263 and restored the AO's original assessment order under Section 143(3). The appeal of the assessee was allowed, affirming that the original assessment was neither erroneous nor prejudicial to the interest of the revenue.