2025 (6) TMI 1404 - AT - Income Tax

Revision u/s 263 - as per CIT assessment order passed by the AO appears to have been passed without proper inquiry - assessee has withdrawn amount from the capital account and could not explained the withdrawals and its application - HELD THAT - We noted that the assessee out of the total withdrawal assessee explained that Rs.4, 80, 400/- was withdrawn for household expenses and a sum of Rs.7.50 lakhs was utilised in M/s Dwelling Private Limited where assessee is one of the Directors. The assessee explained for the balance that these were withdrawals and not the income. He stated that this amount was withdrawn out of capital account and amount withdrawn was utilised for expenses. Once there is a withdrawal from the capital account it cannot be treated as income and there is no error in the order of the AO which caused prejudice to the revenue. Once the amount is not taxable which is withdrawn out of capital account it cannot be treated as income and hence there is no prejudice caused to the revenue. Therefore we find that the Ld. PCIT s finding on this very issue is without any basis and bad in law thus we reverse the same on this count. Receivables declared by the assessee as against meager sundry creditors - The assessee before the AO filed the complete books of accounts which were duly examined by the AO. We noted that the assessee before the AO filed the complete books of accounts which were duly examined by the AO and even now before us assessee filed the complete details of sundry creditors vis-a-vis sale effected during the year and sundry receivables. We find no reason that what was the ambiguity having sundry receivables and how the PCIT reached the conclusion that the AO s order is erroneous and prejudicial to the interest of the revenue. In the absence of any adequate finding by the PCIT on this revision carried out is bad in law and thus we reverse the same on this count. Contradicted reply filed by the assessee wherein it is admitted that a sum was provided by the M/s Garg Agencies the proprietory concern of assessee s father late Umakant Garg to M/s A.R. Fruits - As before us assessee filed a complete details and we noted that the assessee has received a sum of Rs.2, 00, 30, 000/- during the year assessment year 2011-12 relevant to financial year 2010-11 from M/s Garg Agencies. We noted that M/s Garg Agencies is a proprietory concern of assessee s father and from the facts it is noted that a sum of Rs.51, 41, 000/- was credited to M/s Garg Agencies against the goods supplied and a sum of Rs. 1, 48, 90, 000/- was credited to assessee Shri Umesh Garg. We noted that these facts were duly examined during the scrutiny assessment proceedings as the details were available before the AO. Even otherwise the PCIT in his revision order has not given a finding that how this amount is taxable and which type of enquiry the AO has not carried out. It is not the case of the assessee that the assessee is withdrawing the money from his capital account for the purpose of investment into M/s AR Dwelling P Ltd. hence we find no reasonableness in the finding of the PCIT on this count thus we reverse the finding of the Ld. PCIT on this issue. Verification of debit entry as bank charges and interest - We noted from the copy of account filed by the assessee that these bank charges and interest is clearly chargeable by the bank and claimed by the assessee. These details were available before the AO during the course of assessment proceedings in the form of books of accounts which were duly examined by the AO during the course of assessment proceedings. Hence we find no reasonableness in the finding of the Ld. PCIT on this count thus we reverse the finding of the Ld. PCIT on this issue. Thus order passed u/s. 263 by the Ld. PCIT deserve to be quashed - Assessee appeal allowed.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered in this appeal under Section 263 of the Income Tax Act (the Act) pertain to whether the original assessment order passed under Section 143(3) of the Act for the assessment year 2011-12 was erroneous and prejudicial to the interests of the revenue. Specifically, the issues examined include:

• Whether the Assessing Officer (AO) erred in not investigating withdrawals totaling Rs. 44,80,400/- from the capital account, including unexplained amounts and their application;
• Whether the AO failed to properly scrutinize the stark disparity between sundry receivables (Rs. 1,75,86,380/-), sundry creditors (Rs. 1,27,689/-), and total sales (Rs. 2,85,66,581.30), which warranted further inquiry;
• Whether the AO neglected to investigate the nature and source of Rs. 2,00,30,000/- received from M/s Garg Agencies, especially in light of conflicting explanations regarding the transaction and the assessee's investment in a sister concern;
• Whether the AO failed to examine the debit of Rs. 27,02,436/- recorded as bank charges and interest, which was a significant sum;
• Whether the order passed by the AO was thus erroneous and prejudicial to the revenue, justifying revision under Section 263.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Withdrawal of Rs. 44,80,400/- from Capital Account and Its Application

Legal Framework and Precedents: Under the Income Tax Act, withdrawals from the capital account are not taxable as income, provided they are genuine withdrawals and not disguised income. The AO is obliged to verify the nature of such withdrawals to ensure no income has escaped assessment. The AO's function is quasi-judicial, requiring reasoned inquiry and findings.

Court's Interpretation and Reasoning: The revising authority (PCIT) held that the AO failed to inquire into the unexplained withdrawal of Rs. 44,80,400/-, particularly Rs. 32,50,000/- which was not accounted for. The PCIT directed reassessment on this ground.

The Tribunal noted that the assessee explained Rs. 4,80,400/- was for household expenses and Rs. 7,50,000/- was invested in a related company. The balance was withdrawals from capital and not income. The Tribunal emphasized that withdrawal from capital account cannot be treated as income and thus, no prejudice to revenue occurred. The AO's order was not erroneous in this respect.

Application of Law to Facts: The Tribunal applied the principle that capital withdrawals are not taxable income, and since the AO had examined the books and accepted the explanation, no further inquiry was necessary.

Treatment of Competing Arguments: The PCIT's contention of inadequate inquiry was rejected due to lack of evidence showing the withdrawals were income. The assessee's explanation was accepted as reasonable.

Conclusion: The Tribunal reversed the PCIT's direction to reassess on this issue, holding no error in the AO's order.

Issue 2: Disparity Between Sundry Receivables, Sundry Creditors, and Total Sales

Legal Framework and Precedents: The AO is expected to examine financial statements for consistency and reasonableness, especially where large discrepancies exist between receivables, creditors, and turnover. However, mere disparity without evidence of tax evasion or misstatement may not warrant reassessment.

Court's Interpretation and Reasoning: The PCIT considered the large sundry receivables compared to meager creditors and turnover as suspicious and directed reassessment.

The Tribunal found that the AO had examined the complete books of accounts and that the assessee had furnished detailed explanations and supporting documents. No specific finding was made by the PCIT to demonstrate how this disparity translated into erroneous assessment or prejudice to revenue.

Application of Law to Facts: Without concrete evidence or findings indicating malafide or error, the Tribunal held that the AO's scrutiny was adequate and the PCIT's order lacked basis.

Treatment of Competing Arguments: The PCIT's general suspicion was not supported by findings, while the assessee's detailed submissions were accepted.

Conclusion: The Tribunal reversed the PCIT's direction for reassessment on this ground.

Issue 3: Receipt of Rs. 2,00,30,000/- from M/s Garg Agencies and Investment in Sister Concern

Legal Framework and Precedents: The AO must investigate significant capital inflows, especially from related parties, to ensure they are genuine business transactions and not undisclosed income. Contradictory explanations may raise suspicion warranting inquiry.

Court's Interpretation and Reasoning: The PCIT observed contradictory replies from the assessee regarding the nature of the Rs. 2,00,30,000/- receipt and noted the AO did not inquire into this or the investment in the sister concern.

The Tribunal noted that the AO had examined the details during scrutiny, including the accounts of M/s Garg Agencies and the assessee's transactions. The PCIT did not specify how the AO's order was erroneous or prejudicial, nor did it demonstrate that the amount was taxable income. The Tribunal also noted that the investment in the sister concern was not alleged to be funded by the withdrawn capital amount.

Application of Law to Facts: The Tribunal applied the principle that mere discrepancy in explanations does not suffice to declare an order erroneous unless it causes prejudice to revenue. The AO's inquiry was deemed sufficient.

Treatment of Competing Arguments: The PCIT's reliance on contradictory replies was not supported by findings of tax evasion. The assessee's detailed accounts and explanations were accepted.

Conclusion: The Tribunal reversed the PCIT's direction for reassessment on this issue.

Issue 4: Verification of Debit Entry of Rs. 27,02,436/- as Bank Charges and Interest

Legal Framework and Precedents: Expenses such as bank charges and interest are allowable deductions if supported by evidence. The AO must verify such claims but is not required to conduct exhaustive inquiries absent suspicion.

Court's Interpretation and Reasoning: The PCIT criticized the AO for not enquiring into the large bank charges and interest debited in the profit and loss account.

The Tribunal observed that the assessee had furnished complete books of accounts showing these charges, which the AO had examined during assessment. No evidence was produced to suggest these charges were fictitious or disallowed.

Application of Law to Facts: The Tribunal held that the AO's examination sufficed and the PCIT's direction was unwarranted.

Treatment of Competing Arguments: The PCIT's general observation was rejected for lack of supporting evidence. The assessee's documentation was accepted.

Conclusion: The Tribunal reversed the PCIT's direction on this issue.

Issue 5: Whether the Assessment Order was Erroneous and Prejudicial to Revenue Justifying Revision under Section 263

Legal Framework and Precedents: Section 263 empowers the Commissioner to revise an assessment order if it is erroneous and prejudicial to revenue. The AO's order must be shown to be lacking in inquiry or based on incorrect facts or law causing loss to revenue.

Court's Interpretation and Reasoning: The PCIT initiated revision proceedings on the basis that the AO failed to conduct proper inquiries on the above issues.

The Tribunal found that the AO had issued statutory notices under Sections 143(2) and 142(1), received replies, examined books of accounts and details, and completed the assessment with reasoned findings. The PCIT's observations were general and not supported by findings showing error or prejudice.

Application of Law to Facts: The Tribunal applied the settled principle that revision under Section 263 requires demonstrable error and prejudice. Mere suspicion or failure to make further inquiries by the AO does not suffice if the AO has conducted proper scrutiny.

Treatment of Competing Arguments: The PCIT's reliance on absence of inquiry was countered by the AO's documented scrutiny and the assessee's compliance. The Tribunal gave greater weight to the AO's quasi-judicial function and findings.

Conclusion: The Tribunal quashed the revision order under Section 263 as lacking merit.

3. SIGNIFICANT HOLDINGS

"Once there is a withdrawal from the capital account, it cannot be treated as income and there is no error in the order of the AO which caused prejudice to the revenue."

"The AO performs a quasi judicial function and the reason for his conclusions and findings should be forthcoming in the assessment order."

"It is not necessary for the Commissioner to make further inquiries before cancelling the assessment order of the Income Tax Officer. The Commissioner can regard the order as erroneous on the ground that in the circumstances of the case the Income Tax Officer should have made further inquiries before accepting the statements made by the assessee in his return." (cited precedent)

"The AO issued notices u/s. 143(2) and 142(1) of the Act, examined the books of accounts and completed the assessment after due inquiry. Therefore, the order passed u/s. 263 by the PCIT deserves to be quashed."

The Tribunal established the core principle that revision under Section 263 requires clear demonstration of error and prejudice to revenue, and that the AO's quasi-judicial findings based on proper inquiry cannot be lightly set aside. Mere suspicion or absence of further inquiry without showing prejudice is insufficient to invalidate an assessment order.

Final determinations on each issue were in favor of the assessee, reversing the revisional directions of the PCIT and quashing the revision order under Section 263.