Section 263 Valid Where AO Dropped Bogus Purchase Addition Without Enquiry: ITAT Chandigarh

Subhash Kumar Dua Vs PCIT (ITAT Chandigarh)

The Chandigarh ITAT dismissed the assessee’s appeal and upheld the Principal CIT’s revisionary order under Section 263, holding that where the Assessing Officer himself records that purchases are unverifiable and even proposes a disallowance, he cannot subsequently drop the proposed addition without conducting further enquiry or recording reasons as to how his doubts stood resolved. Such an assessment order is both erroneous and prejudicial to the interests of the Revenue.

The assessee, engaged in the wholesale scrap business, was selected for scrutiny under CASS on the issue of low income from TCS receipts. During assessment, the AO issued notices under Section 133(6) to ten suppliers. While replies were received from only a few parties, the AO observed that purchases from several suppliers remained unverifiable and even issued a show-cause notice proposing 25% disallowance of such purchases. However, without making any further enquiry or explaining how the deficiencies were overcome, the AO accepted the assessee’s explanation and completed the assessment without any addition.

The Tribunal held that this was not a case of adopting one of two possible views, but a case of incomplete enquiry and non-application of mind. The principle of a “possible view” is available only where the Assessing Officer has conducted adequate enquiry, examined the material and consciously reached a legally sustainable conclusion. It cannot protect an assessment where the AO himself found the purchases to be unverifiable but abandoned the proposed addition without proper verification or reasons.

Accordingly, the Tribunal upheld the exercise of revisionary jurisdiction under Section 263 and directed the Assessing Officer to re-examine all documentary evidence, including confirmations, bank statements, e-way bills and other supporting documents, conduct such further enquiries as necessary, and pass a fresh speaking order after granting adequate opportunity to the assessee. The Tribunal clarified that it had expressed no opinion on the merits of the proposed addition, leaving all issues open for fresh adjudication.

Cases Discussed

• Arihant Roller Flour Mills vs ITO (ITAT Chandigarh), ITA No. 942/Chandi/2026 order dated 07.07.2026
• Colgate Palmolive (India) Ltd. vs. PCIT (Mumbai), [2025] 179 com149
• PCIT vs. Prabhu Poly Pipes Ltd. (SC), [2025] 176 com1005
• PCIT vs. V-Con Integrated Solutions Pvt. Ltd. (SC), [2025] 173 com774
• PCIT vs. Clix Finance India (P.) Ltd., [2024] 160 taxmann.com 357 (Delhi)
• Exotic Relators and Developers vs. PCIT, (2024) 71 CCH 0299 Chd-Trib
• PCIT vs. Pramod Kumar Tekriwal (SC), [2023] 154 taxmann.com 142
• CIT vs. NIRAV MODI (SC), 77 com15
• CIT vs. Kanda Rice Mills, [1989] 44 TAXMAN 316 (PUN. & HAR.)

FULL TEXT OF THE ORDER OF ITAT CHANDIGARH

This is an appeal filed by the assessee feeling aggrieved by the order passed by the ld. Pr.Commissioner of Income Tax, Ludhiana) [in short the PCIT’] dated 11.02.2026 passed for assessment year 2022-23.

2. The facts of the case are that the assessee is an individual carrying on the business of wholesale trading of waste, scrap and materials for recycling through the proprietary concern, M/s Bombay Sales Corporation. The return of income for the assessment year 2022-23 was selected for complete scrutiny under CASS on the issue of “Low income from TCS Receipts – Scrap”. During the course of assessment proceedings, the Assessing Officer issued notices under section 142(1) and also invoked the provisions of section 133(6) by issuing notices to ten parties with whom the assessee had undertaken purchase transactions. Out of the said notices, replies along with documentary evidences were received from four parties, including M/s Kailash Industries and M/s Ess Kay Fabrics. The assessee also furnished confirmations, purchase bills, GST returns, bank statements and other supporting documents. After considering the material placed on record, the Assessing Officer completed the assessment under section 143(3) without making any addition.

3. Subsequently, the learned PCIT invoked the provisions of section 263 on the ground that the Assessing Officer had failed to make proper enquiries and verification regarding the genuineness of purchases from the aforesaid concerns and set aside the assessment for fresh adjudication.

4. Feeling aggrieved by the order, the assessee is in appeal before this Tribunal.

5. The learned Authorised Representative (AR) submitted that the assumption of jurisdiction by the learned Principal Commissioner under section 263 of the Act is wholly unsustainable both on facts and in law. It was submitted that the assessee’s case was selected for scrutiny under the CASS parameter “Low Income from TCS Receipts – Scrap” and, therefore, the very issue sought to be revised had been the subject matter of detailed examination during the assessment proceedings. It was submitted that the Assessing Officer had conducted extensive enquiries by issuing notices and calling for details on various dates, namely 26.07.2023, 18.08.2023, 29.12.2023, 29.02.2024 and 18.03.2024. In response thereto, the assessee furnished complete details from time to time, copies whereof have been placed at the relevant pages of the Paper Book. The learned AR submitted that the assessment order was thus passed only after due application of mind and after considering the material placed on record. The learned AR further submitted that, for the purpose of verifying the purchases amounting to Rs.35,24,03,407/-, the Assessing Officer exercised his statutory powers under section 133(6) of the Act and, on a test-check basis, issued notices to various suppliers. Pursuant thereto, replies along with documentary evidences were received from the concerned parties and were duly examined by the Assessing Officer. Besides the replies received under section 133(6), the assessee also furnished confirmations of accounts, GST returns, purchase invoices, e-way bills, bank statements, kanda slips, bilties, vehicle registration details, driving licences of the drivers and other supporting documents establishing the genuineness of the purchases. It was, therefore, contended that the Assessing Officer had carried out adequate and effective enquiries before completing the assessment.

6. The learned AR invited our attention to the show cause notice issued by the learned Principal Commissioner and submitted that the entire foundation of the proceedings under section 263 rests on the allegation that, out of ten parties to whom notices under section 133(6) were issued, only eight parties had furnished replies and two parties, namely M/s Kailash Industries and M/s Ess Kay Fabrics, had allegedly failed to respond. According to the learned AR, the very factual premise adopted by the learned Principal Commissioner is erroneous. It was submitted that both the aforesaid parties had, in fact, furnished confirmations of account, bank statements, e-way bills and other documentary evidences, which formed part of the assessment record. These documents, according to the learned AR, clearly established the genuineness of the transactions and disproved the observation made in the show cause notice that the said parties had not complied with the notices issued under section 133(6) of the Act. The learned AR further submitted that, during the course of assessment proceedings, the Assessing Officer had even issued a show cause notice proposing disallowance of 25% of the purchases on the ground that the genuineness of certain purchases required further explanation. The assessee duly responded to the said show cause notice by placing complete documentary evidence on record. After considering the explanation and the supporting material furnished by the assessee, the Assessing Officer accepted the claim and consciously completed the assessment without making any addition. It was, therefore, contended that the Assessing Officer had taken a conscious and informed decision after making necessary enquiries and verification.

7. It was further argued that the learned Principal Commissioner has invoked section 263 merely because, in his opinion, further or more exhaustive enquiries ought to have been conducted. Such an approach, according to the learned AR, is impermissible in law. Once the Assessing Officer has conducted enquiries, examined the relevant material and adopted one of the legally permissible views, the revisional jurisdiction under section 263 cannot be exercised merely because the learned Principal Commissioner holds a different opinion or considers that deeper enquiry was desirable. The learned AR submitted that the present case is not one of lack of enquiry but, at the highest, a case where the learned Principal Commissioner seeks substitution of his own opinion for that of the Assessing Officer. Such substitution of opinion falls outside the scope of section 263 of the Act. It was, therefore, prayed that the revisionary order passed under section 263 be quashed as being without jurisdiction. In support of the aforesaid contentions, the learned AR also relied upon the detailed written submissions filed before us, particularly paragraph 6 appearing at pages 4 to 10 thereof, reiterating that the assessment order had been passed after due enquiry and verification and, therefore, the essential conditions for assumption of jurisdiction under section 263 of the Act were absent. In the submissions it was mentioned as under:-

7. Reliance in this regard is placed on the Judgment of Hon’ble Chandigarh Bench in the case of Arihant Roller Flour Mills vs ITO in ITA No. 942/Chandi/2026 order dated 07.07.2026 (Pb-453-461) wherein on similar facts the order u/sec 263 has been quashed:

8. Further We also rely on the following Judgments in this regard:

a) PCIT vs. V-Con Integrated Solutions Pvt. Ltd. [2025] 173 com774 (SC)

SLP dismissed against order of High Court that where Pr. Commissioner invoked revision proceedings on ground that Assessing Officer had not made sufficient inquiries regarding share capital, however, he had not pointed out any further inquiries which were required to be made by Assessing Officer, Tribunal was justified in quashing order of Pr. Commissioner

b) PCIT vs. Prabhu Poly Pipes Ltd. [2025] 176 com1005 (SC)

INCOME TAX : SLP dismissed against order of High Court that where Assessing Officer raised necessary queries regarding unsecured loans and, being satisfied with details furnished by assessee, accepted identity, creditworthiness, and genuineness of creditors and completed assessment under section 143(3), Tribunal rightly quashed revisionary order passed by Principal Commissioner based on a mere general observation of lack of enquiry

c) CIT vs. NIRAV MODI as reported in 77 com15(SC)

Section 68 read with section 263, of the Income-tax Act, 1961 – Cash credit (Gift) – Assessment years 2007-08 and 2008-09 – Assessee received certain amount as gifts from his father and sister who were non-residents in India – Assessing Officer after making detailed enquiries, took a view that assessee had duly proved identity, source and creditworthiness of donors – Commissioner, however, passed a revisional order under section 263 directing Assessing Officer to enquire into capacity of donors and to decide about genuineness of gifts afresh – It was noted that Commissioner in his order of revision,  did not indicate any doubt in respect of genuineness of evidence  produced by assessee – Moreover, satisfaction of Assessing Officer on  basis of documents produced was not shown to be erroneous – High  Court by impugned order held that it was a case where a view had been taken by Assessing Officer after making proper enquiry and,  thus, Tribunal was justified in setting aside impugned revisional order – Whether Special Leave Petition filed against impugned order was to be dismissed – Held, yes [Para 21 /In favour of assessee]

That after detailed verifications made by the Ld. PCIT as stated above, he has merely set aside the case of the assessee to the AO without pin pointing our submissions. He has to be of confirmed before setting aside the case via order passed u/s 263 of the Act as per the following judgments:

d) CIT vs. Kanda Rice Mills as reported in [1989] 44 TAXMAN 316 (PUN). & HAR.)

8. A reading of the entire order of the Commissioner clearly goes to show that he did not furnish his opinion or considered the cited cases or the argument raised and merely observed that these were the points which deserved consideration and after setting aside the order of the ITO, issued a direction for making assessment afresh This is not permissible under the provisions contained in section 263. The Commissioner had to come to a firm decision that the order of the ITO was erroneous and was prejudicial to the interests of the revenue. Since no decision about the erroneous nature of the order was firmly taken, the Tribunal was right in vacating the order. Accordingly, we answer the question in favour of the assessee, that is, in the affirmative, with no order as to costs.

e) Exotic Relators and Developers vs. PCIT as reported in (2024) 71 CCH 0299 Chd-Trib

AO having issued successive notices under ss. 142(1) and 143(2) from time to time to the assessee raising numerous queries and framed the assessment after considering the replies submitted by the assessee, the assessment order passed by the AO cannot be said to be erroneous and prejudicial to the interests of the Revenue and, therefore, the impugned order passed by the Principal CIT in exercise of his revisionary jurisdiction under s. 263 is bad in law, more so as he himself has not made any minimal enquiry before holding that the AO has not made any enquiry; inadequate inquiry or insufficient inquiry cannot be a ground to order revision of assessment under s. 263.

f) Colgate Palmolive (India) Ltd. vs. PCIT [2025] 179 com149 (Mumbai ) [29-09-2025]

Section 37(1) of the Income-tax Act, 1961 – Business expenditure – Allowability of (ESOP expenditure) – Assessment year 2018-19 – Assessee-company, engaged in business of manufacturing and selling of personal care products, filed its return of income claiming deduction under section 37(1) towards Employees Stock Option Plan (ESOP) expenditure – Assessing Officer allowed said deduction -Thereafter, Principal Commissioner invoked revision proceedings under section 263 by issuance of show-cause notice against said order of Assessing Officer on ground that same was erroneous and prejudicial to interest of revenue – Whether since Assessing Officer had examined each and every issue thoroughly with vortex of evidence, impugned revisionary order passed by Principal Commissioner was to be quashed and set aside – Held, yes [Paras 6, 6.2 and 6.3] [In favour of assessee]

g) PCIT vs. Pramod Kumar Tekriwal as reported in [2023] 154 taxmann.com 142 (SC)

INCOME TAX : SLP dismissed against impugned order of High Court that where Assessing Officer made addition of 3 per cent in respect of bogus purchases over and above rate of gross profit of 4.63 per cent declared by assessee and passed assessment order, since assessee had produced all necessary details of purchase, sales, audited books of account, quantity details and there was no discrepancy between purchase and sales declined, Assessing Officer had taken one possible view out of two assumption and thus to assumption of jurisdiction by Principal Commissioner under section263 was erroneous

h) PCIT vs. Clix Finance India (P.) Ltd. as reported in [2024] 160 taxmann.com 357 (Delhi)

Where Assessing Officer during assessment proceeding issued a questionnaire to assessee regarding deduction on account of provision for non-performing assets and loss on interest rate swap and same was replied by assessee, it was not a case where no enquiry whatsoever had been conducted by Assessing Officer with respect to claims under consideration and, thus, revision order passed under section 263 was not sustainable

8. Further, the explanation 2 to section 263 of the Act, as applied by the Ld. PCIT, is not applicable in the case of the assessee as it not a case that no enquiry has been made by the Ld. AO and in fact it is a case wherein sufficient enquiries have been made by the Ld. AO before allowing the claim of the assessee and there is complete application of mind by the Ld. AO.

9. In view of the complete and verifiable record on hand, it is respectfully submitted that the Principal Commissioner of Income Tax (POT) has completely erred both on facts and in law by invoking revisionary powers under Section 263. This case is demonstrably a matter of “adequate inquiry” by the Assessing Officer (AO), who actively applied his mind, issued specific show-cause notices for purchase variations, and systematically analyzed all underlying financial reconciliations before concluding that “no adverse inference is drawn”.

10. The recent, identical jurisdictional ruling of this Hon’ble Chandigarh Bench in M/s Arihant Roller Flour Mills vs. ITO (07-07-2026) completely solidifies the appellant’s position. It reaffirms the settled legal reality that a third-party’s failure to respond to Section 133(6) notices cannot render an assessment order erroneous or prejudicial when the assessee has produced comprehensive secondary logistical trails and bank-cleared payment records to fully validate the transactions, The PCIT’s subsequent intervention amounts to a mere change of opinion and an impermissible demand for a deeper probe, which lacks legal sanction under the scope of Section 263. Therefore, the impugned revision order dated 11/02/2026 is entirely untenable and deserves to be quashed in the interest of absolute justice, and the original assessment order dated 20/03/2024 must be fully restored.

8. Per contra, the learned Departmental Representative (DR) strongly supported the revisionary order passed by the learned Principal Commissioner under section 263 of the Act. It was submitted that the assessment order itself demonstrates that the enquiries initiated by the Assessing Officer remained incomplete and inconclusive. Drawing our attention to paragraph 3.4 of the assessment order, the learned DR submitted that, out of the notices issued under section 133(6) of the Act, replies were received only from a few parties, whereas several parties failed to respond. The Assessing Officer himself recorded that the purchases from such parties remained unverifiable and, on that basis, even issued a show cause notice proposing disallowance of 25% of the purchases. However, despite recording such findings, the Assessing Officer accepted the assessee’s explanation and completed the assessment without making any addition or recording any reasons for how the doubts regarding the genuineness of the purchases were resolved.

9. The learned DR further submitted that the mere issuance of notices under section 133(6) or receipt of replies from some of the parties cannot, by itself, be regarded as a proper or effective enquiry. The statutory obligation of the Assessing Officer does not end with the collection of documents. It was incumbent upon him to verify the authenticity and correctness of the material so received, examine the genuineness of the purchase transactions, reconcile the replies with the books of account and other supporting records, and, wherever necessary, carry out further enquiries before accepting the assessee’s claim. According to the learned DR, the assessment records do not indicate that the Assessing Officer undertook any such exercise.

10. It was further argued that the present case is not one of an inadequate enquiry but of failure to conduct an effective and meaningful enquiry despite the Assessing Officer himself entertaining doubts regarding the genuineness of the purchases. Assessing Officer having reached the conclusion that the purchases from certain parties remained unverifiable and having proposed a disallowance on that basis, he could not have accepted the claim of the assessee without carrying the enquiry to its logical conclusion. Such an assessment order, according to the learned DR, clearly suffers from non-application of mind and lack of proper verification, thereby rendering it both erroneous and prejudicial to the interests of the Revenue within the meaning of section 263 of the Act. The learned DR, therefore, submitted that the learned Principal Commissioner has rightly exercised the revisional jurisdiction vested under section 263 of the Act by setting aside the assessment order for fresh adjudication after proper verification. It was accordingly prayed that the impugned order passed by the learned Principal Commissioner be upheld and the appeal of the assessee be dismissed.

11. We have given our thoughtful consideration to the rival submissions. Upon a careful examination of the assessment order, particularly paragraph 3.4 thereof, we find that the Assessing Officer had initiated verification of the purchases by issuing notices under section 133(6) of the Act to ten parties. The assessment order specifically records that replies along with supporting documentary evidence were received only from four parties, whereas six parties failed to respond to the statutory notices. The Assessing Officer further recorded a categorical finding that, in the absence of such replies, the purchases from those parties remained unverifiable. Consequent thereto, a show cause notice was issued proposing disallowance of 25% of such purchases on the ground that their genuineness could not be satisfactorily established. However, despite recording the aforesaid findings and despite initiating proceedings for making a disallowance, the Assessing Officer ultimately accepted the explanation furnished by the assessee and completed the assessment without making any addition. Significantly, the assessment order does not disclose any further enquiry having been undertaken after issuance of the show cause notice, nor does it record any reasons explaining as to how the earlier doubts regarding the genuineness of the purchases stood satisfactorily resolved. There is no discussion in the assessment order demonstrating that the material subsequently furnished by the assessee, if any, was independently verified or that the non-compliance of the concerned parties was duly explained.

12. It is well settled that, for invoking the revisional jurisdiction under section 263 of the Act, the learned Principal Commissioner is required to satisfy the twin conditions, namely, that the assessment order is erroneous and that it is prejudicial to the interests of the Revenue. In the facts of the present case, both these requirements stand satisfied. The assessment records themselves reveal that the enquiry initiated by the Assessing Officer remained incomplete. Having himself recorded that the purchases from several parties remained unverifiable and having proposed an appropriate disallowance, the Assessing Officer could not have abandoned the proposed addition without recording any cogent reasons or conducting further verification. It was expected from the Assessing Officer to take the assessment to the logical conclusion, thereby making the addition in the hands of the assessee as the assessee failed to substantiate the purchases through cogent evidence. Such an order cannot be said to be the outcome of a proper application of the mind.

13. We are also unable to accept the contention of the learned Authorised Representative that the assessment order represents one of the possible views. The principle relating to a “possible view” applies only where the Assessing Officer has conducted adequate enquiries, examined the relevant material and thereafter adopted one of the legally sustainable views available on the facts. The said principle cannot be invoked where the enquiry itself remains incomplete or where the Assessing Officer accepts the claim of the assessee despite recording that the transactions remained unverifiable. An order passed in such circumstances cannot be regarded as a plausible or legally sustainable view; rather, it reflects inadequate enquiry and non-application of mind.

14. It is equally well settled by the decisions of the Hon’ble Supreme Court that where the Assessing Officer fails to make the enquiries which the facts of the case demand or accepts a claim without proper verification, the assessment order becomes both erroneous and prejudicial to the interests of the Revenue, thereby attracting the provisions of section 263 of the Act. In the present case, the learned Principal Commissioner has merely restored the matter to the file of the Assessing Officer for carrying out a proper examination of the relevant transactions and for deciding the issue afresh after due verification. We, therefore, find no legal or factual infirmity in the exercise of revisional jurisdiction by the learned Principal Commissioner. Accordingly, the order passed by the learned Principal Commissioner under section 263 of the Act is upheld. The Assessing Officer shall, while giving effect to the revisionary order, examine all the evidences and documentary material which the assessee may place on record, including the confirmations, bank statements, e-way bills and any other supporting documents relied upon before us, conduct such further enquiries as may be considered necessary in accordance with law, and thereafter pass a fresh speaking order after affording adequate and effective opportunity of hearing to the assessee.

15. We make it clear that we have not expressed any opinion on the merits of the purchases or on the correctness of any proposed addition. All the contentions of the assessee are kept open. The Assessing Officer shall adjudicate the matter independently, objectively and strictly in accordance with law, uninfluenced by any observations made either in the revisionary order or in the present order, except to the extent of examining the issue in the light of the deficiencies noticed hereinabove.

16. In the result, the appeal of the assessee is dismissed.

Order pronounced on 05th August,2026.