Provisions of section 269ST is applicable to receiver & not to payer

Janatha Fish Meal & Oil Products Vs PCIT (ITAT Bangalore)

ITAT Bangalore held that assessee has paid money for the purpose of investment which is not disputed and therefore the provisions of Section 269ST of the Act is not applicable.

Facts-

Post search operations and proceedings, AO concluded the assessment by accepting the return of income filed by the assessee.

However, the PCIT stated that unexplained stock is offered under the head “income from other source” and not routing it through profit and loss account and therefore should be categorised as unexplained investment u/s.69C to be taxed at special rate of tax u/s. 11 5BBE. The PCIT further stated that the investment made in cash is in violation of Section 269ST of the Act and therefore to be assessed accordingly, which the AO failed to do. The PCIT therefore issued a show cause notice to the assessee in this regard. After considering the submissions made by the assessee the PCIT passed an order under Section 263 of the Act.

Being aggrieved, by the order of PCIT, the assessee has preferred the present appeal.

Conclusion-

The view of the ld. PCIT, in our opinion, is not the right reason for exercising revisionary powers u/s. 263 of Act, since the AO has brought out the details of excess stock in the table extracted above, and has also verified the fact that the income declared by the assessee includes the additional income offered towards excess stock. In our view the error envisaged by Section 263 of the Act is not one that depends on possibility as a guess work, but it should be actually an error either of fact or of law.

Held that the assessee has paid money for the purpose of investment which is not disputed and therefore the provisions of Section 269ST of the Act is not applicable.

Considering the facts of the case and the relevant provisions of the Act, we are of the view the action of PCIT invoking section 263 stating that the AO’s order is erroneous to the extent of AO not verifying whether investments are in violation of section 269ST is not tenable. We therefore quash the order of PCIT with regard to this issue.

FULL TEXT OF THE ORDER OF ITAT BANGALORE

This appeal is against the revision order passed under Section 263 of the Income Tax Act, 1961 (the Act) dated 28.03.2022 passed for AY 201 8-19 by the Principal Commissioner of Income Tax, (PCIT) Bangalore.

2. The assessee has raised the following grounds of appeal: –

“1. The order of revision passed by the learned Principal Commissioner of Income tax [Central], Bengaluru, under Section 263 of the Act dated 28/03/2022, in so far as it is against the Appellant is opposed to law, weight of evidence, probabilities, facts and circumstances of the Appellant’s case.

2. The learned Principal Commissioner of Income tax is not justified in law and on facts to set aside the assessment order passed under section 143 [3] of the Act dated 17/12/2019 and direct the assessing officer to modify the original assessment passed by the learned assessing officer, on the facts and circumstance of the case.

3. The learned Principal Commissioner of Income tax is not justified in passing an order under section 263 of the Act, as the order passed under section 143 [3] of the Act, was pursuant to proper enquiry by the learned assessing officer on the facts and circumstances of the case.

4. The learned Principal Commissioner of Income tax has grossly erred in revising the order passed by the learned Assessing officer without appreciating that there is no error, much less prejudicial to the interests of the Revenue to warrant a revision and therefore the order passed by the learned PCIT is ultra vires to the scope of Section 263 and requires to be cancelled on the facts and circumstances of the Appellant’s case. The direction to make thorough and detailed enquiry amounts to ordering fishing and roving enquires without any material in support thereof and consequently the impugned order passed is bad in law and is liable to be cancelled.

5. The learned Principal Commissioner of Income tax failed to appreciate that the said alleged declaration made on account of alleged difference in stock was treated as business income of Rs. 1,82,70,000/- by the appellant as well as by the learned assessing officer in the original order of assessment, and further failed to appreciate that the business income cannot come under the purview of the provisions of section 69C of the Act and consequently the provisions of section 11 5BBE of the Act is not attracted, on the facts and circumstances of the case.

6. The learned Principal Commissioner of Income tax failed to appreciate that once an item is considered as business income the same cannot be taxed as per the special rates under section 11 5BBE of the Act, on the facts and circumstances of the case.

7. The learned Principal Commissioner of Income tax, failed to appreciate that the appellant has already offered the alleged difference in stock once in the return of income and again by adjusting the stock in the books of the appellant which would enhance the profit of the appellant and consequently resulting in double taxation of the same item, which is not as per the intent of the legislature and consequently the observations of the learned Principal Commissioner of Income tax requires to be modified to this extent, on the facts and circumstances of the case.

8. The learned Principal Commissioner of Income tax, failed to appreciate that the provisions of section 269 ST of the Act is not applicable for the amounts paid by the appellant of Rs. 4,50,00,000/- and the said provisions are applicable only for the amounts received and consequently the said observation of the learned Principal Commissioner of Income tax to examine the applicability of the provisions of section 269ST is devoid of merits and consequently the said direction of the learned Principal Commissioner of Income tax requires to be cancelled, on the facts and circumstances of the

9. The learned Principal Commissioner of Income tax failed to appreciate that the Assessing Officer before completing the assessment order under section 143[3] r.w.s 153D of the Act on 17/12/2019 had made detailed enquiries calling for relevant records and documents and explanation pertaining to the matter at hand, the same being produced by the appellant during various instances during the assessment proceedings and further as per the provisions of section 153D of the Act an approval has been sought for passing the order of assessment and having applied their mind and considering the facts the order of assessment has been passed. Hence on the very same issue no action can be taken under Section 263 of the Act as the actions of the Assessing Officer is pursuant to applying his mind to the matter and in accordance with law.

10 .The learned Principal Commissioner of Income tax failed to appreciate that the provisions of section 269ST of the Act is not applicable for the amounts paid by the appellant of Rs.4,50,00,000/- and the said provisions are applicable only for the amounts received and consequently the said observation of the learned Principal Commissioner of Income tax to examine the applicability of the provisions of section 269ST is devoid of merits and consequently the said direction of the learned Principal Commissioner of Income tax requires to be cancelled, on the facts and circumstances of the case.”

3. The assessee is a partnership firm and filed the return of income for assessment year under consideration on 29.11.2018 declaring an income of 7,58,25,710/-. A search and seizure operation was conducted on 08.02.20 18. The case was selected for scrutiny and notice under Section 143(2) of the Act dated 16.11.2019 was issued and served on the assessee. During the course of assessment the assessing officer (AO) called on the assessee to furnish details pertaining to incriminating materials found during the course of search and also the incomes offered to tax under the statement recorded u/s. 132(4) during search. The assessee submitted the details called for by the AO and the AO concluded the assessment by accepted the return of income filed by the assessee.

4. The PCIT noticed that the following amounts which have been admitted by ShriAnand Kumar, one of the partners in the assessee firm in his statement under Section 132(4) of the Act are offered as additional income by the assessee in the return of income u/s.139(1) and the same has been accepted by the AO in the assessment completed u/s. 143(3)

(i) The difference in the value of stock as per the books of accounts and physical stock for an amount of Rs.1,82,70,000/-.

(ii) A sum of Rs.4.50 crores was invested byassessee in cash that has not been recorded in the books of account.

5. The PCIT stated that unexplained stock is offered under the head “income from other source” and not routing it through profit and loss account and therefore should be categorised as unexplained investment u/s.69C to be taxed at special rate of tax u/s. 11 5BBE. The PCIT further stated that the investment made in cash is in violation of Section 269ST of the Act and therefore to be assessed accordingly, which the AO failed to do. The PCIT therefore issued a show cause notice to the assessee in this regard. After considering the submissions made by the assessee the PCIT passed an order under Section 263 of the Act setting aside the order of the AO by stating as under: –

“11. In view of the facts, it is held that the Assessment Order passed by the Assessing Officer is erroneous so far as it is prejudicial to the interest of the Revenue as per the provisions of Clause (a) of Explanation (2) to the Section 263 of the Income Tax Act, 1961. The details of excess stock found during survey proceedings needs to be verified and enquired into as to whether the same is in the nature of unexplained cash expenditure u/s 69C in the books of account and whether the same is required to be taxed u/s 11 5BBE of Income Tax Act. Further cash investment amounting to Rs.4.5 crore made during the period under consideration needs to be verified as to whether the said transaction arc in violation of section 269ST of the Act. The claims of the assessee made during current proceedings require in depth enquiry and investigation by the Assessing Officer. Hence, the assessment order dated 17.12.2019 is hereby partly set-aside to the file of the Assessing Officer for passing a fresh Assessment Order after making thorough enquiry on above issues and after considering the submissions made by the assessee during current proceedings.”

6. Aggrieved by the order of the PCIT the assessee is in appeal before the Tribunal.

Additional income towards excess stock

7. With regard to whether the excess stock should be assessed as unexplained expenditure u/s.69C of the Act the learned A.R. made the following submissions: –

i) That the additional amount declared on account of alleged difference in stock amounting to Rs. 1,82,70,000/- itself is not correct, for the reason that actually there was no difference of stock as alleged during the course of search conducted and the declaration was made by the assessee only to buy peace with the department.

ii) That the assessee is in the business of manufacturing and sale of Fish Meal and also engaged in the business of trading in Soluble Paste and Powder which is procured by its sister concerns and is only doing the trading activity as regard to the two items are concerned. The said manufacturing of Soluble paste and Powder is manufactured by its sister concern i.e. Janatha Agro Products, which actually operates in the assessee premises. During the search the learned search officials on the day of search had in fact while verifying the stock of inventory had inadvertently considered the stock of Soluble Paste and Powder which is actually not manufactured by the assessee which is the reason for excess physical stock found by the Department.

iii) That the search happened before the end of the financial year and therefore the assessee adjusted the inventory in its books to the extent of allegation made by the search officials and resulting in an increase in the profit of the assessee has also declared in the computation of total income under the head business income.

iv) That on account of the pressure and without verifying the facts and records, the assessee firm with a view to avoid any controversy and litigation with the department, agreed with the allegation made by the investigating officers and offered the additional income in the return of income filed by it without realising that the same has been offered by adjusting in the stock of inventory which has an effect of enhancing the profit of the assessee.

v) That through the declaration made in the inventory as well as the computation of total income under the head business income, the assessee has paid the applicable taxes.

vi) That the assessee has in fact declared the additional income in its profit and loss account and thus, the provisions of section 11 5BBE of the Act is not at all applicable to the facts of the present case.

viii) That these facts have been submitted before the assessing officer and the assessing officer in the assessment proceedings has made enquiries and applied his mind as regard to the taxability of the inadvertent declaration made by the assessee amounting to Rs. 1,82,70,000/- on account of difference in stock and has treated the same as business income and accepted the taxation of the said alleged inadvertent declaration as business income.

8. The learned D.R. supported the order of the PCIT.

9. We have heard the rival contentions and perused the material on record. We notice that during the search proceedings the inventory of physical stock was verified and the difference between the stock as per the books and the physical stock was compared and then addition of Rs.1,82,70,000/- was computed as under: –

The AO has made a note on this difference in stock being offered as other addition to the income under the head profits and gains from business or profession as under: –

“9.3 In the computation of income filed with the return of income filed on 9.11.2018 the assessee has added Rs.4,92,61,199/- as “Other Additions” to the income under the head “Profits and gains of business or profession”. As per Schedule-4 this amount of Rs.4,92,61,199/- includes Rs.1,82,70,000/- being the difference in stock valuation admitted u/s. 132(4).

10. The PCIT has stated the order of the AO to be erroneous to the extent that the AO has not verified the source of excess stock and that the AO accepted the submission of the assessee that the difference in stock is a business income.Before proceeding further, it is apposite to take note of the relevant extract of section 263 and the Explanation (2) to section 263 of the Act, which read as under :-

“Revision of orders prejudicial to revenue.

263 (1) The [Principal Chief Commissioner or Chief Commissioner or Principal Commissioner] or Commissioner may call for and examine the record of any proceeding under this Act, and if he considers that any order passed therein by the Assessing Officer 89[or the Transfer Pricing Officer, as the case may be,] is erroneous in so far as it is prejudicial to the interests of the revenue, he may, after giving the assessee an opportunity of being heard and after making or causing to be made such inquiry as he deems necessary, pass such order thereon as the circumstances of the case justify, 90[including,—

****

Explanation 2.—For the purposes of this section, it is hereby declared that an order passed by the Assessing Officer 94[or the Transfer Pricing Officer, as the case may be,] shall be deemed to be erroneous in so far as it is prejudicial to the interests of the revenue, if, in the opinion of the Principal 95 [Chief Commissioner or Chief Commissioner or Principal] Commissioner or Commissioner,—

(a) the order is passed without making inquiries or verification which should have been made;

(b) the order is passed allowing any relief without inquiring into the claim;

(c) the order has not been made in accordance with any order, direction or instruction issued by the Board under section 119; or

(d) the order has not been passed in accordance with any decision which is prejudicial to the assessee, rendered by the jurisdictional High Court or Supreme Court in the case of the assessee or any other person.”

11. Thus, from close scrutiny of the provisions of section 263, it is evident that twin conditions are required to be satisfied for exercise of revisional jurisdiction under section 263 of the Act i.e., firstly, the order of the Assessing Officer is erroneous; and secondly, it is prejudicial to the interests of the revenue on account of error in the order of assessment. The Bombay High Court in the case of Gabriel India Ltd. (1993) 203 ITR 108 has explainedas to when an order can be termed as erroneous as follows:-

“From the aforesaid definitions it is clear that an order cannot be termed as erroneous unless it is not in accordance with law. If an income tax officer acting in accordance with the law makes a certain assessment, the same cannot be branded as erroneous by the Commissioner simply because, according to him, the order should have been written more elaborately. This section does not visualise a case of substitution of the judgment of the Commissioner for that of the Income-tax Officer, who passed the order, unless the decision is held to be erroneous. Cases may be visualised where the Income tax officer while making an assessment examines the accounts, makes enquiries, applies his mind to the facts and circumstances of the case and determines the income either by accepting the accounts or by making some estimate himself. The Commissioner, on perusal of records, may be of the opinion that the estimate made by the officer concerned was on the lower side and left to the Commissioner he would have estimated the income at a figure higher than the one determined by the Income tax officer. That would not vest the Commissioner with power to examine the accounts and determine the income himself at a higher figure. It is because the Income tax officer has exercised the quasi judicial power vested in him in accordance with law and arrived at a conclusion and such a conclusion cannot be termed to be erroneous simply because the Commissioner does not feel satisfied with the conclusion ………… . There must be some prima facie material on record to show that the tax which was lawfully exigible has not been imposed or that by the application of the relevant statute on an incorrect or incomplete interpretation a lesser tax than what was just has been imposed.”

12. There is no dispute that u/s. 263 of the Act, the PCIT does have the power to set aside the assessment order and send the matter for a fresh assessment if he is satisfied that further enquiry is necessary and the assessment order is prejudicial to the interests of the Revenue. However, in doing so, the PCIT must have some material which would enable to form a prima facie opinion that the order passed by the AO is erroneous, insofar as it is prejudicial to the interests of the Revenue. In the present case, the PCIT has not brought out any material on record to substantiate that the source for the excess stock declared as additional income during the search proceedings is anything other than the income from business of the assessee. The AO has given a clear finding with respect to additional income offered by the assessee as business income since the same is arising out of the difference in stock between the books of accounts and the physical stock. The PCIT in his order has stated that further enquiry should have been done to verify the source of excess stock and that the assessee has not offered any explanation and therefore the additional income is from an undisclosed source to be taxed u/s. 11 5BBE of the Act. This view of the ld. PCIT,in our opinion, is not the right reason for exercising revisionary powers u/s. 263 of Act, since the AO has brought out the details of excess stock in the table extracted above, and has also verified the fact that the income declared by the assessee includes the additional income offered towards excess stock. In our view the error envisaged by Section 263 of the Act is not one that depends on possibility as a guess work, but it should be actually an error either of fact or of law.

13. With regard to the argument that the assessee’s case requires to be considered in the light of the explanation (2) to Section 263 of the Act, we notice that the Hon’ble Gujarat High Court in the case of Shreeji Prints (P) Ltd. (130 taxmann.com 293 – Guj) while considering the explanation of Section 263 of the Act, has held that : –

“4 Being aggrieved by the order passed by the PCIT under section 263 of the Act, 1961, the assessee went before the Tribunal. The Tribunal, after considering the submissions made by the assessee and after considering the scope of power to be exercised by the PCIT under section 263 of the Act, 1961 came to be conclusion that the Assessing Officer has made inquiries in detail about two unsecured loans taken by the respondent assessee and observed as under:

“13. In the light of the aforesaid judicial precedents in the present case what has to be seen is whether the AO has made enquiries about two loans taken from GTPL and PAFPL. If the answer is affirmative, then second question arises whether the acceptance of the claim by the AO was a plausible view or on the facts of the finding on the facts that the said funding of the AO can be termed as sustainable in law. We find that vide notice issued u/s.142(1) dated 13-10-2015 placed at Page No. 1 of Paper Book shows the AO vide item no.(iii) has asked the information regarding details of unsecured loan outstanding as on 3 1-3-2013 and the loans were squared up amounts in the format prescribed therein. In compliance to thereof, the assessee has furnished complete details of the unsecured loans outstanding/ squared up vide para 3 of his letter dated 2-11-2015 placed as Annexure-2 at page 4 of paper book. The assessee has also furnished details consisting of copy of ledger account, copy of acknowledgment of income filed for A.Y. 2012-13 and 20 13-14 and copy of bank statement reflecting the payment received was paid during the financial year 2012-13 relevant to assessment year 2013-14 which are placed at paper book, page 9 to 49 in respect of GTPL as well as PAFPL. This indicate that the assessee has furnished account confirmation of the depositor, acknowledgment of income of the parties, audited balanced sheet and profit and loss account of the parties and bank pass book and bank statement of the parties. During the course of assessee proceedings, form these facts it is clear that the assessee has not only proved the from these facts it is clear that the assessee has not only proved the identity of the lenders but also the genuineness of the transactions and credit worthiness of the lenders. Accordingly, the Ld. AO after verifying the details of unsecured loans being satisfied, accepted the submissions of the assessee which leads to infer that the Assessing Officer had made full enquiries of unsecured loans by raising the queries and calling for the all information in respect of the loan taken along with details evidences in support thereof and the same were also duly replied by the assessee and on receipt of all the details of evidences, the unsecured loans received by the assessee were accepted by the Assessing Officer and the assessment was finalised u/s.143(3) of the Act on 15-3-20 16. We also note that there was audit objection in the case of the assessee. The language of audit objection and show-cause notice under section 263 is same meaning thereby that the show cause notice u/s.263 has been issued by the PCIT Without going through assessment records and without exercising his own application of his mind. The assessee has not only filed complete details of Income-tax Return, audited balance sheet, profit and loss account and bank statement. The assessee further explained that both the these unsecured loans stands fully repaid as on the date and there is no capital creation by the assessee on this count. In view of these facts and circumstances, we are of the considered opinion that the order of the Assessing Officer is not erroneous nor it is prejudicial to the interest of revenue. It was also brought to the notice of the PCIT that entire share capital of GTPL being already tax, all the investment made by the said company recorded in its balance sheet stands explained tax in its hands itself and hence, “there is no question of adding the same amount in the hands of the assessee. As regards loans from PAFPL, it was submitted that assessee company has made voluntary disclosure of income of Rs. 1.5 crore under IDS 2016 in September 2016 and the said loan was repaid before making declaration. In view of these facts and circumstances, we find that the AO has made due enquiries. Since we find that the AO had made enquiries regarding unsecured loans and accepted the claim of the assessee after detailed enquiries.”

15 The Pr.CIT had observed that Explanation 2 of section 263 of the Act is clearly applicable and it is clear that the Assessing Officer has passed the assessment order after making enquiries for verification which ought to have been made in this case. However, we find that the Pr. CIT has not mentioned in the show-cause notice issued under section 263 that he is going to invoke the Explanation 2 to 263 hence, invocation of Explanation in the order without confronting the assessee is not appropriate and sustainable in law in support of this contention, the ld. Counsel has placed reliance on the following decision:

CIT v. Amir Corporation 81 CCH 0069 (Guj.), CIT MehrotraBrothem -270 ITR 0157 (MP,CIT v. Ganpet Ram Bishnoi – 296 ITR 0292 (Raj.), Cadila healthcare Ltd. v. Cl 7, Ahmedabadh-1 [ITA no. 1096/Ahd/2013 & 910/Ahd/2014], Sri Saí Contractors v. ITO [ITO no. 109Nizag/2002] and PyarelalJaiswal v. CIT, Vamnesi [(2014) 41 taxmann.com 27 & (AII Trib.)]. It was contended by the Learned Counsel that clause -(a) & (b) of Explanation 2 of Section 263 are not applicable as the Assessing Officer has made enquiry and verification which should have been made. Further, in the show cause notice, the Explanation-2 of section 263 was not invoked by the PCIT and it was referred in the order u/s.263 of the Act. Therefore, in the light of decision of the Co-ordinate Bench of Mumbai ga in the case of Narayan TatuRane – 70 taxmann.com 227 (Mum.Trt.) [PB 153-1561 wherein held that explanation cannot laid to have over ridden the law as interpreted/the various High Courts where the High Courts have held that before reaching the conclusion that the order of the Assessing Officer is erroneous prejudicial to the interest of Revenue. The CIT himself has to undertake some enquiry to establish that the assessment order is erroneous and prejudicial to the interest of Revenue. The ld. Counsel relied on the decision of M/s. Amira Pure Foods Pvt. Ltd., v. PCIT in ITA No.3205/Del/2017 and Ahmedabad Tribunal in the case of Torrent Pharmaceuticals Ltd. v. DCIT [2018] 97 taxmann.com 671 (Ahd. – Trib.). it is clear from the enquiries made by the Assessing Officer and submissions made by the assessee that the Assessing Officer has taken the plausible view which is valid in the eyes of law. The Assessing Officer was satisfied consequent to making enquiry and after examining the evidences produced by the assessee, he accepted the assessee’s claim of loan similar view were also expressed by the Hon’ble Delhi High Court in the case of CIT v. Vodafone Essar South Ltd. [2013] 212 taxman 0184. We observe the Pr.CIT has drawn support from newly inserted Explanation 2 below section 263(1) of the Act introduced by Finance Act, 2015 w.e.f. 1-6-2015 for his action. The Explanation 2 inter alia provides that the order passed without making inquiries or verification ‘which should have been made’ will be deemed to be erroneous insofar as it is prejudicial to the interest of the Revenue. It is on this basis, the assessment order passed by the AO under section 143(3) of the Act has been set aside with a direction to the AO to pass a fresh assessment order. It will be therefore imperative to dwell upon the impact of Explanation 2 for the purposes of section 263 of the Act. The aim and object of introduction of aforesaid Explanation by Finance Act, 2015 was explained in CBDT Circular No. 19/2015 [F.NO.142I14/2015T PL], Dated 27-11-2015 which is reproduced hereunder:

“53. Revision of order that is erroneous in so far as it is prejudicial to the interests of revenue.

53.1 The provisions contained in sub-section (1) of section 263 of the Income-tax Act, before amendment by the Act, provided that if the Principal Commissioner or Commissioner considers that any order passed by the Assessing Officer is erroneous in so far as it/s prejudicial to the interests of the Revenue, he may, after giving the assessee an opportunity of being heard and after making an enquiry pass an order modifying the assessment made by the Assessing Officer or cancelling the assessment and directing fresh assessment.

53.2 The interpretation of expression “erroneous in so far as it/3 prejudicial to the interests of the revenue” has been a contentious one. In order to provide clarity on the issue, section 263 of the Income-tax Act has been amended to provide that an order passed by the Assessing Officer shall be deemed to be erroneous in so far as it is prejudicial to the interests of the revenue, if, in the opinion of the Principal Commissioner or Commissioner. (a) the order is passed without making inquiries or verification which, should have been made; (b) the order is passed allowing any relief without inquiring into the claim; (c) the order has not been made in accordance with any order, direction or instruction issued by the Board under section 119; or (d) the order has not been passed in accordance with any decision, prejudicial to the assessee, rendered by the jurisdictional High Court or Supreme Court in the case of the assessee or any other person.

53.3 Applicability: This amendment has taken effect from 1st day of June, 2015.”

“17. We thus find merit in the plea of the assessee that the Revisional Commissioner is expected show that the view taken by the AO is wholly unsustainable in law before embarking upon exercise of revisionary powers. The revisional powers cannot be exercised for directing a fuller inquiry to merely find out if the earlier view taken is erroneous particularly when a view was already taken after inquiry. If such course of action as interpreted by the Revisional Commissioner in the light of the Explanation 2 is permitted, Revisional Commissioner can possibly find fault with each and every assessment order without himself making any inquiry or verification and without establishing that assessment order is not sustainable in law. This would inevitably mean that every order of the lower authority would thus become susceptible to section 263 of the Act and, in turn, will cause serious unintended hardship to the tax payer concerned for no fault on his part. Apparently, this is not intended by the Explanation. Howsoever wide the scope of Explanation 2(a) may be, its limits are implicit in it. It is only in a very gross case of inadequacy in inquiry or where inquiry is per se mandated on the basis of record available before the AO and such inquiry was not conducted, the revisional power so conferred can be exercised to invalidate the action of AO. The AO in the present case has not accepted the submissions of the assessee on various issues summarily but has shown appetite for inquiry and verifications. The AO has passed after making due enquiries issues involved impliedly after due application of mind. Therefore, the Explanation 2 to section 263 of the Act do not, in our view, thwart the assessment process in the facts and the context of the case. Consequently, we find that the foundation for exercise of revisional jurisdiction is sorely missing in the present case.

18. In the light of above facts and legal position, we are of the considered view that the AO had made detailed enquiries and after applying his mind and accepted the genuineness of loans received from GTPL and PAFPL, which is also plausible view. Therefore, we find that twin conditions were not satisfied for invoking the jurisdiction under section 263 of the Act. The case laws relied by the ld. CIT(D.R.) are distinguishable on facts and in law hence, by the ld. Counsel as well and we concur the same hence not applicable to present facts of the case. Therefore, in absence of the same, the ld. CIT ought to have not exercised his jurisdiction under section 263 of the Act. Therefore, we cancel the impugned order under section 263 of the Act, allowing all grounds of appeal of the Assessee.”

5. The Tribunal has found that in the order passed by the PCIT, Explanation 2 of section 263 of the Act, 1961 is made applicable. The Tribunal observed that the PCIT has not mentioned in the show cause notice to invoke the Explanation 2 of section 263 of the Act 1961. Therefore, by invocation of Explanation in the order without confronting the assessee and giving an opportunity of being heard to the assessee is not appropriate and sustainable in law.

6. Thus, the Tribunal has considered in detail the aspect of revisional power to be exercised by the PCIT in the facts of the case and has given a finding of facts that the Assessing Officer has made inquiries in detail and after applying mind, accepted the genuineness of loans received by the respondent assessee from the aforesaid two companies and such view of the Assessing Officer is a plausible view, and therefore, the same cannot be said to be erroneous or prejudicial to the interest of the Revenue.”

14. The SLP against the above order of the Hon’ble High Court was dismissed by the Hon’ble Supreme Court, thereby the issue, that the explanation (2) to Section 263 of the Act could be invoked only in a very gross case of inadequacy in enquiring or where the mandatory enquiries are not conducted, has reached finality.

15. In the given case, in the statement recorded during the course of search the Shri Anand Kumar, one of the partners in the assessee firm, he has admitted that there is difference in the stock recorded in the books and the physical stock and agreed to offer the same as additional income. The PCIT has not brought anything contrary to record to state that the amount admitted towards excess stock is from a difference source. When the additional income is offered towards excess stock, the stock being part of the business of the assessee is offered to tax as business income. The PCIT has merely substituted his views to the extent that the AO should have done further enquiry when PCIT himself admits that the additional income is from the excess stock. We are of the considered opinion that the revisionary jurisdiction could not be allowed to be exercised by the PCIT either for substituting his own opinion for that of the AO or for making a fishing and roving enquiry.

16. In view of the above discussion, we are of the opinion that the PCIT in the present case has wrongly invoked the jurisdiction under section 263 and the controversy in the present case is fully covered by the judgment of the Hon’ble Bombay High Court in the case of Gabriel India Ltd. (supra). Accordingly the impugned order of the PCIT with regard to the issue of setting the order of AO u/s. 143(3) with regard to this issue is quashed

Applicability of section 269ST to the investments made in cash

17. With regard to whether the provisions of Section 269ST of the Act is applicable in the payments made to the extent of Rs. 4.5 crores in cash, learned A.R. submitted that provisions of Section 269ST of the Act is applicable only to the receiver of the amount and not the payer. In the given case it is submitted that the assessee has paid money for the purpose of investment which is not disputed and therefore the provisions of Section 269ST of the Act is not applicable. Further the learned A.R. drew our attention to para 5.8 of the assessment order wherein the AO has taken note of the fact that the impugned amount of Rs.4.5crores is already disclosed as undisclosed income and assessed the same accordingly in AY 2017-18. Therefore it is submitted that there is no error in the order of assessment of the AO warranting revision under Section 263 of the Act.

18. We heard the learned D.R. We will at the provisions of Section 269ST and section 271DA which contains provisions relating Penalty for failure to comply with provisions of section 269STof the Act

“Mode of undertaking transactions.

269ST. No person shall receive an amount of two lakh rupees or more—

(a) in aggregate from a person in a day; or

(b) in respect of a single transaction; or

(c) in respect of transactions relating to one event or occasion from a person,

otherwise than by an account payee cheque or an account payee bank draft or use of electronic clearing system through a bank account or through such other electronic mode as may be prescribed¹⁰:

Provided that the provisions of this section shall not apply to—

(i) any receipt by—

(a) Government;

(b) any banking company, post office savings bank or co-operative bank;

(ii) transactions of the nature referred to in section 269SS;

(iii) such other persons or class of persons or receipts, which the Central Government may, by notification in the Official Gazette, specify.

Explanation.—For the purposes of this section,—

(a) “banking company” shall have the same meaning as assigned to it in clause (i) of the Explanation to section 269SS;

(b) “co-operative bank” shall have the same meaning as assigned to it in clause (ii) of the Explanation to section 269SS.”

Penalty for failure to comply with provisions of section 269ST.

271DA. (1) If a person receives any sum in contravention of the provisions of section 269ST, he shall be liable to pay, by way of penalty, a sum equal to the amount of such receipt:

Provided that no penalty shall be imposable if such person proves that there were good and sufficient reasons for the contravention.

(2) Any penalty imposable under sub-section (1) shall be imposed by the Joint Commissioner.

19. The facts of the case here as has been noted by the AO is that the assessee has made payments of Rs.4.50 crores to the shareholders of M/s.Lax Bio Feeds Pvt Ltd., apart from the agreed share price. As per the statement recorded u/s.132(4) from the partner of the assessee the source of the amount paid was the inflated purchases and payments made boat owners and that the said payments have not been recorded in the books of accounts. It is also noted by the AO that the amount invested has already been taxed as undisclosed income is already offered to tax in AY 20 17-18. Further from the combined reading of the above provisions it is clear that section 269ST and the penalty provisions for not complying with the said section as contained in section 271DA are applicable to the receiver of the sum. Considering the facts of the case and the relevant provisions of the Act, we are of the view the action of PCIT invoking section 263 stating that the AO’s order is erroneous to the extent of AO not verifying whether investments are in violation of section 269ST is not tenable. We therefore quash the order of PCIT with regard to this issue.

20. In the result, the appeal filed by the assessee is allowed.

Dictated and pronounced in the open Court on 20^th September, 2022.