PCIT Vs Klaxon Trading Pvt Ltd (Delhi High Court)
Delhi High Court held that revisionary power under section 263 of the Income Tax Act can be invoked only in case of ‘no enquiry’. The revisionary power cannot be invoked in case of ‘inadequate enquiry’.
Facts-
The respondent/assessee was incorporated in 1992, and since then, it has been trading in metal, including gold. The respondent/assessee filed its return on 28.09.2013. On 25.04.2014, a search and seizure action was conducted against the “Dua Group”. The respondent/assessee, concededly, belongs to the Dua Group.
The respondent/assessee was asked as to why the cash deposited in banks should not be treated as unexplained income. Regarding cash deposits, the respondent/assessee averred that they were cash sales proceeds made during the period in issue. It was also emphasised that the cash sales had been declared revenue from operations.
The record shows that on 05.09.2017, the PCIT issued a show cause notice proposing the exercise of revisionary power u/s. 263 of the Act. Although the appellant/revenue has failed to file a copy of the show cause notice, it is common ground that it adverted to the proposed addition concerning unexplained cash deposits.
The PCIT was, however, not persuaded by the submissions advanced on behalf of the respondent/assessee, and hence proceeded to pass the order dated 11.10.2017 in the exercise of his powers u/s. 263 of the Act.
This order was carried in appeal by the respondent/assessee to the Tribunal. For the reasons given in the order dated 27.01.2020, the Tribunal set aside the PCIT’s order dated 11.10.2017.
Conclusion-
Held that the PCIT, in our view, wrongly equated a case of “no enquiry” with what he construed as “inadequate enquiry”. The respondent/assessee had offered an explanation with regard to cash deposits. In the course of the assessment proceedings, the AO had accepted the explanation given by the respondent/assessee that the source of the cash deposits was cash sales. The AO, having been satisfied with the explanation given, chose not to make any addition with regard to the cash deposit. The PCIT on the other hand, without making any enquiry at his end, chose to cancel the assessment order with a direction to pass a fresh assessment order. In our opinion, the PCIT had to reach a conclusion in the fact situation obtaining in the instant case, that the assessment order was erroneous by conducting an enquiry before passing an order under Section 263 of the Act.
FULL TEXT OF THE JUDGMENT/ORDER OF DELHI HIGH COURT
1. This appeal concerns Assessment Year (AY) 2013-14. Via the instant appeal, the appellant/revenue seeks to assail the order dated 27.01.2020 passed by the Income Tax Appellate Tribunal [hereafter referred to as the “Tribunal”].
1.1 The moot question which arises for consideration is whether the Principal Commissioner of Income Tax (PCIT), in passing the order dated 11.10.2017 under Section 263 of the Income Tax Act, 1961 [hereafter referred to as “the Act”], had correctly exercised his revisionary power?
1.2 The PCIT, via the order dated 11.10.2017, “cancelled” the assessment order to the extent the Assessing Officer (AO) had failed, according to him, to enquire about the “unexplained cash deposit” found credited in the respondent’s/assessee’s bank account.
1.3 The Tribunal, though, has recorded a finding of fact that the AO had conducted an enquiry, and it was only thereafter that the original assessment order dated 30.12.2016 was passed, which was cancelled by the PCIT, as indicated above, via the order dated 11.10.2017.
Backdrop:
2. Thus, to adjudicate the instant appeal, the following broad facts are required to be noticed.
2.1 The respondent/assessee was incorporated in 1992, and since then, it has been trading in metal, including gold. In the AY in issue, the respondent/assessee filed its Return of Income (RoI) on 28.09.2013. The income declared in the RoI by the respondent/assessee was Rs. 59,99,560/-. The income declared comprised earnings from business amounting to Rs. 12,88,981/-.The remaining amount, i.e., Rs.47,10,582/-, was disclosed as income from other sources.
3. On 25.04.2014, a search and seizure action was conducted against the “Dua Group”. The respondent/assessee, concededly, belongs to the Dua Group. The search and seizure action also brought the respondent/assessee within its sway.
4. The record shows that a centralisation order under Section 127 of the Act was passed on 04.03.2015.The centralisation order was followed by the respondent/assessee being issued a notice dated 16.05.2016 under Section 153A of the Act.
5. With this, the AO commenced his inquisition by issuing notices under Section 142(1) of the Act. These notices are dated 01.06.2016 and 25.07.2016. Significantly, a questionnaire accompanied the notice dated 01.06.2016.
5.1 In the interregnum, the respondent/assessee filed its RoI as per the directions contained in the 153A notice via the e-filing system on 03.06.2016. The RoI filed in response to this notice was the same as the original RoI filed on 28.09.2013. The respondent/assessee in the fresh RoI once again declared its income as Rs.59,99,560/-.
6. The record discloses that in response to the Section 142(1) notice dated 01.06.2016, the respondent/assessee had filed a reply dated 27.07.2016, which was received by the AO on 08.08.2016.
7. Evidently, upon receiving the aforementioned reply, the AO issued a notice dated 19.12.2016, under Sections 143(2) and 142(1); this notice was also accompanied by a questionnaire. Importantly, the questionnaire sought an explanation concerning the cash deposits in the bank accounts maintained by the respondent/assessee in Axis Bank and Kotak Mahindra Bank. As per the questionnaire, the cash deposited in Axis Bank was Rs.1.94 crores, whereas the amount deposited in Kotak Mahindra Bank was Rs.1.30 crores. The respondent/assessee was thus asked to submit corroborative evidence and justify why the said amount should not be treated as unexplained income, since neither the books of accounts were found at its registered office during the search, nor were they produced in the post-search proceedings.
8. The record shows that the respondent/assessee filed a response dated 23.12.2016, to the questionnaire seeking an explanation concerning the unexplained cash deposit. In the reply, the respondent/assessee, among other things, adverted to the fact that it maintained proper books of accounts, which had been audited under the provisions of the prevailing statutes. Furthermore, it was brought to the notice of the AO that the audited financial accounts, the auditor’s report and the relevant bank statements had been submitted to his office. Besides this, reference was also made to the fact that a stock summary of all items, including gold items, had been appended to the reply. More significantly, the respondent/assessee alluded to the fact that it had regularly filed its sales tax return with the concerned department and paid requisite tax under the Delhi Value Added Tax Act, 2004. The details concerning the same were appended to the reply.
8.1 Regarding cash deposits, the respondent/assessee averred that they were cash sales proceeds made during the period in issue. It was also emphasised that the cash sales had been declared revenue from operations. In this context, reference was made to Note 18, incorporated in the profit and loss account. In support of this plea, a copy of the cashbook reflecting the cash sales transaction and cash deposited against the same was also enclosed with the reply.
9. It is against this backdrop that the AO passed the original assessment order dated 30.12.2016 under Section 153A read with 143(3) of the Act. It is important to note that the AO accepted the returned income, as disclosed by the respondent/assessee.
10. The record shows that on 05.09.2017, the PCIT issued a show cause notice proposing the exercise of revisionary power under Section 263 of the Act. Although the appellant/revenue has failed to file a copy of the show cause notice, it is common ground that it adverted to the proposed addition concerning unexplained cash deposits.
11. Via the said show cause notice, the respondent/assessee was called upon to file its objection, if any, on or before 14.09.2017. A reply qua the same was filed by the respondent/assessee on 14.09.2017. The PCIT discussed the case with the Chartered Accountant (CA) appointed by the respondent/assessee as its authorised representative and director, Mr Rajesh Dua. The discussion with the CA was held on 14.09.2017, while the director appeared before the PCIT on 20.09.2017.
12 The PCIT was, however, not persuaded by the submissions advanced on behalf of the respondent/assessee, and hence proceeded to pass the order dated 11.10.2017 in the exercise of his powers under Section 263 of the Act.
13. This order was carried in appeal by the respondent/assessee to the Tribunal. For the reasons given in the order dated 27.01.2020, the Tribunal set aside the PCIT’s order dated 11.10.2017.
14. While the appeal was pending consideration, it appears that the AO had issued a fresh notice under Section 143(2) and 142 of the Act, to which a reply dated 15.03.2018 was filed by the respondent/assessee, along with supporting evidence. The aforesaid notice was followed by another notice dated 13.11.2018 issued under Section 143(2) of the Act. Since the AO was still not persuaded by the point of view of the respondent/assessee, he proceeded to pass a fresh assessment order dated 19.11.2018.
15. The appellant/revenue, being dissatisfied with the order dated 27.01.2020 passed by the Tribunal, instituted the instant appeal, which came up before the Court for the first time on 16.04.2021. On that date, the counsel for the respondent/assessee was directed to place on record the order passed by the AO, the questionnaire served on the respondent/assessee, and the reply filed thereto. The Court issued this direction given what was noted right at the beginning of the narration of events, which is that the AO, before passing the original assessment order dated 30.12.2016, had enquired into the matter concerning cash deposits in the two bank accounts maintained by the respondent/assessee.
16. Given the direction issued by the Court, the order sheets of the AO, the questionnaire dated 19.12.2016 and the reply dated 23.12.2016, were placed on the Court record by the appellant/revenue. These are the documents to which we had referred hereinabove.
Submissions of Counsels:
17. Thus, we heard arguments in the matter against the backdrop of the facts and circumstances noted hereinabove. Submissions on behalf of the appellant/revenue were advanced by Mr Shlok Chandra, learned senior standing counsel, while the respondent’s/assessee’s stand was put forth by Mr Somil Agarwal.
18. The arguments advanced by Mr Chandra can broadly be paraphrased as follows:
18.1 The PCIT had set aside the order, as according to him, the original assessment order dated 30.12.2016 was both erroneous and prejudicial to the interest of the appellant/revenue. [See Malabar Industrial Company Ltd. v. CIT, (2000) 243 ITR 83 (SC)] In support of this submission, reliance was placed on the order dated 11.10.2017 passed by the PCIT. It was emphasised that the PCIT had exercised his powers under Section 263 of the Act as the respondent/ assessee had furnished “inadequate evidence to justify the nature and source of cash deposited” in the concerned bank accounts.
18.2 It was also sought to be highlighted that the respondent/assessee had failed to produce its books of accounts both during the search as well as in the post-search proceedings. The cashbook submitted during the assessment proceedings was nothing but computer-generated papers.
19. Furthermore, the following discrepancies noticed by the PCIT were emphasised by Mr Chandra to support the conclusion that no enquiry was made with regard to the unexplained cash deposits:
(i) Since several invoices bearing the same amount were issued on a single day, it was improbable that gold was sold to different parties as claimed by the respondent/assessee.
(ii) Cash amounting to Rs.5 lakhs was deposited either every day or every alternate day.
(iii) Cash in hand amounting to Rs. 40-60 lakhs was retained for a long period without any apparent reason. The fact that the respondent/assessee did not claim any cash expenses made it look improbable that substantial amounts would be kept as cash in hand for a long duration without any purpose.
(iv) The respondent/assessee had deliberately assisted the purchasers in buying gold for a value of less than Rs.2 lakhs, so it was not obliged to collect their details, including the Permanent Account Number (PAN). The modality used gave rise to the possibility that either the respondent/assessee was concealing the identity of the purchasers or had introduced its own unaccounted money by showing cash sales.
(v) The submission of VAT returns filed by the respondent/assessee did not establish the genuineness of the cash sales transactions.
(vi) The manner in which invoices have been generated for the same amount in a single day would point in the direction that the cash sales are not genuine.
(vii) The erroneous assessment order dated 30.12.2016 passed by the AO resulted in a loss being suffered by the respondent/revenue in the form of tax. The Tribunal has committed a serious error in setting aside the order passed by the PCIT under Section 263 of the Act.
(viii) The PCIT can exercise power under Section 263 of the Act, albeit after examining the record and after making or causing an enquiry to be made, if he concludes that the assessment order passed in a matter is erroneous and prejudicial to the interest of the revenue. [See: CIT, Bangalore v. Shree Manjunatheaware Packing Products, (1998) 1 SCC 598]
20. In rebuttal, Mr Somil Agarwal broadly made the following submissions:
(i) The total revenue the respondent/assessee registered in his books of accounts and offered to tax in the AY in issue was Rs.35,06,28,560/-. This amount included cash sales against which cash deposits had been made in the subject bank accounts.
(ii) In the original assessment proceedings, inter alia, a query had been raised by the AO about cash deposits. After duly verifying the books of accounts, stock summary statements invoices, VAT returns, and bank statements, the AO concluded that no additions were required to be made to the income declared by the respondent/assessee. In this context, inter alia, reliance was placed on the questionnaire dated 19.12.2016 and the reply dated 23.12.2016 filed by the respondent/assessee.
(iii) The fact that an enquiry was made is also demonstrable from a perusal of the order sheets of the AO placed before the Court. Therefore, the observation made by the PCIT in paragraph 6 of the order dated 11.10.2017 that “no enquiry or investigation” was made by the AO concerning cash deposits was incorrect.
(iv) Although the PCIT has laid great emphasis on the fact that the respondent/assessee has not produced his books of accounts during the search carried out at its registered office or thereafter in the post-search proceedings, what was lost sight of was that the AO issued the show cause notice for precisely this reason.
(v) Inadequacy of the enquiry conducted by an AO as against no enquiry cannot form a basis for setting aside an assessment order. In such cases, the PCIT should conduct an enquiry and after that return unambiguous findings in the matter. In the instant case, the PCIT, without conducting an enquiry, has remanded the matter for passing a fresh assessment order, disregarding the fact that an enquiry had been conducted by the AO while passing the original assessment order dated 30.12.2016. Therefore, the order dated 11.10.2017 cannot be sustained in law. [See ITO v. DG Housing Projects Ltd., [2012] 343 ITR 329 (Delhi); Director of Income Tax v. Jyoti Foundation, [2013] 357 ITR 388 (Delhi); Commissioner of Income Tax – XIII v. Ashish Rajpal, [2010] 320 ITR 674 (Delhi) and Commissioner of Income Tax v. Hero Auto Ltd., 343 ITR 342 (Delhi)] appreciate that all the transactions were entered into by the respondent/assessee with its customers in the ordinary course of business. Since the respondent/assessee had sold gold items, the weight of such items was also more or less similar, and therefore, not much variation could be found in the invoices. The conclusion arrived at by the PCIT that something was amiss was not founded on any material or evidence. The PCIT, without basis, overlooked the explanation given and the material/evidence tendered before the AO in support of the respondent’s/assessee’s explanation concerning cash sales.
(vi) Merely because the original assessment order does not advert to the queries raised by the AO and the responses given by the respondent/assessee, it would not lead to the conclusion that no enquiry was conducted by the AO while passing the assessment order. [See Commissioner of Income Tax -XIII v. Ashish Rajpal; Commissioner of Income Tax v. Gabriel India Ltd., [1993] 203 ITR 108 (Bom.);Commissioner of Income Tax v. Kelvinator of India Ltd., [2002] 256 ITR 1 (Del.) {affirmed in [2010] 320 ITR 561 (SC)} and Oracle Systems Corporation v. Assistant Director of Income Tax, Circle 2(1), International Taxation, New Delhi, [2016] 380 ITR 232 (Delhi)]
(vii) Without prejudice to the aforesaid submissions, the AO took a possible view in the matter, and hence, the PCIT could not have exercised the powers conferred upon him under Section 263 of the Act, only for the reason that he had a different view or perspective in the matter. [See Malabar Industrial Co. Ltd. case and CIT v. Max India Ltd., (2007) 295 ITR 282 (SC)]
Reasons and Analysis:
21. Having heard the learned counsel for the parties and perused the record, the issue at hand boils down to whether or not the AO, before passing the original assessment order dated 30.12.2016, had made inquiries concerning the cash deposits made by the respondent/assessee in the subject bank accounts maintained with Axis Bank and Kotak Mahindra Bank. The sum deposited in Axis Bank was Rs. 2.03 crores, while in Kotak Mahindra Bank Ltd., cash amounting to Rs. 1.30 crores was deposited.
21.1 The clue to this issue is contained in the order sheets, the questionnaire dated 19.12.2016, and the response dated 23.12.2016submitted by the respondent/assessee, qua the said questionnaire. 21.2 For convenience, the orders passed by the AO during the assessment proceedings are set forth hereafter, as they provide a pen picture of how the assessment proceedings were conducted.
“01.06.2016 Notice u/s 142(1) alongwith questionnaire issued and fixed the case for hearing on 09.06.2016.
09.06.2016 The assessee vide letter dated 09.06.2016 furnish Power of Attorney and requested for adjournment.
25.07.2016 Notice u/s 142(1) of the Income Tax Act, 1961 issued and fixed the case for hearing on 08.08.2016.
08.08.2016 The assessee vide letter dated 27.07.2016, received in this office on 08.08.2016 furnish part details, placed on record.
01.09.2016 Notice u/s 143(2) and 142(1) alongwith questionnaire issued and fixed the case for hearing on 16.09.2016.
07.10.2016 Show-cause notice u/s 271(1)(b) of the Act issued for non-compliance of notice u/s 142(1) of the Act.
02.12.2016 Suraj Garg, CA & AR of the assessee company attended & submit the details/reply as per questionnaire dated 01.06.2016. The details have been examined & discussed with him. He is asked to submit details as per questionnaire dated 01.09.2016.
09.12.2016 Suraj Garg, CA of the assessee attended & submit that details as per this [illegible] questionnaire dated 01.09.2016. The details have been examined & discussed with him.
13.12.2016/14.12.2016 Notice u/s 133(6) of the IT Act issued to debtor and creditor of the assessee.
16.12.2016 Reply in respect of notice u/s 133(6) received [illegible] parties.
19.12.2016 Suraj Garg, CA attended & submit details in response to questionnaire dated 01.09.2016 of this office. The details have been examined & placed on record.
19.12.2016 Notice u/s 142(1) of the Act alongwith letter dated
19.12.2016 wherein assessee was asked to give reply in respect of cash deposits in Axis Bank of Rs.1.94 Cr. & Kotak Mahindra Bank of Rs.1.30 Cr. by 23.12.2016.
23.12.2016 Suraj Garg, CA attended & submit the details in response to cash deposit Rs.1.94 Cr. in Axis Bank & Rs.1.30 Cr. in Kotak Mahindra Bank.
30.12.2016 Order passed u/s 153A r.w.s. 143(3) of the IT Act. ”
21.3 Likewise, the relevant part of the questionnaire and the response dated 19.12.2016 and 23.12.2016, respectively are extracted hereafter:
Extract from the questionnaire dated 19.12.2016
“In connection with the above mentioned assessment proceedings you are required to furnish the following details in addition to the details/information already called for :-
On perusal of the bank statement for the financial year 2012-13 relevant to the above mentioned assessment year, it is noticed that heavy cash deposits amounting to Rs 3.24 crore have been made in the bank accounts maintained with Axis Bank and Kotak Mahindra Bank as mentioned below:-
