ITAT held revision u/s 263 could not address issues beyond limited scrutiny under CASS

Avinash Chalana and Company Vs PCIT (ITAT Indore)

Conclusion: An issue which was not a point in limited scrutiny under CASS could not be taken up in the proceeding u/s 263 as an appropriate remedy for such an issue was either the AO would have obtained the approval of the competent authority for expanding the limited scrutiny to the full scrutiny or the remedy if possible available u/s 147/148.

Held: Assessee-partnership firm had filed its income tax return declaring income. The case was selected for limited scrutiny, focusing on the issues such as investment in immovable property and share capital/other capital. The assessment was completed under sections 143(3) read with 143(3A) and 143(3B) of the Act. CIT later found that some issues were not reviewed by AO. Therefore, CIT initiated proceedings under section 263 and issued show cause notices. Since the assessee did not respond, CIT canceled the AO’s assessment order and ordered a new assessment, giving the assessee a chance to be heard. Assessee being aggrieved by the impugned order filed an appeal before the tribunal. Tribunal noted that assessee had filed its return of income ( ROI ) which was selected for limited scrutiny under the Computer Assisted Scrutiny Selection ( CASS ) and e-assessment scheme 2019. AO had mentioned the issues taken up for limited scrutiny. Further, it noted that assessee had clarified that its partners, who were regular taxpayers, provided returns, bank statements, and capital account details. The capital introduced into the firm mainly came from the sale of shares in M/s Som Distilleries and Breweries Ltd., which was confirmed by the partners’ Dmat accounts. AO was satisfied with this evidence, including the partners’ returns and the exempt long-term capital gains. No new evidence was presented by the AO or CIT to dispute the authenticity of the transactions. It was observed that CIT passed an ex-parte order without considering the assessee’s replies to the notices issued, including a response dated 13.02.2023 and another dated 21.02.2023. AO had conducted a thorough inquiry into the introduction of capital by the partners and was satisfied with the transactions. When AO had thoroughly examined and accepted the assessee’s claim regarding the introduction of capital by the partners, it reflected a logical and reasonable conclusion. Therefore, the case did not fall under the lack of inquiry by the AO. Consequently, CIT could not invoke section 263 merely because he disagrees with the AO’s view. Once the assessee had provided adequate evidence for the partners’ identity, creditworthiness, and transaction genuineness, and no defects were found by AO or Pr. CIT, setting aside the assessment under section 263 and ordering a fresh assessment was not legally justified and should be quashed. An issue not part of the limited scrutiny under CASS could not be raised in section 263 proceedings. The correct steps would have been for AO to expand the scrutiny or use sections 147/148. Thus, CIT order was not valid and was set aside.

FULL TEXT OF THE ORDER OF ITAT INDORE

This appeal by assessee is directed against the revision order dated 27.03.2023 of the Pr. Commissioner of Income Tax, Bhopal for A.Y.2018-19. The assesse has raised following grounds of appeal:

“1.That on the facts and in the circumstances of the case and in law the order of the Ld. PCIT-1 is bad in law and without jurisdiction.

2. That on the facts and in the circumstances of the case and in law the findings of the Ld.PCIT-1 in para 3 of the order that none attended and no submission were uploaded are wholly unjustified and opposed to facts and such findings be quashed and it be held that the submissions were duly submitted by e­mail.

3. That on the facts and in the circumstances of the case and in law the findings of the Ld. PCIT that the assessment order has been passed without making enquiries and without the application of mind are wholly wrong and opposed to facts and therefore such findings be quashed.

4. That on the facts and in the circumstances of the case and in law it be held that the order of assessment passed by the A.O. On 29/09/2018 u/s 143(3) is not erroneous and not prejudicial to the interest of revenue and therefore the order passed by the Ld. PCIT is unsustainable in law and therefore the same be quashed.”

2. The assesse is a partnership firm and filed return of income on 29.09.2018 declaring total income of Rs.1,25,28,260/-. The case of the assesse was selected for limited scrutiny under e-assessment scheme 2019 on the issues; (i) investment in immovable property and (ii) share capital/other capital. The assessment was completed u/s 143(3) r.w. section 143(3A) & 143(3B) of the Act on 11.02.2021. Subsequently, on examining assessment record the Pr. CIT found that certain aspect of the case were not examined by the AO during the assessment proceedings and therefore, order passed by the AO was erroneous in so far as it was prejudicial to the interest of revenue. The Pr. CIT initiated the proceedings u/s 263 by issuing show cause notice dated 03.02.2023, reminder dated 16.02.2023 & 27.02.2023. The Pr. CIT has taken up two issues for revising the assessment order and stated in the impugned order that there was no response on behalf of the assessee to the three notices issued on 03.02.2023, 16.02.2023 & 27.02.2023 and consequently the impugned order was passed ex-parte whereby the order of the AO has been cancelled with the direction that the AO shall pass assessment order denovo after affording reasonable opportunity of being heard to the assessee. Aggrieved by the impugned order the assessee has filed present appeal.

3. At the outset, Ld. Sr. counsel has submitted that the Pr. CIT has taken up two issues in show cause notice i.e. introduction of capital by the partners to the tune of Rs.40,66,06,744/- and secondly, the investment of Rs.59,17,31,446/- by various persons/entities. He has pointed out that only the first issue regarding the capital introduced by the partners of the assessee firm was subject matter of limited scrutiny under E-assessment scheme 2019. Ld. Sr. counsel has submitted that this issue was very much examined by the AO and only after conducting a proper inquiry the AO was satisfied with the transactions of capital introduced by the five partners of the assessee firm while completing scrutiny assessment. He took us to para 4 to 6 of the assessment order to manifest that the AO issued show cause notice u/s 142(1) dated 09.11.2020 which is placed at page no.20 & 21 of the paper book wherein the AO has raised specific query under question no.9 of the Annexure to show cause notice u/s 142(1) and asked the assessee to provide the details such as the additional capital introduced during the year and source for the same with documentary evidence. The assessee duly replied the show cause notice dated 09.11.2020 vide reply dated 09.01.2021 along with relevant supporting evidence placed at page no.22 to 71 of the paper book. He has referred to the supporting evidence comprising of computation of income, return of income, bank account statement etc. of partners along with confirmation of the partners of the assessee firm. Thus, Ld. Sr. counsel has contended that the AO has conducted due inquiry on this issue and after considering reply and supporting evidences filed by the assessee the AO was satisfied with the transactions of capital introduced by the partners during the year and then passed the assessment order u/s 143 r.w. section 143(3A) & 143(3B) of the Act. He has then referred to the show cause notice issued by the Pr. CIT u/s 263 on 03.02.2023 placed at page no.76 & 77 of the paper book and submitted in para 2 of the show cause notice the Pr. CIT has raised this issue of capital introduced by the partners whereas in para 3 of the said show cause notice another issue was taken up but the same was not a point of limited scrutiny. The ld. Sr. counsel then referred to the para 3 of the impugned order and submitted that the Pr. CIT has stated that no reply was filed by the assessee to the show cause notice and other notices issued to the assessee but this observation and statement of the Pr. CIT is contrary to the record as the assessee duly filed reply dated 13.02.2023 through e-mail placed at page no.78 & 79 of the paper book. He has then referred to the notice dated 17.02.2023 at page no.80 to 82 of the paper book and reply of the assessee dated 21.02.2023 at page no.83 & 84 of the paper book. Thus, ld. Sr. counsel has submitted that the assessee has duly responded to the each of the notices issued by the Pr. CIT but it appear that the impugned order was passed without considering the replies filed by the assesse. He has contended that this is a case of non-application of mind and proceeding in a mechanical manner by the Pr. CIT while passing the impugned order which is liable to quashed. Ld. Sr. counsel then submitted that even otherwise the AO conducted a due inquiry on the issue of genuineness of the capital introduced by the partners of the assesse firm and then taken a view after considering reply and evidences produced by the assessee. Therefore, the Pr. CIT cannot be allowed to invoke the jurisdiction u/s 263 and asked the AO to do denovo assessment when the issue was already taken up by the AO in the scrutiny assessment . In support of his contention he has relied upon the following decisions:

(i) CIT vs. Metachem Industreis 116 taxman 572

(ii) Kesharwani Sheetalaya Sahsaon vs. CIT 116 com 382

(iii) Maa Narmada Agrotech and infrastructure Ltd. v. PCIT

(iv) Aabhushan dhamnod vs. ITO, Dhar in ITANo.344/Ind/2023

4 Ld. Sr. counsel submitted that the evidence produced by the assessee establish the capacity of the partners to introduce the capital. The main source of capital introduced by the partners is sale of shares held by them in M/s Som Distilleries and Breweries Ltd. a listed company and the long capital gain arising from the sale of shares of the listed company is exempt from tax u/s 10(38) of the Act. Therefore, the observation of the Pr. CIT of low return income by the partners is contrary to the fact and record as long term capital was duly declared in the return of income of the partners. He then referred to the return of income and other relevant evidence proving the availability of the funds in the hands of the partners placed at page no.1 to 164 of the paper book-II. Ld. Sr. counsel has submitted that all the relevant documents establish that the transactions of sale of shares and other funds available with the partners duly disclosed in the return of income, computation of income and balance sheet filed along with return of income. He has then referred to the loan confirmations for the loan taken by the partners along with bank account statement, Dmat account of the partners to show the sale of shares and availability of the funds in the hands of the partners sufficient to transfer to the assessee firm as capital contribution by each of the partners. Therefore, once the assessee establish the capacity of the partners and genuineness of transactions of capital introduction with supporting evidence then the order passed by the Pr. CIT is not sustainable in law and liable to be quashed on this ground itself.

5. On the second issue take up by the Pr. CIT Ld. Sr. counsel has submitted that this was beyond the scope of limited scrutiny and therefore, the question of conducting any inquiry by the AO or production of evidences by the assessee does not arise. In support of his contention he has relied upon decision of this Tribunal in case of S.R. Ferro Alloys vs. Pr. CIT in ITANo.148/Ind/2021 dated 09.11.2023 and submitted that when an issue was not part of the limited scrutiny taken up under CASS the order of the AO cannot be held as erroneous for not conducting an inquiry on such issue.

6. On the other hand, Ld. DR has submitted that the AO has not referred to any evidence furnished by assessee in support of claim of introduction for capital by the partners and therefore, it is a case of improper inquiry on the part of the AO. He has further submitted that the assessee has not submitted any supporting evidence even before the Pr. CIT and the confirmation of loan creditors to the partners is very vague without giving any details of PAN etc. Thus, the Ld. DR has submitted that the evidence now referred by the ld. Sr. counsel of the assessee required a proper verification and examination at the level of the AO and to that extent the Pr. CIT is justified in directing the AO for denovo assessment after conducting a proper inquiry on the issues taken up in the proceedings u/s 263 of the Act. He has relied upon the impugned order of the Pr. CIT.

7. In rejoinder Ld. Sr. counsel has submitted that documents have been filed by the assessee as per directions of this tribunal vide order dated 8^th May 2024 and further most of the documents filed by the assesse are independent evidence like income tax return, bank account statement, Dmat account statement of the partners which are maintained by the statutory authorities and cannot be questioned. He has further submitted that these documents were filed as per directions of the Tribunal and to take extra precaution not otherwise required under law.

8. We have considered rival submissions as well as relevant material on record. The assessee filed its return of income on 29.09.2018 which was taken up for limited scrutiny under CASS and e-assessment scheme 2019. The AO has mentioned the issues taken up for limited scrutiny in para 3 as under:

“The return of income fled by the assesse for the assessment year 2018-19 was selected for scrutiny through CASS for complete scrutiny to verify the following issues:

i. Investment in immovable property

ii. Share capital/other capital”

8.1 The AO issued notice u/s 142(1) dated 09.11.2020 as under:

“Dear Taxpayer,

Kindly refer to notice u/s 143(2) of the Income-tax Act, dated 22/09/2019 for A.Y 2018-19 for conducting assessment proceedings under E-assessment Scheme, 2019.

2. We appreciate the anxiety and uncertainty that is facing all of us in the limes of Covid-19. This communication is to assist you in ending one uncertainty, which is pending e-Assessment in your case for the Assessment Year 2018-19.

3. You are requested and required to kindly furnish or cause to be furnished on or before 24/11/2020 by 11:00 AM, the accounts and documents specified in the Annexure to this notice.

4. The accounts or documents, as mentioned above, are required to be submitted online electronically in ‘E- proceedings’ facility through your account in e-Filing website (www.incometaxindiaefiling.gov.in)

Yours faithfully,

Additional / Joint/Deputy/Assistant Commissioner of Income Tax, National e-Assessment Centre, Delhi

ANNEXURE

1. Please refer to the pending scrutiny assessment proceedings in your case for the assessment year 2018-19. In continuation to the same and further to the notice issued u/s 143(2) of the Income Tax Act 1961, you are requested to furnish as detailed below.

1. Detailed computation of income for assessment year under consideration.

2. Please provide following details regarding property(ies) purchased during the year.

3. Address of the property| Date of purchase | Purchase consideration | Stamp value | Details of owners and Share of each owner | Address of sub-registrar office | Payment schedule including date and mode of payment.

4. Please provide copies of complete set of sale/purchase deed(s) of the properties purchased by you during the year.

5. Whether the excess of stamp duty value over purchase consideration has been shown in Schedule OS or any other relevant section and if yes, please provide the computation of amount shown in schedule OS or any other relevant section as income being excess of Stamp Value over Purchase Consideration.

6. Provide reasons as to why the entire excess of stamp duty value over purchase consideration has not been shown in Schedule OS u/s 56(2) or any other relevant section.

7. Copy(ies) of bank statement(s) of the bank accounts highlighting the payments made in respect of property(ies) purchased during the year.

8. Whether TDS @ 1% in respect of property purchase transaction has been deducted by you. If yes, please furnish copy of form 26QB and Form 16B.

Also, please provide the details such as the additional capital introduced during the year and sources for the same with documentary evidences.

Yours faithfully.

Additional/Joint/Deputy/Assistant Commissioner of Income Tax/ Income-tax Officer,

National e-Assessment Centre,
Delhi

8.2 Question no.9 was raised specifically on the issue of additional capital introduced during the year under consideration and the source of the same with documentary evidences. The assessee filed its reply dated 09.11.2020 placed at page no.22 & 23 of the paper book and the relevant part of the reply to Question no.9 is as under:

“9. Details of additional capital introduced during the year by partners are enclosed and in support of credit worthiness and genuineness of transactions it is submitted that the assessee is a partnership firm constituted on 08/04/2004. The first year of the business of the firm was A.Y. 2005-06 and since then it is being regularly assessed to tax. The partners of the firm are old income tax assessee and the are also regularly assessed to tax independently having their own Pan. For the subject year also, the said partners had filed their own tax returns. The copies of the acknowledgement of their returns are attached. The assessee submits that all the partners have introduced the capital during the year by cheque payments / banking channels. The copy of partners confirmation letter are enclosed herewith along with partners capital account.”

8.3 In this reply the assessee explained that the partners of the firm are old income tax assessees who are regularly assessed to tax independently. The assessee filed copies of acknowledgement of return of income filed by the partners, details of the payment through banking channels, copies of confirmation letters of the partners with capital account. Thus, the assessee discharged its primary onus to identify the partners with PAN and return of income and bank account statement and their capital account to show the capacity of the partners and genuineness of the transactions. Once the partners have confirmed the introduction of capital in the partnership firm and also disclosed the source of the said amount transferred to the assessee then it is a subject matter of scrutiny in their individual assessment proceedings of the partners. It is pertinent to note that the major source of the fund which is introduced as capital in the assessee firm by the partners is the sale of shares of M/s Som Distilleries and Breweries Ltd. hold by the partners. As per the direction of the Bench the assesse filed the copies of Dmat account of the partners. This fact of holding of the shares and sale of the shares of M/s Som Distilleries and Breweries Ltd. cannot be question as all these details are available in the Dmat account of the partners maintained by the Central Depository Services Ltd. The AO was satisfied with the reply and supporting evidence filed by the assessee which includes the return of income of the partners declaring source of sale of shares of M/s Som Distilleries and Breweries Ltd. and long term capital gain from sale of shares of listed company was claimed as exempt from tax u/s 10(38) of the Act. Therefore, even otherwise all these facts were already available with the department as part of the return of income of the partners and assesse has filed Dmat account of the partners as per the directions of this Bench to verify whether the transactions declared by these partners in the return of income are matched with the Dmat account or not. Therefore, the objection raised by the Ld. DR against filing of these records by the assessee is devoid for any merits. Further the transactions of loan taken by the partners to Finance the part of the capital introduced was also part of the books of account of the partners and subject matter of their individual assessment. Neither the AO nor the Pr. CIT has brought any material on record to contradict the claim of the assessee or to doubt the genuineness of the transactions. The Pr. CIT has issued show cause notice u/s 263 on 03.02.2023, as under:

“To

Avinash Chalana and Company

G-2/119-A, Milestone 100 Complex,

Trianga Road, Gulmohar Colony, Bhopal (M.P.)

[PAN: AALFA4929P]

Sub: -Notice u/s 263 of Income-tax Act for AY 2018-19-Show Cause-reg.

1. It is seen from case records that you have filed return of income for AY 2018-19 on 29/09/2018 declaring total income of Rs. 1,25,28,260/- and the same was assessed u/s 143(3) of the Income Tax Act, 1961 on 11/02/2021 accepting return income.

2. On perusal of the case record, it is observed that partners capital depicted amounted to Rs 63,10,24,142.06/- for the year ending on march, 2018 and Rs 22,44, 17,397 28/- for the year ending on march, 2017. Thus, there was a massive increase in capital amounting to Rs 40,66,06,744/- during the AY 2018-19. On being asked to prove the genuineness of the increase in capital, the assessee provided the confirmation and ITR acknowledgement of parties who had introduced capital. However, their returned income is very low as compared to the investment in capital. Thus, assessee failed to prove the creditworthiness and genuineness of the transactions made by the parties.

3 It was found that an amount of Rs 59,17,31.446/-had been invested in the year by various persons/entities. Bank account statements of the parties and other substantiating documents were not furnished to prove the creditworthiness and genuineness of the amount invested by the parties. Thus, income to the tune of Rs 59,17,31,446/- was not properly inquired by the FAO.

4. Considering the above facts, the AO has failed to look into the matter as required in Explanation 2, of section 263. Hence, the assessment order passed u/s 143(3) of the IT Act, 1961 on 11.02.2021 for the A.Y. 2018-19, is erroneous in so far as it is prejudicial to the interest of revenue.

5.Therefore, in exercise of the powers conferred on me by section 263 of the Act, I propose to suitably revise the order u/s 263, which may include setting aside the order as such. Accordingly, an opportunity of being heard is extended to you to explain your case along with details, documents and necessary evidences Absence of any submission or reply shall lead to the conclusion that you have no objection for the proposed action, and the proceedings shall be finalized accordingly.

6. Therefore, you are hereby given an opportunity to make submission through e-mail id mentioned above or in person or through an authorized representative on or before 13.02.2023 at 12:30 PM to explain your case.”

8.4 In the impugned order the Pr. CIT has stated in para 3 & 3.2 as under:

“3. In the instant case the e-notice under section 263 of the Income Tax Act, 1961, dated on 03.02.2023, 16.02.2023 & 27.02.2023, wherein the case was fixed for hearing on 13.02.2023, 23.02.2023 & 03.03.2023, was sent on the address available on the e-portal being last known/last updated / latest available address in the data base of the department of the assessee, as envisioned in the provisions of Rule 127 of the Income Tax Rules, 1962. According to the track report, the said e-notice were delivered to the assessee. Notice was also sent via Speed Post and was duly served on assessee on 02/03/2023 [E1312266595ΙΝ]. However, non-attended on the date(s) of hearing and no submissions were filed/uploaded/emailed. Also, no further request for adjournment was made through personal appearance /telephone/email.

3.1 There has been no compliance on part of the assessee to give detailed explanation regarding the issue taken up for revision u/s 263 for A.Y. 2018-19. It clearly shows that the assessee has no explanation in the matter. It is undisputed that the notices were duly served on the assessee. The action of assessee of not availing the opportunity provided can be said to be “vigilantibus non dormientibus jura subveniunt” which means law will help only those who are vigilant. Law will not assist those who are careless of their rights.

3.2 Accordingly, it is held that the assessee has no evidence/submissions to make with regard to the issues raised, as there is nothing in possession of the assessee to controvert the issues raised in show cause notices u/s 263. Accordingly, I proceed with my findings on the basis of information/facts available on record.”

8.5 Thus, the Pr. CIT has proceeded to pass impugned order ex-parte on the premises that the assesse has not responded to the notices issued by it. However, we find that the assessee has filed the reply to the show cause notice vide letter dated 13.02.2023 through e-mail placed at page no.78 as under:

6 Thus, it shows that the assesse filed a reply dated 13.02.2023 as an attachment with mail of 222KB. pdf. Thereafter the Pr. CIT again issued a notice dated 17.02.2023 which was also replied by the assesse vide reply dated 21.02.2023 placed at page no.83 & 84 as under:

“Sir,

It is submitted that the proceedings as initiated by your honour are not lawful. The Explanation -2 to Section 263 is not applicable in this case because the assessment was made after making the enquiries on the issue of the Share Capital introduced by the partners during the year. The assessee in the course of assessment proceedings the partners of the firm submitted confirmation letter and the copy of their Income Tax Returns. The partners have also stated that they are regular tax assessees for last several years and given their Permanent Account Number. The partners in their tax returns have shown their taxable income and exempted income. The Ló. A.O. aiso in his assessment order also mentioned that the introduction of the capital by the partners have been explained with relevant particulars with documentary evidences and accordingly in the assessinent the A.O. considering the reply and evidences furnished accepted the introduction of the capital by the partners.

In view of the above it is submitted that the provision of Section 263 are not applicable because the assessment was completed after making enquiries on the issues raised by your honour. The order of assessment passed by the NFAC, Delhi is not erroneous and prejudicial to the interest of revenue, kindly therefore dropped the proceedings.”

8.7 It is matter of record that the assesse duly replied the notices issued by the Pr. CIT however, the impugned order has been passed by the Pr. CIT without considering these replies but on the premises that the assessee did not file any reply to show cause notice issued by it. So far as the issue of introduction of capital by the partners it is evident from the record that the AO has conducted a due inquiry and after considering reply and relevant supporting evidence filed by the assessee the AO was satisfied with the transactions of introduction of capital by the partners. Therefore, it is not a case of lack of inquiry on the part of the AO so far as the issue of introduction of capital by the partners is concerned. Further the issue of addition in the hands of the assesse-firm on account of capital introduced by the partners is otherwise settled in the favour of the assessee by various decisions as relied upon by the assessee including the judgment of Hon’ble Jurisdictional MP High court in case of CIT vs. Metachem Industries (supra) in para 3 to 6 as under:

“4. We have heard learned counsel for the parties. Section 68 of the Act of 1961 says that where any sum is found credited in the books of an assessee maintained for any previous year, and the assessee offers no explanation about the nature and source thereof or the explanation offered by him is not, in the opinion of the Income-tax Officer, satisfactory, the sum so credited may be charged to income-tax as the income of the assessee of that previous year. Therefore, according to Section 68, the first burden is on the assessee to satisfactorily explain the credit entry in the books of account of the previous year. If the explanation given by the assessee is satisfactory, then that entry will not be charged with the income of the previous year of the assessee. In case the explanation offered by the assessee is not satisfactory or the source offered by the assessee-firm is not satisfactory, then in that case, the amount should be taken to be the income of the assessee. In the present case, the Assessing Officer did not feel satisfied with the explanation given by the assessee and accordingly assessed all the three credit entries to the account of the assessee as the income.

5. On appeal, the Commissioner of Income-tax (Appeals) examined the matter in detail and found that Shri S. K. Gupta was the real owner of the business. The explanation given by the assessee was found to be satisfactory and he deleted the aforesaid three entries. The same finding of fact has been affirmed by the Tribunal. Once it is established that the amount has been invested by a particular person, be he a partner or an individual, then the responsibility of the assessee-firm is over. The assessee-firm cannot ask that person who makes investment whether the money invested is properly taxed or not. The assessee is only to explain that this investment has been made by the particular individual and it is the responsibility of that individual to account for the investment made by him. If that person owns that entry, then the burden of the assessee-firm is discharged. It is open to the Assessing Officer to undertake further investigation with regard to that individual who has deposited this amount.

6. So far as the responsibility of the assessee is concerned, it is satisfactorily discharged. Whether that person is an income-tax payer or not or from where he has brought this money is not the responsibility of the firm. The moment the firm gives a satisfactory explanation and produces the person who has deposited the amount, then the burden of the firm is discharged and in that case that credit entry cannot be treated to be the income of the firm for the purposes of income-tax. It is open to the Assessing Officer to take appropriate action under Section 69 of the Act, against the person who has not been able to explain the investment. In the present case, there is the concurrent finding of both the Commissioner of Income-tax (Appeals) as well as of the Tribunal that the firm has satisfactorily explained the aforesaid entries.”

8.8 Thus, the AO has taken a possible view and rather a correct view for not making any addition in the hands of the assesse on account of capital introduced by the partners. Hence, the Pr. CIT cannot be allowed to invoke the provisions of section 263 when the AO has already conducted an inquiry and taken a possible view on this issue. Similarly in case of Kesharwani Sheetalaya Sahsaon vs. CIT(supra) the Hon’ble Allahabad High Court in para 29 to 33 as under:

“29. The question as to whether in a case where money has come from a partner, addition, if any, has to be made in the hands of the partner or of the firm came up for consideration upon the reference under Section 256(1) of the Act in the case of Commissioner of Income Tax v Kishorilal Santoshilal13, and referring to the language used under Section 68 and various authorities on the point it was held that in this regard the following points are required to be noted:-

“On the basis of the language used under section 68 and the various decisions of different High Courts and the apex court, the only conclusion which could be arrived at is :

(i) that there is no distinction between the cash credit entry existing in the books of the firm whether it is of a partner or of a third party,

(ii) that the burden to prove the identity, capacity and genuineness has to be on the assessee,

(iii) if the cash credit is not satisfactorily explained the Income-tax Officer is justified to treat it as income from “undisclosed sources”,

(iv) the firm has to establish that the amount was actually given by the lender,

(v) the genuineness and regularity in the maintenance of the account has to be taken into consideration by the taxing authorities,

(vi) if the explanation is not supported by any documentary or other evidence, then the deeming fiction credited by section 68 can be invoked.”

30. It is therefore seen that in a case where a sum is credited in the books of account of a firm from a partner, the assessee firm could discharge its onus by proving three things: (i) identity of the creditor; (ii) creditworthiness of the creditor; and (iii) genuineness of transaction in question. Once the assessee proves all the three things its onus is discharged. It has also been consistently held that the assessee only needs to prove the source of credit entries and he is not required to prove the source of the source or the creditors’ credit.

31. In a case where the integrity of the creditors is established and the entries are shown to be not fictitious, the burden would shift on the Revenue.

32. In the case at hand, the partners have shown the agricultural income in their personal returns of the past years which had been accepted by the department as such. The partners are all identifiable and separately assessed to tax. The source of investment having been explained, in the event the Assessing Officer was not satisfied the addition could have been considered in the hands of the partners and not in the hands of the firm. The burden of proving the source of the credits having been sufficiently explained the addition could not have been made in the hands of the firm in the facts of the present case.

33. In view of the aforementioned facts and circumstances the questions of law are answered in favour of the assessee and against the Revenue.”

8.9 Therefore, when this issue of introduction of capital by the partners has been duly examined by the AO and accepted the claim of the assessee which is a logical and possible view taken by the AO then the case does not falls in the ambit of lack of inquiry on the part of the AO and consequently the Pr. CIT is not permitted to invoke the provisions of section 263 merely because he does not agree with the view of the AO. This tribunal in case of Maa Narmada Agrotech and Infrastructure Ltd. vs. PCIT (supra) has considered an identical issue in para 9 to 13 as under:

“9. We have considered the rival submissions as well as relevant material on record. The Pr. CIT issued show cause notice u/s 263 on 25.02.2022 and passed the impugned order on 15.03.2022. The assessee was given only seven days to file the reply to the show cause notice. In compliance to the show cause notice the assessee filed reply and also requested the Pr. CIT to allow the assessee to produce the voluminous record in the physical form but due to paucity of time as the limitation was gone to expire on 31.03.2022 the Pr. CIT passed the impugned order without considering the explanation and replied filed by the assessee whereby the assessment order was set aside and matter was remanded for de novo assessment. Therefore, at the outset it appears to be a case of violation of principal of natural justice. The issue taken up by the Pr. CIT in the show cause notice are reproduced in the impugned order in para 2 as under:

“xxxxxxxxxxxxx”

10. Therefore, various points were raised by the Pr. CIT in the show cause notice but the show cause notice was issued at the fage end of the limitation period to pass the revision order u/s 263 of the Act. The sole ground for setting aside the order passed by the AO is lack of inquiry on the part of the AO in respect of these issues. However, we find that the AO issued show cause notice u/s 142(1) and specifically asked the assessee to furnish details and evidence in respect of these issues as taken up by the Pr. CIT while invoking provision of section 263 of the Act. For ready reference we reproduced the notice issued by the AO u/s 142(1) dated 06.12.2019 along with annexures as well as notice dated 24.12.2019 as under:

11. As it is apparent from the annexures to show cause notice issued by the AO u/s 142(1) that the AO issued a detailed questionnaire to the assessee for providing the necessary details, record and evidence. The AO even given a specific format in respect of each details to be provided by assessee which covered all these issues as raised by the Pr. CIT in the show cause notice issued u/s 263 of the Act. The assessee duly complied with the show cause notice issued by the AO by filing to detail reply along with relevant details and documents which runs into 100 of the pages, therefore, for the sake of brevity we are not reproduced the reply and documents filed by the assessee before the AO. However, on-going through the reply filed by the assessee it is manifest that the assessee has given all these details and explanation as sought by the AO in the show cause notice issued u/s 142(1) of the Act. The AO even issued a second show cause notice dated 22.12.2019 asking the details regarding unsecured loans along with explanation in respect of disallowance u/s 14A r.w. Rule 8D. Finally the AO has made disallowance only u/s 14A and no disallowance or addition was made in respect of the other issues as raised in the show cause notice issued u/s 142(1) of the Act. Thus, it is clear that the AO has conducted an inquiry on these issues and was satisfied with the reply and explanation filed by the assessee along with supporting evidence. Hence it is not a case of complete lack of inquiry on the part of the AO while passing the assessment order and therefore, the assessment order cannot be held to be erroneous so far as the prejudicial to the interest of the revenue on the ground of lack of inquiry. Though the commissioner has jurisdiction to invoke the provision of section 263 even when the AO has conducted inquiry and taken a view but the said jurisdiction and power of commissioner is restricted only in the case, where the view taken by the AO is absolutely wrong and against provision of law. No such allegation has been made by the Pr. CIT in the impugned order that the view taken by the AO in allowing the claims and accepting the explanation of the assessee is absolutely not permissible under the law. Even otherwise we find that the assessee has duly explained discrepancies in the total receipts declared by the assessee in comparison to the receipts appearing in form 26AS and explained the reasons with supporting evidence that the said difference is due to the time difference in recognizing the revenue by the assessee and booking of expenditure by the contractee. It is matter of record that the assessee filed the reconciliation before the AO as well as before the Pr. CIT. Therefore, it was incumbent upon the Pr. CIT to verify the details produced by the assessee as well as reconciliation of difference in the receipts and to give a finding about the correctness of the claim of the assessee. The assessee has given the relevant details and explained difference of Rs.1.97 cr being the income already declared by the assessee in the preceding year with the supporting bills and TDS which was deducted by the payee in the preceding year as well as for the year under consideration. Therefore, if the TDS details for two years are taken into consideration it goes to prove that only because of the difference of time in deducting the TDS by contractee the discrepancies appears in respect of the receipts as shown in the form 26AS and turnover declared by the assessee. All these details were produced by the AO and this is a recurring issue as already examined before the AO in the preceding assessment years. The AO did not feel any need to give an elaborate finding on this issue. The assessee has produced copies of the assessment order passed u/s 143(3) for A.Ys.2014-15 & 2015-16 wherein an identical issue was considered by the AO and after examining of the record and explanation of the assessee the AO accepted the claim of the assessee. Once it is a recurring issue and already examined in the preceding years and AO has duly conducted an inquiry by issuing show cause notice u/s 142(1) which was duly replied by the assessee with relevant record then the AO was not expected to give an elaborate finding on this issue. Similarly on the other issues when the AO has issued show cause notice and the assessee produced relevant details and supporting evidence in respect of the expenses incurred which were subjected to TDS wherever applicable and the extra expenditure was incurred for the year was specifically explained by the assessee giving the specific reasons of consumption of electricity in development of site in the remote rural area as well as the expenditure incurred on acquiring equipment of machinery require for carrying out construction work. All these details were available with the AO as filed by the assessee, therefore, this case is certainly does not fall in the category of lack of inquiry on the part of the Assessing Officer. Coordinate Bench of this Tribunal in case of Rakesh Khandelwal vs. Pr. CIT (Supra) while considering an identical issue has held as under:

“8. Therefore, it is not the case where there was no enquiry at all by the A.O. The assessee had furnished certain evidences, which the assessing officer has gone through. There is no dispute that the Ld. Principal CIT can exercise the revisionary jurisdiction u/s 263 of the Act. If he considers that any order passed by the A.O. is erroneous in so far as it is prejudicial to the interest of the revenue. Explanation (2) to section 263 of the Act further clarifies that an order passed by the A.O. shall be deemed to be erroneous in so far as it is prejudicial to the interest of the revenue, if in the opinion of the Principal Commissioner or Commissioner (a) the order is passed without making enquiries or verification which should have been made (b) the order is passed allowing any relief without enquiring into the claim (c) the order has not been made in accordance with the order, direction or instruction issued by the Board u/s 119 or (d) 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. In the present case, Principal CIT has revised the order on the ground that the A.O. has failed to make enquiries or verification, which should have been made. Ld. Principal CIT has not specified that what enquiries the A.O. has not made. There is no material suggesting that the Principal CIT has expressed his view about insufficiency of enquiry on the material placed on record. The issue regarding whether the assessment order is erroneous or prejudicial on the ground of insufficiency of enquiry has been dealt by the Hon’ble Delhi High Court in the judgement of ITO Vs. DG Housing Projects Ltd. (2012) 20 Taxmann.com 587, which has been followed by this Tribunal in various cases. Hon’ble High Court while adverting to the issue held that in cases of wrong opinion for finding on merit, the CIT has to come to the conclusion and himself decide that order is erroneous, by conducting necessary enquiry, if required and necessary before the order u/s 263 of the Act is passed. In such cases, the order of the A.O. will be erroneous because the order passed is not sustainable in law and the said finding must be recorded CIT cannot remand the matter to the assessing officer to decide whether the findings recorded are erroneous. In cases where there is inadequate enquiry but not lack of enquiry, again the CIT must give and record a finding that the order/enquiry made is erroneous. This can happen if an enquiry and verification is conducted by the CIT and he is able to establish and show the error or mistake made by the A.O. making the order unsustainable in law. In some cases, possibly though rarely, the CIT can also show and establish that the facts on record or inferences drawn from facts on record per se justified and mandated further enquiry or investigation but the A.O. had erroneously not undertaken the same. However, the said finding must be clear, unambiguous and not debatable.

The matter cannot be remitted for a fresh decision to the A.O. who conduct further enquiries without a finding that the order is erroneous finding that order is erroneous the condition or requirement which must be satisfied for exercise of jurisdiction u/s 263 of the Act. In such matters, to remand the matter/issue to the A.O. would imply and mean the CIT has not examined and decided whether or not the order is erroneous but has directed the A.O. to decide the aspect/question. The Hon’ble Court further held that this distinction must be kept in mind by the CIT while exercising jurisdiction u/s 263 of the Act and in the absence of the finding that the order is erroneous and prejudicial to the interest of revenue, exercise of jurisdiction under the said section is not sustainable. In most cases of alleged “inadequate investigation”, it will be difficult to hold that the order of the A.O., who had conducted enquiries and had acted as an investigator, is erroneous, without CIT conducting verification/enquiry.

The order of the A.O. may be or may not be wrong. CIT cannot direct reconsideration on this ground but only when the order is erroneous. An order of remit cannot be passed by the CIT to ask the A.O. to decide whether the order was erroneous. This is not permissible. An order is erroneous, unless the CIT held and records reason why it is erroneous.

An order will become erroneous because on remit, the A.O. may decide that order is erroneous. Therefore, CIT must after recording reasons, hold that order is erroneous the jurisdictional pre-condition stipulated is that CIT must come to the conclusion that the order is erroneous and is unsustainable in law. It was further observed that the material, which the CIT can rely includes not only the records as it stands at the time when the order in question was passed by the A.O. but also record as it stands at the time of the examination by the CIT. Nothing appears/prohibits CIT from collecting and relying new/additional material which evidence to show and state that the order of the A.O. is erroneous. We find that Ld.

CIT in the present case has not carried out any enquiry of his own has merely set aside the assessment to the file of the A.O. to re-examine issue of source of cash deposited by the assessee. Therefore, it is contrary to the guidelines as mandated in the Hon’ble Delhi High Court in the case of ITO Vs. DG Housing Projects Ltd. (supra) coupled with the fact that the assessee during the assessment proceedings had submitted evidences in support of sale of jewelleries and receipt of gift. Moreover, the issue of examination of source of gift was not subject matter of the scrutiny.

Therefore, the decision of the Ld. CIT invoking provisions of section 263 of the Act is not justified and cannot be sustained under the facts and circumstances of the present case. We therefore, set aside the impugned order and allow the grounds raised by the assessee.”

12. Once AO has conducted an inquiry which may be inadequate inquiry but in that case it cannot be said that the order passed by the AO is erroneous due to complete lack of inquiry. Once the AO has conducted an inquiry and taken a view which is not found to be impermissible view then the Pr. CIT is not permitted to invoke the provision of section 263 of the Act merely because he does not agree with the view of the AO. Similar view has been taken by the Jaipur Bench of the Tribunal in case of Smt. Lata Phulwani vs. Pr. CIT (supra) as under:

“5. We have considered the rival submissions as well as the relevant material on record. We have carefully perused the assessment order passed by the AO under section 143(3), show cause notice issued by the ld. PCIT under section 263 of the Act as well as the impugned order passed under section 263. It is manifest from the record that the case of the assessee was taken up for limited scrutiny as per the notice issued under section 143(2) dated 19.09.2016, the relevant part of the said notice listing the issues identified for examination are as under :-

” This is for your kind information that the return of income for Assessment Year 2015-16 filed vide ack. No. 134831180300316 on 30/03/2016 has been selected for Scrutiny. Following issues have been identified for examination :-

i. Purchase of Property

ii. Deduction claimed under the head Capital Gains

2. In view of the above, we would like to give you an opportunity to produce, or cause to be produced, any evidence which you feel is necessary in support of the said return of income on 26/09/2016 at 11:00 AM in the Office of the undersigned.”

Thus it is clear that the case was selected for limited scrutiny on the issue of purchase of property and deduction claimed under the head Capital Gains. Both these issues are inter-connected as the deduction under section 54F was claimed by the assessee in respect of purchase of property and construction of residential house on the said land. The AO, thereafter issued notice under section 142(1) dated 14.07.2017 along with a questionnaire. These facts are also evident from the assessment order in para 1 and 2 as under :-

” Thereafter, the case was transferred to the office of the undersigned from the ITO Ward 4(1) Jaipur on 26.05.2017 and due to change of incumbent of charges, notice u/s 142(1) along with questionnaire issued on 14.07.2017 fixing the case of hearing on 20.07.2017 which was duly served upon the assessee on 15.07.2017. In response thereto, the CA/AR of the assessee Sh. Ajay Jain attended the proceedings from time to time and furnished required details/documents and also produced books of accounts, which were examined on test check basis. The case was discussed with him.

2. The assessee earned income from capital gain and interest. During the course of assessment proceedings written submissions were filed placed on file and other details were produced which were examined on test check basis. After discussion with the A/R of the assessee, the returned income is accepted.”

Thus in response to the notice issued under section 142(1), the assessee attended the proceedings through her A/R and also furnished the required details/documents as well as books of account which were examined by the AO. There is no dispute that the AO has conducted the enquiry on the issue for which the case was selected for scrutiny and after satisfying himself the AO finally concluded that the assessee earned the income from capital gain and interest. The details and records produced before him were examined and thereafter the returned income is accepted. Thus it is not a case of lack of enquiry on the part of the AO. Though the AO has not discussed the issue in elaborate manner, but once he was satisfied with the supporting evidences produced by the assessee he has accepted the claim. The ld. PCIT has invoked the provisions of section 263 by issuing the show cause notice dated 4th February, 2019 at pages 16 & 17 of the paper book as under :-

Xxxxxxxxxxxxx

Thus it is clear from the show cause notice issued under section 263 that the ld. PCIT has invoked the provisions of section 263 only on the issue of allowability of deduction under section 54F in respect of the investment made by the assessee towards cost of agricultural land and construction of house. The sole ground for initiating the proceedings under section 263 by the ld. PCIT is that in his view the claim of deduction in respect of agricultural land is not admissible. As apparent from the show cause notice that the scope of proceedings under section 263 was limited ITA No. 246/JP/2020 Smt. Lata Phulwani, Jaipur.only on the issue of allowability of deduction under section 54F in respect of the agricultural land acquired by the assessee and used for construction of house. There was no allegation by the ld. PCIT about the lack of enquiry on the part of the AO while passing the assessment order. Even otherwise, it is clear from the assessment order that the case was selected for limited scrutiny only on the issue of investment made in the agricultural land and deduction under section 54F of the IT Act. Therefore, the question of lack of enquiry does not arise when the AO has taken up the scrutiny and issued the notice under section 142(1) along with a questionnaire calling for all the details relevant to the acquisition of the land as well as of construction of house. It is also not in dispute that the assessee produced the relevant details and evidences and specifically the purchase documents for acquiring the agricultural land as well as the valuation report towards the cost of construction. The ld. PCIT has also not doubted the facts as brought on record by the assessee and considered by the AO while passing the assessment order. The provisions of section 263 were invoked by the ld. PCIT due to the reason that he has a different view regarding the allowability of deduction under section 54F in respect of the investment made for purchase of agricultural land and construction of house. There is no quarrel on the point that lack of enquiry renders the order of the AO as erroneous so far as prejudicial to the interests of the revenue. However, when there is no allegation and even otherwise it is manifest from the record that this is not a case of lack of enquiry on the part of the AO but the AO after satisfying himself about the claim of deduction under section 54F consequent upon the examination and verification of the concerned details, evidences and books of account produced by the assessee, allowed the claim of the assessee. Further, though the ld. PCIT has not alleged that there is inadequate enquiry on the part of the AO, however, even in case there is inadequate enquiry on the part of the AO, the ld. PCIT can give a concluding finding while passing the revision order after considering the complete record as well as conducting a necessary enquiry. In this case the assessee has contended before the ld. PCIT that the claim of deduction under section 54F is eligible even if the residential house is constructed on the agricultural land. The crux of the argument of the assessee has been reproduced by the ld. PCIT in para 5 of the impugned order. Thus the assessee has cited various decisions in support of her claim. The ld. PCIT has turned down the contentions of the assessee and has gone further to verify the facts by conducting an enquiry. This exercise of the ld. PCIT in conducting the enquiry to find the facts is beyond the scope of the proceedings initiated under section 263 by issuing the show cause notice dated 4th February, 2019. In the said show cause notice, the ld. PCIT has raised only one issue i.e. purely a view regarding the allowability of the deduction under section 54F in respect of the investment made for construction of house on agricultural land. Whereas in the proceedings under section 263 the ld. PCIT has travelled beyond the scope of proceedings as initiated vide show cause notice dated 4th February, 2019. Therefore, the proceedings which are beyond the scope of the revisional proceedings, are not permissible as not an issue involved in the show cause notice.

6. Further, once it is not a case of lack of enquiry or inadequate enquiry as per the show cause notice issued under section 263 of the Act, then conducting a further enquiry on the factual aspects of the investment made in purchase of agricultural land and construction of the house is beyond the jurisdiction of the ld. PCIT as assumed by issuing show cause notice under section 263. The finding of the ld. PCIT in the revision order ought to have been confined on the issue of allowability of deduction under section 54F. Since the ld. PCIT was not agreeing with the view of the AO regarding the claim of deduction under section 54F, at the outset, he was required to give a concluding finding on the issue. On the contrary, the ld. PCIT has remitted the issue to the AO in para 7 as under :-

” 7. In view of the above I hold that the order passed by the AO in this case for the A.Y. 2015-16 on 18.12.2017 is erroneous in so far as it is prejudicial to the interests of revenue. The order dated 18.12.2017 passed u/s 143(3) of the Act deserves to be set-aside. AO will pass the order after taking into account all necessary facts and details connected with the claim of deduction u/s 54F of the Act and the claim of indexed cost of construction/improvements on the land sold by the assessee amounting to Rs. 18,18,483/- (pertaining to F.Y. 2007-08) and of Rs. 13,46,834/-(pertaining to F.Y. 2010-11).”

Thus while passing the revision order, the ld. PCIT himself was not sure about the correctness of the claim and has remanded the matter to the record of the AO for passing a fresh order. Hence he has not given a concluding finding whether the order of the AO allowing the claim of deduction under section 54F after conducting an enquiry is absolutely against the provisions of law. Once it is not a case of lack of enquiry on the part of the AO, the said order cannot be held to be erroneous unless the ld. PCIT holds and records the reason why it is erroneous. The pre­condition for invoking the jurisdiction under section 263 is that the ld. PCIT must come to the conclusion that the order of the AO is erroneous and is unsustainable in law. When the order passed by the AO is not erroneous for want of an enquiry, then it is incumbent upon the ld. PCIT to give a concluding finding and reasons that the order is not sustainable in law. An identical issue was considered by the Hon’ble Jurisdictional High Court in case of CIT vs. Ganpat Ram Vishnoi, 296 ITR 292 (Raj.) in para 7 to 12 as under :-

” 7. In this connection, it would be relevant to refer to the material which was relied by the Tribunal to set aside the order of the CIT. The Tribunal noticed that as per the record of the proceedings; on 16-10-1995, the Assessing Officer required the assessee to produce documents or material in relation to 10 different items, which included the details of capital contributed by partners, details of purchases made in excess of Rs. 20,000 with evidence, confirmation of unsecured loans, amongst other matters, which the Assessing Officer desired to enquire into.

The assessee has produced desired information by 15-11-1995. There­after, the case was adjourned to 22-11-1996 and 1-12-1995. On 5-12­1995, the Assessing Officer studied the sundry creditors, unsecured loans and desired to furnish affidavits of unsecured loans and details of interest paid and the case was adjourned to 19-1-1996. On 19-1-1996, the Assessing Officer again required the assessee to furnish the details of partners capital accounts and also to produce voucher for expenses and the matter was adjourned for 23-1-1996. On 23-1-1996, the case was discussed and finalised. After that, assessment was completed by passing assessment order. These matters clearly indicate that the Assessing Officer particularly made reference to the matters, which the CIT has opined were not inquired.

Thus, according to the Tribunal, the foundation to exercise power under section 263 of the Income-tax Act, was not existing.

8. We are of the opinion in the aforesaid circumstances on the finding reached by the Assessing Officer, no question of law really arises for consideration in this appeal.

9. It is true that in a given case not holding of any enquiry, which is relevant for assessment may indicate non-application of mind by Assessing Officer or furnish the ground for taking action under section 263 by the CIT. In this connection, reference may be made in the case of Malabar Industrial Co. Ltd. v. CIT [2000] 243 ITR 831 (SC), wherein the CIT opined that the has passed the order of “nil” assessment without application of mind. The High Court accepted this part of the assertion made by the CIT in his order that the ITO has failed to apply his mind to the case in all perspectives and the order passed by him was erroneous. The High Court has also found that the assessment order was passed without application of mind. The High Court rightly held that the exercise of jurisdiction by the CIT under section 263(1) was justified.

10. From the record of the proceedings, in the present case, no presumption can be drawn that the Assessing Officer had not applied its mind to the various aspects of the matter. In such circumstances, without even prima facie laying foundation for holding that assessment order is erroneous and prejudicial to interest in any matter merely on spacious ground that the Assessing Officer was required to make an enquiry, cannot be held to satisfy the test of existing necessary condition for invoking jurisdiction under section 263 of the Income- tax Act.

11. Undoubtedly, the jurisdiction under section 263 is wide and is meant to ensure that due revenue ought to reach the public treasury and if it does not reach on account of some mistake of law or fact committed by the Assessing Officer, the CIT can cancel that order and require the concerned Assessing Officer to pass a fresh order in accordance with law after holding a detailed enquiry. But when enquiry in fact has been conducted and the Assessing Officer has reached a particular conclusion, though reference to such enquiries has not been made in the order of the assessment, but the same is apparent from the record of the proceedings, in the present case, without anything to say how and why the enquiry conducted by the Assessing Officer was not in accordance with law, the invocation of jurisdiction by the CIT was unsustainable. As the exercise of jurisdiction by the CIT is founded on no material, it was liable to be set aside. Jurisdiction under section 263 cannot be invoked for making short enquiries or to go into the process of assessment again and again merely on the basis that more enquiry ought to have been conducted to find something.

12. The finding of the Tribunal that the ITO had passed assessment order after relevant enquiries and considering the aspects of the matter required by the CIT to be considered by him is a finding of fact and on the basis of which, the jurisdiction assumed by the CIT being non-existent must be held to be not sustainable.

Consequently, the appeal fails and is hereby dismissed.”

Thus the Hon’ble High Court has held that the ld. CIT can cancel the order of the AO and require the concerned AO to pass a fresh order in accordance with the law after holding a detailed enquiry. But when the enquiry in fact has been conducted and the AO has reached a particular conclusion, though reference to such enquiries has not been made in the order of assessment, but the same is apparent from the record of the proceedings, the invocation of jurisdiction by the ld. CIT was unsustainable. A similar view has been taken by the Hon’ble Delhi High Court in case of ITO vs. D.G. Housing Projects Ltd. 343 ITR 329 in para 18 as under :-

“18. It is in this context that the Supreme Court in Malabar Industrial Co. Ltd. v. Commissioner of Income Tax, [2000] 243 ITR 83 / 109 Taxman 66 (SC), had observed that the phrase ‘prejudicial to the interest of Revenue’ has to be read in conjunction with an erroneous order passed by the Assessing Officer. Every loss of Revenue as a consequence of an order of the Assessing Officer cannot be treated as prejudicial to the interest of Revenue. Thus, when the Assessing Officer had adopted one of the courses permissible and available to him, and this has resulted in loss to Revenue; or two views were possible and the Assessing Officer has taken one view with which the CIT may not agree; the said orders cannot be treated as an erroneous order prejudicial to the interest of Revenue unless the view taken by the Assessing Officer is unsustainable in law. In such matters, the CIT must give a finding that the view taken by the Assessing Officer is unsustainable in law and, therefore, the order is erroneous. He must also show that prejudice is caused to the interest of the Revenue.”

The Hon’ble High Court has laid out a fine distinction between the orders where no enquiry has been made by the AO from the order based on inadequate enquiry. Therefore, where the AO has made an enquiry and taken a possible/permissible view, then the said order cannot be treated as erroneous and prejudicial to the interests of the revenue unless the view taken by the AO is unsustainable in law. The Hon’ble Supreme Court in case of Malabar Industrial Co. Ltd. vs. CIT, 243 ITR 83 (SC) has held that an order of ITO cannot be treated as prejudicial to the interests of the revenue if the ITO adopted one of the course permissible in law and it has resulted in loss of revenue or two views are possible and the ITO has taken one view with which the ld. CIT does not agree, it cannot be treated as an erroneous order prejudicial to the interests of the revenue unless the view taken by the ITO is unsustainable in law. As it is clear from the impugned order that the assessee has relied upon various decisions and further the assessee has also relied upon the recent decision of the Coordinate Bench of this Tribunal in case of Shri Rajendra Kumar Sharma vs. JCIT in ITA No. 358/JP/2015 wherein the Tribunal has held in paras 4 & 5 as under :-

“4. We have heard and considered the rival contentions and perused the material placed on record. From the record, we found that the assessee claimed deduction of Rs. 83,54,434/- u/s 54F from the LTCG declared by it. The assessee made investment of Rs. 1,15,00,000/- in purchase of land and constructed residential house thereon. The area of land was 4090 Sq.mt. and construction thereon is of 1504 Sq. ft. The A.O. on these facts issued a show cause notice to assessee as given in assessment order to which assessee replied which is given in page — 6 of assessment order. The A.O. on following grounds denied the claim of assessee:

(a) The land is agricultural and not residential.

(b) The construction of residential house without approval of plan by Govt. Authority.

(c) The assessee has also not submitted any electricity and water connection evidence.

(d) The land was registered in the name of assessee on 28-3-13 i.e. beyond the period specified in Section 54F (4) and so assessee not complied conditions laid down therein. The agreement to purchase land executed on 2-6-2011 claimed by assessee has no evidentiary value as payment of consideration shown in cash.

(e) The bills for construction are lacking details and contain no detail of work done and each payment made therefor was in cash for less than Rs. 20,000/-.

(f) The Inspector physically verified the property and found there is only boundary wall with gate and on whole land there was little construction, with walls and Tin shed roofing and construction is about 700-800 Sq.ft as against 1504 Sq.ft. construction claimed by assessee. The Ld. A.O. in assessment order gave scanned photographs stated to have been taken by Inpsector on site visit.

The A.O. thus concluded that investment was purely in land and not a residential house as required u/s 54F of I. T. Act, 1961 and so assessee is not entitled to claimed deduction u/s 54F. As per our considered view, benefit of Section 54F cannot be denied on the ground that land on which construction done was agriculture in nature. Reliance is placed on the judgements in case of Vishnu Trading Co. 259 ITR 724 (Raj.), Narendra Mohan Uniyal 34 SOT 152 (Del.), Shyam Sunder Mukhija Vs. ITO 38 ITD 125 (JPR) and ACIT Vs. Om Prakash Goyal (2012) 53 SOT 158 (JPR). In the case of Narendra Mohan Uniyal (Supra) it is held that “It is crystal clear from the plain reading of ss. 54 and 54F that exemption is allowable in respect of amount invested in the construction of a residential house. There is no any rider under s. 54F that no deduction would be allowed in respect of investment of capital gains made on acquisition of land appurtenant to the building or on the investment on land on which building is being constructed. When the land is purchased and building is constructed thereon, it is not necessary that such construction should be on the entire plot of land, meaning thereby a part of the land which is appurtenant to the building and on which no construction is made, there is no denial of exemption on such investment. In this connection reference may be made to Cir. No. 667 dated 18- 10-1993 (204 ITR (ST) 103) issued by CBDT which has clarified that for the purpose of computing exemption u/s 54 or 54F, the cost of the plot together with cost of the building will be considered as cost of new asset, provided the acquisition of the plot and also the construction thereon are completed within the period specified in these sections. There is no need of approval of plan from competent authorities if construction is within limits on agricultural land and it is not a condition laid down in Section 54F for construction of residential house. The construction on land is meant for residential house. The assessee could complete the construction of the residential house within three years and if any facility lacking in the constructed residential house the same could be completed within in that period. There is water supply from well and temporary electric connection in the residential house constructed by assessee. The construction of residential house is 1553.50 Sq.ft. and not having proper bills for construction cannot be taken adversely against him for purposes of Section 54F. These facts are evident from the valuation report of Regd. Valuer a copy of which is submitted. The Inspector of department furnished vague details without any physical inspection of building and took only photographs. The assessee has only to invest net sale consideration in purchase or construct a residential house and therefore registration or legal ownership is not necessary which is evident from Circular No. 471 dated 15-10-1986 issued by CBDT and from judgements of Balraj Vs. CIT 254 ITR 22 and CIT Vs. Laxmi Chand 211 ITR 804 and various other judgements on the issue. Thus, agreement to purchase copy of which submitted proves domain and control of assessee on the land in the hands of assessee and satisfies the connotation of purchase of land for construction of residential house. WE found from the record that the assessee had invested Rs. 1,15,00,000/-in construction of residential house and, therefore entitled to claimed deduction u/s 54F. The Ld. A.O. is wrong and has erred in law in disallowing the claimed deduction of Rs. 83,54,434/- u/s 54F the Act, which deserves to be allowed.

5. We found that in the previous year relevant to the above said assessment year the assessee invested a sum of Rs.1,15,00,000/- in purchase of land for construction of a residential house. The deduction u/s 54F amounting to Rs.83,54,434/- has been claimed on account of said investment in the land; copy of the agreement to purchase and registered purchase deed were verified before the A.O.. The assessee got constructed a residential house in the F.Y. 201213 i.e. within the statutory time limit allowed by the Act i.e. before the due date of February, 2014. Copy of bills for construction of house alongwith Map of the house was filed before the A.O.. The total area of land is about 4090 sq.mtr. and the constructed area is about 1504 sq.ft. No approval is required for construction of the above said residential house. C o p y o f r e g i s t e r e d s a l e d e e d i s a l s o f i l e d before the A.O. We found that it was a residential unit, therefore, the assessee is entitled for claim of deduction U/s 54F of the Act amounting to Rs. 83,54,434/-.”

Thus it is clear that the Tribunal has referred and relied upon various decisions on the point of allowability of deduction under section 54/54F of the Act in respect of the investment made in construction of house on agricultural land. Therefore, the view taken by the AO is a possible view though may not be the only view. Further once the issue of allowability of deduction under section 54F is a debatable issue and the AO has taken a possible view, then the ld. PCIT is not permitted to invoke the provisions of section 263 merely because he does not agree with the view of the AO. Hence in the facts and circumstances of the case as well as the foregoing discussion about the settled principles of law laid down in various decisions, we hold that the impugned order passed by the ld. PCIT is not sustainable and the same is liable to be set aside.”

13. Therefore, once the AO was satisfied with the supporting evidence produced by the assessee in response to the show cause notice u/s 142(1) then it is not necessary for the AO to give an elaborate finding on the issue. Accordingly, in the facts and circumstances of the case when the AO has conducted an inquiry then the Pr. CIT while passing the revision order cannot remand the matter back to the AO for passing afresh order simply because of the reason that the Pr. CIT himself was not sure about the correctness of the claim of the assessee. Therefore, once the order passed by the AO is not erroneous for want of inquiry then it is incumbent upon Pr. CIT to give conclusive finding that the order passed by the AO is not sustainable in law. Accordingly in the facts and circumstances of the case and following the various judgments of the Hon’ble High court as relied upon Coordinate Benches of the Tribunal sited (supra) the impugned order of the Pr. CIT passed u/s 263 of the Act is not sustainable and the same is liable to be set aside. We order accordingly.”

8.10 We further note that an identical issue of addition made by the AO on account of capital introduced by the partners was again considered by this tribunal in case of Aabhushan Dhamnod vs. ITO (supra) in para 7.3 to 7.7 as under:

“7.3 Therefore, the identity of the partners are not in dispute. The next onus on the assessee was regarding the creditworthiness of the partners to show the capacity of the partners to introduce respective amount of capital and the assessee has furnished the balance sheet and statement of affairs of the partners to show the source of the capital introduced by each of the partners. Further the partners have confirmed the introduction of respective amount of capital in the assessee partnership firm. Even if any of the partners was not having sufficient source of the said capital or fails to explain the source then it is open to the department to take necessary action to assess the income in the hands of the partner(s). One more important aspect in the case in hand is that the assessee firm was formed during the year under consideration and this is first year of assessment as well as business of the assesse. Therefore, the capital introduced by the partners cannot be deemed to be income of the assessee when there was no business of the assessee prior to the said introduction of the capital by the partners. Where the assessee firm came into existence only during the year under consideration and capital was introduced by partners to facilitate business activity of the firm then the said amount of capital introduced by the partners cannot be treated as income under the deeming provisions of section 68 of the Act. We note that the assessee has discharged its onus to establish the identity and creditworthiness of the partners by producing the relevant evidence which including the ITRs, balance sheet/statement of affairs as well as bank account of the assessee firm and partners. Since all the transactions are through banking channel and assessee has produced the bank account and entries are duly recorded in the books of the assessee as well as in the books of the partners then being first year of the business of the assessee firm the genuineness of the transactions cannot be doubted. In case of some of the partners have shown the source of capital introduced in the assesse firm as secured and unsecured loan obtained by them. Therefore, to the extent of secured loan taken by partners the same cannot be doubted as source of introduction for capital in the partnership firm. So far as the unsecured loan is shown by the partners in their books of account as a source to introduce the capital partnership firm is concerned tt is subject matter of the assessment in the hands of such partner(s) and not in the hands of the assessee. The Hon’ble jurisdictional High Court in case of CIT vs. Metachem Industries 116 taxman 572 while considering an identical issue has held in para 3 to 6 as under:

“3. We have heard learned counsel for the parties. Section 68 of the Act of 1961 says that where any sum is found credited in the books of an assessee maintained for any previous year, and the assessee offers no explanation about the nature and source thereof or the explanation offered by him is not, in the opinion of the Income-tax Officer, satisfactory, the sum so credited may be charged to income-tax as the income of the assessee of that previous year. Therefore, according to Section 68, the first burden is on the assessee to satisfactorily explain the credit entry in the books of account of the previous year. If the explanation given by the assessee is satisfactory, then that entry will not be charged with the income of the previous year of the assessee. In case the explanation offered by the assessee is not satisfactory or the source offered by the assessee-firm is not satisfactory, then in that case, the amount should be taken to be the income of the assessee. In the present case, the Assessing Officer did not feel satisfied with the explanation given by the assessee and accordingly assessed all the three credit entries to the account of the assessee as the income.

4. On appeal, the Commissioner of Income-tax (Appeals) examined the matter in detail and found that Shri S. K. Gupta was the real owner of the business. The explanation given by the assessee was found to be satisfactory and he deleted the aforesaid three entries. The same finding of fact has been affirmed by the Tribunal. Once it is established that the amount has been invested by a particular person, be he a partner or an individual, then the responsibility of the assessee-firm is over. The assessee-firm cannot ask that person who makes investment whether the money invested is properly taxed or not. The assessee is only to explain that this investment has been made by the particular individual and it is the responsibility of that individual to account for the investment made by him. If that person owns that entry, then the burden of the assessee-firm is discharged. It is open to the Assessing Officer to undertake further investigation with regard to that individual who has deposited this amount.

5. So far as the responsibility of the assessee is concerned, it is satisfactorily discharged. Whether that person is an income-tax payer or not or from where he has brought this money is not the responsibility of the firm. The moment the firm gives a satisfactory explanation and produces the person who has deposited the amount, then the burden of the firm is discharged and in that case that credit entry cannot be treated to be the income of the firm for the purposes of income-tax. It is open to the Assessing Officer to take appropriate action under Section 69 of the Act, against the person who has not been able to explain the investment. In the present case, there is the concurrent finding of both the Commissioner of Income-tax (Appeals) as well as of the Tribunal that the firm has satisfactorily explained the aforesaid entries.

6. We are, therefore, of the opinion that the view taken by the Tribunal is correct and the aforesaid question is answered against the Revenue and in favour of the assessee.”

7.4 Once assessee established that the amount has been invested by partners then the responsibility of the assessee firm is over as onus of the assessee is to explain that the investment has been made by the partners and it is the responsibility of the partners to account for the investment made by them. Undisputedly the partners have owned the entries and introduction of capital in the assessee firm therefore, the burden of the assessee firm is discharged. The Hon’ble High Court has observed that it is open for the AO to undertake the further investigation with regard the individual who has deposited the amount. A similar view has been taken by the Hon’ble Gujarat High Court in the case of CIT vs. Pankaj Dyestuff Industries in Income Tax Reference No.241 of 1993 vide judgment dated 06.07.2005(supra) in para 9 to 15 as under:

“9. As can be seen from the order of the Tribunal, the Tribunal has confirmed the findings of the Deputy Commissioner of Appeals, hence it would be necessary to advert to the findings recorded by the Deputy CIT (Appeals). Before the Deputy CIT (Appeals), it had been contended on behalf of the assessee that the source of monies in the hands of the partners had been explained by producing necessary supporting evidences by way of extract from panipatrak in Form 7/12 and record of rights in Form 8-A etc. That the Income Tax Officer had not disputed that the credits in the accounts of the partners were not deposits from the partners. It was pointed out that the credits in the accounts of partners are not in proportion to the profit sharing ratio. It was submitted that the partners had satisfactorily explained the credits in their accounts by necessary supporting evidence. Alternatively, it was contended that, in any view of the matter, the credits in the accounts of the partners are to be explained by the partners and not by the firm. Reliance was also placed upon the decision of the Allahabad High Court in case of Commissioner of Income Tax v. Jaiswal Motor Finance (1983) 141 ITR 706, wherein it has been held as follows:

“It appears to be well settled that if there are cash credit entries in the books of the firm in which the accounts of the individual partners exist and it is found as a fact that cash was received by the firm from its partners then in the absence of any material to indicate that they were profits of the firm, it could not be assessed in the hands of the firm.”

10. The Deputy CIT (Appeals), upon consideration of the submissions of the appellant, found that the partners had produced sufficient evidence to show the source for deposit in their accounts. Accordingly. he deleted the addition. However, he left it open for the Income Tax Officer to consider the cash credits in the hands of the partners, if he was not satisfied with the source of investment of cash credits in the hands of the partners.

11.This Court in a recent decision dated 29 ^ (th) June 2005 rendered in case of C.I.T. v. Pragati Cooperative Bank Ltd., Income Tax Reference No.215 of 1993 has, while construing the provisions of section 68 of the Act, observed as follows:

“11. Section 68 of the Act requires that there has to be a credit in the books maintained by an assessee; such credit has to be of a sum during previous year; and the assessee offers no explanation about the nature and source of such credit; or the explanation offered by the assessee is not, in the opinion of the assessing authority, satisfactory, then the sum so credited may be charged to tax as income of the assessee of that previous year. The Apex Court in the case of Commissioner of Income Tax Vs. Smt.P.K.Noorjahan, (1999) 237 ITR 571 has laid down that the word “may” indicated the intention of the legislature that a discretion was conferred on the Assessing Officer in the matter of treating the source of investment / credit which had not been satisfactorily explained as income of an assessee, but it was not obligatory to treat such source as income in every case where the explanation offered was found to be not satisfactory.

12. Applying the aforesaid principle to the facts found, it is not possible to state that the Tribunal committed any error when it confirmed the findings of CIT (Appeals) deleting the addition. The assessee offered an explanation. The said explanation is not found to be false. The Assessing Officer merely does not accept the explanation because he finds it not satisfactory. From that, legally there is no obligation, on the Assessing Officer, to treat the fixed deposits as income of the assessee.”

12. The Bombay High Court in case of Narayandas Kedarnath v. Commissioner of Income Tax, Central, [1952] 22 ITR 18 has, while dealing with the question as to whether certain amounts standing to the credit of some of the partners of the assessee firm could be treated as undisclosed profits of the firm itself, observed thus:

“If the department was satisfied that moneys, although paid in in the names of the partners or strangers, were really undisclosed profits of the firm and were not individual contributions made by partners or strangers, then it would be legitimate for the department to draw an inference that those moneys represented the undisclosed profits of the firm. But here the only finding we have from the Tribunal is that these moneys were brought in by the partners from their native place and that no adequate explanation is forthcoming from the persons themselves as to where these moneys came from. Now it seems to me that the assessee firm has discharged the burden which was upon it to explain these credit entries and it has discharged the burden by satisfying the department that these entries represent genuine remittances received from Jaipur which have gone into the coffers of the firm. When that burden is discharged, it would be for the department to find that notwithstanding the fact that these moneys were actually brought in they do not represent the moneys of the partners but they represent the undisclosed profits of the firm which left the firm earlier and returned through the intermediary of the partners. If the department was not satisfied with the explanation given by the partners then it is legitimate for the department to draw an inference that these amounts represent undisclosed profits of the partners and to assess them in their own individual assessment.”

The aforesaid decision in the case of Narayandas Kedarnath (supra) rendered by Bombay High Court on 28th March 1952 has precedential value equivalent to a decision of this Court and hence, is equally binding on this Court. The said decision though rendered under the Indian Income Tax Act, 1922, would not make any difference. Section 68 of the Act was introduced for the first time in the Act and there was no corresponding provision in the 1922 Act. However, as per settled legal position, Section 68 of the Act only gives a statutory recognition to the principle that cash credits which are not satisfactorily explained might be assessed as income. (See CIT v. Orissa Corporation Pvt. Ltd. [1986] 159 ITR 78).

13. Applying the aforesaid principles to the facts of the present case, it is apparent that the assessee had furnished the details which would discharge the onus which lay on the assessee. It is not the case of the revenue that the partners of the assessee firm are fictitious. The Income Tax Officer has not disputed that the credits in the accounts of the partners were not deposits from the partners. Moreover, it is an admitted position that this was the second year of the firm, and that it was running in loss. It is true that the Income Tax Officer did not accept the explanation given on behalf of the assessee in respect of the new deposits or cash credits in the accounts of the partners. The mere non-acceptance of that explanation does not, however, provide material for finding that the said sum represented income of the assessee firm. As held by the Allahabad High Court in case of Commissioner of Income Tax, Allahabad v. Jaiswal Motor Finance (supra), in the absence of any material to indicate that there were profits of the firm, the amount credited to the partners’ accounts could not be assessed in the hands of the firm. Once the partners have owned that the monies deposited in their accounts are their own, the Income Tax Officer is entitled to and may proceed against the partners and assess the same in their hands, if their explanation is not found satisfactory.

14.In the facts and circumstances of the present case, both the Deputy CIT (Appeals) and the Tribunal have found that the assessee had discharged the primary onus which was on it by offering explanation, which has not been found to be incorrect or false in any manner. The interest of the revenue is also safeguarded as the Income Tax Officer has been given the liberty to consider the said credits in the hands of the partners if he is not satisfied with the sources of investment of cash credits in the accounts of the partners.

15.In these circumstances, it is not possible to find that the order of the Tribunal suffers from any infirmity which would require interference at the hands of this Court. Accordingly, it is held that the Tribunal was right in law and on facts in deleting the addition of Rs.87,250/- being deposits in the accounts of the partners. The question referred to this Court is, accordingly, answered in the affirmative i.e. in favour of the assessee and against the revenue.”

7.5 Thus, it is clear that if the assesse failed to offer the explanation about nature and source of credit in the books maintained by the assessee or the explanation offered by the assessee is not satisfactory then the sum so credited may be charged to tax as income of the assessee of that previous year. However, when the assesse has discharged it’s burden to prove the identity, creditworthiness of creditor as well as genuineness of the transactions then in absence of any facts or material to confront the explanation or prove otherwise the discretion concerned upon AO u/s 68 of the Act has to be exercised by accepting the explanation of the assessee When all the partners have confirmed that they have introduced those amounts as capital contribution then it was for the partners to explain the source of deposit and if they fail to discharge the onus such credit can be credited in the hands of the partners and not in the hands of the assesse firm. Further when the capital contributed by the partners entered into books of account of the assessee prior to the commencement of the business then the same cannot be treated as income of the assessee firm. The Hon’ble Rajasthan High Court in case of CIT vs. M/s Kewal Krishnan & partners (supra) has held in para 7 & 8 as under:

“7. It is not in dispute that the members of the AOP S/Shri Ali Mohd. deposited Rs.5,00,000/-, Amarnath deposited Rs.3,00,000/- and Kewal Krishan deposited Rs.50,000/- as capital contribution on the first day of commencement of the business by the firm i.e. 1.4.1989. All the partners have confirmed that they had introduced those amount as their capital contribution. Obviously, it was for the partners to explain the source of the deposits and if they failed to discharged the onus then, such deposits could be added in the hands of the partners only and not in the hands of the assessee firm. In any case, such capital contributions entered into the books of the accounts of the assessee firm prior to the commencement of the business cannot be treated to be the income of the assessee firm. In considered opinion of this Court, such unexplained credits may be added to the income of the partners concerned in terms of Section 69 and not u/s 68 of the Act of 1961.

8. For the aforementioned reasons, in our view, no substantial question of law arises out of the order impugned passed by the learned ITAT for consideration of this Court.”

7.6 This Tribunal in case of ACIT vs. Mayur Industries Khandwa, (supra) has considered an identical issue in para 12 to 16 as under:

“12. We find that the Ld. CIT(A) while allowing the appeal preferred by the assessee observed as follows:

“4.4. Ground Nos 1 to 4 for A.Y. 2018-19: – Through these grounds of appeal the appellant has challenged the addition made by the AO amounting to Rs: 2,59,28,791/- on account of capital introduced by the partners by treating the same as unaccounted and unexplained credit u/s 68 of the I.T. Act, 1961 and charging of tax liability by invoking the amended provision of section 115BBE of the Act. The appellant firm received capital from its partners to the tune of Rs 2,59,28,791/-, since no explanation was provided by the appellant firm. Hence, the said amount was added to the total income of the appellant firm. The assessing officer in the assessment order observed that the amount as introduced by Shri Rahul Bansal and Shri Rajendra Bansal was withdrawn from the firm M/s Motilal Gopikishan but transactions with the firm M/s Motilal Gopikishan was doubted by the assessing officer and entire amount of capital introduced by all the partners were added to the total income of the firm. During the course of appellate proceedings, it was stated by the appellant that no show cause notice was issued by the assessing officer prior to making addition in respect of capital as introduced by the partners. The details in respect of capital as introduced by the partner was provided by the appellant firm itself. Shri Rahul Bansal and Shri Rajendra Bansal was assessed by the same assessing officer and no addition was made in respect of capital introduced by them in the appellant firm. The appellant firm during the course of appellate proceeding provided complete details in respect of capital as introduced by the partners which was forwarded to the assessing officer for his comments. The assessing officer in his remand report challenged the legality of the acceptance of additional evidence as per Rule 46A of the Income Tax Rules but no reply on merit was filed. The assessing officer at the end of the remand report stated that additional evidence may be accepted in the appellate proceeding. In the interest of substantial justice, additional evidence as filed by the appellant was permitted and considered while adjudicating the ground of appeal.

4.4.1. The appellant firm filed confirmation of partner’s capital duly signed, copy of bank account of the partner, Acknowledgement of income tax return as filed and ledger account in the book of the firm from where the partners received amount prior to introducing in form of capital in the appellant firm. On perusal of the documents as filed, I am of the considered view that the appellant firm has properly discharged onus lying on it. The identity of the partners were not doubted by the assessing officer. The creditworthiness and genuineness of the transactions have been proved by the appellant. Major amount of capital as introduced by the partners were withdrawal from the firm M/s Motilal Gopikishan which was also assessed by the same assessing authority. If the assessing officer was not satisfied with the source of amount paid by the firm M/s Motilal Gopikishan in that case, necessary addition can be made in the assessment of that firm but no adverse view was taken in that firm. Similarly, assessment of two partners were also made by the same assessing officer and if the assessing officer doubted about the creditworthiness and genuineness of the capital as introduced by these two partners viz Shri Rahul Bansal and Shri Rajendra Bansal, in that case necessary addition was to be made in their assessment but no such addition was made in their individual assessment order.

Considering the overall facts of the case, submissions and supporting documents as filed by the appellant firm, it is held that the AO has not justified in making addition. Therefore, the SS 212 of 2021 11 Mayur Ind.

addition made by the AO amounting to Rs: 2,59,28,791/- on account of capital introduced by the partners is Deleted. Thus, the appeal on these grounds is Allowed. Since the addition as made by the assessing officer on account of unexplained cash credit u/s 68 of the I.T. Act, 1961 have already been deleted on merit. Therefore, the charging of tax liability as per amended provisions of section 115BBE on these grounds is academic in nature and having no impact on the fate of these grounds.”

13. The above findings of the Ld. CIT(A) have not been controverted by the Ld. DR. The facts discussed above squarely reveal that the Ld. AO made addition on account of capital introduced by the partners simply for the reason that the assessee did not furnish any documentary evidence during the course of assessment proceedings to justify the source of capital introduced by the partners. The Ld. CIT(A) rightly admitted the additional evidences furnished by the assessee during the course of appellate proceedings. Further, on perusal of the remand report annexed on Page No. 133-134 of the Paper Book, we find that the Ld. AO in the remand report merely challenged the acceptance of additional evidence as per Rule 46A but he utterly failed to comment on merits of the documentary evidences furnished by the assessee during the course of appellate proceedings to justify the identity and creditworthiness of the partners as well as genuineness of the transactions as entered into with them. Hence, we observe that there are no adverse remarks of the Ld. AO regarding source of capital introduced by the partners in the assessee firm except for the fact that no documentary evidences were furnished by the assessee during the course of assessment proceedings to justify the source of capital introduced by the partners.

14. On merits, we find that the assessee filed ample corroborative documentary evidences such as confirmation of accounts, bank statements and income-tax returns of the partners along with the copy of capital/ ledger account of the partners in the books of the firm, M/s Motilal Gopikishan and thus, the SS 212 of 2021 12 Mayur Ind.

assessee satisfactorily discharged the primary onus cast upon it under section 68 of the Act. Accordingly, we of the considered opinion that there was no justification for making addition to the total income of the assessee on account of capital introduced by its partners since the assessee duly justified the identity and creditworthiness of the partners as well as genuineness of the transactions as entered into with them.

15. We also find force in the contentions of the Ld. Counsel that assessment in the case of two of the partners i.e. Shri Rahul Bansal and Shri Rajendra Kumar Bansal was also completed by the same Assessing Officer wherein the Assessing Officer did not take any adverse view in respect of the amount of capital introduced in the assessee firm which in itself justified that the Assessing Officer was satisfied with the source of capital introduced in the assessee firm. Further, assessment in the case of the partnership firm, M/s Motilal Gopikishan from where the partners of the assessee firm withdrew cash/ obtained loan and thereafter introduced capital in the assessee firm was also completed by the same Assessing Officer and that no adverse view was taken in the case of M/s Motilal Gopikishan in respect of the amount withdrawn by the partners for contributing capital in the assessee firm which further justified that the Ld. AO was satisfied with the source of capital introduced in the assessee firm. Hence, we found no reason to sustain addition to the total income of the assessee on account of capital introduced by partners since source of capital introduced by the partners stood duly explained.

16. The addition made by the Ld. AO on account of capital introduced by partners cannot be said to be justified in view of the observations made SS 212 of 2021 13 Mayur Ind. hereinabove. Hence, we do not find any infirmity in the findings of the Ld. CIT(A) and accordingly, the deletion of addition of Rs. 2,59,28,791/- made by the Ld. CIT(A) is found to be just and proper so as to warrant no interference. Hence, this ground of appeal preferred by Revenue is found to be devoid of any merit and, thus, dismissed.”

7.7 Accordingly in view of the facts and circumstances of the case as discussed above wherein the assesse has produced relevant evidence to establish the identity, creditworthiness of the partners as well as genuineness of the transactions in the form of capital introduced by the partners of the assesse firm in the first year of the existence of the assesse and prior to the commencement of the business then the addition made by the AO u/s 68 and confirmed by the CIT(A) is not justified the same is deleted.”

Therefore, once the assessee has discharged its onus to prove the identity and creditworthiness of the partners and genuineness of the transactions with supporting evidence and the AO as well as the Pr. CIT has not pointed out any defect in the documentary evidence then setting aside the assessment order by the Pr. CIT u/s 263 of the Act and directing the AO for denovo assessment if not sustainable in law and liable to be quashed.

8.11 As regard the second issue taken up by the Pr. CIT it is clear from the record that this issue was beyond the scope of scrutiny through CASS and therefore, the order of the AO cannot be held to be erroneous for want of any inquiry on the said issue. This issue has been considered by this Tribunal in case of S.R. Ferro Alloys vs. Pr. CIT (supra) in para 5 to 5.5 as under:

“5. We have considered the rival submissions as well as relevant material on record. The assessment was completed in the case of the assesse u/s 143(3) on 14.12.2017 after the case was selected under CASS for limited scrutiny on the following issues:

i. mismatch in amount paid to related persons u/s 40A(2)(b) reported in Audit Report & ITR

ii. High interest expenditure against new capital

5.1 Thereafter on perusal of the record the Pr. CIT noted that the assesse has taken interest bearing loans of Rs.9.90 crores and unsecured loans of Rs.6.76 crores and debited the interest expenditure in the profit and loss account of Rs.1.10 crores. Simultaneously the assesse has given interest free advance of 13.89 crores to M/s Vidhya Niketan Samiti. Further it was noted from the audit report that the assessee has claimed to have taken unsecured loan of Rs.3.86 crores from M/s Nikita Multi Trade Pvt. Ltd. The Pr. CIT has observed that the AO has not conducted any inquiry regarding the disallowance of interest expenditure on account of interest free advances given by the assesse as well as regarding the identity, creditworthiness of the creditors and genuineness of the unsecured loan transactions. The Pr. CIT accordingly issue show cause notice u/s 263 on 17.03.2021. The assessee filed the reply to the notice u/s 263 and explained that so far as the first issue regarding the interest free loan/advances is concerned there was no loan or advanced given by the assesse during the year under consideration. The amount as mentioned by the Pr. CIT was advanced in the assessment years 2007-08 to 2013-14. Further the assesse has also explained the source of the said advance given to M/s. Vidhya Niketan Samiti during the assessment years 2007-08 to 2013-14 as partners’ capital was sufficient to advance the said amount. The Pr. CIT dropped the first issue of disallowance of interest on account of interest free advance after considering the reply of the assessee and then proceeded to pass the impugned order only on the second issue regarding the non-examination and verification of the identity, creditworthiness of the creditor and genuineness of the transactions by the AO. The Pr. CIT itself has reproduced the reasons for selection of the case for limited scrutiny under CASS and therefore, there is no dispute that this issue of verification and examination of the transactions of unsecured loan shown by the assesse was not subject matter of the limited scrutiny undertaken by the AO through CASS. The Hon’ble Calcutta High Court in case of Pr. CIT vs. Naga Dhunseri Group Ltd. (supra) while considering an identical issue has held in para 5 to 9 as under:

“5. If that is the undisputed factual position, we find the reasoning given by the learned Tribunal is fully justified. That apart, the learned Tribunal has rightly pointed out that the CBDT has issued instructions as to the manner in which the limited scrutiny should be carried out. In CBDT Instruction No. 7 of 2014, dated 26th September, 2014, the relevant portion of the said Instruction reads as follows:-

“3. The reason(s) for selection of cases under CASS are displayed to the Assessing Officer in AST application and notice u/s 143(2), after generation from AST, is issued to the taxpayer with the remark “Selected under Computer Aided Scrutiny Selection (CASS)”. The functionality in AST is being modified suitably to flag the reasons for scrutiny selection in AIR/CIB/26AS cases. This functionality is expected to be operationalised by 15th October, 2014. Further, the Assessing Officer while issuing notice under section 142(1) of the Act which is enclosed with the first questionnaire would proceed to verify only the specific aspects requiring examination/verification. In such cases, all efforts would be made to ensure that assessment proceedings are completed expeditiously in minimum possible number of hearings without unnecessarily dragging the case till the time-barring date.”

6. A bare reading of the of the above Instruction clearly shows that the PCIT cannot make a roving enquiry in the guise of a limited scrutiny and as such the instruction issued by the CBDT is binding on the Department.

7. Thus, we find that on facts the learned Tribunal has granted relief in favour of the assessee.

8. The learned counsel appearing for the respondent points out that the PCIT in its order has relied upon a decision of the Learned Single Bench of the High Court of Kerala in the case of Sunrise Academy of Medical Specialties (India) (P) Ltd. v. ITO [2018] 94 com 181.

9. On a reading of the said order, we find that the said order supports the case of the assessee rather than the revenue. Thus, we find there is no question of law much less substantial question of law arising for consideration in this appeal.”

5.2 The Hon’ble High Court has upheld the order passed by the Tribunal holding that the instruction issued by CBDT to explain the manner in which limited scrutiny to be completed by the AO and therefore, once the AO has completed the assessment take up through CASS for limited scrutiny then the Pr. CIT cannot make a roving inquiry in guise of a limited scrutiny and as such instruction issued by the CBDT is binding on the department. Similarly the Hon’ble Orissa High Court in case of Pr. CIT vs. Shark Mines & Minerals (P. ) Ltd. (supra) has held in para 8 to 11 as under:

“8. In the impugned order, the ITAT distinguished its own decision in Sri Sushanta Kumar Choudhury (supra) as under:

“12. Coming to the issue of the decision of Co-ordinate Bench of this Tribunal in the case of Sri Sushant Kumar Choudhury (supra) the facts in the said case were that the Pr. CIT mentioned that the order of the AO is erroneous insofar as he did not ask for permission for complete scrutiny and to that extent, the assessment order was erroneous and prejudicial to the interest of the Revenue. In the present case, there is no such averment by the Pr. CIT. Even assuming such averment is there, the order of revision would be unsustainable insofar as the issue raised by Pr. CIT is in no way connected to the issues that have been raised in the limited scrutiny assessment. Thus, the decision in the case of Sri Sushanta Kumar Choudhury (supra) is clearly distinguishable. Therefore, the prayer of the ld. CIT DR that the matter be referred to Larger Bench also does not survive insofar as the facts of the present case and in the said decision in the case of Sri Sushanta Kumar Choudhury (supra) is fully distinguishable.”

9. Indeed, the Court finds that the Madras High Court has while affirming the decision of the ITAT in Smt. Padmavathi (supra) taken the view that while exercising suo motu revisional power under section 263 of the Act, the CIT cannot travel beyond the scope of the issues which form part of the ‘limited scrutiny’ in the original Assessment Order. This Court concurs with the above view.

10. What persuades this Court to reach this conclusion is the requirement in law that if the AO has to go beyond the scope of the issues for which ‘limited scrutiny’ has to be undertaken by him, he has to seek prior permission of the superior officer in terms of the CBDT Instruction No. 7/14 dated 26th September, 2014 and Instruction No. 20/15 dated 19th December, 2015. Consequently, it was not open to the Pr. CIT while exercising suo motu revisional power under section 263 of the Act to find fault with the assessment order of the AO on the ground of its being erroneous on an issue not covered by the ‘limited scrutiny’ when the AO could not have possibly examined such issue. To reiterate, in the present case, the limited scrutiny was in respect of excess disallowance under section 40A(3) of the Act whereas the SCN under section 263 was regarding the FIFO method of valuation of closing stock adopted by the Assessee. These were, as rightly noted by the ITAT, unconnected issues and the assessment order could not have been held to be “erroneous and prejudicial to the interest of Revenue” when the AO could not have travelled beyond the issues forming subject matter of the ‘limited scrutiny.’

11. The Court is unable to find any error having been committed by the ITAT in coming to the above conclusion. No substantial question of law arises. The appeal is accordingly dismissed.”

5.3 Thus, Hon’ble High Court has held that it was not open to the Pr. CIT while exercising suo motu revisional power u/s 263 of the Act to find fault with the assessment order on the ground of its being erroneous on an issue not covered by the limited scrutiny when the AO could not have possibly examined such issue. The coordinate Bench of this Tribunal in case of M/s. Sahita Construction Company vs. Pr. CIT(supra) has considered an identical issue in para 8 to 11 as under:

“8. Now first we need to examine that “whether the ld. AO was required to examine the issue for payment to contractors and tax deducted thereon” Perusal of records shows that assessee’s case was selected for limited scrutiny through CASS for verification of “contract receipts/fees mismatch, sales turnover mismatch and tax credit mismatch”. The issue of payment to contractors and tax deducted thereon was never a part of reasons for the limited scrutiny. Therefore, there was no occasion for the Ld. AO to examine this issue for payment to contractors. It is well settled that in case of limited scrutiny matter Ld. AO has to work within the parameters observed by the Central Board of Direct Taxes; instruction dated 29.12.2015 and various other circular issued in this behalf. Since the assessee’s case was selected for limited scrutiny on certain issues and Ld. AO has examined these issues and framed the assessments and the issue of examination of payment to contractors was not a part of the limited scrutiny reasons, in our considered view, Ld. Pr. CIT erred in assuming jurisdiction u/s 263 of the Act and also erred in holding that assessment order is erroneous and prejudicial to the interest of revenue.

9. We find that our view is supported by the decision of Coordinate Bench Delhi in the case of Rakesh Kumar vs. CIT ITANo.6187/Del/2015 dated 20.12.2018 which has adjudicated the similar issue observing as follows:

On the 2nd Issue the learned CIT has held that the AO has failed to verify the cash payment made for purchase of goods which are not in conformity with the provisions of section 40A (3) of the income tax act. It is apparent from the audit objection filed before us at page number 30 of the paper book that the case of the assessee was selected for the scrutiny to verify only the cash deposit in the bank account of the assessee. The issue before us is whether assessing officer has made any enquiry with respect to the above purchases. Though, learned assessing officer has obtained the explanation of the assessee with respect to the purchases made by the assessee in cash, whether the learned assessing officer is required to make any such enquiry or not is also an issue. This because of the reason that the learned assessing officer was only required to verify the cash deposit in the bank account of the assessee. In this respect instruction dated 29/12/2015 issued by the central board of direct taxes is very relevant. Apparently the selection of the scrutiny in case of the assessee was also only on the parameters of AIR information. According to para number 2 (iii) the scope of enquiry should be limited only on that aspect only. In such cases, the assessing officer are also directed to confine themselves by questionnaire only to the specific issues pertaining to AIR data and further the wider scrutiny in those cases can only be conducted as per the guidelines and procedures stated in instruction number 7/2014. Therefore according to us when the learned assessing officer was not required to enquire on those issues such as purchases in cash more than specified sum, the learned CIT was not correct in holding that the learned assessing officer has not made due inquiries on that ground as the verification of the purchases exceeding specified limit in cash was not an issue before the assessing officer. Naturally, he should not have made any enquiry on that aspect. Even though the learned assessing officer has raised the specific questions on that aspect and verified the requisite detail. Therefore, it cannot be said that the order of the learned assessing officer is erroneous and prejudicial to the interest of the revenue on this ground also.

10. In view of this, according to us the order of the learned CIT in assuming jurisdiction under section 263 of the income tax act holding that the order of the learned assessing officer passed under section 143 (3) of the act is erroneous and prejudicial to the interest of the revenue is not correct. Accordingly, the order passed by the learned CIT is unsustainable.

10. In the above referred decision Tribunal has held that when the assessment is taken up for limited scrutiny, Ld. Pr. CIT/CIT cannot hold the assessment order as erroneous and prejudicial to the interest of revenue in respect of issue which was not a reason for selection of the case for limited scrutiny. Similar view also taken in the following decision:

(i) The Deccan Paper Mills Co. Ltd. v. CIT [1013 & 1035/Pun/2014 – order dated 10.10.2017], ITAT Pune Benches.

(ii) M/s. Aggarwal Promoters v. Pr.CIT [1708/Chd/2017 – order dated 16.04.2019] ITA Chandigarh Benches.

(iii) Sanjeev Kr. Khemka v. Pr.CIT [1361/Kol/2016 – order dated 02.06.2017] ITAT Kolkata Benches.

(iv) M/s. R & H Property Developer Pvt. Ltd. v. Pr.CIT [1906/Mum/2019 – order dated 30.07.2019] ITAT Mumbai Benches.

(v) Mrs. Sonali Hemant Bhavsar v. Pr.CIT [742/Mum/2019 – order dated 17.05.2019] ITAT Mumbai Benches.

11. We, therefore, respectfully following the judicial precedents and the finding of Coordinate Bench Delhi in the case of Rakesh Kumar (supra) hold that Ld. Pr. CIT erred in assuming revisionary powers u/s 263 of the Act. The impugned order of Ld. Pr. CIT is quashed. Thus in our considered view assessment order dated 11.09.2017 u/s 143(3) of the Act is neither erroneous nor prejudicial to the interest of revenue and the same is restored. All the grounds raised by the assessee are allowed.”

5.4 In the above case the Tribunal has held that the Pr. CIT erred in assuming jurisdiction u/s 263 of the Act and also erred in holding that the assessment order is erroneous and prejudicial to the interest of the revenue on an issue which was not subject matter of limited scrutiny. Similar view has been taken of this Tribunal in case of M/s. Parth Developers Manawar Dist. Dhar vs. Pr. CIT (supra) in para 15 to 17 as under:

“15. Having held that the provision of section 43CB are not applicable for the year under consideration the question arises is whether the AO can go beyond the subject matter of limited scrutiny while passing the assessment order. The answer to this question is certainly not without converting the limited scrutiny into complete scrutiny. Therefore, in case the AO proceeded within the scope of limited scrutiny and not taken up any issue beyond the scope of limited scrutiny the same can be held to be erroneous for lack of inquiry. The CBDT issued instruction No.5 of 2016 dated 14.07.2016 and specifically clarified the scope of limited scrutiny in para 4 as under:

“4. It is further clarified that in cases under Limited Scrutiny, the scrutiny assessment proceedings would initially be confined only to issues under Limited Scrutiny and questionnaires, enquiry. investigation etc. would be restricted to such issues. Only upon conversion of case to ‘Complete Scrutiny’ after following the procedure outlined above, the AO may examine the additional issues -besides the issue(s) involved in ‘Limited Scrutiny’. The AO shall also expeditiously intimate the taxpayer concerned regarding conducting Complete Scrutiny’ in such cases.”

16. Thus, the scope of limited scrutiny has been explained by the CBDT and it was advised to the assessing officers not to travel beyond the jurisdiction while making assessment of limited scrutiny cases. The CBDT again expressed its concern on the point of exceeding the jurisdiction and scopes of limited scrutiny by AO’s vide instruction dated 30.11.2017 in para 3 & 4 as under:

“3. Instances have come to notice of CBDT where some Assessing Officers are travelling beyond their jurisdiction while making assessments in Limited Scrutiny cases by initiating inquiries on new issues without complying with mandatory requirements of the relevant CBDT Instructions dated 26.09.2014, 29.12.2015 and 14.07.2016. These instances have been viewed very seriously by the CBDT and in one case the Central Inspection Team of the CBDT was tasked with examination of assessment records on receipt of allegations of several irregularities. Amongst other irregularities, it was found that no reasons had been recorded for expanding the scope of limited scrutiny, no approval was taken from the PCIT for conversion of the limited scrutiny case to a complete scrutiny case and the order sheet was maintained very perfunctorily. This gave rise to a very strong suspicion of mala fide intentions. The Officer concerned has been placed under suspension.

4. In view of discussion in the preceding paragraphs it is once again reiterated that the Assessing Officers should abide by the instructions of CBDT white completing limited scrutiny assessments and should be scrupulous about maintenance of note sheets in assessment folders.”

17. Thus, it is not open to the AO take up any issue which is not subject matter of the limited scrutiny until and unless the limited scrutiny is controverted into complete scrutiny. Hence not conducting an inquiry on the issue beyond subject matter of limited scrutiny would not be considered as lack of inquiry on the part of the AO so as to render the order of the AO erroneous so far as prejudicial to the interest of revenue. Even otherwise the Project Completion Method of accounting is well recognized and accepted method and if the assesse is following this method regularly and consistently then the revenue cannot force the assessee to adopt different method not mandated by statute. The coordinate bench of this tribunal in case of Ashoka Hi-tech Builders (P.) Ltd. vs. DCIT (supra) after following the binding precedents of Hon’ble Supreme Court and various High Courts has held as under

“28. Now the issue as to whether a person is mandatorily required to adopt percentage completion method o The method of accounting is governed by section 145 of the Act and as per section 148(2) of the Act the income is to be computed in accordance with either cash or mercantile system of accounting to be regularly employed. This sub-section further empowers Central Government to notify the accounting standards to followed by any case of assessee or in respect of clause from time-to-time and sub-section 3 of section 145 empowers the Assessing Officer to make the assessment of the assessee in the manner provided under section 144, in case he is not satisfied about the correctness or completeness of the assessee or where the method of accounting have not been regularly followed by the assessee, Once the assessee followed accounting regularly the Assessing Officer is bound to assess the income of the assessee on the basis of such method of accounting On perusal of the provision of section 145 shows that it nowhere empowers the authorities to assess the income on the basis of method of accounting followed by another assessee nor does it empower the authorities to thre upon the assessee to adopt the method of accounting followed by mother assessee. In the instant appeal both the lower authorities have rejected the books of account of assessee and applied the percentage completion method adopted by the developer JSM DPL and computed the income accordingly. Whether soch action of the revenue authorities is justified or not needs to be examined in light of the jurisdictional pronouncements. 29. We find that Hon’ble Supreme Court in case of Investment Ltd. (supra), where their Lordships have heldy that “assessee is free to employ for the purpose of his trade, his own method of keeping accounts, and for they purpose to value his stock-in-trade either at cost or at market price. A method of accounting adopted by the trader consistently and regularly cannot be discarded by departmental authorities on the view that he should have adopted a different method of keeping accounts or of valuation. The method of accounting regularly employed may be discarded only, if, in the opinion of taxing authorities, income of the trade cannot be property deduced there from (as per provisions of 1922 Act in force at that time, presently only if case falls in sub section (3) of section 145).

30. Further in another judgment of Hon’ble Supreme Court in the case of Krishnaswami Mudaliar (supra), their Lordship’s of Apex court while dealing provisions of section 13 of 1922 Act (the provisions of which are in parimateria of section 145 of 1961 Act) have held as under “Section 13 of 1922 Act merely prescribes that the computation of taxable profits shall be made according to the method of accounting regularly employed. Where in the opinion of the ITO the income, profits and gains cannot be properly deduced from the method of accounting, it is open to ITO to compute the income upon such basis and in such manner as he may determine”.

Comparing the provisions with the English provisions, it is held:

“the only departure made by section 13 of 1922 Act from tax legislation in England is that whereas under English legislation the commissioner is not obliged to determine profits of a business venture according to method of accounting adopted by the assessee, under the Indian Income Tax Act, prima facie, the ITO has for purposes of sections 10 & 12 of 1922 act to compute income, profits and gains in accordance with method of accounting regularly employed. If, therefore, there is a system of accounting regularly employed and by appropriate adjustments from the accounts maintained taxable profits may be properly deducted the ITO is bound to compute profit in accordance with method of account, but wherein the opinion of ITO the profit cannot be properly deduced from the system of accouting adopted by the assesse is it open to him to adopt a more suitable basis for computation of true profits.

Their Lordship then also dealt with method of accounting and observed as under:- among Indian businessmen as elsewhere, there are current two principle systems of book keeping, there is, firstly, the cash system in which record is maintained of actual receipts and actual disbursements, entries being posted when money or money’s worth is actually received, collected or disbursed. There is secondly, mercantile system in which entries are posted in the books of account on the date of transaction is on the date on which rights accrue or liabilities are incurred irrespective of the date of payment.”

31. Further in the decision of the coordinate Bench, ITAT Allahabad Bench in the case of Mahabir Jute Mille (upra) as also on the decision in the case of Advance Construction Company (P) Ltd. (upra), where their Lordships have reiterated position that choice of accounting method lies with that of assesses, the only caveat being that it has to show that the chosen method has been regularly followed. The section is couched in mandatory terms and the department is bound to accept the assessee’s choice of method regularly employed except for the situation wherein the AO is permitted to intervene, in case it is found that true income profits and gains cannot be arrived at by the method employed by assessee. Their Lordship’s further held that the position of law is further well settled that regular method adopted by assessee cannot be rejected merely because it gives benefit to assessse in certain years.

32. Examining the facts of instant appeal we in light of above judgments we find that the method of accounting along with following project completion method for treatment of advances received from proposed buyers the assessee has been consistently followed this method and appellant’s assessment has been completed by the Ld AO for first two years Viz, AYS, 2010-11 & 2011-12, In both these years also the appellant has credited the advance received against proposed sales of flats to a separate account and shown as a liability in balance sheet At this stage it may be relevant to mention that in those years also the appellant has credited the advance Freceived against proposed sale of flats to the Advance against sale of Flat Aler and not treated the same a income for said years on the basis that revenue in respect of sale of said flats would be recognized only execution and registration of sale deeds of flats. The assessment of the said years have been completed by AD by the same common order, accepting the method of accounting and method of recognition of revenue. Thus the method followed by appellant is a consistent method which has been accepted by AO for two years Le AYS. 2010-11 & 2011-12 Since the said method has been consistently followed by appellant and even accepted by department, the same cannot be deviated in the present two years without there being any finding as contemplated u/s 145(3) on the basis of satisfaction required by that section viz, (1) about correctness or completeness of the accounts of the assessee or (2) about the fact that the assessee has not regularly employed the method of accounting provided in sections 145(1) or (3) that the income has not been computed in accordance with the standards notified u’s 145(2).

33. Now it is an admitted fact based on the financial statement and audited reports for 2010-11 and 2011-12 accepted by the revenue authorities in the assessment proceedings w/s 143(3), read with respect of 153(A) of the Act that the assessee has been consistently following project completion method/completed contract method for the treatment of advances received from proposed buyers through developer JSM DPL. In the light of the above fact we observe that Hon’ble Gujarat High Court in the case of Manjusha Estates (P) Ltd. (supra) adjudicating similar issue i.e. “Whether on the facts and in the circumstances of the case, the Tribunal was right in law in rejecting the project completion method which was followed consistently by the assessee and instead applying work-in-progress method and taxing 80 per cent. Thereon as net profit held that as assessee has followed the method which is consistent considering the decision in the case of CIT v Shivalik Buildwell (P) Ltd. [2013] 40 com 219/12014] 220 Taxman 3 (Mag) (Guj.) and CIT v. Umang Hiralal Thakkar [2014] 42 Laxmann.com 194/226 Taxman 28 (Mag.) (Guj) and therefore this court is are of the opinion that the view taken by the Tribunal and the Commissioner of Income Tax is not correct. Issue decided in favour of assesssee.

33. Further the Hon,ble High Court of Gujarat in the case of CIT v Shivalik Buildwell P Ltd (2013) 40 com 219 (Guj.) dealing with the similar issue observed as follows;

“On the Revenue’s appeal, the Tribunal confirmed the view of the Commissioner of Income Tax (Appeals), however, on slightly different ground, namely, that the assessee being a developer of the project, profit in his case, will arise on transfer of title of the property and receipt of any advances or booking amount cannot be treated as trading receipt of the year under consideration. The Tribunal further noted that such method of accounting followed by the assessee had been accepted by the Revenue in earlier years. The Tribunal was, therefore, of the opinion that the Assessing Officer’s decision to reject the book results during the year under consideration was not justified. We are of the opinion that the Tribunal committed no error. If as per the accounting standard available, the assessee was entitled to claim the entire income on completion of the project and if such accounting standard was accepted by the Revenue in the earlier years, in the present year, the Assessing Officer could not have taken a different sand and that too, without hearing the assessee”.

Ashoka Hi-Tech Builders Pvt. Ltd ITA No.121/Ind/2016 &686/Ind/2016

35. Further in another judgment by CIT Vs. Umang Hiralal Thakur (2014) 42 taxmann.com 194 (Guj) is placed on the following paragraphs of its judgment.

“In the present case, it is not the Assessing Officer’s case that the appellant is not reporting or under reporting its income. In fact, I find in the subsequent assessment year, i.e. the assessment year 2007-08, the appellant has disclosed substantial income from the projects undertaken in the business proprietary concerns, viz, M/s. Neelkanth Enterprises, M/s. Ghanshyam Enterprises and M/s. Swaminarayan Enterprises. In the subsequent year, i.e. the assessment year 2007-08 the profit declared from the projects run by these three proprietary concerns ranges from 43 per cent to 46 per cent. The Supreme Court in the case of Sanjeev Woolden Mills v. CIT (supra), has clearly held that to attract the proviso to secti9on 145(1) of the Act, the Assessing Officer should be of the view that the accounts are correct and complete but the method employed is such that the income cannot be property deduced there from. The choice of method of accounting regularly employed by the assessee lies with the assessee but the assessee would be required to show tat he has followed the chosen method regularly. The Department is bound by the assessee’s regular method would not be rejected as improper merely because it gives the assessee the benefit in certain years or that as per the Assessing Officer, the other method would have been more preferable. If the method adopted does not afford true picture of profit, it would be rejected, but then such rejection should be based on cogent evidence and should be done with caution.

In the present case, the appellant has declared substantial profits on the basis of project completion method in the subsequent years. In construction, the project completion method and percentage completion methods, both have also been recognized by the Central Board of Direct Ashoka Hi-Tech Builders Pvt. Ltd ITA No.121/Ind/2016 &686/Ind/2016 Taxes in the instruction No.4 of 2009 dated June 30, 2009. Therefore, the Assessing Officer is not considered justified in bringing to tax the profit of Rs.1,66,70,811 in the year under consideration, particularly when such profits have already been offered to tax by the appellant in the assessment year 2007-08. The addition of Rs.1,66,70,811 are directed to be deleted”.

36. Further the co-ordinate Bench of Ahmedabad Tribunal in the case of Vraj Developers passed in ITA No.19/AHD/2008 which attained finality as it is not challenged by the department before the high forum observed as follows;

“The learned Departmental representative supported the order of the learned Assessing Officer and the learned authorized representative of the assessee supported the order of the learned Commissioner of Income-tax (Appeals) and also placed reliance on the Bangalore Bench of the Tribunal in the case of Nandi Housing P. Ltd v. Deputy CIT (2003) 80 TTJ (Bang) 750, wherein the Tribunal followed the decision of the Karnataka High Curt in the case of Khoday Distillers Ltd, in ITRC Nos. 19mto 21 of 1993. This, it is observed that the issue which requires our adjudication is that the income in the instant case is to be computed as per system of accounting followed by the assessee or as per accounting followed by the assessee or as per accounting standard AS7 for the purpose of charging of income tax. We find that the issue is to be decided in accordance with the provisions of section 145 of the Act shows that the business income which is assessable under the Income tax Act is to be computed in accordance with the consistent system of accounting followed by the assessee unless such system, of accounting is defective and/or from such system of accounting, profit cannot be deduced. Thus, in our considered opinion, the option for choosing the system of account is with the assessee and not with the learned Assessing Officer provided the Ashoka Hi-Tech Builders Pvt. Ltd ITA No.121/Ind/2016 &686/Ind/2016 system chosen by the assessee is consistently followed by him and such system is not a defective system. In our considered view, provisions of AS7 cannot override the provisions of section 145 in so far as the computation of business income under the Income Tax Act for the purpose of determining income is concerned. In the instant case, we find that the learned Assessing Officer has brought no material on record to show that the system of accounting adopted by the assessee for the year under appeal was not consistently followed y the assessee or the system adopted was a defective system. In our considered view, even a project completion method is also a recognized system of accounting. Simply the Institute of Chartered Accountants of India has recommended the percentage completion method does not mean that project accounting or the same is a defective system of accounting. The learned Commissioner of Income-tax (Appeals) has recorded a finding after pursuing the assessment records of the subsequent years that the assessee has offered for taxation its income in the subsequent year as per the consistent system of accounting followed by the assessee. The learned Departmental representative could not point out any error in the above finding of the learned Commissioner of Income-tax (Appeals). In view of the above discussion, we do not find any error in the order of the learned Commissioner of Income-tax (Appeals) and therefore, the same is upheld and the appeal of the Revenue is dismissed.

It is reported that the decision of Appellate Tribunal in the case of Vraj Developers (supra) has attained the finality as the said decision is not challenged by the Department before higher forum. In view of the above and more particularly, when it has been found that the assessee is consistently following the accounting system of percentage completion method, which is permissible and accepted by ICAI and the Central Board of Direct Taxes with respect to construction work, it cannot be said that the learned Appellate Tribunal has committed any error/ or Ashoka Hi-Tech Builders Pvt. Ltd ITA No.121/Ind/2016 &686/Ind/2016 illegality, which call for the interference of this court. We see no reason to see to interfere with the impugned judgment and order passed by the learned Commissioner of Income tax (Appeals) deleting the addition of Rs.1,66,70,881 which was made by the Assessing Officer on rejecting the accounting system on percentage completion method followed by the assessee. No question of law much less any substantial question of law arise in the present appeal. Hence, the present appeal deserves to be dismissed and is accordingly dismissed.”

37. We further find the co-ordinate bench of Mumbai in the case of Prem Enterprises V Income Tax Officer (2012) 25 com 179 (Mum.) deal with the similar issue wherein the assessee was constructing a project and was consistently following project completion method and the assessing officer rejected the method of project completion adopted by the assessee on observing that 8% of the total project has been incurred up to the relevant assessment year the income should have declared on the percentage completion method. The Co-ordinate Bench decided in favour of the assessee holding that the results declared by the assessee on the basis of method of accounting consistently followed and the entire profit of the project has been offered in subsequent assessment year therefore there is no justification in rejecting the method of accounting followed by the assessee and substituting the same by adopting accounting AS-7 issued by ICAI and followed it for accounting.

38. Similarly Hon’ble High Court of Punjab & Haryana in the case of Commissioner of Income Tax (Central), Gurgaon V. Principal Officer, Hill View Infrastructure (P) Ltd (2017) 81 com 58 (Punjab & Ashoka Hi-Tech Builders Pvt.Ltd ITA No.121/Ind/2016 &686/Ind/2016 Haryana) order dated 13.8.2015 confirmed the view taken by the Tribunal deciding in favour of the assessee relating to the issue of the project completion method adopted by the assessee vis-à-vis percentage completion method applied by us, the Assessing Officer observing as follows;

“The assessee in reply to the query raised by the Assessing Officer had inter alia claimed that it had been consistently following method of booking of the revenue on the completion of the flat when full payment had been made to it by the person concerned and possession was delivered to him. It was pointed out that neither Accounting standard 9 (AS 9) or Accounting Standard 7 (AS 7) issued by the Institute of Chartered Accounts of India has been recognized by the Act and in such circumstances, there was no guidance or strict procedure for adopting a particular accounting standard under the /act and it depends upon facts and circumstances of each case. In other words, the assessee was entitled to adopt Project Completion method for determining its income which was being regularly followed by it. Though the Assessing Officer had rejected the plea of the assessee, but the CIT(A) while accepting the appeal of the assessee made the following observations:-

“It is however not the AO’s case that the profits have been distorted by following the project completion method. The impugned order is also silent as regards the position of the books of account. In other words the books have not been rejected, nor any defects pointed out. In the case of CIT vs. Bilahari Investment (P) Ltd (2008) 299 ITR 1 SC, the Apex Court held that the completion contract method adopted by the assessee for chit discount consistently over the years, is not required to be substituted by percentage completion method. In CIT v Manish Buildwell (P) Ltd (2011) 245 CTR 397 (Del), it was enunciated that project completion method is one of the recognized methods of accounting. That Ashoka Hi-Tech Builders Pvt.Ltd ITA No.121/Ind/2016 &686/Ind/2016 it cannot be said that the project completion method followed by the assessee would result in deferment of payment of taxes.

Therefore, considering the discussion above, I do not find any merit on the part of the AO to have worked out the income by applying the percentage completion method”.

The Tribunal affirmed the order of the CIT(A). It was concluded that project completion method and percentage completion method are accepted standards of accounting and the assessee has option to adopt any one of them. The relevant findings recorded by the Tribunal read thus:-

“We have heard the rival contentions and perused the record. The issue arising in the present appeal before us is in relation to the method to be applied for recognizing the revenue generated by the assessee in the course of carrying on the business of real estate developers. The case of the assessee is that it is following one of the accepted accounting standards approved by ICAI for recognizing the revenue generated by it. The assessee had followed project completion method which had been consistently followed by the assessee for the preceding years also. The Assessing Officer on the other hand, had applied percentage completion method to compute the income in the hands of the assessee. The Commissioner of Income Tax (Appeals) had allowed the claim of the assessee.

Both the methods of accounting are i.e. project completion method and percentage completion method is accepted standards of accounting and either of the methods can be applied by the assessee. In the facts of the present case before us, the assessee had chosen to compute its income on the basis of project completion method i.e. recognizing the income on the completion of the project and not from year to year whereas the case Ashoka Hi-Tech Builders Pvt.Ltd ITA No.121/Ind/2016 &686/Ind/2016 of the revenue was that it should account for the income as it is generated in the hands of the assessee i.e. from year to year on the basis of the work completed being relatable to the revenue generated from year to year.

The Hon’ble Supreme Court in CIT Vs. Bilahari Investment (P) Ltd (supra) had held that “recognition/identification of income under the 1961 Act is attainable by several methods of accounting. It may be noted that the same result could be attained by any one of the accounting methods. Completed contract method is one such method. “It was further held that “Every assessee is entitled to arrange its affairs and follow the method of accounting which the Department has earlier accepted. It is only on those cases where the department records a finding that the method adopted by the assessee results in distortion of profits, the Department can insist on substitution of the existing method”.

Applying the above said principles to the facts of the present case we find that the assessee before us has been following the systematic method of accounting from year to year which has been accepted by the department and no defects have been pointed out by the department in the method of accounting adopted by the assessee and thus, there is no reason to reject the same.

The Hon’ble Delhi High Court in CIT v Manish Buildwell (P) Ltd (supra) had held that “It is well settled that the project completion method is one of the recognized methods of accounting. It cannot be said that the projection completion method followed y the assessee would result in deferment of the payment of the taxes which are to be assessed annually under the IT Act. AS-7 issued by the ICAI also recognizes the position that in the case of construction contracts, the assessee can follow either the project completion method or the percentage completion method.”

Ashoka Hi-Tech Builders Pvt. Ltd ITA No.121/Ind/2016 &686/Ind/2016 Where the assessee was following a particular method of accounting consistently, which has been accepted by the department from year to year and in the absence of any defect being pointed out by the Assessing Officer that by following such method, income had escaped assessment, we find no merit in the order of the Assessing Officer in holding that percentage completion method should be applied to the assessee for the year under consideration. It is the prerogative of the assessee to arrange its affairs in such a manner and follow any recognized method of accounting to compute its profits. In view thereof, we find no merit in the order of the Assessing Officer in recomputing the income in the hands of the assessee. Upholding the order of Commissioner of Income Tax (Appeals), we dismiss ground of appeal raised by the revenue”.

The Delhi High Court in CIT v Manish Build Well (P) Ltd (2011) 16 taxmann.com 27(2002) 204 Taxman 106 noted that project completion method is one of the recognized methods of accounting. It was held as under:-

“It is well settled that the project completion method is one of the recognized methods of accounting. It cannot be said that the project completion method followed by the assessee would result in deferment of the payment of the taxes which are to be assessed annually under the IT Act”

The assessee respondent had been consistently following one of the recognized methods of accountancy, i.e project completion method, for computation of its income. In the absence of any prohibition or restriction under the Act for doing so, it cannot be held that the approach of the CIT(A) and the Tribunal was erroneous or illegal in any manner so as to call for interference by this Court. No substantial question of law arises. Consequently, finding no merit in these appeals, the same are dismissed.” Ashoka Hi-Tech Builders Pvt. Ltd ITA No.121/Ind/2016 &686/Ind/2016 38. It is well settled that the project completion method is one of the recognized methods of accounting. In CIT v Hyundai Heavy Industries Co. Ltd (2007) 291 ITR 482/ 161 Taxman 191 (SC) the Supreme Court held as follows:-

“Lastly, there is a concept in accounts which is called the concept of contract accounts. Under that concept, two methods exist for ascertaining profit for contracts, namely, “completed contract method” and “percentage of completion method”. To know the results of his operations, the contractor prepares what is called a contract account which is debited with various costs and which is credited with revenue associated with a particular contract. However, the rules of recognition of cost and revenue depend on the method of accounting. Two methods are prescribed in Accounting Standard No.7. They are “completed contract method” and “percentage of completion method”.

39. This view was reiterated by the Supreme Court in CIT v. Bilahari Investment (P) Ltd. (2008) 299 ITR 1/168 Taxman 95 with the following observations:

“Recognition/identification of income under the 1961 Act is attainable by several methods of accounting. It may be noted that the same result could be attained by any one of the accounting methods. The completed contract method is one such method. Similarly, the proceedings of completion method is another such method.

Ashoka Hi-Tech Builders Pvt. Ltd ITA No.121/Ind/2016 &686/Ind/2016 Under the completed contract method, the revenue is not recognized until the contract is complete. Under the said method, costs are accumulated during the course of the contract. The profit and loss is established in the last accounting period and transferred to the profit and loss account. The said method determines results only when the contract is completed. This method leads to objective assessment of the results of the contract.

The On the other hand, the percentage of completion method tries to attain periodic recognition of income in order to reflect current performance. The amount of revenue recognized under this method is determined by reference to the stage of completion of the contract. The stage of completion can be looked at under this method by taking into consideration the proportion that costs incurred to date bears to the estimated total costs of contract.

The above indicates the difference between the completed contract method and the percentage of completion method.” (underlining ours)

40. After the above judgments of the Supreme Court it cannot be said that the project completion method followed by the assessee would result in deferment of the payment of the taxes which are to be assessed annually under the Income Tax Act. Accounting Standards 7 (AS7) issued by the Institute of Chartered Accountants of India also recognize the position that in the case of construction Ashoka Hi-Tech Builders Pvt. Ltd ITA No.121/Ind/2016 &686/Ind/2016 contracts, the assessee can follow either the project completion method or the percentage completion method. In view of the judgments of the Supreme Court (Supra), the finding of the CIT(A), upheld by the Tribunal, does not give rise to any substantial question of law. Further, the Tribunal has also found that there was no justification on the part of the assessing officer to adopt the percentage completion method for one year(the year under appeal) on selective basis. This will distort the computation of the true profits and gains of the business. For these reasons, we are of the view that no substantial question of law arises. We, therefore, decline to admit question Nos. 2 and 3.”

41. From perusal of all the judgments it has been consistently held rather a settled law that the action of revenue authorities cannot be held justified if they substitute another method of accounting on the assessee which in the instant case was imposing of percentage completion method on the assessee even when it has been consistently maintaining the regular books of accounts on mercantile basis u/s 145 of the Act adopting project completion method to account for the revenue and the revenue authorities have failed to bring forth any inconsistency in the books of accounts. The Assessing Officer in the instant case has merely applied the method of percentage completion adopted by the Developer JSM DPL and calculated the income of the assessee completely ignoring the fact that the assessee was merely the owner of land and he was entitled to 32% of saleable area only on completion of construction and the deadline of which was 60 Ashoka Hi-Tech Builders Pvt. Ltd ITA No.121/Ind/2016 &686/Ind/2016 months from the date of agreement i.e. from 1.4.2009. The Ld. A.O also ignored the fact that right to sale its share of constructed area with the assessee was only from April, 2014 onwards and the assessee has offered the revenue for taxation from F.Y 2014-15 onwards as and when the sale deed has been registered. As held by various courts as discussed above that the method of adopting project completion method is not ultra virus and the assessee is free to adopt either the percentage completion method or project completion method with the only rider that it should be consistently adopted and in case of any deviation the effect of profit or loss should be offered to tax as the case may be. Revenue has not disputed this fact that assessee has offered the impugned advances to tax in the subsequent years i.e. from financial year 2014-15 based on sale deed registered which proves that there has been no loss to the revenue. Mere postponement of tax as a result of method employed by assessee has not been viewed adversely by courts so long as the method is regularly and consistently employed as held by Hon’ble Apex Court in the case of Excel Industries Ltd (2013) 358 ITR 295.”

5.5 Therefore, when the issue of examination of the identity, creditworthiness of the creditors and genuineness of the transactions was not subject matter of the limited scrutiny then the order of the AO cannot be held as erroneous so far as prejudicial to the interest of revenue on the ground that lack of inquiry. Accordingly by following various judgments cited above of Hon’ble High Courts as well as of this tribunal we hold that the impugned order of Pr. CIT passed u/s 263 is invalid for want of jurisdiction.

8.12 An issue which is not a point in limited scrutiny under CASS cannot be taken up in the proceeding u/s 263 as an appropriate remedy for such an issue was either the AO would have obtained the approval of the competent authority for expanding the limited scrutiny to the full scrutiny or the remedy if possible available u/s 147/148 of the Act. Therefore, in the facts and circumstances of the case as discussed above the impugned order of the Pr. CIT is not sustainable in law and the same is liable to be set aside. We order accordingly.

9. In the result, the appeal of the assessee is allowed.

Order pronounced in the open court on 25.07.2024.