PCIT Vs Premlata Tekriwal (Calcutta High Court)
Kolkata: The Calcutta High Court has set aside orders of the Income Tax Appellate Tribunal (ITAT) that had quashed a Principal Commissioner of Income Tax’s (PCIT) decision to revise assessment orders under Section 263 of the Income Tax Act, 1961. The case involved alleged bogus purchases by the assessee, Premlata Tekriwal, and the quantum of disallowance made by the Assessing Officer (AO). The High Court’s ruling emphasizes the PCIT’s power to intervene when an AO’s order is deemed erroneous and prejudicial to the revenue due to inadequate inquiry or incorrect application of law, particularly concerning unsubstantiated expenditures.
The appeals filed by the Revenue challenged a common ITAT order from January 14, 2020, which had invalidated the PCIT’s revision orders for assessment years 2009-10, 2010-11, and 2011-12. The background for these assessments stemmed from information received by the Director General of Income Tax (Investigation) from the Maharashtra Sales Tax Department regarding entities involved in issuing fictitious purchase bills. The assessee, Premlata Tekriwal, was identified as a beneficiary of such ‘accommodation bills’.
In the assessment proceedings for the year 2009-10, which was reopened based on this information, the AO concluded that while the assessee likely did not purchase goods from the parties named in the bills, they probably acquired goods from other sources without proper documentation. Confronted with the allegations of bogus purchases amounting to Rs. 54.13 lakhs, the assessee was given an opportunity to substantiate the transactions. Unable to produce the required records, the assessee proposed that 2% of the purported bogus purchase value be added to their income. The AO rejected this specific percentage but proceeded to estimate and add 3% of the bogus purchases, amounting to Rs. 1,62,405, to the assessee’s total income.
Subsequently, the Principal Commissioner of Income Tax invoked the powers vested under Section 263 of the Act. The PCIT initiated revision proceedings on the ground that the AO’s assessment order was erroneous in so far as it was prejudicial to the interest of the Revenue. The PCIT’s show cause notice highlighted that once expenditure, such as purchases, is established as bogus, there is no provision in the Act for making only a partial disallowance; the entire amount should be disallowed, particularly under a provision like Section 69C dealing with unexplained expenditure. The PCIT was of the prima facie opinion that the AO failed to take logical action on the information available and did not conduct the necessary inquiries before making a baseless estimation of income. The AO themselves had reportedly submitted to the PCIT that an error had occurred in the assessment order.
In the order passed under Section 263, the PCIT reiterated that the alleged purchases were proven beyond doubt to be bogus based on available materials. The PCIT specifically referred to Section 69C of the Act, emphasizing that once an expenditure is found to be unexplained or bogus, the entire amount should be added to the assessee’s income. To support this stance, the PCIT cited the Supreme Court decision in N.K. Proteins Vs. DCIT [2017] 84 taxmann.com 195(SC), which the PCIT interpreted as supporting the principle of disallowing substantial portions, if not the entirety, of bogus purchases. The PCIT also pointed out that the AO should have conducted further investigations to reach a logical conclusion instead of making an arbitrary 3% addition. Reference was made to Supreme Court judgments in Rampyari Devi Saraogi Vs. CIT and Smt. Tara Devi Aggarwal Vs. CIT regarding the AO’s duty to inquire. Furthermore, the PCIT relied on Explanation 2 to Section 263, inserted with effect from June 1, 2015, which provides that an order shall be deemed erroneous and prejudicial to the revenue if it has been passed without making inquiry or verification which should have been made. Accordingly, the PCIT directed the AO to reassess the income disallowing the entire bogus purchase amount.
The assessee challenged the PCIT’s order before the ITAT. The ITAT allowed the assessee’s appeal, quashing the Section 263 order. The Tribunal based its decision on two precedents: its own coordinate bench ruling in Om Foregoing & Engineering P. Ltd. Vs. PCIT and a decision of the Calcutta High Court in PCIT Vs. M/s. Subarna Rice Mill.
However, the Calcutta High Court, in the present appeals, found the ITAT’s reliance on these precedents to be misplaced and the Tribunal’s interference with the PCIT’s order erroneous. The High Court distinguished the Om Foregoing & Engineering P. Ltd. case, noting that in that instance, the assessee had submitted detailed records and the AO had conducted inquiries, which was not the factual position in the present case where the assessee failed to produce documents and even offered a percentage addition. The court also found the facts in M/s. Subarna Rice Mill distinguishable, as the source of purchases had been identified in that case.
The High Court underscored the fact that the assessee, by offering to accept a percentage addition (2%), implicitly acknowledged the bogus nature of the purchases alleged against them. Given this admission, coupled with the assessee’s failure to provide documentation and the AO’s subsequent estimation at a minimal 3% without thorough investigation, the court concluded that the AO had not completed the assessment proceedings to a “logical end.” Therefore, the court held that the PCIT was fully justified in exercising the revisionary power under Section 263. The court found that the AO’s failure to conduct proper inquiry and disallow the entire bogus expenditure (or a higher, reasoned percentage) rendered the assessment order both erroneous and prejudicial to the interest of the revenue.
Answering the substantial questions of law in favour of the Revenue, the Calcutta High Court allowed the appeals, set aside the ITAT’s order, and restored the order passed by the PCIT, thereby directing the Assessing Officer to conduct a fresh assessment for the relevant years consistent with the PCIT’s findings, which advocate for the disallowance of the entire bogus expenditure.
FULL TEXT OF THE JUDGMENT/ORDER OF CALCUTTA HIGH COURT
