Case Law Details
Nirav Chandrakantbhai Bhalani Vs PCIT (ITAT Ahmedabad)
ITAT Ahmedabad held that invocation of section 263 by PCIT unjustified due lack of sufficient evidence to support claim that the order is erroneous and prejudicial to the interest of revenue.
Facts- The assessee is an individual. AO passed the order u/s. 147 r.w.s. 144 of the Act, accepting the return as declared by the assessee. Thereafter, PCIT issued a notice of hearing exercising his powers u/s.263 of the Act relating to assessment order passed by AO u/s 147 read with section 144 of the Act. In the said notice the PCIT stated the assessee has made cash payment of Rs.22,13,735/ against the purchase of immovable property over and above the document value and concluded that the AO should have made addition of this amount as unaccounted. He concluded that since the said issue was not verified the order passed by AO is erroneous in so far as prejudicial to the interest of revenue.
PCIT set aside the order of the AO and directed the AO to pass a fresh assessment order. Being aggrieved, assessee has preferred the present appeal.
Conclusion- Held that for the Ld.PCIT to invoke Section 263 of the Act, it must be conclusively proven that the AO’s order is both erroneous and prejudicial to the interests of the revenue. In this case, the AO made inadequate inquiries, during the proceedings, the AO could not provide any documentary evidence that formed the basis for reopening the assessment. This lack of evidence, supports the conclusion that the Ld.PCIT’s action of setting aside the order of AO and directing him to pass a fresh order is unwarranted. In view of the above, the order passed by the Ld.PCIT under Section 263 is set aside.
FULL TEXT OF THE ORDER OF ITAT AHMEDABAD
This appeal is filed by the Assessee as against the order dated 27/03/2024 passed by the Principal Commissioner of Income Tax, Ahmedabad-1 [hereinafter referred to as “the Ld. PCIT” in short] in exercise of his revisionary jurisdiction under Section 263 of the Income Tax Act, 1961 (hereinafter referred to as “the Act” in short) for the Assessment Year (AY) 2016-17.
Facts of the case:
2. The assessee is an individual who filed his original return of income for the A.Y. 2016-17 on 31-03-2017 declaring total income of Rs.3,49,430/-. The proceedings u/s.148 of the Act were initiated on the basis of information on the Insight Portal that the assessee has purchased immovable property on 06-01-2016 (Reg. No. 249) for the consideration of Rs.1,92,400/- and the assessee had made unaccounted cash payment of Rs.22,13,735/- in addition to agreement value. The assessee filed his return of income in response to notice u/s 148 of the Act. The notices u/ss. 143(2) and 142(1) of the Act were issued along with the reasons for reopening the assessment proceedings. As per the reasons for reopening, the search at the residential premises of the Accountant of group Shri Maheshbhai Dilubhai Parmar was conducted, where a pocket diary was found and seized. In the said diary there were some details, as explained by the said accountant and the partner of the group Shri Vashrambhai Talshibhai Savani, of the sale of industrial plot were recorded.
2.1. During the course of reassessment proceedings, the AO requested to furnish the source of payment made towards immovable property with documentary evidence vide notice u/s 142(1) of the Act dated 03-08-2021. In the reply to this notice, the assessee requested for the copy of reasons recorded so as to enable him to clarify the facts and raise his objections. He placed his reliance on the decision of Hon’ble Supreme Court in case of G.K.N. Driveshaft (India) Ltd. Vs. ITO 259 ITR 19(SC).
2.2. Once again, the AO issued notice u/s.142(1) of the Act on 22-11-21 asking to provide required details. In the same notice, the AO provided the basis of forming reason to believe and details of escapement of income. On 09-12-2021, another notice u/s.142(1) of the Act issued by the AO reminding the assessee to file all the details as required vide earlier notices. The assessee, in response to the said notice dated 09-12-2021, asked to provide the document on which the AO relied to conclude that there is escapement of income. The AO issued one more notice u/s.142(1) of the Act on 24-01-2022 pointing out the non-compliance of the assessee and requesting the assessee to provide the details as called for.
2.3. The AO issued show cause notice u/s.144 of the Act on 10-02-2022 highlighting the non-compliances to the notices issued earlier and giving draft computation of income adding Rs.22,13,735/- u/s.68 of the Act. The assessee, in reply to this notice, once again sought details of documentary evidence on which the AO has relied on. The assessee also furnished the details of bank statement, cash book and copy of purchase deed of immovable property. On the same day, i.e. on 10-02-2022, the assessee also submitted response to the said notice dated 10-02-2022 that AO has not given any documentary evidence for cross verification/cross-examination. The Assessee also submitted balance sheet along with schedules, bank account statement, cash book, copy of purchase deed, answer to show-cause notice and details of return of income. In the said reply to show-cause notice, the assessee denied that he has paid nay cash which is aligned in copy of reason of reopening. On 10-03-2022, the AO passed the order u/s. 147 r.w.s. 144 of the Act, accepting the return as declared by the assessee.
2.4. On 12-03-2024, the Ld. PCIT issued a notice of hearing exercising his powers u/s.263 of the Act relating to assessment order passed by AO u/s 147 read with section 144 of the Act. In the said notice the PCIT stated the assessee has made cash payment of Rs.22,13,735/ against the purchase of immovable property over and above the document value and concluded that the AO should have made addition of this amount as unaccounted. He concluded that since the said issue was not verified the order passed by AO is erroneous in so far as prejudicial to the interest of revenue.
2.5. In response to the notice, the assessee submitted detailed reply explaining the facts. The assessee contended that the AO has applied his mind after considering the reply to notices and then passed his order. He also contended that since the AO could not give any documentary evidence that he has paid any cash against the purchase of immovable property and, therefore, has accepted his returned income. The assessee further stated that any addition made without giving any evidence is bad in law and also against natural justice and placing reliance on following judicial pronouncements:
1. In the case of Kishanchand Chellaram v. CIT [1980] 125 ITR 713 (SC), where it was held that before the income tax authorities could rely upon a piece of evidence, they were bound to produce it before the assessee so that the assessee could controvert the statement contained in it by asking for an opportunity for cross examination of the person with reference to the statement made by him.
2. The Hon’ble Gujarat High Court in the case of Laxman S. Patel 174 Taxman 206 has held that the legal effect of the information received behind the back of the assessee and without furnishing the copy thereof or without giving an opportunity of cross examination, if the addition is made, the same is required to be deleted on the ground of violation of the principles of natural justice.
3. The evidence brought on record without the knowledge of the assessee and used against him without giving him an opportunity to rebut it offends the principles of natural justice. There must be something more than bare suspicion to support the assessment, (Dhakeshwari Cotton Mills Ltd v. CIT (1954) 26 ITR 775 (SC).
4. In the caseof State of Kerala Vs. K.T. Shaduli Yusuf (1977), the Hon’ble Supreme Court remarked that the tax authorities, which are empowered to assess tax, discharge quasi-judicial functions, and they are bound to observe the principles of natural justice while passing the order.
5. A Constitution Bench of this Court in the case of State of M. P. v. Chintaman Sadashiva Vaishampayan AIR 1961 SC 1623, held that the rules of natural justice, require that a party must be given the opportunity to adduce all relevant evidence upon which he relies, and further that, the evidence of the opposite party should be taken in his presence, and that he should be given the opportunity of cross examining the witnesses examined by that party. Not providing the said opportunity to cross-examine witnesses, would violate the principles of natural justice. [CIT v. Sunita Dhadda – Date of Judgement: 28.03.2018 (SC)].
2.6. The assessee, in his reply to the Ld. PCIT, stated that such issue of notice u/s 263 is change in opinion and also stated that the order passed by AO is with application of mind and, hence, not erroneous. He also placed reliance on following additional judicial pronouncements:
1. CIT Vs Sunbeam Auto Ltd. (2011) 332 ITR 167 (Del-HC).
2. Malabar Industrial Co. Ltd. Vs CIT [2000] 243 ITR 83 (SC).
3. CIT Vs. Krishna Capbox (P.) Ltd. [2015] 372 ITR 310 (All.).
4. Rajendrakumar Kantilal Patel Vs. PCIT – ITA No. 354/SRT/2018 (ITAT Surat).
5. Gabrial India Ltd. [1993] 203 ITR 108 (Bom).
2.7. The Ld. PCIT, however, set aside the order of the AO and directed the AO to pass a fresh assessment order. While doing so, he produced the details of documents seized during the course of search and drew inference from the impounded documents that the assessee has paid cash of Rs.22,13,735/- against the purchase of immovable property.
3. Aggrieved by the order of the Ld. PCIT, the assessee is in appeal before us with following grounds:
“(1) That on facts, and in law, the learned PCIT has grievously erred in exercising jurisdiction u/s 263 of the Act on the same issue for which on same information, reasons were recorded u/s 147 of the Act, and assessment order was framed u/s 147 of the Act and no addition was made by AO.
(2) That the learned PCIT has grievously erred in law, and on facts, in setting aside the assessment order and in directing the AO to make addition of Rs.22, 13,735/-on account of alleged cash payment made for purchase of property.
(3) The appellant craves leave to add, alter, amend any ground of appeal.” On the grounds
4. The Ld. Authorized Representative (Ld.AR) of the assessee explained the facts in detail. He took us through various notices issued by AO during the re-assessment proceedings and vehemently argued that the AO could not provide any documentary evidence to prove that the payment of Rs.22,13,735/- was paid in cash against the purchase of immovable property. He also argued that the reference of seized document came directly in the order of the Ld. PCIT for the first time and, therefore, the decision of the Ld. PCIT to review the order of the AO in exercise of his jurisdiction u/s.263 is not valid.
4.1. The Ld.AR further took us through the order of the Ld. PCIT and argued that the details relied upon by the Ld. PCIT in assuming his jurisdiction u/s 263 are not related to the assessee as no where there is mention of the plot number and name of the assessee. There is a reference of some Shri Tushar J. Bhalani in the order or the Ld. PCIT (page no. 4) but that is not assessee. The Ld.AR further argued that the Ld. PCIT, from the impounded material, has drawn only inference that the details are of the assessee. He once again stated that the assessee has not paid any cash against purchase of immovable property.
4.2. The Ld.AR placed reliance on the decision of co-ordinate bench in case of Rolesh Somchanbhai Shah Vs. ACIT, Circle-5(2)(1) (ITA No. 782/Ahd/2023), where the reliance was placed on the judgement of the Hon’ble High Court of Gujarat in case of PCIT Vs. Kaushik Nanubhai Majithia (Tax Appeal No. 20 of 2024).
5. The Ld.DR, on the other hand, relied on the order of the Ld. PCIT and explained that the Ld. PCIT has rightly passed order on the basis of on the impounded documents.
6. We have heard the contentions of both the parties, perused the material available on record. We have noted the facts that the AO issued notices under Sections 143(2) and 142(1) of the Act and made specific inquiries relating to purchase of immovable property along with other aspects of assessee’s financial statements. The assessee responded to these inquiries, providing some documents including purchase deed.
6.1. At this juncture, we take into consideration the fact that the order is passed u/s. 147 read with section 144 r.w.s.144B of the Act. This section pertains to the best judgment assessment, where the AO makes an assessment to the best of his judgment based on available information if the assessee fails to comply with the notices or fails to provide the required information. We also note that during the course of the assessment proceedings the AO could not provide any documentary evidence on the basis of which the assessment was reopened even after repeated requests from the assessee and after considering the responses, the AO accepted the declared income and passed the assessment order u/s 147 r.w.s. 144 read with section 144B of the Act.
6.2. Section 263 of the Act empowers the Ld.PCIT to revise any order passed by the AO if it is erroneous and prejudicial to the interests of the revenue. An order can be considered erroneous if it is passed without proper verification, inquiry, or based on incorrect facts or law and it is prejudicial to the interests of the revenue if it results in the loss of revenue or incorrect computation of taxable income. In the present case, it is evident that even after persistent requests by the assessee, the AO could not provide the documentary evidence based on which the assessment was reopened and passed order u/s.147 read with section 144. It is only the case where the evidence available with the Ld.PCIT gave rise to suspicion about its veracity that further scrutiny is called for. The circumstances can certainly be termed as inadequate inquiry. Therefore, in our opinion, the Ld.PCIT is not wrong in assuming jurisdiction u/s.263 of the Act. Therefore, the first ground of the assessee’s appeal is dismissed.
6.3. After assuming jurisdiction u/s.263 of the Act, on the basis of impounded document, which the AO could not bring on record during the course of reassessment proceeding, the Ld. PCIT issued the notice to assessee. It is evident that there is no mention of name of the assessee in the said impounded document and the Ld. PCIT has only inferred from the said document that the assessee has paid cash against purchase of immovable property. The assessee has also denied that he has paid any cash against the said transaction. The PCIT also has failed to prove that the cash is paid by the assessee.
6.4. We have also considered the judicial pronouncements relied upon by the Ld.AR. Given the principles established by these judicial precedents, the validity of a notice issued under Section 263 of the Act based on incorrect grounds or unsupported evidence can be questioned. If the reasons cited in the notice are factually incorrect or legally unsustainable, the notice can be challenged as invalid. The Ld.PCIT must have sufficient evidence to support the claim that the order is erroneous and prejudicial to the interests of the revenue. Mere suspicion or conjecture is not sufficient.
6.5. Based on the detailed analysis of the facts and judicial precedents, it is evident that for the Ld.PCIT to invoke Section 263 of the Act, it must be conclusively proven that the AO’s order is both erroneous and prejudicial to the interests of the revenue. In this case, the AO made inadequate inquiries, during the proceedings, the AO could not provide any documentary evidence that formed the basis for reopening the assessment. This lack of evidence, supports the conclusion that the Ld.PCIT’s action of setting aside the order of AO and directing him to pass a fresh order is unwarranted. In view of the above, the order passed by the Ld.PCIT under Section 263 is set aside. Accordingly, the second ground of appeal of the assessee is allowed.
6.6. Third ground of assessee’s appeal is general in nature, hence not adjudicated.
7. In the result, the appeal of the Assessee is partly allowed.
Order pronounced in the Open Court on 6 August, 2024 at Ahmedabad.
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