Mumbai ITAT Quashes Section 263 Revision: AO’s 25% Bogus Purchase Addition Held to Be a Possible View

Lavesh Agarwal Vs PCIT (ITAT Mumbai)

Mumbai ITAT Quashes Section 263 Revision: AO’s 25% Bogus Purchase Addition Held to Be a Possible View

The Mumbai ITAT quashed the revisionary order passed under Section 263, holding that where the Assessing Officer had conducted detailed enquiries and adopted a possible view by estimating profit at 25% of alleged bogus purchases, the PCIT could not invoke revision merely because he preferred 100% disallowance.

The assessee, engaged in the scrap trading business, had disclosed purchases of about ₹168.85 crore, out of which purchases of ₹139.10 crore were made from suppliers whose GST registrations were cancelled or who had not filed GST returns. During scrutiny, the Assessing Officer examined purchase invoices, stock records, bank payments, confirmations and sales records, rejected the books under Section 145(3), and made an addition of ₹34.77 crore, being 25% of the disputed purchases.

The PCIT invoked Section 263 on the ground that in the immediately preceding assessment year similar enquiries had led to 100% disallowance of purchases from certain suppliers and therefore the Assessing Officer ought to have disallowed the entire amount instead of restricting the addition to 25%. According to the PCIT, failure to make full disallowance rendered the assessment order erroneous and prejudicial to the interests of the Revenue.

The Tribunal, however, found that the Assessing Officer had carried out detailed enquiries, examined the material placed on record, analysed the suppliers, considered the GST-related discrepancies and consciously adopted an estimation approach. The assessment order itself reflected application of mind and could not be characterised as a case of lack of enquiry. At best, the PCIT was alleging inadequate enquiry or seeking to substitute his own opinion for that of the Assessing Officer.

The ITAT reiterated the settled principle that Section 263 cannot be invoked merely because the PCIT prefers another view or believes a higher addition should have been made. Once the Assessing Officer has taken one of the legally permissible views after conducting enquiries, the assessment order cannot be revised simply on account of a difference of opinion.

Accordingly, the Tribunal held that the twin conditions of “erroneous” and “prejudicial to the interests of the Revenue” were not satisfied. The revision order passed under Section 263 was therefore quashed and the assessment order making an addition of 25% of the disputed purchases was restored.

FULL TEXT OF THE ORDER OF ITAT MUMBAI

This appeal by the assessee is directed against order dated 14.11.2025, passed by the learned, Principal Commissioner of Income-Tax – 27, Mumbai (in short, the Ld. PCIT), for Assessment Year (in short ‘A.Y’), 2022-23, in terms of section 263 of the Income Tax Act, 1961 (in short, “the Act”), holding the assessment order dated 24.03.2024 passed by the Assessing Officer as erroneous insofar as prejudicial to the interest of the Revenue. The grounds raised by the assessee are reproduced as under:

“1. On the facts and in the circumstances of the case and in law, the learned Principal Commissioner of Income Tax- 27, Mumbai (‘Ld. Pr. CIT’) erred in invoking the provisions of section 263 of the Act and setting aside the order of the Ld. A.O.

2. On the facts and circumstances of the case and in law, the Ld. Pr. CIT has erred in invoking the provisions of section 263 of the Act in respect of the issues decided by the bLd. AO by taking one of the possible view therefore the order u/s 143(3) is not erroneous.

3. On the facts and in the circumstances of the case, the Ld. Pr.CIT erred in both fact and in law in ignoring the fact that the powers under Section 263 of the Act cannot be used by the PCIT for substituting the thoughtful decision of the Ld. A.O.

4. On the facts and circumstances of the case, the order passed by Pr. CIT under section 263 of the Income Tax Act is unsustainable as the power to revise can be invoked in the case of a lack of enquiry, not in the case of an inadequate ”

2. Briefly stated, facts of the case are that the assessee had e-filed his return of income for the year under consideration 29.09.2022 declaring total income at Rs. 67, 91.900/-. The return of income filed by the assessee was selected for scrutiny for verific ation/ examination of:

(i) High liability as compared to low income/receipt;

(ii) Substantial purchases made from suppliers who are non-filers; and

(iii) Cases in which large addition made in earlier years.

3. The Assessing Officer completed the assessment under section 143(3) r.w.s 144B of the Act on 24 .03.2024 by making a disallowance of Rs. 34,77,68,805 /-, being 25% of unexplained/ unverifiable purchases of Rs. 139,10,75,219 /-.

4. Subsequently, the learned PCIT called for the assessment record and after examination, he was of the view that the assessment order passed by the Assessing Officer was erroneous insofar as prejudicial to the interest of the Revenue and accordingly issued notice under section 263 of the Act on 21 .07.2025 providing the asses see an opportunity of being heard.

5. In the said notice, the learned PCIT noted that during the year under consideration, the assessee had debited purchases amounting to Rs. 168,85,87,710 /- to the profit and loss account, out of which 24 suppliers who made sales to the tune of Rs. 139,10,75,219/- had not filed their Goods and Service Tax ( GST) returns for the relevant period and the GST authority had cancelled or suspended registration ( i.e. GSTIN) of 23 out of 24 suppliers from whom the assessee had made purchases, and this fact was duly admitted by the assessee.

6. Further, the learned PCIT noted that the assessee furnished unsigned confirmations of the accounts but failed to furnish the ledger copies of transactions of suppliers incorporating quantitative details of goods purchases and sales. He further noted that the assessee failed to mention the nature and quality of goods procured in the purchase register. He also noted that mode and date of payment and payment evidences were not entered in the purchase register.

7. The learned PCIT also noted that except for a few vehicles, the assessee failed to furnish date and place of dispatch, date and time of receipt of consignment, inward time, signature of transporter, vehicle number and mode of transportation, Weighment slips, Bilti Slips, inventory of stocks etc were not furnished to establish the genuineness of physical receipt of goods purchased.

8. The learned PCIT further noted that the Assessing Officer during the course of assessment proceedings observed that in view of cancellation or suspension of GSTIN and non -filing of GST returns by suppliers, the question of fictitious inflation of purchases/substituting grey market purchases for genuine one by obtaining higher rate invoices from entry providers cannot be ruled out. The Assessing Officer held that the assessee did not discharge its burden with corroborative evidences and accordingly construed that the assessee had taken help of bogus purchase invoices to reduce its profit. The Assessing Officer accordingly rejected the books of account invoking section 145(3) of the Act and estimated the income at Rs. 34,77,68,805 /-, being 25% of bogus purchases of Rs. 139,10,75,219/-.

9. The learned PCIT however noted that in the case for assessment year 2021-22, on similar information, the Assessing Officer carried out enquiry during assessment proceedings through Ward Inspector and came to the conclusion as under:

“1. you have misreported and accounted the bogus purchases in your books of account,

2. the submissions made by you were not true and misleading

3. some of suppliers Smt Seema and Santosh had never stayed at the premises mentioned in PAN address and some of them ie Smt. Manowara Begum (MB Trading Company) were not doing the business of trading of scrap or metal products as mentioned in GST data

4. Smt Maya (Jai Mata Enterprises & Patel Enterprises) was a house help and has never entered into business transaction with you.

5. The list of the suppliers submitted by you were neither found on last known addresses nor involved in any business with you.

6. In most of the supplier’s cases, GST was cancelled suo -moto by the GST Department for various faults.”

10. Accordingly, the Assessing Officer in AY 2021-22 disallowed the entire amount of unverifiable purchases of Rs. 34,07,49,344 /- as bogus and added the same to the total income.

11. The learned PCIT further noted that on comparison of the suppliers for assessment years 2021 -22 and 2022-23, two common suppliers were found, namely, M/s Maya having PAN FKFPM 0241F and Seema having PAN JLBTS 5070 P.

12. The learned PCIT noted that the Assessing Officer in the year under consideration ( i.e. AY 2022 -23), without making proper enquiries, estimated profit at the rate of 25% of the bogus purchases instead of fully disallowing the unverifiable/bogus purchases. Accordingly, the learned PCIT called upon the assessee as to why the failure on the part of the Assessing Officer to disallow the entire unverifiable purchases after due enquiry rendered the assessment erroneous insofar as prejudicial to the interest of the Revenue within the meaning of section 263 of the Act.

13. The assessee, in its written submission, submitted that during the assessment proceedings, the assessee furnished tax invoices, purchase orders, proof of payment via banking channel, stock register entries, audited accounts and corresponding sales details, with banking receipts which were duly examined by the Assessing

14. It was submitted that the Assessing Officer had made enquiries and taken one of the possible views by making addition at the rate of 25% of the purchases and therefore the asset ssmen order cannot be branded as erroneous merely because the learned PCIT was of the view that deeper enquiry was warranted and 100% disallowance ought to have been made.

15. Further, the assessee submitted that the sole basis of the PCIT proceedings was generic investigation report as a third party statement recorded during GST proceedings, which did not directly implicate the assessee. No independent tangible material was brought on record to establish that purchases were bogus. Further, it was submitted that the alleged third-party statements were not subjected to cross-examination despite being reliance upon.

16. Accordingly, the assessee submitted that the Assessing Officer conducted due enquiries and after considering the relevant material on record and adopted estimated profit at 25% of the purchases and therefore the learned PCIT cannot replace one of the possible view.

17. The learned PCIT, after verification of the submissions of the assessee, concluded that the order passed by the Assessing Officer was erroneous insofar as prejudicial to the interest of the Revenue, observing as under:

“6.0 Observations made during the revision proceedings u/s 263 of the Act:

6.1 On perusal of records, it is observed that during the year relevant to AY 2022-23, the assessee has debited purchases amounting to Rs.168,85,87,710/ – to Profit & Loss Account. Out of the same, 24 suppliers who made sales to the assessee to the tune of Rs.139,10,75,219/ – have not filed their GST Returns for the relevant period, hence, the GST authority has cancelled or suspended GSTIN of 23 out of 24 suppliers. This fact was admitted by the assessee vide his remark note dated 18.03.2024.

6.2 It is further noticed that original purchase invoices of the assessee were seized by GST Authority for investigation purpose from his possession. Many discrepancies in purchase register were found such as order No. & date, terms of payment, receipt Note No. & Date, Receipt Doc./LR No., despatch details were kept blank. No narration of items /goods purchased were mentioned. The assessee had furnished unsigned confirmation of accounts and failed to furnish the ledger copy of transactions of suppliers incorporating quantitative details of goods purchases and sales. The assessee also failed to mention / enter the nature and quantity of goods procured in Purchase Register. Also, mode and date of payment and payment evidences were not entered in Purchase Register. Therefore, the Assessing Officer rightly concluded that the assessee had resorted to accommodation entries in the form of bogus purchases.

6.3 It is noteworthy to mention here that on similar information, the case of the assessee was selected for scrutiny under CASS for AY 2021 -22 i.e. substantial purchases made by the assessee from suppliers who are either Non-Filers or have filed non-business ITR or reflected a substantially lower turnover in ITR. On perusal of the assessment order u/s 143(3) r.w.s 144B of the Act dated 23.12.2022 for AY 2021 –22, it is seen that the Assessing Oficer after due verification of facts and exhaustive enquiry including field enquiry through Ward Inspector had come to the following conclusion:

1. the assessee had misreported and accounted the bogus purchases in books of account of assessee

2. the submissions made by the assessee were not true and misleading

3. some of the suppliers Smt. Seema (Proprietor of Radhakishan & Sons) and Santosh had never stayed at the premises mentioned in PAN address which showed the contradiction in assessee’s claim and actual reality on

4. some of them i.e Smt. Manowara Begum (MB Trading Company) was not doing the business of trading of scrap and dealers in clothing and other dressing apparels as mentioned in GST data. This proved that the assessee claimed bogus purchase as the vendor was not selling scrap or metal products.

5. Maya (Proprietor of Jai Mata Enterprises & Patel Enterprises) was a house-help and has never entered into any business transaction with the assessee.

6. The list of the suppliers submitted by the assessee were neither found on last known addresses nor involved in any business with the assessee. Rather these suppliers were managing their life hand to mouth by doing labour work or as house help.

7. In most of the supplier’s cases, GST was cancelled sub -moto by the GST Department for various defaults as per the provisions of GST Law.

6.3.1 Accordingly, the Assessing Officer after thorough enquiry & investigation and after considering the report of Ward Inspector disallowed unverifiable purchases of Rs.34,07,49,344/ – as bogus and added the same to the total income for AY 2021-22.

6.4 It is seen that the CASS reason for selection of the case u nder scrutiny for both the assessment years AY 2021 -22 & AY 2022-23 is identical which is reproduced as under:

6.4.1 In the assessment order for AY 2021 -22, the Assessing Officer after thorough inquiry and investigation including physical enquiries of suppliers has disallowed unverified purchases of Rs.34,07,49,344/ – out of total purchases of Rs.50,75,99,943/-. However, on the other hand, in AY 2022 -23 the Assessing Officer has estimated the profit @ 25% of total purchases of Rs.139,10,75,219/ – without any inquiry or verification, even after observing that the assessee resorted to accommodation entry in the form of bogus purchases to reduce profits. For the year under consideration i.e AY 2022–23, one of the CASS reasons was “cases in which large addition made in earlier years”. Hence, the Assessing Officer ought to have verified the findings and the investigations made in AY 2021-22 before passing the order for AY 2022-23.

6.4.2 Further, on comparison of suppliers for AY 2021 –22 & AY 2022-23, two common suppliers are found i.e Maya having PAN FKFPM0241F (Proprietor of Jai Mata Enterprises & Patel Enterprises) and Seema having PAN JLBPS5070P (Proprietor of Radhakishan & Sons). The assessee made the following purchases in both the AYs 2021 -22 & 2022-23 from these common suppliers:

6.4.3 However, the A.O without making proper enquiries or verification has estimated profit @25% of bogus purchases in AY 2022-23 instead of fully disallowing the unverifiable bogus purchases. The Assessing Officer cannot arbitrarily change its stance in a subsequent year on an issue that was previously decided and accepted in earlier assessments, especially if no new material facts, changes in law, or changes in circumstances have arisen. On comparison of both the assessment orders, vis-à-vis AY 2021 -22 & AY 2022-23, it is quite evident that the Assessing Officer has changed the stance in dealing with the facts without any basis and ignoring the findings / investigation made in the preceding assessment year.

6.4.4 The report of the Ward Inspector / Verification Unit which is recorded on page number 6 of the assessment order dated 23.12.2022 for AY 2021 -22 in respect of Seema (Proprietor of Radhakishan & Sons having PAN: JLBPS5070P) is reproduced as under:

7. Radhakishan & Sons (Smt. Seema), PAN: JLBPS5070P, GSTIN: 07JLBPS5070P1ZB: The assessee company has reported purchase of Rs.3,78,06,383/ – (as per the ledger submitted by the assessee dated 17.12.2022) from the above seller (Radha Kishan & Sons) during the year as per the purchase register furnished vide its reply dated 10.12.2022. The case was referred to the verification unit to ascertain the genuineness of transaction by physically verifying the sales made. The verification unit has furnished a report stating that the specified person Smt. Seema never stayed at the premise mentioned in the PAN address (Screenshot attached below):

[Remarks/any relevant information such as name of person staying in the address, new address of the specified person: I visited the above mentioned address area. Neighbors told the reported person never stayed at the premise, the space is Office of the IT Act, could not be linked to the specified person.]

In this regard the assessee stated the following in his submission made on 17.12.2022:

Without prejudice to above we have to mention that I have gone through the list of parties given in the notice. It is came to my notice that purchase figure of M/s Radha Kishan & Sons considered in the notice is Rs. 9,17– ,45,681/ but actual purchase from the said party is of Rs. 3,23-. ,59,306/

Whereas, as per the ledger of Radha Krishna and Sons submitted by the assessee dated 17.12.2022, it was found that the total purchase made for F.Y. 2020-21 with the supplier is of Rs. 3,78,06,383/ –.

6.4.5 The report of the Ward Inspector / Verification Unit which is recorded on page numbers 11 – 14 of the assessment order dated 23.1 2.2022 for AY 2021 -22 in respect of the Supplier Maya (Proprietor of Jai Mata Enterprises & Patel Enterprises having PAN: FKFPM0241FF ) for AY 2021 –22 is reproduced as under:

7.4. Jai Mata Enterprises (Smt. Maya), PAN: FKFPM0241F, GSTIN: 07FKFPM0241F2ZG : The assessee company has reported purchase of Rs.3–,82,68,875/ (as per the ledger submitted by the assessee dated 17.12.2022) from the above seller (Jai Mata Enterprises) during the year as per the purchase register furnished vide its reply dated 10.12.2022 . The case was referred to the verification unit to ascertain the genuineness of transaction by physically verifying the sales made. The verification unit has furnished a report stating that during the enquiry Smt. Maya (PAN–FKFPM0241F) received the notice u/s 133(6) of IT Act issued by the designated Verification Unit.

7.5. Patel Enterprises (Smt. Maya), PAN: FKFPM0241F, GSTIN:07FKFPM0241F2ZH: The assessee company has reported purchase of Rs.4,45,08,420/ – (as per the ledger submitted by the assessee dated 17.12.2022) from the above seller (Jai Mata Enterprises) during the year as per the purchase register furnished vide its reply dated 10.12.2022. The case was referred to the verification unit to ascertain the genuineness of transaction by physically verifying the sales made. The verification unit has furnished a report stating that during the enquiry Smt. Maya (PAN–FKFPM0241F) received the notice u/s 133(6) of IT Act issued by the designated Verification Unit.

7.5.1. As per the purchase register furnished by the assessee Mr. Lavesh Kumar vide its reply dated 10.12.2022, the suppliers i.e. Jai Mata Enterprises and Patel Enterprises belongs to Smt. Maya as mentioned above in para 7.4 and 7.5. On receipt of notice u/s 133(6) of IT Act, Smt. Maya, Proprietress of Patel Enterprises and Jai Mata Enterprises (as per the GST data) furnished her written reply as below;

6.4.6 From the above, it quite clear that in case of both the common suppliers i.e Maya and Seema, it is not established that they were doing some genu business and carried out any sale transactions with the assessee during AY 2021-22. Therefore, the purchases in respect of these two common suppliers were proved beyond doubt as bogus purchases. It is crystal clear that the assessee, with an intention to evade taxes, had taken bogus bills. Thus, the Assessing Oficer has failed to properly examine this issue, which has rendered the assessment order erroneous in so far as it is prejudicial to the interests of revenue.

7. Various Courts have held time and again that if the AO failed to conduct proper enquiries and failed to appreciate the facts in the right perspective, the resultant assessment order may be held to be erroneous and prejudicial to the interests of the revenue.

7.1 In the case of ITO Vs. DG Housing Projects- [(2012) 343 ITR 329 (Delhi)], the power of revision u/s 263 of the Act has also been thoroughly examined by the Delhi High Court. While examining the issue, the Hon’ble Court made distinction among different situations and has held that;

“The Assessing Officer is both an investigator and an adjudicator. If the Assessing Officer as an adjudicator decides a question or aspect and makes a wrong assessment which is unsustainable in law, it can be corrected by the Commissioner in exercise of revisionary power. As an investigator, it is incumbent upon the Assessing Officer to investigate the facts required to be examined and verified to compute the taxable income.

If the Assessing Oficer fails to conduct the said investigation, he commits an error and the word “erroneous” includes failure to make the enquiry. In such cases, the order becomes erroneous because enquiry or verification has not been made and not because a wrong order has been passed on merits.”

7.1.1 In the case under consideration, the Assessing Officer had not made proper inquiries, verification and examination of the bogus purchases amounting to Rs.139,10,75,219/- despite the fact that the list of suppliers of both AYs 2021 -22 & 2022-23 had two common suppliers and purchases from those two common suppliers (Maya & Seema) to the tune of Rs.12,05,83,678/ – [Rs.3,82,68,875 + Rs.4,45,08,420/- + Rs.3,78,06,383] were 100% disallowed on the basis of investigation / physical enquiries in AY 2021 -22 as discussed above. For AY 2022-23, the Assessing Oficer had without any basis disallowed only 25% of total purchases of Rs.7,47,68,790/ – from these two established bogus suppliers and 25% of all the remaining suppliers who were non-filers of GST return and their GSTIN were cancelled /suspended. A s such, the assessment order for AY 2022-23 is erroneous due to failure on the part of the Assessing Oficer to make proper inquiry, investigation and verification.

7.2 Hon’ble Supreme Court, vide its judgement dated 10.02.2000, in the case of Malabar Industrial Co Ltd [2000] 109 Taxman 66 (SC) has held that:

“…There can be no doubt that the provision cannot be invoked to correct each and every type of mistake or error committed by the Assessing Officer; it is only when an order is erroneous that the seciont will be attracted. An incorrect assumption of facts or an incorrect application of law will satisfy the requirement of the order being erroneous. In the same category fall orders passed without applying the principles of natural justice or without application of mind.

The phrase ‘prejudicial to the interests of the revenue’ is not an expression of art and is not defined in the Act. Understood in its ordinary meaning, it is of wide import and is not confined to loss of tax…” collect tax in accordance with the provisions of the Act and this task is entrusted to the revenue. If due to an erroneous order of the ITO, the revenue is losing tax lawfully payable by a person, it will certainly be prejudicial to the interests of the revenue…”

7.2.1 In CIT vs Bhagwan Das (2005) 272 ITR 367 (All.), Hon’ble High Court has held that non-application of mind by the Assessing Oficer was prejudicial to the interests of the revenue. In Pratap Footwear vs ACIT (2003) SOT 638 (Jabalpur) (Trib.) Hon’ble Tribunal has held that non-application of mind by the Assessing Officer was prejudicial to the interests of revenue.

7.2.2 Similarly, in the case of CIT Vs Ashok Logani [(2011) 202 Taxman, 201], the Hon’ble Delhi High Court has held revision u/s 263 to be valid when it was found that there was no proper consideration by A.O to issues at hand and he left many loose ends. Further, in the case of Raj Mandir Estates [386 ITR 162] and Daniel Merchants Pvt. Ltd. Vs ITO [2017 TIOL-2526-H.C Kolkata-IT], it was held by Hon’ble High Court that the CIT is entitled to revise the assessment order u/s 263 of I.T. Act on the ground that the A.O did not make any proper enquiry while accepting the explanation of the assessee.

7.2.3 In the present case, the Assessing Officer vide para 4.4 & 4. 5 recorded on pages 10 to 13 of the assessment order, had pointed out various lacunas / deficiencies in the submissions of the assessee and came to conclusion that assessee had taken the help of bogus purchase invoices from entry providers to reduce its actual financial result or its profits. However, the Assessing Oficer only brought to tax 25% of total purchases which is certainly ‘an error’ committed by the Assessing Oficer. This caused a loss of revenue to exchequer to the extent of Rs.1,04,33,06,414/ – [Rs.139,10,75,219 (-) Rs.34,77,68,805/ -]. Hence, it is quite apparent that the Assessing Oficer had drawn incorrect assumption of facts before him and had also not applied his mind while passing the assessment order rendering the assessment order prejudicial to the interests of the revenue.

8.0 The assessee vide his submissions has alleged that neither of the jurisdictional conditions i.e ‘erroneous, and ‘prejudicial to the interest of the revenue’, for invoking section 263 is satisfied.

8.1 On the issue of assumption of jurisdiction u/s 263 of the Act, reliance is placed on the landmark judgement of the Hon’ble Supreme Court of India dated 02.05.2023 in SLP APPEAL (C) NO. 6457 OF 2018 in the case of BSES Rajdhani Power Ltd Vs PCIT, Delhi-2 [[2023] 152 taxmann.com 139 (SC)] wherein the Apex Court has upheld the decision of the Hon’ble High Court of Delhi dated 08.11.2017 [2017] 88 taxmann.com 25 (Delhi)], in which it was held that:

“15. As far as the first aspect with respect to exercise of power under Section 263 is concerned, the issue stands concluded, in the light of the amendment with efect from 1989, by insertion of Explanation (c) to Section… 263 (1). The non-consideration of the larger claim for Rs.298.93 crores as depreciation and the consideration of only a part of it (Rs. 644,81,091) by the assessing officer, who did not go into the issue with respect to the whole amount, was an error, that could be corrected under Section 263. Aruba (supra) is decisive, in that the provision of Section 263 (1) Explanation (c) was introduced to cater to precisely this kind of mischief

16. On the aspect of show cause notice, i.e., the second and third questions framed, the court is of the opinion that the ruling in Amitabh Bachhan (supra) is decisive; it upholds the power of the Commissioner to consider all aspects which were the subject matter of the AO’s order, if in his opinion, they are erroneous, despite the assessee’s appeal on that or some other aspect. The Court held that:

“Reverting to the specific provisions of Section 263 of the Act what has to be seen is that a satisfaction that an order passed by the Authority under the Act is erroneous and prejudicial to the interest of the Revenue is the basic pre-condition for exercise of jurisdiction under Section 263 of the Act. Both are twin conditions that have to be conjointly present. Once such satisfaction is reached, jurisdiction to exercise the power would be available subject to observance of the principles of natural justice which is implicit in the requirement cast by the Section to give the assessee an opportunity of being heard…”

8.1.1 From the above, it is seen that the Pr. Commissioner of Income Tax can very well consider all issues related to the order of the Assessing Oficer, if the issues are erroneous and prejudicial to the interests of the revenue. The only pre-condition for exercising the jurisdiction u/s 263 of the Income Tax Act is satisfaction of the twin conditions i.e order passed by the Assessing Oficer should be erroneous and prejudicial to the interests of the revenue.

8.1.2 In the case under consideration, the twin conditions have been satisfied for initiating the revision proceedings u/s 263 of the I.T Act. It is seen from the assessment order passed u/s 143(3) rws 144B of the Act dated 24.03.2024 that despite having two common suppliers with respect to AY 2021 -22 wherein 100% bogus purchases were added, the Assessing Officer has not carried out any inquiries and impetuously made disallowance of only 25% of total purchases instead of 100% of unverified purchases. Therefore, the first condition of the order being ‘erroneous’ is satisfied. With respect to second condition i.e. ‘prejudicial to the interests of the revenue’, as the Assessing Oficer chose to tax only 25% of total purchases instead of unverified purchases, this resulted in under assessment of income to the extent of Rs.1,04,33,06,414/ – [Rs.139,10,75,219 (-) Rs.34,77,68,805/-]. Thus, the second condition is also satisfied, as there is loss of revenue.

9. Another contention of the assessee is that ‘this is no case of ‘lack of enquiry ‘ and where the AO has made enquiries and taken one of the possible views, the same cannot be branded as “erroneous” merely because the PCIT believes a deeper inquiry was warranted.’

9.1 With regard to the above, it is hereby submitted that this case is not only a case of ‘lack of enquiry’ by the Assessing Oficer but also ignoring the enquiry / investigation made in the preceding assessment year. In the assessment order for AY 2021-22, the Assessing Officer, after carrying out inquiries and physical verification through Ward Inspector had disallowed the entire ‘unverified purchases.’ For the year under consideration i.e AY 2022 -23, the Assessing Officer, despite concluding that the assessee had resorted to ‘bogus purchases ‘ for evading the tax, has hastily passed the assessment order without conducting inquiries or verification of all the suppliers and disallowed only 25% of total purchases. This is a completely diverse stand taken by the Assessing Officer when compared with previous assessment year, especially where adverse findings were recorded in respect of two common suppliers i.e. Maya and Seema. Hence, the stand of the Assessing Oficer is erroneous. Further, no question of two views arises here, as claimed by the assessee. There is only one view that the entire unverified purchases after thorough inquiries and verification should have been added, since the assessee has resorted to accommodation entry in the form of bogus purchases from those suppliers whose GSTIN was cancelled / suspended.

9.1.2 As cited in para 7.2, the Hon’ble Delhi High Court has held in D. G. Housing Projects (supra) that “the Assessing Officer is both an investigator and an adjudicator. If the Assessing Officer as an adjudicator decides a question or aspect and makes a wrong assessment which is unsustainable in law, it can be corrected by the Commissioner in exercise of revisionary power”. Thus, Assessing Oficer has failed to examine this issue in the right perspective. Non-application of mind by the Assessing Officer resulted in an erroneous order and caused prejudicial to the interests of the revenue. Therefore, the contention of the assessee that this is not a case of lack of enquiry and AO has taken one of the possible views is not acceptable and devoid of any merit.

10.0 The revision proceedings u/s 263 of the Act for AY 2022 -23 are based on the fact that despite the finding of the Assessing Oficer that the assessee resorted to accommodation entry in the form of bogus purchases, the Assessing Officer only estimated the profit @25% of total purchases without carrying out proper enquiries or verification of suppliers and thereby deviated from the stand taken in assessment proceedings for AY 2021 -22. The Assessing Officer also failed to notice that there are two common suppliers in the list of purchases made by the assessee for both the AYs 2021 -22 & 2022-23 and the said common suppliers were subjected to exhaustive enquiries including field enquiries by Ward Inspector and it was found during the assessment proceedings in AY 2021 -22 that one of the suppliers Smt. Seema (Proprietor of Radhakishan & Sons) had never stayed at the premises and another supplier Smt. Maya (Proprietor of Jai Mata Enterprises & Patel Enterprises) was a house-help and has never entered into any business transaction with the assessee. The bogus purchases of these two suppliers to the tune of Rs.12,05,83,678/ – were disallowed 100% by the Assessing Officer in AY 2021 -22 along with other unverified /bogus suppliers.

10.1 As such, the contentions of the assessee that there is no error in the assessment order and the revision notice is merely change of opinion, revision is based on generic report of Investigation Wing and revision is solely on suspicion arising from a third-party statement has no force and deserves to be rejected.

11. It is also noticed from the submission that on the one hand, the assessee is claiming that the Assessing Oficer (AO) conducted due enquiries, considered all relevant material on record but on the other hand, the assessee is contending that addition of 25% of the purchases was made without even considering the corresponding sales which is erroneous and unsustainable in law. Thus, the assessee is making contradictory statement that the action of the assessing officer was correct but assessment order was erroneous. In view of the conflicting statement, the claim of the assessee that proceedings u/s 263 are without jurisdiction holds no water.

12. It is an established law that an assessment passed by the Assessing Oficer is expected to be made after making necessary inquiries and verifications to find out the correct course of action, including the correct assessable income of the assessee, and not take the facts placed by the assessee on their face value. In the case, Assessing Oficer failed to make proper / any inquiry and verification on the issues discussed above and passed the order without proper consideration of law and due application of mind. Consequently, the assessment order passed by him is erroneous and pre-judicial to the interest of revenue. Interestingly, the case of assessee is also clearly covered under clause (a) of Explanation 2 of section 263(1) of IT Act, 1961. For the sake of clarity, the same is reproduced herein below:

“263. (1) The Principal Commissioner or Commissioner may call for and examine the record of any proceeding under this Act, and if he considers that any order passed therein by the Assessing Officer is erroneous in so far as it is prejudicial to the interests of the revenue, he may, after giving the assessee an opportunity of being heard and after making or causing to be made such inquiry as he deems necessary, pass such order thereon as the circumstances of the case justify, including an order enhancing or modifying the assessment, or cancelling the assessment and directing a fresh assessment.

Explanation 1. ………………

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

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

13. Accordingly, after careful examination of the facts placed on record and the legal position discussed as above, the contentions raised by the assessee through submissions filed during the course of revision proceedings, are hereby disposed as meritless and unacceptable for the following reasons:

1. In the case under consideration, it is abundantly clear that the Assessing Officer has failed to properly inquire / verify / examine the issue which has rendered the assessment order erroneous in so far as it is prejudicial to the interests of the revenue. The Assessing Oficer, despite his categorical finding that the assessee had resorted to accommodation entry in the form of bogus purchases has disallowed only 25% of total purchases instead of 100% of unverified / bogus purchases for AY 2022–23, as was done in AY 2021 –22. The Hon’ble Bombay High Court in its recent judgement in the case of PCIT vs Kanak Impex (India) Ltd dated 03.03.2025 has held that “since assessee had failed to prove purchases including source of expenditure by not offering any explanation in course of reassessment proceedings, provisions of section 69C were clearly attracted and, therefore, Assessing Officer was justified in making addition of entire amount of bogus purchases”.

2. The Assessing Officer has also failed to consider that the list of suppliers vis–à-vis for AYs 2021-22 & 2022-23 consisted of two common suppliers i.e Maya having PAN FKFPM0241F (Proprietor of Jai Mata Enterprises & Patel Enterprises) and Seema having PAN JLBPS5070P (Proprietor of Radhakishan & Sons) and purchases from these two common suppliers (Maya & Seema) to the tune of Rs.12,05,83,678/ – [Rs.3,82,68,875 + Rs.4,45– ,08,420/ + Rs.3,78,06,383] were 100% disallowed on the basis of investigation / physical enquiries in AY 2021­22 along with other unverified / bogus purchases. However, the A.O, without making proper enquiries or verification has estimated profit @25% of total purchases in AY 2022–23 instead of fully disallowing the entire unverifiable bogus purchases which also included these two common suppliers whose whereabouts were not found and job profile was that of house-help.

3. The Assessing Oficer has allowed the relief of Rs.1,04,33,06,414/ – [Rs.139,10,75,219 (-) Rs.34,77,68,805/-] without inquiring into th e claim and without application of mind on the above aspects. He has left many loose ends in the assessment order.

14. In view of the above facts and circumstances of the case, it is held that the assessment order dated 24.03.2024 passed u/s 143(3) r.w.s. 144B of the I.T. Act for AY 2022-23 is erroneous in so far as it is prejudicial to the interests of the revenue within the meaning of Section 263 of the I.T Act in terms of Explanation 2(a) to section 263 of the Act. Therefore, the assessment order dated 2 4.03.2024 passed u/s 143(3) r.w.s. 144B of the I T Act is fully set–aside. The Assessing Oficer is directed to reframe the assessment de novo after considering the issues raised in the notice u/s. 263 of the Act in accordance with law and after afording proper opportunity of being heard to the assessee. ”

18. We have carefully considered the rival submissions, examined the assessment records, perused the impugned revisional order, and scrutinised the material placed before us. Upon such consideration, we find that the learned Principal Commissioner of Income Tax invoked the jurisdiction under section 263 of the Act on two distinct grounds. First, by placing reliance upon Explanation 2(a) to section 263, it was held that the assessment order was rendered erroneous and prejudicial to the interests of the Revenue on account of the Assessing Officer having failed to conduct the enquiries and verifications which the facts of the case demanded. Secondly, the learned PCIT formed the view that, having regard to the nature of the transactions and the findings recorded by the Assessing Officer himself regarding bogus purchases, the entire amount of such purchases ought to have been brought to tax, particularly in the light of the law laid down by the Hon’ble jurisdictional High Court in PCIT v. Kanak Impex (India) Ltd.

19. Insofar as the first limb of the revisional jurisdiction is concerned, it is now well-settled that an assessment order passed without making enquiries or verifications which ought to have been made in the circumstances of the case falls within the deeming fiction contained in Explanation 2(a) to section 263 and is, therefore, liable to be regarded as erroneous insofar as it is prejudicial to the interests of the Revenue. In the present case, the assessee had claimed substantial purchases from certain suppliers, some of whom had already been subjected to extensive investigation in the immediately preceding assessment year. The enquiries conducted in that year had culminated in a categorical finding that the concerned parties were merely accommodation-entry providers and that the purchases claimed from them were not genuine, resulting in a disallowance of the entire amount of such purchases. Despite the existence of these findings and notwithstanding the fact that one of the reasons for selection of the case for scrutiny was verification of purchases from non-compliant suppliers, the Assessing Officer, in the year under consideration, failed to undertake any meaningful enquiry or verification regarding the genuineness of the suppliers, the actual source of procurement of goods, or the surrounding circumstances of the impugned purchases. The learned PCIT has rightly taken note of the detailed enquiries carried out in the preceding assessment year and the adverse findings recorded therein with respect to common suppliers. In these circumstances, we are unable to fault the conclusion of the learned PCIT that the assessment order suffered from a patent lack of enquiry and, therefore, squarely attracted the provisions of Explanation 2(a) to section 263.

20. We also find considerable force in the second aspect highlighted by the learned PCIT. The Assessing Officer himself recorded a finding that the entities from whom purchases were shown to have been made were merely bill providers and that the transactions represented accommodation entries. At the same time, the sales declared by the assessee were accepted as genuine. Once such a position is accepted, the inevitable inference is that the goods sold by the assessee must have been procured from some undisclosed source outside the recorded channels. In such a situation, the burden lies upon the assessee to explain the actual source of procurement of the goods as well as the source of expenditure incurred therefor. Admittedly, no such explanation was forthcoming. The Hon’ble Bombay High Court in Kanak Impex (India) Ltd. has held that where the assessee fails to establish the source of expenditure relating to purchases allegedly made through accommodation entries, the provisions of section 69C are attracted and the entire amount is liable to be brought to tax. We find that the Assessing Officer did not examine the issue from this perspective at all. More importantly, despite the fact that in the immediately preceding assessment year a complete disallowance had been made on the basis of detailed investigation, the Assessing Officer, in the year under consideration, chose to restrict the addition to 25 per cent of the purchases without recording any cogent reason for departing from the earlier factual findings or demonstrating any material change in facts, law, or circumstances. Such unexplained departure from an earlier stand founded upon investigation and verification clearly reflects non-application of mind and renders the assessment order vulnerable to revision under section 263.

21. Having regard to the totality of the facts and circumstances, we are of the considered view that the learned PCIT was fully justified in invoking the revisional jurisdiction under section 263 of the Act. The impugned assessment order was passed without conducting the enquiries and verifications warranted by the facts of the case and without properly examining the legal consequences flowing from the findings regarding bogus purchases. The order, therefore, rightly falls within the ambit of an order that is both erroneous and prejudicial to the interests of the Revenue. We, accordingly, find no infirmity, factual or legal, in the revisional order passed by the learned PCIT and uphold the same.

22. In the result, the appeal filed by the assessee is dismissed.

Order pronounced in the open Court on 10/06/2026.