Hoshiarpur Traders Vs PCIT (ITAT Amritsar)
Conclusion: AO had applied his mind while doing the assessment therefore, the investigation by AO could not be called ‘lack of investigation’ and revision order passed under section 263 was quashed.
Held: Assessee was a partnership firm and the dealer of the liquor. The assessment was completed u/s 143(3). The notice u/s 263 was issued by PCIT and the details submission was filed by assessee against the show cause notice & finally PCIT had set aside two issues for further verification before AO considering the assessment order erroneous & prejudicial to the revenue. Primarily the set aside issues were a) Introduction of capital contributed by the partners; b) amount raised through unsecured loan. The ground for setting aside of the assessment order was that creditworthiness and the genuineness of the transaction was not verified during the assessment proceeding. PCIT has formed opinion that the verification was insufficient in relation to creditworthiness and the genuineness of the transaction. Accordingly, the order passed u/s 143(3) was erroneous and prejudicial to the interest of revenue and liable to be set aside. It was held that though the assessment order did not patently indicate that the issue in question had been considered by AO, the record showed that AO had applied his mind. Once such application of mind was discernible from the record, the proceedings under Section 263 would fall into the area of the Commissioner having a different opinion. Investigation by AO could not be called ‘lack of investigation’. PCIT had not brought any material on record to show that the view taken was contrary to law or the investigation was erroneous. PCIT was not justified in setting aside the order of AO. Accordingly, the directions of the PCIT were quashed.
FULL TEXT OF THE ORDER OF ITAT AMRITSAR
The instant appeal of the assessee is directed against the order of the ld. Pr. Commissioner of Income Tax -1, Jalandhar, [in brevity the PCIT] bearing appeal No. DIN & Order No. ITBA/REV/F/Rev5/2021-22/1042161981(1), date of order 30.03.2022, the order passed u/s 263 of the Income Tax Act 1961, [in brevity the Act] for A.Y. 2017-18.The impugned order was emanated from the order of the ld. Dy. Commissioner of Income Tax, Circle, Hoshiarpur, (in brevity the AO) order passed u/s 143(3) of the Act date of order 24.12.2019. The assessee has raised the following grounds:
“1. That on the facts and in the circumstances of the case and in law, Ld. Principal Commissioner of Income Tax (CIT) erred in passing order u/s 263 of the Income Tax Act, 1961 (the Act), when the assessment for the impugned assessment year 2017-18 had already been concluded by Assessing officer (AO), u/s 143(3) of the Act, after seeking explanations and making all the enquiries necessary for the completion of assessment. Appellant prays order so passed u/s 263 may please be held as bad in law.
2. That the PCIT has failed to appreciate that the assessment order was neither erroneous nor prejudicial to the interest of the revenue and thus order u/s 263 is bad in law, illegal, ultra-vires, in excess of and/or in want of jurisdiction and otherwise void. That the order u/s 263 setting aside already completed assessment as made by the Assessing Officer u/s 143(3) of the Income Tax Act is based upon incorrect assumption of fact which cannot render the order erroneous. Furthermore, inaction of AO towards inadequate enquiry cannot be said to be prejudicial to the interests of the revenue. Therefore, the mandatory twin conditions of section 263 are not fulfilled.
3. That the Ld. PCIT has erred in invoking clause (a) of explanation 2 of section 263(1) of as the explanation does not authorize unfettered powers to the CIT to revise each and every order passed by the AO.
4. That on the facts and in the circumstances of the case and in law, Ld. PCIT erred in directing the AO to examine the details pertaining to capital introduced by partners by ignoring the fact that all the partners were being assessed to Income Tax regularly in their individual capacity and all the evidences in support thereof were already submitted and examined by Ld. AO. Thus, appellant prays the said direction may please be held as bad in law.
5. That on the facts and in the circumstances of the case and in law, Ld. PCIT erred in directing the AO to examine the creditworthiness of the partner. That the PCIT has ignored the legal precedent that the partnership firm is not required to explain source of income in respect of amount contributed by partners towards capital of firm. That the PCIT has ignored that the assessee firm has duly discharged its onus by submitting assessment orders, audited balance sheet, copy of ITR and capital account of all the partners who have made capital contribution in the firm.
6. Without prejudice to ground no. 5 above, the Ld. PCIT has erred in not appreciating that the investment made by the partners in the firm has already been examined during assessment proceedings framed u/s 143(3) of respective partners. Therefore, the assessment framed u/s 143(3) by the AO is neither prejudicial to interest of revenue nor erroneous.
7. That on the facts and in the circumstances of the case and in law, Ld, PCIT erred in directing the AO to inquire into the identity, genuineness and creditworthiness of Unsecured loans ignoring the fact that necessary details in this regard has already been submitted before AO during assessment proceedings and examined by Ld. AO. Thus, appellant prays the direction of CIT is bad in law.
8. That the order u/s 263 by the Ld. PCIT is illegal, bad in law and without jurisdiction as the Ld. PCIT has failed to consider the replies furnished by the assessee before passing the order u/s 263. That the PCIT has failed to consider the submissions of the assessee regarding the unsecured loans raised by the assessee. The PCIT has ignored that the assessee firm has duly discharged its onus by submitting Income tax returns, bank statements and confirmations in respect of unsecured loans in reply to notice u/s 263. That the PCIT has failed to make any independent enquiry before initiating proceedings u/s 263.
9. That there was no prima facie satisfaction recorded by the PCIT on the basis of material available on record and on the basis of reply submitted by the assessee that the order passed by AO was erroneous and prejudicial to the interest of revenue.
10. That the order passed u/s 263 is without jurisdiction because the PCIT has travelled on issue of capital contribution by the partners, and which is not flagged in the notice u/s 143(2). That the PCIT has no jurisdiction to convert the limited scrutiny into complete scrutiny by invoking the provisions of section 263.
11. That the appellant craves leave to add, amend, or alter any of the above grounds of appeal before or during the course of appellate proceedings.”
2. Tersely, we advert, the fact of the case that the assessee is a partnership firm and the dealer of the liquor. The assessment was completed u/s 143(3) of the Act. The notice u/s 263 was issued by the ld. PCIT and the details submission was filed by the assessee against the show cause notice & finally the ld. PCIT had set aside two issues for further verification before the ld. AO considering the assessment order erroneous & prejudicial to the revenue. Primarily the set aside issues are a) Introduction of capital contributed by the partners; b) amount raise through unsecured loan. The ground for setting aside of the assessment order was that creditworthiness and the genuineness of the transaction was not verified during the assessment proceeding.
The source of the introduction of capital and receiving of unsecured loan was not verified as per observation of the revisional authority. During the assessment proceeding, the assessee complied the notice u/s 142(1) of the Act &filed submission against the requirement of the ld. AO. The ld. PCIT has formed opinion that the verification was insufficient in relation to creditworthiness and the genuineness of the transaction. Accordingly, the order passed u/s 143(3) was erroneous and prejudicial to the interest of revenue and liable to be set aside. Aggrieved assessee filed an appeal before us by challenging the order passed u/s 263 of the Act.
3. Broadly, the two issues were set aside by the ld. PCIT for further verification before the assessing authority. During hearing before ITAT, the ld. Counsel has filed the paper book with brief note which are kept in the record. The observation of the ld. PCIT in para no. 3 and 4 of order U/s 263is extracted as below:
“3. In response to the show cause notices, the assessee filed reply reiterating the submissions made during assessment. Copies of the two replies and of the ledger accounts of creditors, etc. as filed during assessment proceedings were again filed. It was stated that assessments in the case of partners have been framed u/s 143(3) of the Act and investments made by them including their investment in the assessee firm had been examined in their individual cases by their respective AOs.
4. I have considered the reply of the assessee to the SCN u/s 263 of the Act and the assessment records.
(I). The case was selected under CASS for complete scrutiny on the following issues:
i. Large Squared up Loans during the year
ii. Mismatch in expenditure of personal nature.
(II). Verification of Large Squared up Loans during the year was one of the reasons for selection of the case under CASS and hence it merited a proper examination. The assessee did not furnish complete information on this issue as was called for by the Assessing Officer during assessment proceedings, yet the AO completed the assessment and accepted the explanation of the assessee without taking note of the fact that the information as called for by him had not been furnished. The AO also did not make any independent or requisite enquiries or verifications regarding the source, financial capacity of the creditors or of the genuineness of transactions as were called for in the facts and circumstances of the case.
III). The squared-up loans were as under:
