Revisional Power: Difference of Opinion Alone Insufficient to invoke Section 263

Nanak Chand & Co. Vs PCIT (ITAT Delhi)

In a recent decision, the Income Tax Appellate Tribunal (ITAT) in Delhi ruled that a difference of opinion alone is insufficient to invoke Section 263 of the Income Tax Act. The case involved a revisional order passed by the Principal Commissioner of Income Tax (Pr.CIT) concerning the assessment order for the assessment year 2017-18.

Background:

The assessee had e-filed its income tax return for Assessment Year 2017-18, declaring a taxable income of Rs. 1,75,930. The return was selected for scrutiny assessment, with the primary issue being the verification of cash deposits made during the demonetization period.

After the completion of the assessment, the Pr.CIT exercised revisional powers under Section 263 of the Income Tax Act, deeming the assessment order to be erroneous and prejudicial to the interest of the revenue. The Pr.CIT issued a show-cause notice to the assessee, pointing out alleged discrepancies in the assessment.

Key Issues:

The primary issues highlighted in the show-cause notice were as follows:

i. Deposit of Rs. 35,10,000 in the assessee’s bank account on 11.11.2016.

ii. A significant decrease in the gross profit (GP) and net profit (NP) ratios compared to previous years.

iii. The inclusion of interest income of Rs. 1,87,700 in the profit and loss account.

The assessee responded to these issues, providing explanations and supporting documents. The Assessing Officer accepted the explanations and completed the assessment without any modifications.

Pr.CIT’s Revisional Order:

The Pr.CIT, upon reviewing the assessment records, found that the assessment order was erroneous and prejudicial to the interest of the revenue. The Pr.CIT alleged that the Assessing Officer had failed to conduct a proper inquiry into the cash deposits, the decrease in profitability ratios, and the interest income.

The Pr.CIT issued a revisional order setting aside the assessment and directing the Assessing Officer to conduct further inquiries and make a fresh assessment.

ITAT’s Decision:

The ITAT examined the case and concluded that the Pr.CIT’s revisional order was not sustainable in law. The tribunal made the following key observations:

i. Cash Deposit Inquiry: The ITAT noted that the assessee had provided a detailed explanation for the cash deposits, including evidence of withdrawals immediately preceding the deposits. The Assessing Officer had conducted an inquiry and accepted the explanation. The ITAT found that the Assessing Officer’s decision was based on a reasonable inquiry and could not be deemed erroneous merely due to a difference of opinion.

ii. Profitability Ratios: The ITAT acknowledged that the GP and NP ratios had decreased but pointed out that the nature of the assessee’s business, which involved dealing in agricultural produce, could lead to fluctuations in profitability. The Assessing Officer had made inquiries and accepted the explanations provided by the assessee. The ITAT held that the Pr.CIT’s opinion that the assessment was erroneous was unjustified.

iii. Interest Income: The ITAT observed that the Assessing Officer had considered the interest income and assessed it under the appropriate head. The Pr.CIT’s objection on this issue lacked merit.

Conclusion: The ITAT’s decision emphasized that a mere difference of opinion with the Assessing Officer’s decision is insufficient to invoke Section 263 of the Income Tax Act. In this case, the Assessing Officer had conducted reasonable inquiries, and the explanations provided by the assessee were accepted. Therefore, the revisional order was set aside and quashed.

This ruling underscores the importance of conducting thorough assessments and making decisions based on a reasonable inquiry, as it can provide protection against revisional actions.

FULL TEXT OF THE ORDER OF ITAT DELHI

The captioned appeal has been filed at the instance of the assessee against the revisional order of the ld. Principal Commissioner of Income Tax, Ghaziabad (‘Pr.CIT’ in short) dated 15.03.2022 wherein order passed by the Assessing Officer (AO) under Section 143(3) of the Income Tax Act, 1961 (the Act) dated 28.06.2019 concerning AY 2017-18 was held to be erroneous in so far as prejudicial to the interest of the revenue within the meaning of Section 263 of the Act.

2. The grounds of appeal raised by the assessee read as under:

“1. On the facts and circumstances of the case, the revision order passed u/s 263 dated 15.03.2022 by PCIT, Ghaziabad in respect of Assessment Order dated 28.06.2019 u/s 143(3) passed by the ITO, Ward-2(3)(3), Bulandshahar, UP is totally wrong, bad in law and needs to be quashed.

2. That the show cause notice has been issued in regard to three issues mentioned as under:

a) Deposit of sum of Rs.35,10,000/- in the bank account of the assessee on 11.11.2016,

b) Low rate of GP and NP as compared to previous years

c) Mentioning that if interest of Rs.1,87,700/- is excluded then the figure of net profit will be negative.

The assessee has filed complete details asked by the Assessing Officer from time to time and details filed by the assessee covered all the three issues. The cash was deposited on 11.11.2016. The assessee withdrew sum of Rs.18,00,000/- on 03.11.2016 and again Rs.18,00,000/- on 07.11.2016. The assessee explained the source of Rs.35,10,000/- and other details relating to GP and NP etc. Every officer has different way of working and the AO was fully satisfied with the papers / explanation filed by the assessee during the assessment proceedings. Anyhow, the assessee should not suffer for the negligence of the Assessing Officer. It is again the principle of natural justice. Hence, the order passed by the PCIT u/s 263 cancelling the assessment is totally wrong, bad in law and needs to be quashed.

3. That the order passed under Section 263 dated 15.03.2022 by the PCIT, Ghaziabad is bad, illegal and unjustified o the merits of the case and must be quashed.”

3. Briefly sated, the assessee e-filed his income tax return for Assessment Year 2017-18 declaring taxable income at Rs.1,75,930/-. The return filed was subjected to scrutiny assessment under Section 143(3) of the Act whereby the returned income was assessed without any modification. As per the assessment order, the return of assessee was selected under complete scrutiny with verification of cash deposits during demonetization period as central issue.

4. After the completion of the assessment, in exercise of the powers conferred under Section 263 of the Act, the case records of the assessment so made were called by the Revisional Commissioner (Pr.CIT, Ghaziabad). The Pr.CIT observed that the impugned assessment order is erroneous in so far as it is prejudicial to the interest of the revenue. A show cause notice dated 23.02.2022 was issued to the assessee in this regard by the Pr.CIT. As per the show cause notice, the revisional commissioner alleged that the Assessing Officer has failed to carry out requisite verification in respect of cash deposits in bank account during the demonetization period aggregating to Rs.36 lakh and also failed to objectively enquire into reasons for fall in GP ratio and the correctness of book results. The show cause notice issued in this regard to the assessee is reproduced hereunder:

Show Cause Notice u/s. 263 of the Income Tax Act, 1961

ITR for A.Y. 2017-18 was e-filed on 22.10.2017 declaring total income of Rs.1,75,930/- Later on the case was selected for complete scrutiny under CASS with reasons “abnormal increase in cash deposits during demonetization period as compared to pre-demonetization period “. The ITO, Ward-2(3)(3), Bulandshahr completed assessment order u/s. 143(3) of the I.T. Act, 1961, dated 28.06.2019 on total income of Rs.1,75,930/-.

2. From perusal of assessment record, for the year under consideration, following discrepancies/ errors have been noticed:-

(i) On perusal of reply dated 22.04.2019 in respect of notice issued by AO dated 09.04.2019, the assessee’s counsel has submitted reply regarding core issue scrutiny as under.-

Assessee was required to explain the reasons regarding cash deposit in bank account in demonetization period. In this respect my submission is that the govt. has declared demonetization currency from midnight of 08.11.2016 and all the banks were closed on 09.11.2016. Assessee withdraw Rs.36,00,000/- from his PB account as under to pay amount to the farmers from whom goods were purchased.

Out of the above amount assessee has deposited Rs.35,10,000/- on 11.11.2016 to support the above contention I am producing the books of A/cs for your examination/ verification.

AO has accepted the reply of the assessee without enquiring into the assessee’s claim that the cash of Rs.18 lacs withdraw on 03.11.2016 were in fact spent by the assessee for the purpose of his business. The above noted enquiry was all the more relevant in view of the fact that the assessee had also withdrawn Rs.18 lacs from bank on 07.11.2016. As per the common prudence of a businessman it is not probable that the assessee would withdraw a huge cash of Rs.18 lacs on 07.11.2016 when he has already in possession of Rs.18 lacs withdrawn on 03.11.2016. The AO ought to have been made enquiry to pierce the veil which seems to have camouflaged the above noted transactions. The above noted inference of lack of enquiry is further substantiated from the facts that no details of name and address/ particulars of the so called farmers for whom the above noted money is claimed to have been withdrawn for making payment to them is found placed on record. Had the assessee’s claim been a genuine claim, there would have been some shred of evidence for having made such demand by the farmers on the assessee.

(ii) During the year the GP of the assessee has reduced substantially at 2.71% in comparison to 6.30% in the AY 2015-16. The NP has also been comedown to 2.10% from 2.58% in the AY 2015-16. In the reply to justify the low GP and NP the counsel of the assessee has submitted vide dated 15.04.2019 as under:-

“Reasons for the low GP and NP is due to the fact that the nature of business is arhat which depends on agricultural produce. If agricultural produce is more than the supply is more and if the agricultural produce is less than the supply is less hence market price depends on supply basis. My further submission is that the entire purchases and sales are verifiable from the books of accounts which are producing for your verification.”

It is noted that no supporting evidences to substantiate its reply are enclosed. It trite law that more submissions/ claim of the assessee are not evidence into itself. The same has to be substantiated by relevant and cogent documentary evidence. However, it apparent that the AO has been carried away by mere submission of the assessee without bringing any material on record to verify the same.

(iii) On perusal of P&L A/c it is noted that the assessee has credited the interest on FDR’s Rs.1,87,700/-, which is assessable under the head income from other sources. If the interest on FDR’s Rs. 1,87,700/- is taken away from P&L A/c the Net Profit shown Rs. 1,75,925/- will come in negative figures. In such situation the AO should have enquired into purchases, sales and expenses claimed by the assessee in its trading and P&L A/c. No such enquiry seems to have been made by the AO. Since the case was selected for complete scrutiny AO should have inquiry all aspects of the case in vigilant manner. Thus AO fails to his duty.

3. In view of the above, the assessment order passed by the ITO, Ward-2(3)(3), Bulandshahr is erroneous and prejudicial to the interest of revenue and may be cancelled or modified by invoking the provisions of section 263 of the Income Tax Act, 1961.”

5. The assessee filed its response before the Pr.CIT to the revisional action and objected to the exercise of revisional jurisdiction. The Pr.CIT however ultimately set aside the assessment order and directed the Assessing Officer to conduct necessary inquiries on the aforesaid points in the case and frame fresh assessment order in terms of the directions of the revisional order.

6. Aggrieved, the assessee has agitated the revisional order before the ITAT.

7. When the matter was called for hearing, the ld. counsel for the assessee made various submissions and pointed out that the assessment order is neither shown to be erroneous nor prejudicial to the interest of the revenue. It was submitted with reference to the paper book filed that necessary inquiries were specifically carried out on both the points alleged in the show cause notice and the Assessing Officer found the explanation of the assessee on such pointes to be satisfactory. The Assessing Officer thus applied his mind to the issues in question objectively and found rationale in the explanation offered on behalf of the assessee. The ld. counsel also submitted that when a reasonable inquiry was carried out and a reasonable view has been taken thereon, merely because the Pr.CIT may have a different opinion on the decision making process, that by itself will not be sufficient to invoke the revisional power. The ld. counsel referred to the judicial dicta prevailing in this regard for such proposition. The ld. counsel thus pointed out that the action of the Pr.CIT is wholly unsustainable and does not meet the requirement of Section 263 of the Act.

8. The ld. CIT-DR for the Revenue on the other hand supported the order of the Pr.CIT and contended that the Assessing Officer has merely accepted the facts as placed before him by the assessee without probing into the facts so placed. A mere furnishing of details would thus not meet the requirement of Explanation-2 to Section 263 of the Act. The Explanation-2 has given quietus to such line of arguments on behalf of assessee. The ld. CIT-DR thus submitted that no interference with the order of the Pr.CIT is called for.

9. We have carefully considered the rival submissions and gone through the assessment order as well as the revisional order and perused the material available on record. The jurisdiction assumed by the Pr.CIT under Section 263 of the Act is under challenge having regard to the facts as broadly noted above.

9.1 As regards the enquiry on cash deposits, it is the case of the assessee that the assessee withdrew Rs.18 lakh on 03.11.2016 and another Rs.18 lakh on 07.11.2016 from his bank account in an anticipation to make payment to the farmers from whom purchase of certain goods were in contemplation. Out of the above amount as available, the assessee has deposited Rs.35,10,000/- on 11.11.2016, i.e., a few days after withdrawal which fell in the demonetization period. The assessee contends that the case was selected for scrutiny in which this issue was the central point of inquiry. The assessee filed the details as well as the books of account to support the source of cash deposits which is out of immediate withdrawals. The facts of withdrawal immediately before deposit itself speaks the source of cash deposit and the observation of the Pr.CIT that Assessing Officer ought to have made inquiry to pierce the veil on the account and that such deposits seem to have been camouflaged, is farfetched and wholly premised on surmises and conjectures. It is a matter of record that an inquiry was duly carried out and books of account were examined. Be as it may, source of cash deposit in the instant case is having direct relationship with the immediate withdrawal before such deposits and doubting the genuineness of such deposit is without any shred of evidence adverse to the assessee is uncomprehensive to the core.

9.2 On appraisal of facts on records, we find palpable merit in such plea put forth on behalf of the assessee. The factum of withdrawal immediately prior to deposit provides reasonable basis to the Assessing Officer in his quasi-judicial capacity to accept the contentions in the course of the assessment. Such action of the Assessing Officer cannot be regarded to be wholly erroneous in such fact situation to invite the revisional proceedings. The action of the Pr.CIT rather appears to be in the realm of surmises and conjectures without any compelling evidence to assert a lack of bona fides in the explanation offered. The action of the Pr.CIT is thus incomprehensible and thus cannot be countenanced in the absence of any ‘error’ per se in the assessment.

9.3 We now advert to second issue towards reasons for falling GP ratio. As pointed out on behalf of the assessee, a specific notice under Section 142(1) was issued seeking details indicating the sales, GP ratio, NP ratio along with comparative figures and also the reason for increase/decrease in the GP ratio and NP ratio. It is demonstrated on behalf of the assessee that in response to the inquiry, the assessee has submitted vide letter dated 05.04.2019 providing explanation for falling in the profitability ratio which reads as under:

“Reasons for the low GP and NP is due to the fact that the nature of business is arhat which depends on agricultural produce. If agricultural produce is more than the supply is more and if the agricultural produce is less than the supply is less hence market price depends on supply basis. My further submission is that the entire purchases and sales are verifiable from the books of accounts which are producing for your verification.”

It was pointed out that the assessee deals in food grains, cattle feeds and petty items etc in his own account as Kuccha Arhtia and also on commission basis.

9.4 From the case records, it appears that the Assessing Officer has made specific inquiry and the assessee has filed in specific answers in response to the fall in the profitability. A comparative chart for Assessment Year 2015-16; 2016-17 and 2017-18 were also provided to the Assessing Officer. The reasons for low GP and NP were also provided. The opening and closing stock and all other details along with books of account were produced. It is common knowledge that the business of Arhat in food grains etc totally depends upon agricultural produce which is in turn overwhelmingly depends upon vagaries of climate variability and also demand and supply. The margin of profits, at times, varies drastically and comparison of GP, NP ratio qua other financial years may not necessarily be strictly comparable unlike other business ventures. The Assessing Officer, in its wisdom, after verification of the records has agreed with the explanation offered towards fall in the ratio. The substitution of opinion of Pr.CIT in the circumstances in the name of inadequacy in inquiry on the point is thus a far cry. The allegation of the Pr.CIT that the action of the Assessing Officer on the point is erroneous appears to be quite hollow.

10. The supervisory jurisdiction exercised under Section 263 of the Act is thus not sustainable in law. Consequently, the revisional order is set aside and quashed.

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

Order pronounced in the open Court on 30/08/2023