Revisionary jurisdiction unsustainable as Pr.CIT finding is based on incorrect appreciation of facts

Shankarlal Thakordas Narsingani Vs PCIT (ITAT Ahmedabad)

ITAT Ahmedabad held that Pr.CIT’s view that entire cash deposits during demonetization is to be treated as unexplained, is contrary to the facts on record, as assessee has demonstrated the factum of huge turnover prior to and post demonetization. Accordingly, Pr.CIT’s finding of error in AO’s order is based on incorrect appreciation of facts and accordingly revisionary jurisdiction u/s 263 unsustainable.

Facts- The present appeal has been filed by the assessee against order passed by the ld. Pr. Commissioner of Income Tax contenting that PCIT has erred in invoking provisions of section 263. Further, it is also contested that PCIT has erred in holding that Assessing Officer in making disallowance @ 20% of cash deposits of Rs. 3,85,80,075/- made in the bank accounts is erroneous in so far as it is prejudicial to the interests of revenue within the meaning of section 263 of the I.T. Act and need to be adjudicated afresh.

Conclusion- The ld.Pr.CIT’s view that entire cash deposits during this period is to be treated as unexplained, is contrary to the facts on record, wherein the assessee has demonstrated the factum of huge turnover prior to and post demonetization in the preceding year, and even in the succeeding year, and also factum of majority of the sales being in cash. Therefore, there was no occasion at all for the AO to treat the entire cash deposited during the demonetization period, as unexplained credits. The facts on record could not have led to the inference that entire sales made by the assessee during the demonetization period were bogus. In fact, the inference drawn by the AO, that only a portion of it could be treated as bogus/unexplained, was not incorrect. Therefore, we hold that the ld.Pr.CIT’s finding of error is based on incorrect appreciation of the facts before it, and his finding that the assessee had not been able to substantiate its explanation for cash sales completely is also not correct. In fact, as rightly found by the AO, to a great extent his explanation was substantiated that the majority of sales made by the assessee was in cash, but it was only vis-à-vis abnormal incremental sales made during the demonetization period, the AO refused to agree with the assessee.

FULL TEXT OF THE ORDER OF ITAT AHMEDABAD

Present appeal has been filed by the assessee against order passed by the ld. Pr.Commissioner of Income Tax-1, Vadodara [hereinafter referred to as “Ld.Pr.CIT”] dated 30.3.2022 pertaining to the Asst.Year 2017-18 by invoking revisionary power under section 263 of the Income Tax Act, 1961 (hereinafter referred to as the “Act’ for short).

2. The grounds raised in the appeals read as under:

1. The Ld. PCIT erred on facts and in law in invoking provisions of section 263 of the Act even though the asstt order passed u/s 143(3) by the Assessing Officer is neither erroneous nor prejudicial to the interests of

2. The Ld. PCIT erred on facts and in law in holding that of Assessing Officer in making disallowance @ 20% of cash deposits of Rs. 3,85,80,075/- made in the bank accounts is erroneous in so far as it is prejudicial to the interests of revenue within the meaning of section 263 of the I.T. Act and need to be adjudicated afresh.

3. As transpires from orders of the authority below, the revisionary jurisdiction was exercised by the ld.Pr.CIT on the order passed by the AO in the present case under section 143(3) of the Act, noting that the despite the assessee not substantiating with evidences, the source of cash deposited during demonetisation period of Rs.3,85,80,075/- and the AO not being satisfied with the reply of the assessee, he had still gone to make an addition of only 20% of the cash so deposited, when he should have added back the entire amount of cash deposited during this period. The show cause notice issued in this regard by the ld.Pr.CIT for initiating proceedings under section 263 of the Act placedbefore us at PB page no.103 to 105, bringing out the above facts as under:

4. As also finding of the ld.Pr.CIT at para 5 and 5.1 of his order is as under:

“5. I have carefully considered the facts of the case, assessment records and written reply furnished by the assessee. The contentions put forth by the assessee in his above referred reply are found to be not acceptable. In addition to the contentions raised in its above referred reply, the assessee has also sought for personal hearing. In this regard, it is pertinent to mention here that the assessee has furnished his reply in respect of all the issues mentioned in the show cause notice dated 16/02/2022 through electronically. In view of the same and also keeping in view of the faceless era, the present proceedings are finalized considering the reply furnished by the assessee through electronically and hence it is not considered necessary to provide opportunity of being heard personally in the instant case. In his reply, the assessee has contended that he had clearly substantiated with documentary evidences the particulars of cash deposited into bank during demonetization period, co-related with cash sales and there was no any failure on his part for this issue. This contention of the assessee is found to be not correct. On perusal of the case records, it is noticed that the assessee has not furnished any supportingevidences to substantiate thesales which were claimed to be the source of cash deposits made during the demonetization period. Further, on perusal of the assessment order, it was noticed that after verifying the details furnished by the assesseeduring the course of assessment proceeding in Para No. 4 of the assessment order, the Assessing Officer has made-some observations, findings and conclusions as to why the reply of the assessee has been found to be not acceptable. The AO has discussed some factual issues and anomalies and has referred to the decision of Hon’ble Supreme Court in the case of SumatiDayal vs. CIT [1995] 214 ITR 801 and has concluded as under :

“Based on the above facts and observation by the undersigned, the contention of the assessee is not found satisfactory. In this regard, the assessee has not submitted any credible reply/ cogent evidences which can prove that the claim of the assessee is genuine. The assessee has colouring the transaction through inflating the sales and adjusted the cash deposited during the demonetization period. The onus is upon the assessee to prove that the amount credited did not represent his income in terms of Section 68 of the Act as ruled out by the Hon’ble Supreme Court in the case of SumatiDayal Vs. CIT (1995) 214 ITR 801. Since the assessee fails to prove to the satisfaction of the Assessing Officers, the source and nature of the amount of cash credits, AO is entitled to draw an inference that the entire credit entry represents income taxable in the hands of the assessee. “

5.1. From the above, it is clear that the Assessing Officer was not satisfied with the explanation furnished by the assessee in respect of the nature and source of cash deposit made during the period of demonetization. However, despite, being not satisfied as regards the nature and source of such cash deposit of Rs.3,85,80,075/-made during the demonetization period of 09/11/2016 to 30/12/2016, the Assessing Officer has made addition of only 20% of such deposit as unexplained cash credit u/s 68 of the IT. Act, to the total income for the year under consideration. Here, it is pertinent to mention that in respect of any sum credited (in this case Rs.3,85,80,075/-), once in the opinion of the Assessing Officer, the explanation offered by the assesses is not satisfactory, within the meaning of Section 68 of the I.T. Act, then there is no provision to limit the addition or make any estimated addition. Under such circumstances, Section 68 of the I.T. Act mandates the sum so credited (in this case Rs.3,85,80,075/-) may be charged to the income tax as the income of the assessee of that previous year. Thus the action of the AO in limiting or estimating such addition to 20% of the sum credited is against the express provisions of Section 68 of the I.T. Act and accordingly, the assessment order for A.Y. 2017-18 dated 29/12/2019 passed by the Assessing Officer in the case of the assessee is erroneous in so far it is prejudicial to the interest of revenue within the meaning of Section 263 of the I.T. Act. Here it is pertinent to reproduce the relevant portion of the Section 263(1) of the I.T. Act as under:

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 orderthereon as the circumstances of the case justify, including an order enhancing or modifying the assessment, or cancelling the assessment and directing a fresh assessment.

5. Accordingly, after holding the assessment order to be erroneous on account of insufficient inquiry conducted by the AO on the issue of cash found deposited during the demonetization period of Rs.3.85 crores, the ld.Pr.CIT set aside the case of the assessee to the AO with direction to frame fresh assessment order, after taking into consideration the issue as may be considered together with the issue discussed in the order. His finding at para 7 of his order is as under:

“7. In view of the above and in exercise of the powers conferred by the provisions of Section 263 of the Income-tax Act, 1961, the assessment order passed u/s 143(3) of the Act dated 29/12/2019 for the A.Y. 2017-18 in the case of the above mentioned assessee is set aside with a direction to the Assessing Officer to pass fresh assessment order after taking into consideration the issues as may have been already considered together with the issues discussed hereinabove also. Needless to mention that while passing the fresh assessment order, consequent to this order under section 263 of the I.T. Act, the Assessing Officer shall grant reasonable and sufficient opportunity of being heard to the assessee.”

6. We have heard both the parties, and we have also gone through the assessment order passed in the case, under section 143(3) dated 19.12.2019, paper book filed by the ld.counsel for the assessee running into 132 pages and contentions of both the ld.counsel for the assessee and the ld.DR before us. After going through the above, and carefully considering all material and facts before us, we find that the impugned order passed by the ld.Pr.CIT under section 263 of the Act is not sustainable in law.

As noted above, and as is evident from the order of the ld.Pr.CIT, his finding of the error was in relation to cash found deposited in the bank account of the assessee to the tune of Rs.3.85 crores during demonetization period and as per the ld.Pr.CIT, the AO had disallowed only 20% of the same, when –

i) the assessee’s explanation that the cash sales so deposited was supported by the cash sales made by the assessee,         was found to be  notduly evidenced/substantiated;

ii) The AO himself was not satisfied with the explanation of the assessee.

7. We find that on both the counts, the ld.Pr.CIT is totally incorrect. A bare perusal of the assessment order reveals that this aspect of cash deposit during the demonetization was thoroughly inquired into by the AO and the assessee had repeatedly maintained that the cash deposited was on accountof cash sales made by it. The assessment order reveals that the assessee had submitted comparative figures of sales made by it in the preceding and succeeding years and demonstrated huge turnover averaging Rs.20-30 crores. He had also submitted comparative details of cash component of total sales reflecting the fact that the cash component was approx. more than 90% of the turnover. The assessee had further demonstrated the fact of increase in sales in the impugned year by showing that its business had shown an increasing trend from year to year right from Asst.Year 2014-15 to Asst.Year 2018-19 including the year of demonetization i.e. financial year 2016-17. The assessee had shown its sales had continuously increased in the pre-demonetization period at the rate of 32.5% and 39.01% while during the demonetization period and post demonetization, the sales had shown a decline in the %ge of increase, increasing at the rate of 13.90% and 17.22% in the subsequent year i.e. FY 2017-18 and 2018-19. The assessee had also given an explanation for decline in increasing trend in turnover for post demonetization. The reply of the assessee submitting the above details of comparative figures of sales, cash component therein, and increasing trend in sales for FY 2015-16 to 17-18 as reproduced at page-4 of the assessment order is as under:

8. The submission of the assessee showing the increasing trend in the sales year to year from FY 2014-15 to 2018-19 and its explanationfor the declining trend in the increase in turnover post-demonetization is reproduced at page no.5 & 6 of the assessment order as under:

9. Thus the assessee had demonstrated that the cash deposit in bank account during demonetization period was not an abnormal occurrence but in fact was attributable to the scale and manner of conducting business by the assessee ,having huge turnover ,all majorly in cash. He had explained the increase in turnover as compared to the preceding year in the year of demonetization, which is the impugned year in the present case .And had also explained the reason for turnover not increasing in the same proportion in the succeeding year.

However, we have noted, the AO was not completely satisfied with this reply of the assessee, noting that during the period of demonetization ,i.e 01st to 8t^h November 2016 , there was abnormal increase in turnover, and therefore, he went to treat 20% of the cash deposit as unexplained credits. Taking note of the fact the assessee had established that majority of its sales were made in cash which was deposited in bank, but noting the fact that during demonetization period, the assessee had shown substantially larger increase in turnover, he therefore, considering it fit,to treat only 20% of the total cash deposits as unexplained. His finding at page-7 and 8 of the order is as under:

8. Even before the ld.Pr.CIT the assessee reiterated contentions madebefore the AO that cash deposited during demonetization period was on account of sales made by it during that period and had also pointed out that even prior to demonetization, the assessee had deposited substantial amount in cash in the bank to the tune of Rs.20.32 crores fromApril to October, 2016. He had explained that being retailer in pan-masala products, their sales were mainly in cash, and therefore, the cash deposits was not only during the demonetization period, but also prior and post demonetization also. His reply to this effect at page no.4 to 7 of the order is as under:

9. Thus the assessee had demonstrated that the cash deposit in bank account during demonetization period was not an abnormal occurrence but in fact was attributable to the scale and manner of conducting business by the assessee ,having huge turnover ,all majorly in cash. He had explained the increase in turnover as compared to the preceding year in the year of demonetization, which is the impugned year in the present case .And had also explained the reason for turnover not increasing in the same proportion in the succeeding year.

However, we have noted, the AO was not completely satisfied with this reply of the assessee, noting that during the period of demonetization ,i.e 01st to 8th November 2016 , there was abnormal increase in turnover, and therefore, he went to treat 20% of the cash deposit as unexplained credits. Taking note of the fact the assessee had established that majority of its sales were made in cash which was deposited in bank, but noting the fact that during demonetization period, the assessee had shown substantially larger increase in turnover, he therefore, considering it fit,to treat only 20% of the total cash deposits as unexplained. His finding at page-7 and 8 of the order is as under:

10. It is evident from the above that the assessee had clearly demonstrated that the entire cash deposited during demonetization could not be treated as unexplained; that its scale of business operations was huge and nature of business was such that 90% of its sales was done in cash, and even prior to demonetization, the assessee had made huge cash sales commensurate to the sale made during the demonetization period. All these explanation given by the assessee was rightly taken note of by the AO and finding anomaly to the extent of substantial increase in sales during the demonetization period, he considered it fit to treat 20% of the sales as unexplained credits. The ld.Pr.CIT’s view that entire cash deposits during this period is to be treated as unexplained, is contrary to the facts on record, wherein the assessee has demonstrated the factum of huge turnover prior to and post demonetization in the preceding year, and even in the succeeding year, and also factum of majority of the sales being in cash. Therefore, there was no occasion at all for the AO to treat the entire cash deposited during the demonetization period, as unexplained credits. The facts on record could not have led to the inference that entire sales made by the assessee during the demonetization period were bogus. In fact, the inference drawn by the AO, that only a portion of it could be treated as bogus/unexplained, was not incorrect. Therefore, we hold that the ld.Pr.CIT’s finding of error is based on incorrect appreciation of the facts before it, and his finding that the assessee had not been able to substantiate its explanation for cash sales completely is also not correct. In fact, as rightly found by the AO, to a great extent his explanation was substantiated that the majority of sales made by the assessee was in cash, but it was only vis-à-vis abnormal incremental sales made during the demonetization period, the AO refused to agree with the assessee.

Also the finding of the ld.Pr.CIT therefore that the AO completely disagreed with the assessee regarding its explanation and found the explanation of the assessee to be unsatisfactory for the entire cash deposits, is also incorrect. As noted above, the AO was dissatisfied not with the explanation of the entire cash deposits, but only partially in view of the abnormal increase in the sales shown by the assessee during that period.

11. In view of the above, the finding of the ld.Pr.CIT that the entire cash deposits during the demonetization ought to have been treated as unexplained credit under section 68 of the Act, we hold, could not have been inferred from the facts on record, and there is no error as such in the order of the AO in this regard. The order passed by the ld.Pr.CIT under section 263 of the Act holding the assessment order erroneous so as to cause prejudice to the Revenue is therefore not sustainable in law and is set aside. The grounds raised by the assessee are allowed in above terms.

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

Order pronounced in the Court on 09th June, 2023 at Ahmedabad.