Revisionary power u/s. 263 rightly invoked as AO failed to conduct proper enquiry during original assessment

Bhanvarlal Champalal Kanuga Vs PCIT (ITAT Ahmedabad)

ITAT Ahmedabad held that invocation of revisionary power under section 263 of the Income Tax Act sustained as AO failed to conduct proper enquiries and verifications during original assessment proceedings.

Facts- The assessee is an individual. The return was processed u/s.143(1) of the Act and, later, taken up for scrutiny under CASS. Notices u/s. 143(2) and 142(1) of the Act. Thereafter, AO passed the order u/s.143(3) accepting the returned income.

Later, the PCIT issued show-cause notice u/s.263 of the Act on 23-02-2022 stating that the assessee has claimed exempt agricultural income of Rs.1,18,77,893/-, however, has not shown any agricultural expenses for earning this agricultural income.

PCIT concluded that the assessment order was passed without making enquiries which should have been made. The PCIT set aside the order of the AO passed u/s.143(3) of the Act and directed the AO to pass a fresh assessment order after making thorough enquiries and verification of the facts. Being aggrieved, the present appeal is filed.

Conclusion- Held that the revision proceedings do not merely constitute a change of opinion. The AO failed to conduct proper enquiries and verifications during the original assessment proceedings. We concur with the PCIT’s finding that the AO’s order was erroneous due to the lack of enquiry into the exempt agricultural income, the source of payments towards the purchase of land, and the cash deposits in the bank account. Based on the facts and circumstances, and in light of Explanation-2 to Section 263 of the Act, we dismiss the assessee’s appeal and uphold the order passed by the PCIT.

FULL TEXT OF THE ORDER OF ITAT AHMEDABAD

This appeal is filed by the Assessee as against the order dated 29/03/2022 passed by the Principal Commissioner of Income Tax-3, Ahmedabad [hereinafter referred to as “PCIT(A)” in short] in exercise of the revisionary powers under Section 263 of the Income Tax Act, 1961 (hereinafter referred to as “the Act”) relevant to the Assessment Year (AY) 2017-18.

Facts of the case:

2. The assessee is an individual filed his return of income for the A.Y. 2017-18 on 23-10-2017 declaring total income of Rs.25,66,680/-. The return was processed u/s.143(1) of the Act and, later, taken up for scrutiny under CASS. Notices under sections 143(2) and 142(1) of the Act along with the questionnaire were issued. Based on the various replies submitted by the assessee and the hearing conducted, the AO passed the order u/s.143(3) accepting the returned income.

2.1. Later, the PCIT issued show-cause notice u/s.263 of the Act on 23-02-2022 stating that the assessee has claimed exempt agricultural income of Rs.1,18,77,893/-, however, has not shown any agricultural expenses for earning this agricultural income. The PCIT, after applying the ratio of decision of Ahmedabad Tribunal in the case of Dhriubhai Narula in ITA Nos.2190 to 2192/Ahd/2004 dated 17-04-2004, concluded that the NIL expenses claimed by the assessee is required to be held as inadequate and 40% of the receipts was required to be added to the income. He also concluded that, since the AO has failed to add the expenses at the rate of 40% of the receipts, the order passed by the AO is erroneous. In the said notice of the PCIT, required assessee to show-cause why the Rs.47,51,157/-being 40% of exempt income of Rs.1,18,77,893/- should not be treated as deemed income by passing revisional order u/s.263 of the Act. The assessee filed reply in response to the notice of the PCIT in which he stated that the facts, evidence, documents and proof of the income were duly submitted to the AO at the time of assessment proceedings, and they were considered by the AO while completing the assessment, therefore, the escapement of income cannot be ground for revisional order. The assessee also stated that the facts and circumstances of decision of Ahmedabad Tribunal in the case of Dhirubhai L. Nerula & others in ITA Nos. 2190 to 2192/Ahd/2004 dated 17-04-2004 were totally different and therefore the ratio of that decision cannot be applied in his case. On the basis of documents submitted, the PCIT issued one more show-cause notice on 17-03-2022. The assessee’s reply dated 24-03-2022 could not be downloaded, hence the same were re-uploaded on 25-03-2022. The PCIT also considered the submissions made by the assessee on 04-08-2019, 07-10-2019 and 11-11-2019 during the course of original assessment proceedings and concluded that the assessee’s claim of exempt agricultural income is not genuine. He also concluded that the source of payment towards purchase of land and cash deposits made in bank remained unexplained. Thus, the PCIT concluded that the assessment order was passed without making enquiries which should have been made. The PCIT set aside the order of the AO passed u/s.143(3) of the Act and directed the AO to pass a fresh assessment order after making thorough enquiries and verification of the facts.

3. Aggrieved by the order of the PCIT, the assessee is in appeal before us with following grounds of appeal:

“1. The whole proceedings u/s 263 as per notice dated 24-02-2022 and is itself bad in law and void, inter alia order passed u/s 263 dated 29- 03-2022 on the ground that the conditions mentioned in sec. 263 has not been fulfilled and therefore, the order passed in dispute may please be quashed.

2. That Pr. CIT has erred in not appreciating the fact that the details verifications and submissions have already been made by appellant in reference to the non-incurring expenditure out of exempt agriculture income of Rs. 1,18,77,893/- and therefore, the present proceeding u/s 263 is amounts to “Change of Opinion” based on the facts on record and therefore, the same is liable to be quashed.

3. That Pr. CIT has erred in not appreciating the fact that the details verifications and submissions have already been made by appellant in reference to unexplained source of payment of Rs. 66,00,000/-made towards purchase of land and therefore, the present proceeding u/s 263 is amounts to “Change of Opinion” based on the facts on record and therefore, the same is liable to be quashed.

4. That Pr. CIT has erred in not appreciating the fact that the details verifications and submissions have already been made by appellant in reference cash deposited in bank account of Rs. 70,10,000/- and therefore, the present proceeding u/s 263 is amounts to “Change of Opinion” based on the facts on record and therefore, the same is liable to be quashed.

5. The Ld. Pr. CIT has erred in not appreciating the facts that the order passed earlier u/s 143(3) dated 16-11-2019 is neither “erroneous” nor “prejudicial to the interest of the revenue” and therefore, the present proceeding initiated by way of SCN dated 24-02-2022 as well as the order passed in dispute dated 29-03-2022 is unwarranted, illegal and liable to be quashed.”

3.1. The assessee also filed following additional grounds of appeal:

“1. The Ld. Pr. CIT has erred in facts and in law in not appreciating the facts that, the revision power has been initiated based on the audit objection (Paperbook page 102 to 107) and therefore, based on the various decision cited in a paperbook at page 108 to 115, 187 to 211 and also 237 to 239, it is said that the proceeding is itself bad in law and void and therefore, liable to be quashed.

1. That Ld. Pr. CIT has erred in relying upon Explanation 2 first time in the body of the order at page 20, para13 and therefore, since no hearing was given in this regard and therefore, the whole proceedings and order passed u/s 263 is liable to be quashed.”

4. Before us, the Ld. Authorised Representative (AR) argued that the additional grounds are filed on the basis of facts revealed due to RTI application made on 02-12-2022 to provide copy of audit objection. The Ld.AR further stated that after going through the documents given by AO on 18-02-2022, it was observed that the PCIT issued notice u/s.263 of the Act on the basis of audit objection. To support his claim, the Ld.AR placed on record the letter from the AO to the PCIT proposing the revision u/s.263 of the Act in which it was specifically mentioned that the proposal is submitted because of audit objection. The Ld.AR also stated that it can be seen from the audit objection that it is based on the decision of Tribunal in the case of Dhirubhai Narula (supra). The Ld.AR also stated that in the letter by the AO to the PCIT, there is mention of the fact that the AO has not accepted the audit objection.

4.1. The Ld.AR also explained various submissions made to the AO during the course of assessment proceedings and submitted the copies thereof. The Ld.AR further argued that the PCIT’s action of issuing notice u/s.263 of the Act amounts to change in opinion his action to take another view and/or not to agree with the finding of AO is not a ground to take action u/s.263 of the Act. The Ld.AR placed reliance on following judicial pronouncements:

1. Decision of Jaipur tribunal in case of Modern Minerals Vs. ACIT [1997] 59 TTJ 733 (Jaipur) where the ratio of Apex Court’s judgement in case of Indian & Eastern News paper Society Vs CIT [1979] 119 ITR 996 was followed.

2. Sirpur Paper Mills Ltd. Vs CIT [1970] 77 ITR 6 (SC).

3. High Court decision in SCA No. 11900/2016 in the case of Binori Buildcon Pvt. Ltd.

4. High Court decision in SCA No. 7140/2014 in the case of Raj Ratna Metal Industries Ltd.

5. Delhi High Court Decision in Sun Pharmaceuticals, [2016] 137 DTR 18.

6. Jammu and Kashmir High Court Decision in the case of Greenfields Commercials Pvt. Ltd. [2015] 372 ITR 740.

7. Delhi High Court decision in the case of Sunbeam Auto Ltd. [2011] 332 ITR 167.

8. Supreme Court decision in Shreeji Prints (P.) Ltd., [2021] 130 com 294.

9. Supreme Court decision in Nuclear Power Corporation of India Ltd. [2022] 138 com 332.

5. The Ld. Departmental Representative (DR), on the other hand, stated that the PCIT has relied not only on the audit objection but has carried out independent inquiry and found that the order of AO is erroneous. The Ld.DR placed reliance on the decision of Hon’ble Supreme Courtin case of Deniel Merchants (P.) Ld. Vs. Income Tax Officer [2018] 95 taxmann.com 366 and decision of Co-ordinate Bench in case of Ravi Dipakbhai Shah Vs. PCIT-6 (ITA No.160/Ahd/2020 dated 26-05-2023). The Ld.AR further pointed out that the sale deed is not a registered document, and the entire amount is paid in cash and such cash is out of agricultural income from the land/crop which was purchased at later date. The Ld.DR also pointed out that the agricultural receipts are also in cash and deposited in the bank and AO has not verified the invoices provided by the assessee. He placed reliance on the orders of lower authorities.

6. We have heard the contentions of both the parties, perused the material available on records and note that the initial notice under section 263 of the Act was issued based on an audit objection which was not accepted by the AO. We also noted that the jurisdictional AO (JAO) in his proposal for initiation of action u/s.263 of the Act has specifically mentioned that the audit party has raised an objection with regard to allowing the gross receipts amounting to Rs.1,18,77,893/- as exempt without treating 40% expenses of gross receipts. The JAO also stated in the same proposal that the decision of the Ahmedabad Tribunal in Dhirubhai Narula (ITA No. 2190 to 2192/Ahd/2004) was relied upon by the Revenue Audit.

6.1. The PCIT in his order u/s.263 of the Act has pointed out his findings that the claim of entire agricultural income of Rs.1,18,77,893/- offered by the assessee as exempt is based on fabricated documents and represents unaccounted income of the assessee, the payment of Rs.66,00,000/- towards purchase of land remained to be explained for want of proof of execution of the documents and the source of Cash deposits of Rs.70,10,000/-in the bank account remained to be proved.

6.2. We further noted that during the course of assessment proceedings the assessee submitted replies to various notices of AO details of which are given below:

6.3. Apart from the above-mentioned submissions, the assessee claimed that he has submitted certain documents during the course of assessment proceedings, however, there is no any acknowledgement, either online or offline, for the same submission in the paper book (Page Nos. 84A and 84B submitted by the assessee before us. Following is the list of documents claimed to have been submitted by the assessee on 11-11-2019:

1. Copy of Vechan Sale Deed agreement with Jagmalaram dated 02-04-2016 in Hindi.

2. Copy of cash account for land purchased Rs. 66 lacs on 02-04-2016 and amount returned on 08-11-2016 as per cash account.

3. Copy of old agricultural land proof of holding dated 25-10-1981 along with 23-10-1981 and others in Hindi.

4. Samjota Lekh dated 08-11-2016 in Hindi.

5. Ekrar Namu in Gujarati between Govindbhai Patel and Bhanwarlal Kanunga with Aadhar Card of Govindbhai Patel.

6. Court inquiry in Gujarati dated 17-10-2016 for inquiry no. 23/2016.

7. CRI revision court order in Gujarati dated 21-02-2018 by Vijay Premchand Agrawal Judge.

8. Court inquiry no. 23/16 dated 30-05-2017 in Gujarati.

9. Agriculture income account along with Xerox Copies of 3 invoices, no expenditure to be incurred by me.

10. That agriculture income of Rs.1,18,77,893/- is as per last so many years and proof is also attached herewith. No expenditure to be incurred by me as agreed.

11. The total cash deposited in two accounts of Kotak Mahindra Bank Rs. 56,10,000/- and in Mehsana Urban Rs. 10 lacs and in Gujarat State Rs. 4 lacs is as per Xerox Copy of bank statement attached and as per our earlier sub mission dated 07-10-2019. The copy of bank book and cash book further attached explaining source of cash deposit.

6.4. We note that the assessee has only furnished the documents and there is no any explanations provided to the issues involved in the revision proceedings u/s.263 of the Act. Considering the facts that such submission has not been duly acknowledged and the AO is completely silent on the issues in his order, we are of the opinion that the PCIT has a sufficient ground to conclude that the AO has failed to pass the assessment order with proper enquiry and verification of the facts.

6.5. We also note that the PCIT has given the proper opportunity of being heard to the assessee and after proper enquiry, has reached a conclusion that the order passed by the AO is erroneous. The amendment inserting Explanation 2 has taken effect from ^1st day of June 2015. This explanation gives some degree of discretion to PCIT to use his revisionary powers rationally and not arbitrarily. In his show cause notice dated 17/21.03.2022, PCIT has expressly discussed the issues, which according to him have not been inquired into and verified by the AO, and assumed his jurisdiction. Thus, the PCIT has invoked Explanation 2 to section 263(1) after concluding that the order passed by AO was subject to revision.

6.6. We have considered the judicial precedents relied on by the assessee and note that these can be distinguished on the basis of facts and circumstances. We have also noted that though the initial notice u/s.263 of the act was based on an audit objection, which the AO had not accepted, the PCIT, however, carried out an independent inquiry and found that the AO’s order was erroneous and prejudicial to the interests of the revenue. Further, we note that the assessee had furnished documents but did not provide explanations to the issues involved in the revision proceedings u/s 263 of the Act, which is submitted to conclude that the AO’s order lacked proper enquiry and verification of the facts.

6.7. There are many judicial precedents which demonstrate a consistent interpretation of section 263 of the Act across various Courts and Tribunals. Considering the judicial precedents relied on by The Ld.DR, it is noted that the SLP was dismissed by the Hon’ble Supreme Court in the case of Deniel Merchants (P.) Ltd. (supra) with the observations that the Assessing Officer did not make any proper inquiry while making the assessment and accepting the explanation of the assessee. It is also noted that the Co­ordinate bench, in the case of Ravi Depakbhai Shah (Supra), upheld the PCIT’s invocation of Section 263, directing the AO to make all necessary inquiries and reassess the case afresh and reinforced the need for thorough examination and inquiry by the AO in scrutiny cases to ensure the correctness and fairness of the assessment. The Tribunal emphasised that Explanation 2 to Section 263 clarifies and lists the circumstances where an assessment order will be deemed to be erroneous and the explanation is meant to provide additional support to the dominant object of Section 263, which is to ensure that the assessment orders are not prejudicial to the interests of the revenue. The Tribunal further decided that the Explanation 2 does not expand the scope of Section 263 but only explains its scope and ensures that assessment orders comply with the legal and procedural requirements. These precedents affirm the PCIT’s authority to revise an assessment order when the AO’s order is found to be erroneous and prejudicial to the interests of the revenue due to inadequate inquiry or incorrect application of law. The lack of proper inquiry by the AO into the assessee’s claims justifies the PCIT’s revision under section 263 of the Act.

6.8. After considering the facts, submissions, and judicial precedents, we conclude that the PCIT has the authority to invoke section 263 of the Act when the AO’s order is erroneous and prejudicial to the interests of the revenue. The PCIT provided proper opportunities for the assessee to be heard and conducted an independent inquiry. We also note that Explanation-2 to Section 263 of Act, specifically states that an order shall be deemed to be erroneous and prejudicial to the interests of the revenue, if it is passed without making inquiries or verification which should have been made. We find that the revision proceedings do not merely constitute a change of opinion. The AO failed to conduct proper enquiries and verifications during the original assessment proceedings. We concur with the PCIT’s finding that the AO’s order was erroneous due to the lack of enquiry into the exempt agricultural income, the source of payments towards the purchase of land, and the cash deposits in the bank account. Based on the facts and circumstances, and in light of Explanation-2 to Section 263 of the Act, we dismiss the assessee’s appeal and uphold the order passed by the PCIT.

6.9. In the result, the appeal filed by the Assessee is hereby dismissed.

Order pronounced in the Open Court on 23rd August, 2024 at Ahmedabad.