2022 (9) TMI 1443 - AT - Income Tax

Revision u/s 263 - cash deposit in the bank account of the assessee during the demonetization period unexplained - as per PCIT the amount of cash deposits was not verified during the assessment proceedings by the AO - HELD THAT - We find that the AO during the course of assessment proceedings made enquiries on this issue and after consideration of written submissions filed by the assessee and documents / evidence placed on record and then framed the assessment u/s 143(3) accepting the return of income. CIT initiated proceedings under section 263 of the Act on the ground that the AO has not made enquiries or verification which should have been made in respect of cash deposited during the demonization period. It is not the case of the Pr. CIT that the Ld. AO did not apply his mind to the issue on hand or he had omitted to make enquiries altogether. In the instant set of facts the AO had made enquiries and after consideration of material placed on record accepted the genuineness of the claim of the assessee. PCIT has not invoked the explanation 2 of section 263 of the Act in the show cause notice dated 17 January 2022 about the same. Opportunity with respect to the explanation 2 of section 263 of the Act was not afforded to the assessee. Thus on this count the learned PCIT erred in taking the course of such provisions while deciding the issue against the assessee. Secondly PCIT has also not specified the nature and the manner in which the enquiries which should have been conducted by the AO in the assessment proceedings. Thus in the absence of any specific finding of the learned PCIT with respect to the enquiries which should have been made we are not convinced by his order passed under section 263 of the Act. We hold that there is no error in the assessment framed by the AO under section 143(3) causing prejudice to the interest of revenue. Appeal filed by the assessee is allowed.

Issues Involved:
1. Whether the assessment framed under section 143(3) of the Income Tax Act was erroneous and prejudicial to the interest of Revenue under the provisions of section 263 of the Act.

Detailed Analysis:

Introduction:
The appeal was filed by the Assessee against the order of the Principal Commissioner of Income Tax (PCIT), Rajkot-1, dated 10/03/2022, concerning the revision order under section 263 of the Income Tax Act, 1961, for the Assessment Year 2017-18.

Issue: Error in Assessment under Section 143(3):
The main issue raised by the assessee was that the PCIT erred in holding the assessment framed under section 143(3) as erroneous and prejudicial to the interest of Revenue under section 263.

Facts of the Case:
The assessee, a partnership firm engaged in manufacturing and trading jewelry, had deposited Rs. 6,58,76,500.00 in cash during the demonetization period. The PCIT found that the cash deposits were not verified during the assessment proceedings by the Assessing Officer (AO) and initiated proceedings under section 263.

Assessee's Defense:
The assessee argued that the cash deposits were from earlier withdrawals and cash sales before 8th November 2016, which were verified by the AO and ADIT. The assessment was framed after approval from JCIT, and the cash sales were recorded in the books and accepted in the assessment.

PCIT's Observations:
The PCIT noted several discrepancies:
1. Majority of sales bills were less than Rs. 2 Lacs, without proper purchaser details, and many bills were issued post-demonetization announcement.
2. Cash was not deposited in one go despite no restrictions.
3. Cash deposits during demonetization should have been compared with the previous year.
4. Cash sales before and after demonetization should have been verified.
5. Sales were shown less than Rs. 2 Lacs to avoid section 269ST provisions.
6. No signature or ID proof from purchasers.
7. Sales vouchers were self-serving documents.
8. No verification of profit from sales before 8th November 2016.

PCIT's Conclusion:
The PCIT concluded that the AO failed to verify these facts, making the assessment erroneous and prejudicial to the interest of Revenue. The PCIT directed a fresh assessment after necessary verifications and inquiries.

Assessee's Appeal:
The assessee filed an appeal, arguing that all necessary details were provided during the assessment proceedings and verified by the AO. The assessment was framed after considering these details, and the AO applied his mind to the facts.

Tribunal's Analysis:
The Tribunal noted that an inquiry deemed inadequate by the PCIT does not make the AO's order erroneous. The AO has the prerogative to determine the extent of inquiry. Various judgments support that an order cannot be set aside under section 263 merely for inadequate inquiry if the AO applied the law correctly.

Judicial Precedents:
The Tribunal referred to several judgments, including:
- CIT Vs. Sunbeam Auto (Delhi High Court): Distinguished between lack of inquiry and inadequate inquiry.
- Gabriel India Ltd. (Bombay High Court): Emphasized that the Commissioner cannot initiate proceedings for fishing inquiries.
- Sh. Narayan Tatu Rane Vs. ITO (Mumbai ITAT): Explained the scope of inquiry under Explanation 2(a) to section 263.
- Principal Commissioner of Income-tax v. Shree Gayatri Associates (Supreme Court): Held that detailed inquiries by the AO cannot be set aside under section 263.
- Principal Commissioner of Income-tax v. Canara Bank Securities Ltd (Supreme Court): Dismissed SLP against Tribunal's order where AO made inquiries and took a plausible view.

Tribunal's Conclusion:
The Tribunal found that the AO made inquiries and considered the material placed on record before framing the assessment. The PCIT's order did not specify the nature and manner of inquiries that should have been conducted. The Tribunal held that the assessment was not erroneous or prejudicial to the interest of Revenue. The revisional order by the PCIT was quashed, and the appeal was allowed.

Final Order:
The appeal filed by the assessee was allowed, and the order was pronounced on 09/09/2022 at Ahmedabad.

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