2020 (10) TMI 617 - AT - Income Tax

Revision u/s 263 - genuineness of the transaction on account of sundry creditors - as per AO Assessee has incurred higher expenditure during the year thus disallowed 20% of the expenses u/s 37 - HELD THAT - In the original assessment proceedings, AO was not precluded to make addition of the whole of the creditors or disallow the whole of the expenditure , if the details were not forthcoming from the assessee. But when the details are filed by assessee, because of the Lake of time available with the assessing officer, provisions of Section 263 cannot be invoked. For this reasons the order of CIT cannot be sustained. In the order passed by the CIT there is no inclination or finding that how the creditors are unsubstantiated. Even one creditor allegedly held to be bogus by the learned CIT, we do not find any mention in the order of the assessing officer or in the order of the CIT. There is no basis for such a finding. When the complete expenditure has been allowed by AO to the extent of 80% of those expenditure as expenditure incurred wholly and exclusively for the purposes of the business there is no question to further examine the genuineness and creditworthiness of such creditors when such creditors emerge from these expenditure only. The creditors were not the loans received by the assessee but are part of unpaid expenditure. Thus the reason given for resuming jurisdiction u/s 263 of the act to verify the genuineness and creditworthiness of the sundry creditors is also not correct. There is no provision in the act that unpaid expenditure is also to be tested on the parameter of creditworthiness. Therefore even in the assessment order the ld AO did not commit any error of law. - Decided in favour of assessee.

Issues Involved:

1. Validity of the order passed by the Principal Commissioner of Income Tax (PCIT) under Section 263 of the Income Tax Act.
2. Examination of the genuineness and verification of sundry creditors amounting to ?514,453,415.
3. Whether the assessment order was erroneous and prejudicial to the interest of the revenue.

Issue-wise Detailed Analysis:

1. Validity of the order passed by the Principal Commissioner of Income Tax (PCIT) under Section 263 of the Income Tax Act:

The assessee contested the validity of the order passed by the PCIT under Section 263 of the Income Tax Act. The PCIT had set aside the assessment order passed by the Assessing Officer (AO) on the grounds that it was erroneous and prejudicial to the interest of the revenue. The PCIT directed the AO to examine the genuineness of transactions amounting to ?514,453,415 on account of sundry creditors and to conduct proper inquiries and investigations. The assessee argued that the order passed by the AO was neither erroneous nor prejudicial to the interest of the revenue, as all the relevant details had been furnished and verified during the assessment proceedings.

2. Examination of the genuineness and verification of sundry creditors amounting to ?514,453,415:

The core issue in this revision proceeding under Section 263 was whether the AO had properly examined and verified the sundry creditors amounting to ?514,453,415. The PCIT observed that the AO had completed the assessment without proper examination/verification of the relevant issues and had allowed the sundry creditors without proper verification. The assessee contended that the details of the sundry creditors had been furnished and verified by the AO during the assessment proceedings. The assessee also argued that the creditors were generated out of the expenditure incurred by the assessee, which had been verified by the AO, and an ad hoc disallowance of 20% of the expenses had been made.

3. Whether the assessment order was erroneous and prejudicial to the interest of the revenue:

The Tribunal noted that the AO had disallowed 20% of the expenses claimed by the assessee, amounting to ?24,083,797, based on the examination of the profit and loss account and the details submitted by the assessee. The AO had disallowed the expenses on the grounds that they did not appear to have been claimed only for business purposes and were not substantiated with proper documents. The Tribunal observed that the PCIT’s order was based on the incorrect assumption that one entry of ?46,586,911 was verified and found to be bogus. The Tribunal found no evidence to support this claim in the assessment order or the PCIT’s order.

The Tribunal held that the AO had taken one of the possible views by disallowing 20% of the expenses and that the PCIT could not invoke Section 263 to substitute an alternative view. The Tribunal also noted that the PCIT’s order did not provide a finding as to the error and prejudice caused to the revenue by the assessment order. The Tribunal concluded that the PCIT’s order was not sustainable in law, as it was based on incorrect facts and did not show how the AO’s order was erroneous.

Conclusion:

The Tribunal quashed the order passed by the PCIT under Section 263 of the Income Tax Act, holding that it was not sustainable in law. The Tribunal allowed the appeal of the assessee, stating that the AO had properly examined and verified the details of the sundry creditors and had taken one of the possible views by disallowing 20% of the expenses. The Tribunal emphasized that the PCIT could not invoke Section 263 to substitute an alternative view and that the PCIT’s order did not provide a finding as to the error and prejudice caused to the revenue.

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