2021 (12) TMI 935 - AT - Income Tax

Revision u/s 263 - Profit on unaccounted sales - estimation of the gross profit at 0.7% without ascertaining profit from unaccounted purchases and unaccounted sales is erroneous and prejudicial to the interests of revenue - As per CIT A.O. should have ascertained the profit by considering unaccounted purchases and unaccounted sales noted down in the seized materials and that the A.O. has made the addition without making any enquiry or verification regarding the source of unaccounted purchases - HELD THAT - We notice that it is nobody s case that the cash payment represents unaccounted purchases as presumed by Ld PCIT. In that case, the AO could not have computed gross profit on the basis of entries noted in the seized materials. Under these set of facts, one of the courses of action available with the AO is to estimate profit from the unaccounted sales. Since the assessee could not have sold materials without purchasing them, only profit element may be assessed. Thus, the AO has estimated the income and assessed the same in the hands of the assessee in all the three years. Thus, we notice that the AO has adopted one of the possible views in this matter. As held by Hon ble Supreme Court in the case of Malabar Industrial Company (supra), if the AO has taken one of the possible views, then the same would not make the assessment order prejudicial to the interests of revenue. PCIT has held the assessment orders to be erroneous for the reason that the AO should have estimated income from unaccounted sales at a higher figure, thus it is case where Ld PCIT is having a different view on the manner of estimation of income from unaccounted sales. As held by Hon ble Bombay High Court in the case of Gabriel India Ltd (supra), the view so entertained by Ld PCIT would not give him power u/s 263 of the Act to initiate revision proceedings, since the view of the AO cannot be termed as erroneous. We are of the view that the impugned assessment orders cannot be termed as erroneous and prejudicial to the interests of revenue. Accordingly, Ld PCIT was not justified in invoking revision proceedings in all the three years under consideration - Decided in favour of assessee.

Issues Involved:
1. Validity of the revision of the order passed by the Principal Commissioner of Income Tax (PCIT) under section 263 of the Income-tax Act, 1961.
2. Whether the Assessing Officer's (AO) estimation of gross profit on unaccounted sales was erroneous and prejudicial to the interests of revenue.

Detailed Analysis:

1. Validity of the Revision of the Order Passed by PCIT under Section 263 of the Income-tax Act, 1961:
The assessee, a partnership firm engaged in trading Arecanut, challenged the revision orders passed by the PCIT for assessment years 2013-14 to 2015-16. The AO had completed the assessments under section 143(3) read with section 153C of the Act, making additions based on "Profit on unaccounted sales" derived from incriminating materials found during a search operation. The PCIT reviewed the assessment records and concluded that the AO had not adequately verified the sources of unaccounted purchases and had erroneously estimated the gross profit at 0.7%.

The assessee argued that the gross profit on unaccounted turnover was admitted and accepted by both the ADIT (Inv) and the AO. The seized materials did not indicate unaccounted purchases, and the sale proceeds were used for payments towards unaccounted purchases. The PCIT, however, did not accept these contentions and directed a de-novo assessment considering all entries in the seized documents. The assessee contended that the AO's view was plausible and not erroneous or prejudicial to the revenue.

2. Whether the AO's Estimation of Gross Profit on Unaccounted Sales was Erroneous and Prejudicial to the Interests of Revenue:
The legal principles governing revision proceedings under section 263 were examined, referencing judgments from the Hon'ble Supreme Court and Bombay High Court. The Supreme Court in Malabar Industrial Co. Ltd. v. CIT clarified that section 263 can only be invoked if the order is erroneous and prejudicial to the interests of revenue. An order is considered erroneous if it involves an incorrect assumption of fact or application of law, violates natural justice principles, or lacks application of mind.

The Bombay High Court in CIT v. Gabriel India Ltd. emphasized that the PCIT's consideration must be based on the record's materials, and the power cannot be exercised for fishing and roving enquiries. The AO's decision, if plausible and based on a conscious evaluation of facts, cannot be termed erroneous merely because the PCIT holds a different view.

In this case, the AO had discussed the unaccounted sales in detail and adopted the gross profit rate from the books of account for estimating income from unaccounted sales. The PCIT believed the AO should have computed gross profit based on seized materials' entries, which only detailed cash receipts and payments without mentioning purchases/sales. The AO's inference that the receipts represented unaccounted sales was accepted by the assessee. The AO's estimation of profit from unaccounted sales, considering no unaccounted purchases were indicated, was a plausible view.

The Tribunal concluded that the AO's view was one of the possible views and not erroneous or prejudicial to the revenue. The PCIT's different view on income estimation did not justify invoking section 263. Therefore, the revision orders by the PCIT were set aside, and the assessee's appeals were allowed.

Conclusion:
The Tribunal found that the AO had taken a plausible view in estimating the gross profit on unaccounted sales, and the PCIT's initiation of revision proceedings was not justified. The assessment orders were neither erroneous nor prejudicial to the interests of revenue. Consequently, the revision orders passed by the PCIT for the assessment years 2013-14 to 2015-16 were set aside, and the assessee's appeals were allowed.

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