2023 (11) TMI 430 - AT - Income Tax

Revision u/s 263 by CIT - source of cash deposits in the bank account, and opening balances of partner s capital account, unsecured loans and stock at the beginning of the year as well as remuneration paid to the partners of the firm, the order so passed by the AO has been held by the ld PCIT to be erroneous as well as prejudicial to the interest of the Revenue - HELD THAT - Examination of source of cash deposits in the bank account - As we find that the case of the assessee was reopened precisely for the reason that the assessee has not filed any original return of income and there were cash deposits in the bank account maintained by the assessee - notices were issued during the course of assessment proceedings wherein the AO has specifically enquired about the source of said cash deposits in the bank account maintained with SBI along with documentary evidence. In response to the notices, the assessee has submitted that cash deposit relates to cash sales arising out of its poultry farming business which has been deposited from time to time in the bank account maintained with SBI and in support, has submitted its stock statement detailing the opening stock, purchases during the year, sales during the year and closing stock, list of purchasers and sellers exceeding Rs 5 lacs as called for by the AO AO thereafter has examined and has recorded a specific finding in the assessment order that the assessee s source of income is from poultry farming business and audited financial statements, books of accounts, bank statement and explanation called for from the assessee regarding source of cash deposit has been duly examined and thereafter, no adverse finding has been recorded. Thus the matter relating to source of cash deposits has been duly examined during the course of assessment proceedings and it is clearly not a case of lack of enquiry as so held by the ld PCIT. Balances of partner s capital account, unsecured loans and stock at the beginning of the year not verified due to non-filing/invalid treatment of original return of income - As far as non-filing of the original return of income, we find that the present proceedings were initiated precisely for the reason that the original return of income was not filed and therefore, what is relevant to examine is the return of income filed pursuant to notice u/s 148 and subsequent assessment proceedings so conducted by the AO and the order passed u/s 147 r/w 143(3) which has been made subject matter of the revisionary proceedings. Once the original return of income has been treated as invalid return of income, what has been reflected or not reflected in the said return of income has no bearing on the proceedings initiated u/s 147 and consequent proceedings u/s 263 of the Act. There is no dispute that where the assessee has filed its return of income for the earlier assessment year 2013-14, the opening balances which are carried forward from the said assessment year to the year under consideration are easily verifiable. At the same time, in the instant case, we find that the AO has called for and examined the audited financial statements for the previous financial year relevant to earlier assessment year 2013-14 and thus, where the audited financial statements for the previous financial year are on record and the same has been examined by the AO, the findings of the ld PCIT holding the order so passed by the AO erroneous in nature due to non-examination of the opening balances is clearly not borne out of records. Opening stock - AO has examined the same and accepted the turnover and closing stock as well as trading results and gross profit declared by the assessee. Thus, where stock statement has been verified and book results have been accepted and no adverse finding has been recorded by the AO as well as by ld PCIT, the order so passed by the AO cannot be held as erroneous in nature as well as prejudicial to the interest of the Revenue. Non-verification of partner s capital account and unsecured loans - We find that these are again opening balances which are carried forward from the earlier assessment year as apparent from the audited financial statements for the earlier assessment year which is available on record and duly examined by the AO. Further, during the course of assessment proceedings, the AO has called for and examined the partnership deed and it has also been submitted by the assessee that there is no addition to the capital account during the year. We thus, find that where the balances are carried forward from the earlier assessment year and there are no movements in these accounts during the year, it is a revenue neutral exercise and thus, there is no prejudice which is caused to the Revenue and in any case, the matter has been examined by the AO and no further enquiries have been conducted by the ld PCIT. Thus, the findings of the ld PCIT in this regard that the order so passed by the AO is erroneous in so far as prejudicial to the interest of the Revenue are again not borne out of records and thus deserve to be set-aside. The matter has been duly examined by the AO and nothing has been brought on record in terms of any further enquiries conducted by the ld PCIT so as to reach a prima facie finding that the order so passed is erroneous in so far as prejudicial to the interest of the Revenue - no basis for setting aside the assessment order and that too, a speaking order, thus, the order so passed by the ld PCIT u/s 263 is hereby set- aside and that of the AO is sustained. Decided in favour of assessee.

Summary

Issues Involved:
1. Jurisdiction under Section 263 of the Income Tax Act.
2. Basis for issuing notice under Section 263.
3. Consideration of replies and submissions by the Principal Commissioner of Income Tax (PCIT).
4. Application of mind by the Assessing Officer (AO) during assessment.
5. Validity of the PCIT's order.

Summary:

1. Jurisdiction under Section 263:
The Assessee challenged the jurisdiction of the Principal Commissioner of Income Tax (PCIT) under Section 263, arguing that the assessment order was neither erroneous nor prejudicial to the interest of Revenue. The Tribunal noted that for the PCIT to assume jurisdiction under Section 263, both conditions'error in the order and prejudice to the Revenue'must be satisfied.

2. Basis for Issuing Notice under Section 263:
The Assessee contended that the PCIT issued the notice based solely on an audit objection, which is not permissible. The Tribunal observed that the PCIT must apply his mind independently and cannot rely solely on audit objections to assume jurisdiction under Section 263.

3. Consideration of Replies and Submissions by PCIT:
The Assessee argued that the PCIT failed to consider various replies and submissions in the correct perspective. The Tribunal found that the PCIT did not adequately consider the Assessee's submissions and failed to apply his mind to the facts and evidence presented.

4. Application of Mind by AO During Assessment:
The Assessee asserted that the AO had duly applied his mind, considering various replies and materials on record. The Tribunal noted that the AO had conducted necessary inquiries, verified documents, and passed a speaking order. The Tribunal referenced multiple High Court decisions emphasizing that if the AO has conducted inquiries, the PCIT must conduct further inquiries to establish that the AO's order was erroneous and prejudicial to the Revenue.

5. Validity of PCIT's Order:
The Tribunal examined whether the PCIT's findings regarding non-verification of partner's capital account, unsecured loans, and stock were justified. It concluded that these matters were not part of the reasons for reopening the case under Section 147 and were beyond the PCIT's jurisdiction under Section 263. The Tribunal found that the AO had verified the necessary documents, including audited financial statements, and that the PCIT's findings were not supported by the record. The Tribunal set aside the PCIT's order, sustaining the AO's assessment order.

Conclusion:
The Tribunal allowed the Assessee's appeal, setting aside the PCIT's order under Section 263 and sustaining the AO's assessment order. The Tribunal emphasized that the PCIT must conduct independent inquiries and cannot assume jurisdiction based solely on audit objections. The Tribunal found that the AO had conducted necessary inquiries and that the PCIT's findings were not borne out of the records.