2023 (7) TMI 1570 - HC - Income Tax

Validity of Revision u/s 263 as set aside by ITAT - estimation of bogus expenditure - whether assessment order was allegedly erroneous and prejudicial to the interest of the Revenue having been passed without due and proper enquiry and verification of the genuineness of purchases and expenditure which the Assessing Officer himself had found to be inflated? - Whether Hon ble Tribunal has substantial erred in law in deciding the instant case by placing reliance on the co-ordinate benche s order in case of Kartick Bose 2020 (1) TMI 1218 - ITAT KOLKATA - HELD THAT - The second substantial question of law which has been raised for consideration points out that the learned Tribunal had erred in deciding the issue in favour of the assessee by placing reliance on the order of the learned Tribunal in 2020 (1) TMI 1218 - ITAT KOLKATA . The said order was challenged by the appellant/revenue in 2021 (11) TMI 760 - ITAT KOLKATA and by the judgment and order the appeal was dismissed and held PCIT while invoking his power u/s 263 has proceeded based on conjecture and there is no finding recorded that the books of accounts of the assessee were rejected. Furthermore the specific issue raised by the assessee that the documents and details were furnished before the assessing officer was not found to be incorrect. Therefore we are of the view that the tribunal having taken note of the factual position had rightly interfered with the order passed by the PCIT. Decided against revenue.

Summary

1. ISSUES PRESENTED and CONSIDERED

The Court considered two core legal questions presented by the revenue in the appeal under Section 260A of the Income Tax Act, 1961:

(i) Whether the Income Tax Appellate Tribunal committed a substantial error in law by quashing the order passed under Section 263 of the Income Tax Act, 1961, when the assessment order was allegedly erroneous and prejudicial to the interest of the Revenue, having been passed without due and proper enquiry and verification of the genuineness of purchases and expenditure, which the Assessing Officer had found to be inflated?

(ii) Whether the Tribunal erred in deciding the case in favour of the assessee by relying on a co-ordinate bench's order in ITA No.1027/Kol/2018 (Kartick Bose case), ignoring that the said case had not attained finality at the relevant time?

2. ISSUE-WISE DETAILED ANALYSIS

Issue (i): Validity of Quashing the Order under Section 263 of the Income Tax Act

Relevant Legal Framework and Precedents: Section 263 empowers the Principal Commissioner of Income Tax (PCIT) to revise an assessment order if it is erroneous in law and prejudicial to the interests of the Revenue. The Supreme Court decisions in Malabar Industrial Co. Ltd. vs. Commissioner of Income Tax and Commissioner of Income Tax vs. Max India were relied upon by the Tribunal to guide the principles governing exercise of jurisdiction under Section 263. These decisions emphasize that the jurisdiction should be exercised sparingly and only when the twin conditions of error in law and prejudice to Revenue are clearly established.

Court's Interpretation and Reasoning: The Tribunal examined the factual matrix and found that there was no dispute regarding the sale and purchase figures between the group concerns, which had been accepted by the Assessing Officer. The Assessing Officer had disallowed only an estimated 5% of the inflated amount, indicating some degree of enquiry and adjustment. The Tribunal held that the twin conditions for invoking Section 263 were absent and the PCIT's jurisdiction was invoked based on conjecture rather than concrete findings.

Key Evidence and Findings: The Assessing Officer did not reject the books of accounts, and the assessee had furnished documents and details before the Assessing Officer, which were not found to be incorrect. The PCIT's order under Section 263 was therefore deemed to be based on surmise without proper verification.

Application of Law to Facts: The Court noted that the PCIT's order was not supported by findings that the purchases were fictitious or the accounts rejected. The Tribunal's interference was justified as the revisionary power under Section 263 was improperly exercised.

Treatment of Competing Arguments: The revenue argued that the assessment order was erroneous and prejudicial due to lack of proper enquiry. However, the Tribunal and the Court found that the Assessing Officer had made some enquiry and adjustments, and the PCIT's order was based on conjecture. The revenue's reliance on a Gujarat High Court decision in N.K. Industries Ltd. was distinguished on facts, as that case involved conclusive findings of bogus purchases, unlike the present case.

Conclusions: The Tribunal did not err in quashing the revisionary order under Section 263. The Court upheld the Tribunal's finding that the PCIT's jurisdiction was wrongly invoked without establishing the statutory conditions.

Issue (ii): Reliance on Co-ordinate Bench's Order Pending Finality

Relevant Legal Framework and Precedents: The principle of judicial discipline and consistency requires that co-ordinate benches of the same Tribunal follow each other's decisions unless and until those decisions are set aside by a higher authority or attain finality. The Court examined whether reliance on the co-ordinate bench's order in ITA No.1027/Kol/2018 was appropriate despite the pending challenge.

Court's Interpretation and Reasoning: The Court noted that the co-ordinate bench's order in ITA No.1027/Kol/2018 had been challenged before the Tribunal in ITAT No.115/Kol/2021, and that appeal was dismissed by judgment dated 8th July, 2022. This dismissal effectively affirmed the co-ordinate bench's decision, thereby removing the uncertainty about its finality.

Key Evidence and Findings: The operative portion of the co-ordinate bench's order was reproduced, showing that it applied Supreme Court precedents and carefully distinguished the facts from other cases relied upon by the revenue, such as Vijay Proteins Ltd., where purchases were conclusively held to be fictitious.

Application of Law to Facts: The Court found that the Tribunal's reliance on the co-ordinate bench's order was justified, as that decision had attained finality and was factually distinguishable from cases cited by the revenue.

Treatment of Competing Arguments: The revenue contended that reliance on a non-final order was improper. However, the Court rejected this argument given the subsequent dismissal of the appeal challenging the co-ordinate bench's order, affirming its binding effect.

Conclusions: The Tribunal rightly relied on the co-ordinate bench's decision, and no error of law arose from such reliance.

3. SIGNIFICANT HOLDINGS

The Court held that the substantial questions of law raised by the revenue did not survive scrutiny. It observed:

"The twin conditions required to be satisfied for invoking Section 263 of the Act was absent and, therefore, the assumption of jurisdiction by the PCIT was held to be bad in law. We note that the PCIT while invoking his power under Section 263 of the Act has proceeded based on conjecture and there is no finding recorded that the books of accounts of the assessee were rejected. Furthermore, the specific issue raised by the assessee that the documents and details were furnished before the assessing officer was not found to be incorrect. Therefore, we are of the view that the tribunal having taken note of the factual position had rightly interfered with the order passed by the PCIT."

Further, distinguishing the revenue's reliance on Vijay Proteins Ltd., the Court stated:

"We find that the decision in Vijay Proteins Ltd. is distinguishable on facts since in the said case it was conclusively found that the entire purchases were shown to be based on fictitious invoices and have been debited in trading account and the entire transaction was held to be bogus. Furthermore, it was pointed out that the tribunal had come to a categorical conclusion that the amount of Rs.2,95,93,288/- representing alleged purchase from bogus suppliers and, therefore, it was held that the tribunal could not have restricted the disallowance only to Rs.73,23,32/-. Thus, there was a factual adjudication in the said case and the order passed by the tribunal was faulted for rejecting the disallowance. The decision is distinguishable on facts and cannot in any manner advance the case of the appellant before us."

Finally, the Court concluded:

"For the above reasons, we find that there is no question of law much less substantial question of law arises for consideration in this appeal."

The appeal filed by the revenue was dismissed, and the delay in filing the appeal was condoned as a matter of discretion.