2022 (7) TMI 992 - AT - Income Tax

Revision u/s 263 by CIT - unexplained source of cash deposited in bank account - HELD THAT - This case was selected for CASS for verifying the source of cash deposit. Thereafter, the ld. PCIT referred to order sheet entry from which AO sought explanation from the assessee regarding cash deposit. Despite noting the above and noting that assessee replied to the same, the ld. PCIT contradicted himself by the observation that no enquiry has been done on this issue and the AO simply accepted the version of the assessee. The above line mentions that firstly there is no enquiry and in the same breath it states that AO simply accepted the version of the assessee. There is no whisper as to what was the version of the assessee which according to ld. PCIT was to be further examined. Hence, it is amply clear that ld. PCIT invoked his jurisdiction u/s 263 without any application of mind. As noted by the ld. PCIT himself enquiries were made by the AO and due replies were given by the assessee. As after duly considering the replies, AO found that assessee agreed to surrender the amount of Rs.3,20,000/- and the same was added. There is no whisper by the ld. PCIT as to why the explanation accepted by the AO is not acceptable or wrong. In the paper book submitted before us, it has been submitted that AO has issued several notices to the assessee. We note that AO has made comprehensive enquiry regarding various aspects. The observation of ld. PCIT that no enquiry was done by the AO is absolutely not sustainable as a proper enquiry has been done. Moreover, the amendment in this regard is not applicable in this assessment year - observation that AO accepted the reply without further enquiry has no substance as to what further enquiries was required is also not stated by ld. PCIT. There is no mention by ld. PCIT what was wrong in the explanation given by assessee and what more enquiries were required. It is a classic case of ld. PCIT directing for roving enquiries totally unsustainable in law. This is further amplified by the second notice by ld. PCIT dated 02.11.2015 after initial notice on 16.09.2015, which was issued after issue of notice about cash deposit. The said notice has already been reproduced by us hereinabove. Though the said notice is said to be in continuation of earlier notice, by no stretch of imagination it can be said to be in continuation of the earlier notice. A reading of the same clearly shows that after having made a contradictory observation on issue of lack of enquiry of cash deposit aspect for which the assessment was taken up, the ld. PCIT went on virtually issue a notice u/s 143(2) and embark upon fishing and roving expedition. PCIT never mentioned in his order before issuing this second notice as to how the Assessment Order in this regard was erroneous so as to be prejudicial to the interest of the revenue. Hence, this part of the ld. PCIT s order wherein notice was issued dehors any finding or even mention of the AO s order being erroneous or prejudicial to the interest of the revenue is not at all sustainable. - Decided in favour of assessee.

Issues Involved:
1. Whether the CIT erred in setting aside the assessment order and directing a fresh assessment.
2. Whether the AO conducted proper and detailed enquiries and investigations into the explanations furnished by the assessee.
3. Whether the CIT properly applied his mind to the explanations on record.
4. Whether the CIT's order is prejudicial to the interest of the revenue and erroneous in law.

Issue-wise Detailed Analysis:

1. Whether the CIT erred in setting aside the assessment order and directing a fresh assessment:
The CIT set aside the assessment order dated 26.09.2013, directing a fresh assessment, citing that the AO did not properly verify the source of cash deposits amounting to Rs. 43,19,000/-. The CIT observed that the AO failed to make adequate enquiries and simply accepted the assessee's explanations without proper verification. The CIT noted that the AO did not question the source of significant cash deposits and made an addition of only Rs. 3,20,000/- to cover potential revenue leakage.

2. Whether the AO conducted proper and detailed enquiries and investigations into the explanations furnished by the assessee:
The AO noted that the assessee derived income from salary and retail business of handloom goods under section 44AD of the Income Tax Act, 1961. The AO observed cash deposits in the bank and asked the assessee to explain the source. The assessee explained that the cash was from earlier withdrawals, cash sales, and funds from an OD account. The AO, after discussions, accepted a surrender of Rs. 3,20,000/- from the assessee to plug possible revenue leakage. The CIT, however, found that the AO did not adequately verify the explanations and simply accepted the assessee's version.

3. Whether the CIT properly applied his mind to the explanations on record:
The CIT noted that the AO did not properly enquire into the sources of cash deposits and other financial transactions, such as FDRs and interest-free advances made by the assessee. The CIT observed that the AO failed to question the source of significant cash deposits used for making FDRs and did not enquire about interest-free advances given by the assessee while the assessee had taken loans and paid interest. The CIT also noted discrepancies in the assessee's bank balances and transactions, which were not adequately explained or reconciled by the AO.

4. Whether the CIT's order is prejudicial to the interest of the revenue and erroneous in law:
The CIT invoked section 263 of the Income Tax Act, stating that the AO's order was erroneous and prejudicial to the interest of the revenue. The CIT highlighted several issues, including unexplained cash deposits, interest-free advances, and discrepancies in bank balances, which were not properly examined by the AO. The CIT directed a fresh assessment to address these issues. The assessee contended that the AO made proper enquiries and that the CIT's invocation of section 263 was not justified. The Tribunal found that the AO did conduct enquiries and that the CIT's order lacked specific reasons for why the AO's acceptance of the assessee's explanations was incorrect. The Tribunal noted that the CIT's direction for a fresh assessment was based on general observations without specific findings of error or prejudice to the revenue.

Conclusion:
The Tribunal concluded that the CIT's order under section 263 was not sustainable as the AO had made proper enquiries and the CIT did not provide specific reasons for setting aside the assessment order. The Tribunal set aside the CIT's order and allowed the assessee's appeal.

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