2022 (9) TMI 822 - AT - Income Tax

Revision u/s 263 by CIT - cash payment made for purchase of old gold jewellery - violation of section 40A(3) - whether the AO has conducted necessary enquiry regarding the issue raised in the Show Cause Notice and secondly, that whether the order of the AO is erroneous as well as prejudicial to the interest of the revenue? - HELD THAT - As we find that the assessee is in the course of its business of selling of old gold jewellery and occasionally receives old gold jewellery in exchange from the customers. The value of such old gold jewellery is calculated by the assessee as per rates of the gold/silver/diamond or other precious stones as on the date of the transaction and the same is reduced from the sale value of new jewellery purchased by such customers. We can understand such transaction with the help of an example. The value of new gold jewellery is Rs. 1 lakh and customer gives old gold jewellery worth at Rs. 20,000/- to the assessee in exchange. After agreeing to the value of old jewellery the customer pays Rs. 80,000/-, which can be received in cash/cheque. In this transaction no cash is paid by the seller to purchase of old gold jewellery. Now in the books of account in order to make clarity and also to make proper quantitative details the assessee categorises the Rs. 1 lakh as sales and books purchase of old jewellery at Rs. 20,000/-. Actually the assessee has not made any purchases in cash in alleged transactions and only net consideration i.e total sale value less value of old jewellery exchange is received by the assessee in cash/cheque. There is no violation of provisions of section 40A(3) of the Act in the case of assessee as alleged by Ld. PCIT in the impugned order, as there is no actual transaction of payment of cash for making purchases exceeding the limit as prescribed u/s. 40A(3) of the Act. Since there is no violation of the said provisions of section 40A(3) of the Act, no such disallowance was called for in the hands of the assessee for alleged amount mentioned in the impugned order and Ld. AO has rightly carried out the assessment proceedings. PCIT erred in not considering the facts in correct perceptive and erred in holding that the assessment order is erroneous and prejudicial to the interest of the revenue. Since the impugned order is bad in law we quash the revisionary proceedings made u/s. 263 - We also hold that the order passed u/s. 143(3) dt. is neither erroneous nor prejudicial to the interest of the revenue and the same is accordingly restored. Appeal of assessee allowed.

Summary

Issues Involved:
1. Whether the assessment order passed u/s 143(3) of the Income Tax Act, 1961 for AY 2017-18 was erroneous and prejudicial to the interests of the revenue.
2. Whether the Principal Commissioner of Income Tax (PCIT) correctly invoked jurisdiction u/s 263 of the Income Tax Act, 1961.
3. Whether there was a violation of Section 40A(3) of the Income Tax Act, 1961 regarding cash payments for purchases.

Detailed Analysis:

1. Erroneous and Prejudicial Assessment Order:
The PCIT issued a show cause notice (SCN) stating that the assessment order dated 29.11.2019 was erroneous and prejudicial to the interests of the revenue. The PCIT observed that the Assessing Officer (AO) failed to examine the cash payment of Rs. 2,24,63,103/- for purchasing old gold jewellery, which should have been disallowed under Section 40A(3) of the Income Tax Act, 1961. The PCIT concluded that the AO did not make the necessary inquiries or verifications, rendering the assessment order erroneous and prejudicial to the interests of the revenue.

2. Jurisdiction Under Section 263:
The Tribunal examined whether the PCIT rightfully invoked jurisdiction under Section 263. The Tribunal noted that the power of revision under Section 263 can be exercised only if the order is both erroneous and prejudicial to the interests of the revenue. The Tribunal referred to various judicial pronouncements, including PCIT vs. Delhi Airport Metro Express Pvt. Ltd and DIT vs. Jyoti Foundation, emphasizing that the PCIT must conduct an inquiry to establish that the AO's order is erroneous and prejudicial.

The Tribunal found that the AO had indeed conducted detailed inquiries during the assessment proceedings. The AO issued multiple notices and the assessee provided comprehensive replies, including details of purchases, sales, and stock movements. The Tribunal concluded that the AO had made a permissible view after due consideration of facts and proper application of mind. Furthermore, the PCIT did not conduct an independent inquiry before setting aside the AO's order, which is a prerequisite for invoking Section 263.

3. Violation of Section 40A(3):
The Tribunal examined whether there was a violation of Section 40A(3) regarding cash payments. The assessee explained that the alleged cash payment of Rs. 2,24,63,103/- actually comprised two components: (i) purchase of old gold jewellery in exchange for new jewellery worth Rs. 2,10,38,492/-, and (ii) purchase of old gold jewellery through banking channels amounting to Rs. 14,24,611/-. The Tribunal accepted that no cash payments were made for these purchases, and the transactions were adjustments against the sale of new jewellery.

The Tribunal referred to Rule 6DD(d) of the Income Tax Rules, 1962, which exempts certain payments from the purview of Section 40A(3) if made by way of adjustment against liabilities for goods supplied or services rendered. The Tribunal also cited relevant judicial decisions, including DCIT vs. Kirtilal Kalidas Jewellers and ACIT vs. Ms. Kanishk Gold Pvt. Ltd, which supported the assessee's case.

The Tribunal concluded that there was no actual cash payment exceeding the limit prescribed under Section 40A(3), and thus, no disallowance was warranted. The AO's assessment order was neither erroneous nor prejudicial to the interests of the revenue.

Conclusion:
The Tribunal quashed the revisionary proceedings under Section 263, holding that the AO had conducted adequate inquiries and the assessment order was not erroneous or prejudicial to the interests of the revenue. The Tribunal restored the assessment order dated 29.11.2019 and allowed the appeal of the assessee.