2022 (11) TMI 1196 - AT - Income Tax

Revision u/s 263 - undisclosed income of the firm - PCIT went on to hold that neither the assessee firm was covered under the provisions of section 44AD and nor was the calculation made by the AO @ 8% justified as the AO was required to treat the entire gross receipts as undisclosed income of the firm - PCIT concluded that the assessment order was passed without making inquires or verification and, therefore, the order of the AO was erroneous - HELD THAT - AO had made necessary inquiries regarding assessee's claim of having earned income from sub-contract work and, thereafter, after considering the reply submitted by the assessee, the AO has rejected such claim of the assessee regarding its working as a subcontractor. AO proceeded to hold that the assessee's work was in the nature of providing accommodation entries and based on this conclusion, the AO held that a rate of 8% should be applied being percentage of commission earned on providing the accommodation entries. Thus, in view of the questionnaires issued by the AO and the replies submitted by the assessee, the conclusion reached by the AO of rejecting the assessee's claim apparently proves that the AO had made proper inquiries and had also duly applied his mind to the facts of the case. Contention of the Ld. PCIT that no enquiry was made by the AO is factually incorrect. Having said that, in the present case, PCIT has not specifically pointed out as to what further inquires or verification should have been carried out by the AO in this regard. Merely because the Ld. PCIT felt that further inquiry should have been made does not make the order of the AO erroneous and prejudicial to the interest of the Revenue. It is not a case where the AO has upheld the applicability of section 44AD as alleged by the Ld. PCIT. Rather, the AO has rejected the assessee's claim of business income under section 44AD of the Act and has determined the true nature of assessee's activities as that of an accommodation entry provider rather than provider of sub-contractor services as so claimed by the assessee. Having arrived at the true nature of assessee's activities of that of an accommodation entry provider, the AO has applied commission rate of 8% on total receipts/transaction value of entries - PCIT has not pointed out how rate of 8% being the commission income so determined by the AO is unsustainable in the eyes of law and whether there are other benchmark of estimating commission income which the AO should have applied and which he has failed to apply. There is thus no incorrect application of law by the AO in the present case and further, the AO, after making inquiries and examining the records, has taken a view which is one of the possible views, and since this view is not unsustainable in law, it cannot be said that the order passed by the AO was erroneous in so far as being prejudicial to the interest of Revenue. Thus following the decision of the Coordinate Benches in case of Shiv Shakti Constructions 2022 (10) TMI 972 - ITAT CHANDIGARH the order so passed by the Ld. PCIT u/s. 263 is set-aside and the order of the AO is sustained. Assessee appeals stands allowed.

Issues Involved:
1. Legitimacy of the assessee's claim of business income under Section 44AD of the Income Tax Act.
2. Validity of the assessment order passed by the AO under Sections 147/143(3) of the Act.
3. Justification for the Principal Commissioner of Income Tax (PCIT) invoking Section 263 of the Act.
4. Adequacy of the inquiries and verifications conducted by the Assessing Officer (AO).

Issue-Wise Detailed Analysis:

1. Legitimacy of the Assessee's Claim of Business Income under Section 44AD of the Income Tax Act:
The assessee firm filed its return of income under Section 44AD of the Income Tax Act, declaring income from business on gross receipts of Rs. 33,00,133/-. However, the AO rejected the assessee's claim, concluding that the firm had provided accommodation entries to the S.P. Singla Group companies rather than performing actual subcontract work. The AO observed that most of the credit receipts were withdrawn in cash and converted into accommodation entries, indicating no business activity was undertaken by the assessee firm during the year.

2. Validity of the Assessment Order Passed by the AO under Sections 147/143(3) of the Act:
The AO issued a notice under Section 148 based on information that the assessee firm received bogus entries from M/s. S.P. Singla Constructions (Pvt.) Ltd. and M/s. SPS Structures Ltd. The AO concluded that the receipts were mere paper entries and treated the assessee's income as commission income, applying a rate of 8% on the gross receipts. The AO also disallowed expenses claimed by the assessee due to the absence of a certified copy of the partnership deed.

3. Justification for the Principal Commissioner of Income Tax (PCIT) Invoking Section 263 of the Act:
The PCIT issued a show cause notice under Section 263, stating that the AO failed to verify/enquire the facts and did not make any relevant inquiries. The PCIT argued that the AO should have treated the entire gross receipts as commission income, as the assessee firm had not incurred any expenses against the receipts. The PCIT concluded that the assessment order was erroneous and prejudicial to the interest of the Revenue, setting aside the order for a fresh assessment.

4. Adequacy of the Inquiries and Verifications Conducted by the AO:
The Tribunal found that the AO had made necessary inquiries regarding the assessee's claim of earning income from subcontract work. The AO issued detailed questionnaires and considered the assessee's responses before concluding that the firm provided accommodation entries. The Tribunal noted that the PCIT did not specify what further inquiries or verifications were required. The Tribunal held that the AO's conclusion was based on proper inquiries and application of mind, making the PCIT's contention factually incorrect.

Conclusion:
The Tribunal quashed the PCIT's order under Section 263, stating that the AO had made adequate inquiries and applied a possible view that was not unsustainable in law. The Tribunal emphasized that inadequacy of inquiry does not justify invoking Section 263 and that the PCIT cannot impose his view on the AO. Consequently, the appeals of the respective assessees were allowed, and the AO's assessment order was sustained.

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