Tax officer's reasonable approach on demonetization cash deposits cannot be overturned by revision under section 263

ITAT Bangalore quashed PCIT's revision order u/s 263 regarding unexplained cash deposits during demonetization. AO conducted limited scrutiny of bank deposits, examined cash purchases/sales from May-October 2016, found inflation, and made additions on ad hoc basis. PCIT disagreed, wanting additions based on actual proved transactions. ITAT held AO's view was possible and pragmatic; PCIT cannot substitute their view for AO's under s.263 when AO's approach was reasonable. PCIT cannot direct fishing enquiry without showing AO's investigation was improper. Since limited scrutiny focused only on bank deposits and s.40A(3) wasn't part of original notice, that provision didn't apply. Assessee's appeal allowed.

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Issues:
- Appeal against order under section 263 of the Income Tax Act, 1961 for Assessment Year 2017-18.

Analysis:
1. The assessee, engaged in wholesale business, filed a return declaring total income. The case was selected for limited scrutiny to verify cash deposits during demonetization. The Assessing Officer (AO) found discrepancies in cash deposits, purchases, and sales, leading to an addition to the total income.

2. The Principal Commissioner of Income Tax (PCIT) held the AO's order as erroneous and prejudicial to Revenue's interest due to inadequate enquiries. The PCIT noted the need for a thorough examination of purchases, sales, and cash in hand to determine unaccounted money deposited in bank accounts during demonetization.

3. The PCIT observed that the AO did not conduct necessary inquiries to ascertain the source of cash deposits. The PCIT set aside the assessment order and directed the AO to make a fresh assessment, considering all relevant aspects and giving the assessee an opportunity to explain.

4. The PCIT ruled that settlement under the VSV Scheme only applies to the extent of the addition made by the AO, not the entire cash deposit. The PCIT directed the AO to verify any contravention of section 40A(3) without prior notice to the assessee, which was deemed invalid.

5. The Tribunal, considering the submissions, found that the AO's enquiries were proper, and the conclusions drawn were based on available evidence. The Tribunal emphasized that the PCIT cannot substitute the AO's view with its own unless the AO's view is unreasonable.

6. Consequently, the Tribunal allowed the appeal, quashing the PCIT's order and emphasizing that the power under section 263 was not properly exercised. The Tribunal also clarified that the issue of the VSV Scheme's effect and section 40A(3) did not arise in this context.

7. In conclusion, the Tribunal allowed the assessee's appeal, setting aside the PCIT's order and emphasizing the importance of proper exercise of power under section 263 of the Income Tax Act, 1961.

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