2022 (2) TMI 373 - AT - Income Tax

Tribunal sets aside PCIT's order under Section 263, finding original assessment not erroneous.

Sh. Vishnu Dutt Garg Versus PCIT, Agra

The tribunal quashed the Principal Commissioner of Income Tax's order under section 263, finding that the original assessment order was not erroneous or ... Revision u/s 263 by CIT - NP Estimation - CIT issued the notice alleging that AO should have taken 7% as net profit of the assessee in should of 6.52% - HELD THAT:- Once the due verification was made by the assessing officer as is clear from the paragraph 3 of the assessment order, then the income was required to be estimated by the assessing officer. We do not find any error in the estimation made by the assessing officer whereby the gross profit of the assessee on calculation came to 6.859% whereas the net profit as claimed by the PCIT should have been 7%. In our view once two views are possible to estimate the income of the assessee, then the view taken by the assessing officer cannot be faulted with - we are also of the opinion that there is no loss to the revenue while computing the GP rate at 6.859% as against NP rate of 7%. PCIT has neither complied with one of the essential conditions that how the Assessment Order passed was prejudicial to the interest of the revenue - In our view, the order passed by the PCIT was without any direction and accordingly the same is required to be quashed. We quash the same. Accordingly, the appeal of the assessee is allowed. Issues Involved:1. Validity of the order passed by the Principal Commissioner of Income Tax (PCIT) under section 263 of the Income Tax Act.2. Whether the original assessment order passed by the Assessing Officer (AO) under section 143(3) was erroneous and prejudicial to the interest of the revenue.3. Examination of the limitation period for passing the order under section 263.4. Verification of sundry creditors by the AO.5. Adequacy of the AO’s inquiries and verification.Issue-wise Detailed Analysis:1. Validity of the Order Passed by PCIT under Section 263:The assessee filed an appeal challenging the PCIT's order under section 263, arguing that the order was passed without appreciating the provisions of section 263 read with section 143(3) of the Income Tax Act. The assessee contended that the original assessment order dated 08.05.2017 was neither erroneous nor prejudicial to the interest of the revenue, and thus, the PCIT's order should be set aside.2. Whether the Original Assessment Order was Erroneous and Prejudicial to the Interest of the Revenue:The assessee argued that the AO had examined the books of accounts, vouchers, and other relevant documents before passing the order under section 143(3). The AO had made an ad hoc addition of Rs. 5,00,000 after considering discrepancies, indicating that the AO applied his mind and the order was not erroneous. The PCIT failed to demonstrate how the AO’s order was erroneous or prejudicial to the interest of the revenue.3. Examination of the Limitation Period for Passing the Order under Section 263:The assessment order was passed on 08.05.2017, and the impugned order under section 263 was passed on 21.03.2021. The limitation period for passing an order under section 263 is two years from the date of the AO's order. Although the board extended the limitation period, the extension should have been within the original limitation period. Therefore, the validity of the extension was questioned.4. Verification of Sundry Creditors by the AO:The AO noted that most purchases were from unregistered vendors, and many purchase bills lacked TIN/NAT numbers. The AO observed unverifiable addresses for several creditors and made an ad hoc addition of Rs. 5,00,000 to cover potential revenue leakage. The PCIT argued that the AO failed to independently verify the sundry creditors amounting to Rs. 2,97,09,506, making the AO's order erroneous.5. Adequacy of the AO’s Inquiries and Verification:The AO had issued notices under sections 142(1) and 143(2), and the assessee furnished the required details. The AO made inquiries and verified documents before passing the order. The PCIT criticized the AO for not invoking section 145(3) despite observing unverifiable creditors and cash payments. The PCIT suggested that the AO should have estimated the income based on past profit percentages.Conclusion:The tribunal concluded that the AO had made necessary verifications and inquiries before passing the order. The AO's estimation of income, resulting in a gross profit rate of 6.859%, was not erroneous. The tribunal found that the PCIT did not demonstrate how the AO's order was prejudicial to the revenue. Consequently, the tribunal quashed the PCIT’s order under section 263 and allowed the assessee’s appeal.