Tribunal upholds AO's assessment, sets aside Principal CIT's order, ruling no jurisdiction exceed

The Tribunal found that the Principal CIT did not exceed jurisdiction under Section 263 in examining cash deposits during demonetization. The AO's inquiries on the deposits were thorough, with explanations accepted after verification. The Principal CIT's order was based on audit objections, lacking independent assessment. The AO's examination of records was comprehensive, including verification of the source of deposits from the books of account. The AO also verified information on a recovery suit. The Tribunal ruled the AO's assessment was not erroneous, setting aside the Principal CIT's order under Section 263 and upholding the AO's order under Section 143(3), allowing the assessee's appeal.

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Issues Involved:
1. Limitation of the order passed under Section 263(1) of the Income Tax Act, 1961.
2. Legality of the notice and order under Section 263.
3. Jurisdiction of the Principal CIT under Section 263.
4. Erroneous and prejudicial nature of the assessment order regarding cash deposits during the demonetization period.
5. Basis of the proceedings and order under Section 263.
6. Examination of assessment records by the Assessing Officer (AO).
7. Source of deposits from the books of account.
8. Verification of information/details/documents by the AO.

Detailed Analysis:

1. Limitation of the Order Passed Under Section 263(1):
The assessee contended that the order passed by the Principal CIT under Section 263(1) was barred by limitation as the assessment order was passed on 19.03.2019, and the limitation expired on 31.03.2021. The order under Section 263(1) was passed on 27.03.2022, making it liable to be canceled.

2. Legality of the Notice and Order Under Section 263:
The assessee argued that the notice issued under Section 263 and the subsequent order were illegal, bad in law, and against the facts of the case. The Principal CIT's order was challenged on the grounds of legality.

3. Jurisdiction of the Principal CIT Under Section 263:
The assessee claimed that the Principal CIT exceeded his jurisdiction by issuing the notice under Section 263 and passing the order, as the case was taken for limited scrutiny under CASS. The Principal CIT was argued to have no authority to pass the order under Section 263.

4. Erroneous and Prejudicial Nature of the Assessment Order:
The Principal CIT invoked Section 263 on the grounds that the assessment order for AY 2017-18 was erroneous and prejudicial to the interest of the Revenue due to unexplained cash deposits of Rs. 24,00,000 during the demonetization period. The assessee contended that the deposits were duly explained before the AO.

5. Basis of the Proceedings and Order Under Section 263:
The assessee argued that the proceedings and the order passed by the Principal CIT under Section 263 were perverse as they were based on general observations and not specific to the facts of the case. The Principal CIT was said to have ignored the thorough examination of the assessment records by the AO.

6. Examination of Assessment Records by the AO:
The assessee emphasized that the AO had thoroughly examined the assessment records for the year in question and the earlier two years (2015-16 and 2016-17). The Principal CIT ignored this fact while passing the order under Section 263.

7. Source of Deposits from the Books of Account:
The assessee argued that the deposits were made from the books of account, which included sale proceeds of a plot (capital gain shown and tax paid). The Principal CIT failed to appreciate this fact.

8. Verification of Information/Details/Documents by the AO:
The assessee contended that the AO had examined the amount received by the appellant through a recovery suit and compromise through court. Necessary information/details/documents were furnished by the assessee, examined, verified, and placed on record by the AO.

Judgment:

Limitation and Jurisdiction:
The Tribunal examined the contention regarding the limitation and jurisdiction of the Principal CIT. The Tribunal found that the Principal CIT exercised his jurisdiction under Section 263 to examine the explanation and documentation submitted by the assessee regarding the cash deposits during the demonetization period. The Tribunal held that the Principal CIT's jurisdiction was not exceeded as the matter pertained to the assessment year 2017-18, and the explanation of the assessee regarding the opening cash-in-hand had to be verified.

Erroneous and Prejudicial Nature of the Assessment Order:
The Tribunal noted that the AO had conducted extensive inquiries and verification regarding the cash deposits during the demonetization period. The AO had issued notices under Sections 143(2) and 142(1), called for explanations, examined the submissions, and verified the information from independent sources. The AO had accepted the assessee's explanation regarding the cash deposits after due verification.

Basis of the Proceedings and Order Under Section 263:
The Tribunal found that the Principal CIT's order under Section 263 was based on audit objections and was a case of borrowed satisfaction. The Principal CIT did not independently apply his mind before initiating the proceedings under Section 263. The Tribunal held that the AO had conducted all necessary inquiries and verification, and the Principal CIT could not substitute the AO's view with his own.

Examination of Assessment Records by the AO:
The Tribunal acknowledged that the AO had thoroughly examined the assessment records for the relevant year and earlier years. The AO had verified the cash deposits, examined past year tax returns, and called for information from banks. The Tribunal found that the AO had taken all requisite steps and accepted the explanation of the assessee.

Source of Deposits from the Books of Account:
The Tribunal noted that the assessee had explained the source of cash deposits from the books of account, including sale proceeds of a plot. The AO had verified the explanation and accepted it after due examination.

Verification of Information/Details/Documents by the AO:
The Tribunal found that the AO had verified the information/details/documents furnished by the assessee regarding the recovery suit and compromise through court. The AO had examined and placed the necessary information on record.

Conclusion:
The Tribunal concluded that the assessment order passed by the AO was not erroneous or prejudicial to the interest of the Revenue. The Principal CIT's order under Section 263 was set aside, and the AO's order under Section 143(3) was sustained. The appeal of the assessee was allowed.

Order Pronounced:
The order was pronounced in the open Court on 20/02/2023.

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