ITAT quashes CIT revision order under section 263 for lack of basis in declaring assessment erroneous

The ITAT Rajkot quashed the CIT's revision order under section 263, finding no basis for declaring the assessment erroneous. The assessee had provided complete details of sundry creditors including names, addresses, PAN, and transaction details, stating bank statements were unavailable. The CIT failed to demonstrate why additional inquiry was necessary or provide financial analysis showing the creditor balances were suspicious. The tribunal held that inadequate inquiry alone is insufficient for section 263 revision unless it results in prejudice to revenue, citing Delhi HC precedents. The revision order was set aside in favor of the assessee.

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Issues Involved:
1. Validity of the order passed under section 263 of the Income Tax Act, 1961.
2. Denial of fair opportunity of hearing to the assessee.
3. Merits of the revisionary power exercised by the Principal Commissioner of Income Tax (Pr.CIT) regarding the addition of new sundry creditors.

Summary:

1. Validity of the order passed under section 263 of the Income Tax Act, 1961:
The assessee challenged the order passed by the Principal Commissioner of Income Tax (Pr.CIT) under section 263 of the Income Tax Act, 1961, arguing that it was unwarranted, unjustified, and bad in law. The Pr.CIT had set aside the issues of addition of new sundry creditors amounting to Rs. 3,66,31,437, treating them as unexplained cash credits under section 68 of the Act.

2. Denial of fair opportunity of hearing to the assessee:
The assessee contended that the order under section 263 was passed without giving a fair opportunity of hearing. Only two notices were issued during the peak of the COVID-19 pandemic, making it virtually impossible for the assessee to respond. The Tribunal agreed, noting that the Pr.CIT issued only two notices in March 2021 and passed the order without a fair hearing, violating the principles of natural justice. Citing the Apex Court's decision in Sona Builders vs UOI, orders passed in violation of natural justice cannot be restored for fresh hearing and must be set aside. The Tribunal quashed the order under section 263 on this ground alone.

3. Merits of the revisionary power exercised by the Pr.CIT regarding the addition of new sundry creditors:
The Pr.CIT noted that the Assessing Officer (AO) had not verified the quantum increase of sundry creditors, which should have been disallowed under section 68 of the Act. The assessee argued that the AO had conducted due inquiries, including specific queries about the sundry creditors, and had accepted their genuineness after reviewing the provided details. The Tribunal found that the Pr.CIT failed to demonstrate any error in the AO's order. The Pr.CIT's claim of inadequate inquiry was not sufficient to hold the assessment order erroneous. The Tribunal cited the Delhi High Court's decision in CIT vs Sunbeam Auto Ltd., which held that inadequate inquiry alone does not justify revision under section 263 unless it results in prejudice to the Revenue. The Tribunal concluded that there was no error in the AO's order, and the revisionary order under section 263 was set aside.

Conclusion:
The appeal of the assessee was allowed, and the order passed under section 263 of the Income Tax Act, 1961, was quashed. The judgment was pronounced on 17th November 2023 at Ahmedabad.

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