2023 (11) TMI 984 - AT - Income Tax

PCIT revision under section 263 upheld for agricultural income and creditors verification but rejected for depreciation claims

Rajendran Sreedharan Versus The Asst. Commissioner of Income Tax, Circle-1, Nagercoil

ITAT Chennai upheld PCIT's revision order under section 263 regarding agricultural income and sundry creditors but allowed appeal on depreciation. AO ... Revision u/s 263 - Agricultural income - As per CIT AO accepted the claim of the assessee that his agricultural income for the relevant financial year despite there was no supporting materials/ documents before him about the earning as income from agriculture - HELD THAT:- AO did not sought any evidence from the assessee on the claimed income as agricultural income. Land revenue records as was submitted by the assessee cannot be the proof of earning from the agricultural activities during the relevant assessment year although there might be some agricultural income from that agricultural land. But examining only the revenue documents as submitted by the assessee it cannot be said that there was an income to the assessee during that relevant assessment year. By furnishing the land revenue record, the assessee has only proved that the land is an agricultural land. The assessee in order to prove the agricultural income had to furnish evidence regarding sale of agricultural products which was ignored by the Ld. AO. Hence, we agree to the finding of the learned PCIT that the ld. AO did not make any enquiry on the agricultural income as was claimed by the assessee. Accordingly, we decide this ground of appeal against the assessee. Sundry Creditors the assessee only disclosed the name and relation of Mr. Ragul who is one of the sundry creditors. No PAN, confirmation letters, address of the creditors, their creditworthiness were insisted / obtained by the ld. AO during the assessment proceeding. As the assessee borrowed money from some of the persons, the Ld. AO ought to enquire about the creditworthiness of the creditors. He ought to see whether the creditors confirm the credits given by them to the assessee. No such exercise was done by the Ld. AO. PCIT has rightly observed that the Ld. AO had to obtain the PAN, confirmation letters, addresses, creditworthiness of the sundry creditors before completion of the assessment. Accordingly, we decide this ground also against the assessee. Depreciation on the machineries assessee explained that the same is the opening written down value and he had produced all the bills with ledger account copy to the Income Tax Officer for the assessment year 2014-15 during an enquiry. Therefore, we reject the observation of the PCIT that the AO did not verify the details of machineries. As a result, we decide this ground of appeal in favour of the assessee. Appeal of the assessee is partly allowed. ISSUES PRESENTED AND CONSIDERED 1. Whether the revisionary proceedings under section 263 were validly initiated on the ground that the assessment order was erroneous and prejudicial to the interests of Revenue for failing to verify claimed agricultural income. 2. Whether the revisionary proceedings under section 263 were validly initiated on the ground that the Assessing Officer failed to verify sundry creditors (names, PAN, confirmations, addresses and creditworthiness) before completing assessment. 3. Whether the revisionary proceedings under section 263 were validly initiated on the ground that the Assessing Officer failed to verify fixed assets/machinery (opening written down value of Rs. 10.03 Crores) and its utilization for business, thereby rendering the assessment erroneous and prejudicial to Revenue. 4. Whether procedural irregularity in filing the appeal (delay) affects the merits of the revisionary challenge (condonation of delay considered by the Tribunal). ISSUE-WISE DETAILED ANALYSIS Issue 1 - Verification of agricultural income and validity of invoking section 263 Legal framework: Section 263 permits revision where the assessing officer's order is 'erroneous and prejudicial to the interests of the Revenue.' An essential facet of a valid assessment is that the AO make reasonable inquiries and obtain supporting evidence for claimed incomes/exemptions where necessary. Precedent Treatment: No specific judicial precedents are invoked in the text to alter or limit the principles applied; the Tribunal relies on statutory duty of inquiry by the AO and the scope of section 263 as understood in law. Interpretation and reasoning: The assessee claimed agricultural income of Rs. 40,00,000 and produced land revenue records establishing that lands are agricultural. The Tribunal observed that land revenue records only prove character of land, not quantum of agricultural receipts. The AO accepted the claimed amount without seeking corroborative evidence (sales bills, ledger entries, market rates, expense particulars or other proof of realization) and without enquiry into exact earnings for the relevant year. The Principal Commissioner (PCIT) found that absence of such verification rendered the assessment order wanting. The Tribunal agreed that proving land as agricultural is insufficient to prove income quantum; the AO ought to have made enquiries or demanded evidence to substantiate the claimed agricultural income before accepting it in assessment. Ratio vs. Obiter: Ratio - AO's acceptance of specific quantum of agricultural income without obtaining supporting evidence or making reasonable inquiries can render the assessment order erroneous and prejudicial under section 263. Obiter - general observations on types of evidentiary materials that could substantiate agricultural income (e.g., bills, ledgers, market rates). Conclusions: The Tribunal upheld the PCIT's revisionary allegation in respect of agricultural income and decided this ground against the assessee - i.e., the AO's failure to seek/obtain evidence as to the actual earning of Rs. 40,00,000 constituted a lapse making the order susceptible to revision under section 263. Issue 2 - Verification of sundry creditors and validity of invoking section 263 Legal framework: Assessing Officer must verify liabilities and credits reflected in books where claims affect taxable income; verification can include obtaining identity particulars (names, PAN), confirmations, addresses and assessing creditor creditworthiness to satisfy genuineness of liabilities. Precedent Treatment: No distinct precedents are cited or distinguished in the judgment; the PCIT's expectation of customary documentary/confirmation checks is applied as a standard of reasonable enquiry. Interpretation and reasoning: The assessee disclosed sundry creditors aggregating substantial sums, including an amount from the assessee's son and large balances from business units. The AO did not obtain PANs, confirmation letters, addresses or other proof of creditworthiness, nor did the AO seek confirmation from creditors. The PCIT found that absence of such enquiries left the AO's acceptance of the creditors unexplored and the assessment consequently erroneous and prejudicial. The Tribunal concurred, reasoning that when an assessee claims liabilities (credits) in respect of borrowings and sundry creditors, the AO ought to have procured information to test their genuineness before concluding assessment. Ratio vs. Obiter: Ratio - Failure by the AO to obtain basic corroborative particulars (PAN, confirmations, address, evidence of creditworthiness) for creditors relied upon by the assessee may render the assessment erroneous and prejudicial to Revenue justifying revision under section 263. Obiter - delineation of the creditor particulars that 'ought' to have been obtained (list, PAN, confirmations) as examples of reasonable verification. Conclusions: The Tribunal upheld the PCIT's objection in respect of sundry creditors and decided this ground against the assessee - the AO's lack of enquiry into creditors' particulars and creditworthiness justified revisionary view under section 263. Issue 3 - Verification of fixed assets/machinery (opening written down value) and validity of invoking section 263 Legal framework: Verification of claims relating to fixed assets (capitalization, depreciation, opening written down value) requires that AO examine relevant vouchers, bills and ledger entries to ensure correctness of book figures where material to tax computation; however, if supporting documentation has been produced and examined in prior proceedings, repetition may not be necessary. Precedent Treatment: No precedents are cited; the Tribunal assesses factual sufficiency of records produced and whether AO had an opportunity to verify in earlier year proceedings. Interpretation and reasoning: The assessee asserted that the machinery addition was capitalized in an earlier year (AY 2014-15) and the sum of Rs. 10.03 Crores appearing in books for AY 2015-16 represented opening written down value. The assessee produced bills and ledger copies to the Income Tax Officer during enquiries in AY 2014-15. The PCIT recorded a view that AO had not verified machinery details; the Tribunal, upon examining the record, found that the assessee had produced all relevant bills and ledger copies in earlier enquiries and that the AO had, in effect, been furnished with the supporting material. On that basis, the Tribunal rejected the PCIT's objection in respect of machinery verification. Ratio vs. Obiter: Ratio - Where supporting bills and ledger accounts for capital assets have been produced to the assessing authority in prior enquiries and the opening written down value is reflected accordingly, absence of fresh verification in the assessment year may not render the assessment erroneous and prejudicial; prior production of supporting documents can suffice. Obiter - comments on the practical sufficiency of prior-year verification for opening WDV claims. Conclusions: The Tribunal decided this ground in favour of the assessee - the PCIT's contention that the AO failed to verify the machinery was rejected because the assessee had previously produced bills and ledger copies substantiating the opening written down value. Issue 4 - Procedural delay in filing appeal (condonation) and its effect Legal framework: Delay in filing appeals may be condoned for sufficient cause; condonation does not adjudicate merits but allows appellate consideration of substantive issues. Precedent Treatment: The Tribunal exercised discretion to condone delay, citing Covid-19 lockdown as sufficient cause; no further precedential analysis is recorded. Interpretation and reasoning: Registry noted a delay of 657 days; the Tribunal condoned the delay due to the lockdown situation arising from the Covid-19 pandemic and proceeded to hear the appeal on merits. Ratio vs. Obiter: Ratio - Sufficient cause (here, pandemic-related lockdown) can justify condonation of delay to enable adjudication on merits. Obiter - none beyond the factual finding of condonation. Conclusions: Delay in filing the appeal was condoned and did not bar appellate consideration of the substantive questions. Overall Disposition The Tribunal partly allowed the appeal: it upheld the PCIT's revisionary objections as to (a) failure to verify the quantum of agricultural income and (b) failure to verify sundry creditors, but rejected the PCIT's objection regarding non-verification of machinery opening written down value, deciding that point in favour of the assessee.