2023 (12) TMI 36 - HC - Income Tax

PCIT cannot invoke Section 263 without conducting own enquiry when AO properly examined assessee's explanations

The Delhi HC upheld the Tribunal's decision setting aside the PCIT's order under Section 263. The PCIT had cancelled the original assessment order ... Revision u/s 263 - No enquiry v/s inadequate enquiry - As per CIT AO had failed to enquire about the “unexplained cash deposit” found credited in the respondent’s/assessee’s bank account - HELD THAT:- PCIT, in the instant case, while concluding that the cash sale transactions, according to him, had not been duly verified, chose not to carry out any enquiry on his own before cancelling the original assessment order and directing a fresh assessment to be made in the matter. The PCIT, in our view, wrongly equated a case of 'no enquiry' with what he construed as 'inadequate enquiry'. Assessee had offered an explanation with regard to cash deposits. In the course of the assessment proceedings, the AO had accepted the explanation given by the respondent/assessee that the source of the cash deposits was cash sales. Assessee had also explained why several invoices were issued on the same date bearing the same amount. It was the respondent/assessee's submission that since it was in the business of selling gold, the quantity sold often did not vary, and therefore, the amounts shown in the invoice were also similar. This was a plausible explanation which found favour with the AO. The respondent/assessee, in support of the plea that the cash sales were the source of the deposits found credited in the subject bank account, had concededly submitted relevant material, which the AO examined in the course of the assessment proceedings. AO, having been satisfied with the explanation given, chose not to make any addition with regard to the cash deposit. PCIT on the other hand, without making any enquiry at his end, chose to cancel the assessment order with a direction to pass a fresh assessment order. PCIT had to reach a conclusion in the fact situation obtaining in the instant case, that the assessment order was erroneous by conducting an enquiry before passing an order u/s 263. PCIT, in our opinion, took the easy route by cancelling the impugned order and remanding the matter for a fresh assessment to the AO. While exercising powers under Section 263 of the Act, the concerned officer is entitled to examine the entire record, which includes not only the assessment order but also the notices issued, queries raised, responses received, and the material/evidence placed on record by the assessee. In a nutshell, the record should disclose whether the AO had applied his mind to various facets that cropped up during the assessment proceedings. In other words, furnishing reasons in the assessment order is not the sine qua non of a sustainable assessment order. Courts have repeatedly stated that the AO is not required to give detailed reasons for accepting or not accepting a particular transaction. The record should reflect whether the AO applied his mind to the transaction in issue [See CIT v. Ashish Rajpal [2009 (5) TMI 18 - DELHI HIGH COURT] Tribunal set aside the PCIT’s order correctly - Decided in favour of assessee. Issues Involved:1. Whether the Principal Commissioner of Income Tax (PCIT) correctly exercised his revisionary power under Section 263 of the Income Tax Act, 1961.2. Whether the Assessing Officer (AO) conducted adequate inquiry regarding the unexplained cash deposits before passing the original assessment order.Summary:Issue 1: Exercise of Revisionary Power by PCITThe appeal concerns the Assessment Year (AY) 2013-14, where the appellant/revenue challenged the order of the Income Tax Appellate Tribunal (Tribunal) dated 27.01.2020. The primary question was whether the PCIT correctly exercised his revisionary power under Section 263 of the Income Tax Act, 1961. The PCIT had cancelled the assessment order dated 30.12.2016, claiming the AO failed to inquire about the unexplained cash deposits in the respondent/assessee's bank accounts. The Tribunal found that the AO had indeed conducted an inquiry before passing the original assessment order.Issue 2: Adequacy of Inquiry by AOThe respondent/assessee, part of the Dua Group, filed its Return of Income (RoI) declaring an income of Rs. 59,99,560/-. During a search and seizure operation, cash deposits of Rs. 1.94 crores and Rs. 1.30 crores were found in the respondent/assessee's Axis Bank and Kotak Mahindra Bank accounts, respectively. The AO issued notices under Sections 142(1) and 143(2), followed by a detailed questionnaire seeking explanations for the cash deposits. The respondent/assessee provided explanations supported by audited financial accounts, stock summaries, VAT returns, and bank statements, asserting that the deposits were from cash sales.The AO, after examining the submissions, passed the original assessment order accepting the declared income. However, the PCIT issued a show cause notice and subsequently cancelled the assessment order, stating that the AO did not conduct a proper inquiry. The Tribunal set aside the PCIT's order, noting that the AO had made adequate inquiries and accepted the respondent/assessee's explanations.Arguments and Analysis:The appellant/revenue argued that the original assessment order was erroneous and prejudicial to the revenue's interests, citing inadequate evidence for cash deposits and discrepancies in sales transactions. The respondent/assessee countered that the AO had conducted a thorough inquiry and accepted their explanations, and the PCIT's order was based on a different opinion rather than a lack of inquiry.The court found that the AO had indeed made inquiries, as evidenced by the order sheets, questionnaires, and responses. The PCIT's conclusion that no inquiry was made was contrary to the record. The court emphasized that the PCIT should have conducted his own inquiry before cancelling the assessment order. The distinction between 'lack of inquiry' and 'inadequate inquiry' was crucial, and the PCIT had wrongly equated the two.Conclusion:The court concluded that the PCIT had wrongly exercised his revisionary power under Section 263 of the Act, as the AO had conducted an inquiry and accepted the respondent/assessee's explanations. The Tribunal's order setting aside the PCIT's order was upheld, and the appeal was dismissed, with no substantial question of law arising for consideration.