CIT revision under section 263 upheld due to inadequate inquiry on CST disallowance and cash purchases

ITAT Indore upheld CIT's revision u/s 263 against assessee's assessment order. AO failed to conduct proper inquiry on two issues: non-disallowance of outstanding CST under section 43B and cash purchase of cotton worth Rs. 14.90 crore without examining section 40A(3) applicability. While AO made adhoc disallowance for cotton purchase due to lack of supporting documents, complete absence of inquiry regarding CST disallowance and section 40A(3) provisions rendered the assessment order erroneous and prejudicial to revenue interest. Appeal dismissed.

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Issues Involved:
1. Legality of the order passed under section 263 of the Income Tax Act, 1961.
2. Verification and examination of cash purchases.
3. Disallowance on account of outstanding Central Sales Tax (CST).
4. Invocation of section 40A(3) regarding cash purchases.

Summary:

1. Legality of the Order Passed U/S 263:
The assessee challenged the order passed by the Pr. Commissioner of Income Tax (Pr. CIT) under section 263 of the Income Tax Act, 1961, claiming it was illegal, wrong, and bad-in-law. The Pr. CIT initiated proceedings under section 263 due to the lack of proper inquiry by the Assessing Officer (AO) on specific issues, rendering the assessment order erroneous and prejudicial to the interest of revenue.

2. Verification and Examination of Cash Purchases:
The Pr. CIT found that the AO did not properly verify and examine the cash purchases of cotton amounting to Rs. 14,90,73,159/-, which lacked supporting documents such as bills, vouchers, transportation receipts, and weighment slips. The AO made an ad hoc disallowance of Rs. 1,50,000/- due to the absence of proper supporting evidence but did not address the genuineness of the purchases or the applicability of section 40A(3).

3. Disallowance on Account of Outstanding CST:
The Pr. CIT noted that the assessee had not paid the CST amounting to Rs. 90,022/- by the due date under section 139(1) and neither added it back in the computation of income nor was it disallowed by the AO during the assessment proceedings. The assessee accepted the non-allowability of the claim of outstanding CST as per the provisions of section 43B, and thus, this issue was not disputed.

4. Invocation of Section 40A(3) Regarding Cash Purchases:
The Pr. CIT invoked section 263 due to the AO's failure to consider the disallowance under section 40A(3) for cash purchases exceeding Rs. 14.90 crores. The assessee contended that the purchases fell under the exceptions provided in Rule 6DD, but this required verification of necessary facts and records. The Tribunal found that the AO did not address this issue, leading to a complete lack of inquiry.

Conclusion:
The Tribunal upheld the Pr. CIT's order, concluding that the AO's assessment was erroneous and prejudicial to the interest of revenue due to the lack of proper inquiry on the issues of disallowance under sections 43B and 40A(3). The appeal of the assessee was dismissed. The Tribunal emphasized that the decisions cited by the assessee applied only where the AO conducted an inquiry and took a possible view, which was not the case here due to the complete lack of inquiry on the two issues.

Order Pronounced:
The appeal was dismissed, and the order was pronounced in the open court on 20.11.2023.

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