2024 (10) TMI 1698 - AT - Income Tax

ITAT Upholds Section 263 Revision, Confirms Full Tax on Undisclosed Rs. 27 Crore Cash Loan

Naveen Narang Versus PCIT (Central) -3, New Delhi

The ITAT Delhi upheld the revision under section 263, confirming that the Assessing Officer erred in taxing only a small portion of the undisclosed cash ... Revision u/s 263 - invocation of proceedings u/s 153C on the statement of the third person and the statement was construed as an incriminating material - cash loan/investment - HELD THAT:- A comprehensive reading of the Section 132 elucidate that the warrant of authorization would be issued by the DGIT/PDIT/CIT on any premises/person on whom the warrant issuing authority has a reason to believe that the unaccounted income /document of the assessee are kept at. The person who has been searched can have an immediate possession of the evidences leading to undisclosed income in his own custody or the same may be available in a mediate possession with somebody else who is having an association with the person searched and such person is also covered under the same action u/s 132 of the Act. What is to be observed whether the material found and seized reveals the undisclosed income or not? For example, in case of an assessee “ABC” who is a founder, promoter and Director of the company and he keeps the second set of books of accounts to be kept with his manager on day to day basis, the manager is only in constructive possession of the documents but the manager is neither the owner of the documents nor has any say in such second set of books of accounts. It is the documents of the assessee which were believed to be in the possession of the manager by the revenue authorities and based on that belief, the revenue authorities have issued warrant of authorization on the manager as per the provisions of Section 132 of the Act. Even the legislative intention was not to burden an assessee with 7 assessments u/s 153A, 7 assessments u/s 153C and some more assessments u/s 148. The purpose of legislation is to aid its citizens with least possible procedural hitches to pay the right taxes but not to entangle in own citizens by subjecting them with plethora of assessments under various Sections as a result of one single action taken u/s 132 of the Act. Seized material clearly denotes that the assessee Sh. Naveen Narang had advanced a sum of Rs. 27 Cr. and received back an amount of Rs. 3,26,50,248/-. Further, the seized material mentioned above in the order of the ld. PCIT clearly proves that the said loan was being repaid in cash to the extent of Rs. 3,26,50,248/-. Assessing Officer considered an amount of Rs. 15,58,96,355/- as bogus billing provided by Sh. Naveen Narang and calculated and taxed only the commission income of Rs. 12,10,692/- in the hands of Sh. Naveen Narang. Thus, it can be concluded that the AO has committed an error of bringing an amount of Rs. 12,10,692/- to tax instead of the undisclosed amount of Rs. 27,00,00,000/-. Thus, the Assessment Order passed is erroneous as well as prejudicial to the interest of revenue and hence, we decline to interfere with the order passed u/s 263 by the ld. PCIT(Central)-3. Appeal of the assessee is dismissed. 1. ISSUES PRESENTED and CONSIDERED 1. Whether the Principal Commissioner of Income Tax (PCIT) had jurisdiction to initiate proceedings under section 263 of the Income Tax Act, 1961, and whether such initiation was valid and within limitation. 2. Whether the original assessment order passed under sections 153A/143(3) was erroneous and prejudicial to the interest of the revenue. 3. Whether the directions issued by the PCIT under section 263 were vague, ambiguous, and untenable. 4. Whether the order under section 263 was passed without application of mind. 5. Whether the PCIT erred in setting aside the assessment order despite the same being passed with due approval under section 153D. 6. Whether the assessment was passed without making necessary inquiries or verification. 7. Whether the PCIT erred in directing reassessment regarding alleged cash loan/investment of Rs. 27 crores based on seized excel sheets from a third party. 8. Whether the order under section 263 was arbitrary and against principles of natural justice. 9. Whether the original assessment order itself was bad in law and without jurisdiction. 10. Whether the directions under section 263 exceeded the scope of section 153A. 2. ISSUE-WISE DETAILED ANALYSIS Issue 1 & 9: Jurisdiction and Validity of Proceedings under Section 263 - Legal Framework: Section 263 permits the PCIT/Commissioner to revise an order if it is erroneous and prejudicial to the revenue. Jurisdiction depends on whether the order is within the statutory scope and limitation. - Court's Reasoning: The PCIT's jurisdiction was valid as the assessment was passed under section 153A following a search and seizure operation under section 132. The order was challenged on grounds of jurisdiction and limitation but the Tribunal found the PCIT acted within powers. - Findings: The PCIT issued show cause notice and gave opportunities to the assessee before passing the revisionary order. The limitation period was respected. - Conclusion: The initiation of proceedings under section 263 was lawful and within limitation; the original assessment order was not without jurisdiction. Issue 2, 5, 6 & 8: Whether the Original Assessment was Erroneous and Prejudicial to Revenue Due to Lack of Proper Inquiry - Legal Framework: Explanation 2(a) to section 263 states that an order is erroneous if passed without making inquiries or verification which should have been made. Judicial precedents emphasize AO's duty to investigate and verify facts beyond passive acceptance of returns. - Court's Reasoning: The seized excel sheet titled 'Narang (01-01-2016).xlsx' found during search from a third party's possession contained detailed records of a Rs. 27 crore unaccounted loan/investment by the assessee. The AO made only a partial addition of Rs. 11.41 crores without adequate inquiry or verification of the full amount. - The AO failed to investigate the distinct nature of the Rs. 27 crore cash loan/investment and wrongly conflated it with bogus billing commission income, leading to under-assessment. - Despite evidence, the AO did not conduct summons or show cause notices to concerned parties for detailed inquiry. - The PCIT found the assessment order cryptic and lacking proper reasons, failing to reflect the relevant facts and law. - Competing Arguments: The assessee argued that the excel sheets were seized from a third party and could not be used without compliance with section 153C. The AO's addition was also claimed to be erroneous. - Findings: The Tribunal observed that the assessee was covered in the search, and the seized documents pertained to the assessee's undisclosed income. The AO's failure to investigate was held to be an error prejudicial to revenue. - Conclusion: The original assessment order was erroneous and prejudicial to revenue due to lack of proper inquiry and verification, justifying revision under section 263. Issue 7 & 10: Applicability of Section 153A and Use of Third Party Seized Material - Legal Framework: Section 153A applies to persons covered in search. Section 153C governs use of material seized from third parties. Judicial precedent holds that material seized from a third party cannot be used to assess another person without following section 153C procedure. - Court's Reasoning: The assessee contended that excel sheets were seized from a third party and hence not admissible for addition under section 153A without invoking section 153C. Relying on High Court precedent, the assessee argued that non-compliance with section 153C invalidates the use of such material. - The PCIT and Tribunal noted that the assessee was covered in the search and the seized material related to the assessee's unaccounted transactions. The seized excel sheets were maintained by a key employee of the searched party and contained detailed records of transactions involving the assessee. - Findings: The Tribunal held that the seized material was relevant and admissible against the assessee under section 153A as the assessee was covered in the search and the material pertained to him. - Conclusion: The use of seized excel sheets was valid under section 153A and did not require separate invocation of section 153C in this case. Issue 3 & 4: Validity and Clarity of Directions Issued under Section 263 and Application of Mind - Legal Framework: Orders under section 263 must be reasoned, clear, and passed after due application of mind and opportunity to the assessee. - Court's Reasoning: The PCIT issued detailed reasons highlighting the AO's failure to investigate the full extent of unaccounted loan/investment and the reliance on partial addition. The assessee was given opportunity to reply but failed to provide complete response within limitation. - The Tribunal found the directions specific and justified, rejecting the assessee's claim of vagueness or arbitrariness. - Conclusion: The order under section 263 was passed after due application of mind and was neither vague nor ambiguous. Issue 5: Approval under Section 153D and Its Effect - Legal Framework: Section 153D requires prior approval of Joint Commissioner for assessment or reassessment under section 153A. - Court's Reasoning: The PCIT noted that the assessment was passed with due approval under section 153D. This fact does not preclude revision under section 263 if the order is erroneous and prejudicial. - Conclusion: Approval under section 153D does not immunize an erroneous and prejudicial assessment order from revision under section 263. Issue 8: Alleged Violation of Natural Justice - Legal Framework: Revision under section 263 requires opportunity of hearing to the assessee. - Court's Reasoning: The assessee was given multiple opportunities to reply to the show cause notice but failed to submit complete reply within limitation. The PCIT considered the partial reply and proceeded. - Conclusion: Principles of natural justice were complied with; no violation found. Issue 6 & 7: Distinction Between Bogus Billing and Cash Loan/Investment - Legal Framework: Income tax law distinguishes between unexplained investments and commission income from bogus billing, requiring separate assessment and inquiry. - Court's Reasoning: The seized excel sheets showed Rs. 27 crores cash loan/investment and separate bogus billing transactions. The AO conflated these distinct issues, reducing the addition of unaccounted loan/investment by adjusting bogus billing amounts. - The Tribunal held that the Rs. 27 crore investment was a distinct transaction requiring full addition in the relevant assessment year. - Conclusion: The AO's approach was erroneous; full addition of Rs. 27 crores was warranted. Issue 1 & 2: Overall Conclusion on Revision under Section 263 - The Tribunal upheld the PCIT's order under section 263, holding the original assessment order erroneous and prejudicial to revenue due to inadequate inquiry and verification of seized evidence indicating substantial unaccounted income. - The assessment order was set aside for fresh adjudication with directions to conduct thorough and detailed inquiries on the Rs. 27 crore cash loan/investment issue. Additional Observations: - The seized excel sheets from the key employee of a searched party, containing detailed ledgers and transaction records, were held to be admissible and relevant for assessing the assessee covered in the search. - The AO's failure to investigate the seized material and reliance on partial additions was held to be a clear error. - The Tribunal relied on Supreme Court precedents affirming the Commissioner's power to revise orders under section 263 where the AO fails to make proper inquiries.