2024 (9) TMI 1849 - AT - Income Tax

ITAT restores best judgment assessment, holds s.263 revision invalid where AO made adequate enquiry into bank credits

ITAT set aside the revision order u/s 263 passed by Pr. CIT against the assessee, a non-filer assessed on best judgment basis. The AO had examined ... Revision u/s 263 - Issue of credits in the banks accounts - assessee was assessed on best judgment basis - assessee remained a non-filer throughout and did not respond to various notices issued by Ld. AO during the course of assessment proceedings HELD THAT:- The bank accounts were analyzed and it was observed by Ld. AO that that there were periodic deposits and withdrawals throughout the year in all forms. The Ld. AO formed an opinion that the assessee was carrying out business activities and the credits and debits in the banks accounts were arising out of business transactions. As per enquiries made by Ld. AO, the assessee was running a grocery and finance business. AO concluded that credits in the bank account represent business receipts and accordingly, estimated net profit on presumptive basis by applying presumptive rates of estimation of income. The assessment was framed on best judgment basis wherein the income is assessed to the best judgment of Ld. AO without considering any of the submissions of the assessee. On these facts, it could not be alleged that Ld. AO did not make proper enquiries before concluding the assessment. The view taken by Ld. AO was one of the possible views and the same could not be held to be opposed to any statutory provisions. The estimation of Ld. AO was based on factual position emerging during the assessment proceedings. The Hon’ble Supreme Court in Malabar Industrial Co. Ltd. [2000 (2) TMI 10 - SUPREME COURT] has held that the phrase 'prejudicial to the interests of the revenue has to be read in conjunction with an erroneous order passed by the Assessing Officer. Every loss of revenue as consequence of an order of the Assessing Officer cannot be treated as prejudicial to the interest of the revenue. Thus, allegation of Ld. Pr. CIT that Ld. AO did not make necessary enquiries, could not be accepted. The Explanation-2 to Sec.263 would not apply in the present case. 1. ISSUES PRESENTED AND CONSIDERED 1.1 Whether the conditions for valid invocation of revisionary jurisdiction under section 263, including Explanation 2(a), were satisfied where the assessment was completed under section 153C read with section 144 on the basis of bank account analysis and estimation of income at 8% of total bank credits. 1.2 Whether the assessment order could be treated as 'erroneous and prejudicial to the interests of the revenue' merely because the Principal Commissioner disagreed with the Assessing Officer's view on characterization of bank credits as business receipts and estimation of income. 1.3 Whether the allegation that the Assessing Officer failed to conduct 'necessary enquiries' into the nature and source of bank credits was sustainable in the facts of a best judgment assessment where the assessee was a non-filer and non-compliant during assessment proceedings. 1.4 Whether the additional legal ground challenging the very validity of the base assessment under section 153C read with section 144, on the plea of absence of incriminating material, required adjudication after the setting aside of the revision under section 263. 1.5 Whether the conclusions on section 263 for the lead assessment year applied mutatis mutandis to the subsequent assessment years where facts and the manner of assessment were identical. 2. ISSUE-WISE DETAILED ANALYSIS Issue 1 & 2: Validity of revision under section 263 and characterization of the assessment order as 'erroneous and prejudicial to the interests of the revenue' Legal framework (as discussed by the Tribunal) 2.1 The Court examined section 263, including the requirement that an order be both 'erroneous' and 'prejudicial to the interests of the revenue' and the deeming provision in Explanation 2(a) treating an order as erroneous where it is passed without making enquiries or verification which should have been made. 2.2 The Court referred to the principles laid down by the Supreme Court in decisions including Malabar Industrial Co. Ltd. v. CIT, CIT v. Max India Ltd., and Grasim Industries Ltd. v. CIT, particularly that: (a) every loss of revenue does not ipso facto render an order prejudicial to the interests of the revenue; (b) where the Assessing Officer adopts one of the courses permissible in law, or where two views are possible and the Assessing Officer has taken one such view, the order cannot be treated as erroneous and prejudicial merely because the Commissioner does not agree with that view, unless the view is unsustainable in law. Interpretation and reasoning 2.3 The Court noted that the assessments were framed under section 153C read with section 144 on a best judgment basis, in a situation where: (a) the assessee was a non-filer and did not respond to notices; (b) the Assessing Officer obtained and analyzed bank statements independently from the portal; (c) it emerged from enquiries that the assessee earlier ran a provision (grocery) shop and was engaged in grocery and finance business, with one bank account in the name of a business concern and regular credits and debits in the accounts. 2.4 On these facts, the Assessing Officer formed an opinion that the bank credits represented business receipts and, treating the activity as business, estimated income at 8% of the gross bank credits on a presumptive/estimation basis, applying a presumptive rate of profit. 2.5 The Principal Commissioner invoked section 263 on the reasoning that: (a) the Assessing Officer did not ascertain the true nature of the bank credits; (b) substantial deposits followed by quick withdrawals suggested that these were not trading receipts; (c) no enquiry had been made into the nature and source of the credits; and (d) therefore, the order was 'erroneous and prejudicial' within the meaning of Explanation 2(a) to section 263. 2.6 The Court rejected this approach on the following reasoning: (a) the assessments were best judgment assessments, necessarily based on the Assessing Officer's reasonable inference from available material where the assessee had not cooperated; (b) the Assessing Officer did carry out enquiries by obtaining and analyzing bank statements and by ascertaining the assessee's business activities (provision shop and finance business); (c) on that factual foundation, treating bank credits as business receipts and estimating profit at a presumptive rate was a permissible view and a plausible method of assessment in best judgment proceedings; (d) such estimation, based on available facts, constituted a conscious application of mind, not a non-enquiry or lack of enquiry; (e) hence, the allegation that the Assessing Officer failed to conduct necessary enquiries was unsustainable. 2.7 The Court held that the Principal Commissioner's invocation of section 263 was founded only on a different perception of how the bank credits should have been treated or how much enquiry was adequate, which amounted to a mere change of opinion rather than correction of an 'erroneous' order. 2.8 Applying the Supreme Court's jurisprudence, the Court concluded that: (a) the Assessing Officer's view was one of the 'possible views' on the material on record; (b) the order was neither contrary to any statutory provision nor unsustainable in law; (c) in such circumstances, even if the view led to lower tax, the order could not be branded as 'erroneous and prejudicial to the interests of the revenue.' Conclusions 2.9 The Court held that the pre-conditions for exercise of revisionary jurisdiction under section 263 were not satisfied and that the deeming provision in Explanation 2 to section 263, particularly clause (a), did not apply in the present factual scenario. 2.10 The revisionary orders under section 263 passed by the Principal Commissioner were set aside, and the original assessments framed by the Assessing Officer were restored. Issue 3: Alleged lack of enquiry by the Assessing Officer and applicability of Explanation 2(a) to section 263 Interpretation and reasoning 3.1 The Tribunal examined whether the assessment could be said to have been made 'without making enquiries or verification which should have been made' so as to trigger the deeming error under Explanation 2(a) to section 263. 3.2 The Court emphasized that the assessment was made under section 144 on a best judgment basis after: (a) collecting bank statements of the assessee's various accounts; (b) noting regular deposits and withdrawals in these accounts, including in an account in the name of the assessee's business concern; (c) gathering information that the assessee was engaged in grocery and finance business; and (d) forming an opinion that such credits and debits represented business receipts and payments. 3.3 On these facts, the Court found that the Assessing Officer had made sufficient enquiry and verification consistent with the constraints of a best judgment assessment, particularly in the face of non-compliance and absence of explanations from the assessee. 3.4 The Court thus held that the case did not fall within the mischief of Explanation 2(a) to section 263, as the assessment could not be characterized as one made without requisite enquiries. Conclusions 3.5 The allegation of lack of enquiry was rejected, and Explanation 2(a) was held inapplicable; the assessment could not be revised on that ground. Issue 4: Necessity to adjudicate the additional ground challenging the validity of the base assessment under section 153C read with section 144 Interpretation and reasoning 4.1 The assessee raised an additional legal ground that the base assessment under section 153C read with section 144 was invalid in the absence of incriminating material and, therefore, could not be made the subject of revision under section 263. 4.2 The Court admitted the additional ground as a pure question of law not requiring fresh factual inquiry. 4.3 However, having already held that the revisionary order under section 263 itself was invalid and had to be quashed, the Court found that the additional ground, which attacked the very base assessment, became academic. Conclusions 4.4 The additional ground challenging the validity of the base assessment was dismissed as infructuous and not adjudicated on merits, in view of the setting aside of the section 263 order and restoration of the Assessing Officer's assessment. Issue 5: Application of the decision to other assessment years Interpretation and reasoning 5.1 The Court noted that for the subsequent assessment years (AYs 2016-17 to 2020-21), the factual matrix and the basis of assessment were identical: (a) assessments framed under similar provisions and on similar best judgment principles; (b) similar pattern of bank credits and debits and non-cooperation by the assessee; and (c) similar grounds for revision invoked by the Principal Commissioner under section 263. 5.2 In view of this identity of facts and law, the Court held that the reasoning and conclusions recorded for the lead assessment year applied mutatis mutandis to all other years. Conclusions 5.3 For all the relevant assessment years, the revisionary orders under section 263 were quashed and the respective original assessments framed by the Assessing Officer were restored.