2025 (2) TMI 44 - AT - Income Tax

AO's incomplete inquiry into sundry creditors' genuineness makes assessment erroneous under Section 263

ITAT Mumbai upheld CIT's revision order u/s 263 against assessee. AO failed to conduct proper inquiries regarding genuineness of sundry creditors despite ... Revision u/s 263 - failure to make necessary inquiries or verifications regarding the genuineness of certain sundry creditors - HELD THAT:- As evident from the record that even the assessee also failed to furnish the details as sought during the assessment proceedings. Accordingly, the AO concluded that the initial onus upon the assessee to prove the genuineness of the transaction was not discharged by the assessee From the perusal of the assessment order, we find that even though the AO doubted the genuineness of the transaction with 10 parties, as noted in the foregoing paragraph, however, proceeded to make the addition u/s 41(1) in respect of only two sundry creditors. We find that as regards the remaining 8 parties shown as sundry creditors by the assessee, there is no examination by the AO nor any addition was made. During the hearing, AR furnished a copy of the ledger account of AJS Impex Pvt. Ltd. in the books of the assessee. From the perusal of the same, we find that there is a credit balance as against the debit balance noted of the assessment order. Thus, it is ostensible that even despite coming to the conclusion that the genuineness of the transaction in respect of afore-noted 10 parties is not proved, the addition was only made in respect of two parties on the basis that liability has ceased to exist under section 41(1) without giving any reasoning as to why the same conclusion cannot be reached in respect of remaining 8 parties. Thus, assessment order passed under section 143(3) r.w.s. 144B of the Act has been passed without making inquiries or verification which should have been made, and therefore, the present case clearly falls within the ambit of provisions of Explanation 2 to Section 263 of the Act. Decided against assessee. ISSUES PRESENTED and CONSIDEREDThe core legal issue considered in this judgment is whether the initiation of revisionary proceedings under section 263 of the Income Tax Act, 1961 by the Principal Commissioner of Income Tax (PCIT) was justified. The specific question was whether the assessment order passed under section 143(3) r.w.s. 144B was erroneous and prejudicial to the interests of the Revenue due to the failure to make necessary inquiries or verifications regarding the genuineness of certain sundry creditors.ISSUE-WISE DETAILED ANALYSISRelevant Legal Framework and PrecedentsThe legal framework revolves around section 263 of the Income Tax Act, which empowers the PCIT to revise an assessment order if it is deemed erroneous and prejudicial to the interest of the Revenue. Explanation 2 to Section 263 specifies that an order is considered erroneous if inquiries or verifications which should have been made were not made.Court's Interpretation and ReasoningThe Tribunal examined whether the Assessing Officer (AO) conducted appropriate inquiries or verifications regarding the genuineness of the sundry creditors listed by the assessee. The Tribunal noted that the AO had issued notices under section 133(6) to ten parties but had only made additions concerning two parties, without providing reasons for not making similar additions for the remaining eight parties.Key Evidence and FindingsDuring the assessment proceedings, the AO issued notices to ten creditors to verify their genuineness. The assessee failed to provide confirmations and bank statements for these creditors. The AO made additions for two creditors, Turakhia International Pvt. Ltd. and Nyka Engineering Co., under section 41(1) of the Act, but did not address the remaining eight creditors.Application of Law to FactsThe Tribunal applied the provisions of section 263, determining that the AO's failure to make inquiries or verifications regarding the remaining eight creditors rendered the assessment order erroneous and prejudicial to the Revenue's interest. The Tribunal upheld the PCIT's decision to set aside the assessment order for a de novo assessment.Treatment of Competing ArgumentsThe assessee argued that the AO's decision not to make additions for AJS Impex Pvt. Ltd. was justified. However, the Tribunal found that the AO did not provide adequate reasoning for this decision, especially given the lack of response to the notices issued under section 133(6). The Tribunal concluded that the AO's selective approach to making additions was not substantiated by sufficient inquiry or verification.ConclusionsThe Tribunal concluded that the assessment order was indeed erroneous and prejudicial to the interests of the Revenue due to the AO's failure to conduct necessary inquiries or verifications regarding the genuineness of the creditors. The Tribunal upheld the PCIT's order to set aside the assessment for further examination.SIGNIFICANT HOLDINGSPreserve Verbatim Quotes of Crucial Legal ReasoningThe Tribunal stated, 'the assessment order passed under section 143(3) r.w.s. 144B of the Act has been passed without making inquiries or verification which should have been made, and therefore, the present case clearly falls within the ambit of provisions of Explanation 2 to Section 263 of the Act.'Core Principles EstablishedThe judgment reinforces the principle that an assessment order is deemed erroneous and prejudicial to the Revenue's interest if the AO fails to make necessary inquiries or verifications. It highlights the necessity for comprehensive scrutiny when the genuineness of transactions is in question.Final Determinations on Each IssueThe Tribunal determined that the PCIT was correct in invoking section 263 to revise the assessment order. The AO's failure to inquire into the genuineness of all ten creditors, despite having doubts, justified the PCIT's directive for a de novo assessment. Consequently, the Tribunal dismissed the appeal filed by the assessee.