AO's thorough enquiry under section 142(1) prevents CIT from invoking section 263 revision powers without establishing clear error

ITAT Bangalore quashed CIT's revision order u/s 263 that deemed AO's reassessment order u/s 147 r/w 144B as erroneous and prejudicial to revenue interests. The tribunal found AO conducted complete enquiry u/s 142(1), verified debtor details, compared purchase/sales data, and examined cash deposits across three banks. Since subsequent reassessment also accepted returned income and PCIT failed to establish any error or invoke Explanation-2 of section 263, the revision order was unsustainable. Assessee's appeal allowed.

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1. ISSUES PRESENTED and CONSIDERED

- Whether the reassessment order passed under section 147 read with section 144B of the Income-tax Act, 1961 (the Act) dated 12.3.2022 is erroneous and prejudicial to the interests of the revenue, justifying revision under section 263 of the Act.

- Whether the Assessing Officer (AO) conducted proper verification of the nature and source of cash deposits made during the demonetisation period, including the adequacy of verification of cash receipts from debtors and bank deposits.

- Whether the Principal Commissioner of Income Tax (PCIT) was justified in setting aside the reassessment order and directing a fresh assessment on the ground of alleged inadequate verification and failure to obtain bank certificates regarding denomination of notes deposited.

- Whether the subsequent reassessment order passed pursuant to the revisionary order under section 263 of the Act, which accepts the returned income, renders the appeal infructuous.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Validity of the reassessment order dated 12.3.2022 under sections 147 and 144B of the Act

Relevant legal framework and precedents: Section 147 empowers the AO to reopen assessment if income has escaped assessment. Section 144B prescribes faceless assessment procedures. Section 263 allows the PCIT to revise an order if it is erroneous and prejudicial to the interests of the revenue. Explanation 2 to section 263 clarifies the scope of revision.

Court's interpretation and reasoning: The Court examined the reassessment order passed by the AO, noting that the AO had conducted a detailed enquiry under section 142(1) of the Act. The AO sought and verified extensive details regarding the cash deposits during the demonetisation period, including date-wise cash deposits, bifurcation of cash sales and receipts from debtors, ledger accounts, monthly sales and purchases, cash books, bank books, and annual accounts. The AO also scrutinized details of the top 10 debtors and creditors, including their PANs and addresses.

Key evidence and findings: The AO's verification was thorough, with documentary evidence supporting the source of cash deposits as business receipts. The assessee had furnished detailed particulars of cash sales and receipts, which were corroborated by bank statements and books of account.

Application of law to facts: Given the comprehensive verification and acceptance of returned income by the AO, the Court found no error in the original reassessment order. The order was neither erroneous nor prejudicial to the interests of the revenue.

Treatment of competing arguments: The PCIT contended that the AO failed to verify the denomination of notes deposited and should have obtained bank certificates to that effect. However, the Court held that such certificates would not materially affect the determination of income and that the AO's enquiry was adequate. The PCIT did not invoke Explanation 2 to section 263, nor did it conduct any preliminary enquiry to substantiate its claim of error.

Conclusions: The reassessment order dated 12.3.2022 is valid and sustainable.

Issue 2: Justification for revisionary order under section 263 by the PCIT dated 19.3.2024

Relevant legal framework and precedents: Section 263 permits revision only if the order is erroneous and prejudicial to the interests of the revenue. Revision cannot be based on mere change of opinion or without proper enquiry.

Court's interpretation and reasoning: The PCIT's revisionary order criticized the AO for not verifying the denomination of notes and for accepting cash deposits without adequate scrutiny. However, the Court observed that the PCIT did not conduct any independent enquiry or call for additional evidence before passing the revisionary order. The PCIT's observations were based on assumptions rather than findings.

Key evidence and findings: The AO had recorded in the reassessment order the detailed verification steps undertaken. The assessee had supplied extensive documentary proofs. The PCIT's demand for bank certificates regarding denomination was not mandated by law and would not have altered the outcome.

Application of law to facts: The Court held that the PCIT's revisionary order was not sustainable as it was based on an erroneous premise that the AO had not verified the source of cash deposits. The revisionary order was thus quashed.

Treatment of competing arguments: The PCIT argued that the revision was necessary to protect revenue interests. The assessee contended that the revision was unjustified and amounted to mere change of opinion. The Court sided with the assessee, emphasizing the adequacy of AO's enquiry and the absence of any error.

Conclusions: The revisionary order under section 263 is set aside.

Issue 3: Effect of subsequent reassessment order dated 10.3.2025 passed pursuant to revision under section 263

Relevant legal framework and precedents: A subsequent reassessment order accepting the returned income may render appeals against the original reassessment order infructuous.

Court's interpretation and reasoning: The Court noted that the reassessment order passed pursuant to the revisionary order also accepted the returned income of the assessee, indicating no change in the assessment position.

Key evidence and findings: The reassessment order dated 10.3.2025 confirmed the correctness of the original assessment and did not alter the income declared by the assessee.

Application of law to facts: Since the subsequent order accepts the returned income, the appeal against the revisionary order loses its purpose.

Treatment of competing arguments: The Revenue argued that the appeal should be dismissed as infructuous. The assessee sought restoration of the original order. The Court held that the appeal is allowed as the revisionary order is quashed and the original order stands.

Conclusions: The appeal is allowed, and the revisionary order is quashed.

3. SIGNIFICANT HOLDINGS

"We find that even in the reassessment order passed in pursuance of the directions u/s. 263 of the Act the returned income of the assessee is accepted. This itself shows that there is no error in the original reassessment order which is not prejudicial to the interests of the revenue."

"It is a fact that when the list of such debtors from whom cash is received along with their copy of accounts, address, PAN, etc. was furnished, it is apparent that the source of cash deposit is business receipt of the assessee."

"Even the ld. PCIT on examination of the submissions did not make even a preliminary enquiry and did not invoke Explanation-2 of section 263 of the Act. There was no finding because the reassessment order originally passed was erroneous."

"Obtaining the bank certificate about the denomination would not have made any difference so far as the income of the assessee is concerned."

"In view of the above facts, the revisionary order u/s. 263 of the Act is not sustainable and hence quashed."

Core principles established:

• Revision under section 263 requires a finding of error and prejudice to revenue, which cannot be based on mere change of opinion or assumptions.
• Thorough verification by the AO, including examination of books, bank statements, and debtor details, suffices to establish the genuineness of cash deposits.
• Failure to obtain bank certificates regarding denomination of notes is not fatal if the AO has otherwise conducted adequate enquiry.
• Revisionary orders must be supported by preliminary enquiry and proper findings before setting aside assessment orders.

Final determinations:

• The original reassessment order dated 12.3.2022 is neither erroneous nor prejudicial to the interests of the revenue and is upheld.
• The revisionary order dated 19.3.2024 passed under section 263 is quashed for lack of justification.
• The appeal is allowed in favor of the assessee.

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