ITAT Upholds Revision Under Section 263 for Failure to Verify Contract Receipt with Social Forestry Division

The ITAT upheld the PCIT's revision under section 263, finding the AO's order erroneous and prejudicial to revenue for failing to verify the contract receipt from Social Forestry Division, Jaunpur, which the assessee denied. The AO accepted the denial without conducting independent third-party inquiry despite the receipt appearing in the assessee's Form 26AS and the assessee's request for verification. Receipts from tyre retreading and tanker rent were properly accounted for and not disputed. The matter was remanded with directions for the AO to verify the transaction with Social Forestry Division, Jaunpur, and re-adjudicate accordingly. The assessee's appeal was partly allowed.

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ISSUES:

Whether the order passed by the Assessing Officer under Section 147 read with Section 144 of the Income Tax Act, 1961 was erroneous and prejudicial to the interest of revenue for not including contract income as per Form 26AS.Whether the Principal Commissioner of Income Tax (PCIT) correctly exercised revisional jurisdiction under Section 263 of the Act by directing modification of the assessment order to add contract income not offered for taxation.Whether the Assessing Officer was obligated to independently verify the denial of contract receipt from a third party (Social Forestry Division, Jaunpur) when such receipt appeared in Form 26AS but was denied by the assessee.Whether acceptance by the Assessing Officer of the assessee's explanation without third-party verification constitutes an erroneous order prejudicial to the revenue under Explanation 2 to Section 263 of the Act.

RULINGS / HOLDINGS:

The order of the Assessing Officer was held to be "erroneous and prejudicial to the interest of revenue" only in respect of the contract receipt of Rs. 49,76,868/- from Social Forestry Division, Jaunpur, which was denied by the assessee but accepted by the AO without requisite verification.The revisional jurisdiction under Section 263 was validly invoked by the PCIT to the extent that the AO failed to make necessary enquiries or verifications regarding the disputed contract receipt, as per Explanation 2 to Section 263 of the Act.The direction to the AO to add the entire contract income of Rs. 66,22,032/- as per Form 26AS was modified; only the disputed portion relating to Social Forestry Division, Jaunpur requires verification and re-adjudication.The Assessing Officer's acceptance of the assessee's denial without independent third-party verification was insufficient and rendered the assessment order erroneous and prejudicial to revenue in that respect.

RATIONALE:

The Court applied the framework under Section 263 of the Income Tax Act, 1961, particularly Explanation 2, which states that if an assessment order is passed without making inquiries or verifications which should have been made, the order shall be deemed erroneous and prejudicial to the interests of the revenue.The Court emphasized the necessity of independent verification when the assessee denies a transaction that appears in Form 26AS, to safeguard revenue interests and ensure correctness of assessment.The Court recognized that the Assessing Officer had duly examined and accounted for other contract receipts (tyre retreading and tanker rent income), and thus the error was confined to the unverified denial of receipt from Social Forestry Division, Jaunpur.No doctrinal shift or dissent was noted; the judgment aligns with established principles requiring proper verification before acceptance of explanations in tax assessments.

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