2025 (12) TMI 591 - AT - Income Tax

No Section 69C, 115BBE for bogus purchases; revision under Section 263 fails as reassessment under 147 valid

ITAT Delhi set aside the revisionary order u/s 263, holding that the AO's original reassessment u/s 147 was neither erroneous nor prejudicial to the ... Revision u/s 263 - CIT held assessment order be held as erroneous and prejudicial to the interest of revenue since the AO has failed to invoke the provisions of section 69C r.w.s. u/s 115BBE - HELD THAT:- Case of the assessee reopened u/s 147 of the Act for the reason that purchases made from M/s Radha Kanhaya Exports is bogus and thereafter, the AO referred to the statements of person managing and controlling that firm and accordingly disallowed the purchases by holding the same as bogus purchase. From the perusal of section 69C, it is observed by us that provisions of section 69C are applicable where assessee incurred any expenditure for which he has failed to offer any Explanation or the Explanation given was not found satisfactorily by the AO. In the instant case, it is not the allegation of the AO that source of purchases made from M/s Radhe Kanheya Exports was not explained rather the AO alleged the said party is bogus thus the purchases made from that party is not genuine and nowhere in the assessment order, AO raised any doubts about the source of such purchases. Therefore, he invoked the provisions of section 37(1) of the Act and disallowed the purchases made by the assessee. This being so, the provisions of section 69C of the Act are not applicable on the facts of the instant case. In the instant case, the 263 proceedings were initiated only after audit wing of the department has raised an objection which was accepted by the Assessing Officer and a proposal was made to Ld. PCIT for initiation of proceedings u/s 263 of the Act. Disallowance of purchases claimed in the Profit & Loss account held as bogus, provisions of section 69C of the Act could not be invoked and, therefore, the assessment order is neither erroneous nor prejudicial to the interest of revenue for not invoking the provisions of section 69C r.w.s. 115BBE - Assessee appeal allowed. 1. ISSUES PRESENTED AND CONSIDERED 1.1 Whether an assessment order disallowing bogus purchases under section 37(1) without invoking sections 69C and 115BBE can be treated as 'erroneous and prejudicial to the interests of the Revenue' for the purposes of section 263. 1.2 Whether section 69C is applicable where the Assessing Officer has treated purchases as bogus for being non-genuine, but has not doubted or rejected the source of such expenditure. 1.3 Whether initiation of revisionary proceedings under section 263 based solely on an audit objection, accepted by the Assessing Officer, is permissible in the facts of the case. 2. ISSUE-WISE DETAILED ANALYSIS Issue 1 & 2: Applicability of section 69C and consequential tax under section 115BBE to disallowance of bogus purchases; correctness of the assessment order for section 263 purposes Legal framework (as discussed by the Tribunal) 2.1 The Tribunal extracted and examined the text of section 69C, which applies where an assessee has incurred any expenditure and either (i) offers no explanation about the source of such expenditure, or (ii) the explanation offered is not, in the opinion of the Assessing Officer, satisfactory, in which case the amount covered by such expenditure may be deemed to be the income of the assessee. 2.2 The Tribunal also considered section 115BBE, which prescribes a special rate of tax on income determined under, inter alia, section 69C. Interpretation and reasoning 2.3 The Assessing Officer, in reassessment, had disallowed purchases from a particular concern by treating them as bogus purchases, based on statements indicating that the supplier was a non-genuine entity. The disallowance was made by treating the purchases as non-genuine expenditure and was effectively referable to section 37(1); no doubt was raised about the source of funds used for making such purchases. 2.4 The Principal Commissioner proceeded under section 263 on the basis that such bogus purchases were 'covered under section 69C' and therefore should have been taxed at the special rate under section 115BBE. The show cause notice explicitly proceeded on the premise that the failure to invoke section 69C and to charge tax under section 115BBE rendered the assessment order erroneous and prejudicial to the interests of the Revenue. 2.5 The Tribunal examined the language and scope of section 69C and held that its application is confined to situations where the source of the expenditure is unexplained or the explanation regarding such source is found unsatisfactory by the Assessing Officer. It distinguished this from a case where expenditure is disallowed as non-genuine or bogus under section 37(1), i.e., on the ground that the expenditure itself is not proved or is fictitious, not that its source is unexplained. 2.6 It was noted that in the present case the Assessing Officer had not alleged or recorded any finding that the assessee failed to explain the source of the payments for the impugned purchases; the only allegation was that the supplier was bogus and the purchases were not genuine. Thus, the disallowance was of non-genuine expenditure, not of unexplained expenditure. 2.7 Relying on decisions of the Coordinate Bench (ITAT Rajkot) in comparable fact situations, the Tribunal concurred with the reasoning that section 69C covers unexplained expenditure where the source is in doubt, whereas disallowance of non-genuine or bogus expenses, already recorded in the books, falls under the ordinary computational provisions such as section 37(1) and does not get converted into deemed income under section 69C merely because the expenditure is disallowed. 2.8 Consequently, the foundational assumption in the show cause notice-that the bogus purchases in issue 'should have been added under section 69C' and taxed under section 115BBE-was held to be legally unsustainable. Conclusions 2.9 On the facts as found in the assessment order, section 69C was not attracted because the Assessing Officer did not doubt or reject the source of the expenditure on purchases; he only held the purchases to be bogus/non-genuine. 2.10 The disallowance of such bogus purchases under section 37(1) was a plausible view in law, following proper enquiry, and the mere non-mention or non-application of sections 69C and 115BBE did not render the assessment order 'erroneous and prejudicial to the interests of the Revenue' within the meaning of section 263. 2.11 The Principal Commissioner, therefore, had no valid jurisdictional basis under section 263 to revise the assessment merely to substitute section 69C/115BBE treatment for the disallowance already made by the Assessing Officer. Issue 3: Validity of section 263 proceedings when triggered solely by audit objection Legal framework (as discussed by the Tribunal) 3.1 The Tribunal referred to judicial exposition on section 263, particularly that jurisdiction under section 263 arises only where the Principal Commissioner is satisfied that the assessment order is both erroneous and prejudicial to the interests of the Revenue. It cited the principle that a mere audit objection or the possibility of a different view does not by itself justify exercise of revisionary jurisdiction. Interpretation and reasoning 3.2 In the present case, the revision under section 263 was initiated only after the audit wing raised an objection that the Assessing Officer should have invoked section 69C and levied tax under section 115BBE on the bogus purchases. The Assessing Officer accepted this audit objection and forwarded a proposal to the Principal Commissioner for initiation of section 263 proceedings. 3.3 The Tribunal, relying on the principle laid down by the jurisdictional High Court, reiterated that an audit objection or a mere difference of opinion regarding the correct provision to apply cannot, by itself, establish that the original assessment order is erroneous and prejudicial to the interests of the Revenue. The Principal Commissioner must independently reach a legally sustainable satisfaction that the order suffers from such error. 3.4 Given the Tribunal's finding that section 69C was not applicable on the facts and that the Assessing Officer had already taken a tenable view in law, the audit objection could not validly form the basis for invoking revisionary jurisdiction. Conclusions 3.5 Initiation of revisionary proceedings under section 263 in this case, being founded solely on an audit objection that misapprehended the scope of section 69C, did not satisfy the statutory requirement that the assessment order be both erroneous and prejudicial to the interests of the Revenue. 3.6 The revisionary order passed under section 263, directing the Assessing Officer to treat the disallowed purchases under section 69C and apply section 115BBE, was without proper jurisdiction and was liable to be quashed. 3.7 The Tribunal accordingly set aside the revisionary order under section 263 and allowed the appeal, holding that the original assessment order could not be revised on the grounds taken by the Principal Commissioner.