Source of cash deposit enquiries under Section 263 upheld; revision set assessment aside for lack of enquiry.

Revision under the CIT's supervisory power was upheld because the Assessing Officer failed to inquire into the precise source of substantial cash deposits that constituted the immediate source of unsecured loans and capital; this absence of enquiry was characterised as a lack of enquiry and rendered the assessment erroneous and prejudicial to revenue, resulting in the PCIT setting aside the assessment. The tribunal accepted that audit objections can form the basis for initiating revision proceedings where facts justify it and relied on precedent requiring the CIT to form and, if necessary, itself conduct enquiry before exercising revision powers; the appeal against the s.263 order was dismissed.

---

---

Issues: Whether the Principal Commissioner of Income Tax was justified in invoking Section 263(1) of the Income-tax Act, 1961 to set aside the assessment order dated 07.02.2017 on the ground that the Assessing Officer failed to inquire into the source of substantial cash deposits which were the immediate source of unsecured loans and capital received by the assessee.

Analysis: The issue required examination of whether the assessment involved a "lack of enquiry" (as distinct from an "inadequate enquiry") into the immediate source of cash deposits aggregating Rs. 32,90,000/- which corresponded to unsecured loans and capital entries in the assessee's books. Relevant legal principles include the scope of revision under Section 263(1) of the Income-tax Act, 1961 where revision is permissible only if an order is shown to be "erroneous in so far as it is prejudicial to the interests of the Revenue", and the distinction between lack of enquiry and inadequate enquiry. The material on record showed cash deposits in the bank accounts of the alleged creditors and the transfer of equivalent cash to the assessee/partner accounts without the Assessing Officer having elicited or recorded satisfactory explanation of the immediate source of those cash deposits. The appellate authority found that enquiries by the Assessing Officer merely recorded the existence of loans and capital entries but did not examine the precise source of the cash deposits which constituted the primary source of the advances; documentary verification called for (such as cash books) was not produced or examined. On these facts, it was held that the circumstances amounted to a lack of enquiry thereby justifying exercise of revisional jurisdiction under Section 263(1) to set aside the assessment and direct fresh assessment after comprehensive enquiries.

Conclusion: The invoking of Section 263(1) and the setting aside of the assessment order is upheld and the appeal is dismissed; decision is against the assessee and in favour of the Revenue.

---