Provisions of Section 263 on the issue of taxability of unexplained sales, receivables and payables

Last updated: 15 October 2021

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This Income Tax Appellate Tribunal ruling addresses the taxability of unexplained sales, receivables, and payables under Section 263. The Tribunal found that the Principal Commissioner of Income Tax (PCIT) incorrectly invoked Section 263 powers. The PCIT failed to conduct necessary inquiries or demonstrate that the Assessing Officer's view was unsustainable in law before issuing revision orders. Consequently, the Tribunal set aside the PCIT's revision orders, allowing the assessee's appeals.

Court :
ITAT Chandigarh

Brief :
The present appeals relate to the same assessee and are against separate orders both dated 31.03.2021 of the Principal Commissioner of Income Tax (Central ) , Ludhiana( in short referred to as “PCIT” ) , passed in exercise of his revisionary jurisdiction u/s 263 of the Income Tax Act ,1961

Citation :
ITA Nos. 123 & 124/CHD/2021

IN THE INCOME TAX APPELLATE TRIBUNAL, CHANDIGARH
BENCH‘A’ CHANDIGARH

BEFORE: SH. SANJAY GARG, JUDICIAL MEMBER &
SMT. ANNAPURNA GUPTA, ACCOUNTANT MEMBER

ITA Nos. 123 & 124/CHD/2021

Assessment Year : 2016-17 & 2017-18

M/s A.P. Refinery Pvt. Ltd.,
Village – Tapper Harnia,
Jalandhar Road, Jagraon,
Distt. Ludhiana.

The Pr. Commissioner of
Income Tax (Central),
LudhianaAssessee by : Shri Ashwani Kumar, C.A. &
Shri Aditya Kumar, CA &
Shri Bhavesh Jindal, CA

Revenue by : Smt. C. Chandrakanta, CIT

Date of Hearing : 24.08.2021

Date of Pronouncement : 04.10..2021

Order

It was common ground that the revision order in both the years had been passed in identical facts and ci rcumstances.
Therefore both the appeals were taken up together for hearing and are being disposed of f by a common consolidated order.

2. Brief ly stated the assessee had returned an income of Rs. 9,49,54,390/- and Rs. 9,91,49,440/- respect ful ly for the two assessment years involved and the assessment was completed u/s 153A read with Sect ion 143(3) of the Act for assessment year 2016-17 at the returned income and u/s 143(3) for assessment year 2017-08 at an income of Rs. 10,06,43,151/- . Thereafter, the ld. PCIT noted that there was mis-match in the amounts reflected against certain items in the financial statements of the assessee and that reflected in the details furnished by the assessee during assessment proceedings, for the two years involved.

3. “The law interpreted by the High Courts makes it clear that the Ld Pr. CIT, before holding an order to be erroneous, should have conducted necessary enquiries or verification in order to show that the finding given by the
assessing officer is erroneous, the Ld Pr. CIT should have shown that the view taken by the AO is unsustainable in law. In the instant case, the Ld Pr. CIT has failed to do so and has simply expressed the view that the assessing officer should have conducted enquiry in a particular manner as desired by him. Such a course of action of the Ld Pr. CIT is not in accordance with the mandate of the provisions of sec. 263 of the Act. The Ld Pr. CIT has taken support of the newly inserted Explanation 2(a) to sec. 263 of the Act. Even though there is a doubt as to whether the said
explanation, which was inserted by Finance Act 2015 w.e.f. 1.4.2015, would be applicable to the year under consideration, yet we are of the view that the said Explanation cannot be said to have over ridden the law interpreted by Hon’ble Delhi High Court, referred above. If that be the case, then the Ld Pr. CIT can find fault with each and every assessment order, without conducting any enquiry or verification in order to establish that the assessment order is not sustainable in law and order for revision. He can also force the AO to conduct the enquiries in the manner preferred
by Ld Pr. CIT, thus prejudicing the independent application of mind of the AO. Definitely, that could not be the intention of the legislature in inserting Explanation 2 to sec. 263 of the Act.

3. In view of the same, we hold that the orders passed by the ld. Pr. CIT being beyond the scope of section 263 of the Act are not valid. Accordingly we set aside the revision orders passed by the Ld.PCIT for the two years under consideration.

4. In the result , both the appeals of the assessee are allowed.
Order pronounced on 4th October,2021.

Please find attached the enclosed file for the full judgement

FAQ :

The judgement concerns the taxability of unexplained sales, receivables, and payables, and the validity of revision orders passed by the Principal Commissioner of Income Tax (PCIT) under Section 263.

No, the Tribunal found that the PCIT failed to conduct necessary inquiries or demonstrate that the Assessing Officer's order was unsustainable in law, which is required before revising an order under Section 263.

The assessee argued that the PCIT's revision orders were beyond the scope of Section 263, as the PCIT had not established that the Assessing Officer's assessment was erroneous or unsustainable.

The Tribunal allowed both appeals filed by the assessee, setting aside the revision orders passed by the PCIT.

The Tribunal suggested that even with the insertion of Explanation 2(a) to Section 263, it cannot override established law as interpreted by High Courts, particularly regarding the PCIT's duty to conduct inquiries.