Invocation of power under s.263 is justified where the order passed by the AO clearly suffers from the vice of lack of requisite enquiries or verification expected from him.

1. The captioned appeals by the assessee are directed against the Pr. Commissioner of Income Tax, Rajkot-2. The relevant particulars are tabulated as under:

I TA Nos. Name of assessee AY CIT(A)'s order dated

AO's penalty order dated

AO's order under Section 103 (of Income Tax Act, 1961)/Rjt/17 Shri Hemendra K.Parmar

2010-11 06.02.17 27.03.15 143(3) r.w.s. 147 (of Income Tax Act, 1961) (in short ‘the Act')

104/Rjt/17 -Do- 2011-12 -Do- -Do- -Do-

105/Rjt/17 -Do- 2012-13 -Do- -Do- -Do-

2. The grievances raised being common in al l three appeals were heard together and disposed of by way of the common order.

3. We shall take up appeal in ITA No.103/Rjt/2017 concerning AY 2010-11 as a lead case for adjudication.

4. As per the grounds of appeal, the assessee has challenged the revisional jurisdiction usurped by the Principal Commissioner of Income Tax, Rajkot (Pr.CIT) under s.263 of the Act.

5. In the instant appeal, the relevant facts are noted as follows:

5.1 The assessee, an individual, derived income from sources such as ‘salary’, ‘business income’ and ‘interest income’. The assessee however did not fi le return of income. Thereafter, based on certain information available with the department that the assessee has made huge transact ions in stock market and commodities and made cash deposits in bank, a notice under s.148 of the Act was issued to the assessee on 02.12.2013. Pursuant to the statutory notices thereafter, the assessee filed a return of income for the impugned AY 2010-11 declaring business loss of Rs.6,68,451/ - and ‘income from other sources’ and ‘salary income’ aggregating to Rs.76,220/-. The assessment was carried out under s.143(3) r.w.s. 147 (of Income Tax Act, 1961) whereby the income was assessed at Rs.76,220/ - as offered. However, the claim of carry forward loss of Rs.6,68,451/ - was disallowed.

5.2 Subsequent to the assessment, on verification of assessment records, it was found by the Revisional Commissioner that while the assessee has deposited huge cash in bank account aggregating to Rs.20,82,000/ -, the same was accepted as explained without any deliberations and without making any verification or enquiry in relation thereto. The Pr.CIT also noted that the assessee has filed a copy of his account in the books of the share broker M/s. Labdhi Finance Corporation where an amount of Rs.26,86,510/- has been shown to be credited for the cheques received by broker from the assessee. However, the bank account of the assessee does not correspondingly reflect the similar outgo parallely.

In the light of such discrepancies and lack of enquiry on such issues, the Pr.CIT invoked the jurisdiction vested under 263 of the Act and issued a show cause notice dated 30.12.2015 seeking explanation on the aforesaid issues.

5.3 The show cause notice is reproduced hereunder for ready reference:

“ 2. In the above mentioned case, an assessment of 143(3) r.w.s 147 (of Income Tax Act, 1961) was finalized on 27/03/20 15 by the ITO, ward 2(2)(4), Rajkot, assessing total income of Rs.76 ,220/-.

3. A perusal of the records shows that in your bank a/c with Co.-perative Bank of Rajkot, there were cash deposits totaling to Rs.20,87,000/ -. In order to explain the source of cash deposited, you Have stated that there was cash on hand of Rs.15,46,000/ - on 31/03/2009. Besides you received cash from share transact ions. As per information available on records, you had carried out share transact ions through M/s. Labdhi Finance Corporation. Ongoing through your ledger account in the books of accounts of M/s Labdhi Finance Corporation, no such cash payments by the share broker is not iced. Further it is found that return of income was filed for the A.Y. 2009-10. Even though the AO has accepted source of the cash deposits as genuine, this makes the assessment order erroneous and prejudice to the interest of the revenue.

4. Further perusal of your ledger account with M/s. Labdhi Finance Corporation shows that you have made payments to the share broker on various dates. Ongoing through the ledger account vis-a-vis your bank a/c, it is seen that certain payments aggregating to s.26,86,510/ - made through cheques are not appearing in your bank account with Co. Operative Bank of Rajkot. However, the AO did not investigate source of the aforesaid payments of Rs.26,86,510/ - to M/s. Labdhi Finance Corporation. Thus the assessment order passed by the AO is erroneous and prejudicial to the interest of the revenue.

5. The above facts show that the assessment order passed by the Assessing Officer in respect of AY 2010-11 appears to be erroneous and prejudicial to the interest of the revenue. Therefore, I intend to initiate proceedings u/s 263 (of Income Tax Act, 1961) and pass a suitable order. Before passing such order, you are hereby given an opportunity of being heard in the mat ter. Please state as to why the order passed by the Assessing Officer in your case should not be revised after making necessary inquiry. In this connection you are requested to submit the written submission, if any, and at tend this office on 28/01/2016 at 12.15 p.m. A soft copy of the written submission should also be produced.”

5.4 The assessee filed a written submission contesting the show cause notice which is reproduced in para 4 of the revisional order appealed against. The Pr.CIT however did not concur with the justifications advanced by the assessee to drop the proceedings initiated under s.263 of the Act.

5.5 As regards first issue, as noted by the Pr.CIT, the source of cash deposits to the tune of Rs.20,87,000/ - in the bank account has not been verified by the AO at all. In the absence of any tangible source of income, the claim of the assessee towards opening balance of more than Rs.15 Lakhs to meet the deposits was not found plausible and ought not to have been readily accepted. It was alleged that the AO ought to have make requisite enquiry into the source of such deposits more so, having regard to meager income. It was further noticed by the Revisional CIT that the share brokers do not make or receive payment from its clients in cash for settlement of share transactions. The explanation of the assessee towards source of cash therefore ought to have been verified. It was thus alleged by the Pr.CIT that lack of enquiry and necessary verification into the explanation of the assessee before accepting such assertions regarding source of cash deposits in the bank account has resulted in definite prejudice to the Revenue attracting the provisions of Sect ion 263 of the Act .

5.5 As regards the second limb of show cause notice, the Pr.CIT found that the ledger account of the assessee in the books of accounts of broker (Labdhi Finance Corporation) shows receipt of several payments from the assessee through cheque aggregating to Rs.26,85,510/-. The bank account of the assessee however does not correspondingly reflect the payment to the broker. It was alleged that the AO has failed to verify the source of various payments to the broker.

5.6 The Pr.CIT thus cancel led the re-assessment order and directed the AO to make a fresh assessment de novo after making necessary enquiry regarding source of credit entries appearing in the ledger account of the assessee maintained by the broker as well as the source of cash deposited in the bank account of the assessee. While doing so, the Pr.CIT also took note of various decisions relied upon by the assessee and distinguished the same essentially on the premise of lack of appraisal of material placed before the AO and non-application of mind thereon.

6. Aggrieved by the order of the Pr.CIT passed under s.263 of the Act dated 06.02.2017 holding the assessment order passed under s.143(3) r.w.s. 147 (of Income Tax Act, 1961) dated 27.03.2015 to be erroneous as well prejudicial to the interest of the Revenue on both scores as noted above, the assessee preferred appeal before the Tribunal.

6.1 Adverting to the first limb of allegation, the learned AR for the assessee at the outset submitted before the Tribunal that the ingredients of Section 263 (of Income Tax Act, 1961) is not available at all and therefore Pr. CIT has wrongly invoked the jurisdiction under s.263 of the Act. The learned AR submitted that the assessment order which was the subject matter of revision by the Pr.CIT is neither erroneous nor prejudicial to the interest of the Revenue. The learned AR adverted our at tent ion to the assessment order passed by the AO and submitted that the notice under s.148 of the Act was issued to the assessee for filing the return on the ground that the assessee had made huge transact ions in share market and commodities and made cash deposits in the bank. In response to such notice, a return was filed showing losses to the tune of Rs.6.68 Lakhs incurred by the assessee. The return so filed was subjected to scrutiny assessment. The source of cash deposits of Rs.20,87,000/- was specifically raised by the AO and in response thereto, the books of accounts were produced by the assessee which were suitably verified at the end of AO. In the circumstances, lack of proper enquiry on the issue cannot be alleged.

6.2 As regards the second limb of allegation towards source of credit entries appearing in the books of the broker against the name of the assessee and not correspondingly shown to be debited in the bank account of the assessee, the learned AR submitted that the payments were made through ‘demand draft’ to the extent of Rs.15.85 Lakhs and remaining amount of Rs.11.01 Lakhs are either returned uncleared or duly reflected in the bank. The demand drafts were prepared out of cash kept with the assessee. It was thus contended that the Pr.CIT has proceeded on misconception of facts that the payment has been made by the assessee but not reflected in the books of the assessee, which is not true. The act ion of the AO therefore cannot be said to be erroneous in accepting the transact ions reflected by the assessee. The learned AR also refer red to the ledger account of the assessee in the books of the broker and submitted that the assessee was doing share trading business on behalf of the many small time individuals who used to pay cash to the assessee to recoup for the losses incurred by the assessee for the transaction carried out on their behalf on the plat form of the exchange through Labdhi Finance Corporation. The source of cash deposits in the bank as well as the source of payment to the broker, thus, was fully explainable from the books of accounts, as verified by the AO. It was thus contended that the view taken by the AO on these facts ought not to have been held erroneous by the Pr. CIT. It was further contended that where the assessee has accounted for all the transactions of shares and securities and recorded all the cash received from various sources and deduced taxable income based on such entries, there cannot be said to be any revenue leakage. Hence, no prejudice has been caused to the Revenue and therefore invocation of Sect ion 263 of the Act is not permissible in law.

The learned AR for the assessee also referred to the decision of Hon’ble Supreme Court in Malabar Industrial Company Ltd. vs. CIT (2000) 243 ITR 83 (SC); CIT vs. Ami t Corporation (2012) 21 taxmann.com 64 (Guj ) & CIT vs. Arvind Jewellers (2002) 290 ITR 689 (Guj ) to support the proposition that when a particular view has been taken by the AO after examination of facts, mere possibility of a different view on the given facts could not be the basis for an act ion under s.263 of the Act. The learned AR accordingly urged that the revisional order of the Pr.CIT under s.263 of the Act is not sustainable for the reasons ci ted above and accordingly requires to be quashed.

7. The learned DR, on the other hand, strongly defended the action of the Pr.CIT and submitted that plea raised on behalf of the assessee is without any traction as noted in the revisional order. The learned DR pointed out that on the face of a very meager or negative income, a substantial amount of cash conveniently shown to be an opening balance for the year under consideration was naturally required to be verified. The source of cash generated during the year alleged to have been received from unknown clients is unworthy of any reliance as neither the broker nor the assessee could have entered into share transact ions in cash. The AO has totally failed to obtain the details of so called individual clients from whom the cash was claimed to be received and in turn, deposited in the bank and with the broker via demand draft/cheque. The narrative of the assessee towards source of cash thus clearly remains unverified even at this stage. The learned DR thus submitted that the whole basis of explanation is hollow and anything but bonafide. The AO had shut his eyes on the glaring incongruity in the source of cash deposited without any meaningful enquiry despite reopening the case. Such perfunctory order of the AO is a nullity in law and rightly set aside by the Pr.CIT for appropriate verification on the source of deposits and to detect the truth. The learned DR accordingly submitted that no interference with the order of Pr.CIT is called for.

8. We have carefully considered the rival submissions on the maintainability of revisional act ion towards the source of deposits made with the bank and source of payments made to the broker. Section 263 (of Income Tax Act, 1961) confers power upon the Pr.CIT/CIT to call for and examine the records of a proceeding under the Act and revise any order, if he considers the same to be erroneous and prejudicial to the interests of the Revenue. The Pr.CIT can however take recourse to revision under Sect ion 263 of the Act only where the assessment order is erroneous as well as prejudicial to the interest of Revenue. The twin conditions are required to be satisfied simultaneously. The Pr.CIT in the present case has purported to act in exercise of power under s.263 of the Act and thereby has sought to cancel the assessment order of the AO passed under s.143(3) of the Act. The Pr.CIT essentially observed that the AO in a summary manner has wrongly accepted the source of cash deposits in bank as well as source of payments made to the broker without making any meaningful enquiry in this regard and in the absence of proper enquiry, the order of the AO is erroneous in so far as prejudicial to the interest of the Revenue.

8.1 As pointed out on behalf of the assessee, two pre-requisites must coexist before the designated authority to enable him to exercise the revisional jurisdiction conferred on him namely; the order should be (i) erroneous & (ii) the error must be such that it is prejudicial to the interests of the Revenue. However, an erroneous order does not necessarily mean an order with which the Pr.CIT is unable to agree. The AO while passing an order of assessment, per forms judicial functions. An order of assessment passed by the AO cannot be interfered only because an another view is also possible on the issue as held in CIT vs. Greenworld Corporation (2009) 181 Taxman 111 (SC). If in given facts and circumstances of the case, two views are possible and one view, as legally plausible, has been adopted by the AO then existence of other possible view alone would not be sufficient to exercise powers under s.263 of the Act by the Pr.CIT / CIT concerned. Hence, there can be no doubt that the provision cannot be invoked to correct each and every type of mistake or error committed by the AO. It is only when an order is erroneous and causing prejudice, that the Section will be attracted. An incorrect assumption of facts or incorrect application of law will satisfy the requirements of the order being erroneous.

8.2 In the instant case, the allegation of the Revisional CIT are two fold; firstly, the source of cash deposit to the tune of Rs.20.87 Lakhs during the year [and similar deposits of Rs.36.45 Lakhs in FY 2010-11 (AY 2011-12) and Rs.62.20 Lakhs in FY 2011-12 (AY 2012-13)] has not been examined at all and secondly, deposits of Rs.26.85 Lakhs shown to have been received by the corresponding broker was not probed by the AO. On the other hand, it is the case of the assessee that the cash book was produced before the AO in the course of re-assessment proceedings which reflects the source of cash deposits and therefore the extent of inquiry could not be determined by the Pr. CIT when the AO was satisfied on the source of the cash deposits as well as drafts issued in favour of corresponding broker namely M/s. Labdhi Finance Corporation. On the facts narrated above, a pertinent quest ion would arise as to whether the Pr.CIT was justified in setting aside the assessment order where source of cash deposits from unidentified people have been accepted summarily without any tangible inquiry in this regard. A perusal of the questionnaires issued and replies made by the assessee thereon clearly show that no relevant or meaningful inquiry was conducted in respect of source of cash to meet the losses incur red on transact ions with M/s. Labdhi Finance Corporation. A bare look at the assessment order gives an infallible impression that the assessment order was passed in a routine and perfunctory manner without any discussion on any aspect of the assessment for which the case was reopened. The preponderance of evidence and explanations thereon by the assessee clearly indicates its unrealistic nature which would war rant an inquiry from the source persons. The Pr.CIT in discharge of its solemn duty under s.263 of the Act could not remain oblivious of these facts. There is an apparent plausibility in the act ion of the Pr.CIT by resorting to powers under s.263 of the Act which is of wide amplitude. The circumstances clearly existed which demanded enquiry which was not done by the AO while discharging its statutory function.

8.3 It is common knowledge that the stock market regulations did not permit a share broker or market intermediary to accept the cash payments against the transactions carried out on the platform of the stock exchange. The client is expected to deal with the share broker only through the banking channel. The case made out on behalf of the assessee that the transact ions were carried out on behalf of the unknown clients from whom the cash was received remains totally unsubstantiated. No tangible enquiry has been made by the AO into the circumstances which led to so called arrangement whereby the cash was given by unidentified people to the assessee for doing transact ions on their behalf where arrangement itself is violative of regulated procedure. The source of cash has remained unexplained before the AO indeed in the absence of proper verification in this regard. Similarly, no concrete evidence is available for conversion of cash into demand drafts, which has, in turn, been paid to the broker. The elementary details called for by the AO could not persuade any reasonable person to form an opinion in favour of the assessee as regards source of cash. No trail of cash deposits was placed on record. Mere passing of entries towards receipt of cash from unknown persons, in the cash book, in the strange circumstances bypassing the stock market regulations, could not have discharged the AO of its quasi-judicial responsibilities. The assessment order passed by the AO clearly suffers from the vice of lack of requisite enquiries or verification expected from him which has rendered the order passed by the AO to be erroneous in so far as it is prejudicial to the interests of the Revenue as rightly held by the Revisional Commissioner. Armed with fairly extensive powers, the Pr.CIT, in our view, has taken act ion compatible with circumstances. Therefore, the cause of act ion did exist in relation to all the three assessment years in quest ion. Hence, the Pr.CIT was fully justified in invoking its power under s.263 of the Act to set aside the assessment framed without any application of mind for making a fresh assessment de novo after making necessary enquiry regarding source of credit entries from the assessee and towards cash deposits made in the bank account by the assessee.

8.4 The judicial precedents relied upon on behalf of the assessee are not found to be of any assistance. The decisions refer red too are broadly based on the circumstances where either relevant material was not found or where it was found is a matter of fact that there was no failure on the part of the AO is to make inquiries. Needless to say, the scope of Sect ion 263 of the Act is quite different. In order to invoke Section 263 (of Income Tax Act, 1961), the competent authority is required to find that order sought to be revised is erroneous and caused prejudice to the Revenue. A lack of inquiry on a pert inent point which demonstrates possible revenue leakage of staggering amount would definitely tantamount to the order being both erroneous as well as prejudicial to the interest of the Revenue. Consequent upon the act ion of Pr.CIT, the assessment order is merely cancel led and set aside to the fi le of the AO for making relevant inquiries as specified for which objective material is available at the threshold. The assessee has not estopped in any manner from dealing with the inquiry as specified to the AO and to rebut the percept ion that the prima facie belief on error in the original order is not correct. The assessee is not prevented from supporting its case in any manner before the AO in the proceedings pursuant to Sect ion 263 of the Act. We thus do not see any justifiable reason to interfere with the revisional action of the Pr. CIT.

9. The appeal of the assessee in ITA No. 103/Rjt/2017 is thus dismissed. Other captioned appeals are also found to be without any merit for the similar reasonings.

10. In the combined result, all three appeals of the assessee are dismissed.

This Order pronounced in Open Court on 20/02/2020

Sd/- Sd/-

(MADHUMITA ROY) (PRADIP KUMAR KEDIA)

JUDICIAL MEMBER ACCOUNTANT MEMBER