The Ahmedabad bench of the Income Tax Appellate Tribunal (ITAT) upheld the Principal Commissioner of Income Tax‘s (PCIT) order, agreeing that the Assessing Officer (AO) failed to conduct proper inquiries and verifications during the original assessment proceedings, and concurred with the PCIT’s finding that the AO’s order was erroneous due to the lack of investigation into exempt agricultural income, the source of payments for land purchases, and cash deposits in the bank account.
The appeal was filed by the Assessee challenging the order dated 29/03/2022 issued by the Principal Commissioner of Income Tax-3 (PCIT (A) in Ahmedabad, exercising revisionary powers under Section 263 of the Income Tax Act, 1961 for the Assessment Year (AY) 2017-18.
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The Assessee, Bhanvarlal Champalal Kanuga an individual, filed a return of income for AY 2017-18 on 23-10-2017, declaring a total income of Rs. 25,66,680/-. The return was processed under Section 143(1) of the Income Tax Act and subsequently scrutinized under CASS. Notices under Sections 143(2) and 142(1) of the Income Tax Act were issued, along with a questionnaire. Following the Assessee’s responses and hearings, the Assessing Officer (AO) completed the assessment under Section 143(3), accepting the declared income.
However, the PCIT issued a show-cause notice under Section 263 of the Act on 23-02-2022. The notice alleged that the Assessee claimed exempt agricultural income of Rs. 1, 18, 77,893/- but did not account for any agricultural expenses. Relying on the Ahmedabad Tribunal’s decision in the case of Dhriubhai Narula the PCIT concluded that the claimed expenses were inadequate and proposed adding 40% of the receipts (Rs. 47,51,157/-) to the income. The Assessee was asked to show cause why this amount should not be treated as deemed income under Section 263 of the Income Tax Act, 1961.
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The Assessee responded, arguing that all relevant facts, evidence, and documents were submitted to the AO during the assessment proceedings and considered appropriately. The Assessee contended that the decision in Dhriubhai Narula’s case was not applicable. On 17-03-2022, the PCIT issued another show-cause notice. The Assessee’s response dated 24-03-2022 was re-uploaded on 25-03-2022.
The PCIT also reviewed the submissions made during the original assessment proceedings on 04-08-2019, 07-10-2019, and 11-11-2019, concluding that the claim of exempt agricultural income was not genuine. The PCIT noted that the source of payments for land purchases and cash deposits in the bank account were unexplained. Consequently, the PCIT determined that the AO’s assessment order was passed without appropriate inquiries and directed the AO to issue a fresh assessment order after thorough verification.
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Mr. Ketan H. Shah, representing the Assessee, argued that additional grounds were based on information obtained from an RTI application dated 02-12-2022. The AR asserted that the PCIT’s notice under Section 263 was grounded in audit objections, which the AO had not accepted. It was noted that the audit objection was based on the Dhriubhai Narula case and the AO had not concurred with it. Further argued that the PCIT’s action constituted a mere change in opinion, which was insufficient for invoking Section 263. The AR cited judicial pronouncements to support this argument.
In contrast, Mr. Pushpendra Singh Chaudhary, representing the revenue, stated that the PCIT had not only relied on audit objections but had also conducted independent inquiries, finding the AO’s order erroneous. Reliance was placed on Supreme Court decisions and co-ordinate bench rulings.
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The tribunal reviewed the arguments and materials on record, and the two-member bench, consisting of Suchithra Kamble (Judicial Member) and Makarand V. Mahadeokar, observed that the initial Section 263 notice was based on audit objections that were not accepted by the AO, and that the jurisdictional AO’s proposal for Section 263 action specifically referenced audit objections related to exempt agricultural income and associated expenses.
The PCIT’s findings included that the claimed agricultural income was based on fabricated documents and unaccounted income. The payment for land and cash deposits remained unexplained. The tribunal agreed that the AO had failed to conduct proper inquiries and verification. The PCIT provided adequate opportunity for the Assessee to be heard and conducted a thorough review. The tribunal concluded that the PCIT was justified in invoking Section 263 as the AO’s order was erroneous due to inadequate inquiry. Accordingly, ITAT dismissed the Assessee’s appeal and upheld the PCIT’s order.
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