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Judgment
PER MANISH AGARWAL, AM :
The present appeal is filed by assessee against the order dated 10.02.2025 by Ld. Pr. Commissioner of Income Tax, Delhi-12 [“Ld. PCIT”] passed u/s 263 of the Income Tax Act, 1961 [“the Act”] pertaining to Assessment Year 2021-22.
Briefly stated facts are that the return of income was filed by the assessee on 15.03.2022, declaring total income of INR 7,25,61,760/-. The assessee is engaged in the business of civil contractor and the case of the assessee was selected under CASS for complete scrutiny for verification of contract receipts. Notice u/s 143(2) of the Act was issued on 27.06.2022. Thereafter notice u/s 142(1) of the Act alongwith questionnaire was issued on 14.12.2022 and finally, show cause notice was issued on 21.12.2022. After considering the submissions made by the assessee, the AO, NFAC has accepted the income declared by the assessee however, in para 3.3 at page 21 of the assessment order, AO observed that due to paucity of time, as the case was received on 13.12.2022 from the Jurisdictional AO, no independent inquires or verification of debit and credit balances could be made for which the Auditors have pointed out that the balances are subject to confirmations and the submissions and justifications given by the assessee have been accepted on face value. Thereafter, Ld. PCIT invoked the provision of section 263 of the Act and in terms of the show notice issued on 05.12.2024 asked the assessee as to why the assessment order passed should not be held as erroneous and pre-judicial to the interest of the Revenue as complete verification of debit and credit balances have not been done by the AO therefore, the case of the assessee fall under Explanation 2(a) of section 263 of the Act. After considering the submissions of the assessee, Ld. PCIT held the assessment order as erroneous and pre-judicial to the interest of the Revenue and direct the AO to make necessary inquiries with respect to the debit and credit balances as reported by the Auditor in its Audit Report.
Aggrieved by the said order, the assessee is in appeal before the Tribunal wherein all the three Grounds of appeal taken are with respect to the findings of Ld. PCIT of holding the assessment order as erroneous and pre-judicial to the interest of Revenue.
Before us, Ld.AR for the assessee submits that assessee has filed all the replies and the information as called for by the AO in terms of notice issued u/s 142(1) on 14.12.2022. Thereafter, in response to final show cause notice dated 21.12.2022 proposing the estimation of income by applying profit rate @ 10% on gross contract receipts, assessee filed another reply. Ld. AR submits that case of the assessee was selected for scrutiny for the verification of contract receipt and the AO has not raised doubts with respect to contract receipt declared by the assessee and further accepted the profits declared by the assessee on such receipts and further dropped the proposal for estimation of income of the assessee by applying profit rate of 10% on such contract receipts. Ld. AR submits that the observations made by the AO of not carrying out independent inquiry or verification with respect to Debit and credit balances as pointed out by the Auditor, cannot be the subject matter of section 263 proceedings as all the necessary inquiries were carried out with respect to the contract receipts for which the case was taken for scrutiny. Therefore, the order cannot be held as erroneous and pre-judicial to the interest of the Revenue. Ld.AR further submits that assessee cannot be held responsible for the failure, if any, on the part of the AO as in the instant case, the assessee has made compliance of all the notices issued within the stipulated time. He, therefore, requested that the order passed u/s 263 of the Act be quashed.
On the other hand, Ld. CIT DR for the Revenue submits that in the assessment order itself, AO has observed that the necessary inquiries/investigations could not be carried out with respect of debit/ credit balance appearing which was also pointed out by the Auditor’s in the Audit Report and the assessment was completed on the basis of the submissions and justifications given by the assessee by considering the same on their face value. Once the assessment was completed without making proper verifications of the facts and without carrying out proper inquiries therefore, in terms of Explanation (2) to section 263, the assessment order is erroneous and pre-judicial to the interest of the Revenue and accordingly, the action of Ld. PCIT in holding the said order as erroneous is correct and requested for the confirmation of the order of Ld. PCIT passed u/s 263 proceedings.
Heard the contentions of both parties and perused the material available on record. Ld. PCIT while holding the assessment order as erroneous and pre-judicial to the interest of the Revenue in para 8 & 9 of the order has made following observations:-
8.“The submission of the assessee has been perused and has been found to be deficient on various counts.
8.1It is important to note that the reason for CASS selection of the case of the assessee was based on the Issue of Contract Receipts with a specific rationale, which includes the potential discrepancy between the large receipts reported u/s 194C and the relatively low net profit reported by the assessee. The reference to contract receipts is not the only concern. The scrutiny also intended to verify why a contractor with substantial receipts (u/s 1940) reported such low profits.
8.2While the assessee may have submitted explanations during the course of assessment proceedings but the genuineness of the receipts and the reason for low profitability remained unverified. The submission of contract receipts ledgers and contract agreements does not necessarily address the issue of the low net profit in relation to receipts and further verification is needed.
8.3The fact that the A.O. did not make any variations to the assessment does not negate the need for further scrutiny under Section 263. The A.O. has accepted the assessee's submissions on face value without carrying out thorough examination.
8.4The A.O.'s comments regarding the lack of independent verification are not vague but highlight a legitimate concern that proper verification of critical aspects like the genuineness of contract receipts and justification for low profitability was not carried out during the assessment proceedings due to paucity of time.
8.5Section 263 provides the PCIT with the authority to revise an assessment if it is found to be erroneous and prejudicial to the interests of the revenue. The failure to carry out independent verification of crucial aspects, such as contract receipts and profitability, constitutes a valid error in the assessment.
8.6The above facts clearly show that AO had not made proper enquiry and verification before completion of assessment. The AO passed the order u/s 143(3) r.w.s 144B of the Income Tax Act on 28/12/2022 without making inquiries or verification which should have been made. From above discussion, it is clear that assessment order passed u/s 143(3) read with Section 144B of the Income Tax Act is erroneous. If due to an erroneous order of the AO the revenue is losing tax lawfully payable by a person, it would be certainly prejudicial to the interest of revenue, as held in the case of CIT Vs Leisure Wear Exports Ltd. (2012) 341 ITR 166 (Del.).
Thus, the assessment order passed u/s 143(3) r.w.s 144B of the Income Tax Act on 28/12/2022 for A.Y 2021-22 is both erroneous & prejudicial to the interest of revenue.
9.Further, section 263 of the Act and amendment made in explanation 2 to section 263 states that
"The Principal Commissioner or] Commissioner may call for and examine the record of any proceeding under this Act, and if he considers that any order passed therein by the Assessing Officer is erroneous in so far as it is prejudicial to the interests of the revenue, he may, after giving the assessee an opportunity of being heard and after making or causing to be made such inquiry as he deems necessary. pass such order thereon as the circumstances of the case justify, including an order enhancing or modifying the assessment, or cancelling the assessment and directing a fresh assessment.
Explanation 1………………..
Explanation 2. For the purposes of this section, it is hereby declared that an order passed by the Assessing Officer shall be deemed to be erroneous in so far as it is prejudicial to the interests of the revenue, if, in the opinion of the Principal Commissioner or Commissioner,-
1.the order is passed without making inquiries or verification which should have been made;
2.the order is passed allowing any relief without inquiring into the claim;
3.the order has not been made in accordance with any order, direction or instruction issued by the Board under section 119; or
4.the order has not been passed in accordance with any decision which is prejudicial to the assessee, rendered by the jurisdictional High Court or Supreme Court in the case of the assessee or any other person."
From the perusal of the observations of ld. CIT(A) and overall discussions made herein above, it is observed that the case of the assessee was selected for complete scrutiny and one of the reasons for scrutiny was verification of the income declared from contract receipts thus necessary verification/investigations with respect to the expenditure claimed and genuineness of the receipts has to be examined with reference to the agreements and other material. As observed by the AO, such examination was not carried out and therefore in terms of Explanation (2) to section 263 of the Act, the order was passed without making proper inquiries and verification which should have been made ordinarily to complete the assessment.
In view of these facts, we find no error in the order of Ld. PCIT in holding the assessment order as erroneous and pre-judicial to the interest of the Revenue. Accordingly, the same is hereby, upheld. All the grounds of appeal of the assessee are thus, dismissed.
In the result, appeal of the assessee is dismissed.