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Judgment
PER MANISH AGARWAL, AM :
The captioned appeal is filed by assessee against the order dated 29.03.2025 by Ld. Pr. Commissioner of Income Tax, Delhi-7 [“ld. Pr. CIT”] passed u/s 263 of the Income Tax Act, 1961 [“the Act”] revising the Assessment Order dated 24.01.2023 passed u/s 147 r.w.s. 144 r.w.s. 144B of the Act pertaining to Assessment Year 2018-19.
Brief facts of the case are that the assessee is a company, engaged in the business of manufacturing and trading of Home furnishing handloom and machine-made items since 2005 and filed its return of income on 31.10.2018, declaring total income of INR 31,37,490/-. Based on the information flagged in Insight portal uploaded by Investigation Wing that assessee had entered into fictious transaction of bogus purchases of INR 50,95,572/- from M/s Shri Balaji Wool Tax, Panipat which was alleged as engaged in issuing bogus bills, case of the assessee was reopened by way of issue of notice u/s 148 of the Act and after passing the order u/s 148A(d) of the Act. Thereafter, the reassessment order was passed wherein the total income of the assessee was computed at INR 91,24,072/-vide order dated 24.01.2023 passed u/s 147 r.w.s.144 r.w.s. 144B of the Act by making addition on account of bogus purchases made from M/s Shri Balaji Wool Tex of INR 53,50348/- Including CGST and SGST and further made disallowance of INR 6,36,234/- u/s 43B of the Act.
Thereafter, the ld. PCIT in terms of the show cause notice dt. 13.01.2025, initiated proceedings u/s 263 and asked the assessee as to why the reassessment order should not be held as erroneous and prejudicial to the interest of revenue as the AO has failed to invoke the provisions of section 69C r.w.s. 115BBE of the Act to the disallowance made on account of bogus purchases. After considering the reply filed by the assessee, the ld. PCIT vide impugned order dt. 29.03.2025 held that the reassessment order passed is erroneous and prejudicial to the interest of revenue to the extent of non-initiation of penalty proceeding as per law and non-application of tax rates as per the provisions of Act. The ld. PCIT thereafter, has set aside the reassessment order and direct the AO to pass the order afresh after conducting necessary enquiries and verifications.
Aggrieved by the order of Ld. PCIT, assessee is in appeal before the Tribunal by taking following grounds of appeal:-
1.“That having regard to facts & circumstances of the case, Ld. PCIT has erred in law and on facts in assuming jurisdiction u/s 263 of Income Tax Act, 1961 and has erred in holding the assessment order dated 24-01-2023 as erroneous as well as prejudicial to the interest of revenue and that too by recording incorrect facts and findings and in violation of principles of natural justice.
2.That having regard to facts & circumstances of the case, Ld. PCIT has erred in law and on facts in setting aside the order passed by the assessing officer u/s 147/144/144B dated 24-01-2023 with the direction to pass a fresh order after making proper enquiry and verification and that too by recording incorrect facts and findings and without observing the principles of natural justice.
3.That having regard to facts & circumstances of the case, Ld. PCIT has erred in law and on facts in holding as under:
(i)That penalty notice has not been issued in accordance with law
(ii)That the addition of purchases should have been made u/s 69C and taxing the same @60% as per provisions of section 115BBE, as against normal rate of tax.
4.In any view of the matter and in any case, order passed under section 263 is bad in law and against the facts and circumstances of the case & is barred by limitation.
5.That having regard to the facts and circumstances of the case, Ld. Pr. CIT has erred in law and on facts in assuming jurisdiction u/s 263 which is bad in law inter alia for this reason that the reassessment order passed u/s 147/144/144B dated 24.01.2023 which is sought to be revised u/s 263 itself was invalid on various grounds and thus proceedings initiated u/s 263 against the invalid reassessment order is clearly bad in law.
6.That the appellant craves the leave to add, amend, modify, delete any of the grounds of appeal before or at the time of hearing and all the above grounds are without prejudice to each other.”
Since all grounds of appeal raised by the assessee are against the order of ld. PCIT in holding the reassessment order as erroneous and prejudicial to the interest of the Revenue, therefore, they are taken together for consideration.
Before us, Ld. AR submits that the AO has made the addition for the purchases of INR 53,50,348/- by alleging the same as bogus made from M/s Shri Balaji Wool Tex. As per ld. AR, the AO has taken a plausible view while disallowing the purchases after making proper and adequate enquiries. It is further submitted that the purchases alleged as bogus are duly recorded in the books of accounts maintained in regular course thus the source of such purchases cannot be doubted more particularly when the payments made were through payees account cheque, and therefore provisions of section 69C of the Act cannot be invoked which is applicable where assessee failed to substantiate the source of expenditure. Ld. AR submits that observation of ld. PCIT that the addition was made on account of unexplained bogus purchases, the income should have been taxed @ 60% as per the provisions of 115BBE of the Act as against normal rate of tax therefore, the reassessment order is erroneous and prejudicial to the interest of the Revenue which is contrary to the fact where the AO made the disallowance u/s 37(1) of the Act and not u/s 69C of the Act. Regarding the directions of the ld. PCIT for making fresh enquiries and investigation, ld. AR submits that ld. PCIT has failed to bring on record any material to hold what enquires were left to be undertaken by the assessee and what is the error in the reassessment order when the AO has already treated the purchases made from M/s Shri Balaji Wool Tex as bogus which fact is never doubted by ld. PCIT.
Ld. AR submits that the ld. PCIT has placed reliance on the judgment of Hon’ble Allahabad High Court in the case of CIT Vs Surendra Prasad Agarwal reported in [2005] 275 ITR 113 (All.) and wrongly observed that the Hon’ble high Court has held that non initiation of penalty proceedings in the assessment order amounts to error causing prejudice to the interest of the revenue. Ld. AR drew our attention to the said judgment and also filed a copy of the same as per which the Hon’ble Court has held the Commissioner had no jurisdiction to cancel the assessment with the view to initiate penalty proceedings. Therefore, ld. AR submits that the judgement Relied upon by ld. PCIT appeal rather favors the assessee. It is thus requested that the revision order passed u/s 263 of the Act deserves to be quashed. She prayed accordingly.
On the other hand, the Ld. CIT DR for the Revenue vehemently supported the orders of Ld. PCIT and submit that in the instant case, the assessee has failed to justify the purchases made thus, the same is unexplained expenditure for which the source was not established to the satisfaction of the AO and once the purchases were disallowed, the AO must invoke the provisions of section 115BBE of the Act and charge the tax at the special rate of 60% as against normal rate of tax. It is thus requested that the order of Ld. PCIT deserves to be uphold.
Heard both the parties and perused the material available on record. The case of the assessee was reopened u/s 147 of the Act for the reason that the purchases made from M/s Shri Balaji Wool Tex of Rs. 50,95,572/- is bogus which has been based on the information received from Investigation Wing. Based on the facts available, the AO reached to the conclusion that the purchase made of Rs. 53,50,348/- including CGST and SGST made from M/s Shri Balaji Wool Tex is bogus and disallowed the same. The Ld. PCIT vide show cause notice dated 13.01.2025, alleged that the purchases held as bogus should be disallowed u/s 69C of the Act and tax has to be charged at the special rate of 60% as provided in section 115BBE of the Act.
At this stage, we must refer the provisions of section 69C which reads as under:
“69C Where in any financial year an assessee has incurred any expenditure and he offers no explanation about the source of such expenditure or part thereof, or the explanation, if any, offered by him is not , in the opinion of the Assessing Offertory the amount covered by such expenditure or part thereof at the case may be may se deemed to be the income of the assessee by such for such financial year.
Provided that notwithstanding anything standing contained in any other provision of this Act such unexplained expenditure which deemed to be he income of the assessee shut not be allowed as a deduction under any head of income.
The provisions of section 1158BE of Act reads as under:-
“115BBE (1) Where the total income of the assessee-
(a)Includes any income referred to in section 68, section 19, section 64 section 698. section 6PC, section 690 and reflected in the return of income furnished under section 139 or
(b)Determined by the Assessing Officer includes any income referred to in section 68 section 69, section 69A, section 69B, section 69C, Section 69D if such income is not covered under clause (a)
the income tax payable shall be the aggregate of
(i)the amount of income tax calculated on the income referred to in clause (a) and clause (b), at the rate of sixty percent, and
(ii)the amount of income tax with which the assessee would been chargeable had his total income been reduced by the amount of income referred to in clause (i).”
From the perusal of section 69C, it is evident that the same is applicable where assessee incurred any expenditure and has failed to offer any Explanation or the Explanation tendered was not found satisfactory by the AO.
In the present case, the ld. PCIT has failed to establish that the assessee has not explained the source of purchases made from M/s Shri Balaji Wool Tex however, the only allegation was that the addition should have been made in section 69C of the Act and tax has to be charged at the rate provided in section 115BBE. Admittedly, the ld. PCIT has not disputed the action of the AO in holding the purchases from M/s Shri Balaji Wool Tex as bogus. Once the AO found the purchases as unverifiable, he disallowed the same u/s 37(1) of the Act. Under these circumstances, provisions of section 69C of the Act cannot be invoked for the expenditure found recorded in the books of accounts.
The Co-ordinate Bench of ITAT, Rajkot in the case of Shashikant Bhavajjibhai Rajpara vs. PCIT (ITAT Rajkot) in ITA No. 59/RJT/2022 vide order dated 22.03.2023 has made following observations:
“7.We have considered the above contentions made by the ld counsel for the assessee, we find merit in the same. As per the ld Pr. CIT the disallowance of Rs. 29 30,229/- made by the AO came within the purview of section 69C of the Act. We have gone through the provision of section 69C of the Act and also disallowance made by the AO in his assessment order which is reproduced above. As is evident from bare perusal of the order of the AO, disallowance related to expenses incurred by the assessee in relation to subcontractor which were not found to be genuine. Section 69C on the other hand, brings to tax the disallowance related to expenses incurred by the assessee, source of which remain unexplained. Therefore, purview and scope of section 69C is totally different from the disallowance of expenses found to be not genuine. The basic premise with the Id. Pr. CIT therefore for finding error in the order of the AO, that the disallowance made by him of contractors' expense came under the purview of section 69C of the Act is found to be untenable in law. This finding of error, as a consequence whereof, that the same not being subjected to tax at a special rate provided under section 1158BE of the Act also as a result does not survive.”
This view is further followed by the Co-ordinate Bench of ITAT, Rajkot in the case of Vijuba Jutubha Jadeja vs. PCIT reported in [2023] (9TMI 206).
By following the aforesaid decisions of Rajkot Bench of ITAT, the Co-ordinate Delhi Bench of Tribunal in the case of Joginder Kumar & Sons (ITAT Delhi) in ITA No. 1975/Del/2025 order dt. 27.11.2025, in the case of Sandeep Kumar (ITAT Delhi) in ITA No. 4348/Del/2025 order dt. 28.11.2025 and in the case of Arvind Kumar Vs. PCIT reported in (2025) 178 Taxmann.com 351 (Delhi Tribunal) has quashed the revision order passed u/s 263 of the Act.
In the light of above, when the purchases claimed in the Profit & Loss account is doubted and disallowed, provisions of section 69C of the Act could not be invoked and, therefore, the reassessment order is neither erroneous nor prejudicial to the interest of revenue. The ld. PCIT has not brought any material to show that the assessee has failed to explain the source of such purchases and therefore, provisions of section 69C r.w.s. 115BBE of the Act cannot be invoked. Accordingly, we quash the revision order passed by ld. PCIT u/s 263 of the Act. All the grounds of appeal taken by the assessee are thus allowed.
In the result, appeal of the assessee is allowed.