SHRI DEEPAK KHANNA, JAIPUR V. PR.CIT-2, JAIPUR

ITA 19/JPR/2021

• Counselvise Citation: [2022] 106 COUNSELVISE.COM (IT) 9416 (ITAT-JAIPUR)
• Duration Of Justice: 1 year(s) 5 month(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 06-09-2022
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: B
• Assessment Year: 2016-2017
• Appeal Filed On: 06-04-2021
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Revision of order; Transfer pricing; Assessment record
• Section: 263; 2; 40A(3); 80C; 143(3); 142(1); 64; 44AB; 2(A); 101

Judgement Text

vk;dj vihyh; vf/kdj.k] t;iqj U;k;ihB] t;iqj IN THE INCOME TAX APPELLATE TRIBUNAL, JAIPUR BENCHES,’B’ JAIPUR Jh laanhi xkslkbZ] U;kf;d lnL; ,oa Jh jkBkSM deys’k t;arHkkbZ] ys[kk lnL; ds le{k BEFORE: SHRI SANDEEP GOSAIN, JM & SHRI RATHOD KAMLESH JAYANTBHAI, AM vk;dj vihy la-@ITA No. 19/JP/2021 fu/kZkj.k o"kZ@Assessment Year :2016-17 Sh. Deepak Khanna F-198, Sitapura Industrial Area, Jaipur cuke Vs. PCIT, Jaipur-2 LFkk;h ys[kk la-@thvkbZvkj la-@PAN/GIR No.: AFXPK 5933 N vihykFkhZ@Appellant izR;FkhZ@Respondent fu/kZkfjrh dh vksj ls@ Assessee by : Sh. P. C. Parwal (CA) jktLo dh vksj ls@ Revenue by : Sh. Sanjay Dhariwal (CIT) lquokbZ dh rkjh[k@ Date of Hearing : 12/07/2022 mn?kks"k.kk dh rkjh[k@Date of Pronouncement: 07/09/2022 vkns'k@ ORDER PER: RATHOD KAMLESH JAYANTBHAI, A.M. This appeal is filed by the assessee aggrieved from the order of the Pr. Commissioner of Income Tax, PCIT Jaipur-2 [ Here in after referred as Ld. PCIT ] for the assessment year 2016-17 dated 31.03.2021 which in turn arises from the order passed by the DCIT, Circle-07 passed under Section 143(3) of the Income tax Act, 1961 (in short 'the Act') dated 05.12.2018. ITA No. 19/JP/2021 Shri Deepak Khanna vs. Pr. CIT-2 2 2. Aggrieved form the order of the ld. PCIT the assessee has marched this appeal on the following grounds; 1. Under the facts and circumstances of the case, order passed by the Ld. PCIT u/s 263 is illegal & bad in law and the same be quashed. 2. The Ld. PCIT has erred on facts and in law in holding that AO has not examined the capital introduced by the assessee in its proprietary concern/partnership firm nor has enquired into the accounting of cash transaction from one entity to other physically distant entity for which the case was selected for limited scrutiny and therefore, the order passed by AO is erroneous and prejudicial to the interest of revenue ignoring that the same was examined in detail by the AO by issue of notice u/s 142(1) on various dates and replied vide letter dt. 17.07.2018 and 31.08.2018. 3. The appellant craves to alter, amend and modify any ground of appeal. 4. Necessary cost be awarded to the assessee. 3. The fact as culled out from the records is that the assessee is engaged in trading and export of Indian Handmade Woolen Carpet & Durries. During the year under consideration the assessee has declared income from salary at Rs. 4,60,000/- from M/s. Pritham Khanna Rugs Private Limited, income from house property at Rs. 1.09,200/- income from business at Rs. 1,73,68,625/- and income from other source at Rs. 3,68,607/-. Thus, the assessee has declared returned income of Rs. 1,81,46,430/- after claiming deduction u/s 80C and 80TTA at Rs. 1,60,000/-. The case was ITA No. 19/JP/2021 Shri Deepak Khanna vs. Pr. CIT-2 3 selected for Limited Scrutiny under CASS. Notice u/s. 143(2). After considering the facts of the case and details / explanation / clarification filed by the assessee on e portal, the return of income as declared by the assessee is accepted. 4. The case was selected for limited scrutiny vide notice u/s 143(2) dt. 08.08.2017 to examine that capital is genuine and from disclosed sources and the method of accounting adopted. In order to verify these issues AO raised queries from time to time. The assessee vide reply dt. 17.07.2018 (PB 1-2) provided the breakup of capital introduced of Rs.6,34,46,000/- along with the source from where it is received as under:- (i) Funds transferred from partnership firm M/s Manmade Rs. 5,50,46,000 (ii) Cash withdrawn from M/s Manmade Rs. 23,00,000 (iii) Amount transferred between Jaipur & Varanasi branch Rs. 61,00,000 Thereafter, vide letter dt. 31.08.2018 (PB 4-5) copy of capital account of assessee in M/s Manmade at Varanasi and Jaipur branch duly confirmed in support of capital transferred of Rs.5,50,46,000/- (PB 6) in the proprietary concern of assessee M/s Rugs International and Rs.23 lacs in support of cash transfer (PB ITA No. 19/JP/2021 Shri Deepak Khanna vs. Pr. CIT-2 4 7-8) was filed. Thereafter vide letter dt. 27.11.2018 (PB 9) it was explained that out of Rs.61 lacs, amount transferred from Jaipur branch to Varanasi branch is Rs.41 lacs and Rs.20 lacs is credited in the capital account from personal saving bank account. In support of the same the relevant extract of cash book of Jaipur branch (PB 10-11) and the bank statement was filed. The AO after examining all these details/ explanation/ clarifications furnished by the assessee accepted the income declared by the assessee u/s 143(3) dt. 05.12.2018. 5. After culmination of the assessment proceedings, the Pr. CIT called for the assessment records of the assessee. From the examination of record the ld. PCIT revealed that funds of Rs. 5,50,46,000/- is transferred in from partnership firm M/s Manmade in which assessee is a partner. However, as per tax audit report submitted by assessee u/s. 44AB of the proprietary concern i.e. M/s Rugs International, Jaipur no such loan or deposit taken or accepted during the year. Confirmation of accounts of Manmade submitted by the assessee, neither mention PAN and nor are accompanies by any bank statement of M/s. Manmade to establish ITA No. 19/JP/2021 Shri Deepak Khanna vs. Pr. CIT-2 5 genuineness of the transaction. Nature and source of the sum of money credited in assessee’s books of account is thus not verified. The ld. PCIT further observed that the assessee has shown cash receipt of Rs.41 lacs from the proprietary concern M/s Jaipur Rugs International but the same is not shown as drawings in the capital account or accounted in the books of M/s Rugs International, Jaipur. It was further observed that M/s.Manmade has paid Rs. 23,00,000/- in cash to assessee which is mentioned in the ledger account of M/s. Manmade as payment towards purchases from unregistered dealers but no purchase bills of these cash transactions were submitted on record. He further observed that M/s Rugs International, Jaipur had made cash payment of Rs.14,03,266/- towards purchase from unregistered dealer which is not allowable u/s 40A(3) of the Act. Based on the above observations the ld. PCIT issued a show cause notice to the assessee dated 10.03.2021 asking the assessee show cause as to why the assessment order passed by the DCIT, Circle-7, Jaipur on 05.12.2018 may not be revised u/s. 263 considering it as erroneous and prejudicial to the interest of the revenue as the assessment was passed mechanically without application of mind. ITA No. 19/JP/2021 Shri Deepak Khanna vs. Pr. CIT-2 6 6. Assessee filed detailed reply to the said notice (PB 13-26) explaining that AO has examined all the issues and explained the reasons given in the show cause notice u/s 263 for treating the order of AO erroneous and prejudicial to the interest of revenue. None of these submissions however impressed the learned PCIT who rejected these submissions and observed that AO has not enquired into the details of capital introduced by him in his proprietary concern or partnership firm nor enquired into the accounting of cash transfer from one entity to other physically distant entity. Further no details have been filed during the assessment proceedings relating to the transaction undertaken between proprietary concern and partnership firm. He therefore, relying on Explanation 2 to section 263 as well as various case laws cited in his order held that order passed by AO in a routine and perfunctory manner is erroneous and therefore, the same is set aside to be made denovo after affording reasonable opportunity to the assessee. 7. In support of grounds raised in this appeal the ld. AR of the assessee submitted his written submission which is reiterated herein below:- ITA No. 19/JP/2021 Shri Deepak Khanna vs. Pr. CIT-2 7 “1. It is submitted that the case of assessee was selected for limited scrutiny to examine the introduction of capital in M/s Jaipur Rugs International of which he is the proprietor. The total capital introduced by the assessee in M/s Jaipur Rugs International was Rs.6,34,46,000/-. In course of assessment proceedings in order to examine the same the AO fixed the case for hearing on various dates, i.e. 23.08.2017, 30.08.2017, 20.04.2018, 16.07.2018, 02.08.2018, 22.10.2018, 13.11.2018 & 26.11.2018 as specified in the assessment order and after considering the replies filed by the assessee along with the supporting document in support of the capital introduction accepted the same. Thus, when the AO has made detailed examination to verify the source and genuineness of capital introduced and thereafter accepted the same, his order cannot be held to be erroneous and prejudicial to the interest of revenue only because of certain preconceived incorrect notion of the CIT as explained hereunder. 2. The Ld. CIT in the show cause notice has observed that from P&L A/c it is found that funds of Rs.5,50,46,000/- has been transferred from M/s Manmade to M/s Jaipur Rugs International which is not shown in tax audit report u/s 44AB. This observation is itself incorrect as funds transferred is never reflected in P&L A/c. It is submitted that M/s Jaipur Rugs International has a running account with M/s Manmade where funds are transferred from one entity to another entity as required from time to time. Therefore, the same being a current account is not a loan or deposit and thus not reported in tax audit report u/s 44AB. In fact M/s Manmade, Varanasi has a debit balance with M/s Rugs International, Jaipur of Rs.5,50,46,000/- (PB 6) and therefore, at the year-end by crediting to this account, capital account of assessee which has an opening credit balance of Rs.8,13,89,582/- (PB 6) was debited and correspondingly M/s Jaipur Rugs International has debited the account of M/s Manmade, Varanasi by crediting this amount in the capital account of assessee. Thus, the transaction is fully verifiable and examined by the AO in course of assessment proceedings. Therefore, accepting the same by AO would not make his order erroneous and prejudicial to the interest of revenue more particularly when AO has assessed the income by way of remuneration and interest received by the assessee from M/s Manmade and in the return the PAN of M/s Manmade has been duly shown as AAIFM5853B who is assessed with DCIT, Circle-2, Jaipur. ITA No. 19/JP/2021 Shri Deepak Khanna vs. Pr. CIT-2 8 3. The assessee has two branches, one at Varanasi and another at Jaipur. In course of assessment proceedings assessee has furnished the cash book for verification of cash withdrawn by debiting the current capital account of assessee at Jaipur unit and crediting the current capital account of assessee at Varanasi unit. The amount so debited by Jaipur unit is Rs.41 lacs which was credited by the Varanasi unit in the current capital account of assessee (PB 25-26). Thus, in the capital account Rs.41 lacs is shown as received and same amount is also shown as withdrawn. Hence, when cash is withdrawn from one unit and transferred to another unit and the same having been verified by the AO, his order cannot be said as erroneous and prejudicial to the interest of revenue. So far as observation of Ld. CIT that AO has not enquired into accounting of cash transfer from one entity to other physically distant entity for which there is no record of physical movement, the same is irrelevant more particularly when the entries are made in the cash book of both the units which itself is an evidence of movement of cash. 4. The assessee has withdrawn Rs.23 lacs from his capital account with M/s Manmade, Jaipur on 05.03.2016 for Rs.8 lacs and 18.03.2016 for Rs.15 lacs. In support of the same the capital account with M/s Manmade, Jaipur was filed before the AO (PB 7-8). This is duly reflected in the books of M/s Jaipur Rugs International where such amount is credited in the capital account. Thus, AO has duly verified the transaction and therefore, the observation of Ld. CIT that AO has not enquired into the details of capital introduced by the assessee in its proprietary concern or in its partnership firm is incorrect and misplaced. 5. The Ld. CIT from the cash book of M/s Jaipur Rugs International, Jaipur unit (PB 10-12) has observed in the show cause notice that assessee has made cash payment of Rs.14,03,266/- (1,72,656+1,03,917+8,21,227+3,05,266) towards purchase from unregistered dealer which is not allowable u/s 40A(3). However, after considering the reply furnished by the assessee that payment made for purchase of products, manufactured or processed without the aid of power in cottage industries is excluded from the applicability of section 40A(3) in view of clause (f) of Rule 6DD(3) has not taken up this issue for treating the order of AO as erroneous and prejudicial to the interest of revenue. ITA No. 19/JP/2021 Shri Deepak Khanna vs. Pr. CIT-2 9 6. From the above it can be noted that AO after examining the details, evidences and the explanation furnished by the assessee has accepted the capital introduced by the assessee in its proprietary concern M/s Jaipur Rugs International. Hence, Explanation 2 to section 263 is not applicable. In this connection reliance is placed on the decision of Sir Dorabji Tata Trust Vs. DCIT(E) 188 ITD 38 dt. 28.12.2020 where the Hon’ble ITAT Mumbai Bench comprising of Justice PP Bhatt, President and Pramod Kumar, Vice President in Para 19-22 has held as under:- “19. The question that we also need to address is as to what is the nature of scope of the provisions of Expln. 2(a) to s. 263 to the effect that an order is deemed to be "erroneous and prejudicial to the interests of the Revenue" when CIT is of the view that "the order is passed without making inquiries or verification which should have been made". 20. Undoubtedly, the expression used in Expln. 2 to s. 263 is "when CIT is of the view," but that does not mean that the view so formed by the CIT is not subject to any judicial scrutiny or that such a view being formed is at the unfettered discretion of the CIT. The formation of his view has to be in a reasonable manner, it must stand the test of judicial scrutiny, and it must have, at its foundation, the inquiries, and verifications expected, in the ordinary course of performance of duties, of a prudent, judicious and responsible public servant-that an AO is expected to be. If we are to proceed on the basis, as is being urged by the learned Departmental Representative and as is canvassed in the impugned order, that once CIT records his view that the order is passed without making inquiries or verifications which should have been made, we cannot question such a view and we must uphold the validity of revision order, for the recording of that view alone, it would result in a situation that the CIT can de facto exercise unfettered powers to subject any order to revision proceedings. To exercise such a revision power, if that proposition is to be upheld, will mean that virtually any order can be subjected to revision proceedings; all that will be necessary is the recording of the CIT's view that "the order is passed without making inquiries or verification which should have been made". Such an approach will be clearly incongruous. The legal position is fairly well settled that when a public authority has the power to do something in aid of enforcement of a right of a citizen, it is imperative upon him to exercise such powers when circumstances so ITA No. 19/JP/2021 Shri Deepak Khanna vs. Pr. CIT-2 10 justify or warrant. Even if the words used in the statute are prima facie enabling, the Courts will readily infer a duty to exercise a power which is invested in aid of enforcement of a right—public or private—of a citizen. [ L Hirday Naran vs. ITO (1970) 78 ITR 26 (SC) ]. As a corollary to this legal position, when a public authority has the powers to do something against any person, such an authority cannot exercise that power unless it is demonstrated that the circumstances so justify or warrant. In a democratic welfare state, all the powers vested in the public authorities are for the good of society. A fortiorari, neither can a public authority decline to exercise the powers, to help anyone, when circumstances so justify or warrant, nor can a public authority exercise the powers, to the detriment of anyone, unless circumstances so justify or warrant. What essentially follows is that unless the AO does not conduct, at the stage of passing the order which is subjected to revision proceedings, inquiries and verifications expected, in the ordinary course of performance of duties, of a prudent, judicious and responsible public servant–that an AO is expected to be, CIT cannot legitimately form the view that "the order is passed without making inquiries or verification which should have been made". The true test for finding out whether Expln. 2(a) has been rightly invoked or not is, therefore, not simply existence of the view, as professed by the CIT, about the lack of necessary inquiries and verifications, but an objective finding that the AO has not conducted, at the stage of passing the order which is subjected to revision proceedings, inquiries and verifications expected, in the ordinary course of performance of duties, of a prudent, judicious and responsible public servant that the AO is expected to be. 21. That brings us to our next question, and that is what a prudent, judicious, and responsible AO is to do in the course of his assessment proceedings. Is he to doubt or test every proposition put forward by the assessee and investigate all the claims made in the IT return as deep as he can ? The answer has to be emphatically in negative because, if he is to do so, the line of demarcation between scrutiny and investigation will get blurred, and, on a more practical note, it will be practically impossible to complete all the assessments allotted to him within no matter how liberal a time-limit is framed. In scrutiny assessment proceedings, all that is required to be done is to examine the IT return and claims made therein as to whether these are prima facie in accordance with the law and where one has any reasons to doubt the correctness of a claim made in the IT return, probe into the matter deeper in detail. He need not look at everything with suspicion ITA No. 19/JP/2021 Shri Deepak Khanna vs. Pr. CIT-2 11 and investigate each and every claim made in the IT return; a reasonable prima facie scrutiny of all the claims will be in order, and then take a call, in the light of his expert knowledge and experience, which areas, if at all any, required to be critically examined by a thorough probe. While it is true that an AO is not only an adjudicator but also an investigator and he cannot remain passive in the face of a return which is apparently in order but calls for further inquiry but, as observed by Hon'ble Delhi High Court in the case of Gee Vee Enterprises vs. Addl. CIT & Ors. 1975 CTR (Del) 61 : (1995) 99 ITR 375 (Del) , "it is his duty to ascertain the truth of the facts stated in the return when the circumstances of the case are such as to provoke an inquiry. (Emphasis, by underlining, italicised in print, supplied by us). It is, therefore, obvious that when the circumstances are not such as to provoke an inquiry, he need not put every proposition to the test and probe everything stated in the IT return. In a way, his role in the scrutiny assessment proceedings is somewhat akin to a conventional statutory auditor in real-life situations. What Justice Lopes said, in the case of Re Kingston Cotton Mills (1896) 2 Ch.D 279, 288), in respect of the role of an auditor, would equally apply in respect of the role of the AO as well. His lordship had said that an auditor (read AO in the present context)" is not bound to be a detective, or, as was said, to approach his work with suspicion or with a foregone conclusion that there is something wrong. He is a watch-dog, but not a bloodhound". Of course, an AO cannot remain passive on the facts which, in his fair opinion, need to be probed further, but then an AO, unless he has specific reasons to do so after a look at the details, is not required to prove to the hilt everything coming to his notice in the course of the assessment proceedings. When the facts as emerging out of the scrutiny are apparently in order, and no further inquiry is warranted in his bona fide opinion, he need not conduct further inquiries just because it is lawful to make further inquiries in the matter. A degree of reasonable faith in the assessee and not doubting everything coming to the AO's notice in the assessment proceedings cannot be said to be lacking bona fide, and as long as the path adopted by the AO is taken bona fide and he has adopted a course permissible in law, he cannot be faulted-which is a sine qua non for invoking the powers under s. 263. In the case of Malabar Industrial Co. Ltd. vs. CIT (2000) 159 CTR (SC) 1 : (2000) 243 ITR 83 (SC) , Hon'ble Supreme Court has held that "Every loss of revenue as a consequence of an order of the AO cannot be treated as prejudicial to the interests of the Revenue, for example, when an ITO adopted one of the courses permissible in law and it has ITA No. 19/JP/2021 Shri Deepak Khanna vs. Pr. CIT-2 12 resulted in loss of revenue; or where two views are possible and the ITO has taken one view with which the CIT does not agree, it cannot be treated as an erroneous order prejudicial to the interests of the Revenue unless the view taken by the ITO is unsustainable in law." The test for what is the least expected of a prudent, judicious and responsible AO in the normal course of his assessment work, or what constitutes a permissible course of action for the AO, is not what he should have done in the ideal circumstances, but what an AO, in the course of his performance of his duties as an AO should, as a prudent, judicious or reasonable public servant, reasonably do bona fide in a real-life situation. It is also important to bear in mind the fact that lack of bona fides or unreasonableness in conduct cannot be inferred on mere suspicion; there have to be some strong indicators in direction, or there has to be a specific failure in doing what a prudent, judicious and responsible officer would have done in the normal course of his work in the similar circumstances. On a similar note, a Co-ordinate Bench of the Tribunal, in the case of Narayan T. Rane vs. ITO (2016) 70 taxmann.com 227 (Mumbai) has observed as follows: 20. Clause (a) of Explanation states that an order shall be deemed to be erroneous, if it has been passed without making enquiries or verification, which should have been made. In our considered view, this provision shall apply, if the order has been passed without making enquiries or verification which a reasonable and prudent officer shall have carried out in such cases, which means that the opinion formed by learned Principal CIT cannot be taken as final one, without scrutinising the nature of enquiry or verification carried out by the AO vis-a-vis its reasonableness in the facts and circumstances of the case. Hence, in our considered view, what is relevant for cl. (a) of Expln. 2 to s. 263 is whether the AO has passed the order after carrying our enquiries or verification, which a reasonable and prudent officer would have claimed out or not. It does not authorise or give unfettered powers to the learned Principal CIT to revise each and every order, if in his opinion, the same has been passed without making enquiries or verification which should have been made." 22. Having said that, we may also add that while in a situation in which the necessary inquiries are not conducted or necessary verifications are not done, CIT may indeed have the powers to invoke his powers under s. 263 but that it does not necessarily follow that in all such cases the matters can be remitted back to the assessment stage for ITA No. 19/JP/2021 Shri Deepak Khanna vs. Pr. CIT-2 13 such inquiries and verifications. There can be three mutually exclusive situations with regard to exercise of powers under s. 263, r/w Expln. 2(a) thereto, with respect to lack of proper inquiries and verifications. The first situation could be this. Even if necessary inquiries and verifications are not made, the CIT can, based on the material before him, in certain cases straight away come to a conclusion that an addition to income, or disallowance from expenditure or some other adverse inference, is warranted. In such a situation, there will be no point in sending the matter back to the AO for fresh inquiries or verification because an adverse inference against the assessee can be legitimately drawn, based on material on record, by the CIT. In exercise of his powers under s. 263, the CIT may as well direct the AO that related addition to income or disallowance from expenditure be made, or remedial measures are taken. The second category of cases could be when the CIT finds that necessary inquiries are not made or verifications not done, but, based on material on record and in his considered view, even if the necessary inquiries were made or necessary verifications were done, no addition to income or disallowance of expenditure or any other adverse action would have been warranted. Clearly, in such cases, no prejudice is caused to the legitimate interests of the Revenue. No interference will be, as such, justified in such a situation. That leaves us with the third possibility, and that is when the CIT is satisfied that the necessary inquiries are not made and necessary verifications are not done, and that, in the absence of this exercise by the AO, a conclusive finding is not possible one way or the other. That is perhaps the situation in which, in our humble understanding, the CIT, in the exercise of his powers under s. 263, can set aside an order, for lack of proper inquiry or verification, and ask the AO to conduct such inquiries or verifications afresh.” The principles laid down in this decision when applied to the facts of assessee’s case is evident that in the assessee’s case AO has made all the necessary enquiry and verification as can be expected of a of a prudent, judicious and responsible AO in normal course of his assessment work. The Ld. CIT has not specified as to what type of enquiry ought to have been made by AO which would have resulted into income or disallowance or any other adverse action. Hence, the order passed by AO can’t be branded as erroneous and prejudicial to the interest of revenue. ITA No. 19/JP/2021 Shri Deepak Khanna vs. Pr. CIT-2 14 In view of above, order passed by Ld. CIT u/s 263 is illegal & bad in law and the same be quashed.” 8. In addition to the above written submission the ld. AR of the assessee submitted that the issue raised by the ld. PCIT has already been considered by the AO while passing the assessment order. For that he has drawn our attention to attention to the notice issued u/s. 142(1) of the Act dated 13.04.2018 where in the issue raised by the PCIT has already been seen and relevant details were called by the assessing officer in the proceeding before him. For that the ld. AR of the assessee drawn our attention to the said notice (assessee paper book page 53 & 54) and the relevant extract of the questions raised by the AO is reiterated here in below: “In order to finalize the assessment proceedings in your case for the A.Y 2016-17, you are required to furnish the following details/information/clarification. 1. Furnish a copy of computation of income duly verified by you. 2. Furnish a copy of audit report along with all its annexure duly verified by you along with all the financial statements for the year under consideration. 3. Furnish complete details of share capital and also explain if there is increase in share capital during the year under consideration then furnish its sources of increase with documentary evidences. 4. Please furnish the details of accounting used in return of income and in the audit report during the year under consideration. ITA No. 19/JP/2021 Shri Deepak Khanna vs. Pr. CIT-2 15 After going through reply on various 9 different dates various details were called for and were submitted in the assessment proceedings. As there were two issues before the AO one for method of accounting as raised in the above extracted notice dated 13.04.2018, the assessee filed a reply vide his letter dated 01.08.2018 vide point no. 4 which reads as under : “Assessee has consistently followed mercantile system of accounting. With regard to return of income of A. Y. 2016-17, method of accounting is mercantile and due to typographical error assessee has selected first option i.e. “yes” to change method of accounting. However, there is no change in method of accounting followed and assessee is regularly following mercantile system of accounting.” 9. As regards the introduction of capital the ld. AR of the assessee drawn our attention to his paper book wherein the assessee has submitted the details of the capital introduced in the capital account along with the source of the said capital account on 17.07.2018, 01.08.2018, 31.08.2018 along with the ledger account and contra confirmations. As the proceeding were for limited purpose and both the issue carefully considered by the assessee and submitted all the details the proceeding is bad in law as well as on facts. As regards the observation of the ld. PCIT that the PAN number of the Manmade is not mentioned in the return of income filed, he has filed the extract of the return of income at page 64 of ITA No. 19/JP/2021 Shri Deepak Khanna vs. Pr. CIT-2 16 the paper book, extract from the return of income filed by the assessee. The said extract shows the PAN of the firm wherein the assessee is partner is duly reported. Thus, even these contentions is also factually incorrect and while making allegation has not been verified by the PCIT. The ld. AR of the submitted that when both the entities are regularly assessed to tax and assessee has filed the copy of account expressly showing the entries under questions there cannot be the case of unexplained entries or investment and thus, there cannot be proceeding u/s 263. The PCIT has merely raised the doubts and too without going to the records of the fact that the transaction is between the proprietor of one firm and between a partnership firm where in the assessee is partner. The assessee being partner can withdraw the money in cash or by transfer the same any account and the same is not restricted in any provision of the law. As regards the contention for violation of section 40A(3) the same was not subject matter of the assessment. Therefore, the ld. PCIT is travelling beyond the scope of the subjected assessment made by the AO. Without prejudice to these fact the assessee is regular tax payer and the transaction referred is excluded from the applicability of section 40(A)(3) read with ITA No. 19/JP/2021 Shri Deepak Khanna vs. Pr. CIT-2 17 clause (f) of Rule 6DD(3) thus, the contentions raised by the PCIT is not only without going into the record but also without considering the submission of the assessee on merits and thus, on this account also the order of the PCIT is required to be quashed. 10. Based on the above clarification the ld. AR of the assessee submitted that for both the issues, were raised by the assessing officer in the assessment proceedings by issue of notice and the ld. AO has already analyzed the issues, sought explanation from the assessee from time to time and taken a plausible view. For this ld. AR submitted that all the relevant information was also placed on record to decide the issue on hand by the AO. The PCIT has not pointed out that what is the specific error from where it can be termed that the order passed by the AO is erroneous or prejudicial to the interest of the revenue. There cannot be a gauge that the enquiry conducted is sufficient or not when the specific issue has already been considered in the assessment proceedings before him. ITA No. 19/JP/2021 Shri Deepak Khanna vs. Pr. CIT-2 18 11. Even the amended provision of section 263 inserting explanation 2 does not deal with that situation and for that ld. AR of the assessee draw our attention to the said explanation 2 of section 263. The same is extracted here in below: Explanation 2.—For the purposes of this section, it is hereby declared that an order passed by the Assessing Officer 94 [or the Transfer Pricing Officer, as the case may be,] 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 95 [Chief Commissioner or Chief Commissioner or Principal] Commissioner or Commissioner,— (a) the order is passed without making inquiries or verification which should have been made; (b) the order is passed allowing any relief without inquiring into the claim; (c) the order has not been made in accordance with any order, direction or instruction issued by the Board under section 119; or (d) 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. 12. The ld. AR of the assessee explained that none of the condition specified in the Act is applicable in the present facts of the case. He further submitted that the AO has not granted any relief or claim in the present case without verification which is the subject matter in the case. The order is passed after making proper and sufficient enquiry in the proceeding. The AO has not violated any direction or instruction of the board. The order also not violates any binding judicial decision. He further submitted that the issue raised by the PCIT has already been raised and the relevant ITA No. 19/JP/2021 Shri Deepak Khanna vs. Pr. CIT-2 19 aspect of the facts on the same very issue is seen by the AO. The ld. AR demonstrate before us that the AO has raised which the PCIT is contending in the proceeding under section 263 of the Act. He has also demonstrated before us that the AO has made necessary enquiry on the issue based on the submission made by the assessee. The ld. AO has taken the plausible view on both the issue as per the submission placed on record. This action of the AO is not proved to be prejudicial or erroneous on any of the angel by the PCIT while issuing the show cause notice to the assessee company. In that circumstance the provision of section 263 and its explanation 2 will not apply. 13. Au contraire the ld. DR is heard at length who has relied on the findings of the PCIT and supported the order of the PCIT. He has submitted as there is not appeal mechanism against the order of the assessing officer by the revenue and that is why the proceeding u/s. 263 of the Act. The PCIT based on the reasoning invoked the provision of section 263 of the Act. The ld. AO has not called for the balance sheet to verify whether the loan in fact were in the book of the firm or not. The entry is passed on 31 st March. ITA No. 19/JP/2021 Shri Deepak Khanna vs. Pr. CIT-2 20 This loan is not shown in the tax audit report. This was the specific issue under scrutiny. Even the assessee how the entry is passed and mode of transfer of the entry from one party to another is not asked by the assessee nor it transpire from the record and AO has not raised any query on the issue. Even how the transaction between one branch to another is happening is not raised by the AO. Thus, explanation 2 of section 263 squarely applicable in this case and the action of the PCIT is in accordance with the law. The ld. DR has relied upon the following judicial decision to drive home to his contentions: • [2000] 109 Taxman 66(SC) Malabar Industrial Co. Ltd., Vs. Commissioner of Income-tax • [2007] 158 Taxman 160(SC) Commissioner of Income-tax, Bhopal Vs. Ralson Industries Ltd. • [1975] 99 ITR 375(DELHI) Gee Vee Enterprises Vs. Additional Commissioner of Income-tax • [2000] 108 Taxman 464 (Madras) Commissioner of Income-tax Vs. Seshasayee Paper & Boards Ltd. • [2006] 101 ITD 405(MUM.) Arvec International Vs. Additional Commissioner of Income-tax, Range 19(1), Mumbai 14. We have heard the rival contentions, perused the material on record and duly considered facts of the case in the light of applicable legal position and judicial decision relied upon by the parties. In the facts of the present case, the Pr. CIT has exercised the power by merely flagging certain issues and without caring the ITA No. 19/JP/2021 Shri Deepak Khanna vs. Pr. CIT-2 21 submission made by the assessee has summarily rejected the same and has arrived at the conclusion ignoring the facts, evidences which casts responsibility on the Pr. CIT to point being out the error and not any and every error but such an error which is prejudicial to the interests of the Revenue. The twin requirements and the sine qua non for exercising the Revisionary Power cannot be left at the mercy of whims and fancies of Revisionary Authority the same should be brought out on record mere suspicions are not enough. 15. We find that there was a specific question and detailed reply submitted by the assessee during the assessment proceedings. Yet, learned CIT(A) has subjected the assessment order to revision proceedings on the short ground that the Assessing Officer failed to carry out necessary verifications. He further stated that the AO has not applied his mind to the issue in proper manner and concluded that "AO has not applied his mind to the issue in proper manner”. Everything thus hinges on whether assessee's submission being accepted can be faulted with, whether the assessee ought to have produced the appropriate evidence and whether non-recording of ITA No. 19/JP/2021 Shri Deepak Khanna vs. Pr. CIT-2 22 the reasons for accepting explanation will render the order erroneous and prejudicial to the interest of the revenue? In order to support the conclusion drawn reference may also be made to the decision of the Co-ordinate Benches in Narain Tatu Rane, 70 taxmann.com 227 (Mumbai - Trib.) which clearly brings out that the explanation cannot be said to have overridden the law as incorporated by various High Courts which have consistently held that before reaching to the conclusion that the order of the AO is erroneous and prejudicial to the interests of the Revenue, the Revisionary authority itself has to undertake some enquiries to establish that the assessment order is erroneous and prejudicial to the interests of the Revenue. Recently, the apex court in the case of Commissioner of Income Tax, LTU Vs. Nuclear Power Corporation of India Ltd. [2022] 138 taxmann.com 332 (SC) held that the Commissioner, while exercising the power of revision under section 263 of the Income-tax Act, 1961, cannot examine an issue on merits. The assessee in his submission relied on the decision in the case of JRD Tata Trust v. Dy. CIT [2020] 122 taxmann.com 275 (Mum. - Trib.), a coordinate bench of Mumbai ITA No. 19/JP/2021 Shri Deepak Khanna vs. Pr. CIT-2 23 Tribunal, in the context of exercised of powers under section 263, observed as follows:— 21. That brings us to our next question, and that is what a prudent, judicious, and responsible Assessing Officer is to do in the course of his assessment proceedings. Is he to doubt or test every proposition put forward by the assessee and investigate all the claims made in the income tax return as deep as he can? The answer has to be emphatically in negative because, if he is to do so, the line of demarcation between scrutiny and investigation will get blurred, and, on a more practical note, it will be practically impossible to complete all the assessments allotted to him within no matter how liberal a time limit is framed. In scrutiny assessment proceedings, all that is required to be done is to examine the income tax return and claims made therein as to whether these are prima facie in accordance with the law and where one has any reasons to doubt the correctness of a claim made in the income tax return, probe into the matter deeper in detail. He need not look at everything with suspicion and investigate each and every claim made in the income tax return; a reasonable prima facie scrutiny of all the claims will be in order, and then take a call, in the light of his expert knowledge and experience, which areas, if at all any, required to be critically examined by a thorough probe. While it is true that an Assessing Officer is not only an adjudicator but also an investigator and he cannot remain passive in the face of a return which is apparently in order but calls for further inquiry but, as observed by Hon'ble Delhi High Court in the case of Gee Vee Enterprises v. ACIT [1975] 99 ITR 375, "it is his duty to ascertain the truth of the facts stated in the return when the circumstances of the case are such as to provoke an inquiry. (Emphasis, by underlining, supplied by us). It is, therefore, obvious that when the circumstances are not such as to provoke an inquiry, he need not put every proposition to the test and probe everything stated in the income tax return. In a way, his role in the scrutiny assessment proceedings is somewhat akin to a conventional statutory auditor in real- life situations. What Justice Lopes said, in the case of Re Kingston Cotton Mills [(1896) 2 Ch 279, 288)], in respect of the role of an auditor, would equally apply in respect of the role of the Assessing Officer as well. His Lordship had said that an auditor (read Assessing Officer in the present context) "is not bound to be a detective, or, as was said, to approach his work with suspicion or with a foregone conclusion that there is something wrong. He is a watch-dog, but not a bloodhound. ". Of course, an Assessing Officer cannot remain passive on the facts which, in his fair opinion, need to be probed further, but then an Assessing Officer, unless he has specific reasons to do so after a look at the details, is not required to prove to the hilt everything coming to his notice in the course of the assessment proceedings. When the facts as emerging out of the scrutiny are apparently in order, ITA No. 19/JP/2021 Shri Deepak Khanna vs. Pr. CIT-2 24 and no further inquiry is warranted in his bonafide opinion, he need not conduct further inquiries just because it is lawful to make further inquiries in the matter. A degree of reasonable faith in the assessee and not doubting everything coming to the Assessing Officer's notice in the assessment proceedings cannot be said to be lacking bonafide, and as long as the path adopted by the Assessing Officer is taken bonafide and he has adopted a course permissible in law, he cannot be faulted- which is a sine qua non for invoking the powers under section 263. In the case strial Co Ltd. v. CIT [(2000) 243 ITR 83 (SC)], Hon'ble Supreme Court has held that "Every loss of revenue as a consequence of an order of the Assessing Officer cannot be treated as prejudicial to the interests of the revenue, for example, when an ITO adopted one of the courses permissible in law and it has resulted in loss of revenue; or where two views are possible and the ITO has taken one view with which the Commissioner does not agree, it cannot be treated as an erroneous order prejudicial to the interests of the revenue unless the view taken by the ITO is unsustainable in law." The test for what is the least expected of a prudent, judicious and responsible Assessing Officer in the normal course of his assessment work, or what constitutes a permissible course of action for the Assessing Officer, is not what he should have done in the ideal circumstances, but what an Assessing Officer, in the course of his performance of his duties as an Assessing Officer should, as a prudent, judicious or reasonable public servant, reasonably do bonafide in a real-life situation. It is also important to bear in mind the fact that lack of bona fides or unreasonableness in conduct cannot be inferred on mere suspicion; there have to be some strong indicators in direction, or there has to be a specific failure in doing what a prudent, judicious and responsible officer would have done in the normal course of his work in the similar circumstances. 16. It is not disputed by both the parties that the case of the assessee was selected for limited scrutiny and issue to be examined was raised and the submissions were submitted in the proceedings before the AO. In the assessment order the ld. AO has mentioned that : “In compliance to these notices, the assessee uploaded the replies on efilling portal and furnished required details/explanations/clarification, which were perused and examined thoroughly in respect of the ITA No. 19/JP/2021 Shri Deepak Khanna vs. Pr. CIT-2 25 issues/reasons on the basis of which the case was selected for limited scrutiny. “ 17. Thus, ld.AO has examined that issue as it is evident form the submission made in the form of paper book filed by the assessee. As the case was for this limited purpose the same has been examined and verified by the ld. AO as it emerges from the findings of the AO. The ld. Pr. CIT evidently did not place on record any apparent error on the part of the AO so as to substantiate that order passed by the ld. AO is prejudicial to the interest of revenue. He only mentioned that the AO has not applied his mind to the issue in proper manner. He has not pin pointed any of the enquiry which is required to be made is not made by the ld. AO. and he has to examine the issue on merits. There is no further defect found from the record from the material that has been collected by the ld. AO to verify the point raised in the limited scrutiny. The decision and contentions raised by ld. DR are all related to the fact that the ld. AO either has not examined the issue and the related enquiry on the issue apparently not done or not done to the extent it was required to be examined based on the facts. Since, in this case ld. AO has clearly conducted the enquiry and revenue did not pin point the error on the part of the assessing officer the order passed after ITA No. 19/JP/2021 Shri Deepak Khanna vs. Pr. CIT-2 26 due application of mind cannot be subjected to proceeding u/s. 263 of the Act. The ITAT Mumbai bench in the Mrs. Khatiza S. Oomerbhoy addressed this issue elaborately after referring to number of cases on revisionary powers vested in the Commissioner of Income-tax under section 263 of the Act and summed up the fundamental principles emerging from several cases as under- (i) The CIT must record satisfaction that the order of the Assessing Officer is erroneous and prejudicial to the interest of the Revenue. Both the conditions must be fulfilled. (ii) Sec. 263 of the Act cannot be invoked to correct each and every type of mistake or error committed by the Assessing Officer and it was only when an order is erroneous that the section will be attracted. (iii) An incorrect assumption of facts or an incorrect application of law will suffice the requirement of order being erroneous. (iv) If the order is passed without application of mind, such order will fall under the category of erroneous order. (v) Every loss of revenue cannot be treated as prejudicial to the interests of the Revenue and if the Assessing Officer has adopted one of the courses permissible under law or where two views are possible and the Assessing Officer has taken one view with which the does not agree. If cannot be treated as an erroneous order, unless the view taken by the Assessing Officer is unsustainable under law (vi) If while making the assessment, the Assessing Officer examines the accounts, makes enquiries, applies his mind to the facts and circumstances of the case and determine the income, the Commissioner of Income-tax, while exercising his power under section 263 of the Act is not ITA No. 19/JP/2021 Shri Deepak Khanna vs. Pr. CIT-2 27 permitted to substitute his estimate of income in place of the income estimated by the Assessing Officer. (vii) The Assessing Officer exercises quasi-judicial power vested in his and if he exercises such power in accordance with law and arrive at a conclusion, such conclusion cannot be termed to be erroneous simply because the Commissioner of Income-tax does not fee stratified with the conclusion. (viii) The Commissioner of Income-tax, before exercising his jurisdiction under section 263 of the Act must have material on record to arrive at a satisfaction and (ix) If the Assessing Officer has made enquiries during the course of assessment proceedings on the relevant issues and the assessee has given detailed explanation by a letter in writing and the Assessing Officer allows the claim on being satisfied with the explanation of the assessee, the decision of the Assessing Officer cannot be held to be erroneous simply because in his order he does not make an elaborate discussion in that regard. 18. Be that as it may, in our considered view, as the A.O while framing the assessment had taken a possible view, and revenue did not demonstrate the error remain on the part of the ld. AO. In fact, when the ld. AO has conducted the required enquiry and not violated any of the conditions mentioned for revision of order as required by Explanation 2 of Section 263 of the Act, the order passed by the Assessing Officer could not be deemed to be erroneous so as to be prejudicial to the interests of the revenue. ITA No. 19/JP/2021 Shri Deepak Khanna vs. Pr. CIT-2 28 For this it is relevant to extract the Explanation 2 of section 263 which the ld. DR has heavily relied upon: 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,— (a) the order is passed without making inquiries or verification which should have been made; (b) the order is passed allowing any relief without inquiring into the claim; (c) the order has not been made in accordance with any order, direction or instruction issued by the Board under section 119; or (d) 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. 19. Clearly, therefore, as long as the action of the Assessing Officer cannot be said to be lacking bonafides, his action in accepting an explanation of the assessee cannot be faulted merely because it could have been lawful to make mere detailed inquiries or because he did not write specific reasons of accepting the explanation. As for learned PCIT's observations regarding accepting the explanation "has not applied his mind to the issue in proper manner", there is nothing to question the bonfides of the Assessing Officer or to elaborate as to what should have been proper manner. The fact remains that the specific issue raised, in the revision order was specifically looked into, detailed ITA No. 19/JP/2021 Shri Deepak Khanna vs. Pr. CIT-2 29 submissions were made and these submissions were duly accepted by the Assessing Officer. Merely because the Assessing Officer did not write specific reasons for accepting the explanation of the assessee cannot be reason enough to invoke powers under section 263, and non-mentioning of these reasons do not render the assessment order "erroneous and prejudicial to the interest of the revenue". 20. In view of the above discussions, as also bearing in mind entirety of the case we vacate the impugned revision order. The assessee gets the relief accordingly. In the result, the appeal of the assessee is allowed. Order pronounced in the open Court on 07/09/2022. Sd/- Sd/- ¼ lanhi xkslkbZ ½ ¼ jkBkSM deys’k t;arHkkbZ ½ (Sandeep Gosain) (Rathod Kamlesh Jayantbhai) U;kf;d lnL;@Judicial Member ys[kk lnL;@Accountant Member Tk;iqj@Jaipur fnukad@Dated:- 07/09/2022 *Ganesh Kr. vkns'k dh izfrfyfi vxzsf’kr@Copy of the order forwarded to: 1. vihykFkhZ@The Appellant- Shri Deepak Khanna, Jaipur 2. izR;FkhZ@ The Respondent- PCIT, Jaipur-2 3. vk;dj vk;qDr@ CIT ITA No. 19/JP/2021 Shri Deepak Khanna vs. Pr. CIT-2 30 4. vk;dj vk;qDr@ CIT(A) 5. foHkkxh; izfrfuf/k] vk;dj vihyh; vf/kdj.k] t;iqj@DR, ITAT, Jaipur. 6. xkMZ QkbZy@ Guard File {ITA No. 19/JP/2021} vkns'kkuqlkj@ By order, lgk;d iathdkj@Asst. Registrar