ITAT Ahmedabad validates Section 263 revision where AO left enquiry on bogus purchases incomplete

Background of the dispute

The appeal before the ITAT Ahmedabad in Garg Ship Breaking Pvt. Ltd. Vs PCIT (ITAT Ahmedabad) arose from an order dated 29-03-2025 passed by the Principal Commissioner of Income Tax, Ahmedabad-1 (PCIT) under Section 263 of the Income Tax Act 1961 for Assessment Year 2021-22. The assessee challenged the exercise of revisional jurisdiction on the ground that the original assessment was neither erroneous nor prejudicial to the interests of the Revenue.

The Tribunal was required to examine whether the Assessing Officer (AO) had completed the assessment without carrying out the level of enquiry and verification that the facts of the case demanded, especially in light of the deeming provision contained in Explanation 2(a) to Section 263.

Essential facts of the case

Nature of business and return filing

  • The assessee, Garg Ship Breaking Pvt. Ltd., is engaged in wholesale and retail trading of scrap material.
  • For A.Y. 2021-22, the assessee filed its return of income on 13-03-2022 declaring total income of Rs. 35,76,760/-.
  • The case was selected for scrutiny because the Department noticed that some of the suppliers from whom sizeable purchases were recorded were either:
    • Non-filers, or
    • Showed very low turnover when compared to the volume of transactions reflected by the assessee.

CGST search and seizure of records

  • On 27-03-2022, the CGST Department conducted a search in the case of the assessee.
  • During this action, all the relevant documentary records relating to the assessee were seized and remained in the custody of the CGST authorities.
  • Consequently, during income-tax assessment proceedings, the assessee could not produce original books and records before the AO because they were with another government department.

Red-flag information and Section 133(6) notices

  • The AO traced certain “Red Flagged” information regarding the assessee’s suppliers on the Department’s Insight portal, indicating potential concerns relating to bogus or suspicious purchases.
  • On the basis of this risk information, the AO issued notices under Section 133(6) to various counterparties.
  • Only one such party responded to the notice; the other concerns did not reply.
  • The AO also attempted to obtain relevant documents and details from the CGST Department, but these efforts did not result in any material being made available during the course of assessment.

Completion of assessment and AO’s qualification

  • Despite these pending issues and incomplete material, the AO did not make an adverse addition or disallowance and accepted the income as returned by the assessee.
  • However, in the body of the assessment order, the AO added a significant qualification, stating that “if any adverse information is received to the Department in future, suitable action would be taken as per provisions of law.”
  • The assessment was thus finalized even though:
    • Replies were not received from most suppliers,
    • Records remained with CGST,
    • A complaint by the CGST authorities before the Chief Judicial Magistrate, Bhavnagar regarding fake invoices/bogus purchases had been brought to the AO’s notice, and
    • No detailed verification or findings on these aspects were recorded by the AO.

PCIT’s invocation of Section 263

Basis of revision

The PCIT, after examining the assessment records, formed the view that the assessment order passed by the AO suffered from the twin defects of being both:

  • Erroneous, and
  • Prejudicial to the interests of the Revenue,

as contemplated by Section 263 of the Income Tax Act 1961.

Key grounds recorded by the PCIT included:

  • The AO had accepted the returned income without proper enquiry into the genuineness of the purchases from parties flagged on the Insight portal.
  • The AO had not given due weight to the complaint filed by the CGST authorities before the Hon’ble Chief Judicial Magistrate, Bhavnagar, which allegedly related to fake invoices and bogus purchases linked to this very asse...