ITAT Bangalore Clarifies Scope of Section 263 and Consequential Best-Judgment Assessment

1. Background of the Dispute

The Bangalore Bench of the ITAT in Shivalingaiah Gangadhar Vs PCIT (ITAT Bangalore) dealt with two connected appeals for Assessment Year 2015-16. The controversy revolved around:

  • The legality of a revision order issued under section 263 of the Income Tax Act 1961; and
  • The validity of the subsequent best-judgment assessment framed under section 144 read with section 263 and section 144B.

The assessee, an individual engaged in cement trading, had filed a return of income declaring ₹3,08,854. The case was initially picked up for verification of large cash deposits in bank accounts, leading to an ex parte assessment under section 144.

2. Original Best-Judgment Assessment under Section 144

In the first round, the Assessing Officer (AO) completed an ex parte assessment on 11 December 2017 under section 144, determining the total income at ₹20,27,364. The key features of this assessment were:

  • Bank deposits of ₹1,90,61,760 were treated as business turnover.
  • Profit was estimated at 8% on this amount, after reducing income already offered by the assessee at ₹10,94,588.
  • An addition of ₹5,02,426 was made as unexplained investment.
  • Deduction claimed under Chapter VI-A of ₹1,21,500 was disallowed.

Thus, at this stage, the AO regarded the deposits as business receipts and only estimated profit, instead of treating the entire deposits as unexplained income.

3. Invocation of Revisionary Powers under Section 263

3.1 PCIT’s Examination

Subsequently, the Principal Commissioner of Income Tax-3, Bangalore (PCIT) scrutinised the assessment record and noted that:

  • Two additional bank accounts with IndusInd Bank and Indian Bank had not been examined by the AO.
  • In these accounts, the assessee had made:
    • Cash deposits of ₹1,01,38,052; and
    • Cheque deposits of ₹34,74,750.
  • These deposits were not taken into account in computing taxable income in the original assessment.

The PCIT concluded that the non-examination of these accounts made the assessment order both:

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

satisfying the dual conditions laid down for exercising revisionary powers under section 263.

3.2 Assessee’s Reply before PCIT

In response to the show cause notice, the assessee:

  • Furnished bank statements relating to IndusInd Bank, Bank of Baroda and Indian Bank; and
  • Produced the ledger account and confirmation of Maruti Traders, his cement supplier.

The assessee’s stand was that the bank deposits represented business transactions relating to cement trading.

3.3 PCIT’s Final Direction

Despite the documents produced, the PCIT observed that:

  • The original AO had treated only certain cash deposits as sales and estimated income at 8% without conducting complete verification of all bank accounts.
  • There was no proper enquiry into the nature and source of the sizable deposits in the unexamined bank accounts.

On this reasoning, the PCIT, by order dated 12 March 2020 under section 263, set aside the original assessment and directed the AO to redo the assessment afresh, after appropriate enquiry. This section 263 order was one of the two orders challenged before the Tribunal.

4. Consequential Assessment after Section 263 Order

4.1 Proceedings before AO

Acting on the section 263 directions, the AO reopened the matter and issued multiple statutory notices to the assessee. However:

  • The assessee did not respond to these notices.
  • The AO invoked section 133(6) to call for information from Maruti Traders (the party whose confirmation and ledger were already on record before PCIT).
  • Maruti Traders also did not respond to the section 133(6) notice.

Subsequently, a notice under section 142(1) dated 23 August 2021 was issued calling for specific details. No reply was filed.

4.2 Fresh Best-Judgment Order

In the absence of cooperation, the AO again resorted to section 144 and framed a fresh best-judgment assessment on 28 September 2021, this time under section 144 read with section 263 and section 144B.

Key aspects of this second assessment: