Mumbai ITAT Upholds PCIT's Revisionary Power Under Section 263 Where AO Applied Wrong Charging Provision for Bogus Purchases

Case Overview

Case Name: Lasa Supergenerics Limited Vs PCIT (ITAT Mumbai)
Relevant Assessment Year: 2018-19
Key Provisions Involved: Section 263, Section 68, Section 69C, Section 115BBE, Section 147, Section 148

The Mumbai Bench of the Income Tax Appellate Tribunal delivered a significant ruling affirming the revisionary jurisdiction exercised by the Principal Commissioner of Income Tax under Section 263 of the Income Tax Act, 1961. The core question revolved around whether the Assessing Officer's erroneous invocation of Section 68 — instead of the legally appropriate Section 69C — while framing an addition on account of alleged bogus purchases was sufficient to attract the twin conditions mandated under Section 263. The Tribunal answered this question in favour of the Revenue and dismissed the assessee's appeal.

Background and Factual Matrix

Original Assessment and Reopening

Lasa Supergenerics Limited filed its return of income under Section 139(1) of the Income Tax Act, 1961 for Assessment Year 2018-19, declaring a total loss of Rs. 2,34,13,322/-. The case initially went through scrutiny, and the assessment was completed under Section 143(3) of the Act.

In due course, the Assessing Officer received intelligence indicating that the assessee had entered into purchase transactions aggregating to Rs. 20,47,80,150/- with three entities subsequently identified as bogus suppliers, namely:

  1. M/s. Kushal Limited
  2. M/s. Basant Marketing Ltd.
  3. M/s. Artlink Wintrade Pvt. Ltd.

Acting on this information, the Assessing Officer issued a notice under Section 148 of the Act and initiated reassessment proceedings under Section 147 of the Act. The reassessment order was ultimately passed on 27.03.2023. During these proceedings, the Assessing Officer concluded that the purchases were not genuine and were carried out merely on the basis of paper entries without any actual delivery of goods. Despite arriving at this conclusion, the Assessing Officer proceeded to make the addition of Rs. 20,47,80,150/- under Section 68 of the Act, and simultaneously allowed a set-off of this amount against the current year loss declared by the assessee.

PCIT's Intervention Under Section 263

The Principal Commissioner of Income Tax, Thane-1 took note of the reassessment order and found it to be erroneous and prejudicial to the interests of Revenue. The PCIT observed that:

  • The assessee had claimed the disputed amounts as purchases, which get debited to the Profit and Loss Account as expenditure.
  • Section 68 governs unexplained credits found in the books of account — a conceptually distinct category from expenditure-related transactions.
  • The appropriate provision for disallowing bogus or unexplained expenditure is Section 69C of the Act, read with Section 115BBE.
  • By invoking Section 68 instead of Section 69C read with Section 115BBE, the Assessing Officer enabled the assessee to set off the addition against the current year's business loss, resulting in a direct loss of tax revenue.
  • Application of Section 115BBE would have subjected the income to tax at a flat rate of 60%, without allowing any deductions or set-offs.

Accordingly, the PCIT issued a notice under Section 263, and after considering the assessee's response, partially set aside the reassessment order with the following specific directions to the Assessing Officer:

"1. The AO is directed to make the addition of Rs.20,47,80,150/- on account of unverified purchases u/s.69C r.w.s.115BBE of the Income-Tax Act, 1961, and initiate penalty proceedings u/s.271AAC accordingly.
2. With regard to the issue discussed above, the AO is directed not to set-off the addition of Rs.20,47,80,150/- against the current year loss, as per the provisions of Section 69C r.w.s.115BBE."

Aggrieved by this revision, the assessee preferred an appeal before the ITAT Mumbai.

Delay Condonation

Before proceeding to the merits, the Tribunal noted that the assessee's appeal was filed with a delay of 255 days. A condonation application was filed along with an explanation for the delay. The Departmental Representative did not raise any strong objection to the condonation request. The Tribunal, finding sufficient cause for the delay, condoned the 255-day delay and admitted the appeal for adjudication on merits.