Section 263 Revision Invalid Where AO Adopted a Legally Plausible View on Bogus Purchases — Gujarat High Court
Overview of the Case
The Gujarat High Court, in PCIT Vs Bhagat Marketing Pvt. Ltd., dismissed a tax appeal preferred by the Revenue under Section 260A of the Income Tax Act, 1961, thereby upholding the Income Tax Appellate Tribunal's order dated 14.10.2024 for Assessment Year 2016-17. The core issue before the Court was whether the Principal Commissioner of Income Tax (PCIT) was justified in exercising revisional jurisdiction under Section 263 when the Assessing Officer (AO) had restricted the addition on account of alleged bogus purchases to 12.5% of the total disputed amount, rather than adding the entire sum under Section 69C and taxing it under Section 115BBE.
The High Court upheld the Tribunal's reasoning and firmly held that substitution of the PCIT's opinion for that of the AO — where the latter had already adopted a legally sustainable position — does not constitute a valid ground for invoking Section 263.
Background and Factual Matrix
About the Assessee
Bhagat Marketing Pvt. Ltd. is a private limited company engaged in the trading of stainless steel. For Assessment Year 2016-17, the assessee filed its return of income on 11.09.2017 declaring a total loss of Rs. (-)10,059/-.
Reassessment Proceedings
Pursuant to reassessment initiated under Section 147 of the Income Tax Act, 1961, read with Section 144B, the AO passed an assessment order on 27.03.2022, determining the assessed income at Rs. 1,13,02,151/-. This figure represented an addition of Rs. 1,13,12,210/-, which was equivalent to 12.5% of alleged non-genuine purchases amounting to Rs. 9,04,97,678/- from M/s. Varia Aluminium Pvt. Ltd.
Assessee's Position Before the AO
The assessee consistently maintained that no purchases were in fact made from M/s. Varia Aluminium Pvt. Ltd. According to the assessee, upon inspection of the goods delivered, the material was found to be defective and below required quality standards, and accordingly, the delivery was never accepted. The AO did not accept this explanation but nonetheless restricted the addition to 12.5% of the alleged bogus purchase value, rather than adding the full amount.
Revision Proceedings Under Section 263
PCIT Initiates Revision
The Principal Commissioner of Income Tax, Ahmedabad-1, issued a notice dated 16.02.2024 under Section 263, initiating revision of the AO's assessment order. The PCIT's primary grievance was that the AO, despite concluding that the transactions were non-genuine, had made an addition of only a fraction of the disputed amount. In the PCIT's view, this amounted to underassessment and was therefore erroneous and prejudicial to the interests of the Revenue.
PCIT's Order and Directions
By order dated 19.03.2024, the PCIT set aside the assessment order dated 27.03.2022 and directed the AO to frame a fresh assessment in accordance with law, after examining the relevant issues and affording the assessee a reasonable opportunity of being heard. The PCIT observed:
"7.1 In view of the fact of the case and ruling of Hon'ble Supreme court, it is clear that the assessment order is passed by the A.O without making proper examination of the issues mentioned above. The Assessing Officer has failed to make addition in accordance with the provisions of the Act. The error in the assessment order has resulted into loss of revenue. The order passed by the Assessing Officer is, thus, erroneous and prejudicial to the interest of the Revenue. Therefore, provisions of section 263 of the Act are applicable in this case."
The PCIT also invoked the Supreme Court's ruling in N.K. Proteins vs. CDIT, [2017] 292 CTR 354 (SC), to support his position that the entire bogus purchase amount should have been added under Section 69C and taxed at the special rate prescribed under Section 115BBE.
ITAT's Decision in Favour of the Assessee
Assessee Challenges Revision Order
Aggrieved by the PCIT's revisional order, the assessee preferred an appeal before the Income Tax Appellate Tribunal. The Tribunal allowed the assessee's appeal and set aside the PCIT's order under Section 263.