Facts of the Case

The assessee, Klaxon Trading Pvt. Ltd., engaged in trading of metals including gold, filed its return for AY 2013–14 declaring income of ₹59,99,560. A search operation was conducted on the Dua Group, to which the assessee belonged.

  • Notices under Sections 153A and 142(1) were issued.
  • The Assessing Officer (AO) conducted enquiries, including detailed questionnaires regarding cash deposits amounting to over ₹3.24 crores in bank accounts.
  • The assessee explained that such deposits were cash sales proceeds, supported by books, audited financials, VAT returns, and cash book records.

The AO accepted the explanation and passed an assessment order under Section 153A read with Section 143(3).

Later, the Principal Commissioner of Income Tax (PCIT) invoked Section 263, alleging:

  • Lack of proper enquiry into cash deposits
  • Assessment order being erroneous and prejudicial to revenue

The Tribunal set aside the PCIT’s revision order, leading to the present appeal before the High Court.

Issues Involved

  1. Whether the PCIT validly exercised revisionary jurisdiction under Section 263 of the Income Tax Act.
  2. Whether the AO had failed to conduct enquiry regarding cash deposits.
  3. Whether “inadequate enquiry” can be equated with “no enquiry” for invoking Section 263 

Petitioner’s Arguments (Revenue)

  • The assessment order was erroneous and prejudicial as per principles laid down in Malabar Industrial Co. Ltd. v. CIT.
  • The assessee failed to provide adequate evidence regarding the nature and source of cash deposits.
  • AO did not conduct proper verification of suspicious patterns such as:
    • Repeated invoices of identical amounts
    • Large cash deposits at regular intervals
    • Absence of PAN details for purchasers
  • The AO accepted the explanation without proper investigation, justifying revision under Section 263.

Respondent’s Arguments (Assessee)

  • The AO had specifically raised queries and conducted enquiry on cash deposits.
  • All supporting documents were furnished:
    • Audited books
    • Cash book
    • VAT returns
    • Bank statements
  • Cash deposits were duly explained as business receipts from cash sales.
  • PCIT wrongly assumed “no enquiry” whereas at best it was inadequate enquiry, which is not sufficient for Section 263.
  • PCIT failed to conduct independent enquiry before setting aside the assessment.
  • AO had taken a plausible view, which cannot be revised merely due to a different opinion.

Court’s Findings / Order

  • The AO had indeed conducted enquiry, as evident from:
    • Order sheets
    • Questionnaires issued
    • Detailed replies submitted by the assessee
  • The PCIT’s conclusion of “no enquiry” was factually incorrect.
  • A distinction must be maintained between:
    • Lack of enquiry (valid ground for Section 263)
    • Inadequate enquiry (not a valid ground)
  • PCIT cannot:
    • Remand the matter without conducting its own enquiry
    • Substitute its opinion for that of the AO
  • The AO had accepted a plausible explanation supported by evidence.

Final Order

  • Appeal of the Revenue dismissed
  • Tribunal’s order upheld
  • No substantial question of law arose

Important Clarifications

  • Section 263 can be invoked only when:
    • Order is erroneous, AND
    • It is prejudicial to revenue
  • Mere inadequacy of enquiry does not justify revision
  • PCIT must conduct independent verification before revising
  • AO is not required to write detailed reasoning for every issue in the assessment order

Link to download the order -https://delhihighcourt.nic.in/app/showFileJudgment/RAS29112023ITA1252021_184828.pdf

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