IMPORTANT POINT
The court affirmed that for invoking Section 263 of the Income Tax Act, both conditions of an erroneous order and prejudice to revenue must be satisfied, which were not in this case.

ORDER :

Sanjay K. Agrawal, J.

1. The sole substantial question of law involved and formulated on 2-2-2023 for decision of this tax appeal preferred under Section 260A of the Income Tax, 1961 (for short, ‘the IT Act’), states as under: -

“Whether the learned Tribunal was correct in holding in the attending facts and circumstances of the case that there was no tangible material before the revisional authority for directing the Assessing Officer to make inquiries with regard to applicability of Sections 69 and 115BBE of the Income Tax Act, 1961 in connection with unexplained investment of Rs.2,25,75,951/-?”

[For the sake of convenience, the appellant will be referred hereinafter as ‘Revenue’ and the respondent will be referred hereinafter as ‘assessee’.]

2. The assessee Company is engaged in the business of trading of Gold Ornaments, Gold Bullion, Diamond Ornaments & precious metals and derives income from them. The assessee’s case was selected for compulsory scrutiny consequent upon the survey action carried out at the business premises of the assessee under Section 133A of the IT Act on 6-3-2017. During the course of survey proceedings, excess stock of Rs. 2,25,75,951/-was found which the assessee surrendered as his income for the assessment year 2017-18 and thereafter, the assessee filed income tax return for the said assessment year in response to the notice under Section 142(1) of the IT Act declaring total income of Rs. 2,36,89,620/-as profit and gains from business or profession which includes the impugned excess stock of Rs. 2,25,75,951/-.

3. The assessee filed return of income electronically on 30-11-2018 declaring total income of Rs. 2,36,89,620/-vide acknowledgment No.369948171200118. On 21-12-2017, a notice under Section 142(1) of the IT Act was issued by the Assessing Officer, Central Circle to file return of income by 20-1-2018 which the assessee filed and on 18-9-2018, return of income was selected under compulsory scrutiny after due approval of the competent authority and notice under Section 143(2) of the IT Act was issued and ultimately, the Assessing Officer issued show cause notice to the assessee under Section 263 of the IT Act that the assessee Company has shown very small net profit ratio in comparison to the net profit shown in the previous two years, which the assessee replied, however, the Assessing Officer did not find the explanation satisfactory and added only Rs. 1,42,715/-and the entire income was taxed at the rate of 30% along with surcharge and cess by order dated 21-12-2019.

4. The revisional authority i.e. the Principal Commissioner of Income Tax (PCIT) finding that the Assessing Officer (AO) has failed to verify the claim of the assessee of excess purchase and further finding that there is no application of mind on the part of the AO to verify the claim of the assessee in the return of income and also finding that the assessment order passed under Section 144 of the IT Act is erroneous as well as it is prejudicial to the interest of the Revenue, proceeded to issue notice under Section 263 of the IT Act on the ground that the assessee had disclosed additional income of Rs. 2,25,75,951/-after finding the excess stock of jewellery of same value during the survey proceedings on 6-3-2017 and the same should have been declared as unexplained investment by the assessee under Section 69 of the IT Act which should have been taxed under Section 115BBE of the IT Act and it should have been taxed at the rate of 60% + surcharge and cess. The assessee replied the notice under Section 263 of the IT Act stating that the assessee is a Company engaged in trading of Gold Ornaments, Gold Bullion, Diamond Ornaments and precious metals and that the assessee Company follows mercantile system of accounting over the years consistently and there is no deviation from the method of accounting followed by the assessee Company during the year under consideration, and prayer was made to drop the proceeding initiated under Section 2