PCIT cannot invoke Section 263 revision where AO thoroughly examined demonetization cash deposits during assessment.

By | October 8, 2026
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PCIT cannot invoke Section 263 revision where AO thoroughly examined demonetization cash deposits during assessment.

Issue

Whether the Principal Commissioner of Income Tax (PCIT) was justified in invoking revisionary powers under Section 263 of the Income-tax Act, 1961, to revise an assessment order passed after detailed examination of demonetization-period cash deposits by the Assessing Officer (AO).

Facts

  1. Assessee’s Profile & Activity: The assessee is a retail trader who deposited cash amounting to Rs. 3.76 crore into bank accounts during the demonetization period for Assessment Year 2017-18.
  2. Detailed Assessment Proceedings: During regular assessment proceedings, the AO conducted a thorough examination of the cash deposit issue and addressed it specifically in the assessment order.
  3. Invocation of Revisionary Power: The PCIT subsequently exercised jurisdiction under Section 263 to set aside the assessment order, deeming it erroneous and prejudicial to the interests of the Revenue regarding the cash deposits.
  4. Tribunal’s Ruling: The Income Tax Appellate Tribunal (ITAT) quashed the PCIT’s revision order, holding that the AO had already taken a plausible view after detailed scrutiny.

Decision

  1. Tribunal’s Finding Upheld: The Tribunal was fully justified in holding that the assessment order was neither erroneous nor prejudicial to the interests of the Revenue with respect to the cash deposits.
  2. No Merely Alternative View Permitted: Since the AO carried out due inquiry and arrived at a reasoned conclusion, the PCIT could not invoke Section 263 merely to substitute another opinion on the same facts.
  3. Final Outcome: The appeal/matter was decided in favour of the assessee.

Key Takeaways

  • Scope of Section 263 Revisions: Section 263 cannot be invoked simply because the PCIT disagrees with a view taken by the AO, provided the AO conducted due inquiry during assessment.
  • Demonetization Scrutiny Safeguard: Where an AO has explicitly called for details, examined the source of cash deposits made during demonetization, and passed an order, the assessment cannot be reopened under revisionary jurisdiction without establishing a complete lack of inquiry.
  • Two Plausible Views Doctrine: If the AO adopts one of two possible lawful views after proper verification, the assessment order cannot be labeled “erroneous and prejudicial to the interests of Revenue.”
Karan G Sanghani for the Appellant.
ORDER
Bhargav D. Karia, J. – Heard learned Standing Counsel Mr. Karan G. Sanghani for the appellant.
2. This appeal, filed under Section 260A of the Income Tax Act, 1961 (for short, “the Act”), by the appellant, proposes the following substantial questions of law arising out of the order dated 17.04.2023 passed by the Income Tax Appellate Tribunal, (for short, “the Tribunal”) Surat, in Kanaiya Readymade Stores v. Pr. CIT [IT Appeal No. 61 (SRT) of 2022] for the Assessment Year 2017-2018:
(i) Whether on the facts and circumstances and in law, the Appellate Tribunal is justified in quashing the order passed under section 263 of the Act by holding that the assessment order is not erroneous and prejudicial to the interests of revenue despite the fact that the assessing officer has not made any inquiry on the aspect of alleged addition of four storied showroom which formed the basis for justifying increase in sales by 314% in the month of October, 2016 vis-vis cash deposit of Rs. 3,76,00,000 during demonetization period?
(ii) Whether the Appellate Tribunal has erred on facts and in law in holding that the assessing officer has made sufficient inquiry qua salary expenses despite the fact that the assessing officer has not made any inquiry with respect to huge salary expenses of Rs. 80,44,000 which has increased by 276% as compared to earlier year?
(iii) Whether the assessment order can be said to be erroneous and prejudicial to the interests of revenue in terms of Explanation 2(a) to Section 263 of the Act?
3. The appeal is admitted on Question Nos. (ii) and (iii).
4. So far as Question No. (i) is concerned, the Tribunal has held as under:
“We have heard both the parties and carefully gone through the submissions put forth on behalf of the assessee along with the documents furnished and the case laws relied upon, and perused the facts of the case including the findings of the Id. PCIT and other material brought on record. We note that assessee submitted its reply before Assessing Officer in response to show cause notice dated 27.11.2019, which is placed at paper book page nos.38 to 39. The notice issued under section 142(1) of the Act by the AO is placed at paper book page nos.40-42. The other show cause notice, dated 27.11.2019, issued by the Assessing Officer, to conduct enquiry, during assessment proceedings, is placed at paper book page nos.43 to 45. The assessee furnished its reply before the Assessing Officer dated 27.09.2019, in respect of the issues raised by ld PCIT, vide paper book page nos.46 to 51. The other notice issued under section 142(1) of the Act, by the Assessing Officer dated 18.08.2019 is placed at paper book page nos.52 to 58. The assessee submitted its reply in respect of cash transactions and justification of cash deposited in the bank account. The assessee submitted detail of VAT returns filed during the F.Y.2016-17 which is placed at paper book page nos.70 to 71. The Monthly VAT returns for the Month of July and October, filed by the assessee, is placed at paper book page nos.72 to 79. The annual VAT return filed by assessee for F.Y.2016-17, is placed at paper book page nos.80 to 83. The assessee also submitted the acknowledgement of Return of Income and Computation of total income vide paper book page nos.84 to 87. The tax audit report along with audited financial statements were submitted before assessing officer, which is placed at paper book page nos.88 to 107. The ledger account of advertisement expenses for the period 01.04.2016 to 31.03.2017 was furnished by the assessee, before the assessing officer, which is placed at paper book page no.108.”
5. In view of the aforesaid findings of fact recorded by the Tribunal, more particularly when the Tribunal has held that the Assessing Officer had considered the issue of cash deposits of Rs.3.76 crore in detail in the assessment order, the Principal Commissioner of Income Tax (PCIT) could not have formed another opinion so as to invoke the jurisdiction under Section 263 of the Act.
6. The Tribunal was justified in holding that the assessment order, insofar as the issue of cash deposits was concerned, could not be said to be erroneous and prejudicial to the interests of the Revenue. Accordingly, in view of the aforesaid findings of fact recorded by the Tribunal, we are of the opinion that Question No. (i) does not require consideration.
7. So far as Questions Nos. (ii) and (iii) are concerned, the same are required to be considered for admission, as the Assessing Officer admittedly appears not to have considered the issue of salary expenditure, which had increased by 276% as compared to the earlier year.
8. The appeal is, therefore, admitted on the following two substantial questions of law:-
(ii) Whether the Appellate Tribunal has erred on facts and in law in holding that the assessing officer has made sufficient inquiry qua salary expenses despite the fact that the assessing officer has not made any inquiry with respect to huge salary expenses of Rs. 80,44,000 which has increased by 276% as compared to earlier year?
(iii) Whether the assessment order can be said to be erroneous and prejudicial to the interests of revenue in terms of Explanation 2(a) to Section 263 of the Act?