ITAT Mumbai Quashes PCIT Revision Against Mumbai Trader As 'Larger Issue' Was Already Under Appeal

The Mumbai bench of the Income Tax Appellate Tribunal (ITAT) has refused to uphold the Principal Commissioner of Income Tax's (PCIT) attempt to revise the assessment of a Mumbai-based trading company over alleged bogus purchases, ruling that the dispute was already pending before the Commissioner of Income Tax (Appeals) [CIT(A)].

A coram of Judicial Member Challa Nagendra Prasad and Accountant Member Prabhash Shankar observed, "The larger issue as to whether the purchases made by the assessee from Mahadev Enterprises and Tirupati Traders were genuine or not, or whether the profit element embedded therein should be estimated at 25%, was already the subject matter of appeal before the Ld. CIT(A). Therefore, since the larger issue was pending before the Ld. CIT(A), we hold that the Ld. PCIT was barred from invoking revisional jurisdiction by virtue of clause (c) of Explanation 1 to section 263 of the Act. Therefore, we hold that to the extent of treating the assessment order as erroneous and prejudicial to the interests of the Revenue in respect of purchases made from Mahadev Enterprises and Tirupati Traders, the order of the Ld. PCIT is bad in law."

The bench allowed the appeal filed by M.P. Trading Company and quashed the PCIT's revision order.

The dispute arose from the company's assessment for the 2021-22 assessment year. During scrutiny proceedings, the Assessing Officer examined purchases made from five suppliers.

After considering the material on record, the officer treated purchases from Mahadev Enterprises and Tirupati Traders as non-genuine. Instead of disallowing the entire amount, however, the Assessing Officer brought only the profit element embedded in those purchases to tax.

An addition equal to 25% of the value of those purchases was made. M.P. Trading Company challenged that addition before the CIT(A), where the appeal remained pending.

While that appeal was still awaiting a decision, the PCIT initiated revision proceedings under Section 263 of the Income Tax Act. According to the commissioner, the Assessing Officer should have treated the entire purchases as an unexplained expenditure under Section 69C instead of restricting the addition to the estimated profit element.

The PCIT also held that the outstanding liability of ₹3.53 crore shown in the name of Tirupati Traders ought to have been added as income under Section 41(1).

The tribunal disagreed. It noted that the central dispute before both authorities was the same, whether the purchases from Mahadev Enterprises and Tirupati Traders were genuine and, if not, whether only the embedded profit or the entire purchase value should be added to the company's income.

Since that larger issue was already pending before the CIT(A), the bench held that the PCIT could not invoke revisional jurisdiction over it.

The bench also found that the Assessing Officer had carried out enquiries before completing the assessment. During the scrutiny proceedings, the officer called for and examined purchase invoices, ledger accounts, transport bills and e-way bills, payment details, and balance confirmations.

After considering that material, the Assessing Officer consciously adopted one of the legally permissible views by taxing only the profit element embedded in the purchases.

The tribunal observed that the assessment order could not be treated as erroneous or prejudicial to the interests of the Revenue merely because the PCIT preferred a different approach and believed the entire purchase value should have been added under Section 69C.

It held that revisional powers under Section 263 cannot be used merely to substitute the commissioner's view for that of the Assessing Officer where the latter has conducted enquiries and adopted a legally sustainable view.

The bench also held that the PCIT had incorrectly relied on the Supreme Court's decisions in CIT v. Shri Arbuda Mills Ltd. and EIMCO K.C.P. Ltd. It observed that those rulings arose in different factual and legal contexts and did not apply to the present case.

Instead, the tribunal relied on decisions of the Madras High Court, the Allahabad High Court, and an earlier coordinate bench decision, which it found supported its conclusion that the PCIT could not invoke revisional powers where the larger issue sought to be revised was already pending before the appellate authority.

Accordingly, the tribunal quashed the revision order passed under Section 263 and allowed the company's appeal.

For Assessee: Vimal Punmiya

For Revenue: Nishant Samaiya, CIT-DR