ITAT Rules Section 263 Unsustainable in Refunded Advance Transaction Case

The Ahmedabad Bench of the Income Tax Appellate Tribunal (ITAT) quashed a revision order passed under Section 263 of the Income Tax Act, holding that the Principal Commissioner of Income Tax (PCIT) was not justified in treating the assessment order as erroneous and prejudicial to the interests of the Revenue where the transactions in question had already been examined by the Assessing Officer. The Bench comprising Judicial Member Sanjay Garg and Accountant Member Narendra Prasad Sinha allowed the appeal filed by Siddhartha Bronze Products Pvt. Ltd. for AY 2017-18.

The case originated from information received by the department alleging that the assessee had availed accommodation entries amounting to Rs.59.70 lakh from M/s. Kasturi Commodities Pvt. Ltd. Based on this information, the assessment was reopened under Section 147. During the reassessment proceedings, the assessee explained that the amount had been paid as an advance for purchase of goods. However, since the goods were not found satisfactory, no purchases were ultimately made and the entire amount was returned by the supplier.

The Assessing Officer examined the ledger accounts and bank records and noted that the money had moved from the assessee to M/s. Kasturi Commodities Pvt. Ltd. and was subsequently refunded within a short period. While no addition was made in respect of the principal amount, the Assessing Officer estimated and added commission income at 2% of the transaction value.

Subsequently, the PCIT invoked revisionary jurisdiction under Section 263, observing that there was inconsistency between the explanations of the assessee and M/s. Kasturi Commodities Pvt. Ltd. While the assessee described the transaction as an advance for purchase, the other party stated that it had received a short-term loan. According to the PCIT, the transaction remained unexplained and the Assessing Officer ought to have examined the entire amount under Section 69A instead of restricting the addition to alleged commission income.

Before the Tribunal, the assessee contended that the source of the funds was never in dispute and that the Assessing Officer had already conducted detailed verification of the transactions during reassessment proceedings.

“Whether the assessee had given the amount as a short term loan or as advances for purchases, it makes no difference when there is no allegation that the said amount was advanced by the assessee from any undisclosed sources.”

The Tribunal noted that the assessee had paid the amount through banking channels and that the entire sum had been returned within two to three days. It observed that there was no allegation that the funds originated from undisclosed sources and, therefore, the nature of the transaction—whether an advance or a short-term loan—did not materially affect the tax position.

The Bench further found that the facts on record did not support the allegation that the assessee had received any accommodation entry. It also questioned the basis of the Assessing Officer’s addition of commission income when the transaction merely involved payment and subsequent refund of funds. “It is apparently not a case of any accommodation entry received by the assessee.”

Holding that the assessment order could not be regarded as prejudicial to the interests of the Revenue, the Tribunal concluded that the assumption of jurisdiction under Section 263 was wholly unjustified. Thus, it quashed the revision order passed by the PCIT and allowed the assessee’s appeal.

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