ITAT Upholds PCIT's Section 263 Revision Over AO's Incomplete Inquiry into Bogus Purchases:

The Income Tax Appellate Tribunal (ITAT) Ahmedabad has dismissed an appeal filed by Garg Ship Breaking Pvt. Ltd. and upheld the Principal Commissioner of Income Tax’s (PCIT) order under Section 263 of the Income Tax Act, 1961, for Assessment Year 2021-22.

Garg Ship Breaking, engaged in wholesale and retail trading of scrap materials, filed its return declaring a total income of Rs 35.76 lakh. Its case was selected for scrutiny because some suppliers from whom substantial purchases were made were either non-filers or had reported very low turnover. A search by the CGST Department had also taken place at the assessee’s premises, during which documentary records were seized.

During the assessment, the Assessing Officer (AO) issued notices under Section 133(6) concerning red-flagged information available on the Insight portal. Only one party responded. The AO could not obtain records from the CGST Department and accepted the returned income, while stating that suitable action would be taken if adverse information was received later.

The PCIT subsequently invoked Section 263, observing that the AO had failed to conduct necessary inquiries regarding alleged fake invoices and bogus purchases. The PCIT also noted a complaint filed by the CGST Department before the Chief Judicial Magistrate, Bhavnagar.

The AO has given a statement in the assessment order, reading that "if any adverse information is received to the Department in future, suitable action would be taken as per provisions of law." This means, the AO had completed the assessment, while the material investigation/enquiry remained uncompleted. It was further noted that "in respect of reply received from one Red Flagged party, AO without deliberating on the details in the assessment order accepted the returned income."

The ITAT observed that the seized records were in the custody of another government authority and could have been obtained by the AO for verification. It further noted that the AO did not properly examine the response received from the red-flagged party or verify the genuineness of the purchases through supporting evidence such as bank payment records.

The Tribunal held that the AO had completed the assessment while important inquiries remained incomplete. Therefore, Explanation 2(a) to Section 263 applied, as the assessment order was passed without making inquiries or verification that should have been conducted. The ITAT upheld the revision order and dismissed the assessee’s appeal.