The Ahmedabad Bench of the Income Tax Appellate Tribunal (ITAT) has quashed a revisionary order passed under Section 263 of the Income Tax Act, holding that a mere inconsistency in the description of a transaction between two parties cannot render an assessment order erroneous and prejudicial to the interests of the Revenue when the source and movement of funds are fully explained. 

The bench of Sanjay Garg (Judicial Member) and Narendra Prasad Sinha (Accountant Member) has observed that there was no allegation whatsoever that the funds advanced by the assessee originated from undisclosed sources. Whether the payment was characterized as a purchase advance or as a short-term loan was immaterial in the circumstances of the case because the source of the money stood explained and the amount had been returned.

The controversy arose after the Assessing Officer (AO) received information suggesting that Siddhartha Bronze Products Pvt. Ltd. was allegedly a beneficiary of accommodation entries amounting to ₹59.70 lakh from M/s Kasturi Commodities Pvt. Ltd., an entity purportedly involved in providing accommodation entries to various beneficiaries. Based on this information, the assessment was reopened under Section 147 of the Income Tax Act. 

During the reassessment proceedings, it emerged that the assessee had transferred ₹59.70 lakh to M/s Kasturi Commodities Pvt. Ltd. The assessee explained that the amount represented advances paid for proposed purchases. However, since the goods ordered were allegedly not up to the required standards, no purchases ultimately took place and the advance was refunded. 

On the other hand, in response to a notice issued under Section 133(6), M/s Kasturi Commodities Pvt. Ltd. stated that it had received the amount as a short-term loan from the assessee and had subsequently repaid it. 

After examining the bank statements and ledger accounts, the AO accepted that the amount had been transferred and later returned. Although the AO did not treat the principal amount as unexplained income, he made an addition equivalent to 2% of the transaction value on the premise that the assessee may have earned commission income in connection with the alleged accommodation entry transaction. 

Subsequently, the PCIT invoked revisionary powers under Section 263, observing that the assessee described the payment as an advance for purchases while the recipient characterized it as a short-term loan. According to the PCIT, this inconsistency rendered the transaction unexplained and the AO should have treated the entire amount of ₹59.70 lakh as unexplained money under Section 69A rather than merely making a commission addition. The assessment order was therefore held to be erroneous and prejudicial to the interests of the Revenue and was set aside for fresh adjudication. 

The ITAT disagreed with the revisionary authority and found that the AO had already conducted a detailed examination of the transaction. The Tribunal noted that the AO had verified the assessee’s bank accounts and established that the payments were made through banking channels and were returned within a very short period. 

The Bench emphasized that the transaction involved money flowing from the assessee to the other party and then back to the assessee within merely two to three days. In such circumstances, it could not be regarded as an accommodation entry received by the assessee. The Tribunal also questioned the basis on which even the AO had inferred commission income, observing that the payment had been made and refunded through normal banking channels. 

According to the Tribunal, neither of the classic indicators relied upon in accommodation entry cases existed in the present matter. There was no unexplained source of funds, no receipt of accommodation entry by the assessee, and no bogus purchase claim because the proposed purchase itself never materialized. Instead, the money was simply refunded. 

The Tribunal held that the PCIT’s assumption that the entire amount should have been added under Section 69A was legally unsustainable. Since the assessment order could not be regarded as prejudicial to the interests of the Revenue, the jurisdictional requirements for invoking Section 263 were not satisfied. 

Allowing the appeal, the ITAT quashed the revision order passed by the PCIT under Section 263 and held that the exercise of revisionary jurisdiction was wholly unjustified in the facts of the case. Consequently, the assessment order remained undisturbed and the assessee succeeded in its appeal.

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