Revision u/s 263 upheld as AO accepted creditworthiness of lender merely on the basis of acknowledgement of ITRs
In a recent judgment, ITAT Pune has upheld the revision u/s 263 where Assessing Officer accepted the creditworthiness of the lender merely on the basis of the copies of the acknowledgement of ITRs for the past three years and complete copy of ITRS were not furnished
ABCAUS Case Law Citation:
4365 (2025) (01) abcaus.in ITAT
Important Case Laws relied upon by Parties:
Bagsu Devi Bafna Vs. Commissioner of Income Tax & Ors. (1966) 62 ITR 506
Commissioner of Income Tax Vs. Gabriel India Ltd. (1993) 203 ITR 108
Commissioner of Income Tax Vs. Trustees Anupam Charitable Trust (1987) 167 ITR 129
Malabar Industrial Co. Ltd. Vs. Commissioner of Income Tax (2000) 243 ITR 83 (SC)
Sesa Starlite Ltd. Vs. Commissioner of Income Tax (2021) 430 ITR 121
CIT Vs. Maithan International (2015) 375 ITR 123
Lado Ceramic (P.) Ltd. Vs. Principal Commissioner of Income Tax (2023)
Nagal Garment Industris (P.) Ltd. Vs. Commissioner of Income Tax (2020)
Rajamandir Estates (P.) Ltd. Vs. PCIT (2016) 386 ITR 162
In the instant case, the assessee had challenged the revision order passed u/s 263 of the Income Tax Act, 1961 (the Act) by the Principal Commissioner of Income Tax (“PCIT)” by setting aside the Assessment Order u/s 143(3) passed by the Assessing Officer (AO).
The appellant assessee was an individual engaged in the business of transportation of cement. She e-filed her return of income for relevant Assessment Year declaring Nil income and claiming carry forward of business loss.
The case was selected for scrutiny under the E-assessment Scheme, 2019 on the following issues-(i) non-furnishing of quantitative details; (ii) securities (derivative) transaction; (iii) unsecured loans; (iv) business expenses; and (v) securities transaction.
The AO examined the reply/details uploaded by the assessee and accepted the explanation of the assessee on the above issue(s) under E-assessment Scheme. He, therefore completed the assessment at the total income returned by the assessee at Rs. Nil vide order passed u/s 143(3) r.w.s. 143(3A) of the Act.
Subsequently, PCIT examined the case record of the assessee. To him it appeared that the impugned assessment order was erroneous and prejudicial to the interest of Revenue for the reason that during the assessment proceedings, the AO had accepted the income declared by the assessee in an erroneous manner without even taking on record the basic minimum supporting evidence required for that purpose.
He, therefore invoked his powers u/s 263 of the Act and issued show cause notice to the assessee pointing out Query raised by the AO in the questionnaire issued along with notice u/s 142(1) of the Act in relation to the “unsecured loans” taken by the assessee during the year under consideration.
The PCIT observed that the only evidence submitted by the assessee in respect of the unsecured loans taken by her during the relevant AY was the copies of acknowledgment of ITRs (assessee’s husband and lender) for three AYs. No bank statement, ledger account, balance sheet, confirmation or any other evidence to prove the genuineness of the transaction or the creditworthiness of the lender was available on record.
In the absence of such evidence, the PCIT opined that the provisions of section 68 r.w.s. 115BBE of the Act should have been applied in this regard and the decision of the AO to not draw any adverse inference about the substantive loan was not only erroneous but also prejudicial to the interest of Revenue.
Referring to the decision of Hon’ble Calcutta High Court the Revenue contended that the genuineness of the loan cannot be accepted merely on the basis of the bank statement(s) of the parties and confirmation letter of the lender that was filed for the first time during the revision proceedings before the PCIT. Moreover, the AO grossly failed to examine the creditworthiness of the lender since the assessee filed only copy of the acknowledgment of ITRs of the past three years and not the complete ITRs showing the details regarding the transaction between the parties. Therefore, PCIT was completely justified in exercising powers vested in him by invoking the provisions of section 263 of the Act and directing the AO to revise the assessment order in light of his observations and findings.
The Tribunal observed that during the course of assessment proceedings the AO communicated the issues (including unsecured loans) for selection of case under Eassessment Scheme and sought the explanation of the assessee. However, there is no inkling in the assessment order as to what explanation was given by the assessee. It was merely stated by the AO that in response to the statutory notice, the assessee furnished the details through the e-filing portal. What details were filed is not forthcoming from the assessment order. No reasons had been recorded by him to arrive at a conclusion that the income returned by the assessee at Rs. Nil is acceptable and confirms the legal position. Nothing was discernible as to how the issues raised were examined and found acceptable by him.
The Tribunal also noted that the Finance Act, 2015 inserted Explanation-2 to section 263 of the Act w.e.f. 01.06.2015 and CBDT in Circular No. 19 of 2015, dated 27.11.2015; has explained that interpretation of the expression “erroneous in so far as it is prejudicial to the interest of the Revenue” has been a contentious one. In order to provide the clarity of the issue, section 263 of the Act has been amended to provide that order passed by the Assessing Officer shall be deemed to be erroneous in so far as it is prejudicial to the interest of the Revenue if, in the opinion of the Principal Commissioner or Commissioner the order is passed without making enquiries or verification which, should have been made. Thus, by virtue of the above amendment assessment order passed without making requisite enquiry or verification shall be deemed to be erroneous in so far as it is prejudicial to the interest of the Revenue. This will enable the PCIT to exercise jurisdiction u/s 263(1) of the Act in respect of such an assessment order passed by the AO. Moreover, the documentary evidence available in the records which the AO admits to have examined the veracity thereof amply demonstrate that the AO has not made the requisite enquiry in relation to the transaction in question / dispute.
The Tribunal further observed that it is now well established that incorrect assumption of fact and incorrect application of law will satisfy the requirement of assessment order being erroneous.
It was observed that PCIT had duly considered the query raised by the AO in respect of the loan transaction between the assessee and her lender (husband) and the response filed by the assessee in respect thereof. Only after considering the same, the PCIT observed that reply of the assessee was not enough to prove the three required limps i.e. identity of the lender, genuineness of the transaction and creditworthiness of the lender. The AO accepted the reply and details filed by the assessee before him without making any further enquiry. Therefore, PCIT was justified in treating the assessment order as erroneous and prejudicial to the interest of the Revenue and directing the AO to frame assessment order afresh.
The Tribunal further observed that AO had accepted the creditworthiness of the lender merely on the basis of the copies of the acknowledgement of ITRs for the past three years without even considering the fact that the complete set of ITRs remained undisclosed by the assessee. It was thus evident that the AO passed a cryptic order by simply accepting the version of the assessee without application of mind. The AO therefore failed to make the necessary enquiry/verification that should have been made and hence the impugned assessment order, became erroneous and prejudicial to the interest of the Revenue.
The Tribunal observed that in such a scenario wherein the assessment is completed without adequate enquiry/verification of the issue involved, the Hon’ble Delhi High Court held that the assessment order is erroneous as also prejudicial to the interest of the Revenue as it caused prejudice to the Revenue administration as emphasized by the Hon’ble Madras High Court. Therefore, PCIT was justified in resorting to the provisions of section 263 of the Act. Similar view had been taken by the Bombay High Court which had also been relied upon by the PCIT.
Accordingly, the ITAT rejected the appeal.
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