Notices u/s 133(6) not enough for verification of loan transactions from shell companies. AO ought to have done further inquiry to ascertain genuineness & creditworthiness – High Court
Notice under Section 133(6) of the Act is not enough to verify identity, genuineness and creditworthiness of transactions from shell companies.
In a recent judgment, the Hon’ble High Court has held that for verification of loan transactions from shell companies, mere issue of notices u/s 133(6) not enough, AO ought to have done further inquiry to ascertain genuineness & creditworthiness
ABCAUS Case Law Citation:
ABCAUS 3912 (2024) (03) HC
Important Case Laws relied upon by parties:
Malabar Industrial Co. Limited vs. CIT [2000 SCC OnLine SC 371]
CIT vs. Paville Projects (P) Ltd. [2023 SCC OnLine SC 371]
CIT vs. N. R. Portfolio P. Ltd. [2013 SCC OnLine Del 6466
In the instant case, appeal was filed by the Revenue against the order passed by the Income Tax Appellate Tribunal [ITAT], setting aside the order of the Principal Commissioner of Income Tax (PCIT) passed under Section 263 of the Income Tax Act, 1961 (the Act).
The assessee is engaged in the business of real estate development. The case of the assessee was picked up for scrutiny and notice under Section 143(2) of the Act was issued. Later an assessment order under Section 143(3) of the Act was passed whereby, the Assessing Officer (AO) determined the income of the assessee while making an addition under Section 14A of the Act.
Aggrieved by the assessment order, the assessee preferred an appeal before the Commissioner of Income Tax (Appeals) [CIT(A)] who partly allowed the appeal of the assessee and restricted the addition made by the AO.
Thereafter, by virtue of the revisionary powers vested under Section 263 of the Act, the PCIT perused the assessment order and issued a show cause notice to the assessee. inquiring about the loans advanced to the assessee by two companies. It was further clarified that the genuineness and the creditworthiness of the loan funds issued to the assessee was not properly examined by the AO and an opportunity of hearing was also afforded to the assessee to explain the aforementioned loan transactions. The PCIT observed that it was a case of lack of inquiry, which ought to have been made on the part of the AO as the issue of loans advanced to the assessee was not properly examined by the AO despite the DDIT investigation report. Consequently, while exercising powers under Section 263 of the Act, the PCIT set aside the assessment order considering it to be erroneous and prejudicial to the interests of the Revenue and directed the AO to consider the case afresh.
Assailing the order of the PCIT, the assessee preferred an appeal before the ITAT which accepted the contentions of the assessee and set aside the PCIT order and consequently, restored the original assessment order.
Aggrieved by the said order, the Revenue had preferred appeal before the Hon’ble High Court.
The Hon’ble High Court admitted the appeal on inter alia the substantial questions of law as to whether on the facts and circumstances of case and in law, the ITAT was justified in setting aside the order passed by PCIT under Section 263 of the Act without appreciating that issuance of notice under Section 133(6) of the Act is not enough to verify identity, genuineness and creditworthiness of said transaction and the lender?
The Hon’ble High Court observed that a bare perusal of Explanation 2 of Section 263 of the Act clearly stipulates the quartet of exigencies when an order could be said to be erroneous and prejudicial to the interests of the Revenue i.e., when the order is passed, without making inquiries/verification which should have been made; or allowing any relief without inquiring into the claim; or not following any order/direction/instruction issued by the Central Board of Direct Taxes (CBDT) under Section 119 of the Act; or as per any decision which is prejudicial to the assessee, rendered by the jurisdictional High Court or Supreme Court in the case of the assessee or any other person.
In order to elucidate the scope of the revisional powers of PCIT u/s 263, the Hon’ble High Court noted down the observations made by the Hon’ble Supreme Court. Further the Hon’ble High Court noted that the Hon’ble Supreme Court in another case followed the dictum laid down in the Malabar Industrial Co. Limited and emphasized upon the germane value of the twin conditions imposed under Section 263 of the Act, before invoking the revisional powers.
The Hon’ble High Court further observed that ITAT while setting aside the PCIT order, held that the AO had duly inquired into the matter. The ITAT stated that to further examine the loan transaction, the Assessing Officer issued notice u/s 133(6) of the Act to the two companies who duly responded to the notices u/s 133(6) of the Act and filed complete details sought by the Assessing Officer which included confirmation of loan, copy of ledger account, copy of their Income tax return alongwith financial statement etc.
The Tribunal opined that proper enquiries were made by the Assessing Officer during the course of assessment proceedings and after considering all the facts and evidences, the Assessing Officer took a view which is a plausible view. Therefore, it is not open to the PCIT to direct a re-enquiry as he is of a different view. It was held by the ITAT that the PCIT had erroneously invoked the jurisdiction under Section 263 of the Act as it was not a case of lack of inquiry.
The Hon’ble High Court observed that the PCIT had invoked the revisional powers under Section 263 of the Act and particularly clause (a) of Explanation 2, which provides that an assessment order is erroneous and prejudicial to the interests of the Revenue, if the same is passed without making inquiries or verification, which should have been made. The PCIT, while exercising the revisional powers, recorded that the loan creditors were the shell companies of an entry operator and the assessee was the beneficiary of the unsecured loans received through the entry operator. Notably, the PCIT also recorded that the aspect of the aforementioned loan transactions was sought to be verified by issuing notices under Section 133(6) of the Act, however, when the record reflected that the loan transactions were obtained from the shell companies, then the AO ought to have done further inquiry to ascertain the genuineness and creditworthiness of the loan transactions.
The Hon’ble High Court noted that in another case, the aspect, whether the creditworthiness of the loan transactions was a relevant inquiry or not had also been considered by it wherein, it was observed that the mere production of incorporation details, Permanent Account Number (PAN) or the fact that the company had filed ITR details does not verify the genuineness and creditworthiness of the transactions.
The Hon’ble High Court opined that the genuineness and creditworthiness of the transactions may not be satisfactorily determined solely on the basis of the ledger accounts or the ITR of the entities, especially when the identities of such entities are not bonafide. As observed by the Court, the task of unveiling the mischief of the human minds working behind
the corporate veil in such cases requires a deeper scrutiny, which goes beyond the periphery of documents ordinarily submitted for the purpose of assessment. An inquiry for ascertaining the creditworthiness and genuineness of financial transactions necessarily requires unknotting of the transactions, by going beyond what is conspicuously available.
The Hon’ble High Court observed that bare perusal of the assessment order reflected that it nowhere discussed, examined or evaluated the loan transactions advanced to the assessee by the loan creditors. The discussion about the loan transactions in question was altogether missing. Furthermore, the assessment record would also reflect that the AO had not taken any concrete steps to ascertain the genuineness and creditworthiness of the transactions.
The Hon’ble High Court pointed out that clause (a) of Explanation 2 of Section 263 of the Act introduces a deeming fiction to the effect that the order passed by the AO shall be considered erroneous and prejudicial to the interests of the Revenue, if the order is passed without making inquiries or verification, which should have been made.
The Hon’ble High Court held that the instant case was a fit case to invoke the revisional powers under Section 263 of the Act and the ITAT was incorrect in holding that the AO had duly made the inquiry in the instant case and considered the material produced before it. Furthermore, the ITAT also erred in holding that the PCIT has wrongly assumed the jurisdiction under Section 263 of the Act as the assessment order is not only prejudicial to the interests of the Revenue but also erroneous in nature
As a result, the question of law was answered in favour of the Revenue and against the assessee. Accordingly, the ITAT order was set aside.
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