2021 (6) TMI 898 - AT - Income Tax

Revision u/s 263 - unsecured loans receipts - HELD THAT - We find that one of the key reasons for scrutiny selection was verification of unsecured loans and therefore, it was incumbent on the part of the Assessing officer to carry out necessary examination by calling for information/documentation from the assessee and verifying such information/documentation so submitted before taking any view in the matter. Unsecured loan from Sh. Bharat Harwani, Pr CIT has recorded a finding that the assessee has furnished a photocopy of ledger confirmation, which does not have any signature from Sh. Bharat Harwani and further no ITR and bank statement has been furnished of Sh. Bharat Harwani so as to establish/prove the genuineness and creditworthiness in respect of this unsecured loan - What the ld Pr CIT has stated are basic documentation which is reasonably expected to be called for and examined by the AO as part of standard operating procedure for verifying the genuineness of loan transaction and creditworthiness of the lender. There is nothing on record that the AO on receipt of so called confirmation has called for any further information/documentation from the assessee or carried out any independent examination u/s 133(6) Given that the AO basis a mere confirmation so filed by the assessee which in reality is not a confirmation in absence of signature and authentication has accepted the loan transaction is clearly not just a case of lack of enquiry but a case of no enquiry rendering the order so passed as clearly erroneous and prejudicial to the interest of Revenue. Similar fact pattern exist in respect of other two transactions with Sh. Rahul Harwani and Sh. Sunil Israni and we agree with the findings of the ld Pr CIT that the order so passed by the AO is erroneous and prejudicial to the interest of the Revenue - credits by way of journal entries in account of Sh Rahul Harwani for purchases/expenses cannot be termed in the nature of loans and advances in terms of Section 269SS and to this extent, the findings of the ld Pr CIT are set-aside. Appeal of the assessee is partly allowed.

Summary

Issues:
1. Jurisdiction of PCIT under section 263 of the Income Tax Act, 1961.
2. Verification of unsecured loans by the Assessing Officer.
3. Genuineness and creditworthiness of lenders for unsecured loans.
4. Compliance with provisions of section 269SS of the Income Tax Act, 1961.

Issue 1: The jurisdiction of PCIT under section 263 of the Income Tax Act, 1961 was contested by the assessee, arguing that for the PCIT to exercise jurisdiction, the order passed by the ITO must be both erroneous and prejudicial to the interests of the Revenue. The assessee relied on the case of H.H. Maharaja Raja Power Dewas v. CIT to support this argument.

Issue 2: The PCIT issued a notice under section 263 based on the lack of proper verification by the Assessing Officer regarding unsecured loans. The PCIT found that the AO did not conduct necessary enquiries and verifications, especially in cases where unsecured loans were a key reason for scrutiny selection.

Issue 3: The PCIT highlighted specific instances where the genuineness and creditworthiness of lenders for unsecured loans were not adequately established by the assessee. For example, in the case of loans from Bharat Harwani, Rahul Harwani, and Sunil Israni, the PCIT noted deficiencies such as missing signatures on confirmations and lack of ITR and bank statements to prove genuineness.

Issue 4: The PCIT also pointed out potential violations of section 269SS of the Income Tax Act, 1961, such as non-compliance with the requirement for transactions to be made through account payee cheques, drafts, or electronic clearing systems. The PCIT set aside the findings related to the nature of transactions in the account of Rahul Harwani as loans and advances under section 269SS.

In conclusion, the ITAT Jaipur partly allowed the appeal of the assessee, acknowledging the lack of proper verification and enquiry by the Assessing Officer regarding unsecured loans. The tribunal agreed with the PCIT that the AO's order was erroneous and prejudicial to the interest of Revenue due to the insufficient documentation and verification of loan transactions. However, the tribunal set aside certain findings related to the nature of transactions under section 269SS.