2021 (7) TMI 1100 - AT - Income Tax

Revision u/s 263 - addition on account of interest paid to loan creditors - Addition u/s 68 treating the same as unexplained and non-genuine - CIT observed that when loan deposits were found to be non-genuine, remained unexplained and added the same to the total income of the assessee, then there would not be any question allowing the alleged interest expenditure thereon - HELD THAT - Addition made by the AO under section 68 on the loan taken by the assessee treating the same as unexplained and non-genuine has not been disputed before us by the assessee, nor the issue of addition was contested by the assessee further on merit - we are of the view that the reason for invocation of revisionary power by the ld.CIT is obvious and specific because there is an inherent lack of examination/verification of the record at the end of the AO while finalizing the assessment. On one hand,AO is treating the alleged loan deposits as non-genuine and adding the same to the income under section 68 of the Act, but on other hand, without proper verification, allowed the interest payment allegedly made to the loan depositors, that would render the assessment order erroneous and prejudicial to the interest of the Revenue. Interest paid to creditors against unsecured loans is allowable only when loan deposited by the creditor with the assessee are established. Therefore, the conclusion of the AO while finalizing the assessment is contradictory in itself, which render the assessment order erroneous and prejudicial to the interests of the Revenue. CIT is therefore justified in exercise of his power under section 263, which we uphold and the ground of appeal of the assessee is dismissed.

Summary

Issues:
Appeal against order invoking section 263 for fresh assessment and addition of interest paid to loan creditors.

Analysis:
1. The appeal before the Tribunal revolves around the ld.Pr.CIT setting aside the assessment order under section 263 and proposing an addition of ?2,68,76,432 on account of interest paid to loan creditors.

2. The AO treated unsecured loans of ?49,58,00,000 as unexplained income under section 68 of the Act due to lack of proof regarding the identity, genuineness, and creditworthiness of the loan creditors. The ld.Pr.CIT found the loan non-genuine and added it to the total income, questioning the allowance of interest expenses on the loan. The Tribunal noted the contradictory assessment by the AO, where the loan was treated as non-genuine but interest payments were allowed, leading to an erroneous order prejudicial to revenue interests.

3. The Tribunal analyzed section 263 of the Income Tax Act, emphasizing the four compartments of the Commissioner's revisionary powers. It highlighted the need for the Commissioner to examine records, form an opinion on the AO's order, issue a show cause notice, and finally, annul or modify the assessment. The Tribunal found the ld.CIT's invocation of power justified due to the lack of proper examination by the AO, leading to a prejudicial order.

4. The Tribunal upheld the ld.CIT's decision under section 263, emphasizing that interest on non-genuine loans cannot be allowed as an expense. It concluded that the AO's failure to verify the loan transactions and interest payments rendered the assessment order erroneous and against revenue interests. Therefore, the Tribunal dismissed the appeal, affirming the ld.CIT's direction for a fresh assessment.

5. In conclusion, the Tribunal upheld the ld.CIT's exercise of power under section 263, highlighting the importance of proper verification in assessment orders to avoid prejudicial outcomes. The Tribunal dismissed the appeal, affirming the need for a fresh assessment in line with revenue interests.