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2024 (3) TMI 959 - HC - Income TaxValidity of Revision u/s 263 - Revision of orders prejudicial to revenue - loan transactions advanced to the assessee by entry operators - disallowance u/s 14A of the Act read with Rule 8D(2)(iii) - PCIT, while exercising the revisional powers, recorded that M/s. Sarvottam Securities Ltd. and M/s. Upaj Leasing Finance Pvt. Ltd. are the shell companies of Mr. Himanshu Verma, an entry operator and the assessee was the beneficiary of the unsecured loans received through the entry operator and AO ought to have done further inquiry to ascertain the genuineness and creditworthiness of the loan transactions - HELD THAT - As in light of the findings which are unravelled from the DDIT investigation report and assessment proceedings of M/s. Upaj Leasing Finance Pvt. Ltd. that the entities M/s. Sarvottam Securities Ltd. and M/s. Upaj Leasing Finance Pvt. Ltd. are the shell companies of an entry operator, the relevance of ascertaining the genuineness and creditworthiness of the transactions cannot be undermined. Additionally, 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 bona fide. As observed in N.R. Portfolio 2013 (11) TMI 1381 - DELHI HIGH 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. Unfortunately, the assessment order nowhere reflects any element of inquiry or verification. The discussion about the loan transactions in question is altogether missing. Furthermore, the assessment record would also reflect that the AO has not taken any concrete steps to ascertain the genuineness and creditworthiness of the transactions, which merits consideration in the light of the findings that emerged from the DDIT investigation report and assessment proceedings of M/s. Upaj Leasing Finance Pvt. Ltd. It emerges that the present is a case where the AO failed not only to spell out any finding about the DDIT investigation report and assessment proceedings of M/s. Upaj Leasing Finance Pvt. Ltd. but also to scrutinize the highlighted aspects in the said report qua the genuineness and creditworthiness of aforenoted loan transactions. Therefore, this is the minimum inquiry which atleast was expected to have been made by the AO. It is apposite to point 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. Henceforth, since neither there is any facet of discussion about the aforenoted aspects in the assessment order nor the assessment record duly reflects that the AO has done inquiry in the light of the findings of the investigation report. We find that the present is a fit case to invoke the revisional powers under Section 263 of the Act. So far as question (a) is concerned, we hold that 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. So far as question (b) is concerned, it is crystal clear that Explanation 2 to Section 263 of the Act will be applicable in the instant case as the said explanation was inserted vide Finance Act, 2015 with effect from 01 June 2015 and the case of the assessee belongs to AY 2016-17. Thus, questions of law need to be answered in favour of the Revenue and against the assessee.
Issues Involved:
1. Whether the ITAT was justified in setting aside the order passed by PCIT under Section 263 of the Income Tax Act, 1961 without adequate inquiry into the genuineness and creditworthiness of the transactions. 2. Applicability of Explanation 2 to Section 263 of the Income Tax Act, 1961 for AY 2016-17. Issue 1: Justification of ITAT in Setting Aside PCIT Order The Revenue filed an appeal against the ITAT order dated 14 February 2022, which set aside the PCIT's order under Section 263 of the Income Tax Act, 1961. The PCIT had considered the assessment order dated 26 December 2018 to be erroneous and prejudicial to the interests of the Revenue, directing the AO to re-examine the case. The ITAT, however, accepted the assessee's contention that the AO had conducted proper inquiries. The court examined the assessment order, which only discussed disallowance under Section 14A of the Act and did not address the genuineness and creditworthiness of unsecured loan transactions. The PCIT had invoked Section 263, citing lack of inquiry into loans from M/s. Sarvottam Securities Ltd. and M/s. Upaj Leasing & Finance Pvt. Ltd., identified as shell companies by the DDIT investigation report. The court referenced the Supreme Court's decision in Malabar Industrial Co. Limited v. CIT, emphasizing the need for both conditions'erroneous and prejudicial to the interests of the Revenue'to be satisfied for invoking Section 263. The court found that the AO had not conducted sufficient inquiries into the loan transactions, making the assessment order erroneous and prejudicial to the Revenue. Therefore, the court held that the ITAT was incorrect in concluding that the AO had made due inquiries and that the PCIT had wrongly assumed jurisdiction under Section 263. Issue 2: Applicability of Explanation 2 to Section 263The court noted that Explanation 2 to Section 263, introduced by the Finance Act, 2015, with effect from 01 June 2015, applies to the case of the assessee for AY 2016-17. This explanation deems an order erroneous and prejudicial to the interests of the Revenue if it is passed without making necessary inquiries or verification. Given that the assessment order lacked discussion on the loan transactions and the AO did not adequately verify the findings of the DDIT investigation report, the court found that Explanation 2 to Section 263 was applicable. Consequently, the court answered this question in favor of the Revenue. Conclusion:The court set aside the ITAT order dated 14 February 2022, allowing the appeal and disposing of any pending applications.
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