2024 (9) TMI 1378 - AT - Income Tax

Revision u/s 263 - unsecured loans received by the assessee was not duly verified by the Ld.AO - PCIT mentioned that assessee has not filed relevant documents in relation to the verification of unsecured loan - HELD THAT - AO only added back 10% of the unsecured loan. The addition of @10% unsecured loan has no basis; even there is no application of mind for imposing Section 68 - assessee was unable to submit the documents which are convergent with the verification of unsecured loan creditors. AR respectfully relied on the order of Accumax Lab Devices Pvt Ltd. 2024 (7) TMI 494 - ITAT AHMEDABAD is distinguishable in fact. In impugned assessment there is no verification from the part of the ld. AO. AR took the plea that the issue is pending before the appellate authority. But the issue was challenged only the 10% of addition u/s 68 of the Act. The revisional order pertains to balance unsecure loan creditors - Here the AO was fully ignorant about the verification of unsecured loan creditors which caused the impugned assessment order as erroneous and prejudicial to the interest of the revenue. Mere submission of the documents will not serve the purpose of section 263. Assessee appeal dismissed.

Summary

Issues:
1. Jurisdiction of Principal Commissioner of Income-tax under section 263 of the Income-tax Act, 1961.
2. Verification of unsecured loans by Assessing Officer and Principal Commissioner of Income-tax.
3. Application of mind by the Assessing Officer in imposing Section 68 of the Act.
4. Compliance with provisions of section 263 by the assessee.
5. Interpretation of Explanation 2 of section 263 for deeming an order as erroneous and prejudicial to the interests of revenue.

Jurisdiction of Principal Commissioner of Income-tax under section 263:
The appeal was filed against the order of the Principal Commissioner of Income-tax (PCIT) under section 263 of the Income-tax Act, 1961. The PCIT set aside the assessment order passed by the Assessing Officer (AO) for the assessment year 2018-19, citing it as erroneous and prejudicial to the interest of revenue. The grounds of appeal by the assessee challenged the jurisdiction of the PCIT under section 263, arguing that the PCIT erred in invoking the provisions without proper verification and investigation. The PCIT's order was based on the non-verification of unsecured loans amounting to Rs. 15,49,26,364/-, where only 10% was disallowed by the AO. The PCIT directed the AO to conduct further inquiries and redo the assessment, leading to the appeal before the Appellate Tribunal.

Verification of unsecured loans by Assessing Officer and Principal Commissioner of Income-tax:
The crux of the matter revolved around the verification of unsecured loans received by the assessee. The AO had disallowed only 10% of the unsecured loan amount, leaving a substantial portion unverified. The PCIT, upon assuming revisionary jurisdiction, found the assessment order to be erroneous due to lack of verification and non-submission of relevant documents by the assessee. The assessee contended that all necessary documents were submitted during assessment proceedings, but the PCIT disagreed, emphasizing the need for proper verification. The Appellate Tribunal noted the absence of conclusive evidence supporting the verification of unsecured loans, leading to the affirmation of the PCIT's decision under section 263.

Application of mind by the Assessing Officer in imposing Section 68 of the Act:
The AO's application of mind in imposing Section 68 of the Act on the unsecured loans came under scrutiny. The AO had added back only 10% of the unsecured loan amount without comprehensive verification. The PCIT considered this action as insufficient and deemed the assessment order prejudicial to the revenue's interest. The Appellate Tribunal concurred with the PCIT's assessment, highlighting the lack of proper scrutiny by the AO in dealing with the unsecured loans, which necessitated the revision under section 263.

Compliance with provisions of section 263 by the assessee:
The assessee's compliance with the provisions of section 263 was a focal point in the appeal. The assessee argued that all relevant documents were submitted, and the issue was pending before the CIT(A). However, the PCIT found the verification unsatisfactory and directed further inquiries. The Appellate Tribunal observed that the mere submission of documents did not fulfill the requirements of section 263, especially when the verification process was incomplete. The failure to provide conclusive evidence led to the dismissal of the appeal.

Interpretation of Explanation 2 of section 263 for deeming an order as erroneous and prejudicial to the interests of revenue:
The interpretation of Explanation 2 of section 263 played a crucial role in determining the correctness of the PCIT's decision. The PCIT invoked section 263 based on the lack of proper inquiries and verification by the AO. The Appellate Tribunal referred to Explanation 2, which deems an order erroneous if inquiries or verifications were not adequately conducted. In this case, the Tribunal upheld the PCIT's jurisdiction under section 263, emphasizing the importance of thorough verification processes in maintaining the integrity of assessment orders. Consequently, the appeal was dismissed, affirming the revisionary order of the PCIT.