2025 (5) TMI 807 - AT - Income Tax

Revision u/s 263 - TDS not deducted on the rent paid by the assessee in terms of section 194I - HELD THAT - As noted that during assessment proceedings the assessee had only furnished details of rent expenses comprising of rent for equipment and rent for office. As for TDS the only submission made was that applicable TDS was deducted. There is no clarity in the submissions of the assessee to the AO as well as the Ld.PCIT as to how applicable TDS was deducted by the assessee. Except for a general statement made by the assessee in this regard that too to the AO no evidence / substantiation/explanation with regard to the same was filed furnished by the assessee. It is amply clear therefore that the issue of TDS on rent was not inquired into by the AO more particularly when the facts revealed that the assessee has not deducted TDS on all rent paid during the year. Nor was any explanation on merits furnished to the Ld.PCIT as to why no TDS was deducted. The finding of the CIT therefore that the assessee has not submitted anything on merits of the issue we find is correct. CIT has rightly noted that the AO has not verified the issue of TDS on rent. CIT s order therefore on the aspect of the assessment order being erroneous for not having verified the TDS on rent under section 194-I of the Act is upheld. TDS u/s 194J as noted by CIT to have been deducted on payment of Rs. 17, 34, 150/- only - Finding of the Ld.PCIT means is that prima facie the contention of the assessee is correct that TDS u/s 194J of the Act was leviable only on Rs. 17.79 lacs which the assessee undisputedly had demonstrated to be examined by the AO. Clearly there is therefore no finding of error in the order of the AO vis a vis this issue. Pr.CIT in exercise of revisionary jurisdiction has no power to restore an issue for the purpose of verification only. Restoring a matter for verification means even the Ld.PCIT is not sure of the assessment order being erroneous causing prejudice to the Revenue. It is settled law that the ld. Pr. CIT has to prima facie find error in the order of the AO u/s 263 of the Act. In the absence of the same the power exercised by the Ld.PCIT on the impugned issue is clearly not in accordance with law. The order of the Ld.PCIT finding the assessment order erroneous on the issue of TDS under section 194J is therefore found to be not sustainable in law and is therefore set aside. Valuation of closing stock under percentage control method (PCM) - Pr. CIT in his finding we have noted has not dealt with any of the contention of the assessee as noted above. The ld. Pr. CIT simply went to record a finding of error in the order of the AO vis- - vis the valuation of the closing stock noting that the AO has not verified the issue within the purview of ICDS. What is the within the purview in the ICDS, has not been pointed out/ clarified in his order. Therefore when the assessee explained with facts to the ld.Pr.CIT that there was in fact no error in the valuation of the closing stock the ld. Pr. CIT could not have arrived at a finding of the error in the order of the AO without pointing out infirmities in the explanation of the assessee. We are therefore unable to concur with the ld. Pr. CIT that the assessment order was erroneous causing prejudice to the Revenue on the issue of valuation of closing stock. The finding of error by the ld. Pr. CIT on the aspect of undervaluation of closing stock is accordingly set aside. Unsecured loan taken by the assessee from Anmol Sons whose genuineness identity and credit-worthiness was allegedly not examined during the assessment proceedings - We are in agreement with the ld. Pr. CIT on this aspect. Undoubtedly the issue was not examined during the assessment proceedings despite the records revealing that no interest income was returned to tax by the said party who had given loan to the assessee. It is not the case of assessee that the issue was examined during assessment proceedings. In the light of the same we are in agreement with the ld. Pr. CIT that non-examination of this issue by the AO had rendered the assessment order erroneous causing prejudice to the Revenue. The contentions made by assessee are in relation to the merits of the issue alone having made an attempt to establish the genuineness of the transaction/loan to the Ld.PCIT by filing copy of ledger account of the said party showing interest paid to it that too after deducting TDS. But the fact remains that the genuineness of the loan taken by the assessee was not examined by the AO despite the records revealing that no interest income was returned to tax by the said party who had given loan to the assessee. Further even the documents submitted by the assessee to the Ld.PCIT do not establish the genuineness of the loan being only copy of ledger account of the said party in its Books of accounts. The said document needed to be verified and further inquiry needed to be conducted to establish the genuineness of the loan taken by the assessee. AO having not done so during the assessment proceedings despite the fact on record prompting an inquiry on the issue in the light of the fact that the assessee had taken a huge amount of loan from the said party without any interest the ld.Pr.CIT we hold has rightly found the assessment to be erroneous causing prejudice to the Revenue. The finding error by the ld. Pr. CIT on the issue of non- examination by the AO of genuineness of loan taken by the assessee is accordingly confirmed. Unsecured loan which was found to be not examined by the during the assessment proceedings - The fact of the matter is that loan amount of Rs. 37, 76, 000/- was noted to be received from four persons by showing the same PAN and the issue was admittedly not examined by the AO during the assessment proceedings. The PAN quoted in the tax audit report is also admittedly incorrect. Though the assessee has explained to the ld. Pr. CIT the transaction to be on account of advances received from sale of property and furnished evidences to prove the genuineness of the transaction by filing return of income of all the four persons and their ledger accounts but the fact remains that all these contentions of the assessee need verification which was not done at the first stage itself by the AO despite the facts on record prompting an inquiry to be conducted by the AO on the issue. Thus the finding of the ld. Pr. CIT being error on account of non-examination of all the issues of loans received by the assessee is confirmed.

Summary

The core legal questions considered by the Appellate Tribunal (AT) in this appeal arising under section 263 of the Income Tax Act, 1961, relate to whether the order passed by the Assessing Officer (AO) for the assessment year 2018-19 was erroneous and prejudicial to the interest of the Revenue. The issues identified and examined by the learned Principal Commissioner of Income Tax (PCIT) in exercise of revisionary jurisdiction, and further adjudicated by the Tribunal, are as follows:

1. Whether the AO failed to verify and make appropriate additions for non-deduction of Tax Deducted at Source (TDS) on rent payments under section 194-I of the Act.

2. Whether the AO erred in not verifying the correctness of TDS deductions on professional and technical services payments under section 194-J of the Act.

3. Whether the AO erred in the valuation of closing stock (Work-in-Progress) under the Percentage Completion Method (PCM), resulting in undervaluation.

4. Whether the AO failed to verify the genuineness, identity, and creditworthiness of an unsecured loan of Rs. 1,67,55,443/- received by the assessee, and consequently, whether the assessment order is erroneous and prejudicial to the Revenue.

5. Whether the AO failed to examine unsecured loans amounting to Rs. 37,76,000/- from certain parties whose PANs were shown incorrectly, and whether the assessment order is erroneous on this account.

Each issue is analyzed in detail below, incorporating the relevant legal framework, the Tribunal's interpretation, evidentiary findings, application of law to facts, treatment of competing arguments, and conclusions.

Issue 1: TDS on Rent Payments under Section 194-I

The learned PCIT found that the assessee had paid total rent of Rs. 10,65,941/- but deducted TDS only on Rs. 6,00,000/-, thereby failing to deduct TDS on Rs. 4,65,941/-. The assessee contended that the AO had examined this issue during assessment proceedings, as evidenced by notices issued under section 142(1) and replies filed, including detailed breakup of rent expenses totaling Rs. 31,90,941/-, comprising equipment rent, rent expense, and office rent.

The AO's notice sought party-wise details of rent expenses, and the assessee submitted supporting documents including audited financial statements and ledger accounts. However, the AO's order reflected only partial verification, and the PCIT noted that TDS was deducted only on part of the rent payments.

Under Explanation 2(a) to section 263 of the Act, if the AO has not made inquiries or verification that ought to have been made, the order may be deemed erroneous. The PCIT held that the AO's order was erroneous and prejudicial to the Revenue for not verifying TDS deduction on the entire rent amount, and accordingly set aside the assessment order directing the AO to verify all rental payments and draw appropriate inferences including disallowance under section 40(a)(ia).

The Tribunal upheld the PCIT's finding, noting that the assessee did not furnish substantive explanation or evidence on the merits to justify non-deduction of TDS on the entire rent amount. The Tribunal found that the AO had not conducted adequate verification, especially since the assessee admitted TDS was deducted only on Rs. 6,00,000/-. The Tribunal concluded that the assessment order was erroneous and prejudicial to the Revenue for this issue, confirming the PCIT's order.

Issue 2: TDS on Professional and Technical Services under Section 194-J

The PCIT observed that the assessee had made payments towards professional and technical services amounting to Rs. 22,02,000/- but deducted TDS only on Rs. 17,34,150/-, implying non-deduction on Rs. 4,92,000/-. The assessee disputed the figure of Rs. 22,02,000/-, asserting that the actual expenses debited were Rs. 17,79,500/-, supported by audited financial statements and documents submitted during assessment proceedings. The AO had made an addition of Rs. 9,750/- for TDS not deducted on Rs. 32,500/- paid to a particular party.

The PCIT, while accepting the assessee's contention that the debited amount was Rs. 17,79,500/-, directed the AO to verify whether the amount liable for TDS under section 194-J was Rs. 22,02,000/- or Rs. 17,79,500/-, and to take appropriate action.

The Tribunal disagreed with the PCIT's exercise of revisionary jurisdiction on this issue. It reasoned that the PCIT's direction to restore the issue for verification implied uncertainty about the existence of an error causing prejudice to the Revenue, which is a prerequisite for invoking section 263. Since the AO had already examined the issue and made appropriate additions, and the assessee's figures were prima facie correct, the Tribunal held there was no error in the AO's order. Consequently, the Tribunal set aside the PCIT's order on this issue.

Issue 3: Valuation of Closing Stock (Work-in-Progress) under Percentage Completion Method (PCM)

The PCIT found that the assessee's closing stock was undervalued by Rs. 5,62,21,161/-. The assessee contended that it had followed the formula prescribed in the Guidance Note for Accounting of Real Estate Transactions for valuation of work-in-progress (WIP), and had furnished detailed computations and supporting documents during assessment proceedings. The assessee also pointed out that the PCIT had erred by considering costs incurred till 31.07.2018 instead of the correct reporting date of 31.03.2018, leading to an inflated valuation.

The PCIT held that the AO had not verified the issue of closing stock valuation fully within the purview of the Income Computation and Disclosure Standards (ICDS) and therefore set aside the assessment order for verification and appropriate additions.

The Tribunal did not concur with the PCIT's finding. It noted that the assessee had explained the valuation method adopted and highlighted the PCIT's error in using incorrect cost data. The Tribunal observed that the PCIT did not address the assessee's contentions on merit and failed to specify how the AO's order was erroneous under ICDS. Given the absence of any demonstrated error in the AO's order, the Tribunal set aside the PCIT's order on this issue.

Issue 4: Unsecured Loan of Rs. 1,67,55,443/- from Anmol & Sons

The PCIT noted that the assessee had received an unsecured loan of Rs. 1,67,55,443/- from Anmol & Sons and paid interest of Rs. 8,10,423/- with TDS deducted under section 194A. However, the lender had not reported the interest income in its income tax return, raising doubts about the genuineness, identity, and creditworthiness of the loan.

The assessee argued that non-reporting by the lender was a compliance failure on the lender's part and should not affect the assessee. The assessee submitted ledger accounts of Anmol & Sons showing interest paid and TDS deducted.

The PCIT found that the AO had not examined the genuineness of the loan, the identity and creditworthiness of the lender, or the transaction's authenticity during assessment proceedings. The PCIT held the assessment order to be erroneous and prejudicial to the Revenue and set it aside for the AO to verify these aspects and draw appropriate inferences, including possible addition under section 68 and consequent disallowance of interest under section 36(1)(iii).

The Tribunal agreed with the PCIT's findings, emphasizing that the AO had not conducted any inquiry despite the apparent non-reporting of interest income by the lender, which is a significant fact warranting investigation. The Tribunal noted that the documents submitted by the assessee did not conclusively establish genuineness and required verification. Thus, the Tribunal confirmed the PCIT's order on this issue.

Issue 5: Unsecured Loans of Rs. 37,76,000/- from Four Persons with Incorrect PAN

The PCIT observed that unsecured loans amounting to Rs. 37,76,000/- were received from four persons whose PAN was reported as "PPPPP1234P" in the tax audit report, indicating non-availability or incorrect PAN details. The assessee explained that these amounts represented advances from buyers towards property sales, which were subsequently offered to tax in the year of sale. The assessee also stated that the incorrect PAN reporting was due to non-availability at the time of tax audit and submitted copies of income tax return acknowledgments and ledger accounts of the parties.

The PCIT directed the AO to verify the details of these advances and the income offered in subsequent years, and to refrain from adverse inference if the assessee proved the receipts as advances offered to tax later. The issue was set aside for verification.

The Tribunal noted that the AO had not examined this issue during assessment proceedings despite the facts on record necessitating inquiry. The Tribunal acknowledged the assessee's submissions but emphasized that these required verification. Accordingly, the Tribunal confirmed the PCIT's finding of error in the AO's order for non-examination of this issue.

Significant Holdings and Core Principles

On the issue of TDS on rent under section 194-I, the Tribunal upheld the principle that partial verification by the AO, especially when facts indicate non-deduction of TDS on the entire rent, renders the assessment order erroneous and prejudicial to the Revenue. The Tribunal emphasized the AO's duty to verify all relevant facts and make appropriate additions under section 40(a)(ia) for non-deduction of TDS.

Regarding TDS on professional and technical services under section 194-J, the Tribunal clarified that the PCIT's power under section 263 requires a prima facie finding of error causing prejudice to the Revenue. Merely restoring an issue for verification without such finding is not permissible. The Tribunal held that the AO's order could not be deemed erroneous where the issue was examined and appropriate additions made.

On valuation of closing stock under PCM, the Tribunal underscored the necessity for the PCIT to specify the nature of error and address the assessee's contentions on merit before holding the AO's order erroneous. Mere disagreement without substantiation is insufficient to invoke revisionary jurisdiction.

For unsecured loans, the Tribunal confirmed that the AO must verify the genuineness, identity, and creditworthiness of lenders, especially where discrepancies such as non-reporting of interest income by lenders arise. Failure to do so renders the assessment order erroneous and prejudicial to the Revenue, justifying revision under section 263.

The Tribunal also affirmed that advances received from buyers, even if PAN details are incomplete or incorrect, require verification by the AO to ensure genuineness and proper tax treatment, and non-examination constitutes error.

Final Determinations on Each Issue

i) The Tribunal confirmed the PCIT's order that the AO's assessment was erroneous and prejudicial to the Revenue for failure to verify TDS deduction on the entire rent paid under section 194-I.

ii) The Tribunal set aside the PCIT's order on TDS under section 194-J, holding that the AO's order was not erroneous as the issue was examined and appropriate additions made.

iii) The Tribunal set aside the PCIT's order on valuation of closing stock, finding no error in the AO's order and noting the PCIT's failure to substantiate the alleged error.

iv) The Tribunal confirmed the PCIT's finding that the AO's failure to verify the genuineness of the unsecured loan of Rs. 1,67,55,443/- rendered the assessment order erroneous and prejudicial to the Revenue.

v) The Tribunal confirmed the PCIT's finding that the AO's non-examination of unsecured loans of Rs. 37,76,000/- from parties with incorrect PAN was an error causing prejudice to the Revenue.