2025 (5) TMI 20 - AT - Income Tax

Revision u/s 263 - no inquiry or sufficient inquiry was not conducted by the assessing officer during the assessment proceedings - whether the assessee s case be considered in the category of No Inquiry ? PCIT has mainly raised two issues of unsecured loans given to family members and other depositors without charging interest and notional rent income under the head House Property u/s. 22 r.w.s.23 which has resulted into under assessment - HELD THAT - We find that in the course of assessment proceedings the assessing officer vide notice u/s 142(1) has called for voluminous details covering 25 points which include the justification of borrowed money and payment of interest etc. The assessee has categorically explained the details of opening balance and subsequent transactions in partners cases and the receipts/payments of all other loan and advances etc. The copy of reply dated 04.01.2021 is attached as Annexure-2 in the paper book of the assessee. Thus the issue now raised in the notice u/s 263 of the Act had been verified by the assessing officer in detail and as such the present proceedings are not within the provisions of section 263 of the Act. It may be observed from the balance sheet that the assessee is having Interest free booking deposits Similarly the ledger of unsecured loans reflect unsecured loans interest free loans from Mohanlal C. Patel. As seen from the ledger of current liabilities that at the beginning of the accounting year booking deposits was at Rs. 3, 38, 92, 434/- and at the end of the year at Rs. 2, 47, 01, 636/-. Thus average interest free fund of Rs. 2, 93, 00, 000/- was available 3.39 2.47Cr/2). As against the same partner s average negative balance comes to Rs. 4.13 6.40 1.87Cr./2 against which interest free average customer deposits are Rs. 2.93Cr. 3.39 2.47/2 as such there is negative balance in partner s account comes to Rs. 1.20 Cr. 4.3-2.93 however at the same time the assessee has average interest free unsecured loans at Rs. 2.05 Cr. 1.80 2.3/2 which covers deficit of Rs. 1.20 Cr. Thus there is no case of any under assessment on account of payment of interest on unsecured loans as alleged. Not adding presumptive letting value of rent on vacant closing stock - In the present case the completion certificates were issued on 30.01.2017 and 28.06.2017 and as such the cooling period is not over during the assessment year under consideration and hence the assessee is not required to offer any property income from this stock in trade. We note that in the case of Canara Bank Securities Ltd 2019 (10) TMI 1512 - SC ORDER dismissed the Revenue s SLP holding that 263 proceedings are invalid when assessing officer had made enquiries and taken a plausible view in law. As in the case of CIT vs. Green world Corporation 2009 (5) TMI 14 - SUPREME COURT that an order of assessment passed by ITO cannot be interfered with only because another view is possible. When the Assessing Officer adopted one of the courses permissible in law and it has resulted in loss to the revenue or where two views are possible and the AO has taken one view with which the CIT does not agree it cannot be treated as an erroneous order prejudicial to the interest of the revenue unless the view taken by the Assessing Officer is unsustainable in law . In the conclusion we are of the view that none of the reasons set out by the PCIT for invoking the jurisdiction u/s 263 of the Act are sustainable. The impugned order of the PCIT has to be quashed - Assessee appeal allowed.

Summary

The core legal questions considered by the Appellate Tribunal (AT) in this appeal under section 263 of the Income-tax Act, 1961, are as follows:

1. Whether the order passed by the Principal Commissioner of Income-tax (PCIT) under section 263 is valid and sustainable in law or liable to be quashed as erroneous and without jurisdiction.

2. Whether the assessing officer (AO) failed to apply his mind or conduct proper inquiry/verification regarding (a) the applicability of section 23(5) of the Act and consequent non-inclusion of notional rental income on unsold flats held as stock-in-trade, and (b) the non-charging of interest on negative capital balances of partners as per the partnership deed, resulting in underassessment.

3. Whether the AO's acceptance of returned income without adjustment for (a) unpaid interest from partners on unsecured loans diverted to them, and (b) presumptive rental income on unsold completed flats, was erroneous and prejudicial to the interests of the revenue.

4. Whether the PCIT's exercise of revisional jurisdiction under section 263 to set aside and direct fresh assessment was justified or amounted to impermissible change of opinion.

Issue-wise Detailed Analysis

Issue 1: Validity and correctness of the PCIT's order under section 263

Legal Framework and Precedents: Section 263 empowers the PCIT to revise an assessment order if it is "erroneous" and "prejudicial to the interests of the revenue." The twin conditions for exercise of such jurisdiction were reiterated by the Supreme Court in Malabar Industries Ltd. vs. CIT, which held that the order must be (i) erroneous due to incorrect assumption of fact, incorrect application of law, violation of natural justice, lack of application of mind, or failure to investigate; and (ii) such error must be prejudicial to revenue. Mere difference of opinion or loss of revenue is insufficient unless the AO's view is unsustainable in law. Further, the Supreme Court in Canara Bank Securities Ltd. clarified that revision under section 263 is not permissible if the AO has made detailed enquiries and taken a plausible view, even if the PCIT disagrees with it.

Court's Interpretation and Reasoning: The Tribunal examined the PCIT's order and the materials on record. It noted that the AO had issued a detailed notice under section 142(1), calling for voluminous information on various financial aspects including unsecured loans, partners' capital accounts, and stock-in-trade. The assessee had responded comprehensively with balance sheets, ledgers, loan confirmations, and explanations of transactions. The AO accepted the returned income after such inquiry.

The Tribunal found that the PCIT's order was based on a mere change of opinion on the same facts already examined by the AO. The PCIT's conclusion that the AO did not apply his mind or conduct proper inquiry was not supported by the record. The AO's acceptance of the assessee's explanation and documents was a plausible view, which cannot be branded as erroneous simply because the PCIT disagreed.

Key Evidence and Findings: The AO's notice under section 142(1) dated 10.12.2020 and the assessee's detailed reply dated 04.01.2021 were pivotal. The financial statements, partner's capital ledger, unsecured loan schedules, and completion certificates of buildings were all on record and examined by the AO. The Tribunal noted that the AO's inquiry was detailed and adequate.

Application of Law to Facts: Applying the principles from Malabar Industries and Canara Bank Securities, the Tribunal concluded that the AO's order was neither erroneous nor prejudicial to revenue. The PCIT's jurisdiction under section 263 was thus invoked without jurisdiction.

Competing Arguments: The Revenue contended that the AO failed to verify the non-charging of interest on unsecured loans diverted to partners and the non-inclusion of notional rent income, leading to underassessment. The assessee argued that the AO had conducted detailed inquiry and taken a plausible view, and that the PCIT's order was a mere change of opinion and thus unsustainable.

Conclusion: The Tribunal held that the PCIT's order under section 263 was invalid and liable to be quashed as it was based on a change of opinion and not on any material indicating error or prejudice to revenue.

Issue 2: Non-charging of interest on unsecured loans diverted to partners

Legal Framework and Precedents: The partnership deed required charging interest on negative capital balances of partners. The PCIT alleged that unsecured loans taken by the firm were diverted to partners interest-free, resulting in underassessment of Rs. 1,09,21,304/-.

Court's Interpretation and Reasoning: The Tribunal analyzed the financial data and found that the firm had sufficient interest-free funds (booking deposits and unsecured loans) to cover the negative capital balances of partners. The average interest-free funds exceeded the deficit in partners' accounts. The AO had examined these facts during assessment and accepted the returned income.

Key Evidence and Findings: The balance sheet showed interest-free booking deposits of Rs. 2.47 crore and unsecured loans of Rs. 1.80 crore. The partners' withdrawals and negative balances were quantified, revealing a net deficit of Rs. 1.20 crore, which was covered by interest-free funds. The AO's notice and the assessee's reply with ledgers and confirmations were considered.

Application of Law to Facts: Since the AO had verified the facts and found no underassessment, the PCIT's claim of underassessment due to non-charging of interest was a mere change of opinion.

Competing Arguments: The Revenue argued that interest should have been charged as per partnership deed and failure to do so resulted in underassessment. The assessee contended that the AO had verified the transactions and taken a plausible view that no interest income was due given the availability of interest-free funds.

Conclusion: The Tribunal upheld the AO's view and rejected the PCIT's revision, holding no error or prejudice to revenue on this issue.

Issue 3: Non-inclusion of notional rental income on unsold flats under section 22 read with section 23(5)

Legal Framework and Precedents: Section 23(5) of the Act provides that where property held as stock-in-trade remains vacant and unsold, the annual value for up to two years from the date of completion certificate shall be taken as nil, i.e., no notional rent income is chargeable during this "cooling period." The Supreme Court in Canara Bank Securities Ltd. held that if the AO has taken a plausible view on such issues after inquiry, revisional proceedings under section 263 are not sustainable.

Court's Interpretation and Reasoning: The Tribunal noted that the completion certificates for the buildings were issued on 30.01.2017 and 28.06.2017, and the assessment year under consideration was 2018-19, which falls within the two-year cooling period. Therefore, the assessee was not liable to offer notional rental income on unsold flats held as stock-in-trade.

Key Evidence and Findings: The building completion certificates, balance sheet showing closing stock of Rs. 25.06 crore including Rs. 17.31 crore pertaining to FY 2016-17, and the AO's notice and the assessee's reply were considered.

Application of Law to Facts: Applying section 23(5), the Tribunal found that the AO's acceptance of the assessee's claim was a plausible view. The PCIT's direction to include notional rent income was not sustainable.

Competing Arguments: The Revenue contended that notional rent should have been included, while the assessee relied on the statutory provision and Supreme Court precedent to justify exemption during the cooling period.

Conclusion: The Tribunal held that the AO's order was not erroneous or prejudicial to revenue on this issue, and the PCIT's revision was unjustified.

Issue 4: Whether the PCIT's direction to set aside the assessment and direct fresh assessment was justified

Legal Framework and Precedents: The Supreme Court has consistently held that the revisional jurisdiction under section 263 cannot be exercised merely to substitute the PCIT's opinion for that of the AO or to initiate fishing expeditions. The AO's order must be conclusively erroneous and prejudicial.

Court's Interpretation and Reasoning: The Tribunal observed that the PCIT's order was based on a mere change of opinion without any new material or failure on the part of the AO to apply his mind. The AO had conducted detailed inquiry, examined voluminous documents, and taken a plausible view on both issues.

Key Evidence and Findings: The AO's notice under section 142(1), the assessee's comprehensive replies, and the financial data on record demonstrated adequate inquiry.

Application of Law to Facts: The PCIT's direction to set aside the assessment and direct fresh assessment was held to be unjustified and beyond the scope of section 263.

Competing Arguments: The Revenue supported the PCIT's order, while the assessee argued it was an impermissible change of opinion.

Conclusion: The Tribunal quashed the PCIT's order and upheld the assessment order.

Significant Holdings

"The impugned order of the PCIT has to be quashed for the reason that order of the AO sought to be revised in the impugned order was neither erroneous nor prejudicial to the interest of the revenue for the reason of any lack of inquiry that the AO ought to have made in the given facts and circumstances of the case."

"Where the Assessing Officer adopted one of the courses permissible in law and it has resulted in loss to the revenue, or where two views are possible and the Assessing Officer has taken one view with which the CIT does not agree, it cannot be treated as an erroneous order prejudicial to the interest of the revenue unless the view taken by the Assessing Officer is unsustainable in law."

"The consideration of the ld. PCIT as to whether an order is 'erroneous' insofar as it is prejudicial to the interests of the Revenue must be based on materials on the record of the proceedings called for by him. If there are no materials on record on the basis of which it can be said that the PCIT acting in a reasonable manner could have come to such a conclusion, the very initiation of proceedings by him will be illegal and without jurisdiction."

"The question whether the income should be taxed as business income or as arising from the other source was a debatable issue. The Assessing Officer has taken a plausible view. More importantly, if the Commissioner was of the opinion that on the available facts from record it could be conclusively held that income arose from other sources, he could and ought to have so held in the order of revision. There was simply no necessity to remand the proceedings to the Assessing Officer when no further inquiries were called for or directed."