PROFESSIONAL ARTIST COSMETICS LLP ,MUMBAI vs. PRINCIPAL COMMISSIONER OF INCOME TAX -41, MUMBAI

The learned counsel for the assessee submitted that the very issues on which the PCIT invoked jurisdiction were the subject of detailed inquiries during the assessment proceedings. The AO had raised pointed queries, and the assessee had furnished detailed replies with party-wise ledgers, confirmations, bank statements, and reconciliations. The so-called discrepancy in loans was fully explained with reference to opening balances and repayments. The difference in number of parties was only a matter of classification, and all details were available on record. The higher interest was a commercial decision necessitated by business exigencies. It was contended that once the AO had examined these issues and accepted the explanation, the PCIT could not step in merely because he held a different opinion. Reliance was placed on settled judicial precedents to submit that revision under section 263 requires a demonstrable error which is also prejudicial, and that inadequacy of inquiry cannot be equated with absence of inquiry.

The learned Departmental Representative, on the other hand, supported the PCIT’s order. It was argued that the AO’s inquiry was perfunctory and that the explanations furnished Professional Artist Cosmetics LLP by the assessee were not properly examined. According to the DR, the mismatch in loans, the inconsistent number of parties, and the payment of unusually high interest required thorough verification, which the AO failed to undertake. Therefore, the PCIT was justified in exercising his revisional jurisdiction to protect the interests of the Revenue.

We have carefully considered the rival submissions and have perused the record of proceedings before the Assessing Officer as well as the revisional order impugned before us. The controversy lies within a narrow compass whether the assessment order passed under section 143(3) on 02.12.2022 can be said to be “erroneous in so far as it is prejudicial to the interests of the Revenue” within the meaning of section 263, merely because the Learned PCIT is of the view that the inquiry should have been carried out in a more detailed manner or that the conclusions of the Assessing Officer were not to his satisfaction.

From the chronology of events, it emerges with clarity that the Assessing Officer had issued repeated and specific notices calling upon the assessee to explain precisely the three issues now sought to be revisited by the PCIT: (i) the reconciliation of unsecured loans as per Form 3CD and the audited accounts, (ii) the identification and number of lenders, and (iii) the variation in interest rates. The assessee responded to each of these notices on different dates with detailed replies. Party-wise loan ledgers, confirmations, reconciliations of opening balances and repayments, bank statements, and interest workings were all placed before the Professional Artist Cosmetics LLP Assessing Officer. In fact, five sets of replies spread across August to November 2022 were filed. The assessment order thereafter recorded that these submissions had been considered, thereby evidencing due application of mind.

The so-called discrepancy of ₹1.79 crore, highlighted by the PCIT, is nothing but the difference between loans as per financials and the tabulation furnished in one of the assessee’s submissions. The explanation tendered was that the financials included opening balances carried forward, repayments during the year, and interest credits, whereas the tabulation related only to fresh unsecured loans from 31 parties. When later a comprehensive list was furnished, the total of 46 parties emerged, covering all lenders including those where only interest transactions had taken place. The reconciliation was placed before the AO, who, being satisfied, accepted the explanation.

Similarly, the payment of interest at 18 per cent to two lenders was not an unexplained aberration but was explained as a commercial decision dictated by urgent working capital requirements in a challenging business climate. The AO considered this justification and accepted it. Once the AO has applied his mind to the explanation and taken a view, such a view cannot be substituted by the PCIT under section 263 merely because, in his opinion, the interest appeared excessive.

The law is firmly established that the revisional jurisdiction under section 263 is of a supervisory nature and Professional Artist Cosmetics LLP can be invoked only if both conditions error in the assessment order and prejudice to the interests of the Revenue co-exist. It is not enough to demonstrate that the order could have been written differently or that some other view is also possible. As held by the Supreme Court in Malabar Industrial Co. Ltd., the jurisdiction under section 263 cannot be exercised for a mere change of opinion. The Bombay High Court in Gabriel India Ltd. further clarified that where an AO has conducted inquiries and taken a view, the order cannot be revised only because the Commissioner would have liked a deeper probe or more elaborate reasoning. The Delhi High Court in Sunbeam Auto Ltd. and DG Housing Projects Ltd. has made an important distinction: absence of inquiry may justify revision, but inadequacy of inquiry cannot, unless the Commissioner establishes that the order is unsustainable in law.

Tested on these judicial touchstones, the impugned order falters. The AO did inquire. He raised precise questions. He received detailed replies, reconciliations, and supporting evidence. He applied his mind and accepted the explanation. This is not a case of oversight or non-application of mind. Nor has the ld. PCIT brought on record any fresh material overlooked by the AO, or demonstrated that the conclusions reached were contrary to law. All that has been done is to express dissatisfaction with the manner of inquiry. Such dissatisfaction may furnish a ground for appeal but not for invoking section 263. The revisional jurisdiction is not intended to be a power of second opinion; it is meant to Professional Artist Cosmetics LLP correct demonstrable errors which, if allowed to stand, would cause prejudice to the Revenue.

Equally significant is the fact that the loans in question were largely opening balances brought forward from earlier years. To brand the assessment erroneous on the ground that such balances were not verified afresh ignores the settled principle that what stands accepted in earlier assessments cannot be reopened every year in the guise of section 263. The ld. AO had before him confirmations and bank statements, and he accepted the same. Likewise, the allegation of inconsistency between 31 and 46 parties vanishes once the record is viewed in its entirety. The assessee never concealed any party; the number fluctuated only because at one stage details of fresh loans were filed, and at another stage the cumulative list was given. Such a difference of presentation does not make the assessment erroneous.

We are thus of the considered view that the impugned order under section 263 does not satisfy the statutory preconditions. The AO’s order is neither erroneous nor prejudicial to the interests of the Revenue. The ld. PCIT has not pointed out any defect or error of fact or law; he has only directed the AO to re-verify issues already scrutinised. This is impermissible in law. To allow such revision would be to expand section 263 into an appellate power of substitution, which the statute does not countenance.

In view of the foregoing discussion, we quash the order of the ld. PCIT dated 28.03.2025 passed under section 263

In the result, the appeal of the assessee is allowed.