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Facts
The assessee, a construction company, filed a return declaring a loss for A.Y. 2020-21, which the Assessing Officer (AO) accepted after scrutiny under Section 143(1). Subsequently, the Principal Commissioner of Income Tax (PCIT) initiated proceedings under Section 263, deeming the AO's order erroneous and prejudicial to the revenue for failing to adequately examine several disallowances and additions, including those related to Section 14A, gratuity, unpaid bonus, non-deduction of TDS on interest and compensation, written-off balances, large property advances, and advances to sister concerns.
Held
The Tribunal upheld the PCIT's jurisdiction regarding the Section 14A disallowance (as the assessee did not press this ground). It reversed the PCIT's findings for disallowances/additions related to gratuity, unpaid bonus, debit/credit balances written off, and advances to sister concerns, concluding that the AO had conducted sufficient inquiry or the assessee's position was a permissible view. However, the Tribunal affirmed the PCIT's decision to restore the issues of non-deduction of TDS on interest to PNB Housing Finance and large property advances to the AO for fresh and deeper examination, while reversing the PCIT on the issue of TDS for booking cancellation compensation.
Key Issues
Whether the PCIT's assumption of jurisdiction under Section 263 was valid; Whether the AO's assessment order was erroneous and prejudicial to the revenue due to inadequate examination of various disallowances and additions, including those concerning exempt income, gratuity provisions, unpaid bonus, non-deduction of TDS on interest and compensation, written-off balances, large property advances, and advances to sister concerns.
Sections Cited
263, 143(3), 14A, Rule 8D, 40A(7), 43B, 36(1)(ii), 40(a)(ia), 69B, 115BBE, 194A(4)(iii), 133(6), 139(1)
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Income Tax Appellate Tribunal, PUNE BENCHES “B”, PUNE
Before: DR.MANISH BORAD & SHRI VINAY BHAMORE
आदेश / ORDER
PER DR. MANISH BORAD, ACCOUNTANT MEMBER :
The captioned appeal at the instance of assessee pertaining to A.Y. 2020-21 is directed against the order dated 30.03.2025 of Ld.PCIT, Pune-2 passed u/s.263 of the Income- tax Act, 1961 (hereinafter also called ‘the Act’).
Brief facts of the case are that the assessee is a Private Limited Company engaged in the business of Construction. The assessee has constructed certain premises which are leased out to different occupants and earned rental income. The assessee has installed 9 wind Turbine Generators and the Electricity generated from the said Wind Turbine Generators are sold to either the State Electricity Distribution undertaking or to Private parties. It has also entered into overseas transactions and earned Commission and Brokerage. It also earns interest from some of the property advances made. Loss of (-) Rs.1,62,67,340/- declared in the return for A.Y. 2020-21 e filed on 15.02.2021. After the case being processed u/s.143(1) of the Act return selected for scrutiny and valid statutory notices u/s.143(2) and 142(1) duly served upon the assessee. The information called for in the notice u/s.142(1) were submitted. Ld. Assessing Officer (AO) concluded the proceedings accepting the loss declared by the assessee observing that “conclusively looking to the submissions uploaded along with corroborative evidences, the additions proposed earlier via show cause e-notice have now explained with proper justification. Accordingly, in the light of factual matrix no adverse inference may be drawn and thus the returned income of the assessee is accepted.”
Thereafter, ld. PCIT called for the assessment records and after going through the same assumed jurisdiction u/s.263 of the Act and issued assessee a show cause notice dated 07.03.2025. Referring to various issues which in the view of ld. PCIT have not been examined by the ld. AO resulting into the assessment order framed on 26.09.2022 being erroneous so far as prejudicial to the interest of Revenue. The assessee replied to the show cause notice stating that all the details relating to the said issues have been examined by the ld. AO and even these details are appearing in the body of the assessment order itself and therefore firstly assumption of jurisdiction by the PCIT u/s.263 of the Act is bad in law and secondly on merits of the case also assessee deserves to succeed. However, ld. PCIT was not satisfied and he concluded the proceedings holding as under :
“7. 1 However, having examined the facts of the case, the contentions advanced by the assessee on the various issues involved are found to be not fully acceptable vis-à-vis the following issues:- a) Disallowance of Rs.1,68,194/- as determined by the assessee u/s 14A r.w.r. 8D:-
In this regard, on perusal of the Annexure-17 of the assessee's submission, it is noted that the assessee itself has worked out the quantum of disallowance u/s. 14A. Now the assessee is claiming that there is no case for disallowance of any expenditure if there is no exempt income earned. The claim of the assessee is not correct as the assessee has earned exempt income of Rs. 1,78,60,222/- by way of share of profit from partnership firms. Since, the assessee has shown exempt income during the previous year, the provisions of Sec 14A r.w.r 8D is triggered. Further, the proviso to Sec. 14A inserted by the Finance Act, 2022 clearly provides that the provisions of sec. 14A shall apply and deemed to have always been applied even in a case where the income, not forming part of the total income, has not accrued or arisen or has not been received during the previous year relevant to an assessment year and the expenditure has been incurred during the said previous year. However, the above aspects were not examined by the FAO properly thereby making the assessment erroneous and the prejudicial to the interest of revenue. b) Disallowance of Rs.15,87,717/- on account of provisions of Gratuity fund:
In the P & L account under the head 'Employee Benefit Expenses' at Note A-24, the assessee has claimed Rs.5,37,184/- towards provision to gratuity. Further, the assessee has made a disallowance of Rs.4,30,432/- and added it to the total income. In respect of the balance amount of Rs. 1,06,752/- it is submitted that the amount was actually paid to the employees towards gratuity. The FAO has failed to verify the amount of gratuity actually paid by the assessee. The assessment order is silent on this point.
In respect of disallowance of Rs.15,87,717/- it is noted that these amounts were actually disallowed in the respective assessment years commencing from AY 2014-15. In support of the claim, the assessee had submitted copy of scheduled BP of the ITR for the respective assessment years wherein it is seen that the assessee has made disallowance of provision for gratuity. Further, the FAO has failed to examine the facts presented by the assessee as only part of the copy of the return of income was furnished by assessee and not the full ROI. Such cryptic submission by the assessee does not settle the ambiguities surrounding the issue. Therefore, the AO ought to have examined the issue in the backdrop of the relevant factual position, which has not been done. c) Disallowance of Rs.2,55,864/- u/s 43B r.w.s. 36(1)(ii) being unpaid bonus:-
In this regard, it is to mention here that as per proviso to section 43B of the Act, the said deduction is allowable when it is actually paid by the assessee on or before the due date applicable in its case for furnishing the return of income under sub section 1 of section 139 in respect of the previous year in which liability to pay such sum was incurred.
Further, in the instant case, the payment was not made by the assessee company but by its partnership firm. The FAO has not verified as to how the accounting of the same has been entered into the books of accounts of the assessee company. Now the assessee has submitted that it has recognised the liability towards Sharda Construction and Investment company in its books of account on 13.11.2020. This claim was not made before the FAO to examine. This issue was not examined by the FAO properly before accepting the contention of the assessee, which renders assessment erroneous and prejudicial to the interest of revenue. d) Disallowance of Rs.19,45,124 u/s 40(a) (ia) for non deduction of Tax:-
In the draft assessment order, the FAO noted that in its submission dated 10.03.2022, the assessee submitted that the required TDS has not been deducted on payment made to PNB Housing Finance Ltd. of Rs.56,71,523/- and compensation for cancellation of booking paid to customers of Rs.8,12,226/- having cumulative total of Rs.64,83,749/-. Being apparent infringement of provisions of sec. 40(a)(ia) of the Act, amount of Rs. 19,45,124/- was added to the total income of the assessee in the draft assessment order.
However, on going through the reply of assessee dated 28.03.2022, it is noted that in reply to para 6 of the SCN, the assessee categorically admitted that for the proposed disallowance of Rs. 19,45,124 u/s 40(a) (ia) it has no dispute. The relevant portion of the assessee's reply dated 28/03/2022 is scanned and pasted as below.
Reply to Para 6 - Disallowance of Rs.19,45,124/- u/s.40(a)(ia) : We have no dispute with the proposed addition of Rs.19,45,124/- u/s.40(a)(ia) for failure to make TDS.
It is a matter of record that despite acceptance of the assessee for the proposed disallowance u/s 40(a) (ia) for Rs.19,45,124 to its income, no disallowance has been made by the FAO in the assessment order passed for the AY 2020-21.
Further, the FAO has not brought on record the verification of the fact that the PNB Housing Finance Limited has offered the interest income in its return of income filed. Further, the case law quoted by the assessee relates to non-deduction of TDS on account of failure on the part of builder to hand over the possession of the property to the buyers. The FAO has failed to establish the nature of the compensation paid to the customers. Also, the FAO has failed to examine the issue as to whether the assessee is deemed to be an assessee in default or not under the first provision to sec 201(1) r.w.r 31ACB of the IT Act/Rules. This issue was not examined by the FAO properly, thereby rendering the assessment erroneous and prejudicial to the interest of revenue. e) Addition of Rs.64,93,534/- on account of debit/credit balances written off:-
On this issue, the assessee has submitted that the recognition of the revenue was made on the basis of firstly, accrual basis and subsequently, it was reversed when actual invoice was raised by MSEDCL. In the assessment order, the FAO has only reproduced the submission of the assessee but not given any findings as to why the contention of the assessee was accepted. No verification was made by the FAO in this regard thereby rendering the assessment order erroneous and prejudicial to the interest of revenue. f) Addition of Rs.82,64,73,532/- on account of advance for purchase of property:-
It is submitted by the assessee that it is in the business of development of properties and it is common to give advance for purchase of property. It is also submitted that all the advances were given through account payee cheques or RTGS/NEFT. It has further been submitted that the assessee has received interest of Rs. 4,96,22,802/- against such advances. In the assessment order, the FAO has only reproduced the submission of the assessee but not given any findings as to why the contention of the assessee was accepted. No verification was made by the FAO to verify the source of such payments and receipt of correct percentage of interest from the parties thereby making the assessment erroneous and prejudicial to the interest of revenue. g) Addition of Rs.11,60,000/- for giving advances to sister concerns at lower rate of interest:
On this issue, the assessee has submitted that in the assesseee's own case on the identical issue, the issue was settled by the decision of CIT(A), ITAT and Hon'ble High Court in assessment years 2000-01 to 2015-16, on the presumption that the interest free funds available with the assessee exceeded the interest free loans given to sister concerns and there was no diversion of interest bearing funds. The assessee has now submitted that its shareholders funds of Rs.45,19,80,756.79 are far greater than the exposure of Rs.26,85,95,493/-. Though the issue is settled in favour of the assessee in the preceding years, the FAO appears to have not verified the assessee's contentions as no satisfaction has been recorded by him in the order. The AO may, therefore, verify whether the above contention of the assessee with regard to the position of funds is correct or not on facts.
7.2 From the above, it is clear that the AO did not test the submissions of the assessee on the various issues in question with the relevant factual and legal position. The AO has to demonstrate that the views adopted by him are rational and has the backing of factual and legal position and based on the outcome of the inquiries conducted by him.
7.3. After the introduction of Explanation 2 to Sec. 263, of the Act it has been made clear as to what kind of assessment order shall be deemed to be erroneous in so far as it is prejudicial to the interest of the revenue. The Explanation 2 to Sec. 263 is reproduced below :-
"Explanation 2.-For the purposes of this section, it is hereby declared that an order passed by the Assessing Officer for the Transfer Pricing Officer, as the case may be.] shall be deemed to be erroneous in so far as it is prejudicial to the interests of the revenue, if, in the opinion of the Principal [Chief Commissioner or Chief Commissioner or Principal] Commissioner or Commissioner,-
(a) the order is passed without making inquiries or verification which should have been made;
(b) the order is passed allowing any relief without inquiring into the claim;
(c) the order has not been passed in accordance with any decision which is prejudicial to the assessee, rendered by the jurisdictional High Court or Supreme Court in the case of the assessee or any other person."
7.4 From the above cited Explanation which has come into effect from 01.06.2015, it is clear that an assessment order which has been passed without making inquiries or verification which should have been made, would be rendered both erroneous and prejudicial to the interest of revenue. In the present case, the evidence on record clearly indicates that there is failure on the part of the AO to conduct proper examination and verification of factual aspects vis-à-vis the various issues discussed hereinabove, which he ought to have made before concluding the assessment, which has led to granting of excessive relief / deduction of expenditure claimed. Therefore, assessment order has been passed in violation of sub-clause (a) and sub-clause (b) of Explanation 2 to Section 263 of the I.T. Act, 1961.In such a scenario, the order of the Assessing Officer would clearly be rendered as erroneous and prejudicial to the interest of the revenue. This view is also supported by the following judicial precedents:
The Hon'ble Supreme Court in the case of Rampyari Devi Saraogi Vs. CIT (67 ITR 84) has held that when the Income-tax Officer without making any enquiries to satisfy himself, passed the assessment order, it is not necessary to further detail the reasons given by the Commissioner because on the face of the record the orders were prejudicial to the interest of the revenue.
The Hon'ble Allahabad High Court in the case of Swarup Vegetable Products Industries Ltd vs. CIT (AII) 187 ITR 412 has held that when the ITO had accepted the claim without making proper enquiries, the Commissioner was justified in coming to the conclusion that the ITO's order was erroneous inasmuch as it was not passed after a full enquiry and a proper investigation and that it is also prejudicial to the revenue.
The Hon'ble Delhi High Court in the case of Gee Vee Enterprises Vs. Addl. CIT & Ors (Del) 99 ITR 375, has held that an Income Tax Officer is not only an adjudicator but also an investigator and that an order passed by the Assessing Officer without conducting proper enquiries can be regarded as erroneous and prejudicial to the Revenue. The Hon'ble Court has observed as under-
..... The Commissioner can regard the order as erroneous on the ground that in the circumstances of the case the ITO should have made further inquires before accepting the statements made by the assessee in his return. The reason is obvious. The position and function of the ITO is very different from that of a civil court. The statements made in a pleading proved by the minimum amount of evidence may be accepted by a civil court in the absence of any rebuttal. The civil court is neutral. It simply gives decision on the basis of the pleading and evidence which comes before it. The ITO is not only an adjudicator but also an investigator. He cannot remain passive in the face of a return which is apparently in order but calls for further inquiry. It is his duty to ascertain the truth of the facts stated in the return when the circumstances of the case are such as to provoke an inquiry. The meaning to be given to the word 'erroneous' in section 263 emerges out of this context. It is because it is incumbent on the ITO to further investigate the facts stated in the return when circumstances would make such an inquiry prudent that the word 'erroneous' in section 263 includes the failure to make such an inquiry. The order becomes erroneous because such an inquiry has not been made and not because there is anything wrong with the order if all the facts stated therein are assumed to be correct."
The Hon'ble Calcutta High Court in the case of PCIT Vs. Hill Queen Investment (P.) Ltd., [2023] 152 taxmann.com 335 (Calcutta), has held that when and where the assessments orders which are subject matter of section 263 action shows that an enquiry has not been conducted by the assessing officer in the manner it ought to have been conducted and when the Commissioner while issuing the show cause notice had come to the prima facie conclusion that the assessing officer did not conduct an enquiry as required to justify such prima facie opinion, the assumption of jurisdiction u/s.263 by the CIT was justified.
7.5. The assessee has placed reliance on the decision of the Hon. Supreme Court in the case of Malabar Industrial C. Ltd. vs. CIT (243 ITR 83) (SC)/[2000] & CIT Vs. Max India (295 ITR 282) to argue that every order prejudicial to the interest of the Revenue need not be erroneous. However, in the present case, as pointed out hereinabove, the claims of the assessee on the various issues were found to be not acceptable in the fact of the relevant legal position and therefore, the order passed by the AO would clearly fall under the category of 'erroneous' and the view taken by the PCIT on such an instance cannot be termed to be a mere change of opinion. Thus, the reliance placed on the assessee on the above decisions and other similarly placed decisions is totally misplaced considering the facts of the present case.
8. In the light of the above facts, I am satisfied that the assessment order dated 26/09/2022 passed for the Assessment Year 2020-21 u/s.143(3) r.w.s. 144B of the Act is erroneous in so far as it is prejudicial to the interest of the Revenue. Consequently, the said assessment order passed by the Assessing Officer is hereby set aside to the file of the A.O with direction to examine the issues enlisted at clauses (a) to (g) of para 9.1 hereinabove.
The AO shall accordingly, re-assess the total income of the assessee and pass the assessment order afresh, based on the outcome of verification as above. Needless to say, while doing so, the AO shall give adequate opportunity of being heard to the assessee and consider submissions/evidences, if any, furnished by the assessee.”
Aggrieved assessee is now in appeal before this Tribunal raising following grounds of appeal :
“(All the Ground of Appeals is without prejudice to each other)
Technical contentions
1. The learned PCIT, Pune-3 erred in law and on facts in assuming jurisdiction u/s 263 of the ITA, 1961 on the analogy that the order passed u/s 143(3) of the ITA, 1961 dated 26/09/2022 was erroneous and prejudicial to the interest of the revenue.
2. The learned PCIT-3, Pune erred in law and on facts in not appreciating that for all the issues raised in 263 proceedings, details were asked for by learned AO, details were submitted by appellant, details were duly verified nu learned AO and thus, mind was applied by the learned AO during the scrutiny proceedings u/s 143(3) of the ITA, 1961.
Appellant thus contends that, order of learned AO is not "erroneous" and "prejudicial to interest of revenue" considering conspicuous mind application by learned AO.
3. Learned PCIT-3, Pune also erred in law and on facts in not considering the submissions of the Appellant regarding various issues raised in the 263 notice. Appellant contends that, before reaching to any conclusion, learned PCIT-3, Pune could have verified "merits" of the submission himself.
Contentions on Merits
4. Learned PCIT-3, Pune erred in law and on facts in setting aside the issue of alleged disallowance of Rs.1,68,194/- (though worked out by the appellant u/s 14A r.w.r. 8D) disregarding repeated submission of Appellant that, there was no any exempt income accrued/arisen or received during the year.
Learned PCIT-3, Pune erred in law and on facts in setting aside the issue of alleged disallowance of Rs.1,06,752 u/s 40A(7) of ITA, 1961. Learned PCIT-3, Pune ought to have appreciated that, the said amount of Rs.1,06,752 was duly paid by Appellant during the year and closing balance of Rs.4,30,432 was rightly added to the taxable income of the AY 2020-21.
6. Learned PCIT-3, Pune erred in law and on facts in setting aside the issue of alleged disallowance of Rs.2,55,864 relating to payment of "unpaid bonus' as on 31/3/2020. Learned PCIT-3, Pune ought to have appreciated that, the said "unpaid bonus" was duly paid before filing the Return of Income for AY 2020-21.
7. Learned PCIT-3, Pune erred in law and on facts in holding that interest (of Rs.56,71,523) paid to PNB Housing Finance limited, and, compensation for customers' cancellation of flat booking (of Rs. 8,12,226) ought to have been considered for disallowance u/s 40(a)(ia) due to non-deduction of TDS. Appellant contends that, receivers of the related income are either not eligible to suffer disallowance u/s 40(a)(ia), or, ought to have offered the related income to "TAXATION" for AY 2020-21.
8. Learned PCIT-3, Pune erred in law and on facts in not appreciating that, income of Rs.64,93,534/- relating to sale of electricity power was already credited to the P & L on the basis of notional accrual / arousal at an earlier stage, and as such, remains already taxed. Appellant contends that, learned PCIT, 3 Pune is proceeding to a plausible double taxation.
9. Learned PCIT-3, Pune erred in law in setting aside the issue of alleged absence of source of income for extending advances of Rs.82,64,73,532/- to various parties. Learned PCIT-3, Pune ought to have appreciated that, advances of Rs.82,64,73,532/- were paid from time to time to various parties by account payee cheques / RTGS out of regular funds of the Appellant.
10. Appellant contends that, learned PCIT-3, Pune erred in setting aside the issue of alleged addition of Rs. 11,60,000/- for giving interest free advances to sister concerns despite availability of much larger non-interest-bearing funds with Appellant. Appellant contends that learned PCIT-3, Pune ought to have appreciated ratio of settled decisions of past three years in Appellant's own case, in which, very same issue was decided.
11. The appellant craves leave to add/modify/ amend /delete all / any of the grounds of appeal.”
5. Ld. Counsel for the assessee reiterated the submissions filed before ld.CIT(A) and also furnished a chart mentioning the replies on all the issues. However, ld. Counsel for the assessee fairly did not press Ground No.4 relating to alleged disallowance of Rs.1,68,194/- u/s.14A r.w. Rule 8D. For the other issues, he submitted that for some issues details have been furnished and some issues are debatable in nature and ld. AO has taken one of the permissible view. For some issues details have been furnished to the satisfaction of ld. AO and detailed enquiry has been undertaken. Reference made to the paper book running into 115 pages containing the basic documents, submissions filed before ld. AO along with copies of notices u/s.142(1), replies filed in response to notice for revisionary proceedings u/s.263 of the Act. Reliance placed on the decision of Hon’ble High Court of Kolkata in the case of PCIT vs. M/s. West Bengal Housing Infrastructure Development Corporation Limited – and 85/2018, judgment dated 08.08.2018 and that of decision of Coordinate Bench, Delhi in the case of PCIT Vs. West Bengal Housing Infrastructure Developing Corporation Satish Arora Vs. ACIT – order dated 14.10.2019.
On the other hand, ld. DR vehemently argued supporting the order of ld. PCIT and also took through the relevant findings of ld. PCIT as discussed in the impugned order.
We have heard the rival contentions and perused the record placed before us. Through this appeal Assessee has challenged the assumption of jurisdiction by the ld. PCIT u/s.263 of the Act. On merits, it is contended that the issues mentioned in the show cause notice already stands examined by the ld. AO. We find that the provision of Section 263 of the Act has direct bearing on the issue raised before us, therefore, it is pertinent to take note of this section which reads as under:
263(1) The Commissioner may call for and examine the record of any proceeding under this Act, and if he considers that any order passed therein by the Assessing Officer is erroneous in so far as it is prejudicial to the interests of the revenue, he may, after giving the assessee an opportunity of being heard and after making or causing to be made such inquiry as he deems necessary, pass such order thereon as the circumstances of the case justify, including an order enhancing or modifying the assessment, or cancelling the assessment and directing a fresh assessment. Explanation- For the removal of doubts, it is hereby declared that, for the purposes of this sub-section,- (a) an order passed on or before or after the 1st day of June, 1988 by the Assessing Officer shall include- (i) an order of assessment made by the Assistant Commissioner or Deputy Commissioner or the Income-tax Officer on the basis of the directions issued by the Joint Commissioner under section 144A; (ii) an order made by the Joint Commissioner in exercise of the powers or in the performance of the functions of an Assessing Officer conferred on, or assigned to, him under the orders or directions issued by the Board or by the Chief Commissioner or Director General or Commissioner authorized by the Board in this behalf under section 120; (b) record shall include and shall be deemed always to have included all records relating to any proceeding under this Act available at the time of examination by the Commissioner; (c) where any order referred to in this sub-section and passed by the Assessing Officer had been the subject matter of any appeal filed on or before or after the 1st day of June, 1988, the powers of the Commissioner under this sub-section shall extend and shall be deemed always to have extended to such matters as had not been considered and decided in such appeal. (2) No order shall be made under sub-section (1) after the expiry of two years from the end of the financial year in which the order sought to be revised was passed. (3) Notwithstanding anything contained in sub-section (2), an order in revision under this section may be passed at any time in the case of an order which has been passed in consequence of, or to give effect to, any finding or direction contained in an order of the Appellate Tribunal, National Tax Tribunal, the High Court or the Supreme Court. Explanation- In computing the period of limitation for the purposes of sub-section (2), the time taken in giving an opportunity to the assessee to be reheard under the proviso to section 129 and any period during which any proceeding under this section is stayed by an order or injunction of any court shall be excluded.
On a bare perusal of the sub section-1 would reveal that powers of revision granted by section 263 to the learned Commissioner have four compartments. In the first place, the learned Commissioner may call for and examine the records of any proceedings under this Act. For calling of the record and examination, the learned Commissioner was not required to show any reason. It is a part of his administrative control to call for the records and examine them. The second feature would come when he will judge an order passed by an Assessing Officer on culmination of any proceedings or during the pendency of those proceedings. On an analysis of the record and of the order passed by the Assessing Officer, he formed an opinion that such an order is erroneous in so far as it is prejudicial to the interests of the Revenue. By this stage the learned Commissioner was not required the assistance of the assessee. Thereafter the third stage would come. The learned Commissioner would issue a show cause notice pointing out the reasons for the formation of his belief that action u/s 263 is required on a particular order of the Assessing Officer. At this stage the opportunity to the assessee would be given. The learned Commissioner has to conduct an inquiry as he may deem fit. After hearing the assessee, he will pass the order. This is the 4th compartment of this section. The learned Commissioner may annul the order of the Assessing Officer. He may enhance the assessed income by modifying the order. He may set aside the order and direct the Assessing Officer to pass a fresh order. At this stage, before considering the multi-fold contentions of the ld. Representatives, we deem it pertinent to take note of the fundamental tests propounded in various judgments relevant for judging the action of the CIT taken u/s 263.
9. Hon'ble Supreme Court in the case of Malabar Industrial Co. Ltd. vs. CIT (2000) 243 ITR 83 (SC)has laid down following ratio with regard to provisions of section 263 of the Act:
There can be no doubt that the provision cannot be invoked to correct each and every type of mistake or error committed by the Assessing Officer; it is only when an order is erroneous that the section will be attracted. An incorrect assumption of facts or an incorrect application of law will satisfy the requirement of the order being erroneous. In the same category fall orders passed without applying the principles of natural justice or without application of mind. The phrase 'prejudicial to the interests of the revenue’ has to be read in conjunction with an erroneous order passed by the Assessing Officer. Every loss of revenue as a consequence of an order of the Assessing Officer cannot be treated as prejudicial to the interests of the revenue, for example, when an ITO adopted one of the courses permissible in law and it has resulted in loss of revenue; or where two views are possible and the ITO has taken one view with which the Commissioner does not agree, it cannot be treated as an erroneous order prejudicial to the interests of the revenue unless the view taken by the ITO is unsustainable in law. It has been held by this Court that where a sum not earned by a person is assessed as income in his hands on his so offering, the order passed by the Assessing Officer accepting the same as such will be erroneous and prejudicial to the interests of the revenue - RampyariDevi Saraogi v. CIT [1968] 67 ITR 84 (SC) and in Smt. Tara Devi Aggarwal v. CIT [1973] 88 ITR 323 (SC). [Emphasis Supplied]
Now examining the contentions of ld. Counsel for the assessee in light of the settled judicial precedents and the provisions of section 263 of the Act, we find that since the assessee has himself not pressed Ground No.4 relating to disallowance u/s.14A r.w. Rule 8D of the Act at Rs.1,68,194/-, this itself indicates that ld. PCIT has assumed valid jurisdiction. So the grounds challenging the assumption of jurisdiction by the ld. PCIT are hereby dismissed.
Now coming to the merits of case which have been referred in the impugned order viz. :
(a) Disallowance of Rs.15,87,717/- on account of provisions of Gratuity Fund; (b) Disallowance of Rs.2,55,864/- u/s.43B r.w.s.36(1)(ii) being unpaid bonus; (c) Disallowance of Rs.19,45,124/- u/s.40(a)(ia); (d) Addition of Rs.64,93,534/- on account of debit/credit balances written off; (e) Addition of Rs.82,64,73,532/- on account of Advance for purchase of property; and (f) Addition of Rs.11,60,000/- for giving advances to sister concerns at lower rate of interest
We observe that during the course of assessment proceedings in the questionnaire attached to notice u/s.142(1) of the Act, ld.AO called for the various details relating to the following issues :
Large business loss set off against other heads of income, High liabilities as compared to low income/receipts, Lower amount disallowed under section 40A(7) in ITR in comparison to audit report, Claim or large Refund, Low income compared to large commission receipts, Real estate business with high closing stock, Large difference in the opening stock of current year, High ratio of refund to TDS, Low net profit shown by construction contractors and claim of large refund, High interest expenditure and huge advances in excess of total proprietors / partners fund".
We further notice that the assessee filed the details in reply to each of the issues referred by ld. AO in the notice u/s.142(1) of the Act which have been duly examined by ld. AO except for the issue of addition of Rs.82,64,73,532/- towards purchase of property u/s.69B r.w.s.115BBE of the Act.
We observe that so far as the issue relating to provision for Gratuity Fund u/s.40A(7) of the Act in the current year the provision is made at Rs.4,30,432/- which has already been added to the income in the computation of income and the assessee has only claimed the actual payment of Gratuity at Rs.1,06,752/-. Ld. AO has examined the issue in details and therefore issue need not be set-aside to the file of ld. Assessing Officer. Finding of ld.PCIT on this issue stands reversed.
As regards the disallowance u/s.43B of the Act for the unpaid bonus referred in the impugned order, we note that the unpaid bonus was paid by the sister concern of the assessee Sharada Construction and Investment Company prior to the extended due fate of filing of the return of income u/s.139(1) of the Act. Thus, no addition u/s.43B is called for. Therefore, the issue need not be set aside to the file of ld. Assessing Officer. Finding of ld.PCIT on this issue stands reversed.
Disallowance u/s.40(a)(ia) of the Act for non deduction of tax on interest paid to PNB Housing Finance Limited. We find the assessee has not deducted the tax at source on the interest paid at Rs.56,71,523/-. We find that PNB Housing Finance Limited falls within the exception u/s.194A(4)(iii). Though the assessee has not deducted the tax on the interest paid to PNB Housing Finance Limited but in case the PNB Housing Finance Limited has offered the income in its income-tax return, then no disallowance can be made in terms of section 40(a)(ia) of the Act. However, since the ld. AO has not examined this aspect, the matter needs to be set aside to his file for denovo adjudication. Even the decision of this Tribunal in the case of Satish Arora (supra) referred and relied on by ld. Counsel for the assessee, the Tribunal has restored the issue of non deduction of tax on the interest paid to PNB Housing Finance Limited to the file of Assessing Officer directing him to call for the details by issuing notice u/s.133(6) of the Act. Thus, ld. PCIT has rightly held that this issue deserves to be set aside to the file of ld. AO for fresh examination. Finding of ld.PCIT is affirmed.
So far as the issue relating to non deduction of tax on the compensation for cancellation of booking made to customers at Rs.8,12,226/-, we on going through the submissions filed hold that the compensation is in the nature of a judgment debt or akin to a judgment debt, the payment of which cannot establish a debtor-creditor relationship between the parties. As such, the said sum or any part thereof cannot be liable to tax deducted at source under the relevant provisions of the IT Act in light of judgment of Hon’ble Bombay High Court in the case of Sainath Rajkumar Sarode and Others Vs. State of Maharashtra and Others reported in (2021) 131 taxmann.com 332 (Bom.). We thus find that this issue also need not be restored to the file of ld. AO in the set aside assessment proceedings. Finding of ld.PCIT on this issue stands reversed.
Next issue is regarding addition of Rs.64,93,534/- on account of debit/credit balances written off. We find that ld. AO has raised specific query relating to this issue and detailed submissions have been filed by the assessee and the same have been considered by the ld.AO. Assessee has submitted before ld. AO that it has installed Wind Mills at two locations in Maharashtra, i.e. Satara and Sangli which is connected to the Grid of MSEDCL and the assessee has saved the electricity so generated. Estimated income is credited in the books and recognized as income. Customer account is debited with corresponding credit to income and net sale of electricity is booked when the credit note is received and invoice is raised. It was also submitted that since the income has already been recognized on the basis of accrual, it will tantamount to double taxation if the income is again recognized on the basis of generation of invoice. Ld. AO has accepted this contention and therefore since detailed enquiry has been conducted, ld. PCIT erred in restoring this issue to the file of ld. AO in the set aside proceedings. Finding of ld.PCIT on this issue stands reversed.
Next issue is the disallowance of interest at Rs.11,60,000/-. We note that the assessee has given advance of Rs.1.45 crore to Prashasti Properties Pvt. Ltd. for purchase of property. However, interest @4% has been charged as against the prevailing market rate of 12%. We note that this issue has been examined by the ld. AO and he has found that the transaction of giving advance to Prashasti Properties Pvt. Ltd, is in due course of business and further the assessee had sufficient interest free funds which are higher than the interest free/low interest bearing advances. Thus ld. AO accepted the contention of the assessee which is one of the legally permissible view and therefore we do not find any justification to set aside this issue to the file of ld. AO. Finding of ld.PCIT on this issue also stands reversed.
Last issue relates to advance for purchase of property at Rs.82,64,73,532/- which in view of ld. PCIT has not been examined by the ld. AO and therefore provisions of section 69B r.w.s.115BBE of the Act deserves to be invoked. We notice that during the course of assessment proceedings assessee has furnished certain information along with confirmation from the Auditor that all the Agreements/MOUs were made available for verification of various parties namely Modern Realty, Pvt. Ltd. Colossum Properties Private Limited, Peridot Properties Private Limited, Citrine Properties Private Limited, Prashasti Private Limited and S.A. Trafin Private Limited and the advances amounting to Rs.84,80,26,307/- has been given to these parties for purchase of property and interest of Rs.4,96,22,802/- has been charged. We however find that ld. AO after receiving the submission of the assessee has given brief detail of the advances and the interest charged thereon, but has not conducted any further enquiry about the source of investments and the genuineness of the transactions of making investments. Merely receiving the reply to the issues raised in the notice u/s.142(1) cannot be taken as complete exercise for carrying out proper assessment proceedings in such type of issue and needs deeper examination as it involves huge revenue. Though ld. Counsel for the assessee has submitted that the advances were given for purchase of property and even the interest has also been earned thereon, we are still of the considered view that proper enquiry as required in such type of issue has not been conducted by the ld. AO. Finding of ld.PCIT on this issue deserves to be sustained and the matter has been rightly restored by ld. PCIT to the file of ld. AO for carrying out the assessment afresh as per the directions given in the impugned order.
In view of the above, the findings of ld. PCIT in the impugned order u/s.263 of the Act are partly confirmed as per the discussion made in the preceding paragraphs and therefore Ground No.4 raised by the assessee is dismissed as ‘not pressed, Ground Nos. 5, 6, 8 and 10 raised by the assessee are allowed and Ground Nos. 7 to 9 raised by the assessee are dismissed.
In the result, the appeal filed by the assessee is partly allowed.
Order pronounced on this 22nd day of September, 2025.