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Facts
The assessee's assessment under Section 143(3) included additions for unexplained unsecured loans (Section 68) of Rs. 92,00,000/- and unexplained cash deposits. However, the Assessing Officer failed to disallow the accrued interest of Rs. 44,51,671/- on these unexplained loans. Consequently, the PCIT initiated revisional proceedings under Section 263, deeming the AO's order erroneous and prejudicial to the revenue due to this omission.
Held
The Tribunal upheld the PCIT's order, ruling that the AO's failure to disallow interest on loans already treated as unexplained constituted a wrong decision/conclusion, rendering the assessment order erroneous and prejudicial. It concluded that the PCIT correctly invoked Section 263 to rectify this error, particularly as the AO's inquiry into the interest was superficial.
Key Issues
Whether the PCIT was justified in invoking Section 263 to revise an assessment order for failing to disallow interest on unsecured loans, the principal of which was already treated as unexplained under Section 68.
Sections Cited
263, 143(3), 68
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Income Tax Appellate Tribunal, AHMEDABAD “B” BENCH, AHMEDABAD
Before: SHRI SIDDHARTHA NAUTIYAL & SHRI NARENDRA PRASAD SINHA
O R D E R PER NARENDRA PRASAD SINHA, ACCOUNTANT MEMBER:
This appeal is filed by the assessee against the order of the Principal Commissioner of Income Tax, Ahmedabad (in short “PCIT”) dated 26.03.2025 passed in his revisional jurisdiction under Section 263 of the Income Tax Act, 1961 (hereinafter referred to as ‘the Act’) for the Assessment Year (A.Y.) 2021-22.
The brief facts of the case are that the assessee had filed his return of income for the A.Y. 2021-22 on 31.03.2022 declaring total income of Rs.4,99,500/-. The case of the assessee was selected for compulsory (Assessment Year: 2021-22) Dhanesh Badarmal Jain vs. PCIT Page 2 of 8 scrutiny. In the course of assessment, the Assessing Officer had enquired about the unsecured loan of Rs.1,36,51,671/-. The assessee had furnished a list of the parties from whom the loans were taken. It transpired that the total unsecured loan of Rs.1,36,51,671/- in respect of 10 parties represented unsecured loan of Rs.92,00,000/- and the balance amount was interest accrued during the year. Since the assessee did not furnish any evidence to establish the creditworthiness and genuineness of the transactions, the Assessing Officer had treated the unsecured loan of Rs.92,00,000/- as unexplained and made addition under Section 68 of the Act. Further addition in respect of unexplained cash deposit of Rs.14,00,000/- was also made. The assessment was completed under Section 143(3) of the Act on 26.12.2022 at a total income of Rs.110,99,500/-. Subsequently, the case record was called for and examined by the PCIT, who found that the Assessing Officer had made addition of Rs.92,00,000/- only in respect of loans taken during the year which were held as in-genuine. However, the Assessing Officer had failed to disallow the interest of Rs.44,51,671/- accrued during the year on the said loan of Rs.92,00,000/-, which was debited to the account of the assessee. The Ld. PCIT held that the order of the Assessing Officer was erroneous and prejudicial to the interest of revenue and accordingly the impugned order under Section 263 of the Act was passed by him, directing the Assessing Officer to verify the interest paid/accrued in the year and disallow the same.
Now the assessee is in appeal before us. The following grounds have been taken in this appeal: -
“1. The Ld. PCIT erred on facts and in law in invoking provisions of Section 263 of the Act without any justification and valid jurisdiction.
(Assessment Year: 2021-22) Dhanesh Badarmal Jain vs. PCIT Page 3 of 8 2 The Ld. PCIT erred on facts and in law in holding the assessment order passed u/s 143(3) to be erroneous and prejudicial to the interests of the revenue.
3. The Ld. PCIT erred on facts and in law in holding that issue with reference to interest paid on loans taxed u/s 68 was not properly examined by the Assessing Officer even though necessary verification and inquiries had already been made by the Assessing Officer while completing assessment.
The Ld. PCIT erred on facts and in law in setting aside the order of the Assessing Officer without justifiable reasons.”
4. Shri Sakar Sharma, Ld. AR of the assessee explained that the Assessing Officer had examined the issue of loan taken during the year and the interest paid thereon and, thereafter, had taken a conscious decision not to make any addition in respect of interest accrued/paid on loans. Therefore, the order of the AO can’t be held as erroneous for this reason. In this regard, the Ld. AR has brought on record a copy of show cause notice issued by the Assessing Officer and the reply filed by the assessee. The Ld. AR further submitted that since the assessment order was challenged by the assessee before the Ld. CIT(A) and the issue of addition in respect of loan was already subject matter of appeal, no revisionary order could have been passed by the Ld. PCIT in this respect. In this regard, he relied upon the decision of the Co-ordinate Bench of Visakhapatnam Tribunal in the case of GMR Varalakshmi Foundation vs CIT (Exemption), (173 taxmann.com 535). The Ld. AR further contended that the Hon’ble Supreme Court has held in the case of PCIT-1 vs. M/s. V-Con Integrated Solutions Pvt. Ltd. (173 taxmann.com 774) (SC) that where the Assessing Officer had made enquiries but erred in not making addition, such case cannot be subject matter of revisionary jurisdiction under Section 263 of the Act.
(Assessment Year: 2021-22) Dhanesh Badarmal Jain vs. PCIT Page 4 of 8 5. Per contra, Shri R. P. Rastogi, Ld. CIT-DR strongly defended the order of the Ld. PCIT. He submitted that when the Assessing Officer had held that the entire loan of Rs.92,00,000/- taken during the year was bogus, the interest accrued/paid thereon should also have been disallowed. Since the Assessing Officer had failed to disallow the interest on the unsecured loan, the order of the Assessing Officer was certainly erroneous and prejudicial to the interest of revenue. Therefore, the Ld. PCIT had rightly exercised his revisional jurisdiction in this case and passed the order u/s 263 of the Act.
We have considered the rival submissions. It is found that the total amount of unsecured loan disclosed in the balance sheet of the assessee was Rs.1,36,21,671/-. In the course of assessment, the assessee had given break-up of this amount and had explained that loan taken from 10 parties was to the extent of Rs.92,00,000/- and the balance amount was interest accrued thereon. However, the assessee did not furnish any documentary evidence to establish the identity and creditworthiness of the loan creditors and the genuineness of the loan transaction was also not established. The assessee has brought on record a copy of the show cause notice dated 21.12.2022 issued by the Assessing Officer which is found to be as under: -
SHOW CAUSE NOTICE On perusal of your submission it is seen that you have sought 4 more day's time to collect required details from parties. In this regard it is to be informed that you have already been offered ample opportunities to submit required details. You were asked to submit complete details of unsecured loans taken during the year vide notice dated 06/10/2022, however you have failed to submit the same. You were again requested to submit the same vide notice dated 30/11/2022, however you again failed in submitting required details. Thereafter a specific final show cause was issued to you on 12/12/2022. For which you have again failed to comply. Therefore, again a final show cause was (Assessment Year: 2021-22) Dhanesh Badarmal Jain vs. PCIT Page 5 of 8 issued on 16/12/2022, for which you have complied on 20/12/2022 again giving partial details. Therefore you have failed to explain the queries raised to you with respect to unsecured loans taken. Now even after Four opportunities you have requested for more time. In view of the above your request for 4 more days is rejected and you are requested to file your submission by 22/12/2022 at 12:30 PM.”
6.1 It is evident from the above show cause notice that the assessee did not submit the complete details of unsecured loan till 22.12.2022 in spite of multiple opportunities provided by the Assessing Officer. The assessee has produced a copy of e-acknowledgement in compliance to the show cause notice dated 21.12.2022 but the copy of reply filed has not been brought on record. Be that as it may, the fact remains that the Assessing Officer had treated the entire unsecured loan of Rs.92,00,000/- as unexplained since the identity and the creditworthiness of the loan creditors was not established. Having treated the entire unsecured loan of Rs.92,00,000/- as unexplained, the Assessing Officer should have disallowed the interest of Rs.44,51,671/- debited to the account in respect of these unsecured loans. The contention of the assessee that this interest was paid on month-to-month basis was also not correct as the Assessing Officer had given a finding that the interest of Rs.44,51,671/- was recorded in the books of account through journal entry passed during the year under consideration. In view of these facts, we are of the considered opinion that the Ld. PCIT had rightly held that the order of the Assessing Officer was erroneous and prejudicial to the interest of revenue as the Assessing Officer had disallowed only the quantum of unsecured loan, without disallowing the interest paid/accrued thereon during the year, which was already debited to the account.
(Assessment Year: 2021-22) Dhanesh Badarmal Jain vs. PCIT Page 6 of 8 6.2 The contention of the assessee that no order under Section 263 of the Act could have been passed in this case since the quantum addition made in respect of unsecured loan was already subject matter of appeal before the Ld. CIT(A), is found to be misplaced. What was the subject matter of appeal before the Ld. CIT(A) was the quantum of unsecured loan of Rs. 92,00,000/-. The issue on which the assessment order was held to be erroneous and prejudicial to the interest of revenue, is not the quantum of unsecured loan but the interest accrued/paid on these loans, which was debited to the account but not disallowed by the AO. Since no addition for interest on unsecured loan was made, this issue could not have been subject matter of appeal before the Ld. CIT(A).
6.3 The contention of the assessee that the matter was examined by the Assessing Officer in the course of assessment and a conscious decision was taken not to make the addition in respect of interest on unsecured loan, is also found to be misplaced. In the case of M/s. V-Con Integrated Solutions Pvt. Ltd. (supra), an identical stand was taken before the Hon’ble Supreme Court wherein it was contended that “the assessee does not have control over the pen of Assessing Officer. Once the Assessing Officer carries out the investigation but does not make any addition, it can be taken that he accepts the plea and the stand of the assessee.” The Hon’ble Supreme Court while adjudicating this contention of the assessee had held as under: -
“4. In such cases, it would be wrong to say that the Revenue is remediless. The power under Section 263 of the Income Tax Act, 1961, can be exercised by the Commissioner of Income Tax, but by going into the merits and making an addition, and not by way of a remand, recording that there was failure to investigate. There is a distinction between the failure or absence of investigation and a wrong decision/conclusion. A wrong decision/conclusion can be corrected by the Commissioner of Income Tax with a decision on merits and by making an addition or disallowance.
(Assessment Year: 2021-22) Dhanesh Badarmal Jain vs. PCIT Page 7 of 8 5. There may be cases where the Assessing Officer undertakes a superficial and random investigation that may justify a remit, albeit the Commissioner of Income Tax must record the abject failure and lapse on the part of the Assessing Officer to establish both the error and the prejudice caused to the Revenue”.
6.4 In the present case, the Assessing Officer did make enquiry in respect of loans taken by the assessee and it was apparent from the reply of the assessee that the interest of Rs.44,51,671/- was debited to the account, in respect of unsecured loan of Rs.92,00,000/-. The AO had treated the entire loan of Rs.92 lakhs as unexplained, which was added to income but no addition was made in respect of interest claimed thereon. The action of the Assessing Officer in not making the disallowance of the accrued interest of Rs.44,51,671/-, while disallowing the unsecured loan of Rs.92 lakhs, was a wrong decision/conclusion which can be corrected by the Ld. PCIT, as held by the Hon’ble Supreme Court. The Hon’ble Apex Court has further held that remanding the matter to the Assessing Officer is justified in the cases where the Ld. PCIT records abject failure and lapse on the part of the Assessing Officer to establish both the error and the prejudice caused to the revenue. In the present case, a wrong decision was taken by the AO pursuant to superficial enquiry on the issue of interest on unsecured loan. The Ld. PCIT has recorded the failure and lapse on the part of the AO in this respect and has correctly held that the order of the Assessing Officer was erroneous and prejudicial to the interest of revenue. Therefore, the Ld. PCIT had correctly exercised his jurisdiction to pass the present order under Section 263 of the Act and, accordingly, his order is upheld.
Order pronounced in the open court on this 24th September, 2025.