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Facts
The assessee filed an appeal against the order passed by the PCIT under Section 263 of the Income Tax Act, 1961. The PCIT had initiated revisionary proceedings because the Assessing Officer (AO) had disallowed unsecured loans amounting to Rs.6,19,88,853/- but failed to disallow the corresponding interest of Rs.45,63,779/-.
Held
The Tribunal held that the PCIT rightly assumed jurisdiction under Section 263 as the assessment order was erroneous and prejudicial to the revenue. The assessee failed to demonstrate the genuineness of the unsecured loans or justify the allowability of the interest expenditure.
Key Issues
Whether the PCIT correctly invoked Section 263 jurisdiction when the AO had already examined the issue of unsecured loans and related interest. Whether the disallowance of interest on unsecured loans was justified when the AO treated the loans as not genuine.
Sections Cited
263, 143(3), 36(1)(iii), 37
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Income Tax Appellate Tribunal, “C” BENCH, AHMEDABAD
Before: SMT. ANNAPURNA GUPTA & SHRI T.R. SENTHIL KUMAR
(�नधा�रण वष� / Assessment Year : 2018-19) बनाम/ Narayankrupa Reality The Pr. Commissioner of 87/1037, Panchvati Income Tax-3 Vs. Apartment, Opp. Ahmedabad Rameshwar Society, Sola Cross Road, Ahmedabad, Gujarat - 380060 �थायी लेखा सं./जीआइआर सं./PAN/GIR No. : AANFN2902M (Appellant) .. (Respondent) अपीलाथ� ओर से /Appellant by : Shri Aseem L Thakkar, A.R. ��यथ� क� ओर से/Respondent by : Shri Rignesh Das, CIT. DR Date of Hearing 05/05/2025 Date of Pronouncement 08/05/2025 (आदेश)/ORDER PER SMT. ANNAPURNA GUPTA, AM:
The present appeal has been filed by the assessee against order passed by the Principal Commissioner of Income Tax, PCIT, Ahmedabad-3 (in short ‘the PCIT’) in exercise of revisionary jurisdiction under Section 263 of the Income Tax Act, 1961 (in short ‘the Act’) dated 12.02.2024 pertaining to Assessment Year 2018-19.
2. The orders of the authorities below reveal that the revisionary power was exercised by the Ld. PCIT noting that when Reality vs. PCIT] A.Y. 2018-19 - 2 – the assessment was finalized in the case of the assessee for the impugned assessment year i.e. 2018-19, the AO had disallowed unsecured loans of Rs.6,19,88,853/- since the identity, creditworthiness and genuineness of the persons from whom the loan was taken was not proved, however, the interest paid on the unsecured loan amounting to Rs.45,63,779/-, which was debited in the P&L account was not correspondingly disallowed by the AO u/s.37 of the Act.
3. Before the Ld. PCIT, the assessee contested the revisionary power exercised stating that the unsecured loan had been wrongly added to the income of the assessee,since, they were all genuine and evidences in this regard had been filed to the AO and besides, it was also contended that merely because unsecured loans were added back to the income of the assessee,there could not be a case of automatic disallowance of interest expense also relating to the same. The contention of the assessee are reproduced at page 3 & 4 of the order of the Ld. PCIT and summarized at para 6 & 7 of his order as under:
“6. The above submission has been duly considered. The assessee has contended that observation made by the AO during the assessment proceedings that the identity, creditworthiness and genuineness of the person from whom the unsecured loan was taken was not proved as also mentioned in the notice is incorrect. The assessee has submitted that during the course of assessment proceedings by furnishing the full name and address of the party, the onus of proving the identity of the lender was discharged and Form 3CD contained the PAN of the lender which proves that the lender is a man of means and thus creditworthiness of the person is established. Copies of confirmation of account were furnished during the assessment proceedings proving the genuineness of the transaction and thus the A.O. is not justified in treating the unsecured loan as unexplained.
Reality vs. PCIT] A.Y. 2018-19 - 3 – 7.2 Further, the assessee has submitted that disallowance of interest on unsecured loans is not in conformity with the provisions of the Income-tax Act as admissibility of deduction of an expenditure debited to P&L account depends on the relevant provisions of the Income-tax Act and section 36(1) (iii) provides that expenditure on account of interest on money borrowed is allowable as deduction in computation of business income. The assessee has further submitted that the amount of Rs 6,19,88,853/- by way of unsecured loan has been utilized for purpose of business and no part of the borrowed fund has been diverted for non- business purpose. So the expenditure on account of interest amounting to Rs.45,63,779/- is fully allowable and has been rightly allowed by the A.O. 7.3 It is observed from the assessee's submission that it has only submitted the Name, address and PAN of the lenders. Such documents cannot prove the genuineness of the transactions. It is pertinent to note that assessee was required to produce bank statement of depositors, sources of such deposits, annual accounts of such depositors to justify creditworthiness which in present case, it has failed to submit. Therefore, the A.O. has rightly treated the unsecured loan as unexplained credits. However, the A.O. was required to disallow the claim of interest on unsecured loan and should have added it back to the total income of the assessee. It is observed that merely because, assessee has filed appeal before appellate authority, it does not mean that undersigned is precluded from present proceedings. This clearly prove that the Assessment Order passed by AO is erroneous and prejudicial to the interest of revenue.”
4. The Ld. PCIT was not impressed with the contention of the assessee and accordingly held the assessment order passed by the AO to be erroneous causing prejudice to the Revenue for not having disallowed interest pertaining to the unsecured loan taken by the assessee during the year which was treated not genuine by the AO. Accordingly, he directed the AO to disallow the interest claim on the unsecured loan after gathering and examining suitable evidence whatever required and after considering and making necessary verification from the assessee.
Aggrieved with the same, the assessee has come in appeal before us raising the following grounds:
Reality vs. PCIT] A.Y. 2018-19 - 4 – “1. The Learned Pr. Commissioner of Income Tax-3, Ahmedabad has erred in passing an order us 263 of the LT. Act, 1961 setting aside the Assessment Order passed us. 143(3) r.w.s. 1448 of the LT. Act, 1961 did.13.09.2021 and directing the Assessing officer to make fresh assessment order making disallowance of interest of Rs.45,63,779/- claimed by appellant in Profit and loss account on unsecured loans u/s 37 of the Act.
The Learned Pr. Commissioner of Income Tax-3. Ahmedabad has erred in passing an order w/s 263 of the LT. Act, 1961 since the issues sought to be revised have been examined in the assessment proceedings hence the same being illegal and bad in law requires to be quashed
The Learned Pr. Comm. of Income Tax-3, Ahmedabad has erred in not appreciating the fact that all information and related material and evidences had been furnished at the assessment stage relating to the issues raised in the revision proceedings. The A.O. after examining the evidences and other material considering the same after due application of mind has passed the assessment order.
The Learned Pr. Comm. of Income Tax-3. Ahmedabad has erred in not considering the facts that assessment has been made by the Assessing Officer after verification of records, documents, material and evidences produced by the appellant during the course of assessment proceeding for which revision proceedings have been initiated.
5. The Learned Pr. Comm. of Income Tax-3. Ahmedabad has erred in passing an order u/s 263 of the Act directing the A.O. for making disallowance of interest expenditure of Rs.45,63,779/-w/s.37 of the Act holding the same as incurred for unsecured loan is not correct. In fact the interest expenditure incurred by the appellant of Rs.45.63.779/- as claimed in profit loss account also includes interest expenditure incurred for the business purpose which is allowable u/s 36(1)(iii) of the Act.
6. The Learned Pr. Comm. of Income Tax3, Ahmedabad has erred in not considering the fact that issue raised by him in revision proceedings for disallowance of interest on unsecured loans when the appellant has already filed an appeal before the CIT(A) challenging the addition made by the Assessing Officer in respect unsecured loans while completing the assessment u/s. 143(3) of the Act. 7. The Learned Pr. Commissioner of Income Tax 3, Ahmedabad has erred in assumption jurisdiction and initiated revision Reality vs. PCIT] A.Y. 2018-19 - 5 – proceedings u/s. 263 of the Act on issues which are subject matter of appeal.”
During the course of hearing before us, the solitary argument raised by the Ld. Counsel for the assessee was that in terms of the provisions of Section 263 of the Act, the Ld. PCIT was required to go through the records and arrive at his finding of the assessment order being erroneous so as to cause prejudice to the Revenue. That in the facts of the present case, the Ld. PCIT had not gone through the records since he had not even verified whether the entire interest debited to the P&L account was or not included in the unsecured loans disallowed by the AO. That was the only contention which was raised by the Ld. Counsel before us. However, when the Ld. Counsel for the assesee was asked at bar that when the assessee was confronted with this issue by the Ld. PCIT in revisionary proceeding did the assessee come forth with the facts as canvassed before us that the unsecured loans added back to the income of the assessee already included interest component related to them. The Ld. Counsel for the assessee had nothing to say in response, so much so that even before us no such fact was placed/ demonstrated.
In the light of the above, it is evidently clear that the assessee has no case against the error noted by the Ld. PCIT in the assessment order made by the AO. It is not disputed that unsecured loan taken by the assessee during the impugned year to the tune of Rs.6.19 Crores was treated by the AO as not genuine and added back to the income of the assessee in the assessment Reality vs. PCIT] A.Y. 2018-19 - 6 – framed u/s.143(3) of the Act. It is also not disputed that the assessee had debited an amount of Rs.45,63,779/- as interest paid on the unsecured loans to the P&L account, which, however, was not disallowed by the AO. No case being made out before us or even before the Ld. PCIT as to how on merits the disallowance of interest pertaining to the unsecured loans held to be ingenuine, was not justified, we have no hesitation in holding that the Ld. PCIT has rightly found the assessment order to be erroneous causing prejudice to the Revenue in not having disallowed the interest pertaining to the unsecured loans held to be ingenuine by the AO.
We do not find any merit at all in the plea of the Ld.Counsel for the assessee that the jurisdiction assumed by the Ld.PCIT u/s 263 of the Act was not as per law since he had not perused the records of the assessee to see whether the unsecured loans added to the income of the assessee included interest component or not, before assuming jurisdiction. The facts evident on record that unsecured loans were treated as ingenuine but interest paid on the same was not disallowed by the AO, the Ld. PCIT, we hold, had rightly assumed jurisdiction u/s.263 of the Act to revise the order of the AO. Section 263 of the Act requires opportunity to be given to the assessee to explain their case when confronted with the error noted by the Commissioners/Principal Commissioner of Income Tax. At this juncture, the assessee ought to have demonstrated on facts / merits that the error noted by the Ld. PCIT was not correct. Having failed to do so before the Ld. PCIT and Reality vs. PCIT] A.Y. 2018-19 - 7 – for that matter even before us, we have no hesitation in dismissing the argument of the Ld. Counsel for the assessee that the assumption of jurisdiction by the Ld. PCIT in the present case was without examining the records. It clearly is an argument which is without any basis at all and therefore needs to be dismissed.
In the light of the above, we do not find any infirmity in the order passed by the Ld. PCIT holding the assessment order to be erroneous so as to cause prejudice to the Revenue. All the grounds raised by the assessee are dismissed on account of the solitary argument raised before us being dismissed by us.
In the result, appeal filed by the assessee is dismissed.
This Order pronounced on 08/05/2025 Sd/- Sd/- (T.R. SENTHIL KUMAR) (ANNAPURNA GUPTA) JUDICIAL MEMBER ACCOUNTANT MEMBER Ahmedabad; Dated 08/05/2025 S. K. SINHA True Copy आदेश क� ��त�ल�प अ�े�षत/Copy of the Order forwarded to : अपीलाथ� / The Appellant 1. ��यथ� / The Respondent. 2. संबं�धत आयकर आयु�त / Concerned CIT 3. 4. आयकर आयु�त(अपील) / The CIT(A)- �वभागीय ��त�न�ध, आयकर अपील�य अ�धकरण, अहमदाबाद / DR, ITAT, Ahmedabad 5. 6. गाड� फाईल / Guard file. आदेशानुसार/ BY ORDER,