Revenue's Section 263 revision succeeds as assessment order failed to verify unsecured loan depositors' creditworthiness and capital source

The Jharkhand HC allowed the Revenue's appeal in a revision under Section 263 concerning addition of unsecured loans. The court held that the assessment order was erroneous and prejudicial to revenue interests due to the AO's failure to verify creditworthiness of depositors and conduct proper inquiries regarding the source and introduction of capital. The court distinguished this from a mere change of opinion, finding it was a case of inadequate verification. Citing SC precedents in Rampyari Devi Sarawagi and Tara Devi Agarwal, the court ruled that accepting unearned sums as genuine without proper inquiry renders the assessment erroneous and prejudicial to revenue.

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Issues Involved:
1. Justification of ITAT in setting aside the order under Section 263 of the Income Tax Act.
2. Verification of the genuineness of unsecured loans by the Assessing Officer (AO).
3. Perversity of ITAT's observations regarding the AO's opinion on the creditworthiness and genuineness of transactions.

Detailed Analysis:

1. Justification of ITAT in Setting Aside the Order under Section 263:
The appeal was directed against the ITAT's order which set aside the Principal Commissioner of Income Tax's (CIT) order under Section 263. The CIT had initiated a suo motu revision proceeding against the Assessee, highlighting that there was a significant rotation of money among relatives without interest payments, and loans aggregating to Rs. 6,75,08,220/- were raised from relatives. The CIT found that the AO had not independently verified these transactions, rendering the assessment order erroneous and prejudicial to the revenue's interest. The ITAT, however, held that the AO had duly verified the genuineness of unsecured loans and that the assessment order was not erroneous or prejudicial to the revenue.

2. Verification of the Genuineness of Unsecured Loans by the AO:
The ITAT's judgment was based on the AO having issued notices under Sections 142(1) and 143(2) of the Act, and the Assessee having complied with these notices by furnishing the required documents. The ITAT presumed that the AO had applied his mind to verify the loans obtained from relatives. However, the High Court noted that the AO's assessment order did not discuss the source and details of the introduction of capital. The CIT had pointed out that one of the depositors, Rajesh Chourasia, had declared an income of only Rs. 4,25,598/-, raising doubts about his creditworthiness to advance such a large loan. The High Court found that the AO had failed to make proper inquiries or verification, which should have been made under Section 68 of the Act.

3. Perversity of ITAT's Observations:
The High Court found the ITAT's observations to be perverse, as the AO had not mentioned any verification or inquiries regarding the source and details of the introduction of capital in the assessment order. The High Court emphasized that the amendment to Section 263, which introduced Explanation-2, clarified that an order passed without necessary inquiries or verification would be deemed erroneous and prejudicial to the revenue's interest. The High Court stated that the ITAT failed to consider this amendment, which applied even to assessments made prior to its introduction.

Conclusion:
The High Court allowed the appeal, ruling in favor of the revenue. It quashed the ITAT's order and restored the CIT's order under Section 263, along with the subsequent assessment order dated 13.12.2018. The High Court underscored that the AO's failure to make necessary inquiries or verification rendered the original assessment order erroneous and prejudicial to the revenue's interest. The court reiterated that the CIT's exercise of revisional jurisdiction was justified, as the AO had not formed any opinion on the critical issue of the creditworthiness and genuineness of the unsecured loans.

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