2025 (6) TMI 57 - AT - Income Tax

CIT revision order under section 263 upheld for inadequate verification of suspicious unsecured loans under section 68

ITAT Pune upheld CIT's revision order u/s 263 regarding addition u/s 68 for unsecured loans. The AO failed to adequately verify genuineness of loans worth ... Revision u/s 263 - Addition u/s 68 - as per CIT no adequate verification and inquiry into the genuineness of unsecured loans received by the assessee done by AO - HELD THAT:- A perusal of the assessment order shows that the order has been passed by AO without making any enquiry or verification which should have been made in the instant case. When the lenders are declaring very meager income, how can they extend the loans to the extent of crores of rupees should have opened the eyes of the AO AO for the reasons best known to him, has closed his eyes and accepted the documents filed by the assessee and completed the assessment without application of mind. Under these circumstances, if the provisions of section 263 of the Act are not invoked, then we are afraid that such provisions will become redundant and the Assessing Officers can do anything in the name of enquiry. he various decisions relied on by assessee are of no help to him especially when the assessment order has been passed by the AO by closing his eyes and accepting the huge loans and advances despite meager income declared by those lenders. No infirmity in his order invoking the jurisdiction u/s 263 of the Act. We accordingly uphold the same and the grounds raised by the assessee are dismissed. 1. ISSUES PRESENTED and CONSIDEREDThe core legal questions considered by the Tribunal in this appeal are:(a) Whether the order passed by the Assessing Officer under section 143(3) read with section 144B of the Income Tax Act, 1961 (the Act) accepting the returned income without conducting adequate verification and inquiry into the genuineness of unsecured loans received by the assessee is erroneous and prejudicial to the interests of Revenue, thereby justifying revision under section 263 of the Act.(b) Whether the Principal Commissioner of Income Tax (PCIT) was justified in invoking the jurisdiction under section 263 of the Act to set aside the assessment order and direct a fresh assessment on the issue of unsecured loans/other capital introduced by the assessee.(c) Whether the Assessing Officer's acceptance of the unsecured loans without verifying the identity, creditworthiness, and genuineness of the lenders and the transactions complies with the requirements of section 68 of the Act.(d) Whether the decisions relied upon by the assessee support the contention that the PCIT's order under section 263 is not sustainable when the Assessing Officer has taken one possible view.2. ISSUE-WISE DETAILED ANALYSISIssue (a) & (c): Whether the assessment order is erroneous and prejudicial to Revenue for accepting unsecured loans without adequate verification under section 68 of the ActRelevant legal framework and precedents: Section 68 of the Income Tax Act requires that when an assessee claims any sum as a loan or deposit from any person, the Assessing Officer must verify the identity of the lender, the genuineness of the transaction, and the creditworthiness of the lender. The burden lies on the assessee to prove these elements. Section 263 empowers the PCIT to revise an assessment order if it is erroneous and prejudicial to the interests of Revenue, particularly if the order was passed without making necessary inquiries or verifications (Explanation 2(a) to section 263).Court's interpretation and reasoning: The Tribunal noted that the assessee introduced unsecured loans amounting to Rs. 19.60 crores during the assessment year, allegedly borrowed from seven persons described as friends and relatives. The PCIT found that the income tax returns filed by these lenders disclosed very meager incomes, disproportionately low compared to the huge amounts of loans advanced. For instance, one lender declared an income of Rs. 3,89,700/- but allegedly advanced Rs. 97,61,000/- as loan, representing a disproportion of over 2500%. Similar disproportionate ratios were noted for all lenders, some exceeding 20,000% of their declared income.The PCIT further observed that the Assessing Officer had accepted the loans without verifying the identity and creditworthiness of the lenders or conducting any meaningful inquiry into the genuineness of the transactions. The documents filed by the assessee, such as unsigned ITR-V copies, incomplete bank statements without branch details, and deficient confirmations, were found inadequate to establish the identity and creditworthiness of the lenders. Additionally, the bank statements revealed unusual credit and debit transactions preceding the loans, raising suspicion about the source of funds.The Tribunal agreed with the PCIT that the Assessing Officer's order was passed without proper application of mind and without making necessary inquiries or verifications mandated under section 68. It held that the Assessing Officer's acceptance of the unsecured loans in a mechanical manner, despite glaring inconsistencies and lack of credible evidence, rendered the assessment order erroneous and prejudicial to the interests of Revenue.Key evidence and findings: The disproportion between the loan amounts and the lenders' declared incomes; incomplete and unsigned documents; absence of identity proofs; suspicious banking transactions; no balance sheets reflecting these transactions; and unexplained credit and debit entries in lenders' bank accounts.Application of law to facts: The Tribunal applied the statutory requirements of section 68 and the principles under section 263. It found that the Assessing Officer failed to discharge the duty to verify the basic ingredients of section 68 before accepting the loans. This failure amounted to an erroneous order prejudicial to Revenue, justifying revision under section 263.Treatment of competing arguments: The assessee contended that all required documents were furnished during assessment proceedings and that the Assessing Officer had accepted the returns and accounts. The assessee relied on judicial precedents emphasizing that if two views are possible, the PCIT cannot interfere under section 263. However, the Tribunal distinguished these precedents by highlighting that in the present case, the Assessing Officer did not apply his mind or conduct any inquiry, effectively closing his eyes to the discrepancies. The Tribunal found the PCIT's action justified to prevent misuse of the assessment process.Conclusions: The assessment order was erroneous and prejudicial to Revenue for failure to verify the unsecured loans under section 68. The PCIT was justified in invoking section 263 to set aside the order and direct a fresh assessment.Issue (b): Whether the PCIT was justified in invoking jurisdiction under section 263Relevant legal framework and precedents: Section 263 allows the PCIT to revise an order if it is erroneous and prejudicial to Revenue. Explanation 2(a) clarifies that an order is erroneous if passed without making inquiries or verifications which should have been made. The PCIT must give the assessee an opportunity of being heard before passing such order.The assessee cited decisions from various High Courts and the Supreme Court emphasizing that revision under section 263 is not justified if the Assessing Officer has taken one possible view or if the revisional authority fails to point out what inquiries were omitted.Court's interpretation and reasoning: The Tribunal acknowledged these precedents but found them distinguishable. In the present case, the PCIT had identified specific discrepancies and deficiencies in the assessment order, including lack of verification of identity, creditworthiness, and genuineness of lenders and transactions. The PCIT issued a show cause notice and gave the assessee an opportunity to be heard. The Tribunal held that the PCIT conducted proper scrutiny and inquiry before invoking section 263.The Tribunal emphasized that the Assessing Officer's failure to verify substantial loans from parties with meager declared incomes was a clear omission of necessary inquiry. The PCIT's intervention was necessary to uphold the integrity of the tax assessment process and prevent acceptance of suspicious transactions without scrutiny.Key evidence and findings: The PCIT's detailed analysis of the discrepancies, issuance of show cause notice, and directions for fresh inquiry by the Assessing Officer.Application of law to facts: The PCIT's order fell squarely within the scope of section 263 as the original assessment was passed without necessary inquiry, making it erroneous and prejudicial to Revenue.Treatment of competing arguments: The Tribunal rejected the assessee's reliance on precedents that prohibit revision where two views are possible, holding that the present case involves failure to make any inquiry at all, which is a distinct and more serious deficiency.Conclusions: The PCIT was justified in invoking jurisdiction under section 263 and setting aside the assessment order for fresh examination.3. SIGNIFICANT HOLDINGSThe Tribunal upheld the order passed by the PCIT under section 263 of the Income Tax Act, 1961, holding:'A perusal of the assessment order shows that the order has been passed by Assessing Officer without making any enquiry or verification which should have been made in the instant case. When the lenders are declaring very meager income, how can they extend the loans to the extent of crores of rupees should have opened the eyes of the Assessing Officer. However, the Assessing Officer for the reasons best known to him, has closed his eyes and accepted the documents filed by the assessee and completed the assessment without application of mind.''Under these circumstances, if the provisions of section 263 of the Act are not invoked, then we are afraid that such provisions will become redundant and the Assessing Officers can do anything in the name of enquiry.'Core principles established include:The Assessing Officer must verify the identity, genuineness, and creditworthiness of lenders under section 68 before accepting unsecured loans.An assessment order passed without such verification is erroneous and prejudicial to Revenue, justifying revision under section 263.Section 263 cannot be invoked merely because another possible view exists, but it is justified where there is a complete failure to make necessary inquiries.The revisional authority must give the assessee an opportunity of being heard and make or cause to be made such inquiry as deemed necessary before passing an order under section 263.Final determinations on each issue:(a) The assessment order accepting unsecured loans without verification was erroneous and prejudicial to Revenue.(b) The PCIT was justified in invoking section 263 to set aside the assessment order and direct a fresh assessment.(c) The Assessing Officer failed to discharge the statutory duty under section 68 to verify the identity, genuineness, and creditworthiness of the lenders.(d) The precedents cited by the assessee do not apply when the assessment order is passed without any inquiry or application of mind.