2025 (6) TMI 936 - AT - Income Tax

ITAT overturns PCIT revision order treating trade advances as loans under Section 263

M/s Greater Noida Industrial Development Authority Versus Pr. Cit, Noida

The ITAT Delhi allowed the assessee's appeal against PCIT's revision order under Section 263. The assessee, a statutory body under UP Industrial Area ... Revision u/s 263 - as per CIT AO did not considered issue of loans and advances - HELD THAT:- We note that assessee is a statutory body as per the Uttar Pradesh Industrial Area Development Act, 1976. The advances given by the entities to the various Govt., Corporations have been wrongly noted by the PCIT as loans. PCIT has failed to appreciate that assessee is a statutorily mandated as per the Uttar Pradesh Industrial Area Development Act, 1976 to carry out developmental works through various Central / State Agencies. The advances were thus made to, inter alia, such entities, in the nature of trade advances for execution of various such works, and therefore, were non-interest bearing. The details of assessee's advances were duly enquired by the AO which the PCIT has himself noted that it is available in the assessment record. PCIT was of the opinion that the AO did not examine the details available on records and has summarily accepted the confirmations submitted by the assessee ignoring the facts available on records. Thus it is clear that the details were available on record which have not been ignored by the AO. It is clear that the AO has made an enquiry on the issue of loans and advances for which the explanations was given by the assessee and AO was satisfied with it. The amendment brought out in Explanation 2 to Section 263 of the Act was inserted by the Finance Act, 2015 w.e.f. 1.6.2015 which is not applicable in the instant assessment year applicable here i.e. AY 2013-14. Hence, Ld. DR's submissions in this regard cannot fructify the case of the Revenue. The amendment thus cannot empower the PCIT to order for further enquiry as the period is prior to the amendment. Assessee appeal allowed. 1. ISSUES PRESENTED and CONSIDEREDThe core legal questions considered by the Tribunal in this appeal include:Whether the order passed by the Principal Commissioner of Income Tax (PCIT) under Section 263 of the Income Tax Act, 1961, directing reassessment on the ground that the original assessment was erroneous and prejudicial to the revenue, was legally sustainable or amounted to mere change of opinion.Whether the Assessing Officer (AO) had properly examined and verified the issue of loans and advances given by the assessee, a statutory body under the Uttar Pradesh Industrial Area Development Act, 1976, and whether the advances were rightly treated as non-interest bearing trade advances rather than loans attracting interest income.Whether the PCIT was justified in concluding that the AO mechanically accepted the assessee's contentions without proper verification, thereby making the original assessment erroneous and prejudicial to the revenue.Whether the amendment to Explanation 2 of Section 263 of the Income Tax Act, 1961, which empowers the PCIT to direct further inquiry, applied to the assessment year under consideration.Whether the PCIT's order was bad in law for not granting the assessee an opportunity of oral hearing before passing the order under Section 263.Whether the PCIT erred in passing an order on surcharge without issuing a show-cause notice on that issue to the assessee.2. ISSUE-WISE DETAILED ANALYSISIssue 1: Legality and validity of the PCIT's order under Section 263 (whether it is a mere change of opinion)Legal Framework and Precedents: Section 263 empowers the PCIT to revise an assessment order if it is 'erroneous in so far as it is prejudicial to the interests of the revenue.' However, it is well settled that jurisdiction under Section 263 cannot be exercised to simply substitute the opinion of the AO with that of the PCIT. The exercise of this jurisdiction must be based on a finding of an error apparent on the face of the record, not a mere change of opinion. Relevant precedents cited include Gupta Spinning Mills v. CIT, CIT v. Sunbeam Auto Ltd., and CIT v. Anil Kumar Sharma, which emphasize that Section 263 cannot be invoked to re-examine facts or re-appreciate evidence already considered by the AO.Court's Interpretation and Reasoning: The Tribunal noted that the PCIT's order itself acknowledges that the AO had considered the issue of loans and advances during assessment proceedings. The AO had issued notices under Section 142(1), received detailed replies from the assessee, and passed the assessment order after examining the explanations and documents. Thus, the PCIT's direction for reassessment was based on a mere disagreement with the AO's conclusions rather than any error apparent on record.Key Evidence and Findings: The assessee had furnished detailed schedules of loans and advances, clarifying their nature as non-interest bearing trade advances. The AO had specifically inquired about these advances and accepted the explanations without making any addition for interest income. Further, rectification proceedings under Section 154/155 also considered these issues without any adverse findings.Application of Law to Facts: Since the AO had made a conscious and informed decision after due inquiry, the PCIT's order amounted to a mere change of opinion, which is not permissible under Section 263. The Tribunal held that the PCIT's jurisdiction was improperly exercised.Treatment of Competing Arguments: The Revenue argued that the PCIT's order was justified to protect revenue interests. However, the Tribunal rejected this, emphasizing that the amendment empowering further inquiry under Explanation 2 of Section 263 was not applicable for the assessment year 2013-14, and that the AO had already made sufficient inquiries.Conclusion: The PCIT's order under Section 263 was held to be an impermissible change of opinion and therefore invalid.Issue 2: Nature of advances given by the assessee and taxability of interest income thereonLegal Framework and Precedents: The assessee is a statutory body incorporated under the Uttar Pradesh Industrial Area Development Act, 1976, mandated to carry out developmental works through various Central and State agencies. Advances given to such agencies in the nature of trade advances are non-interest bearing and not loans for commercial purposes. The taxability of interest income depends on the nature of the transaction and the status of the assessee.Court's Interpretation and Reasoning: The Tribunal noted that the PCIT failed to appreciate the statutory status of the assessee and the nature of advances. The advances were made for execution of developmental works and were non-interest bearing. The AO had duly examined the nature of these advances and accepted the assessee's claim that no interest income was applicable.Key Evidence and Findings: The assessee provided detailed schedules and explanations indicating that advances were made to government and quasi-government agencies for developmental projects, and were not loans attracting interest. The PCIT's characterization of these as loans requiring interest computation was found to be incorrect.Application of Law to Facts: The Tribunal held that the advances were rightly treated as non-interest bearing trade advances, consistent with the statutory mandate of the assessee. Therefore, no addition on account of interest income was warranted.Treatment of Competing Arguments: The Revenue's contention that interest income should have been computed at 12% on the advances was rejected on the ground that the advances were not loans but trade advances in the normal course of business.Conclusion: The advances are non-interest bearing trade advances, and the AO's treatment excluding interest income was justified.Issue 3: Whether the AO examined the records properly or mechanically accepted the assessee's contentionsLegal Framework and Precedents: The PCIT relied on judicial pronouncements (Panchaman Traders, Malabar Industrial Co. Ltd., CIT Bhagwan Das) to assert that the AO failed to make proper inquiries and mechanically accepted the assessee's submissions.Court's Interpretation and Reasoning: The Tribunal found that the AO had issued notices, sought explanations, and considered detailed replies and documentary evidence before passing the assessment order. The PCIT's conclusion that the AO did not examine the records closely was not supported by the record.Key Evidence and Findings: The record showed that the AO had specifically inquired about loans and advances, considered the replies dated 13.2.2015 and 16.2.2015, and did not find any reason to add interest income. Rectification proceedings also did not result in any addition.Application of Law to Facts: The AO's examination was found to be proper and not mechanical. Therefore, the PCIT's finding was erroneous.Conclusion: The AO had duly examined the records and the PCIT's contrary finding was incorrect.Issue 4: Applicability of Explanation 2 to Section 263 for directing further inquiryLegal Framework: Explanation 2 to Section 263 was inserted by the Finance Act, 2015, with effect from 1.6.2015, allowing the PCIT to treat an order as erroneous if it was passed without making inquiries or verification which should have been made.Court's Interpretation and Reasoning: The Tribunal noted that the assessment year under consideration was 2013-14, prior to the amendment. Therefore, Explanation 2 was not applicable to this case.Conclusion: The PCIT could not rely on Explanation 2 to justify directing further inquiry or reassessment for AY 2013-14.Issue 5: Failure to grant opportunity of oral hearing and passing order on surcharge without noticeCourt's Interpretation and Reasoning: The assessee contended that no opportunity of oral hearing was granted and that the PCIT passed an order on surcharge without issuing a show-cause notice on the same. The Tribunal noted these contentions but did not elaborate extensively on these procedural issues in the final decision. However, such procedural lapses generally vitiate the order.Conclusion: The PCIT's order was procedurally flawed for not granting an opportunity of hearing and for deciding on surcharge without notice, further supporting the invalidity of the order.3. SIGNIFICANT HOLDINGSThe Tribunal held:'Since the AO had made a conscious decision after examining the details and explanations furnished by the assessee, the order under Section 263 passed by the PCIT is a mere change of opinion and hence not sustainable.''The advances given by the assessee, a statutory body under the Uttar Pradesh Industrial Area Development Act, 1976, are non-interest bearing trade advances made for execution of developmental works through various Central/State agencies and therefore, no interest income is chargeable.''Explanation 2 to Section 263 of the Income Tax Act, 1961, inserted w.e.f. 1.6.2015, is not applicable to the assessment year 2013-14, and therefore, the PCIT cannot direct further inquiry on that basis.''The AO had duly inquired and examined the records and the PCIT's conclusion that the AO mechanically accepted the assessee's contentions is not borne out by the record.''The jurisdiction exercised by the PCIT under Section 263 is quashed and the appeal of the assessee is allowed.'These holdings reaffirm the principle that Section 263 cannot be invoked to substitute the AO's opinion with that of the PCIT unless there is an apparent error prejudicial to revenue, and that procedural fairness and statutory mandates regarding the nature of advances must be respected in tax assessments.