TaxTMI 
TaxTMI 
2026 (1) TMI 801
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.... Nil income. 2.3 Search and seizure action under section 132 was carried out on 28.09.2021 in the case of B Safal and City Estate Group, which is engaged in real estate development. The assessee has been treated as one of the core associated entities of the group. Consequent to the search the assessee's case was selected for complete scrutiny. Notices under section 143(2), 142(1) and specific show cause notice were issued was also issued proposing additions and disallowances on the basis of seized materials. 2.4 The main subject considered in the assessment is alleged receipt of unaccounted on money in cash in respect of sale of units in the project "Seventy". Based on the seized material during search, the Assessing Officer issued a notice calling upon the assessee to furnish, inter alia, a list of purchasers, unit details, floor, super built up area, carpet area, sale deed consideration, rate per sq.ft., date of document, and copies of sale deeds. 2.5 AO relied on (i) seized page 17 of Annexure A-23 showing higher unit- wise values for "Seventy", (ii) Excel file "Seventy Flat Details.xlsx" indicating internal basic rates higher than registered rates, (iii) page 17 of Ann....
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....e advance to the partner. For A.Y. 2021-22, the PCIT noted that the firm incurred bank interest of Rs. 3,84,11,899/- and other interest of Rs. 11,46,036/-, aggregating to Rs. 3,95,57,935/-, and observed that a large portion of this interest cost had been incurred by the firm to finance the loans given to Shri Rajesh B. Brahmbhatt. It was also observed that advancing loans was not the business of the firm and, therefore, the portion of interest expenditure attributable to this interest free loan was not allowable under section 36(1)(iii). 2.11 The PCIT referred to Explanation 2 to section 263(1) along with series of judicial precedents concluded that an assessment order can be regarded as erroneous and prejudicial where the Assessing Officer has failed to make requisite enquiries or has accepted a claim without verification. In consequence, the PCIT set aside the assessment order to the file of the Assessing Officer with a direction to examine the above issue in detail and to pass a fresh assessment order after affording proper opportunity of being heard to the assessee. 3. Aggrieved by the order of the PCIT, the assessee is in appeal before us raising following grounds: ....
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....tnership deed contains a clause regarding the charging or payment of interest on partners' capital or drawings, such provision is clearly subject to mutual agreement among the partners. The clause serves merely as an enabling provision and not a mandatory requirement. Therefore, the absence of interest charged to Shri Rajesh Brahmbhatt does not indicate any violation or deviation from the terms of the deed. Accordingly, no adverse inference should be drawn solely on the basis of the non-charging of interest, as the discretion to implement such a provision lies entirely with the partners. The Ld. PCIT has failed to appreciate that it is well settled that income tax cannot be levied on hypothetical income unless the statute provides otherwise and only real income actually accrued to an assessee is chargeable to tax in ordinary course. Useful reference in this regard can be made to the decision of the Supreme Court in Morvi Industries Ltd. vs. CIT (Central)(1971) 82 ITR 835 (SC) and other judicial pronouncements relied upon by the appellant. 6. The Ld. PCIT has erred in not considering that the case of the appellant for A.Y. 2021-22 was selected for a compulsory scrutiny ....
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....ip law and do not constitute a loan or advance on which interest is mandatorily chargeable. Thus, the PCIT's assumption that the assessee had granted an interest-free loan without commercial justification was stated to be erroneous. The AR further submitted that although the partnership deed contains a clause regarding interest on debit or credit balances, such clause operates subject to mutual understanding among partners. It was explained that the partners had mutually agreed not to charge interest on drawings and that the Assessing Officer had accepted this position in earlier assessments. Hence, there was no deviation from the terms of the partnership deed. 3.3 The AR further pointed out, from the submission before the PCIT, that the very foundation of the proposed revision was factually misconceived. It was emphasised that no loans or advances whatsoever had been granted by the assessee LLP to Shri Rajesh B. Brahmbhatt during the year under consideration or in any of the preceding years referred to in the notice under section 263, and that the amounts referred to by the PCIT represented nothing but capital withdrawals made by the partner from his own capital account. Detail....
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....l introduction, partners' drawings, loan movements and utilisation of funds. The Assessing Officer duly examined these materials and recorded his satisfaction. It was contended that the PCIT, without demonstrating any error in the assessment order, has merely substituted his own opinion for that of the AO, which is impermissible. The AR submitted that the allegation in para 5 of the PCIT's notice, suggesting that a substantial portion of interest-bearing funds was utilised to grant interest-free loans to Shri Rajesh B. Brahmbhatt, is factually incorrect and based purely on assumption without supporting evidence. The assessee had placed on record a reconciliation of finance cost showing that the total interest expenditure for FY 2020-21 is Rs. 3,96,68,128/- and not Rs. 3,95,57,935/-, as wrongly assumed. The detailed breakup of finance cost disclosed that all interest expenses pertain either to bank borrowings or deposits, both utilised for business purposes. 3.6 The AR further submitted that no interest-free loan was ever advanced by the assessee LLP to Shri Rajesh B. Brahmbhatt. The amounts standing in his account represent drawings of his own capital, being a partner of the LLP....
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....dger extracts, contribution details, and the nature and source of funds. These submissions form part of the assessment record and were duly considered by the Assessing Officer. The assessment order thereafter finalised on 30.12.2022 cannot, in our considered view, be described as perfunctory, mechanical, or passed without inquiry. 4.2 We further note that the very same issue of debit balance of the partner, Shri Rajesh Brahmbhatt, had come up during scrutiny assessment for A.Y. 2018-19. The assessee placed on record the assessment order for that year showing that the Assessing Officer had examined the capital withdrawals and the corresponding funds flow without drawing any adverse inference. The existence of a debit balance for multiple years was thus not a new or unexamined fact. The absence of adverse inference in the earlier year cannot, by itself, determine the legal position, but it fortifies the conclusion that the matter had been examined in scrutiny in the present year also and was duly understood in the context of the assessee's business and partnership structure. 4.4 The assessee's explanation during the revision proceedings was clear and supported by documentary ev....