Failure Of AO To Take Concrete Steps To Ascertain The Genuineness And Creditworthiness Of Transactions: Delhi High Court

The Delhi High Court has held that the AO has not taken any concrete steps to ascertain the genuineness and creditworthiness of the transactions.

The bench of Justice Yashwant Varma and Justice Purushaindra Kumar Kaurav has observed that clause (a) of Explanation 2 of Section 263 of the Act introduces a deeming fiction to the effect that the order passed by the AO shall be considered erroneous and prejudicial to the interests of the Revenue if the order is passed without making inquiries or verification, which should have been made. Henceforth, since neither there is any facet of discussion about the aforenoted aspects in the assessment order nor the assessment record duly reflects that the AO has made an inquiry in light of the findings of the investigation report, the court found that the case to invoke the revisional powers under Section 263 of the Income Tax Act.

The respondent or assessee is in the business of real estate development and has filed an income tax return (ITR). The case of the assessee was picked up for scrutiny, and a notice under Section 143(2) was issued.

An inquiry was undertaken and an assessment order under Section 143(3) of the Income Tax Act was passed, by which the Assessing Officer determined the income of the assessee while making an addition under Section 14A of the Income Tax Act.

The assessee preferred an appeal before the Commissioner of Income Tax (Appeals), and the CIT (A) partly allowed the appeal of the assessee and restricted the addition made by the AO.

By virtue of the powers vested under Section 263, the PCIT perused the assessment order and issued a notice to the assessee. While exercising powers under Section 263, the PCIT set aside the assessment order, considering it to be erroneous and prejudicial to the interests of the Revenue, and directed the AO to consider the case afresh.

Assailing the order of the PCIT, the assessee preferred an appeal before the ITAT, and vide its order dated February 14, 2022, the ITAT accepted the contentions of the assessee, set aside the PCIT order, and consequently restored the assessment order dated December 26, 2018. Aggrieved by the order, the department has preferred the appeal.

The department, while highlighting the infirmities in the ITAT order, contended that the ITAT has failed to appreciate the observations of the PCIT to the effect that the AO did not examine the genuineness and creditworthiness of the unsecured loan transactions undertaken by the assessee for AY 2016–17. The PCIT was correct in holding that the AO had not made any inquiry as it did not take any cognizance of the information forwarded by the Deputy Director of Income Tax (Investigation), Noida (DDIT).

The assessee contended that the ITAT was correct in negating the PCIT order since the AO has undertaken a proper inquiry and an assessment order was duly framed after considering all the relevant facts and circumstances.

The court noted that the PCIT or CIT can, inter alia, exercise the revisional powers under Section 263 if the embargo of the twin conditions is satisfied, i.e., the assessment order in question is erroneous and prejudicial to the interests of the Revenue. Moreover, Section 263 also lays down parameters that would render an assessment order erroneous and prejudicial to the interests of the revenue.

The court held that the assessment order nowhere reflects any element of inquiry or verification. The discussion about the loan transactions in question is altogether missing. The assessment record would also reflect that the AO has not taken any concrete steps to ascertain the genuineness and creditworthiness of the transactions, which merits consideration in light of the findings that emerged from the DDIT investigation report and assessment proceedings of M/s. Upaj Leasing & Finance Pvt. Ltd.

“It emerges that the present is a case where the AO failed not only to spell out any finding about the DDIT investigation report and assessment proceedings of M/s. Upaj Leasing & Finance Pvt. Ltd. but also to scrutinize the highlighted aspects in the said report qua the genuineness and creditworthiness of aforenoted loan transactions. Therefore, this is the minimum inquiry that at least was expected to have been made by the AO,” the court said.

Counsel For Appellant: Puneet Rai

Counsel For Respondent: Rakesh Gupta

Case Title: PCIT Versus M/S Paramount Propbuild Pvt. Ltd.

Citation: 2024 LiveLaw (Del) 333

Case No.: ITA 247/2023

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