Incorrect Assumption Of Facts Alone Is No Basis To Revoke Revisionary Jurisdiction U/s 263: Rajkot ITAT

On finding that the PCIT has held the assessment order passed by AO as erroneous and prejudicial to the interest of the Revenue simply based on incorrect assumption of facts, the Rajkot ITAT directed to set aside the order passed u/s 263 of the Income tax Act, 1963.

The ITAT explained that the assessment order needs to be erroneous as well as prejudicial to the interest of Revenue, for purpose of initiating revision u/s 263.

The Bench of the ITAT comprising of Siddhartha Nautiyal (Judicial Member) and Annapurna Gupta (Accountant Member) observed that “The assessee had submitted that only that part of interest expenditure had been claimed by way of deduction under Section 57 of the Act, which had been incurred for earning interest income and the proportionate part of the interest expenditure which was not utilized for earning interest income had not been claimed by the assessee as deduction under Section 57 of the Act. However, the PCIT did not give any specific finding to controvert the written submissions filed by the assessee during the course of 263 proceedings and proceeded to hold that the assessment order passed by the Assessing Officer is erroneous and prejudicial to the interest of the Revenue.” (Para 11)

As per the brief facts of the case, the Assessee's return was selected for scrutiny and finalized accepting the returned income of Rs. 9,50,750/-. Subsequently, the PCIT initiated proceedings u/s 263 on the ground that on verification of profit and loss account, it is noticed that interest of Rs. 10,34,960/- has been paid by the assessee on loan taken from Central Bank of India, and the amount of loan was invested in a firm of which the assessee is a proprietor and the assessee utilized the loan to earn profit in the proprietary concern and not for earning interest income. Therefore, the same is required to be disallowed u/s 57. Further, the PCIT observed that the assessee has paid interest of Rs. 11,40,985/- on a Bank loan from ICICI Bank and the amount of loan was utilized for the purchase of property and not for earning interest income therefore, the same is also required to be disallowed u/s 57. The PCIT was of the view that the AO had passed an assessment order without proper verification and interest expenses amounting to Rs. 21,75,945/- claimed as deduction u/s 57, were required to be disallowed.

The Bench noted that there was no evidence of lack of inquiry on the part of the AO on the aspect of allowability of claim of deduction u/s 57.

The Bench observed that the case of the assessee was opened under limited scrutiny to examine whether the deduction against interest income from other sources has been correctly shown in the return of income and also to examine whether the deduction claimed on account of interest expenses is deductible.

The Bench further observed that the assessee had filed replies to AO and also filed a written submission to PCIT giving the basis for the claim of deduction of interest expenses u/s 57 by stating that the aforesaid interest income had been incurred exclusively to earn interest income and accordingly the order passed by the AO was not erroneous and prejudicial to the interest of the Revenue.

Therefore, on finding that PCIT has erred in evaluating the assessment order passed by AO, ITAT allowed the assessee's appeal.

Counsel for Appellant/Taxpayer: D. M. Rindani

Counsel for Respondent/Department: Shramdeep Sinha

Case Title: Kishorkumar Bhalara verses The Principal Commissioner of Income Tax

Case Number: I.T.A. No.179/Rjt/2022

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