SAFAL ENGINEERS AMD REALTIES LLP,AHMEDABAD V. THE PR. CIT(CENTRAL), AHMEDABAD

ITA 1136/AHD/2025

AI Insights

The case involves Safal Engineers and Realities LLP, which appealed against the order of the Principal Commissioner of Income Tax (Central), Ahmedabad, under section 263 of the Income Tax Act, 1961. The PCIT had set aside the assessment order for the Assessment Year 2021-22, claiming it was erroneous and prejudicial to the interests of the Revenue. The main issues revolved around the alleged non-charging of interest on a substantial advance to a partner, Shri Rajesh Brahmbhatt, and the assessment of unaccounted cash receipts from real estate transactions. The Tribunal examined whether the PCIT's revisionary order was justified, considering the detailed inquiries and explanations provided during the assessment proceedings.

• Counselvise Citation: [2025] 140 COUNSELVISE.COM (IT) 789107 (ITAT-AHMEDABAD)
• Duration Of Justice: 6 month(s) 4 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 25-11-2025
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: B
• Assessment Year: misc
• Appeal Filed On: 21-05-2025
• Other Referred Cases: Morvi Industries Ltd. vs. CIT (Central)(1971) 82 ITR 835 (SC), CIT v. Shoorji Vallabhdas & Co. [46 ITR 144], Godhra Electricity Co. Ltd. v. CIT [225 ITR 746], CIT v. Birla Gwalior (P) Ltd. [89 ITR 266], State Bank of Travancore v. CIT [158 ITR 102]
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: R. P. RASTOGI
• Assessee Lawyers: NUPUR SHAH
• Keywords: Set aside; Difference of opinion; Change of opinion; Opportunity of being heard; Corroborative evidences; Principle of natural justice; Search and seizure; Source of fund; Assessment record
• Section: 143(3); 142(1); 263; 132

Judgement Text

"आयकर अपीलीय अिधकरण,अहमदाबाद ᭠यायपीठ ‘B’ अहमदाबाद। IN THE INCOME TAX APPELLATE TRIBUNAL “B” BENCH, AHMEDABAD ]BEFORE S/SHRI SANJAY GARG, JUDICIAL MEMBER AND MAKARAND V.MAHADEOKAR, ACCOUNTANT MEMBER ITA No.1136/Ahd/2025 Asstt.Year : 2021-22 Safal Engineers and Realities LLP 1, B Safar House B/h. Mirth Masala Restaurant Nr.S.G. Highway Ahmedabad. PAN : ACLFS 5783 R Vs. The Pr.CIT(Central) Ahmedabad. (Applicant) (Responent) Assessee by : Ms.Nupur Shah, AR Revenue by : Shri R.P. Rastogi, CIT-DR सुनवाई कᳱ तारीख/Date of Hearing : 12/11/2025 घोषणा कᳱ तारीख /Date of Pronouncement: 25/11/2025 आदेश/O R D E R PER MAKARAND V.MAHADEOKAR, AM: This appeal by the assessee is directed against the order passed by the Principal Commissioner of Income Tax (Central), Ahmedabad [hereinafter referred to as “the PCIT”] under section 263 of the Income Tax Act, 1961 [hereinafter referred to as “the Act”] dated 31.03.2025, for the Assessment Year 2021–22. The assessee has challenged the assumption of jurisdiction under section 263 and the consequential setting aside of the assessment order passed under section 143(3) of the Act dated 30.12.2022. 2. Facts of the Case 2.2 The assessee is a Limited Liability Partnership engaged in real estate and allied activities. For the year under consideration, the assessee filed its return of income under section 139(1) declaring Nil income. Printed from counselvise.com ITA No.1136/Ahd/2025 2 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 Annexure A-3 from broker Divyang Vyas showing rate of 8500+++ per sq.ft., (iv) pages 15 and 16 of Annexure A-1 with a handwritten “5000” per sq.ft. treated as cash component for certain flats, and (v) notings about “Parking 3” to infer cash collected for parking. 2.6 Assessee claimed all such papers and Excel sheets were rough workings for internal / RERA purposes only, not actual sale prices, that prices varied due to commercial factors, that evidentiary value was weak, and that denial of cross-examination of persons relied upon violated natural justice. 2.7 AO held that the seized and digital documents were authentic “speaking documents”, rejected the assessee’s explanation and cross- examination plea, and concluded that the assessee received unaccounted cash over and above recorded sale consideration. He computed average rate at Rs.10,504 per sq.ft. and made addition of Rs.56,17,74,502/- for flat sales Printed from counselvise.com ITA No.1136/Ahd/2025 3 and Rs.2,76,00,000/- for parking as unexplained money under section 69A, taxed under section 115BBE, initiating penalty under sections 271AAC and 271AAD(1)(ii), and determined total income at Rs.58,93,74,502/- as against Nil returned. 2.8 The PCIT in exercise of powers under section 263, examined the assessment order dated 30.12.2022 passed under section 143(3). The PCIT identified a separate issue relating to an amount of Rs. 28.44 crore shown in the books as due from partner Shri Rajesh Brahmbhatt, which according to the PCIT had not been examined by the Assessing Officer from the angle of interest chargeability and allowability of interest expenditure under section 36(1)(iii). 2.9 The PCIT recorded that the assessee firm had advanced Rs.28.44 crore to Shri Rajesh Brahmbhatt in financial year 2017–18 (assessment year 2018–19) and that the said loan or advance continued thereafter. As per the partnership deed, there was a clause that “interest shall be charged/paid in debit/credit balance of partners”. It was noticed that no interest had been charged by the firm from Shri Rajesh Brahmbhatt from A.Y. 2018–19 onwards, including A.Y. 2021–22. According to the PCIT, this aspect had not been verified during the scrutiny assessment proceedings for A.Y. 2021–22. 2.10 The PCIT further recorded that the firm had incurred substantial interest expenditure over the years and that a large part of such cost was attributable to financing the interest free 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). Printed from counselvise.com ITA No.1136/Ahd/2025 4 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: 1. The Ld. PCIT has erred in law and on facts in passing the order u/s. 263 of the Act by holding in Para 8 on Page 6 that “the assessment order passed by the AO u/s. 143(3) of the Act on 30.12.2022 for AY. 2021-22 is erroneous and prejudicial to the interest of Revenue. Accordingly, the same are set aside to the file of the Assessing officer for examining the above issue in detail while framing the fresh assessment order”. 2. The Ld. PCIT has erred in not appreciating that the issue under consideration in the proceedings under section 263 of the Act—pertaining to the non-charging of interest on the funds amounting to Rs. 28.44 crore advanced to Shri Rajesh Brahmbhatt during the Assessment Year 2018-19— was already examined by the Assessing Officer. The Ld. AO had issued a notice dated 22.12.2020 asking to explain the investments/advances/loan and the Ld.AO after duly considering the explanation submitted by the appellant and applying his mind to the facts of the case, completed the assessment under section 143(3) r.w.s. 143(3A) r.w.s. 143(3B) of the Act without making any addition on this account. Therefore, the observation of the Ld. PCIT that the details remained unverified is both factually incorrect and legally untenable. 3. The Ld. PCIT has failed to correctly appreciate the factual position that the amount of Rs. 28,44,06,941/- has been erroneously construed as loans and advances. In reality, this figure represents the closing capital balance of Mr. Rajesh Brahmbhatt as on 31.03.2018 and the same can be verified from the Audited financials of the appellant for A.Y. 2018-19. The appellant has also duly explained the source of funds utilized for payment made to Rajesh Brahmbhatt in the nature of capital withdrawal for A.Y. 2018-19 to 2021-22 along with supporting evidences. 4. The Ld. PCIT has erred in invoking the provisions of Section 263 of the Act without appreciating that during the Assessment Year 2021–22, the appellant had not advanced any loans to Shri Rajesh Brahmbhatt. In the absence of any such loan transaction, the very foundation for initiating revisionary Printed from counselvise.com ITA No.1136/Ahd/2025 5 proceedings under Section 263 collapses. Consequently, the allegation of non- charging of interest does not arise, and the revision proceedings under the guise of this issue are untenable in law and fact. 5. The appellant humbly submits that the partnership 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 in view of the Guidelines for compulsory selection of returns for Complete Scrutiny and the Ld. AO has issued the notice u/s. 142(1) dated 26.11.2022 along with questionnaire and in the said questionnaire, the Ld. AO has already asked the specific query to appellant to submit the ledger account, bank statement of partners reflecting the bank entries, ITR and computation of income of partners as regards to the fresh capital introduced by the partners and the issue has been duly verified by the Ld.AO in the scrutiny assessment for A.Y. 2021-22. 7. The appellant humbly submits that various judicial pronouncements relied upon by the Ld.AO are not applicable in the case of the appellant as the facts in the case of appellant are totally different and distinguishable from the facts of the case of appellant as in the case of the appellant the Ld.AO has carried out extensive and deep inquiry by issuing the notices u/s. 142(1) of the Act, in respect of the issue as regards to the issue under consideration, hence the order passed u/s. 143(3) of the Act dated 30.12.2022 for A.Y. 2021-22 is not erroneous and prejudicial to the interest of revenue. At the same time, various judicial pronouncements relied upon by the appellant are squarely applicable in the case of appellant. 8. The Ld. PCIT has erred in law and on facts in failing to properly consider the submission made before him as well as various judicial pronouncements relied upon by the appellant. 3.1 The Authorised Representative (AR), during the course of hearing before us, contended that the proposal for revision was misconceived, as similar issues had already been raised and examined in earlier assessment years. It was submitted that the debit balance in the partner’s account pertained to A.Y. 2018-19 and that the assessment for that year had already Printed from counselvise.com ITA No.1136/Ahd/2025 6 been completed after due verification. The AR submitted that during the course of assessment proceedings for A.Y. 2021-22, the Assessing Officer had called for complete details, and all material facts, including the partner’s capital account and the nature of the debit balance, had been duly disclosed. 3.2 The AR contended that the assessee-firm had not advanced any unsecured loan to the partner. The debit balance reflected drawings by the partner against his capital account. It was submitted that such drawings are permissible under partnership 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. Detailed workings, ledger extracts, bank statements and a source chart were furnished to demonstrate that all withdrawals were made out of non-interest-bearing funds such as receipts from the RERA escrow account, capital contributions received from Safal Construction Pvt. Ltd., and interest-free unsecured loan from Smt. Priyanka Brahmbhatt. It was thus urged before PCIT, that the inference of utilisation of borrowed funds for financing any alleged interest-free advances was entirely erroneous. Printed from counselvise.com ITA No.1136/Ahd/2025 7 3.4 The AR also pointed out that the Assessing Officer had issued specific queries under section 142(1) requiring complete details of unsecured loans, advances, deposits received and given, along with interest particulars, and that comprehensive replies were filed on 22.10.2022, 02.12.2022 and 06.12.2022 enclosing ledgers, bank entries, and ITRs of partners. Upon examination of these details, the Assessing Officer accepted the position that no interest was chargeable on partners’ capital in view of the enabling and non-mandatory nature of the clause in the partnership deed, and drew no adverse inference. The assessee also highlighted that the partnership deed dated 01.04.2014 specifically permitted the partners to mutually decide whether or not to charge interest, thereby negating any presumption of accrual of hypothetical income. Before the PCIT, reliance was placed on the real income doctrine laid down by the Supreme Court in Morvi Industries Ltd. v. CIT [82 ITR 835], CIT v. Shoorji Vallabhdas & Co. [46 ITR 144], Godhra Electricity Co. Ltd. v. CIT [225 ITR 746], CIT v. Birla Gwalior (P) Ltd. [89 ITR 266], and State Bank of Travancore v. CIT [158 ITR 102], to submit that no tax can be levied on hypothetical or notional income which never accrued in real terms. It was, therefore, contended that the allegation of non-verification or erroneous allowance of interest expenditure under section 36(1)(iii) was unsustainable, that the observations of the PCIT were premised on assumptions without factual foundation, and that the jurisdiction under section 263 could not be validly exercised in the absence of any actual error or any prejudice to the interests of the Revenue. 3.5 The learned AR, reiterating the detailed written submissions placed before the Principal Commissioner, emphasised that the assessee LLP had furnished complete particulars relating to finance costs, capital 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 Printed from counselvise.com ITA No.1136/Ahd/2025 8 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. The audited financial statements, including Schedule A – Partners’ Fixed Contributions and Schedule B – Partners’ Current Contributions, were produced to demonstrate that there were only withdrawals of partners’ capital and no advances or loans from the assessee LLP to any partner. It was therefore argued that the conclusion drawn by the PCIT regarding diversion of interest-bearing funds is unsupported by material and contrary to the record and once the AO has formed an opinion after due inquiry on the very issues now sought to be revised, the assessment order cannot be held to be erroneous or prejudicial to the interests of the Revenue. 3.7 The learned Departmental Representative, supporting the revisionary order passed by the PCIT, submitted that the findings recorded in para 4 of the impugned order clearly demonstrate that the assessment order dated 30.12.2022 is erroneous and prejudicial to the interests of the Revenue. The DR pointed out that the PCIT has recorded a categorical finding that one of the partners, Shri Rajesh Brahmbhatt, has withdrawn substantial sums from his capital account, resulting in a continuous debit balance since A.Y. 2018–19. As per the terms of the partnership deed, interest is required to be charged on the drawings, irrespective of whether interest-bearing or interest-free funds are utilised for such withdrawals. The DR submitted that Printed from counselvise.com ITA No.1136/Ahd/2025 9 this specific aspect was required to be examined by the Assessing Officer during the assessment proceedings. 4. We have carefully considered the rival submissions, examined the assessment records produced before us, and perused the impugned order passed by the PCIT under section 263 of the Act. The short issue for determination is whether the assessment order dated 30.12.2022 passed under section 143(3) can be held to be erroneous in so far as it is prejudicial to the interests of the Revenue within the meaning of section 263. 4.1 The material on record demonstrates that the Assessing Officer had conducted specific and detailed inquiries on the very aspect which forms the foundation of the revisionary action. A specific notice dated 24.09.2022 was issued calling for particulars relating to partners’ capital accounts, withdrawals, and sources of funds utilised to square up the debit balance. The assessee, in response, furnished complete explanations together with the audited accounts, ledger 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. Printed from counselvise.com ITA No.1136/Ahd/2025 10 4.4 The assessee’s explanation during the revision proceedings was clear and supported by documentary evidence. The assessee had demonstrated that the debit balance in the partner’s account was funded through interest- free sources, namely (i) funds released through the RERA escrow mechanism, (ii) capital contributions received from Safal Construction Pvt. Ltd., and (iii) interest-free unsecured loan received from Smt. Priyanka Brahmbhatt. These explanations were not merely assertions but were backed by entries in the audited financial statements. Once the source of funds was shown to be interest-free, the question of alleging diversion of interest-bearing funds did not arise. The Assessing Officer, after considering these facts, accepted the explanation and did not draw any adverse inference. 4.5 The PCIT, while invoking jurisdiction under section 263, has proceeded on the assumption that interest ought to have been charged on the partner’s debit balance without examining whether any interest-bearing funds were utilised for such drawings. The PCIT has not referred to any material to rebut the assessee’s explanation nor has he demonstrated that the Assessing Officer’s findings were factually incorrect. The assumption that the debit balance must necessarily involve utilisation of interest- bearing funds is inconsistent with the record and contrary to the evidences filed before the Assessing Officer. It is trite law that jurisdiction under section 263 cannot be exercised on conjectures, suspicion or presumption. 4.6 The condition precedent for assuming jurisdiction under section 263 is that the order of the Assessing Officer must be both erroneous and prejudicial to the interests of the Revenue. The Principal Commissioner has not pointed out any incorrect fact, wrong application of law, or non- consideration of material by the Assessing Officer. On the contrary, the record reflects that the Assessing Officer made specific inquiry, elicited explanation, examined the audited statements, and thereafter formed an opinion. The PCIT has not demonstrated how the conclusion drawn by the Assessing Officer is unsustainable in law. In the absence of any finding on Printed from counselvise.com ITA No.1136/Ahd/2025 11 how the order is erroneous, the twin conditions of section 263 are not fulfilled. 4.7 It is well settled through a long line of judicial authorities that where the Assessing Officer has made inquiries, applied his mind to the material placed before him, and taken a plausible view, the Commissioner cannot invoke section 263 merely because he holds a different opinion or believes that further inquiries should have been made. The scope of revision does not extend to substituting the Assessing Officer’s possible view with the Commissioner’s preferred view. The impugned order of the PCIT, being predicated purely on a change of opinion, cannot be sustained. 4.8 In view of the above discussion, we hold that the Assessing Officer had made specific inquiries on the issue forming the basis of revision. The assessee had furnished complete explanations duly supported by audited financial statements. The PCIT has not established any error in the assessment order, nor shown how it is prejudicial to the interests of the Revenue. The invocation of section 263 is based on assumptions and a change of opinion, which is impermissible. Accordingly, the revisionary order passed under section 263 is quashed. 5. In the result, the appeal of the assessee is allowed. Order pronounced in the Court on 25th____November, 2025 at Ahmedabad. Sd/- Sd/- (SANJAY GARG) JUDICIAL MEMBER (MAKARAND V. MAHADEOKAR) ACCOUNTANT MEMBER Ahmedabad, dated 25/11/2025 vk* True Copy आदेश कᳱ ᮧितिलिप अᮕेिषत/Copy of the Order forwarded to : 1. अपीलाथᱮ / The Appellant 2. ᮧ᭜यथᱮ / The Respondent. 3. संबंिधत आयकर आयुᲦ / Concerned CIT 4. आयकर आयुᲦ(अपील) / The CIT(A) Printed from counselvise.com ITA No.1136/Ahd/2025 12 5. िवभागीय ᮧितिनिध, आयकर अपीलीय अिधकरण / DR, ITAT, 6. गाडᭅ फाईल /Guard file. आदेशानुसार/BY ORDER, उप/सहायक पंजीकार (Dy./Asstt.Registrar) आयकर अपीलीय अिधकरण, अहमदाबाद / ITAT, Ahmedabad Printed from counselvise.com "