SAVITA HOMEMAKERS LLP,MUMBAI V. ASSISTANT COMMISSIONER OF INCOME TAX, MUMBAI

ITA 2849/MUM/2024

AI Insights

The case involves Savita Homemakers LLP, which appealed against the order of the Principal Commissioner of Income Tax, Central, Mumbai, passed under section 263 of the Income Tax Act, 1961. The PCIT had set aside the assessment order for AY 2014-15, claiming it was erroneous and prejudicial to the interests of the revenue. The main issues revolved around the adequacy of the inquiry conducted by the Assessing Officer regarding unsecured loans and interest payments, and the treatment of deemed rental income from properties. The Tribunal examined whether the PCIT was justified in invoking section 263, considering the explanations provided by the assessee and the legal provisions applicable at the time.

• Counselvise Citation: [2025] 140 COUNSELVISE.COM (IT) 313952 (ITAT-MUMBAI)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 06-05-2025
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: B
• Assessment Year: 2014-2015
• Other Referred Cases: Shivshahi Punarvasan Prakalp Ltd. vs. PCIT, Ms. Sangeeta Jain vs. PCIT, M/s. Metacaps Engineering & Mahendra Construction Co. (JV) vs. PCIT, Reliance Money Infrastructure Ltd vs. PCIT, M/s Amira Pure Foods Pvt. Ltd vs. PCIT
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: RAKESH RANJAN
• Assessee Lawyers: PIYUSH CHHAJED; AYUSH
• Keywords: Set aside; Difference of opinion; Change of opinion; Opportunity of being heard; Transfer pricing; Reassessment proceedings; Principle of natural justice; Revision of order; Bogus loan; Bogus
• Section: 147; 143(3); 263; 69C

Judgement Text

" IN THE INCOME TAX APPELLATE TRIBUNAL “B” BENCH, MUMBAI BEFORE SHRI SAKTIJIT DEY, VP & MS PADMAVATHY S, AM I.T.A. No. 2849/Mum/2024 (Assessment Year: 2014-15) Savita Homemakers LLP 1003, 10th Floor, Raheja Centre Premises, Free Press Journal Marg, Nariman Point, Maharashtra-400021. PAN: ABYFS2195M Vs. ACIT, Central Circle-2(2), Mumbai. Appellant) : Respondent) Appellant /Assessee by : Shri Piyush Chhajed & Shri Ayush Chhajed, AR Revenue / Respondent by : Shri Rakesh Ranjan- CIT-DR Date of Hearing : 23.04.2025 Date of Pronouncement : 06.05.2025 O R D E R Per Padmavathy S, AM: This appeal by the assessee is against the order of the Principle Commissioner of Income Tax, Central, Mumbai-1 [In short 'PCIT'] passed under section 263 of the Income Tax Act, 1961 (the Act) dated 21.03.2024 for AY 2014-15. The assessee raised the following grounds of appeal: “1. The Learned Principal Commissioner of Income Tax erred in issuing notice Uls 263 of the Act without bringing out the charge as to how was the order erroneous, so far as it is prejudicial to the interest of revenue, without bringing 2 ITA No. 2849/Mum/2024 Savita Homemakers LLP out under which clause of Explanation 2 to section 263 the said notice was issued. 2. The order passed U/s 263 pursuant to the notice issued u/s 263 is bad in law since the same does not bring out the clause under which the assessee's case falls for the purpose of treating the same as erroneous and prejudicial to the interest of revenue and therefore, the notice is devoid of natural justice and bad in law rendering the order passed u/s 263 void ab initio. 3. The Learned Principal Commissioner of Income Tax has ultimately passed the order u/s 263 treating the case covered by clause A & clause B of Explanation 2. whereas the notice did not bring out the said proposal in regard to which clause the same was covered and therefore the order itself is bad in law and beyond the Show Cause Notice and therefore a nullity. 4. The Learned Principal Commissioner of Income Tax erred in passing the order u/s 263 without specifically bringing out whether the assessee's case is covered under Clause A or Clause B or without even explaining thereof. The Show Cause notice was issued on 3 issues, which issue fell within which clause has not been brought out in the order passed u/s 263 and therefore, same deserves to be annulled. 5. The Learned Principal Commissioner of Income Tax failed to appreciate that complete details in respect of issues determined in notice u/s 263 were filed and verified and in fact, a Show Cause Notice was issued before making an assessment u/s 143(3) and therefore it is not the case of no inquiry or no verification and therefore invoking the provisions of section 263 is bad in law.” 2. The assessee is a partnership firm and engaged in the business of construction of residential and commercial buildings. The assessee filed the return of income for AY 2014-15 on 17.09.2014 declaring a total income of Rs. Nil. The assessee's case was reopened under section 147 of the Act and the Assessing Officer (AO) while completing the assessment under section 147 of the Act has made addition towards interest on alleged bogus loans at 12% amounting to Rs. 2,04,96,000/- under section 69C of the Act. The AO made similar addition towards interest payment to Ms. Priyanka for Rs. 4,50,000/-. Subsequently the PCIT issued a show-cause notice to the assessee under section 263 for the reason that 3 ITA No. 2849/Mum/2024 Savita Homemakers LLP “2.2 It is also observed that for the year under consideration, the assessee has claimed interest expenses. It is understood from the records that the interest expenses as claimed by the assessee includes the interest to the unsecured loans that has been allowed by the AO without thorough verification. Accordingly, for the year under consideration the interest expenses needs to be verified. 2.3 It is seen that deemed rent under 'Income from House Property' have not been offered by the assessee nor disallowed by the AO during the assessment proceedings for the property held under inventory during the year in the light of the Hon'ble Delhi High Court's judgment in the case of M/s. Ansal Housing Finance and Leasing Company Ltd.” 3. The PCIT held that for the above said reason the order of the AO passed under section 147 is erroneous and prejudicial to the interest the of revenue. The assessee submitted before the PCIT that the impugned loan have been duly verified during the course of assessment proceedings for the immediately preceding year i.e. AY 2013-14 and huge additions have been made on account of the unsecured loan in the said AY. The assessee further submitted that for the year under consideration the AO based on the finding of AY 2013-14 held that the interest paid on the impugned loans are bogus and accordingly made addition under section 69C of the Act towards interest. Therefore, the assessee submitted that the entire unsecured loans have been verified by the AO and since the loan amount was already made as addition the AO treated only the interest as bogus for the year under consideration. Accordingly, the assessee submitted before the PCIT that there is no error with regard to the findings of the AO in respect of the unsecured loans. On the issue of Income from House Property not offered by the assessee which according to the PCIT has not been verified by the AO in the light of the decision of the Hon'ble Delhi High Court in the case of M/s Ansal Housing Finance and Leasing Co. Ltd. The assessee submitted that the issue is debatable in view of the contrary decisions taken by the different High Courts and therefore the provisions of section263 of the Act cannot 4 ITA No. 2849/Mum/2024 Savita Homemakers LLP be invoked. The PCIT however did not accept the submissions of the assessee and set-aside the order of the AO passed under section 147 of the Act by holding that “7. Assessee's submissions in this regard have been carefully perused. The assessee is objecting to the proceedings u/s 263 on the ground that the order passed by the AO is not erroneous. The observations/objections raised by the assessee have been considered, however, the same are not found to be acceptable. Explanation-2 under sub-section (1) of section 263 (inserted by the Finance Act 2015 w.e.f. 01.06.2015) is very clear on this issue. The relevant provisions are reproduced hereunder for better understanding - \"Explanation-2-For the purposes of this section, it is hereby declared that an order passed by the Assessing Officer shall be deemed to be erroneous in so far as it is prejudicial to the interests of the revenue, if, in the opinion of the Principal Commissioner or Commissioner, (a) the order is passed without making inquiries or verification which should have been made; (b) the order is passed allowing any relief without inquiring into the claim; (c) the order has not been made in accordance with any order/direction or instruction issued by the Board under section 119; or (d) the order has not been passed in accordance with any decision which is prejudicial to the assessee, rendered by the jurisdictional High Court or Supreme Court in the case of the assessee or any other person.\" 7.1. The above clauses of Explanation 2 to section 263 are quite lucid and clear and the present case of the assessee is squarely covered by clauses (a) and (b). The provisions of section 263 read with Explanation 2(a), 2(b) clearly spell out that the assessment order passed by the AO u/s 143(3) r.w.s.147squarely falls within this clause. Thus, the order passed by the A.O. has rendered the assessment erroneous in so far as it is prejudicial to the interest of revenue, for the reasons mentioned above. Therefore, action u/s 263 of the Act was considered necessary and the assumption of jurisdiction is valid. In cases such as this, when it is held that the view taken is unsustainable in law, then even a change of opinion is permissible in revision proceedings. 8. The Assessing Officer needs to verify entire unsecured loan, interest expenditure and rent income of the property held under inventory during the year under consideration. The same has not been done by the Assessing Officer before allowing the above claim made by the assessee. Considering the facts and circumstances of the case, I hold that the assessment order passed u/s 143(3) r.w.s.147 of the Act dated 30.03.2022 by Assessing Officer is erroneous and 5 ITA No. 2849/Mum/2024 Savita Homemakers LLP prejudicial to the interest of Revenue, within the meaning of section 263 of the IT Act, 1961. I therefore, set aside the assessment order passed u/s 143(3) r.w.s.147 of the Act dated 30.03.2022so passed with a direction to complete the assessment order de novo afresh after conducting necessary verification and enquiries on the above mentioned points at para 2 and after affording proper opportunity to the assessee.” 4. The ld. AR submitted that in the show-cause notice issued under section 263 of the Act the PCIT has not invoked explanation (2) to section 263 of the Act whereas while passing the order under section 263 the PCIT has invoked the said explanation. The ld. AR further submitted that the assessee has responded to both the points based in the show cause notice and that the PCIT in the order has not mentioned any finding with regard to the various explanations given by the assessee. The ld. AR also submitted that explanation (2) to section 263 was inserted w.e.f. 01.06.2015 and that the said explanation is not applicable for the year under consideration i.e. AY 2014-15. The ld. AR argued that the PCIT while holding the order of the AO as erroneous and prejudicial to the interest of the revenue has not given any independent finding as to why the order is erroneous and prejudicial. The ld. AR relied on the following judicial precedents with regard to the explanation (2) to section 263 is not applicable for AY prior to 01.06.2015 : “1. Shivshahi Punarvasan Prakalp Ltd., [2023] 155 taxmann.com 408 (Bombay/ (2023) 456 ITR 336 (Bombay) 2. Ms. Sangeeta Jain, [2024] 168 taxmann.com 276 (Delhi)/(2025) 472 ITR 662 (Delhi) 3. M/s. Metacaps Engineering & Mahendra Construction Co. (JV), LT.A. No. 2895/Mum/2014 4. Reliance Money Infrastructure Ltd, ITA No.3259/Mum/2017 5. M/s Amira Pure Foods Pvt. Ltd, ITA No.3205/DEL/2017” 6 ITA No. 2849/Mum/2024 Savita Homemakers LLP 5. On merits the ld. AR took us through the various submissions made before the AO during the course of reassessment to substantiate that the AO called on various details with regard to the unsecured loans from time to time and that the assessee has submitted all the relevant details with regard to the unsecured loans. The details called for by the AO and the response filed by the assessee are given in page no. 1 to 95 of PB. Therefore, the ld. AR argued that even assuming that explanation (2) to section 263 is applicable to assessee's case the AO has carried out adequate enquiry with regard to the unsecured loans and has made disallowance towards the interest while completing the adjustment under section 147 of the Act. Our attention is also drawn to the detailed finding recorded by the AO with regard to each and every loan in the order of assessment under section 147 of the Act. In summary the ld. AR submitted that invoking explanation (2) to section 263 stating that the AO has not made adequate enquiry with regard to the unsecured loans as alleged by the PCIT is not tenable. 6. On the issue of deemed rental income from Income from House Property towards vacant flats held as stock in trade the ld. AR submitted that there are contrary decision held by the different High Courts on the issue of taxability of deemed rental income and therefore, the PCIT is not correct in invoking the provisions of section 263 in this regard. The ld. AR further submitted that it is a settled legal position that when the issue is debatable and the AO has taken one of the plausible views then the provisions of section 263 cannot be invoked. 7. The ld. DR on the other hand supported the order of the PCIT. 8. We heard the parties and perused the material on record. In assessee's case, the PCIT has invoked the revisionary powers bestowed under section 263 of the Act for the reason that the AO has completed the assessment without making inquiries 7 ITA No. 2849/Mum/2024 Savita Homemakers LLP or verification which should have been made as per Explanation 2(a) to the above section. The argument of the ld. AR in this regard is that the explanation is inserted only w.e.f. 01.06.2015 and therefore cannot be applied in assessee's case. The alternate plea of the ld. AR is that even if the explanation is assumed to be applicable, the AO has made adequate enquiry which is evidenced by the findings recorded in the assessment order. Before proceeding further it is apposite to take note of the relevant extract of section 263 and the Explanation (2) to section 263 of the Act, which read as under :- “Revision of orders prejudicial to revenue. 263. (1) The [Principal Chief Commissioner or Chief Commissioner or Principal Commissioner] or Commissioner may call for and examine the record of any proceeding under this Act, and if he considers that any order passed therein by the Assessing Officer 89[or the Transfer Pricing Officer, as the case may be,] is erroneous in so far as it is prejudicial to the interests of the revenue, he may, after giving the assessee an opportunity of being heard and after making or causing to be made such inquiry as he deems necessary, pass such order thereon as the circumstances of the case justify, 90[including,— **** Explanation 2.—For the purposes of this section, it is hereby declared that an order passed by the Assessing Officer 94[or the Transfer Pricing Officer, as the case may be,] shall be deemed to be erroneous in so far as it is prejudicial to the interests of the revenue, if, in the opinion of the Principal 95[Chief Commissioner or Chief Commissioner or Principal] Commissioner or Commissioner,— (a) the order is passed without making inquiries or verification which should have been made; (b) the order is passed allowing any relief without inquiring into the claim; (c) the order has not been made in accordance with any order, direction or instruction issued by the Board under section 119; or 8 ITA No. 2849/Mum/2024 Savita Homemakers LLP (d) the order has not been passed in accordance with any decision which is prejudicial to the assessee, rendered by the jurisdictional High Court or Supreme Court in the case of the assessee or any other person.” 9. Thus, from close scrutiny of the provisions of section 263, it is evident that twin conditions are required to be satisfied for exercise of revisional jurisdiction under section 263 of the Act i.e., firstly, the order of the Assessing Officer is erroneous; and secondly, it is prejudicial to the interests of the revenue on account of error in the order of assessment. Prior to the insertion of Explanation (2) the various courts have held that the order of the AO cannot be considered as erroneous merely because a inquiry made by the AO is considered to be inadequate by the PCIT unless there is a complete lack of inquiry on the part of the AO. It was a settled position then that if there was any inquiry, even inadequate that would not by itself give occasion to excising jurisdiction under section 263 of the Act, merely because the PCIT has a different opinion in the matter and that it is only in cases of “lack of inquiry” that such a course of action would be open. It was also a settled position that for holding an order to be erroneous the PCIT must have some material which would enable to form a prima facie opinion that the order passed by the AO is erroneous, insofar as it is prejudicial to the interests of the Revenue. By insertion of explanation (2) the statute provided a discretionary power to the PCIT to hold the order to be erroneous if in his opinion the order is passed without making inquiries or verification which should have been made. It may be said that the Income Tax Act nowhere provides the exact modalities to be followed to verify a specific claim made by the assessee and it is the prerogative of the AO to decide the extent of verification. In other words what is relevant for clause (a) of Explanation 2 to section 263 is whether the AO has passed the order after carrying out enquiries or verification, which a reasonable and prudent officer would have carried out or not. In that case for the purpose of invoking the explanation it is the responsibility of the 9 ITA No. 2849/Mum/2024 Savita Homemakers LLP PCIT to show that the enquiries or verification conducted by the AO was not in accordance with the inquiries or verification that would have been carried out by a prudent officer. From the above discussed legal position it is clear that regardless of the explanation the PCIT is required to make enquiries to record specific findings evidencing that there is error in the order of the AO that is prejudicial to the interest of the revenue. Therefore before going into the issue of whether the explanation inserted can be applied retrospectively or not, we will examine the facts in assessee's case in the light of the above legal position. 10. On perusal of the PCIT's order we notice that the assessee has made a detailed submission in response to the show cause notice, explaining the inquiry conducted during the reassessment proceedings. We further notice from the order of the PCIT (as extracted in the earlier part of this order) that the PCIT has recorded that the AO needs to verify the unsecured loans completely ignoring the fact that the AO in the order under section 147 of the Act has examined and has recorded findings on each and every loan creditor. The PCIT has also failed to consider the fact that the AO has made disallowance towards the interest on the alleged bogus loans to the tune of Rs.2,04,96,000/- and that the AO has clearly mentioned in the order that the loan amounts are not added for the reason that it is already added in AY 2013-14 (refer para 8.9 in page 13 of AO's order). The PCIT without considering these facts has merely held that the AO has not verified the unsecured loans and interest before allowing the claim of the assessee. This finding of the PCIT is grossly misplaced and substantiates the argument of the assessee, that the PCIT has invoked section 263 without actually examining the records to see whether there has been any inquiry or lack of inquiry by the AO. The PCIT also did not take cognisance of the submissions made by the assessee regarding the inquiry carried out during reassessment proceedings and not recorded anything specifically on the error 10 ITA No. 2849/Mum/2024 Savita Homemakers LLP noticed. On the issue of Income from House property, the PCIT has held the AO has not brought to tax the income from the inventory in the light of the decision of the Hon'ble Delhi High Court. It is now a settled principle that where two views are possible and the AO has taken one of the views with which the PCIT does not agree, it cannot be treated as an erroneous order prejudicial to the interests of the revenue, unless the view taken by the AO is unsustainable in law. In view of these discussions we are of the view that the PCIT is not right in exercising revisionary powers u/s. 263 of Act in assessee's case. Accordingly the order under section 263 is hereby quashed. 11. In result, appeal of the assessee is allowed. Order pronounced in the open court on 06-05-2025. Sd/- Sd/- (SAKTIJIT DEY) (PADMAVATHY S) Vice-President Accountant Member *SK, Sr. PS Copy of the Order forwarded to : 1. The Appellant 2. The Respondent 3. DR, ITAT, Mumbai 4. Guard File 5. CIT BY ORDER, (Dy./Asstt. Registrar) ITAT, Mumbai "