Section 263 Cannot Trigger Roving Enquiry After AO’s Verification: ITAT Mumbai

Jade Constructions Private Limited Vs PCIT (ITAT Mumbai Bench “F”)

Summary: The ITAT Mumbai Bench “F” allowed Jade Constructions Private Limited’s appeal against the PCIT’s order under section 263 for AY 2022-23. The PCIT had set aside the scrutiny assessment over unsecured loans, trade payables, work-in-progress, revenue recognition and a fixed-asset addition. The Tribunal found that the Assessing Officer had called for supporting details, including confirmations and independent responses from three lenders under section 133(6), while further banking and financial records were before the PCIT. The PCIT did not identify a specific defect in those records, the trade payables or the work-in-progress, and could not direct an exploratory fresh enquiry merely because further verification was possible. The Tribunal also held that the PCIT had shifted from the show-cause allegation about work-in-progress funding to a different issue concerning revenue recognition under the project-completion method, without examining the relevant project facts. The ₹6,000 fixed-asset issue was outside the show-cause notice and no prejudice was demonstrated. Holding that the order was not shown to be both erroneous and prejudicial to Revenue, the Tribunal quashed the section 263 order, restored the assessment order and allowed the appeal.

Cases Discussed

• Principal CIT v. NRA Iron & Steel Pvt. Ltd., (2019) 412 ITR 161 (Supreme Court) — The Revenue relied on this decision on the assessee’s burden to establish the identity and creditworthiness of creditors and the genuineness of transactions; the Tribunal distinguished its application on the evidence available in this case.
• CIT v. Amitabh Bachchan, (2016) 384 ITR 200 (Supreme Court) — The Revenue cited this decision in support of revisional jurisdiction; the Tribunal treated the governing principles as unexceptionable but found the record did not establish the necessary jurisdictional error and prejudice.
• Malabar Industrial Co. Ltd. v. CIT, (2000) 243 ITR 83 (Supreme Court) — Cited by the Revenue on the twin requirements under section 263; the Tribunal applied the requirement that the assessment be both erroneous and prejudicial to Revenue.
• Smt. Tara Devi Aggarwal v. CIT, (1973) 88 ITR 323 (Supreme Court) — The Revenue relied on this authority in support of revision where an enquiry was required; the Tribunal distinguished the present record, which showed enquiries and supporting material.
• Rampyari Devi Saraogi v. CIT, (1968) 67 ITR 84 (Supreme Court) — The Revenue cited this decision on revision in cases lacking the necessary enquiry; the Tribunal found that the assessment record in the present case showed that enquiries had been made.

FULL TEXT OF THE ORDER OF ITAT MUMBAI

The aforesaid appeal has been filed by the assessee against the order dated 30.03.2026 passed by the learned Principal Commissioner of Income-tax, Mumbai-2, under section 263 of the Income-tax Act, 1961, for the assessment year 2022-23, whereby the assessment order dated 26.03.2024 passed under section 143(3) read with section 144B has been set aside on certain specified issues with a direction to the Assessing Officer to conduct further enquiries and pass a fresh order after affording due opportunity to the assessee.

2. The facts, in brief, are that the assessee-company, engaged in the business of real-estate development, filed its return of income on 27.10.2022 declaring total income of Rs.15,920, comprising business loss of Rs.1,58,366 and interest income of Rs.1,74,286. The case was selected for scrutiny and, during the course of assessment proceedings, statutory notices were issued and various details were called for. The assessment was ultimately completed on 26.03.2024 at a total income of Rs.83,15,920 after making an addition of Rs.83 lakh under section 69A in respect of cash allegedly paid over and above the registered consideration for purchase of transferable development rights. Subsequently, the learned PCIT called for and examined the assessment records and issued a show-cause notice dated 06.03.2026 proposing revision of the assessment, principally on the ground that the Assessing Officer had not carried out adequate enquiry into the unsecured loans, trade payables and the source of expenditure accumulated as work-in-progress. The assessee furnished a detailed reply dated 23.03.2026, supported by various documents. The learned PCIT, however, held that the assessment order had been passed without conducting enquiries and verifications which ought to have been made and, invoking Explanation 2(a) to section 263, set aside the assessment on the aforesaid issues.

3. Insofar as the unsecured loans are concerned, the learned PCIT observed that the balance sheet reflected short-term borrowings of Rs.40.61 crore. Out of the four lenders, the fresh loans received during the year comprised Rs.4.86 crore from Shri Kishor Mirchandani, Rs.4.26 crore from Shri Vijay Mirchandani, Rs.9.498 crore from Agarwal Infraprojects Pvt. Ltd. and Rs.1 crore from Coral Infrastructure Pvt. Ltd. According to the learned PCIT, the confirmations and acknowledgments of returns furnished in respect of the lenders were insufficient to establish their creditworthiness and the genuineness of the transactions. He further observed that the financial statements, bank accounts and other supporting documents had not been properly examined by the Assessing Officer. Regarding trade payables of Rs.24.11 lakh, the learned PCIT held that the party-wise details and ledger accounts had been accepted without independent verification. He further observed that the assessee had accumulated work-in- progress of Rs.44.61 crore and had not recognised any revenue, notwithstanding the receipt of customer advances. In the final order, he proceeded further to hold that proportionate income ought to have been recognised instead of following the project- completion method. He also adverted to additions to fixed assets and held that their source and the date on which they were put to use had not been verified. On this basis, he concluded that the assessment order was erroneous insofar as it was prejudicial to the interests of the Revenue.

4. Before us, the learned counsel submitted that the impugned order proceeds on a fundamentally erroneous premise that the Assessing Officer had not conducted any enquiry into the liabilities. He drew our attention to the notice under section 142(1) and the detailed reply dated 02.09.2023, whereby the assessee had furnished particulars of loans, trade creditors, advances received from customers, statutory liabilities, retention deposits and other payables, besides party-wise and expense-wise details of expenditure accumulated as work-in-progress. The assessee had also furnished invoices relating to construction materials and extensive ledger accounts of the principal suppliers. More importantly, notices under section 133(6) were issued to three of the four lenders, namely, Shri Kishor Mirchandani, Coral Infrastructure Pvt. Ltd. and Agarwal Infraprojects Pvt. Ltd., and all the said parties independently responded to the notices and furnished their loan details, ledger accounts, confirmations and acknowledgments of returns. The record, therefore, demonstrated that the Assessing Officer had carried out enquiry and had also obtained independent third- party confirmation.

5. The learned counsel further submitted that the lenders were not strangers but comprised the directors and shareholders of the assessee-company and its sister concerns. Their identities were never in dispute and the transactions were routed through banking channels. In the revisional proceedings, the assessee also furnished bank statements, balance sheets, capital accounts and financial statements of the lenders. Even though some of these documents were furnished before the learned PCIT for the first time, they formed part of the record available to him and were required to be examined before recording an adverse conclusion. However, the learned PCIT neither examined the source of the particular remittances nor identified any cash deposit, unexplained credit, circular movement of funds or other discrepancy in the bank accounts. No finding was recorded that the financial statements or banking trail did not establish the capacity of any particular lender. Instead, the assessment was set aside for a general and unfocused re-examination.

6. As regards work-in-progress, it was submitted that the assessee had furnished party-wise and expense-wise details, supporting invoices and ledger accounts during the assessment proceedings. The assessee consistently followed the project- completion method under which project expenditure was carried forward as work-in-progress and customer advances were reflected as current liabilities until the conditions for recognition of revenue were fulfilled. The show-cause notice was concerned with the source and verification of the expenditure forming part of work-in-progress; it did not propose rejection of the regularly followed method of accounting or adoption of the percentage- completion method. The learned PCIT, therefore, travelled beyond the show-cause notice by holding in the final order that proportionate income ought to have been recognised. Regarding trade payables, party-wise details and ledger accounts had already been furnished and no specific creditor or transaction was found to be non-genuine. The source of the fixed-asset addition was not a subject matter of the show-cause notice and, in any event, the addition was merely Rs.6,000, the source of which had already been explained from the available records.

7. The learned CIT DR, on the other hand, strongly supported the impugned order. His principal submission was that this was a case of complete lack of enquiry and not merely inadequate enquiry. According to him, the assessment had been selected for scrutiny to examine liabilities, yet the assessment order contained no discussion regarding the identity, creditworthiness or genuineness of the lenders. The notices and replies under section 133(6), even if available in the assessment record, merely resulted in collection of documents without any evaluation of the financial capacity of the creditors. He submitted that the fresh loans aggregating to Rs.19.62 crore were disproportionately high in comparison with the returned incomes of the individual lenders; that the exposure of Agarwal Infraprojects Pvt. Ltd. allegedly exceeded its net worth; and that there was a difference of approximately Rs.11 lakh between the aggregate lender-wise balances and the figure appearing in the balance sheet. He also referred to the finding in the assessment order concerning cash payment of Rs.83 lakh through a person belonging to the promoter group and contended that this circumstance warranted a more searching enquiry into the loans received from the same group.

8. The learned CIT DR further submitted that substantial expenditure had been accumulated as work-in-progress and was funded, inter alia, by the unsecured loans, while customer advances had also been received without recognition of corresponding revenue. According to him, the Assessing Officer ought to have examined whether the method followed by the assessee correctly reflected its income. He relied upon Explanation 2(a) to section 263 and the decisions in Rampyari Devi Saraogi v. CIT (1968) 67 ITR 84 (SC), Smt. Tara Devi Aggarwal v. CIT (1973) 88 ITR 323 (SC), Malabar Industrial Co. Ltd. v. CIT (2000) 243 ITR 83 (SC), CIT v. Amitabh Bachchan (2016) 384 ITR 200 (SC), PCIT v. NRA Iron & Steel Pvt. Ltd. (2019) 412 ITR 161 (SC) and the other authorities referred to in the written submissions. Alternatively, it was submitted that even if revision was not sustainable on any subsidiary issue, it should at least be upheld on the unsecured loans and the related source of work-in-progress.

9. We have heard the rival submissions and perused the material placed before us. The jurisdiction under section 263 can be exercised only when the assessment order is both erroneous and prejudicial to the interests of the Revenue. The two conditions are conjunctive and the absence of either is fatal to the assumption of revisional jurisdiction. Explanation 2(a) undoubtedly provides that an order shall be deemed to be erroneous insofar as it is prejudicial to the interests of the Revenue if it has been passed without making enquiries or verification which should have been made. However, the Explanation does not confer an uncanalised authority to set aside every assessment in which the revisional authority considers that some further or more elaborate enquiry was possible. The learned PCIT must identify the enquiry which was warranted, examine the material already available and demonstrate how its omission rendered the view taken by the Assessing Officer unsustainable and prejudicial to the Revenue. The distinction between a case where no enquiry has been conducted and one where the enquiry is considered insufficient in the perception of the revisional authority cannot be effaced merely by invoking Explanation 2(a).

10. The assessment record in the present case does not support the foundational allegation that the unsecured loans were accepted without enquiry. The nature of the enquiry conducted and the documents available before the Assessing Officer and the learned PCIT may be summarised as under:

11. The above chronology shows that the Assessing Officer had not merely obtained a consolidated statement of liabilities. In three out of the four cases, notices under section 133(6) were issued and independently complied with by the lenders. In the remaining case also, the loan particulars, ledger confirmation and return acknowledgment were available. The mere fact that the assessment order does not reproduce these enquiries or discuss each document cannot obliterate what is demonstrably borne out from the assessment record. An assessment order is not required to be an encyclopedic narration of every question asked and document examined. Where the record establishes that a specific enquiry was made and responded to, the matter cannot be treated as one of complete non-enquiry merely because the ultimate order is concise.

12. Apart from the unsecured loans, the material furnished in relation to the other issues forming part of the revisional proceedings may be summarised as under:

13. Thus, on each of the issues ultimately referred back to the Assessing Officer, the record contained primary details and supporting material. The learned PCIT did not identify any document as false, any creditor as non-existent, any expenditure as fictitious or any particular liability as unexplained. The impugned order essentially proceeds on the premise that still further verification could have been undertaken. Such a premise, without first examining the material already on record and demonstrating a specific error causing prejudice to the Revenue, cannot sustain the exercise of jurisdiction under section 263.

14. It is true that the bank statements, balance sheets and complete financial statements of the lenders were placed before the learned PCIT during the revisional proceedings. This circumstance, however, does not advance the Revenue’s case in the manner suggested. Once those documents were placed before the revisional authority, they formed part of the record available for examination. The learned PCIT could have examined the bank statements to ascertain the immediate source of each remittance; he could have identified any cash deposit, accommodation entry, circular transfer or inadequacy of funds; and, if any concrete infirmity emerged, he could have confronted the assessee and recorded a definite finding. No such exercise was carried out. The documents were neither rejected nor analysed. The order merely states that the material furnished was insufficient and directs the Assessing Officer to enquire afresh. Section 263 does not contemplate that an assessment may be set aside for conducting a roving enquiry when the revisional authority, despite possessing the relevant evidence, has not demonstrated any prima facie defect therein.

15. The objections subsequently articulated by the learned CIT DR regarding the ratio between the loans and the returned incomes, the alleged excess of the exposure of Agarwal Infraprojects Pvt. Ltd. over its net worth, the difference of approximately Rs.11 lakh and the alleged cash nexus were not examined by the learned PCIT with reference to the underlying documents. Returned income alone cannot be equated with financial capacity; creditworthiness has to be evaluated with reference to the entire financial position, including capital, reserves, assets, liabilities and the actual source reflected in the banking trail. Likewise, a numerical comparison between net worth and the quantum advanced cannot, without examining the composition and source of funds, establish that the transaction was not genuine. The difference of Rs.11 lakh could have been reconciled or investigated by the learned PCIT, but no conclusion was recorded thereon. The separate addition of Rs.83 lakh under section 69A also cannot, without a factual linkage between that cash transaction and the banking trail of the loans, displace the documentary evidence furnished by the lenders. The written submissions of the Department may explain or support the impugned order, but they cannot supply an altogether fresh factual foundation which the revisional authority itself neither examined nor recorded.

16. The decisions relied upon by the learned CIT DR do not alter this conclusion. In Rampyari Devi Saraogi, Tara Devi Aggarwal and Amitabh Bachchan, revisional jurisdiction was sustained in circumstances where the material demanded an enquiry which had not been undertaken. Similarly, NRA Iron & Steel Pvt. Ltd. reiterates the assessee’s obligation to establish the identity and creditworthiness of the creditor and the genuineness of the transaction. These principles are unexceptionable. However, their application necessarily depends upon the factual record of each case. Here, the creditors stood identified, the transactions were through banking channels, confirmations and returns were furnished, notices under section 133(6) were issued to three creditors and independently complied with, and further financial and banking material was placed before the learned PCIT. The impugned order does not demonstrate that this material was false, internally inconsistent or incapable of supporting the transactions. The case, therefore, cannot be placed in the category of an assessment completed in haste without any enquiry.

17. Coming to the work-in-progress, the records show that the assessee had furnished party-wise and expense-wise details of the expenditure accumulated as work-in-progress, invoices for major purchases and extensive ledger accounts of the concerned suppliers. Thus, even on this issue, it cannot be stated that the Assessing Officer accepted the figure without obtaining any material. More importantly, the show-cause notice questioned the source and verification of the expenditure forming part of work- in-progress, whereas the final order proceeded on a different premise that the project-completion method did not reflect the correct income and that proportionate revenue ought to have been recognised. Before reaching such a conclusion, it was necessary to examine the accounting method consistently followed by the assessee, the stage of completion of the project, the terms of the agreements with customers, the point at which enforceable rights accrued and the applicable statutory framework. The existence of substantial work-in-progress or receipt of customer advances does not, by itself, lead inexorably to the conclusion that taxable income had accrued during the year. The learned PCIT neither examined these foundational facts nor demonstrated any distortion in the profits; rather, he substituted a different method of revenue recognition without first putting that specific case to the assessee. A revisional order founded upon a premise materially different from the show-cause notice cannot be sustained.

18. Regarding the trade payables of Rs.24.11 lakh, party- wise details and ledger accounts had been furnished during assessment. The learned PCIT has not identified any particular creditor whose identity was doubtful, any mismatch in the ledger, any fictitious purchase or any liability which had ceased to exist. The observation that further cross-verification ought to have beenundertaken is therefore unaccompanied by any objective material suggesting an error in the assessment. The power under section 263 cannot be employed merely to direct another round of verification in the hope that it may possibly yield a different result.

19. The direction concerning the source of addition to fixed assets is even less sustainable. This was not a specific subject matter of the show-cause notice on which the assessee was called upon to meet a proposed revision. Apart from this jurisdictional infirmity, the addition to fixed assets was only Rs.6,000 and its source had already been explained from the available records. The impugned order neither identifies any unexplained source nor points out incorrect capitalisation, inadmissible depreciation or any other prejudice caused to the Revenue. A concluded assessment cannot be set aside on an unspecified issue of such trivial magnitude, particularly when no error prejudicial to the interests of the Revenue has been demonstrated.

20. When the impugned order is considered cumulatively, it is evident that the learned PCIT proceeded partly on an incorrect premise that no enquiry had been conducted, overlooked the notices and independent responses under section 133(6), did not evaluate the bank statements and financial statements furnished before him, failed to record any specific defect in the trade liabilities or work-in-progress, enlarged the issue relating to work-in-progress into a distinct question of revenue recognition and introduced the source of a minor fixed- asset addition without it forming part of the show-cause notice. The assessment has thus been set aside for an exploratory and indefinite reconsideration rather than on the basis of an error positively demonstrated from the record. Such an exercise does not satisfy the twin statutory conditions of section 263. We accordingly hold that the impugned revisional order lacks the requisite jurisdictional foundation and cannot be sustained.

21. Consequently, the order dated 30.03.2026 passed under section 263 is hereby quashed and the assessment order dated 26.03.2024 is restored.

22. In the result, the appeal of the assessee is allowed. Order pronounced in the open court on18/09/2026.