High Interest Paid to Lenders a Commercial Decision, Not Ground for Section 263 Action

Professional Artist Cosmetics LLP Vs PCIT (ITAT Mumbai)

High Interest Paid to Lenders a Commercial Decision, Not Ground for Section 263 Action- Once AO Inquired Applied Mind, Revision u/s 263 Not Permissible- PCIT Cannot Revise Just for Different Opinion

The appeal by Professional Artist Cosmetics LLP challenged revisionary order u/s 263 passed by PCIT, whereby assessment u/s 143(3) dated 02.12.2022 was set aside for re-verification of unsecured loans & interest payments.

Assessee, engaged in manufacture & trading of cosmetics, had filed ROI declaring ₹89.90 lakh. AO conducted detailed scrutiny, issuing multiple notices u/s 142(1) regarding unsecured loans, variation in number of lenders & higher interest paid to two parties. In response, Assessee furnished exhaustive details including confirmations, party-wise ledgers, reconciliations, bank statements & explanations. AO, after considering the replies, accepted the returned income & passed a speaking order.

PCIT, however, noted alleged mismatch between unsecured loans of ₹5.69 crore vs ₹7.41 crore, inconsistent list of 31 vs 46 parties, & interest @18% to two lenders. Holding that AO’s inquiry was inadequate, he invoked s.263 & directed fresh examination.

Before Tribunal, Assessee argued that AO had already examined all these issues in depth. The difference in loan figures was explained as opening balances & repayments; the variation in number of parties was only classification difference; higher interest was a commercial decision for urgent borrowings. It was contended that once AO has applied his mind & taken a view, PCIT cannot substitute it with his own opinion under s.263. Reliance was placed on SC in Malabar Industrial Co. Ltd., Bom HC in Gabriel India Ltd., Delhi HC in Sunbeam Auto Ltd. & DG Housing Projects Ltd..

Revenue contended AO’s inquiry was perfunctory & PCIT rightly acted to protect Revenue’s interest.

Tribunal’s Findings:

• AO issued repeated specific notices, received 5 sets of detailed replies with supporting documents, & passed a considered order.
• The difference in loan figures was due to opening balances & repayments; number of parties differed due to classification but all were disclosed.
• Higher interest was a commercial decision, duly explained & accepted by AO.
• As per settled law, inadequacy of inquiry is not absence of inquiry. PCIT cannot invoke s.263 merely because he prefers deeper probe or different view.
• AO’s order was neither erroneous nor prejudicial to Revenue. No fresh material was brought by PCIT to show error.

Order u/s was 263 quashed & Assessment u/s 143(3) restored.

FULL TEXT OF THE ORDER OF ITAT DELHI

This appeal is directed against the order dated 28.03.2025 passed by the Learned Principal Commissioner of Income Tax, Mumbai-41 (“PCIT”) under section 263 of the Income-tax Act, 1961, for assessment year 2021–22. The assessee has assailed the validity of the assumption of jurisdiction as well as the conclusions on merits by which the assessment framed under section 143(3) was set aside.

2. The assessee, a limited liability partnership engaged in the manufacture and trading of cosmetic products, filed its return of income declaring ₹89,90,640. The case was selected for complete scrutiny, with focus on unsecured loans and interest payments. During the assessment proceedings, the Assessing Officer issued detailed notices under section 142(1), seeking reconciliation of unsecured loan figures, party-wise confirmations, bank statements, and an explanation for variations in interest rates.

3. In response, the assessee filed exhaustive details on multiple dates, including letters dated 09.08.2022, 05.09.2022, 27.10.2022, 21.11.2022, and 28.11.2022, furnishing party-wise ledgers, confirmations, reconciliations, and supporting annexures. The so-called discrepancy in unsecured loans was explained as arising from opening balances, repayments, and credits in lender accounts. Likewise, the reference to 31 versus 46 parties was clarified as a matter of classification, all parties being duly disclosed. As for the higher interest of 18% paid to two lenders, it was explained that these were short-term borrowings obtained at short notice to meet urgent business exigencies. After examining these submissions, the Assessing Officer passed a speaking order under section 143(3) on 02.12.2022, accepting the returned income.

4. The learned PCIT, however, issued a show cause notice on 21.03.2025, proposing revision on the ground that the assessment was erroneous and prejudicial to the interests of the Revenue. He observed that there was a mismatch between the unsecured loans of ₹5.69 crore as per details filed and ₹7.41 crore as per the financials, that the assessee had given inconsistent lists of 31 and 46 parties, and that higher interest had been paid to two lenders. Holding that these matters required further verification, the PCIT set aside the assessment with directions to the Assessing Officer to redo the inquiry.

5. The learned counsel for the assessee submitted that the very issues on which the PCIT invoked jurisdiction were the subject of detailed inquiries during the assessment proceedings. The AO had raised pointed queries, and the assessee had furnished detailed replies with party-wise ledgers, confirmations, bank statements, and reconciliations. The so-called discrepancy in loans was fully explained with reference to opening balances and repayments. The difference in number of parties was only a matter of classification, and all details were available on record. The higher interest was a commercial decision necessitated by business exigencies. It was contended that once the AO had examined these issues and accepted the explanation, the PCIT could not step in merely because he held a different opinion. Reliance was placed on settled judicial precedents to submit that revision under section 263 requires a demonstrable error which is also prejudicial, and that inadequacy of inquiry cannot be equated with absence of inquiry.

6. The learned Departmental Representative, on the other hand, supported the PCIT’s order. It was argued that the AO’s inquiry was perfunctory and that the explanations furnished by the assessee were not properly examined. According to the DR, the mismatch in loans, the inconsistent number of parties, and the payment of unusually high interest required thorough verification, which the AO failed to undertake. Therefore, the PCIT was justified in exercising his revisional jurisdiction to protect the interests of the Revenue.

7. We have carefully considered the rival submissions and have perused the record of proceedings before the Assessing Officer as well as the revisional order impugned before us. The controversy lies within a narrow compass whether the assessment order passed under section 143(3) on 02.12.2022 can be said to be “erroneous in so far as it is prejudicial to the interests of the Revenue” within the meaning of section 263, merely because the Learned PCIT is of the view that the inquiry should have been carried out in a more detailed manner or that the conclusions of the Assessing Officer were not to his satisfaction.

8. From the chronology of events, it emerges with clarity that the Assessing Officer had issued repeated and specific notices calling upon the assessee to explain precisely the three issues now sought to be revisited by the PCIT: (i) the reconciliation of unsecured loans as per Form 3CD and the audited accounts, (ii) the identification and number of lenders, and (iii) the variation in interest rates. The assessee responded to each of these notices on different dates with detailed replies. Party-wise loan ledgers, confirmations, reconciliations of opening balances and repayments, bank statements, and interest workings were all placed before the Assessing Officer. In fact, five sets of replies spread across August to November 2022 were filed. The assessment order thereafter recorded that these submissions had been considered, thereby evidencing due application of mind.

9. The so-called discrepancy of ₹79 crore, highlighted by the PCIT, is nothing but the difference between loans as per financials and the tabulation furnished in one of the assessee’s submissions. The explanation tendered was that the financials included opening balances carried forward, repayments during the year, and interest credits, whereas the tabulation related only to fresh unsecured loans from 31 parties. When later a comprehensive list was furnished, the total of 46 parties emerged, covering all lenders including those where only interest transactions had taken place. The reconciliation was placed before the AO, who, being satisfied, accepted the explanation.

10. Similarly, the payment of interest at 18 per cent to two lenders was not an unexplained aberration but was explained as a commercial decision dictated by urgent working capital requirements in a challenging business climate. The AO considered this justification and accepted it. Once the AO has applied his mind to the explanation and taken a view, such a view cannot be substituted by the PCIT under section 263 merely because, in his opinion, the interest appeared excessive.

11. The law is firmly established that the revisional jurisdiction under section 263 is of a supervisory nature and can be invoked only if both conditions error in the assessment order and prejudice to the interests of the Revenue co-exist. It is not enough to demonstrate that the order could have been written differently or that some other view is also possible. As held by the Supreme Court in Malabar Industrial Co. Ltd., the jurisdiction under section 263 cannot be exercised for a mere change of opinion. The Bombay High Court in Gabriel India Ltd. further clarified that where an AO has conducted inquiries and taken a view, the order cannot be revised only because the Commissioner would have liked a deeper probe or more elaborate reasoning. The Delhi High Court in Sunbeam Auto Ltd. and DG Housing Projects Ltd. has made an important distinction: absence of inquiry may justify revision, but inadequacy of inquiry cannot, unless the Commissioner establishes that the order is unsustainable in law.

12. Tested on these judicial touchstones, the impugned order falters. The AO did inquire. He raised precise questions. He received detailed replies, reconciliations, and supporting evidence. He applied his mind and accepted the explanation. This is not a case of oversight or non-application of mind. Nor has the ld. PCIT brought on record any fresh material overlooked by the AO, or demonstrated that the conclusions reached were contrary to law. All that has been done is to express dissatisfaction with the manner of inquiry. Such dissatisfaction may furnish a ground for appeal but not for invoking section 263. The revisional jurisdiction is not intended to be a power of second opinion; it is meant to correct demonstrable errors which, if allowed to stand, would cause prejudice to the Revenue.

13. Equally significant is the fact that the loans in question were largely opening balances brought forward from earlier years. To brand the assessment erroneous on the ground that such balances were not verified afresh ignores the settled principle that what stands accepted in earlier assessments cannot be reopened every year in the guise of section 263. The ld. AO had before him confirmations and bank statements, and he accepted the same. Likewise, the allegation of inconsistency between 31 and 46 parties vanishes once the record is viewed in its entirety. The assessee never concealed any party; the number fluctuated only because at one stage details of fresh loans were filed, and at another stage the cumulative list was given. Such a difference of presentation does not make the assessment erroneous.

14. We are thus of the considered view that the impugned order under section 263 does not satisfy the statutory preconditions. The AO’s order is neither erroneous nor prejudicial to the interests of the Revenue. The ld. PCIT has not pointed out any defect or error of fact or law; he has only directed the AO to re-verify issues already scrutinised. This is impermissible in law. To allow such revision would be to expand section 263 into an appellate power of substitution, which the statute does not countenance.

15. In view of the foregoing discussion, we quash the order of the ld. PCIT dated 28.03.2025 passed under section 263 and restore the assessment framed under section 143(3) on 02.12.2022.

16. In the result, the appeal of the assessee is allowed.

Order pronounced on 30^th September, 2025.