ITAT Pune Upholds order u/s 263 – Unverified Advances Towards Property Purchase

Summary

The Income Tax Appellate Tribunal (ITAT), Pune addressed the validity of the PCIT’s invocation of revisionary powers under section 263 in the case of Sharada Erectors Private Limited Vs PCIT, which overturned the original assessment due to the AO’s failure to conduct detailed verification of the advance for the purchase of property and the interest income claimed.

The assessee argued that the advances were legitimate business activities conducted through proper banking channels with supporting documentation, and that the AO had duly examined all materials. However, the ITAT found that the AO’s inquiry into the genuineness and source of such large transactions was insufficient. Therefore, the ITAT upheld the PCIT’s order directing a reassessment.

Facts of the Case:

The assessee is engaged in construction and property development, filed a return for AY 2020-21 declaring a loss from business. As per the financials of the assessee company, it had made advances for purchase of property totalling ₹ 82,64,73,532/-. These advances were made via account payee cheques and electronic transfers, and interest income was also earned on such advances.

The Assessing Officer (AO) accepted the returned loss after scrutiny but did not conduct a detailed enquiry about the source and genuineness of the advances for property purchase or verify the correctness of interest income stated.

The Principal Commissioner of Income Tax (PCIT) revisited the assessment under section 263, considering the AO’s order erroneous and prejudicial to revenue since proper enquiries were not made on the large advances for property purchases, along with some other issues. Consequently, PCIT set aside the AO’s assessment order and directed reassessment with detailed examination.

The assessee challenged the revisionary jurisdiction assumed by PCIT and the directions to inquire into the advances payment issue before the Income Tax Appellate Tribunal (ITAT).

Arguments Made by the Authorized Representative (AR)

The AR contended that:

• The AO had asked for and received detailed information regarding advances during the assessment proceedings. The AO had applied mind and examined the facts; thus, the order was not erroneous or prejudicial to revenue.
• The amounts were paid through bank channels from regular business funds. Interest income earned substantiated the genuineness of transactions.
• The advances were standard business transactions backed by agreements/MOUs and proper confirmations from auditors.
• Revisional jurisdiction under section 263 should not be invoked merely due to difference of opinion. Reliance was placed on Malabar Industrial Co. Ltd. vs. CIT (243 ITR 83) (SC) and CIT vs. Max India (295 ITR 282) (SC)

Decision of the ITAT

The ITAT examined the issue within the framework of section 263 and relevant judicial precedents. It was held that:

• The AO accepted the advances and interest on face value without proper investigation despite the massive amount involved (Rs. 82.64 crores). Merely accepting the submissions without verification in such a case of huge advances amounting to more than Rs. 82 crore was inadequate. The AO failed to conduct necessary and proper enquiries on the source and genuineness of the advances and interest claimed.
• The PCIT was justified in assuming jurisdiction under section 263 to correct the failure of AO to make requisite enquiries.
• The ITAT emphasized that failure to inquire and verify in such cases goes beyond a mere difference of opinion and renders the AO’s order erroneous. Explanation 2 to section 263 mandates that an assessment order passed without proper verification would be erroneous and prejudicial to revenue.
• The tribunal cited decisions reaffirming that an order without required inquiry can be set aside under section 263, including in Rampyari Devi Saraogi vs. CIT (67 ITR 84), Swarup Vegetable Products Industries Ltd vs. CIT (187 ITR 412), Gee Vee Enterprises vs. Addl. CIT (99 ITR 375), and PCIT vs. Hill Queen Investment (2023).
• Other grounds which were properly examined by the AO were restored in favor of the assessee.