Safal Engineers And Realities LLP Vs PCIT (ITAT Ahmedabad)
PCIT’s 263 Action on “Interest-Free Loan to Partner” Held Mere Assumption — AO Made Detailed Enquiry & Took a Plausible View; Revision Order Quashed
In this major 263 revision case, Safal Engineers & Realities LLP challenged the Principal CIT (Central)’s order setting aside its regular scrutiny assessment for AY 2021-22. The LLP belongs to the B Safal–City Estate Group, where a search was conducted on 28.09.2021. Assessment under section 143(3) was completed on 30.12.2022 with heavy additions relating to alleged on-money in project “Seventy”. However, the PCIT did not disturb the on-money additions; instead, he opened a new issue: why the AO did not disallow interest u/s 36(1)(iii) on an alleged interest-free “loan/advance” of ₹28.44 crore standing in the partner Shri Rajesh Brahmbhatt’s account.
According to the PCIT, (i) the partner had a continuous debit balance since AY 2018-19, (ii) partnership deed required charging of interest on debit balances, (iii) the LLP had huge interest expenditure of nearly ₹3.95 crore, and (iv) the AO never examined whether borrowed funds were diverted to the partner. On this basis, he invoked Explanation-2 to section 263 & set aside the assessment as “erroneous & prejudicial”.
Before Tribunal, the Assessee demonstrated that the PCIT’s entire factual foundation was incorrect. The so-called “loan” was actually partner’s drawings from his own capital account, not a loan/advance. The debit balance originated in AY 2018-19 & was examined in that year’s scrutiny assessment. For AY 2021-22 also, the AO had issued multiple detailed notices u/s 142(1) seeking ledger of partners, bank entries, ITRs, interest details, source of withdrawals & nature of debit balance. The Assessee filed exhaustive replies on 22.10.2022, 02.12.2022 & 06.12.2022 with audited financials, capital account, RERA escrow statements, capital contribution ledger & the flow of funds. AO was satisfied that withdrawals were funded entirely from interest-free sources — (i) RERA escrow releases, (ii) capital contribution from Safal Construction Pvt. Ltd., (iii) interest-free unsecured loan from Smt. Priyanka Brahmbhatt. No borrowed funds were used.
The Assessee also argued that the partnership deed clause for charging interest is enabling, not mandatory, subject to mutual agreement, and that interest cannot be presumed to accrue as “hypothetical income” relying on Supreme Court rulings in Morvi Industries, Shoorji Vallabhdas, Godhra Electricity, etc.
The Tribunal found that the AO had conducted specific, pointed & detailed enquiry, examined all explanations, and consciously accepted that there was no diversion of interest-bearing funds and no real accrual of interest income. The PCIT, on the other hand, did not disprove a single factual submission, nor show what error the AO committed. His conclusion was based purely on assumption that interest “ought to have been charged”, without verifying source of funds or the nature of the debit balance.
Reiterating the settled law that 263 cannot be invoked for a change of opinion, and that when the AO has applied mind & taken a plausible view, revision is impermissible, the Tribunal held that the PCIT failed both limbs of section 263 — “error” & “prejudice”.
Accordingly, the revision order passed u/s 263 was quashed in full & the AO’s original assessment restored.
FULL TEXT OF THE ORDER OF ITAT AHMEDABAD
