Section 263 Jurisdiction Based on Assumptions and Suspicion is Impermissible: ITAT

The Income Tax Appellate Tribunal (ITAT), Ahmedabad, held that invoking Section 263 jurisdiction based on assumptions and suspicion is impermissible, and quashed the PCIT’s revision order.

The assessee, Safal Engineers and Realities LLP, was linked as an associated Group of B Safal and City Estate Group, where a search and seizure operation was conducted in 2021. The assessee’s case was selected for scrutiny, and notices were issued based on the seized documents. During the search operation, the AO seized some digital documents, including the Excel sheets, from which the AO concluded that the assessee had received unaccounted cash in respect of sales in the project “Seventy”. Therefore, the AO made additions of Rs 56,17,74,502 for flat sales and Rs 2,76,00,000 for parking as unexplained money and initiated a penalty under sections 271AAC and 271AAD(1)(ii).

The PCIT invoked section 263 and passed a revisionary order, claiming that the AO had failed to examine an amount of Rs 28.44 crore shown as due from partner Shri Rajesh Brahmbhatt. It further observed that the firm had incurred interest including the bank interest and a large part of this interest cost was incurred by the firm to finance the loan given to Shri Rajesh B. Brahmbhatt. The PCIT held that the portion of interest expenditure related to this interest-free loan was not allowable under section 36(1)(iii).

Based on this, the PCIT set aside the assessment order and directed him to re-examine the issue in detail. The assessee challenged this order before the Income Tax Appellate Tribunal (ITAT).

The assessee argued that the AO had already examined the debit balance issue during the assessment after issuing notices and considering explanations. It is submitted that the debit balance showed a drawing by the partner against his capital account, and such drawings are permissible under partnership law. They submitted that the same does not constitute a loan or advance on which interest is to be charged mandatorily.

The assessee also submitted that the partners had mutually agreed not to charge interest on drawings and the same was accepted by AO in earlier assessments. The assessee argued that the PCIT incorrectly substituted his own opinion without supporting evidence.

The main issue before the Tribunal was whether the assessment order passed under section 143(3) can be held incorrect.

The Tribunal observed that the debit balance was funded through interest-free sources, and once the source of funds was proved to be interest-free, the question of diversion of interest-bearing funds did not arise. The Tribunal further observed that the PCIT assumed interest should have been charged on the partner’s debit balance without checking if any interest-bearing funds were used. It was observed that section 263 jurisdiction cannot be based on suspicion or assumptions.

The Tribunal observed that the Assessing Officer had made a specific inquiry and examined the audited statements and then formed an opinion. Meanwhile, the PCIT did not explain how the conclusion drawn by the AO was invalid. The Tribunal also held that if the AO had made enquiries and applied his mind based on the material submitted to him, the commissioner cannot invoke section 263 just because he holds a different opinion or believes that further enquiries should be made.

Since the PCIT did not point out any incorrect fact or incorrect application of law by the assessing officer, the tribunal held that the invocation of section 263 is based on assumptions and a change of opinion. Therefore, the revisionary order passed by PCIT was quashed.