ITAT Upholds PCIT’s Revision Under Section 263: Lack of AO Inquiry on Section 94B Interest Disallowance

The present appeal has been filed by Manaveeya Development and Finance Private Limited, based in Hyderabad, in ITAT Hyderabad, challenging an order dated February 10, 2025, passed by the Principal Commissioner of Income Tax (PCIT), Hyderabad. The case is related to the Assessment Year 2020-21.

The PCIT had revised the assessment order on the ground that it was erroneous and prejudicial to the interests of the Income Tax Department. The assessee is a Non-Banking Finance Company (NBFC) that filed its income tax return (ITR) for the year in the relevant assessment year, declaring the total income of Rs. 100.77 crore. The AO (Assessing Officer) accepted the declared income without making any addition to the assessee’s income and completed the assessment under Section 143(3) read with Section 144B. Later, PCIT reopened the case on the grounds that AO did not properly verify the calculation of interest disallowance under Section 94B, which applies to interest paid to Associated Enterprises (AEs).

The PCIT noticed that while computing allowable interest under Section 94B, the assessee used an inflated EBITDA figure of about Rs. 162.29 crore instead of the actual EBITDA of approximately Rs. 129.26 crore. In conclusion, the assessee was able to claim an excess deduction of interest of around Rs. 9.69 crore. According to the PCIT, the AO failed to examine this issue during assessment, which makes the order erroneous and prejudicial to income tax authorities.

On this point, the assessee argued that this difference arose because of adopting Ind-AS for the first time. As per Ind-AS, fair value gains on equity investments and capital gains were spread over multiple years, which affected EBITDA computation. The assessee claimed that its method was correct and that the AO had accepted the return after due consideration.

When the tribunal analysed these arguments, it found that the assessment order in reality did not show any inquiry or verification done by the assessing officer on the key issue of Section 94B disallowance. There was no evidence on the impact of IND-AS adjustments, fair value gains, or capital gains on EBITDA computation, etc., that was examined by AO. Hence, the tribunal noted that this was a clear case of a lack of inquiry.

The ITAT further noted that the issue involved complex facts covering not only the current year but also earlier years, and such matters required detailed verification by the Assessing Officer. Failure to conduct such verification justified the PCIT’s action under Section 263.

Accordingly, the Tribunal noted that the assessment order was rightly revised, as it was erroneous and prejudicial to the interests of the Revenue. Allowed the revision order passed by the PCIT and dismissed the assessee’s appeal.