The Income Tax Appellate Tribunal ( ITAT ) of Ahmedabad in a recent case, upheld a revision order passed by the Principal Commissioner of Income Tax ( PCIT ) under Section 263 of Income Tax Act 1961, observing that the said order was passed justifiably as the Assessing Officer (A) failed to sufficiently scrutinize a large property investment made by the assessee.
Navin Kalidas Patel, the assessee/appellant, filed his income tax return for the assessment year 2015-16, reporting an income of Rs. 2,03,730. The case was selected for scrutiny under the Computer-Assisted Scrutiny Selection (CASS) to verify a substantial investment of Rs. 9.30 crore in a property as reported in the Annual Information Return (AIR).
The scrutiny concluded in November 2017 with the AO accepting the assessee’s filed return without raising any questions or requiring additional documents.
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However, upon further examination, the PCIT noted that the assessment order did not sufficiently investigate the sources of the assessee’s investment in the property. Concerned about potential errors, the PCIT initiated proceedings under Section 263 of the tax statute, stating that the AO’s order was erroneous and prejudicial to the interests of the revenue, as the scrutiny of the large investment was incomplete.
To elaborate, Section 263 of the Income Tax Act empowers the Commissioner to revise an order passed by an AO if it is considered erroneous and prejudicial to the interests of revenue.
Notices were issued to the assessee addressing this concern, but there was no response from the assessee to the PCIT’s queries. As a result, the PCIT passed an order setting aside the original assessment and directing the AO to conduct further inquiries and reassess the case.
Aggrieved, the assessee challenged the PCIT’s order before the ITAT.
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Before the tribunal, the Counsel for the assessee contended that the PCIT had wrongly assumed jurisdiction under Section 263 of the tax legislature.
The assessee’s counsel argued that the AO had thoroughly investigated the purchase of agricultural land valued at Rs. 9.30 crore and verified all necessary documents, including sale deeds and loan confirmations from third parties, namely Infinity International and Horizon Finvest.
The counsel submitted that the loans taken for the property purchase had been duly documented, and relevant information, such as the identity and creditworthiness of the lenders, had been provided during the assessment.
It was also submitted that the AO had accepted the sources of the investment and completed the assessment, meaning the order was not erroneous.
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On the other side, the counsel for Revenue argued that the AO had failed to properly investigate the large investment in property. Given the substantial discrepancy between the reported income and the investment, it was argued that the AO should have conducted a more rigorous inquiry.
Upon reviewing the case, the bench of Mr TR Senthil Kumar and Mr Narendra Prasad Sinha observed that although the AO had received documents regarding the property purchase, including the sale deed and loan confirmations, there was no indication that the AO had critically examined the details. For instance, no substantial inquiry was made into the creditworthiness of the lenders or whether the funds utilized for the purchase were properly sourced.
The Tribunal pointed out that the payments for the property were made through several post-dated cheques. Additionally, the Tribunal found discrepancies in the transaction details. For example, three cheques drawn in favor of the seller were not encashed by the seller but instead used by the assessee to withdraw cash, raising further questions about the authenticity of the sale.
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The Tribunal further agreed with the PCIT’s assertion that the AO had not verified the key question of how the assessee, who had declared only a modest income of Rs. 2,03,730, could afford to purchase a property worth Rs. 9.30 crore.
Furthermore, there was no interest payment on the loans taken for the purchase, which was also left unexplored by the AO. The Tribunal highlighted that the AO should have conducted independent inquiries into the genuineness of the transactions.
In result, the tribunal inferred that the AO’s failure to make adequate inquiries, particularly concerning the large investment compared to the assessee’s income, justified the PCIT’s decision to exercise jurisdiction under Section 263 of the income tax statute to order a fresh assessment.
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Thus, the appeal was dismissed, with directions given for a detailed investigation by the AO to verify the source of funds and the genuineness of the loan transactions.
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