Inadequate Inquiry into Loan Repayment renders Assessment Erroneous: ITAT upholds Revision [Read Order]

The Mumbai bench of Income Tax Appellate Tribunal (ITAT) upheld the revision under section 263 on the ground that the assessment was erroneous as the AO failed to conduct a sufficient inquiry into the loan repayment by the assessee.

The assessee, Jayantilal Rajmal Seth, filed his return of income for AY 2018-19 declaring a total income of ₹4,24,550. The case was reopened by the Assessing Officer under Section 148, based on information from the Investigation Wing alleging that the assessee had received a bogus accommodation entry from M/s Aneri Fincap Ltd.

The assessee contended that he had not received any fresh loan during the year, and that the transaction in question was merely repayment of an old loan taken in AY 2017-18 through proper banking channels. Supporting documents, including loan confirmations, bank statements, NBFC registration certificate of Aneri Fincap Ltd., and an affidavit, were submitted to demonstrate the genuineness of the transaction.

Despite the evidence, the AO proceeded with the reassessment proceedings but made no addition, effectively concluding that the income declared was correct. Subsequently, the PCIT invoked Section 263, asserting that the assessment order was erroneous and prejudicial to the interests of the Revenue, primarily on the ground that the AO had failed to conduct a proper inquiry into the alleged bogus loan.

The assessee challenged the revision before the Tribunal, arguing that the reopening itself was invalid, as it was based on unverified third-party statements and no independent inquiry was conducted. Since the reassessment order was consequently void ab initio, the PCIT could not assume jurisdiction under Section 263 to revise a non-existent or illegal order.

The assessee in the appeal submitted that the Assessing Officer had carried out all the inquiries in respect of issue of repayment of the loan to M/s Aneri Fincap Ltd. and therefore the PCIT is not correct in holding that the assessment order was erroneous insofar as prejudicial to the interest of the Revenue.

The Revenue, on the other hand, submitted that no inquiry was made by the AO, particularly on the issue of sources of repayment of the loan and hence, the PCIT is justified in invoking clause (a) of Explanation 2 to section 263 of the Act.

The assessee relied on the following decisions of CIT v. Usha Martin Ventures Ltd. [2023], PCIT v. Naga Dhunseri Group Ltd. [2023] and Incorp Advisory Services Pvt. Ltd. v. Pr. CIT

The Tribunal observed that It is an undisputed position that during the reassessment proceedings, the Assessing Officer issued notices which were duly responded to by the assessee. However, the inquiry conducted by the Assessing Officer was confined only to the aspect of repayment of loan to M/s Aneri Fincap Ltd., and he failed to extend the inquiry to the crucial question of the source of such repayment.

Further, the Tribunal noted that in fact, while disposing of the objections under section 148A(d), the Assessing Officer himself recorded that the assessee had not satisfactorily explained the source of repayment made to M/s Aneri Fincap Ltd. In such circumstances, the Assessing Officer was duty-bound to conduct further verification and enquiry into the source of such repayment, which he failed to undertake.

The two-member bench comprising Raj KumarChauhan (Judicial Member) and Om Prakash Kant Accountant Member) held that the assessment order suffers from a clear lack of inquiry into a matter which went to the root of the issue. Therefore, the invocation of the revisional jurisdiction by the Ld. PCIT under clause (a) of Explanation 2 to section 263 of the Act is fully justified.

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