Invoking S. 263 on Interest on Loan Disallowance While such Loan Addition Pending Before CIT(A) Invalid: ITAT [Read Order]

The Delhi Bench of the Income Tax Appellate Tribunal ( ITAT ) has held that a Principal Commissioner of Income Tax ( PCIT ) cannot invoke revisionary jurisdiction under Section 263 to disallow interest on loans when the core issue of the underlying loan’s genuineness is already pending before the CIT(A) in appeal.

A batch of appeals involving multiple assessment years from 2013-14 to 2019-20, filed by the assessee company who had challenged the PCIT’s order directing the disallowance of interest on unsecured loans by treating the loans as bogus accommodation entries.

In the original assessment, the Assessing Officer (AO) had treated certain unsecured loans as unexplained cash credits under Section 68 and made consequential additions under Section 69C for alleged commission expenses.

The assessee contested these additions before the CIT(A), who ultimately accepted the assessee’s claim and deleted the entire loan addition as well as the related expenditure, holding that the assessee had discharged its burden to prove the identity, creditworthiness, and genuineness of the lenders and the transactions.

However, while the appeal on the loan issue was still pending, the PCIT invoked Section 263 and held that the AO’s failure to disallow interest paid on the same allegedly bogus loans rendered the assessment order erroneous and prejudicial to the Revenue’s interest. The PCIT thus directed the AO to disallow the interest under Section 37(1) treating the loans as accommodation entries.

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The Tribunal rejected this action outright, observing that when the principal issue whether the loans were genuine was already under appeal before the CIT(A), the related question of interest disallowance could not be separated out for revision under Section 263.

The ITAT noted that the CIT(A) has explicit powers of enhancement under the Income Tax Act, which include examining any connected or consequential issue arising from the subject matter of the appeal. Since the disallowance of interest directly flows from the treatment of the loans as bogus, it could have been addressed by the CIT(A) itself as part of the same appellate proceedings.

The bench of Yogesh Kumar (Accountant member) and M. Balaganesh (judicial member) decided that if an issue is already pending before the CIT(A), it cannot be reopened under Section 263 or any aspect that flows immediately from it. This ruling was based on the Madras High Court's ruling in Smt. Renuka Philip v. ITO [409 ITR 567].

The bench further noted that extending Section 263 in such circumstances amounts to duplicating proceedings and undermining the appellate authority’s jurisdiction, violating the settled principle that when an appeal is pending, the same matter cannot be revised under Section 263.

Accordingly, the Tribunal quashed the PCIT’s revision orders for all assessment years involved, including the additional observation made by the PCIT regarding a purported mistake in charging interest under Section 234A which was never part of the original show cause notice, and hence violated the principles of natural justice.

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