AO Failed to Verify Genuineness and Creditworthiness of Transactions: Delhi High Court

AO Failed to Verify Genuineness and Creditworthiness of Transactions: Delhi High Court

The Delhi High Court bench, comprising Justices Yashwant Varma and Purushaindra Kumar Kaurav, concluded that the Assessing Officer (AO) failed to conduct thorough inquiries into the authenticity and financial reliability of the transactions.

The court noted that, as per clause (a) of Explanation 2 of Section 263 of the Income Tax Act, the AO's order would be deemed erroneous and prejudicial to the Revenue if necessary inquiries or verifications were not undertaken. Since the assessment order lacked discussion on these crucial aspects and there was no evidence of inquiry based on the investigation findings, the court deemed the case eligible for invoking revisional powers under Section 263.

The pertinent facts of the case revolved around the assessee, engaged in real estate development, who filed an income tax return (ITR) amounting to INR 4,52,68,500/- on October 17, 2016, for the Assessment Year (AY) 2016–17. Subsequently, the case underwent scrutiny, initiated by a notice under Section 143(2) of the Income Tax Act issued on August 10, 2018.

Following this, an inquiry ensued, culminating in an assessment order under Section 143(3) of the Act on December 26, 2018. In this order, the AO determined the assessee's income to be INR 4,55,45,110/-, with an addition of INR 2,76,610/- under Section 14A of the Act. Dissatisfied, the assessee appealed to the Commissioner of Income Tax (Appeals) (CIT(A)), resulting in a partial allowance of the appeal on June 24, 2019, restricting the addition to INR 1,37,022/-.

Subsequently, the Principal Commissioner of Income Tax (PCIT) reviewed the assessment order under Section 263 of the Act, setting it aside on March 31, 2021, deeming it erroneous and prejudicial to the interests of the Revenue. The PCIT directed the AO to reconsider the case.

The assessee then appealed against the PCIT's order to the Income Tax Appellate Tribunal (ITAT), which, on February 14, 2022, accepted the assessee's contentions, setting aside the PCIT's order and reinstating the assessment order of December 26, 2018. Consequently, aggrieved by the ITAT's decision, the Revenue filed the appeal.

The Revenue, in its submission, emphasized the deficiencies in the ITAT's order. It argued that the ITAT failed to acknowledge the observations made by the PCIT regarding the Assessing Officer's (AO) failure to scrutinize the genuineness and creditworthiness of the unsecured loan transactions conducted by the assessee for Assessment Year (AY) 2016–17. Furthermore, it contended that the PCIT's determination that the AO neglected to conduct any inquiry was accurate, as the AO did not take any action on the information provided by the Deputy Director of Income Tax (Investigation), Noida (DDIT).

The assessee vehemently opposed the arguments put forward by the Revenue. The assessee argued that the ITAT's decision to reject the PCIT's order was justified because the AO conducted a thorough inquiry and an assessment order was appropriately drafted after considering all pertinent facts and circumstances.

The court observed that Section 263 of the Act provides clear criteria for the exercise of revisional powers by the PCIT or CIT. The section stipulates that these powers can be invoked if two conditions are met: first, the assessment order must be erroneous, and second, it must be prejudicial to the interests of the Revenue. Additionally, the section outlines specific parameters that would render an assessment order erroneous and prejudicial to the Revenue's interests.

“It emerges that the present is a case where the AO failed not only to spell out any finding about the DDIT investigation report and assessment proceedings of M/s. Upaj Leasing & Finance Pvt. Ltd. but also to scrutinize the highlighted aspects in the said report qua the genuineness and creditworthiness of aforenoted loan transactions. Therefore, this is the minimum inquiry that at least was expected to have been made by the AO,” the court said.

In light of the above discussion, the court determined that the questions of law must be answered in favor of the Revenue and against the assessee. Consequently, the ITAT order was set aside, and the appeal was allowed.