The Kolkata Bench of the Income Tax Appellate Tribunal (ITAT) has partly allowed an appeal challenging a revision order passed under Section 263 of the Income Tax Act, holding that the Principal Commissioner of Income Tax (PCIT) was not justified in reopening issues relating to rental income and construction expenses where the Assessing Officer (AO) had already adopted a plausible view.
The bench of George Mathan (Judicial Member) and Rakesh Mishra (Accountant Member) upheld the revision insofar as it related to verification of unsecured loans amounting to ₹1.28 crore.
The case arose from an assessment for Assessment Year 2021-22 in which the taxpayer had filed its return declaring a total income of ₹17,110. The assessment was completed under Section 143(3) on 31 December 2022, accepting the returned income. Subsequently, the PCIT invoked revisionary jurisdiction under Section 263 and held that the assessment order was erroneous and prejudicial to the interests of the Revenue.
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According to the PCIT, the AO had failed to conduct adequate inquiries regarding: Classification of rental income of ₹5.59 lakh; Construction expenses of ₹31.25 lakh; and Unsecured loans amounting to ₹1.28 crore.
Consequently, the assessment order was set aside with directions for a fresh examination of these issues. The taxpayer challenged this revision before the Tribunal.
One of the principal controversies concerned the treatment of rental income. The taxpayer had consistently shown rental receipts as business income over several years, contending that the property constituted stock-in-trade and that earning rental income was part of its business activity. The taxpayer also relied upon judicial precedents, including the Supreme Court decisions in Sultan Bros. (P) Ltd. v. CIT and Royla Corporation Pvt. Ltd. v. CIT.
The Tribunal noted that the assessee had only rental income and had been consistently offering such income under the head “business income.” It observed that the AO had adopted a possible and legally sustainable view based on the taxpayer’s past history. Since two views were possible and the AO had chosen one after examination, the assessment order could not be branded as erroneous merely because the PCIT preferred a different view.
Accordingly, the Tribunal allowed the taxpayer’s challenge on this issue and held that the PCIT was not justified in invoking Section 263 with respect to the rental income classification.
The second issue related to construction expenses of ₹31.25 lakh. The PCIT had alleged that the AO allowed these expenses without adequate scrutiny. However, the taxpayer argued that the expenditure had not been claimed as a revenue deduction but had instead been transferred to work-in-progress and capitalized.
After examining the profit and loss account, the Tribunal found that although construction expenses of ₹31.25 lakh were debited, an equivalent amount was reduced through adjustment in inventory. As a result, the expenditure did not ultimately form part of the deductible expenses claimed while computing taxable income.
The Bench concluded that the AO had examined the matter and that no prejudice to the Revenue arose from the accounting treatment adopted. Therefore, the PCIT’s intervention on this issue was also unwarranted.
The Tribunal, however, reached a different conclusion regarding unsecured loans aggregating to ₹1.28 crore received from three creditors. While the taxpayer contended that the AO had issued notices under Section 133(6) and received responses from the lenders, the Tribunal found that the assessment records did not reveal any meaningful verification of the underlying transactions.
The Bench specifically noted that documents placed on record did not contain sufficient break-up details of long-term loans and advances reflected in the creditors’ balance sheets. It observed that the AO appeared to have accepted the replies submitted by the creditors without critically examining their contents or verifying the creditworthiness and source of funds.
Relying on judicial principles recognizing that superficial or random inquiries cannot shield an assessment from revision under Section 263, the Tribunal held that the AO’s examination of the loan transactions was inadequate. As a result, the assessment order was rightly considered erroneous and prejudicial to the interests of the Revenue on this limited issue.
The ruling reiterates a settled principle governing Section 263 proceedings: revisionary jurisdiction cannot be exercised merely because the Commissioner disagrees with a view taken by the AO after proper inquiry. Where the AO has examined an issue and adopted a plausible view, the assessment cannot be revised simply on account of a difference of opinion.
At the same time, the decision underscores that revision remains valid where the AO fails to undertake meaningful verification and merely accepts explanations without proper scrutiny, particularly in matters involving large unsecured loans.
The ITAT partly allowed the appeal and restricted the scope of the Section 263 revision. The Tribunal quashed the PCIT’s directions relating to rental income and construction expenses but upheld the revision insofar as it required verification of the unsecured loans of ₹1.28 crore. Consequently, the matter survives only for examination of the creditor transactions, while the other issues stand concluded in favour of the taxpayer.
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