Revision justified for loan verification needed but not done by AO.

I. Section 194-I (TDS on Rent) & Section 263 (Revision): Revenue Wins

Issue: The assessee failed to deduct TDS on the full amount of rent paid.
PCIT’s Action: Found the Assessing Officer’s (AO) order erroneous for not verifying TDS compliance on the total rent amount.
Assessee’s Failure: The assessee couldn’t provide a satisfactory explanation or evidence for the TDS shortfall, even when the PCIT highlighted a larger discrepancy than initially noted.
Outcome: The PCIT’s revision order was upheld because the AO failed to investigate a clear discrepancy, and the assessee failed to provide adequate evidence.

II. Section 194J (TDS on Professional/Technical Fees) & Section 263 (Revision): Assessee Wins

Issue: Discrepancy in the amount of professional/technical fees paid and the amount on which TDS was deducted.
PCIT’s Action: Ordered revision, directing the AO to verify the actual expense amount.
Assessee’s Defense: Provided financial statements and pointed out that the AO had already examined the issue and made a partial disallowance.
Outcome: The PCIT’s revision order was set aside.
- The AO had already examined the issue.
- The PCIT’s order to “verify” implied uncertainty, which is not a valid ground for revision under Section 263. The PCIT must have a prima facie finding of error.

III. Section 145A (Valuation of Closing Stock) & Section 263 (Revision): Assessee Wins

Issue: Alleged undervaluation of closing stock.
PCIT’s Action: Found the AO’s order erroneous for not verifying the valuation under Income Computation and Disclosure Standards (ICDS).
Assessee’s Defense: Provided detailed calculations based on accounting standards, pointed out that the AO had examined the issue, and highlighted errors in the PCIT’s calculations.
Outcome: The PCIT’s revision order was set aside.
- The PCIT didn’t address the assessee’s contentions.
- The PCIT didn’t specify which ICDS provisions were violated.
- The PCIT made calculation errors.

IV. Section 68 (Cash Credit – Unsecured Loans) & Section 263 (Revision): Revenue Wins

Issue: Genuineness of a loan received from a party that didn’t report interest income.
PCIT’s Action: Found the AO’s order erroneous for not examining the genuineness of the loan.
Assessee’s Submission: Provided a ledger account, but this was deemed insufficient to establish the loan’s genuineness.
Outcome: The PCIT’s revision order was upheld. The AO should have investigated the loan’s genuineness, especially given the lack of reported interest income.

V. Section 68 (Cash Credit – Unsecured Loans) & Section 263 (Revision): Revenue Wins

Issue: Genuineness of loans received from four individuals with the same PAN.
PCIT’s Action: Found the AO’s order erroneous for not examining the loan’s genuineness.
Assessee’s Explanation: Claimed the loans were advances from property sales and provided supporting documents.
Outcome: The PCIT’s revision order was upheld. The AO should have verified the assessee’s claims, especially given the unusual circumstance of the same PAN.

Overall Takeaways:

Section 263 allows the PCIT to revise orders that are erroneous and prejudicial to revenue.
The PCIT must have a prima facie finding of error.
The AO has a duty to conduct proper inquiries, especially when there are red flags.
Assessees must provide adequate evidence to support their claims.
Simple submission of ledgers, without further proof of the genuineness of transactions, is often not enough.
The PCIT cannot simply remand issues for verification. They must have a basis for finding the original order erroneous.

IN THE ITAT AHMEDABAD BENCH ‘B’

Hari Enterprise

Principal Commissioner of Income-tax

Smt. Annapurna Gupta, Accountant Member
AND MS. SUCHITRA RAGHUNATH KAMBLE, Judicial Member

IT Appeal No.822 (Ahd) of 2024
[Assessment Year 2018-19]

FEBRUARY 7, 2025

Sanjay R. Shah, AR for the Applicant. V. Nandakumar, CIT-DR for the Responent.

ORDER

Annapurna Gupta, Accountant Member.- The above appeal is filed by the assessee against order passed by the ld.Pr.Commissioner of Income-1, Ahmedabad in exercise of revisionary jurisdiction under section 263 of the Income Tax Act, 1961 [hereinafter referred to as “the Act” for short] dated 19.3.2024 for the assessment year 2018-19.

2. The grounds raised by the assessee are as under:

“1. The learned PCIT has grossly erred in law as well as on facts and circumstances of the case by passing order dated 19.03.2024 u/s. 263 of the Income Tax Act, 1961 (‘the Act’) considering that the order passed by National e-Assessment Centre, Delhi, u/s. 143(3) r.w.s 143(3 A) & 143(3B) of the Act dated 08.04.2021 is erroneous and prejudicial to the interest of the revenue on the premise that the learned Assessing Officer (‘AO’) has passed the aforesaid assessment order without making inquiries or verification on the issues which were required to be made.

2. On the facts and in the circumstances of the case, the learned PCIT has erred in law by holding that the learned AO has failed to carry out adequate enquiries/verification while passing the assessment order without appreciating the fact that the case of the Appellant had been selected under Computer Aided Scrutiny Selection (CASS) for verification of “Real Estate business with high closing stock (Large cash deposits in Bank Accounts)” and the learned AO had undertaken all the relevant and meaningful enquiry and verification and had called for specific details/information after perusing the said details/information during the course of assessment proceedings.

3. The learned PCIT erred in section 263 of the Act without finding an error causing prejudice to the interest of revenue, since verification precedes the finding of error the setting aside of assessment order for doing verification makes it evident that error is not found to initiate the proceedings u/s 263 of the Act. The learned PCIT has directed learned AO to verify the following issues:

TDS on rent u/s 1941.

TDS on professional and technical service u/s 194J.

Value of Closing Stock (WIP) under Percentage Completion Method.

Genuineness etc. of unsecured loans.

4. The learned PCIT without undertaking verification by his own self concluded in para 7 of his order that AO has failed to make addition on above counts. It is submitted that such a direction pre-empting the verification by learned AO is contrary to the intent and provisions of section 263 of the Act. Further, it is submitted that on this ground also the order passed by the learned PCIT u/s 263 of the Act by quashed.

3. A perusal of the order of the Ld.PCIT reveals that revisionary jurisdiction was exercised on the order passed by the Assessing Officer (AO) under section 143(3) of the Act for the impugned assessment year in the case of the assessee, noting several errors in the same causing prejudice to the Revenue. The errors related to payment of rent and professional charges being made without deduction of TDS, closing stock being under-valued by the assessee, and unsecured loans taken by the assessee remaining to be inquired into for their genuineness. All these errors were confronted to the assessee during the revisionary proceedings, due reply filed by the assessee, and after considering the same and not being convinced with the reply of the assessee, the ld.Pr.CIT held, that the AO having not verified the various issues identified by him,accordingly, he set aside the assessment order directing the AO to verify each such issue.

Aggrieved with the same, the assessee has come up before the Tribunal.

4. During the course of hearing before us, the ld.counsel for the assessee reiterated the contentions made before the ld. PCIT which primarily was to the effect that the issues were examined by the AO during assessment proceedings, and even on merits there was no error in the assessment order, with respect to all the issues identified by the ld.Pr.CIT.

5. The ld.DR per contra relied on the findings of the ld.Pr.CIT.

6. Having heard contentions of both the parties and gone through the order of the ld.Pr.CIT, as also through various documents, and case laws referred to before us, placed in a paper-book compilation filed by the assessee, we shall now adjudicate the present appeal, taking up each issue identified by the ld.Pr.CIT to have caused error in the assessment order.

7. First issue, noted by the ld.Pr.CIT related to TDS not deducted on the rent paid by the assessee in terms of section 194-I of the Act.

8. As noted in the order of the ld.Pr.CIT, he found from the assessment records that the assessee had paid total rent of Rs.10,65,941/-, but TDS under section 194-I was deducted only on payment of Rs.6,00,000/-.

9. The ld.counsel for the assessee stated the issue to have been adjudicated during the assessment proceedings. In this regard, he drew our attention to the reply filed to the ld.Pr.CIT placed before us at PB Page No.598 and 599, the contents of which are reproduced in the order of the ld.Pr.CIT also. The same is reproduced hereunder:

“Issue 1: Assessee firm has paid a total rent of Rs. 10,65,941/-, whereas TDS u/s 1941 of the Act is deducted against payment made of Rs. 6,00,000/ – only, accordingly assessee firm had failed to deduct TDS on balance rental payment amounting to Rs. 4,65,941/-, hence Rs.1,39,782 (30% of Rs.4.65,941/-) should be disallowed.

In this regard, assessee firm would like to submit that, the total amount of rent expense debited to the Profit & Loss Statement (‘P&L’) by the assessee firm during the year under consideration amounts of Rs. 31,90,941/-. (Copy of Audited Financial Statement is attached herewith as Annexure-2). Below table shows breakup of rent expense debited to P&L:

Sr No.	Schedule of Audited Financial Statements	Nature of rent expense	Amount (Rs.)
1.	Schedule H – Project Development and Construction Expense	Equipment rent expense	21,25,000
2.	Schedule H – Project Development and Construction Expense	Rent expense	4,65,941
3.	Schedule J -Administrative and Marketing Expense	Office rent expense	6,00,000
	Total Rent Expense debited to Profit & Loss Statement		31,90,941

Relevant extract of schedules forming part of audited financial statements showing the amount of rent expense debited to P&L is reproduced below for your honour’s ready reference:

SCHEDULE-H

PROJECT DEVELOPMENT AND CONSTRUCTION EXPENSES:

Construction Materials consumed	4 17 30 123	3 38 19 277
Labour Charges	2 56 08 369	182 88 804
Consultancy Expenses	17 79 500	39 330
AMC Charges	133 54 427	81 25 148
Electricity expenses	5 57 808	6 35 480
Carting & Freight Expenses :	29 88 701	11 87 039
RERA Fees	3 16 676	–
Other Prefect Expenses	50 61 283	44 16 033
Total	9 39 87 828	6 65 11 111

SCHEDULE I

ADMINISTRATIVE ANE MARKETING EXPENSES

Office Rent Expenses	600 000	5000
Salary Expenses	41 35 900	29 30 610
Office Expenses	1 10 194	89 091
Advertisement Expenses	5 29084	60, 156
Rates & Taxes	1333	–
Audit Fees	30 000	4800
Other Expenses	177 309	1 34 983
	Total 55 83820	32 24 640

Further, during the assessment proceedings for the year under consideration the learned AO in his notice dated 01.03.2021 u/s 142(1) of the Act, has specifically asked details in regard to rent expenses in point no. (3) and (6) of the annexure to the notice. In response to the same, the assessee firm has submitted its reply on 06.03.2021 along with the necessary documents supporting the same. (Copy of such notice and response to the same is attached herewith as Annexure-3).

The learned AO during the assessment proceedings has therefore verified total rent paid by the assessee firm and the IDS deducted on the same for the year under consideration. Since the above issue has been specifically looked upon during the assessment proceedings, the proposed addition by initiating proceedings u/s 263 of the Act is not tenable and be dropped.

10. He also drew our attention to the documents filed to the ld.Pr.CIT evidencing the fact of the issue having been examined during assessment proceedings, placed at PB Page No.617, which is the copy of the notice issued by the AO under section 142(1) of the Act dated 01.03.2021 during assessment proceedings, asking the assessee to give details of parties to whom the rent of Rs.25,90,941/-was paid during the year, and page no.618 to 622, which is the reply filed by the assessee in response to the said notice,dated 6.3.2021, giving details of rent expenses as comprising of the rent for equipment of Rs.21,25,000/- and rent for office of Rs.4,65,941/-, as also submitting copy of the relevant ledger accounts of both the rent expenses and copy of invoices of the same.

11. The ld.Pr.CIT on considering the above reply filed by the assessee has given his finding at para 5.1 of his order as under:

“5.1 TDS on Rent u/s 1941: The assessee contended that its total expenditure on Rent is Rs.31,90,941/-. The assessee has also argued that the issue has already been considered by AO during the assessment proceedings and has verified total rent paid by the assessee. The assessee further argued that proposed addition in the present proceedings u/s 263 is not tenable. The contentions of the assessee are considered. The assessee has not submitted anything on merit of the issue, rather it went ahead in questioning the proceedings u/s 263 of the Act. The legal aspects of the present proceedings are dealt in detail in succeeding paragraphs. However, on merits of the case, the A.O. has not verified the issue of deduction of IDS on rent totaling to Rs.31,90,941/-, the A.O. has verified issue of TDS in partial manner, therefore, in view of clause (a) to Explanation 2 of section 263 of the Act. Accordingly, in view of Explanation 2 of section 263 of the Act, the order of the A.O. is deemed to be erroneous in so far as it is prejudicial to the interest of the revenue. The order of the A.O. is set aside and the A.O. is directed to verify each rental payments, totaling tor Rs.31,90,941/-, within the ambit of provisions of section 1941 of the Act, and, draw appropriate inference including disallowance u/s 40(a)(ia) of the Act.”

12. On going through all the above, we do not find any infirmity in the finding of the ld.Pr.CIT of the assessment order being erroneous causing prejudice to the Revenue on account of the AO having not examined the issue of TDS on rent not being deducted in terms of provisions of section 194-I of the Act.

13. As noted above, the assessee was found by the Ld.PCIT to have not deducted TDS on payment of Rs.4,65,941/- out of total rent payment of Rs.10,65,941/-. But while making contentions before the Ld.PCIT it was revealed by the assessee that total rent of 31,90,941/-was paid by the assessee out of which TDS was deducted only on Rs.6 lacs.

14. Further it is noted that during assessment proceedings the assessee had only furnished details of rent expenses comprising of rent for equipment Rs.21,25,000/- and rent for office Rs.4,65,000/.As for TDS the only submission made was that “applicable TDS was deducted.” There is no clarity in the submissions of the assessee to the AO as well as the Ld.PCIT as to how applicable TDS was deducted by the assessee. Except for a general statement made by the assessee in this regard that too to the AO, no evidence / substantiation/explanation with regard to the same was filed furnished by the assessee.

It is amply clear therefore that the issue of TDS on rent was not inquired into by the AO more particularly, when the facts revealed that the assessee has not deducted TDS on all rent paid during the year. Nor was any explanation on merits furnished to the Ld.PCIT as to why no TDS was deducted.

15. The finding of the ld.Pr.CIT therefore that the assessee has not submitted anything on merits of the issue, we find, is correct. The ld.Pr.CIT has rightly noted that the AO has not verified the issue of TDS on rent totaling to Rs.31,90,941/-. The ld.Pr.CIT’s order, therefore, on the aspect of the assessment order being erroneous for not having verified the TDS on rent under section 194-I of the Act, is upheld.

16. Second issue taken by the ld.Pr.CIT relates to TDS on a sum of Rs.22,02,000/- under section 194J of the Act, which was noted by the ld.Pr.CIT to have been deducted on payment of Rs.17,34,150/- only.

17. The contention of the ld.counsel for the assessee before the ld.Pr.CIT in this regard are reproduced hereunder:

“Issue 2: Assessee firm has made payments towards professional and technical services of Rs. 22,02,000/- u/s 194J of the Act, however TDS is deducted only on payment of Rs. 1 7,34,150/-, accordingly assessee firm had failed to deduct IDS on Rs. 4,92,000/-, hence Rs.1,47,600 (30% of Rs. 4,92,000/-) should be disallowed.

In this regard, assessee firm would like to submit that, your honour has erred by considering the amount of payment made towards professional and technical services u/s. 194J of the Act as Rs.22,02,000/-, whereas, the actual amount of expenses incurred towards professional, consultancy and technical services by the assessee firm during the year under consideration amounts to Rs. 1 7,79,500/-. (Copy of Audited Financial Statement is attached herewith as Annexure-2).

Relevant extract of schedules forming part of audited financial statements showing the amount of consultancy expense debited to P&L is reproduced below for your honour’s ready reference:

SCHEDULE -H

PROJECT DEVELOPMENT AND CONSTRUCTION EXPENSES:

Construction Materials consumed	4 17 30123	3 38 19 277
Labour Charges	2 56 08 369	1 82 88 804
Consultancy Expenses	17 79 500	39 330
AMC Charges	1 33 544 27	81 25 148 ‘
Rent Expenses	25 90 941	–
Electricity expenses	5 57 808	6 35 480
Carting & Freight Expenses	29 88 701	11 87 039
RERA Fees	3 16 676	–
Other Project Expenses	50 61 283	44 16 033
Total____	9 39 87 828	6 65 11 111

Further, during the assessment proceedings for the year under consideration the learned AO in his notice dated 01.03.2021 u/s 142(1) of the Act, has specifically asked for party wise details of consultancy expenses debited to P&L in point no. (2) of annexure to the aforementioned notice. In response to the same, the assessee firm has submitted its reply on 06.03.2021 along with the necessary documents supporting the same. (Copy of such notice and response to the same is attached herewith as Annexure-3).

The learned AO during the assessment proceedings, verified the consultancy charges paid by the assessee firm and TDS deducted on the same for the year under consideration, accordingly, made an addition of Rs.9, 750/- being 30% of Rs. 32,500 paid to M/s Baladeep Law Associates since IDS u/s 194J of the Act was not deducted by the assessee firm. (Copy of Assessment Order is attached herewith as Annexure-1).

Considering the addition is made by learned AO in the assessment order, it can be concluded that the assessment order is passed after complete verification of the documents provided by the assessee firm and after application of mind by the learned AO. Hence, the assessment order passed cannot be held as erroneous, so the addition proposed by your honour by initiating proceedings u/s 263 of the Act should be dropped.

18. The finding of the ld.Pr.CIT on this issue are at para 5.2 of his order are as under:

“5.2 TDS on professional and technical service u/s 194J : The assessee contended that its total expenditure on expenses incurred towards professional, consultancy and technical service u/s 194J is Rs.17,79,500/-instead of Rs.22,02,000/- mentioned in the notice of hearing u/s 263 of the Act. The assessee has also argued that the issue has already been considered by AO during the assessment proceedings and has made addition of Rs.9,750/- being 30% of Rs.32,500/- paid to M/s Baladeep Law Associated. The assessee further argued that proposed addition in the present proceedings u/s 263 is not tenable. The contentions of the assessee are considered. The assessee has not submitted anything on merit of the issue, rather it went ahead in questioning the proceedings u/s 263 of the Act. The contention of the assessee is prima facie found correct that it has debited consultancy expenses of Rs.17,79,500/-. This issue is restored to the file of the A.O. only for the purpose of verification as to whether the expenses on professional and technical service is Rs.17,79,500/- or Rs.22,02,000/-. If A.O. finds that the amount of expenditure is Rs.22,02,000/-, then only the A.O. is directed to verify each such payment within the ambit of provisions of section 194J of the Act, and, draw appropriate inference including disallowance u/s 40(a)(ia) of the Act”

19. We have considered all the above, but we are unable to concur with the ld.Pr.CIT’s finding of the error on the issue of TDS not deducted under section 194J of the Act. The ld.Pr.CIT’s finding of error was to the effect that while the assessee had debited an amount of Rs.22,02,000/- towards professional consultancy and technical services, TDS was deducted only on Rs. 17,34,150/-.

20. The assessee, we have noted, denied having debited an Rs.22,02,000/- towards Professional and other charges and substantiated with the financial statements that it had debited only an amount of Rs.17,34,150/-. The assessee also pointed out that the issue was examined during assessment proceedings and noting the failure of the assessee to deduct TDS on an amount of Rs.32,500/-the AO had noted and made disallowance of 30% of the same to the tune of Rs.9,750/-.

21. We find that the ld.Pr.CIT has found the contention of the assessee to have debited only an amount of Rs.17,34,500/- towards professional and technical services to be correct, but having noted so, he has still gone to restore the issue to the file of the AO for verifying, whether expenses liable for TDS u/s 194J of the Act, amounted to Rs.22,02,000/- or Rs.17.79 lakhs.

What the above finding of the Ld.PCIT means is that prima facie the contention of the assessee is correct that TDS u/s 194J of the Act was leviable only on Rs.17.79 lacs, which the assessee undisputedly had demonstrated to be examined by the AO. Clearly there is therefore no finding of error in the order of the AO vis a vis this issue.

22. The ld.Pr.CIT, in exercise of revisionary jurisdiction, has no power to restore an issue for the purpose of verification only. Restoring a matter for verification means even the Ld.PCIT is not sure of the assessment order being erroneous causing prejudice to the Revenue. It is settled law that the ld.Pr.CIT has to prima facie find error in the order of the AO u/s 263 of the Act. In the absence of the same the power exercised by the Ld.PCIT on the impugned issue is clearly not in accordance with law.

23. The order of the Ld.PCIT finding the assessment order erroneous on the issue of TDS under section 194J is, therefore, found to be not sustainable in law, and is therefore set aside.

24. Third issue taken for consideration by the ld.Pr.CIT related to valuation of closing stock under percentage control method (PCM).

25. As per the ld.Pr.CIT, the assessee was noted to have been recognizing revenue as per the percentage control method (PCM). But the closing stock was found to be undervalued by Rs.5,62,21,161/-. The reply furnished by the assessee in this regard to the ld.Pr.CIT is as under:

“It is submitted that, the formula given in the guidance note for accounting of real estate transactions of work in progress to be carried forward is as mentioned below:

Value of Closing Stock (W1P) work in case of Real Estate Transaction	= Difference between total cost of the as on reporting date and proportionate cost of area sold.
	(total area sold / total saleable area x cost incurred till reporting period).

Further, your honour has erred in calculating the value of Closing Stock (WIP) as on 31.03.2018, as you have considered Cost incurred till 31.07.2018 instead of Cost incurred till 31.03.2018 being the end of reporting period in case of assessee firm. Extract of the notice where your honour has wrongly considered cost incurred till 31.07.2018 is reproduced below for your ready reference.

Cost incurred till 31.07.2018 (in Rs.)	604942270
Total area sold till 31.07.2018 (1521 3651)	5172 sqm
Total saleable area (10547 25426)	35973 sqm
Proportionate cost of area sold (5172/35973’60942270)	86975270
Work in progress to be carried forward as per PCM method	517967000

Work in progress accounted by the assessee in books	461745839
Difference	56221161

In this regard, assessee firm would like to submit that during the assessment proceedings for the year under consideration, the learned AO has asked for the working of valuation of closing stock in its notice dated 03.02.2021 u/s 142(1) of the Act, in response to the same, the assessee firm submitted its reply along with necessary supporting documents on 24.02.2021. (Copy of such notice and response to the same is attached herewith as Annexure-4)

It is further submitted that since your honour has erred in considering the cost incurred till the end of reporting period as 31.07.2018 instead of 31.03.2018, the value of closing stock as calculated in the captioned notice b incorrect, hence the proposed addition u/s 263 of the Act should be dropped.”

26. Finding of the ld.Pr.CIT in this regard is as under:

“5.3 Value of Closing Stock (WIP) under PCM : The assesses has contended that the issue has already been considered by AO during the assessment proceedings. The assessee further argued that proposed addition in the present proceedings u/s 263 is not tenable. The contentions of the assessee are considered. The assessee has not submitted anything on merit of the issue, rather it went ahead in questioning the proceedings u/s 263 of the Act. The legal aspects of the present proceedings are dealt in detail in succeeding paragraphs. However, on merits of the case, the A.O. has not verified the issue of difference in the closing stock of Rs.5,62,21,161/- within the purview of ICDS, the A.O. has verified issue in partial manner, therefore, in view of clause (a) to Explanation 2 of section 263 of the Act. Accordingly, in view of Explanation 2 of section 263 of the Act, the order of the A.O. is deemed to be erroneous in so far as it is prejudicial to the interest of the revenue. The order of the A.O. is set aside and the A.O. is directed to verify the issue and ascertain closing stock of WIP in accordance with ICDS, and, draw appropriate inference including addition on account of difference in closing stock.”

27. On going through the above, we are unable to concur with the ld.Pr.CIT’s finding of the assessment order being erroneous on account of under-valuation of the closing stock.

We have noted that the ld.counsel for the assessee had pointed out that the assessee had followed Guidance Note for Accounting of Real Estate Transaction, adopting formula given therein for valuation of its work-in-progress, and had given complete working of the same to the ld.Pr.CIT for arriving at the value of closing stock debited by it. The assessee had also pointed out the issue to have been examined by the AO during the assessment proceedings. Further, we have noted that the assessee had pointed out that the ld.Pr.CIT had incorrectly taken the cost incurred till the end of the reporting period as on 31.7.2018 instead of 31.3.2018, and therefore, had arrived at a different figure of closing stock.

28. In sum and substance, the assessee had pointed out to the ld.Pr.CIT that for the valuation of closing stock, it had adopted formula prescribed by the Guidance Note for Accounting of Real Estate Transaction. The assessee had also pointed out the mistake being done by the ld.Pr.CIT while calculating closing stock of the assessee at a much higher figure.

29. The ld.Pr.CIT in his finding, we have noted, has not dealt with any of the contention of the assessee, as noted above. The ld.Pr.CIT simply went to record a finding of error in the order of the AO vis-avis the valuation of the closing stock, noting that the AO has not verified the issue within the purview of ICDS. What is the within the purview in the ICDS,has not been pointed out/ clarified in his order. Therefore, when the assessee explained with facts to the ld.Pr.CIT, that there was in fact no error in the valuation of the closing stock, the ld.Pr.CIT could not have arrived at a finding of the error in the order of the AO without pointing out infirmities in the explanation of the assessee. We are, therefore, unable to concur with the ld.Pr.CIT that the assessment order was erroneous, causing prejudice to the Revenue on the issue of valuation of closing stock. The finding of error by the ld.Pr.CIT on the aspect of undervaluation of closing stock is accordingly set aside.

30. Fourth issue taken up by the ld.Pr.CIT was with respect to unsecured loan of Rs.1,67,55,443/- taken by the assessee from Anmol & Sons whose genuineness, identity and credit-worthiness was allegedly not examined during the assessment proceedings.

31. The contention made by the assessee before the ld.Pr.CIT is reproduced hereunder:

“In this regard, the assessee firm submits that it has received a loan amounting to Rs.1,67,55,443/- from Anmol & Sons, on the said loan the assessee firm has paid interest amounting to Rs. 8,10,423/- to the lender and accordingly deducted tax at source u/s 194A of the Act i.e, Rs. 81,033/-.

Further, your honour is of the opinion since Anmol & Sons has not reported the interest income earned by it from the assessee firm amounting to Rs. 8,10,423/- in the income tax return filed for the year, the transaction with Anmol & Sons is not genuine, credible or creditworthy.

In regard to the above, it is submitted that the responsibility of filing of income tax returns and disclosing all the incomes earned lies with the concerned person, non-disclosure of interest income in the Income tax return by Anmol & Sons is non-compliance at their end and the assessee firm cannot be held liable for the same.

Further, the ledger of assessee firm company in the books of Anmol & Sons for the year under consideration is attached herewith as Annexure-5, wherein it can be determined by your honour that the interest income and proportionate TDS receivable against the interest income is booked in their books of accounts. Considering the above, assessee firm cannot be held liable for the non-compliance at the part of lender, therefore the said loan cannot be considered as income of the assessee firm.”

32. The finding of the ld.Pr.CIT are as under:

“5.4.1 Firstly, the assessee has received unsecured loan of Rs.1,67,55,443/-from Anmol & Sons. The assessee has contended that it has deducted TDS on such interest payment. The assessee further contended that it has nothing to do with a situation wherein, the recipient has not offered interest income in its return of income. In this connection, it is to highlight that the recipient of interest is not aware about a situation where considerable amount of income is received by it. The assessee has questioned the proceedings u/s 263 of the Act. The legal aspects of the present proceedings are dealt in detail in succeeding paragraphs. However, on merits of the case, the A.O. has not verified the issue of unsecured loan from Anmol & Sons and has not examined identity of lender, creditworthiness of lender and genuineness of the transaction,. The A.O. might have verified issue in partial manner, therefore, in view of clause (a) to Explanation 2 of section 263 of the Act. Accordingly, in view of Explanation 2 of section 263 of the Act, the order of the A.O. is deemed to be erroneous in so far as it is prejudicial to the interest of the revenue. The order of the A.O. is se: aside and the A.O. is directed to verify the issue and ascertain identity of lender, creditworthiness of lender and genuineness of the transaction,, and, draw appropriate inference including addition on account of unsecured loan u/s 68 of the Act and consequent disallowance of interest paid on such cash credits, if the assessee rails to prove the vital three ingredients of this unsecured loan.

33. A perusal of the above would reveal the ld.Pr.CIT to have noted that Anmol & Sons (A&S) had given loan to the tune of Rs.1,67,55,443/- to the assessee, but the said party had not reported interest income earned from it from the assessee-firm in the return of income filed. Accordingly, the ld.Pr.CIT was of the view that the AO having not examined the genuineness of the loan received from A&S, the assessment was erroneous causing prejudice to the Revenue.

The assessee, we have noted, submitted to the ld.Pr.CIT that the non-reporting of interest by A&S could not be read adversely against the assessee. Further, the assessee filed copy of the ledger account of the said firm showing therein the interest paid to the firm and TDS deducted therein. The assessee reiterated to the ld.Pr.CIT that merely because of non-compliance on the part of the lender, the loan cannot be considered as income of the assessee-firm.

34. The ld.Pr.CIT however noted that the AO had not verified the issue, and therefore, the assessment was erroneous causing prejudice to the Revenue.

35. We are in agreement with the ld.Pr.CIT on this aspect. Undoubtedly, the issue was not examined during the assessment proceedings despite the records revealing that no interest income was returned to tax by the said party who had given loan to the assessee. It is not the case of the Ld.Counsel for the assessee that the issue was examined during assessment proceedings.

In the light of the same, we are in agreement with the ld.Pr.CIT that non-examination of this issue by the AO had rendered the assessment order erroneous causing prejudice to the Revenue.

36. The contentions made by the Ld.Counsel for the assessee are in relation to the merits of the issue alone, having made an attempt to establish the genuineness of the transaction/loan to the Ld.PCIT by filing copy of ledger account of the said party showing interest paid to it that too after deducting TDS. But the fact remains that the genuineness of the loan taken by the assessee was not examined by the AO despite the records revealing that no interest income was returned to tax by the said party who had given loan to the assessee. Further even the documents submitted by the assessee to the Ld.PCIT do not establish the genuineness of the loan being only copy of ledger account of the said party in its Books of accounts. The said document needed to be verified and further inquiry needed to be conducted to establish the genuineness of the loan taken by the assessee.

37. The AO having not done so during the assessment proceedings, despite the fact on record prompting an inquiry on the issue, in the light of the fact that the assessee had taken a huge amount of loan from the said party without any interest, the ld.Pr.CIT, we hold, has rightly found the assessment to be erroneous causing prejudice to the Revenue.

The finding error by the ld.Pr.CIT on the issue, of nonexamination by the AO of genuineness of loan taken by the assessee from Anmol & Sons (A&S) of Rs.,67,55,443/- is accordingly confirmed.

38. The last issue identified by the ld.Pr.CIT relates again to unsecured loan amounting to Rs.37,76,000/- which was found to be not examined by the during the assessment proceedings.

39. The ld.Pr.CIT noted from the tax audit report that these loans were taken from four persons whose PAN was shown as “PPPPP1234P”. The reply furnished by the assessee to the ld.Pr.CIT in this regard are as under:

“In this regard, your honour has observed that since the PAN of four persons has been reported as PPPPP1234P, the transactions are not genuine, credible or creditworthy.

(a) In this connection, it respectfully submitted before your honour that the impugned amount of Rs.37,76,000/- represents advances received from the buyers towards the sale of property by the assessee firm. Hence, the same represents advances against property sale which was subsequently reported as income and offered to tax in the year of sale of the property by the assessee firm i.e, the year in which the final conveyance deed was executed.

It is further submitted that out of total advance of Rs.37, 76,000/-, an amount of Rs.1,25,000/ – was returned back to the buyer.

Below table shows the date on which property is sold to the buyers from whom the impugned amount is received and year in which income from sale of property is offered to tax.:

Sr No.	Party Name	PAN	Amount of Advance (Rs.)	Date on which property is sold	Year in which income offered to tax
1.	Kaushalkumar Naranyanbhai Patel	AKYPP5943H	15,00,000	18.01.2021	AY 2021 22
2.	Jaykrishna G. Patel	AJAPP7004L	1,51,000	11.11.2020	AY 2021-22
3.	Bhartiben Bipinkumar Shah	ADKPS5681C	20,00,000	05.08.2023	AY 2024-25
4.	Rohitkumar Jivanbhai Patel	Not Available	1,25,000	Property not sold; advance returned back

Accordingly, as the impugned amount of Rs.37,76,000/- represent advance received from the buyer, the question of proving the credibility and creditworthiness of the parties does not arise and the therefore, the said advances cannot be considered as income of the assessee firm as the same would result in double taxation of the same amount.

(b) Without prejudice to the above, the assessee firm further submits that the tax auditor had duly examined the records relating to the impugned advance for purchase of property of Rs.37,76,000/- while conducting the tax audit for the year under consideration. Further, the PAN of the parties was reported as such due to non-availability of the PAN at the time of tax audit and therefore, the aforesaid PAN was reported merely for avoiding error at the time of uploading the tax audit report.

Accordingly, mere non-reporting of PAN of the buyers of properly cannot be construed as failure on part of the assessee firm to prove the genuineness, credibility and creditworthiness of the transaction of Rs.37,76,000/-.

However, for your honour’s reference, the assessee firm submits the copies acknowledgements of the return of income filed by the parties from whom it has received the impugned advances and ledger of the concerned parties in the books of assessee firm as Annexure-6. However, the fourth party to whom the advance of Rs.1,25,000/- was returned, did not provide its acknowledgement and therefore, the same is not being submitted.”

40. The ld.Pr.CIT’s finding are as under:

5.4.2 Secondly, loan amounting to Rs.37,76,000/-, appearing against PAN:PPPDP1234P. The assessee contended that this sum represents advance received rom the buyers towards the sale of property. The assessee has also explained that income has been offered. This issue of unsecured loan of Rs.37,76,000/- seems to be factual. The A.O. is directed to verify details of such purported advance from the buyers and also verify the income offered in subsequent. After verification, the A.O. shall not infer in the issue if the assessee proves the receipts as advance, which has been offered as income in subsequent years. This issue is set-aside to the A.O. as discussed supra. “

41. We have considered contentions of both the sides. As noted above, the fact of the matter is that loan amount of Rs.37,76,000/-was noted to be received from four persons by showing the same PAN and the issue was admittedly not examined by the AO during the assessment proceedings. The PAN quoted in the tax audit report is also admittedly incorrect. Though the assessee has explained to the ld.Pr.CIT the transaction to be on account of advances received from sale of property and furnished evidences to prove the genuineness of the transaction by filing return of income of all the four persons, and their ledger accounts, but the fact remains that all these contentions of the assessee need verification, which was not done at the first stage itself by the AO, despite the facts on record prompting an inquiry to be conducted by the AO on the issue.

42. In the light of the same, the finding of the ld.Pr.CIT being error on account of non-examination of all the issues of loans received by the assessee amounting to Rs.37,76,000/- is confirmed.

43. In the result, the appeal of the assessee is partly allowed in the following terms:

(i)

Issue No.1 regarding non-deduction of TDS under section 194-I is confirmed;

(ii)

Issue No.2 regarding non-deduction of TDS under section 194-J is set aside;

(iii)

Issue No.3 regarding valuation of closing stock (PMC) is set aside;

(iv)

Issue No.4 regarding unsecured loan of Rs.1,67,55,443/-is confirmed;

(v)

Issue No.5 regarding unsecured loan of Rs.37,76,000/- is confirmed.