IMPORTANT POINT
The court established that an assessment order can be deemed erroneous and prejudicial if it is passed without necessary inquiries or verification, particularly regarding the creditworthiness of loan providers, as per the provisions of Section 263 and its Explanation 2.

JUDGMENT :

HON’BLE MR. JUSTICE DEEPAK ROSHAN

Heard learned counsel for the parties.

2. The instant appeal is directed against the order dated 20.02.2019 passed by the Income Tax Appellate Tribunal, Ranchi Bench, Ranchi (hereinafter to be referred as the Tribunal) in ITA No. 138/ Ran 2018 for the period AY 2013-14; whereby the learned tribunal has allowed the appeal of the Assessee and set aside the order of learned Commissioner dated 22.03.2018 passed under Section 263 (1) of the Income Tax Act, 1961 (hereinafter to be referred as the Act).

3. The brief fact of the case is that the respondent Assessee is the sole proprietor of M/s RK Trader who filed her return of income for in the AY 2013-14 showing a total income of Rs. 10,36,390/-. Subsequently, the case of the respondent was selected for scrutiny and accordingly notice under Section 143 (2) and 143 (1) of the Act was issued on 03.09.2014 and 08.05.2015, respectively and an order dated 03.12.2015 was passed by the assessing officer assessing total income at Rs.11,56,390/- against the return income of Rs.10,36,390/-. Subsequently, the Commissioner of Income Tax issued a suo motu revision proceeding against the respondent Assessee under Section 263 of the IT Act on following grounds:

“During the course of examination of the records, it has been noticed that there is huge rotation of money amongst relatives without payment or receipt of interest. The assessee has raised loans from the relatives aggregating to Rs. 6,75,08,220/-. Financial dealings amongst the relative/group firms appears to be transformation of income in the hands of recipients of loan from the capital advanced by others, independent verification of such transaction had not been done by the assessing officers. None verification of this issue has rendered the assessment order erroneous and prejudicial to the interest of revenue. Accordingly, notice under Section 263 has been issued to the assessee.”

During the 263 proceedings, notice was issued to the Assessee to which she duly replied and the Principal Commissioner of Income Tax being dissatisfied by the reply passed an order under Section 263 of the Act holding that the assessment order dated 03.12.2015 is erroneous and prejudicial to the interests of revenue within the meaning of Section 263 of the Act and accordingly the said order is set aside with a direction to pass fresh assessment order after making proper enquiry and necessary investigation.

Being aggrieved by the order dated 22.03.2018 passed by the Commissioner of Income Tax under Section 263, the respondent Assessee filed appeal before the learned tribunal who vide its order dated 20.02.2019 passed in ITA No.138/RAN/18 allowed the appeal of the Assessee and set aside the order passed by the Principal Commissioner of Income Tax under Section 263 of the Act. However, in the meantime, fresh assessment order was passed on 13.12.2018 under Section 143(3) read with section 263 of the Income Tax Act and the total income tax assessed was Rs.2,62,78,410/-.

4. The instant appeal was admitted on 21.02.2022 on following substantial question of law vide order dated 21.02.2022 which is quoted herein below:

“(i) Whether on the facts and circumstances of the case and in law, learned Income Tax Appellate Tribunal is justified in setting aside the order passed under Section 263 of Income Tax Act by CIT, though the Assessing Officer, had not carried the verification and inquiry as to the creditworthiness of the two depositors in particular as was also required under Explanation-2 to Section 263 of Income Tax Act, 1961 introduced with effect from 1st June, 2015.

(ii) Whether on the facts and circumstances of the case and in law learned Income Tax Appellate Tribunal was justified in holding that the Assessing Officer had duly verified the genuineness of unsecured loans?

(iii) Whether the observations of learned Income Tax App