ITAT Upholds Revision Where AO Failed to Examine Source of Cash Deposits Behind Unsecured Loans

ITAT Upholds Revision Where AO Failed to Examine Source of Cash Deposits Behind Unsecured Loans

The assessee, M/s Shanti Rice Mills, a partnership firm, was assessed for AY 2015-16 under Section 143(3) by the Assessing Officer. During the year, the firm had received unsecured loans of Rs. 1.80 lakh and Rs. 3.60 lakh from the daughter and son of a partner, unsecured loan of Rs. 8 lakh from M/s Shree Balaji Filling Station, and fresh capital of Rs. 19.50 lakh introduced by partner Shri Sunil Kumar. The Principal Commissioner of Income Taxon examination of records, found that in all cases equivalent amounts of cash were deposited in the bank accounts of the lenders or intermediary entities immediately before the funds were transferred to the assessee.

The Assessing Officer had accepted the transactions without examining the source of these cash deposits. The PCIT invoked Section 263, set aside the assessment, and directed a fresh assessment after proper verification. The assessee challenged the revision order before the ITAT.

Issue Before Court: Whether the Principal Commissioner was justified in invoking revisionary jurisdiction under Section 263 where the Assessing Officer failed to enquire into the source of cash deposits that constituted the immediate source of unsecured loans and capital introduced in the assessee firm.

Tribunal’s Ruling: The Tribunal dismissed the assessee’s appeal and upheld the revisionary order under Section 263. It held that the AO had not conducted any enquiry into the immediate source of cash deposits totalling Rs. 32.90 lakh, which directly funded unsecured loans and capital introduction. The Tribunal observed that merely obtaining confirmations, bank statements, and income tax returns of lenders does not discharge the obligation to examine the source of cash deposits when such deposits are the immediate source of credit. The case was held to be one of complete lack of enquiry and not inadequate enquiry.

The PCIT was therefore justified in treating the assessment order as erroneous and prejudicial to the interests of the Revenue and directing fresh assessment. The Tribunal also held that initiation of Section 263 proceedings based on audit objection is permissible depending on the facts. Thus, the revision under Section 263 was sustained.

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