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Facts
The assessee challenged an order passed by the Principal Commissioner of Income-tax (PCIT) under Section 263 of the Income Tax Act, 1961, which arose from an assessment order under Section 143(3). The PCIT's order was based on a proposal from the Assessing Officer (AO) alleging the original assessment was erroneous and prejudicial to the revenue, specifically concerning liabilities and the percentage completion method of accounting. A significant delay in filing the appeal was condoned by the Tribunal due to pending issues before the NCLT and a plot cancellation.
Held
The Tribunal ruled that the PCIT initiated the Section 263 proceedings based on 'borrowed satisfaction' from the AO's proposal rather than an independent application of mind, which is a prerequisite for valid exercise of Section 263 powers. Citing multiple precedents, the Tribunal concluded that such proceedings, initiated without the PCIT's own conclusive findings on the assessment record, vitiate the jurisdiction. Consequently, the impugned Section 263 order was quashed.
Key Issues
Whether the Principal CIT can initiate revisional proceedings under Section 263 of the Income Tax Act solely based on a proposal from the Assessing Officer, without independent application of mind to the assessment record.
Sections Cited
263, 143(3), 147(1)
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Income Tax Appellate Tribunal, DELHI BENCHES: E : NEW DELHI
Before: SHRI S. RIFAUR RAHMAN & SHRI ANUBHAV SHARMA
Assessment Year: 2016-17 Morpheus Developers Private Vs Pr. CIT, Ltd., Delhi-4, 1, Main Road, Delhi. Maujpur, Delhi – 110 053. PAN: AAICM1972A (Appellant) (Respondent) Assessee by : Shri Yudhister Mehtani, CA Revenue by : Ms Amisha S. Gupt, CIT-DR Date of Hearing : 05.08.2025 Date of Pronouncement : 20.08.2025 ORDER
PER ANUBHAV SHARMA, JM:
This appeal is preferred by the assessee against the order dated 18.03.2021 of the Principal Commissioner of Income-tax (hereinafter referred to as the ld. PCIIT) u/s 263 of the Income Tax Act, 1961 (hereinafter referred as ‘the Act’) in Revision No.PCIT, Delhi-4/Revision-263/100000183556/2021 arising out of the order dated 29.12.2018 passed u/s 143(3) of the Act by the ITO, Ward-17(1), Delhi (hereinafter referred to as the Ld. AO).
At the outset, the ld. AR has pointed out that there was a delay in filing the appeal. On hearing on the application for condonation of delay, we find that primarily for the reason that there were some issues pending before the National Company Law Tribunal followed by appeal, there could not be adequate representation of the assessee. In fact, in January, 2023, the Greater Noida Authority had cancelled the plot on which the company was running the project. Thus, we are of the considered view that the delay although of substantial period of around 746 days, deserves to be condoned.
On hearing the ld. AR, we find that his contention primarily was that the ld.PCIT has issued notice u/s 263 of the Act in a mechanical manner merely accepting the proposal of the AO. The ld. DR has opposed the same and submitted that it is not a case of borrowed satisfaction and merely on the basis of reproduction of some part of the letter of the AO, it cannot be called a mechanical exercise of satisfaction. It was submitted that in any case, it could be sent back as the assessee has not responded before the ld. PCIT.
4. On giving a thoughtful consideration, we find that notice u/s 263 of the Act was issued to the assessee on 11.02.2021 with following averments:- “2. The show cause Notice u/s 263 of the Act was issued to the assessee vide DIN & Notice No. ITBA/REV/F/REV1/2020-21/1030556142(1) on 11.02.2021 which was duly served on the assessee. The show cause issued to the assessee is reproduced below: “In your case the assessment order u/s 143(3) has been passed on 29.12.2018 at the total income of Rs. 32,49,960/-. The AO has made addition of Rs. 35,41,464/- on account of bogus claim of depreciation of Rs. 35,41,464/- in the Profit and Loss account. It is noticed that you are showing huge liability of Rs.1,74,71,24,282/- under the head current liabilities and Rs.50,40,76,590/- as non-current liabilities. There has been substantial increase in liabilities over last year. Further, it is found from different schedules of the balance sheet that these liabilities are in the nature of unsecured loans from croporates, liabilities of Greater Noida authorities, trade payables and advance from customers. Further, it is noticed that you have shown a liability of Rs.1,35,59,93,138/- as advance from customers. You are showing the entire closing stock of Rs. 1,69,16,06,566/- as work in progress in the balance sheet. /As such you are not following the percentage completion method of accounting as mandated in AS-11 in the cases of builder/developer. From the above-mentioned discrepancies, it is apparent that the Assessing Officer has not made proper investigation and enquiries and has completed the assessment without complete verification of all the facts. This has made the assessment order passed u/s 143(3) erroneous and prejudicial to the interest to revenue. You are hereby given an opportunity to show as to why the assessment so framed be not set aside u/s 263 of the IT Act. You may file your reply in this regard either personally or through authorized representative at the office of the undersigned on 16.02.2021 at 05:00 PM at Room No. 251, 2nd Floor, C.R.Building, New Delhi with the evidence in support of your claim, failing which it will be presumed that you have nothing to state in the matter and the case will be decided on facts and material available on record. ”
The assessee has not responded for the reasons as submitted earlier that some proceedings are pending before the NCLT. The ld.PCIT proceeded to decide the issue with the following findings:- “3. It is noticed that the case was selected for scrutiny for various reason including reasons mentioned in the assessment order. However, the assessing officer did not conduct necessary enquiries specially with reference to liabilities and assessment of correct income as per percentage completion method.
In view of the above discussion it is held that the assessment order dated 29.12.2018 for AY 2016-17 is erroneous and prejudicial to the interests of revenue. Therefore, the said order is cancelled and restored to the file of AO for passing fresh assessment order in the light of above observations/directions with reference to issues discussed in the show cause notice. Fresh assessment order should be passed after giving an opportunity of hearing to the assessee and conducting necessary enquiries.”
Very apparently, there is not a word mentioned in the order of the PCIT as to what was the issues which were to be examined and on the basis of the assessment record what the AO failed to do by way of inquiry which otherwise ld. PCIT on the basis of assessment record on his own inquiry found to substantiate or draw any inference with regard to the reasons for which the case was selected for scrutiny. It is very much apparent from the copy of proposal dated 17.10.2019 available at page 1 of the paper book that Addl. Commissioner of Income-tax, Range-17, New Delhi had forwarded the proposal of the AO, ITO, Ward-17(3), New Delhi available at pages 2-3 of the paper book to the PCIT and on that basis the impugned notice dated 11.02.2021 originated. The content of the notice u/s 263 of the Act is nothing, but, reproduction of the averments of the AO in the proposal. The law in this regard is quite settled that while exercising powers u/s 263 of the Act, the order should reflect that the concerned authority has examined the assessment records and by his own inquiry concludes that assessment order was erroneous in so far as prejudicial to the interest of the Revenue. A coordinate bench of Delhi Jagbir Singh, Delhi vs Pr.Cit- 13, New Delhi decided on 1 May, 2024, has taken a similar view where it was established that the proceedings u/s 263 of the Act are initiated without making any conclusive findings on the assessment record, but, on mere proposal of the AO assumption of jurisdiction u/s 263 gets vitiated. The relevant part is reproduced below; “5. At the outset, it is not in dispute that initiation of revision proceedings u/s 263 of the Act by the learned Pr. CIT has been carried out in the instant case not on his own volition, or on examination of the records of the assessee by him by independently applying his mind. Instead, the revisional proceedings had been initiated based on a proposal received from the Additional CIT, which fact is also mentioned in para 2 of the order of learned Pr. CIT. Hence, it is a clear case of borrowed satisfaction by the learned Pr. CIT, which is in complete violation of provisions of Section 263 of the Act. In the case before us, it is not in dispute that the Pr. CIT invoked the proceedings u/s 263 of the Act on the request of the ld. Addl. CIT. Under section 263(1) of the Act, it clearly says, "The Commissioner may call for and examine the records of any proceedings under this Act, and if he considers ... ", which means that proposal for initiation of revision proceedings must be initiated by the ld. CIT, because, it is the ld. CIT who has to call for and examine the records. Whereas in the instant case, the ld. PCIT did not initiate the proceedings himself but initiated the proceedings on the proposal received from the ld. Addl. CIT. Only on receipt of proposal from the ld. Addl. CIT, the Pr. CIT initiated revision proceedings. As mentioned above, that the proposal for initiation of revision proceedings must be initiated by the CIT, which is not the case at present, therefore, the initiation of proceedings u/s 263 of the Act at the instance of the ld. Addl. CIT are invalid. This view of ours is further fortified by the following decisions:- a) Decision of Mumbai Tribunal in the case of Vinay Pratap Thacker in dated 27.2.2013 As per Section 263(1), the CIT must himself come to a conclusion, after applying his own mind, because, the words used in the section are"..... and if he considers ....",here, application of his own mind becomes important. It is important to examine the similarity of the expression used under section 147(1) and 263(1). Under section 147(1), the expression used is "has reason to believe" and under section 263(1), the expression used is "if he considers". Though the expressions used are not verbatim parimateria, but the meaning which is to be drawn in both the expressions are parimateria, i.e., an independent, unpolluted and un-adopted application of mind by the officer, invoking the provision. We have seen from the impugned order of the CIT, dated 5 11.02.2011, the CIT admits, "A proposal was received on 10.06.2010 from the AO under section 263 of the Income Tax Act, 1961, pointing out some discrepancies/short comings in the assessment order". This clearly shows that in so far as the CIT was concerned, he did not apply his own mind........ We are of the considered opinion that the CIT could not have invoked the jurisdiction under section 263 without his own independent application of mind. b) Decision of Kolkata Tribunal in the case of Rupayan Udyog Vs. CIT in dated 28.11.2018 The power vested in the CIT is that of revisional jurisdiction to interfere with the order of AO, if it is erroneous in so far as prejudicial to the revenue and therefore, the power to exercise the revisional jurisdiction is vested only with Pr. CIT/Commissioner if he considers the order of the AO to be erroneous in so far as prejudicial to the interest of the revenue. The power cannot be usurped by the AO to trigger the revisional jurisdiction vested with the CIT as per the scheme of the Act which gives various powers to various authorities to exercise and they have to exercise powers in their respective given sphere which is clearly ear-marked and spelled out by the statute. Here, we note that the AO who is empowered by the Act to assess a subject within a prescribed time period has first assessed the assessee and later after passing of time has taken up a proposal with the CIT to exercise his revisional jurisdiction cannot be countenanced for the simple reason that when in the first place the AO noticing that he failed to properly enquire before assessing the assessee within the time limit prescribed by the statute cannot be allowed to get fresh innings to reassess because it was his duty to enquire properly within the time limit prescribed by the statute. c) Decision of Ahmedabad Tribunal in the case of Shanti Exim Ltd Vs CIT reported in (2017) 88 taxmann.com 361 (Ahd. Tribunal) The Commissioner set aside assessment order in exercise of his power under section 263 on the ground that the Assessing Officer did not make any independent verification to establish the genuineness of the purchase transaction of the assessee-company with eight parties. Held that the action under section 263 initiated on the basis of recommendation by the concerned Assessing Officer/Joint Commissioner. The said Assessing Officer has categorically held that the order of his predecessor is erroneous and prejudicial to the interest of the revenue. Thereafter the case record was called for by the Commissioner. If the recommendation would not have received from ITA no. 3250/Del/2018 the successor Assessing Officer, then the Commissioner would even not have initiated the proceedings under section 263. Therefore, it could not be termed that the Commissioner himself has called for the records. In this case, the record has been called for only after the recommendation received from the successor Assessing Officer. In similar situation, the ITAT, Mumbai "A" Bench in the case of Ashok kumar Shivpuri v. CIT dated 07-11-2014, in (M) of 2014, held that the revision proceedings simply on the basis of proposal from the Assessing Officer is not valid, because section 263(1) says that proposal for initiation of revision proceedings must be initiated by the Commissioner. It is the Commissioner who has to call for and examine the records; but in the instant case the proposal came from the Assessing Officer and on receipt of the proposal, the Commissioner initiated revision proceedings, which is not justified. d) Decision of Mumbai Tribunal in the case of Adishwar K. Jain Vs. CIT in ITA No. 3389/Mum/2014 dated 12.03.2018 We may refer to a plea set-up by the assessee based on the decision of our co- ordinate Bench in the case of Ashok Kumar Shivpuri, ITA No. 631/Mum/2014 dated 07.11.2014. In this case, the Tribunal found that the Commissioner invoked Sec. 263 of the Act based on a proposal received from the Assessing Officer. The Tribunal found it inconsistent with the requirement of Sec. 263(1) of the Act and held that the initiation of proceedings u/s 263 of the Act was bad-in- law. The aforesaid proposition also supports the infirmity in the action of the Commissioner in as much as para 2 of the impugned order brings out that the initiation of proceedings u/s 263(1) of the Act is based on the proposal of the Assessing Officer dated 03.01.2013. e) Decision of Mumbai Tribunal in the case of Ashok kumar Shivpuri v. CIT in ITA No.631 (M) of 2014 dated 7.11.2014 It has been observed that the assessment was framed subject to valuation by the DVO. We further find that the proposal was received by the CIT from the AO, ITA no. 3250/Del/2018 which clearly means that there has been no independent application of mind by the CIT, because section 263(1) clearly says, "The Commissioner may call for and examine the records of any proceedings under this Act, and if he considers ... ", which means that proposal for initiation of revision proceedings must be initiated by the CIT, because, it is the CIT who has to call for and examine the records. But in the instant case the proposal came from the AO and on receipt of the proposal, the CIT initiated revision proceedings. Therefore, in our opinion, the proceeding gets flagged at the threshold. - We, therefore, hold that the proceedings were bad in law and thus subsequent proceedings are annulled. f) Decision of Pune Tribunal in the case of Span Overseas Ltd. Vs. CIT, Pune in ITA No. 1223/PN/2013 dated 21.12.2015 The Commissioner of Income Tax has invoked the provisions of section 263 without applying his own independent judgment and merely at the behest of proposal forwarded by the Dy. Commissioner of Income Tax is against the spirit of Act. Thus, the impugned order is liable to be set aside.