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Facts
The assessee filed its return of income declaring NIL income, which was accepted by the AO. The PCIT initiated proceedings under Section 263 of the Income Tax Act, 1961, citing a revenue audit objection regarding depreciation on investments made under a Service Concession Agreement. The PCIT passed an order setting aside the assessment without issuing a show cause notice or providing an opportunity for hearing.
Held
The Tribunal held that the PCIT erred in passing the order under Section 263 without issuing a show cause notice and providing an opportunity of hearing to the assessee, which violates the principles of natural justice and statutory mandate. Furthermore, the order was passed beyond the limitation period prescribed.
Key Issues
Whether the PCIT's order under Section 263 is valid when passed without issuing a show cause notice and providing an opportunity for hearing, and if such an order can be passed after the limitation period.
Sections Cited
263, 143(3), 144B
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, “E” BENCH, MUMBAI
Before: SHRI SAKTIJIT DEY & SHRI ARUN KHODPIA
O R D E R Per Saktijit Dey, Vice President: Present appeal, at the instance of the assessee, assails the order dated 31.03.2025 passed under Section (u/s.) 263 of the Income Tax Act, 1961 (hereinafter called the ‘Act’) by learned Principal Commissioner of Income Tax (PCIT), Mumbai pertaining to Assessment Year (AY) 2020-21.
At the outset, learned counsel appearing for the assessee submitted that the appeal can be decided on the limited issue raised in Ground No.2, which reads as under: “2. The learned Commissioner of Income Tax erred in passing an order under section 263 without issuing any notice to the appellant.”
Briefly the facts are, assessee is a resident corporate entity engaged in construction and maintenance of roads, rails, bridges, tunnels, ports, harbour, runways etc. For the assessment year under dispute, assessee filed its return of income on 03.02.2021, declaring NIL income. The return of income so filed was selected for scrutiny and the Assessing Officer (AO) completed the assessment u/s. 143(3) r.w.s. 144B of the Act vide order dated 23.09.2022 accepting the income returned by the assessee. Post completion of assessment, it came to the notice of learned PCIT that in assessee’s case in A.Y. 2022-23, the Revenue audit has raised an objection with regard to allowance of assessee’s claim of depreciation on the investments made by the assessee in pursuance to Service Concession Agreement (SCA), whereunder the assessee was required to build, operate and transfer road with Toll collection rights over the concession period. Since similar claim made by the assessee in the impugned assessment year was allowed in the assessment, learned PCIT was of the view that the assessment order is erroneous and prejudicial to the interest of Revenue. Accordingly, he invoked jurisdiction u/s. 263 of the Act and passed the impugned order, setting aside the assessment order, with a direction to the AO to examine the authenticity of depreciation claimed by the assessee on the SCA.
Before us, learned counsel appearing for the assessee submitted that learned PCIT has passed the order u/s. 263 of the Act without issuing a show cause notice and without even providing an opportunity of hearing as mandated under sub section (1) of Section 263 of the Act.
Drawing our attention to sub-section 2 of Section 263 of the Act, he submitted, since, the two year period was going to expire on 31.03.2025, only for the purpose of saving limitation, learned PCIT has passed the order u/s. 263 of the Act without following the statutory mandate. Thus, he submitted, the order being without jurisdiction, should be quashed. In support, he relied upon the decision of the Hon’ble Delhi High Court in the case ‘Tulsi Tracom (P) Ltd. vs. CIT’ [2017] 86 taxmann.com 35 (Delhi).
Learned Departmental Representative (DR) furnished a copy of report dated 17.09.2025 received from the Office of PCIT-1, Mumbai, and submitted that before the order u/s. 263 of the Act was passed, no show cause notice was issued to the assessee. However, he submitted, non-issuance of show cause notice is a mere irregularity, which can be cured by setting aside the matter to the PCIT for passing a fresh order after complying with the principles of natural justice.
We have considered rival submissions and perused materials on record. We have applied our mind to the judicial precedents cited before us. Facts on record clearly demonstrate that based on revenue audit objection in assessee’s case in AY 2022-23, learned PCIT has invoked his power u/s. 263 of the Act to revise the assessment order passed for the impugned assessment year. From the body of the order, it is clearly discernable that it was passed on 31.03.2025. As per sub section (2) of Section 263 of the Act, no order u/s. 263 can be made after expiry of two years from the end of the financial year, in which, the order sought to be revised was passed. Admittedly, the assessment order was passed on 23.09.2022, which, in other words, was passed in Financial Year 2022-23. Therefore, the revisionary authority had time to pass the order u/s. 263 of the Act on or before 31.03.2025. Since the power to pass an order u/s. 263 of the Act was getting barred by limitation on 31.03.2025, in a desperate bid to meet the deadline learned PCIT has passed the impugned order giving a complete go by to the mandatory requirement of issuing a show cause notice to the assessee in terms of sub-Section 1 of Section 263 of the Act.
There cannot be any dispute regarding the fact that no show cause notice, as mandated u/s. 263(1) of the Act was issued to the assessee prior to the passing of the impugned order. Even, learned PCIT has not provided a single opportunity of being heard to the assessee. In fact, in the report dated 17.09.2025 furnished to learned DR by the ITO (HQ) (Tech-1) office of PCIT-1, Mumbai, a copy of which was furnished before us by learned DR it is clearly stated that no show cause notice was issued to the assessee prior to passing of the order u/s. 263 of the Act. Thus, in such a scenario, what would be the effect of noncompliance with the mandate of sub- section (1) of Section 263 of the Act and secondly whether restoration of the matter to PCIT with a direction to pass a fresh order resulting in extension of limitation provided under sub-Section (2) of Section 263 of the Act would be valid. While faced with an identical situation, in case of Tulsi Tracom (P) Ltd. vs CIT (Supra), the Hon’ble Delhi High Court has held as under: 14. The law insofar as it relates to a notice under Section 263 is well- settled by the judgment of the Supreme Court in Amitabh Bachchan's (supra), Para 11 of the said judgment reads as under:
"...11. It may be that in a given case and in most cases it is so done a notice proposing the revisional exercise is given to the Assessee indicating therein broadly or even specifically the grounds on which the exercise is felt necessary. But there is nothing in the section (Section 263) to raise the said notice to the status of a mandatory show-cause notice affecting the initiation of the exercise in the absence thereof or to require the Commissioner of Income-tax to confine himself to the terms of the notice and foreclosing consideration of any other issue or question of fact. This is not the purport of Section 263. Of course, there can be no dispute that while the Commissioner of Income-tax is free to exercise his jurisdiction on consideration of all relevant facts, a full opportunity to controvert the same and to explain the ……… circumstances surrounding such facts, as maybe considered relevant by the Assessee, must be afforded to him by the Commissioner of Income- tax prior to the finalisation of the decision.....” (Emphasis added) 15. Thus, what is required to be given is a full opportunity to the Assessee to controvert the contents of the notice under Section 263 of the Act and explain the circumstances as may be considered to be relevant by the 16. The short question that, therefore, arises is as to whether such an opportunity was afforded to the Appellant in the present case? 17. A perusal of the records reveals that the ITO was well aware of the various addresses of the Appellant including the latest address at New Delhi at the time when the notice under Section 263 of the Act dated 18th March, 2013 was to be issued. The Appellant had filed its return for AY 2012-13 on 25th September, 2012 i.e. a full five months prior to the issuance of the notice under Section 263 of the Act. Thus, the first error committed by the ITO was to issue the notice under Section 263 on 18th March 2013, to the address of the Appellant which was changed as far back in AY 2010-11. There was no justification whatsoever to issue a notice of hearing under Section 263 of the Act to the Assessee at an address which was at least three years old. This shows that the ITO did not do the bare minimum of even perusing the various returns filed by the Assessee prior to the issuance of the notice.
From the records produced before us, the submission of Mr. Manchanda is correct to the extent that the notice which was returned to the ITO was re- posted to the Delhi address of the Appellant on 20th March, 2013. What needs to be borne in the mind, however, is that the notice was dispatched on 20th March, 2013 to the Delhi address and the hearing was fixed for 22nd March, 2013 at 4pm in the ITO's office at Kolkata. This notice sent on 20th March 2013, was also returned to the ITO, Kolkata on 25th March, 2013, with an endorsement at the back of the envelope, which was not readable either to the counsels or the Court.
While agreeing with Mr. Manchanda that the notice was issued on 20th March, 2013, to the Delhi address, the question as to whether it constituted a full opportunity to the Assessee to attend the hearing on 22nd March, 2013 needs no answer as it is obvious that even if the notice had been served, the Assessee did not have adequate time to attend a hearing in Kolkata. Under such circumstances, the CIT recorded in the impugned order dated 30th March, 2013 that it is proceeding ex-parte in the matter. The noting in the impugned order reads: "The show cause notice, which was served by post calling for compliance on 22-03-2013. The notice was returned by the postal authority 25.03.2013. This order is therefore being passed ex-parte."
The CIT who issued the order under Section 263 of the Act ought to have been fully satisfied that adequate opportunity was given to the Assessee to controvert the facts stated in the notice under Section 263 of the Act and to explain the circumstances surrounding such facts. The satisfaction of the CIT on these counts could not have been arrived at as per the narration of facts and events as discussed hereinabove as the process commencing with the issuance of the notice under Section 263 culminating in the order dated 30th March 2013, was completed hurriedly in a matter of 10 days even if the date of posting of the notice i.e.. 20th March 2013 is included. Thus, the satisfaction of the CIT was misplaced.
The ITO, Kolkata could not have expected the Assessee to receive the notice being posted on 20th March, 2013, and attend the hearing on 22nd March, 2013. This Court has no doubt that this does not constitute full opportunity as required by the Supreme Court in Amitabh Bachchan's case (supra) in respect of a notice under Section 263 of the Act.
It, thus, appears that the notice having been given initially at the wrong address and thereafter posted to the correct address just two days prior to the said hearing and the said notice also having been returned unserved due to the reasons which are not decipherable, the requirement under Section 263(1) of the Act is not satisfied. In Chandra Agencies case (supra) this Court has gone to the extent of holding that refusal by the Assessee's son to receive the notice under Section 148 of the Act does not constitute good service.
This Court has also examined the question as to whether an opportunity of hearing could now be afforded to the Appellant. However, Section 263(2) of the Act is a clear bar for any order being passed pursuant to a notice under Section 263 of the Act, after the expiry of two years from the end of the financial year in which the order sought to be revised was passed. Thus, there is an outer limit in the statute under Section 263 which in the present case, is 31st March, 2013. Since, no useful purpose will be served in giving an opportunity to the Appellant of being heard at this stage, this Court answers question No.1 in the negative ie. in favour of the Assessee and against the Revenue.
In view of the above, question No.2 does not survive. The appeal is allowed and the notice dated 18th March 2013 as also order dated 30th March, 2013 are set aside. There will be no order as to costs.”
From the aforesaid observations of Hon’ble Delhi High Court, the following two crucial propositions can be culled out: (i) the assessee must be given full opportunity to controvert the issues/allegations on which revisionary jurisdiction is exercised prior to finalization of the decision (ii) the outer limit of two years for passing the order u/s. 263 of the Act as provided under sub-section (2) of Section 263 of the Act cannot be extended under any circumstances.
In the facts of the present appeal, undoubtedly, the impugned order passed by learned PCIT falls foul of both the propositions laid down by Hon’ble Delhi High Court (Supra). In such a scenario, restoration of matter back to the PCIT for passing a fresh order, after complying with the requirements of natural justice, would empower him to pass the order u/s. 263 of the Act beyond the time limit prescribed under sub-section (2) of Section 263 of the Act, which is permissible. That being the case, the impugned order passed u/s. 263 of the Act, deserves to be quashed. Accordingly, we do so. Resultantly the assessment order is restored.
In the result, appeal is allowed in the terms indicated above.
Order pronounced in the open court on 25 /09/2025.