OWENS CORNING INDIA PRIVATE LIMITED,MUMBAI vs. PRINCIPAL COMMISSIONER OF INCOME TAX, MUMBAI-6, MUMBAI

Since the facts involved in both the appeals are identical and the issues arising for consideration are common, both the appeals were heard together and are being disposed of by this consolidated order, for the sake of convenience and brevity. The appeal pertaining to Assessment Year 2020-21 is taken as the lead appeal.

Briefly stated, the assessee is aggrieved by the assumption of revisional jurisdiction by the ld. PCIT under section 263 of the Act. During the course of hearing, the learned Authorised Representative (“ld. AR”) drew our attention to the notice of hearing dated 17.04.2025 issued by the ld. PCIT fixing the hearing on 16.05.2025. It was submitted that, in paragraph 2 of the said notice, the ld. PCIT had referred to certain issues which, according to him, had not been examined by the Assessing Officer (“AO”) and which had allegedly resulted in under-assessment of income amounting to Rs.17,19,92,948/-. On this basis, the assessment order was proposed to be treated as erroneous in so far as it was prejudicial to the interests of the Revenue.

The ld. AR further invited our attention to paragraph 2 of the impugned order passed under section 263 dated 25.02.2026, wherein the ld. PCIT has stated that an audit objection had been raised and has thereafter reproduced the contents of the said audit objection. It was contended that the issues referred to by the ld. PCIT in paragraphs 2.1 and 2.2 of the notice dated 17.04.2025 are verbatim the same as those raised in the audit objection. According to the ld. AR, the sequence of events and the manner in which the audit objection has been reproduced demonstrate that the proceedings under section 263 were initiated on the basis of the audit objection and not on the basis of an independent examination and satisfaction of the ld. PCIT. The ld. AR accordingly submitted that the satisfaction recorded by the ld. PCIT was merely a borrowed satisfaction and that there was no independent application of mind on the part of the revisional authority before assuming jurisdiction under section 263 of the Act. It was therefore contended that the assumption of jurisdiction itself was invalid and that the consequential order passed under section 263 was liable to be quashed.

In support of the above contention, the ld. AR placed reliance upon the judgment of the Hon’ble Calcutta High Court in the case of Principal Commissioner of Income-tax v. Reeta Lakhmani& Others, reported in (2022) 145 taxmann.com 590 (Cal.). In the said decision, the Hon’ble High Court considered the validity of exercise of revisional jurisdiction under section 263 where the proceedings had been initiated pursuant to a proposal made by the AO. The Hon’ble High Court observed that, although the Principal Commissioner may have information from the assessment records or from other sources, while exercising jurisdiction under section 263, it is incumbent upon him to independently apply his mind to the material available on record and to satisfy himself that the twin statutory conditions prescribed under section 263 are fulfilled. The Hon’ble High Court further observed that the Principal Commissioner must first apply his mind to the issue, record reasons as to how the twin conditions are satisfied and thereafter issue a showcause notice to the assessee. The Court found, on the facts before it, that there was nothing on record to demonstrate that such an exercise had been undertaken by the PCIT.

The ld. AR also relied upon the judgment of the Hon’ble Calcutta High Court in Principal Commissioner of Income-tax, Durgapur v. M/s. SinfortePvt. Ltd., ITAT No.104/2019, dated 07.01.2022. It was submitted that, in the said case, the Hon’ble High Court upheld the Tribunal's conclusion that the PCIT had exercised jurisdiction under section 263 at the instance of the AO, which was not permissible in law. The appeal filed by the Revenue was accordingly dismissed. The aforesaid decision was also noticed by the Hon’ble Calcutta High Court in Reeta Lakhmani.

The ld. AR further placed reliance upon the decision of the Pune Bench of the Tribunal in Alfa Laval Lund AB v. CIT (International Taxation), ITA No.1287/PUN/2017, order dated 02.11.2021. It was submitted that the Tribunal, while examining the scope of section 263, held that the exercise of revisional jurisdiction is required to emanate from the Commissioner calling for and examining the record of the proceedings and thereafter forming his own satisfaction that the assessment order is erroneous in so far as it is prejudicial to the interests of the Revenue. The Tribunal observed that a proposal made by the AO for revision under section 263 could not constitute the statutory foundation for the exercise of jurisdiction by the Commissioner.

Reliance was also placed upon the decision of the coordinate Bench of the Tribunal, Mumbai, in Hampi Expressways Pvt. Ltd. v. PCIT, ITA No.3538/Mum/2025, order dated 21.05.2026. In that case also, the opening paragraph of the order passed under section 263 specifically referred to the issue having been initially raised by the audit objection. The coordinate Bench, after examining the statutory requirements of section 263 and the material available on record, observed that the manner in which the PCIT had proceeded adequately demonstrated that the revisional jurisdiction had been assumed on the basis of the audit objection without independent application of mind. The Tribunal ultimately held the exercise of revisional jurisdiction to be unsustainable.

The ld. AR further referred to the decision of the coordinate Bench of the Tribunal in Zensar Technologies Ltd. v. PCIT, ITA No.4349/Mum/2025, order dated 12.02.2026, wherein the issue of exercise of revisional jurisdiction under section 263 on the basis of an audit objection was considered. It was submitted that the coordinate Bench held that exercise of revisional jurisdiction merely on the basis of an audit objection, without independent application of mind by the revisional authority, would vitiate the assumption of jurisdiction. The said decision has also been noticed and relied upon by the coordinate Bench in Hampi Expressways Pvt. Ltd.

The ld. AR also placed reliance upon the decision of the coordinate Bench of the Tribunal, Dehradun, in Smt. Omwati v. PCIT, reported in (2024) 158 taxmann.com 64, wherein the validity of exercise of revisional jurisdiction under section 263 pursuant to a proposal made by the AO was considered. It was submitted that the Tribunal held that the revisional jurisdiction has to be exercised by the PCIT on his own examination of the record and on the basis of his independent satisfaction regarding the existence of the statutory conditions prescribed under section 263. The mere fact that a proposal has been forwarded by the AO cannot substitute the independent satisfaction required to be formed by the revisional authority.

Per contra, the learned Departmental Representative (“ld. DR”) supported the impugned order passed by the ld. PCIT under section 263 of the Act. The ld. DR drew our attention to the decision of the Hon’ble Punjab and Haryana High Court in Keerti Anand, reported in 170 taxmann.com 585, dated 19.11.2024, and submitted that the audit objection forms part of the record available before the Commissioner. According to the ld. DR, merely because the Commissioner has taken note of an audit objection while examining the assessment record, it cannot be said that he has mechanically exercised jurisdiction under section 263. It was accordingly contended that the impugned order could not be interfered with merely on the ground that the audit objection was referred to or reproduced in the proceedings.

We have carefully considered the rival submissions and perused the material available on record. We have also carefully gone through the judicial precedents relied upon by both sides.

The controversy before us at this stage is confined to the validity of the assumption of revisional jurisdiction under section 263 of the Act. The merits of the issues which formed the subject matter of the revisionary proceedings, therefore, do not arise for our consideration if we come to the conclusion that the assumption of jurisdiction itself is invalid.

Section 263(1) of the Act, in substance, empowers the Principal Commissioner or Commissioner to call for and examine the record of any proceeding under the Act and, if he considers that any order passed therein by the AO is erroneous insofar as it is prejudicial to the interests of the Revenue, to pass an appropriate order thereon after giving the assessee an opportunity of being heard and after making, or causing to be made, such inquiry as he deems necessary. The statutory scheme thus contemplates a sequence of steps. The revisional authority is required to call for and examine the record of the proceedings; upon such examination, he must arrive at his own satisfaction that the order passed by the AO is erroneous in so far as it is prejudicial to the interests of the Revenue; and only thereafter can he proceed to issue notice and exercise the revisional jurisdiction in accordance with law.

It is equally well settled that the two conditions prescribed under section 263, namely, that the order of the AO must be erroneous and that it must also be prejudicial to the interests of the Revenue, are cumulative and must be satisfied before revisional jurisdiction can validly be exercised. The expression “if he considers” occurring in section 263 is significant. The satisfaction contemplated by the provision is the satisfaction of the revisional authority himself and not the satisfaction of any other authority or officer.

We are conscious of the contention of the ld. DR that an audit objection may form part of the material available on the assessment record and that the mere reference to such objection cannot, by itself, invalidate proceedings under section 263. There can be no quarrel with the proposition that information received from an audit party or from any other source may legitimately come to the notice of the PCIT and may prompt him to examine the assessment record. The source from which information comes to the notice of the revisional authority is, therefore, not by itself determinative of the validity of the subsequent proceedings. However, the crucial question is whether, after receiving such information, the PCIT himself examined the assessment record and independently arrived at the requisite satisfaction contemplated under section 263, or whether he merely adopted the audit objection as his own satisfaction.

In our considered view, the distinction is material. An audit objection may certainly be the starting point for an examination by the PCIT. But the audit objection cannot, by itself, constitute the satisfaction required to be formed by the PCIT under section 263. The statutory power is vested in the PCIT and, consequently, the decision to invoke that power must reflect the independent application of mind of the authority in whom the jurisdiction is vested. In other words, there is no legal impediment in the PCIT examining an audit objection and, upon an independent examination of the assessment records and the material available before him, forming his own satisfaction that the assessment order is erroneous insofar as it is prejudicial to the interests of the Revenue. What is impermissible is the mechanical assumption of jurisdiction merely because the audit party has raised an objection, without the PCIT himself considering whether the statutory requirements of section 263 stand satisfied.

The above principle finds clear support from the judgment of the Hon’ble Calcutta High Court in Reeta Lakhmani (supra). The Hon’ble High Court, while considering the validity of the exercise of power under section 263, emphasised that it is the PCIT who has to apply his mind to the issue, satisfy himself regarding the fulfilment of the twin conditions and thereafter issue the showcause notice. The decision, therefore, lays emphasis not merely upon the source of the information but upon the necessity of an independent satisfaction being formed by the revisional authority.

The same principle is discernible from the decision of the Pune Bench in Alfa Laval Lund AB (supra), where the Tribunal observed that a power which is statutorily vested in one authority cannot be invoked or caused to be invoked by another authority. The Tribunal held that the initiation of revision proceedings pursuant to a proposal made by the AO, instead of the Commissioner himself calling for and examining the record and forming the requisite satisfaction, was not sanctioned by section 263.

More recently, the coordinate Bench of the Tribunal, Mumbai, in Hampi Expressways Pvt. Ltd. (supra), has considered the very issue of audit objection and exercise of jurisdiction under section 263. The Tribunal noted that the impugned revisionary order itself referred, in its opening paragraph, to the issue having been initially raised by the audit objection. After examining the statutory framework and the material available before it, the coordinate Bench concluded that the assumption of jurisdiction under section 263 was based upon the audit objection without independent application of mind by the PCIT.

We may also usefully refer to the decision of the coordinate Bench in Zensar Technologies Ltd. (supra), which has been noticed by the Bench in Hampi Expressways Pvt. Ltd. (supra). The said decision reiterates the principle that the revisional authority cannot merely act upon an audit objection but must independently examine the material and form the satisfaction contemplated by section 263.

Turning to the facts of the present case, we find considerable force in the contention advanced by the ld. AR. The notice issued by the ld. PCIT dated 17.04.2025 sets out the issues on the basis of which the assessment order was proposed to be revised. The very same issues have thereafter been reproduced in the impugned order. More importantly, paragraph 2 of the impugned order specifically records that the audit had raised the objection and proceeds to reproduce the audit objection. The material placed before us does not disclose any separate or independent reasoning recorded by the ld. PCIT, prior to issuance of the show-cause notice, demonstrating that he had independently examined the assessment records and arrived at his own satisfaction that the assessment order was erroneous insofar as it was prejudicial to the interests of the Revenue.

In particular, the issues mentioned in paragraphs 2.1 and 2.2 of the notice dated 17.04.2025 are found to be a verbatim reproduction of the audit objection. The impugned revisionary order also substantially proceeds on the same basis. There is no discussion in the notice, prior to initiation of proceedings, indicating an independent examination by the ld. PCIT of the assessment records.

We are not suggesting that the PCIT is prohibited from taking cognisance of an audit objection. As noted earlier, an audit objection may constitute information or material which may cause the PCIT to examine the assessment record. But after such examination, the statutory satisfaction has to be that of the PCIT himself. The audit objection cannot become a substitute for the independent examination and satisfaction required under section 263. The distinction is between “acting upon information received from the audit” and “acting mechanically on the audit objection.” The former is permissible; the latter is not.

The contention of the ld. DR that an audit objection forms part of the record does not, therefore, advance the case of the Revenue. Even assuming that the audit objection constitutes material or information available before the PCIT, what section 263 requires is an independent consideration of such material by the PCIT and formation of his own satisfaction regarding the existence of the statutory conditions. The mere availability of an audit objection on record does not dispense with the statutory requirement of independent application of mind.

In the present case, the absence of such independent application of mind is evident from the manner in which the proceedings have been initiated. The issues in the show-cause notice are verbatim those raised in the audit objection, and the impugned order itself acknowledges that the proceedings originated from the audit objection. At the same time, there is no discernible independent reasoning preceding the issuance of the showcause notice to demonstrate that the ld. PCIT had himself examined the record and concluded that the twin conditions prescribed under section 263 were satisfied.

It is also significant that the requirement of independent application of mind is not a mere procedural formality. It goes to the very assumption of jurisdiction under section 263. The power under section 263 is a statutory revisional power vested specifically in the Principal Chief Commissioner or Chief Commissioner or Principal Commissioner or Commissioner. The authority exercising such power must, therefore, itself satisfy the jurisdictional conditions prescribed by the statute. If the satisfaction is merely borrowed from another authority, the assumption of jurisdiction cannot be sustained.

We are, therefore, of the considered view that, on the facts of the present case, the ld. PCIT did not independently apply his mind to the assessment records before initiating proceedings under section 263 of the Act. Rather, the proceedings were initiated substantially on the basis of the audit objection, which was reproduced verbatim in the show-cause notice and thereafter in the revisionary order. The material on record does not demonstrate that, before issuing the show-cause notice, the ld. PCIT independently recorded his satisfaction as to how and why the assessment order was erroneous in so far as it was prejudicial to the interests of the Revenue.

Once the assumption of jurisdiction itself is found to be invalid, the merits of the issues raised by the ld. PCIT in the revisionary proceedings do not require adjudication. We, therefore, refrain from expressing any opinion on the merits of those issues.

In view of the foregoing discussion and respectfully following the ratio laid down in the judicial precedents referred to above, particularly the judgment of the Hon’ble Calcutta High Court in PCIT v. Reeta Lakhmani& Others (supra), and the decisions of the coordinate Benches in Alfa Laval Lund AB (supra), Zensar Technologies Ltd. (supra) and Hampi Expressways Pvt. Ltd. (supra), we hold that the assumption of revisional jurisdiction by the ld. PCIT under section 263 of the Act, in the facts and circumstances of the present case, is not sustainable in law.

The facts and circumstances in the appeal pertaining to Assessment Year 2021-22 are identical to those considered by us in the appeal for Assessment Year 2020-21. The impugned order for the Assessment Year 2021-22 has also been passed under section 263 of the Act on substantially the same basis.

Since the issue relating to the validity of assumption of jurisdiction under section 263 has already been adjudicated by us in favour of the assessee in the lead appeal for Assessment Year 2020-21, following the same reasoning and conclusion, we hold that the exercise of revisional jurisdiction under section 263 for Assessment Year 2021-22 is also unsustainable in law. Accordingly, the impugned order passed under section 263 of the Act dated 25.02.2026 for Assessment Year 2021-22 is also quashed.

In the result, both the appeals filed by the assessee are allowed.