M/S WS INDSTRIES INDIA LTD,CHENNAI vs. PCIT, CHENNAI
What did the Tribunal hold?
The Tribunal held that the order of the PCIT passed under Section 263 of the Income Tax Act, 1961, was not sustainable. The Tribunal referred to the Supreme Court's observations in Malabar Industrial Co. Ltd. v. Commissioner of Income Tax, emphasizing that for an order to be erroneous and prejudicial to the revenue, the AO's view must be unsustainable in law. The Tribunal found that the PCIT had not referred to any material on record suggesting that the claims for allowance of expenditure while computing capital gains on the Porur land and the allowability of short-term capital loss on the transfer of CCDs were not clearly allowable or unsustainable under law. The submissions made by the assessee on the merits of these claims remained uncontroverted by the PCIT, and it was not the PCIT's case that the claims were patently illegal or inadmissible. Therefore, the assessment order could not be considered erroneous and prejudicial to the interests of the revenue. Furthermore, the Tribunal noted that the reassessment proceedings were initiated pursuant to a search and seizure operation, but the PCIT's order did not refer to any incriminating material found with a nexus to the issues sought to be revised. Citing CIT Vs. Software Consultants, the Tribunal held that if the AO did not have jurisdiction to make an addition, the revision of such an assessment order does not arise as the order is not erroneous. Consequently, the Tribunal quashed and set aside the order of the PCIT.
What were the facts?
The assessee, M/s. WS Industries India Limited, filed its return of income for Assessment Year 2019-20, declaring a business loss. A search and seizure operation was conducted on the assessee's premises, leading to the issuance of a notice under Section 148 of the Income Tax Act, 1961. A reassessment order was passed under Section 147 r.w.s 143, resulting in a reduced business loss after an addition for waiver of working capital loan. The assessee appealed this order. Subsequently, the Principal Commissioner of Income Tax (PCIT) initiated proceedings under Section 263, finding the reassessment order erroneous and prejudicial to the revenue. The PCIT identified issues concerning the computation of capital gains on the sale of Porur land and the claim of short-term capital loss on the transfer of Compulsorily Convertible Debentures (CCDs). The PCIT directed the Assessing Officer (AO) to re-examine these issues. The assessee appealed the PCIT's order to the Income Tax Appellate Tribunal (ITAT).
What were the issues?
1. Whether the order of the Learned Principal Commissioner of Income Tax (PCIT) passed under Section 263 of the Income Tax Act, 1961, is valid when the underlying reassessment order dated 28.03.2024 passed under Section 147 is not erroneous and prejudicial to the interests of the revenue? Assessee's Contention: The PCIT erred in invoking Section 263 as the reassessment order was not erroneous and prejudicial to the revenue. The AO had taken a possible view on the computation of capital gains on Porur land and the claim of short-term capital loss on CCDs, which is not open for substitution by the PCIT under revisionary powers. The PCIT's direction for reconsideration of capital gains on Porur land was unjustified as it was already considered, and the fair market value adopted was based on guideline value and registration data. Payments made to the Mantri group were wrongly excluded from the cost of acquisition. The PCIT's direction for reconsideration of short-term capital loss on CCDs was also unjustified as it was considered, and the valuation was supported by an independent SEBI registered merchant banker's report, reflecting the weak financial position of the issuer and the commercial decision to exit a stressed subsidiary. Revenue's Contention: Not recorded in the judgment.
Which sections of the Income-tax Act were involved?
Section 263,Section 147,Section 143,Section 132,Section 148,Section 139
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, CHENNAI BENCHES, CHENNAI
Before: SHRI GEORGE GEORGE K & SHRI INTURI RAMA RAO
आयकर अपील�य अ�धकरण, चे�नई पीठ�, चे�नई INCOME TAX APPELLATE TRIBUNAL, CHENNAI BENCHES, CHENNAI BENCH: C BEFORE SHRI GEORGE GEORGE K, VICE PRESIDENT AND SHRI INTURI RAMA RAO, ACCOUNTANT MEMBER ITA No.2229/CHNY/2026 िनधा�रण वष�/Assessment Year: 2019-20 M/s.WS Industries India Principal Commissioner of Limited, Income Tax, 3rd Floor New No.48, Old Central-1, No.21, Savidhaanu Building, Chennai – 600034. Vs. Casa Major Road, Egmore, Chennai – 600008. अपीलाथ� Appellant ��थ� Respondent Permanent Account Number of Assessee: अपीलाथ� �ारा/Appellant represented by: Mr.B Ramakrishnan – FCA ��थ� �ारा/Respondent represented by: Guru Bashyam – CIT-DR सुनवाई की तारीख / Date of conclusion of hearing: 03.06.2026 घोषणा की तारीख / Date of pronouncement: 25.08.2026 आदेश / ORDER PER INTURI RAMA RAO, ACCOUNTANT MEMBER : This appeal filed by the Assessee-company directed against the order of the Learned Principal Commissioner of Income Tax(Central), Chennai-1 dated 30.03.2026 passed u/s.263 of the Income Tax Act, 1961 for the Assessment Year 2019-20.
The Assessee raised the following grounds of appeal : “1. For that the order of the Learned Principal Commissioner of Income Tax ("PCIT") passed u/s 263 of the Income Tax Act, 1961 is contrary to law, facts and circumstances of the case.
For that the Learned PCIT is not justified in invoking the provisions of section 263 of the Act, when the underlying reassessment order dated 28.03.2024 passed under section 147 of the Act for AY 2019-20 is not "erroneous in so far as it is prejudicial to the interests of the revenue" within the meaning of section 263, and had thereby erred in setting aside the said reassessment order with directions to the Assessing Officer to re- examine afresh the issues identified in the 263 order.
For that the Learned PCIT is not justified in invoking the provisions of section 263 of the Act when, on the material available on record in the reassessment proceedings, the Learned Assessing Officer had taken a possible view on the issues relating to computation of capital gains on the Porur land and the claim of short-term capital loss on transfer of Compulsorily Convertible Debentures, and it is not open to substitute such view by another view in exercise of revisionary powers.
Without prejudice to the above, we raise grounds on merits as follows:
For that the Learned PCIT erred in directing the Assessing Officer for reconsideration of the computation of capital gains on sale of the Porur land at 108, Mount Poonamallee Road, Porur, Chennai.
4.1. For that the Learned PCIT is not justified in invoking the provisions of section 263 of the Act in respect of the computation of capital gains on sale of land at 108, Mount Poonamallee Road, Porur, which had already been taken up and considered in the course of the reassessment proceedings.
4.2. For that the Learned PCIT erred in questioning the fair market value as on 01.04.2001 adopted by the appellant and in directing the Assessing Officer to reconsider such valuation on the basis of a different value stated to be available with the registering authority, the valuation originally adopted having been determined with reference to guideline value and registration data furnished in the reassessment proceedings.
4.3. For that the Learned PCIT erred in holding that payments made by the appellant to the Mantri group, under the cancellation and settlement arrangement described as cancellation of land/title perfection, do not qualify to be considered as part of the cost of acquisition or as expenditure incurred in connection with the transfer.
For that the Learned PCIT erred in directing the Assessing Officer for reconsideration of the appellant's claim of short-term capital loss on transfer of Compulsorily Convertible Debentures ("CCD") of W.S. TD Limited to M/s. Abhishaya Infrastructure Private Limited.
5.1. For that the Learned PCIT is not justified in invoking the provisions of section 263 of the Act in respect of the claim of short-term capital loss on transfer of Compulsorily Convertible Debentures held in W.S. TD Limited to M/s. Abishaya Infrastructure Private Limited, which had already been taken up and considered in the course of reassessment proceedings.
5.2. For that the Learned PCIT ought to have considered that the CCDs, being compulsorily convertible instruments, derive their value from the underlying enterprise value and equity valuation of the issuer and the valuation report issued by an independent SEBI registered merchant banker under Rule 11UA determined the enterprise value of W.S. TD Limited at Rs.3.62 lakhs and the equity value at Rs.0.01 per share, reflecting its weak financial position.
5.3. For that the Learned PCIT ought to have considered that the consideration for transfer of CCDs is fully supported by independent valuation and reflects the fair market value determined on a scientific and recognized basis and that the transaction was undertaken as part of a commercial decision to exit from a financially stressed subsidiary and is supported by contemporaneous agreements and documentation, with no allegation of lack of genuineness.”
Briefly, the facts of the case are that the appellant is Company duly incorporated under the provisions of the Companies Act, 1956. It is engaged in the business of manufacture and sale of clay and ceramic products. The return of income for the assessment year 2019-20 was filed on 14.09.2019 declaring business of Rs.(-)43,04,30,107/-. Against the said return of income, there was no scrutiny assessment.
Subsequently, the search and seizure operations under the provisions of section 132 of the Act were conducted in the business premises of the appellant on 06.07.2022. According to the Assessing Officer, there was information unearthed as a result of search and seizure action suggesting the escapement of income from assessment to tax. Accordingly, a notice u/s.148 of the Act was issued on 20.03.2023 calling upon the appellant to file the return of income. In response to notice u/s.148 of the Act, the appellant filed the return of income on 18.04.2023 disclosing loss of Rs.(-)43,04,30,107/- same as shown in the original return of income filed under the provisions of section 139 of the Act. Against the said return of income, the assessment was completed by the Assistant Commissioner of Income Tax, Central Circle-3(1), Chennai(hereinafter called ‘AO’) vide order dated 28.03.2024 passed u/s.147 r.w.s 143 of the Income Tax Act, 1961 at a business loss of Rs.(-)27,62,10,667/- under head “Business”. While doing so, the Assessing Officer made addition of Waiver of Working Capital Loan of Rs.15,31,82,392/-.
Being aggrieved by the said assessment order, the appellant had preferred an appeal before the CIT(A)-20, Chennai which is pending disposal.
While matter stood thus, the Learned Principal Commissioner of Income Tax(Central), Chennai-1 on verification of assessment record for the Assessment Year 2019-20 found that the assessment order dated 28.03.2024 passed u/s.147 r.w.s 143(3) of the Act is erroneous and prejudicial to the interests of the Revenue for the following reasons : i) The Assessing Officer failed to properly examine the computation of capital gains on sale of land with reference to the correct guideline value as on 01.04.2021 and the allowability of the amount claimed towards cancellation of land / title perfection as part of the cost of acquisition. ii) The Assessing Officer did not verify the correctness and allowability of the short-term loss claimed on transfer of compulsorily convertible debentures and the basis for adopting the consideration for such transfer.
iii) The assessment order has been passed without adequate enquiry or verification on the above issues, which has resulted in potential under- assessment of income.
Accordingly, the Learned Pr.CIT(central), issued a show cause notice dated 18.03.2026 u/s.263 of the Act calling upon the appellant company to show cause as to why the assessment order dated 28.03.2024 passed u/s.143 r.w.s 147 of the Act should not be set-aside in exercise of power conferred on him u/s.263 of the Income Tax Act, 1961.
In response to the show cause notice, the appellant company had filed a detailed explanation vide letter dated 23.03.2026 contending that the very same issues which were sought to be revised in exercise of power u/s.263 of the Act were subject matter of enquiry during the course of reassessment proceedings conducted pursuant to the search and seizure operation u/s.132 of the Income Tax Act, 1961. Thus, it was submitted that the Learned Pr.CIT cannot exercise the power of revision. The appellant company had drawn the attention of the Learned Pr.CIT to the notices issued u/s.142(1) of the Act, dated 30.10.2023 and 13.03.2024 and also the replies filed by the assessee company in response to notices u/s.142(1) on 21.11.2023 and 16.03.2024 and also filed the copies of the explanation filed before the Assessing Officer during the course of reassessment proceedings. Thus, it was contended before the Learned Pr.CIT that the Assessing Officer had conducted enquiries in respect of these items which were sought to be revised and took a plausible view and therefore, it cannot be said that there was a lack of enquiry and therefore, the assessment order cannot regarded as one passed without enquiry or application of mind so as to attract the provisions of section 263 of the Income Tax Act, 1961. The appellant also placed reliance on the Hon’ble Delhi High Court in the case of CIT Vs. Sunbeam Auto Ltd [2010] 189 Taxman 436 (Delhi) in support of the proposition that if the Assessing Officer had conducted enquiries and taken a view based on the material available on record, the Commissioner cannot invoke section 263 merely because he believes that further enquiry should have been made. Placing reliance on the decisions of the Hon’ble Delhi High Court in the case of CIT Vs. Vikas Polymers [2010] 194 Taxman 57 (Delhi) wherein, it was held that if a query was raised during course of scrutiny by Assessing Officer, which was answered to satisfaction of Assessing Officer, but neither query nor answer was reflected in assessment order, that would not, by itself, lead to conclusion that order of Assessing Officer called for interference and revision. The appellant placed reliance on the decision of the Hon’ble Madras High Court in the case of CIT Vs. Mepco Industries Ltd [2007] 163 Taxman 648 (Madras) wherein, it was held that when two view were possible and it was not the case of the revenue that the view taken by the Assessing Officer was not permissible, in law, the commissioner was not justified in invoking the jurisdiction under section 263 of the Act.
On the merits of the addition, the appellant company submitted as under : “3.1. The assessee is the owner of land situated at 108, Mount Poonamallee Road. Porur, Chennai, forming part of a larger extent originally acquired from the Government of Tamil Nadu under assignment deeds dated 26.02.1964. Over the years, portions of the land were sold, and the balance extent continued to be held by the assessee as capital asset.
3.2. In order to monetise part of the said land, the assessee entered into Agreements of Sale and a Framework / Amended Framework Agreement with Mantri group entities (Panchajanya Realtors Private Limited/ Mantri Premier Homes Pvt Ltd/ Comfortable Abode Private Limited and Mantri Developers Pvt Ltd) starting 07.06.2012, under which enforceable rights, including mortgages and contractual claims, were created in favour of the Mantri group over specified extents of the Porur lands. Copies of these agreements as filed before the Assessing Officer are part of Annexure 3.
3.3. Due to commercial, regulatory and litigation-related issues, the transactions envisaged under the Mantri structure could not be completed, resulting in disputes and claims between the parties.
3.4. To resolve these disputes and extinguish all rights created in favour of the Mantri entities. the assessee entered into a deed of cancellation in April 2018, whereby all prior agreements were all cancelled. Pursuant to the said cancellation, the assessee made, inter alia, the following payments:
Rs. 91,03,45,177/- paid to Mis. Mantri Premier Homes Private Limited.
Rs. 10,41,585/- paid to M/s. Mantri Developers Private Limited, and
Of which Rs.47,00,00,000/- represented refund of advances, Rs.35,80,00,000/-, represented compensation, and Rs.8,23,45,177/- represented interest, subject to deduction of tax at source, as evidence by the cancellation deed.
3.5. The settlement resulted in cancellation of all earlier agreements, release of mortgages and other encumbrances over the Porur lands, withdrawal of claims and litigations, and restoration of absolute, unencumbered title and possession of the lands to the assessee.
3.6. It is submitted that the above payments were not in the nature of independent or voluntary expenditure, but were mandatorily incurred to extinguish third-party rights and remove encumbrances attached to the capital asset. Without incurring such expenditure, the assessee could not have conveyed clear and marketable title, and consequently, the ultimate transfer of the land would not have been possible.
3.7. It is submitted that the payments made under the settlement agreement are inextricably linked to the removal of encumbrances and extinguishment of adverse rights over the property. Without such settlement, the assessee would not have been in a position to deal with the property or effect its transfer. The expenditure is therefore wholly and exclusively incurred in connection with the transfer and is allowable in computing capital gains in terms of section 48 of the Act.
3.8. In this regard, we rely on the decision of Hon'ble Bombay High Court in the case of CIT vs. Shakuntala Kantilal [1991] 58 ΤΑΧΜΑN 106 (BOM) wherein it was held, vide para 5, as under *.... That apart so far as (i) of section 48 is concerned, we find that the expression used by the Legislature in its wisdom is wider than the expression for the transfer'. The expression used is 'the expenditure incurred wholly and exclusively in connection with such transfer. The expression 'in connection with such transfer is, in our view. certainly wider than the expression for the transfer. Here again, we are of the view that any amount the payment of which is absolutely necessary to effect the transfer will be an expenditure covered by this clause. In other words, if without removing any encumbrance including the encumbrance of the type involved in this case, sale or transfer could not be effected, the amount paid for removing that encumbrance will fall under clause (i). Accordingly, we agree with the Tribunal that the sale consideration requires to be reduced by the amount of compensation."
3.9. The Hon'ble Bombay High Court in the case of CIT vs. Abrar Alvi [2001] 117 Taxman 95 (Bombay) held that expenditure incurred in removing the encumbrances is deductible.
3.10. In the present case, the payments made under the cancellation and settlement arrangement are inextricably linked to the capital asset and its transfer, and therefore constitute expenditure incurred wholly and exclusively in connection with transfer and/or cost of improvement within the meaning of section 48 of the Act.
3.11. Without prejudice, it is submitted that the observation in the show cause notice that the assessee has already recognised profit on sale of land and thereafter claimed deduction of settlement payments proceeds on an incorrect appreciation of facts. The payments made under the cancellation and settlement agreement represent a composite arrangement involving (i) refund of advances earlier received, (ii) compensation for termination of contractual rights, and (iii) interest thereon, aggregating to Rs.91,03,45,177/-. These payments were necessitated to extinguish pre- existing rights, release encumbrances, and restore full title and possession of the property to the assessee. There is thus no question of any "double deduction"; rather, the transaction represents a commercial and legal reversal of earlier arrangements and a necessary step to enable the eventual transfer of the property. At best, any issue in this regard would relate to the manner of computation, which has been examined and accepted by the Assessing Officer and cannot be revisited under section 263.
3.12. As regards the fair market value as on 01.04.2001, it is submitted that the same has been adopted based on the guideline value prevailing at the relevant time, supported by contemporaneous records and registration data. The detailed working and basis for such adoption were furnished before the Assessing Officer during reassessment proceedings.
3.13. The observation in the show cause notice regarding adoption of a different guideline value, allegedly confirmed subsequently by the Sub- Registrar, merely represents an alternative view on valuation. It is submitted that such subsequent reference, even if assumed, cannot render the assessment order erroneous, particularly when the Assessing Officer has already examined and accepted a reasonable and supported basis. Valuation being a matter of estimation, the adoption of one permissible view cannot be substituted under section 263 merely because another view is possible.
3.14. The Assessing Officer, after examining the complete agreements, settlement documents, supporting evidences and capital gains computation, has accepted the claim. The view so taken is a legally sustainable view based on material on record and does not warrant interference under section 263.
Short Term Capital Loss on Transfer of CCDS
4.1. During the FY 2018-19 relevant to subject AY 2019-20, the assessee transferred 5,60,41,431 CCDs of its wholly owned subsidiary, M/s. W.S. T&D Limited, to M/s. Abhishaya Infrastructure Private Limited.
4.2. The CCDs had been subscribed by the assessee at a total cost of Rs. 56,04,14,310/-, and were transferred for a consideration of Rs. 5,00,000/-, resulting in a short-term capital loss of Rs. 55.99,14,310/-, as detailed in the computation furnished before the Assessing Officer, and in the submission dated 21.11.2023. A copy of the said submission dated 21.11.2023 along with the enclosures is enclosed as Annexure 4.
4.3. The transaction was duly supported by Debenture Subscription Agreement, Secunities Purchase Agreement, and Valuation Report issued by M/s. Vivro Financial Securities Private Limited, a SEBI registered merchant banker, in accordance with Rule 11UA of the Income Tax Rules, 1962.
4.4. As per the valuation report, the enterprise value of W.S. T&D Limited was determined at Rs. 3.62 lakhs, and the fair market value of its equity shares was Rs. 0.01 per share, reflecting the extremely weak financial position of the subsidiary.
4.5. It is submitted that CCDs, being compulsorily convertible instruments, derive their value from the underlying enterprise value and equity valuation of the issuer. In the present case, the valuation report issued by an independent SEBI registered merchant banker under Rule 11UA determined the enterprise value of W.S. T&D Limited at Rs. 3.62 lakhs and the equity value at Rs. 0.01 per share, reflecting its weak financial position.
4.6. The said valuation report was specifically called for by the Assessing Officer during the reassessment proceedings and was duly furnished and examined. The acceptance of such valuation thus represents a conscious and informed decision taken by the Assessing Officer. Any difference in valuation methodology or approach would, at best, amount to a difference of opinion and cannot form the basis for invoking section 263.
4.7. Accordingly, the consideration of Rs. 5,00,000/- for transfer of CCDs is fully supported by independent valuation and reflects the fair market value determined on a scientific and recognised basis. The transaction was undertaken as part of a commercial decision to exit from a financially stressed subsidiary and is supported by contemporaneous agreements and documentation, with no allegation of lack of genuineness
4.8. The observation in the show cause notice that the subsidiary subsequently issued CCDS at face value to the same purchaser does not invalidate the valuation adopted by the assessee. The said transaction represents a primary issuance by the subsidiary and is commercially distinct from the secondary transfer undertaken by the assessee. Such issuances are often influenced by commercial considerations, regulatory requirements and contractual arrangements. In any event, this fact was part of the material available before the Assessing Officer, who has taken a conscious view after due consideration.
4.9. Therefore, the pricing of a fresh issue by the subsidiary cannot be compared with or used to question the valuation of CCDs transferred by the assessee.
4.10. The capital loss has been computed in accordance with section 48 as the difference between cost of acquisition and consideration received, and is fully supported by documentary evidence and valuation report. The Assessing Officer, after examining the complete details and material on record, has accepted the claim. The view so taken is a plausible and legally tenable view and therefore does not warrant revision under section 263 of the Act.”
The Learned Pr.CIT on due consideration of the submissions made by the appellant-company had proceeded to hold that mere issuance of notices by the Assessing Officer and replies thereto by the appellant-company by itself would not establish that Assessing Officer had applied his mind and carried out the verification as the Assessment Order did not contain any discussion, findings or reasoning on the issues which were sought to be revised. Thus, he concluded that the Assessing Officer accepted the computation of capital gains on sale of Porur Land and the claim of short-term capital loss on transfer of compulsorily convertible debentures (CCDs) without application of mind attracting the provisions of Explanation-2 to Section 263 of the Act. Accordingly, the Learned Principal Commissioner of Income Tax held that the Assessment Order is erroneous and prejudicial to the interests of the Revenue, accordingly, set-aside the assessment order with a direction to Assessing Officer to carry out necessary enquiries and verifications on the following issues : 1. Computation of Capital Gains on sale of Porur land with reference to the correct guideline value as on 01.04.2001 and the allowability of the amount claimed towards cancellation of land/title perfection as part of the cost of acquisition.
Claim of Short-term Capital loss on transfer of Compulsorily Convertible Debentures (CCDs).
Being aggrieved by the above order the Learned Principal Commissioner of Income Tax, the appellant-company is in appeal before us in the present appeal.
The Learned Authorized Representative Shri B.Ramakrishnan submits that the Learned Pr.CIT ought not have branded the assessment order as “erroneous and prejudicial to the interests of the Revenue” in as much as, the Assessing Officer had conducted due enquiries in the course of re-assessment proceedings on the issues sought to be revised by Learned Pr.CIT and took a plausible view that the claims made by the appellant- company were clearly allowable as a deduction. In this connection, he drew our attention to the notice issued by the Assessing Officer u/s.142(1) of the Act dated 30.10.2023 along with the questionnaire which are placed at pages no.13 to 16 of the paper book. The specific attention was drawn to Query No.11, 13, 14 and 19 of the Questionnaire. The Learned AR drawn our attention to notice issued by Assessing Officer u/s.142(1) dated 13.03.2024 along with the questionnaire which is placed at pages no.17 to 22 of the paper book. Our specific attention was drawn to the Queries no.5, 6, 7, 8 and 13. Thus, he submits that the Assessing Officer raised specific query about the following items : “Cancellation of sale of land – Rs.136,06,21,646/-“, including details of the land, agreements entered into with the parties, amount of consideration agreed upon, reasons for cancellation of sale and bank statements evidencing the advance received and the payment.
“Compensation settlement – Rs.35,80,00,000/-“, including details of the compensation, reasons for the compensation, details of the party to whom compensation was made, copies of agreements, and bank statement evidencing the payment; and
Details of Short-Term Capital Loss of Rs.55,99,14,310/- on account of transfer of CCDs.
The Learned AR further submits that the appellant-company had duly complied with the notices issued u/s.142(1) of the Act by filing the requisite information vide letter dated 21.11.2023 and 16.03.2024 which are placed at pages no.23 to 268. He submits that the appellant had filed detailed explanation as to how the claim made by the appellant-company are allowable. On due consideration of the replies filed by the appellant-company, the Assessing Officer took a view that the claims are clearly allowable as a deduction.
He further submits that when the Assessing Officer raised the queries during the course of assessment proceedings, which were answered/replied by Assessee to the satisfaction of the Assessing Officer, the Assessing Officer accepted the claim. But, the fact that the assessment order is silent as to the query raised by the Assessing Officer nor the reply filed by the Assessee does not lead to the conclusion that the order of the Assessing Officer is erroneous simply because, the Assessing Officer in his order did not make elaborate discussion in this regard. The Learned AR also relied on the decision of Hon’ble High Court of Delhi in the case of CIT Vs. Vika Polymers [2012] 341 ITR 537 (Delhi). He further submits that the Assessment Order cannot be branded as “erroneous” merely because the Learned Pr.CIT feels that further enquiry should have been made when the Assessing Officer had conducted the enquiries and took a plausible view based on the material available on record, as it cannot be said that there was a lack of enquiry. Mere inadequate enquiry does not confer power of revision on the Learned Pr.CIT placing reliance the decision of Hon’ble High Court of Delhi in the case of CIT Vs. Sunbeam Auto Ltd [2011] 332 ITR 167 (Delhi).
He further submits that when the Assessing Officer took one of the two plausible views or adopted one of the courses permissible in law merely because the Learned Pr.CIT does not agree, Assessment Order cannot be treated as ‘erroneous’ unless the view taken by the Assessing Officer is unsustainable in law. In this connection, placing reliance on the decision of Hon’ble Supreme Court in the case of CIT Vs Malabar Industrial Co. Ltd. vs. CIT [2000] 243 ITR 83 the Hon’ble High Court of Madras in the case of CIT Vs. Mepco Industries Ltd., 294 ITR 121 (Madras). Thus, he submits that the exercise of power of revision vested with the Learned Pr.CIT u/s.263 of the Act is patently illegal as the assessment order is neither ‘erroneous’ nor ‘prejudicial’ to the interests of the Revenue.
On merits, he submits that the subject land was earlier subject matter of agreement of sale with Mantri Group of entities and for various reasons, the transaction could not be completed resulting in disputes and rival claims between the parties. In order to resolve all disputes and extinguish all rights created in favour of the Mantri Group the appellant-company entered into a deed of cancellation in April 2018, whereby all prior agreements were all cancelled. Pursuant to the said cancellation, the assessee made, inter-alia the following payments : Rs.91,03,45,177/- paid to M/s.Mantri Premier Homes Private Limited Rs.10,41,585/- paid to M/s.Mantri Developers Private Limited, and Of which Rs.47,00,00,000/- represented refund of advances, Rs.35,80,00,000/-, represented compensation, and Rs.8,23,45,177/- represented interest, subject to deduction of tax at source, as evidenced by the cancellation deed.
He submits that the above expenditure was incurred mandatorily in order to extinguish third-party rights and remove encumbrances attached to the capital asset. Without incurring this expenditure, the appellant-company could not have conveyed clear marketable title. Thus, he submits that this expenditure is wholly and exclusively incurred in connection with the transfer and is allowable as a deduction while computing capital gains in terms of provision of section 48 of the Act. In this connection, he placed reliance on the following decisions : Hon’ble Bombay High Court in the case of CIT Vs. Shakuntala Kantilal 190 ITR 56(Bom HC) CIT Vs. Abrar Alvi 247 ITR 31 (Bombay)
As regard to the Short Term Capital Loss on Transfer of CCDs, it was submitted that During the previous year relevant to assessment year under consideration 2019-20, the appellant- company transferred Rs.5,60,41,431/- CCDs of its wholly owned subsidiary, M/s.W.S.T&D Limited, to M/s.Abhishaya Infrastructure Private Limited.
17.1 The CCDs had been subscribed by the appellant-company at a total cost of Rs.56,04,14,310/-, and were transferred for a consideration of Rs.5,00,000/-, resulting in a short-term capital loss of Rs. 55.99,14,310/-, as detailed in the computation furnished before the Assessing Officer, and in the submission dated 21.11.2023. A copy of the said submission dated 21.11.2023 along with the enclosures is enclosed as Annexure 4.
17.2 The transaction was duly supported by Debenture Subscription Agreement, Secunities Purchase Agreement, and Valuation Report issued by M/s. Vivro Financial Securities Private Limited, a SEBI registered merchant banker, in accordance with Rule 11UA of the Income Tax Rules, 1962.
17.3 As per the valuation report, the enterprise value of W.S. T&D Limited was determined at Rs. 3.62 lakhs, and the fair market value of its equity shares was Rs. 0.01 per share, reflecting the extremely weak financial position of the subsidiary.
17.4 It was submitted that CCDs, being compulsorily convertible instruments, derive their value from the underlying enterprise value and equity valuation of the issuer. In the present case, the valuation report issued by an independent SEBI registered merchant banker under Rule 11UA determined the enterprise value of W.S. T&D Limited at Rs. 3.62 lakhs and the equity value at Rs. 0.01 per share, reflecting its weak financial position.
17.5 The said valuation report was specifically called for by the Assessing Officer during the course of reassessment proceedings and was duly furnished and examined. The acceptance of such valuation thus represents a conscious and informed decision taken by the Assessing Officer. Any difference in valuation methodology or approach would, at best, amount to a difference of opinion and cannot form the basis for invoking section 263. Accordingly, the consideration of Rs. 5,00,000/- for transfer of CCDs is fully supported by independent valuation and reflects the fair market value determined on a scientific and recognized scientific basis. The transaction was undertaken as part of a commercial decision to exit from a financially stressed subsidiary and is supported by contemporaneous agreements and documentation, with no allegation of lack of genuineness.
17.6. The observation in the show cause notice that the subsidiary subsequently issued CCDS at face value to the same purchaser does not invalidate the valuation adopted by the appellant-company. The said transaction represents a primary issuance by the subsidiary and is commercially distinct from the secondary transfer undertaken by the appellant-company. Such issuances are often influenced by commercial considerations, regulatory requirements and contractual arrangements. In any event, this fact was part of the material available before the Assessing Officer, who has taken a conscious view after due consideration.
17.7. Therefore, the pricing of a fresh issue by the subsidiary cannot be compared with or used to question the valuation of CCDs transferred by the assessee.
17.8. The capital loss has been computed in accordance with section 48 as the difference between cost of acquisition and consideration received, and is fully supported by documentary evidence and valuation report. The Assessing Officer, after examining the complete details and material on record, has accepted the claim. The view so taken is a plausible and legally tenable view and therefore does not warrant revision under section 263 of the Act.
On the other hand, the Learned CIT-DR submits that on mere perusal of the assessment order, it would reveal that the Assessing Officer had failed to carry out the necessary verification as required under law in respect of the items which are sought to be revised by the Learned Principal Commissioner of Income Tax. Therefore, he submits that failure of the Assessing Officer to carry out necessary verification and conduct the enquiries, renders the assessment order erroneous and prejudicial to the interests of the Revenue. In this connection, he placed reliance on the decision of Hon’ble Delhi High Court in the case of Gee Vee Enterprises Vs. ACIT 99 ITR 375(Delhi). Mere non-examination of the issues renders the assessment order erroneous and also he placed reliance on the decision of Hon’ble Supreme Court in the case of LG Electrification Pvt. Ltd. Vs. PCIT 443 ITR 45(SC). He also submits that an assessment order can be revised in exercising of the power vested with the Commissioner u/s.263 of the Income Tax Act, 1961 based on the Audit Objections. In this regard, he placed reliance on the decision of Punjab & Haryana High Court in the case of PCIT Vs.
Kirti Anand [2025] 170 taxmann.com 585 and also the decision of ITAT Indore Bench in the case of Raj Kumar Goyal Vs. Pr.CIT- 2 in ITA No.438/IND/2019 vide order dated 20.11.2023.
We heard the rival submissions and perused the material on record. The issue in the present appeal relates to the validity of assumption of jurisdiction u/s.263 by the ld. PCIT.
The Parliament had conferred the power of revision on the Commissioner of Income Tax u/s 263 of the Act in case the assessment order passed is erroneous and prejudicial to the interests of revenue. In order to invoke the power of revision, the above two conditions are required to be satisfied cumulatively. References in this regard can be made to the decision of the Hon’ble Supreme Court in the case of Malabar Industrial Co. Ltd. vs. CIT, 243 ITR 83 (SC) and in the case of CIT vs. Max India Ltd., 295 ITR 282 (SC). The error in the assessment order should be one that it is not debatable or plausible view. In a case where the Assessing Officer examined the claim took one of the plausible views, the assessment order cannot be termed as an “erroneous”.
Now, we proceed to examine the facts of the present case with a view to find out whether the Assessing Officer had examined the issues sought to be revised by the Learned Pr.CIT in exercise of power vested with him u/s.263 of the Income Tax Act, 1961. Admittedly, in the present case, during the course of re-assessment proceedings, the Assessing Officer had raised the queries on the issue of allowability of expenditure claimed as a part of cost of sale of the immovable property vide notice issued u/s.142(1) on 30.10.2023 and 13.03.2024. The appellant had filed detailed explanation on 21.11.2023 and 16.03.2024 as to how the claim made by the appellant-company is allowable as deduction while computing the capital gain on the sale of the immovable property. The appellant-company also explained the nature of the claim and as to how it is allowable as a deduction. The appellant also placed reliance on the judicial precedents as is evident from the paper book, pages no.23 to 268. On due consideration of the submissions made by the appellant- company, the claims came to be accepted by the Assessing Officer in the assessment order. The material fact to be kept in mind is that the assessment order was passed pursuant to the return of income filed in response to notice issued u/s.148 of the Income Tax Act, 1961. The notice u/s.148 was issued pursuant to the search and seizure operations conducted in the business premises of the appellant-company on 06.07.2022. On careful perusal of the impugned order passed by the Learned Pr.CIT u/s.263 of the Act, it would reveal that the Learned Pr.CIT had not made any reference to the seized material found or unearthed as result of search and seizure action u/s.132 of the Act which had direct nexus with the issues sought to be revised by the Learned Pr.CIT.
The mere fact that the assessment order is silent as to the query raised by the Assessing Officer and answer / explanation filed by the appellant-company would not by itself lead to the conclusion that order of the Assessing Officer is ‘erroneous’ as the assessee has no control over the Assessing Officer as to how the assessment order is drafted. Reliance in this regard can be placed on the decision of the Hon’ble Delhi High Court in the case of CIT Vs. Vikas Polymers 341 ITR 537 (Delhi) relevant observation of Hon’ble High Court of Delhi as under : “18……………………………. This is for the reason that if a query is raised during the course of scrutiny by the Assessing Officer, which was answered to the satisfaction of the Assessing Officer, but neither the query nor the answer were reflected in the assessment order, this would not by itself lead to the conclusion that the order of the Assessing Officer called for interference and revision.”
The Hon’ble Bombay High Court in the case of Idea Cellular Ltd. v. Dy. CIT [2008] 301 ITR 407 (Bom.) has held that if during Assessment proceedings queries were raised and the assessee responded to the same, then even if an Assessment order does not mention the same, it does not mean that the Assessing Officer had not applied his mind to the issues. It would be impossible for an Assessing Officer to complete all assessments assigned to him under Section 143(3) of the Act if he is required to deal with all issues which arose during the Assessment Proceedings. Thus, the Assessment Order primarily deal with only those issues in respect of which the Assessee has not been able to satisfy him and give reasons for his conclusion. This would enable the Assessee to challenge the same, if aggrieved. In fact the Gujarat High Court in CIT v. Nirma Chemical Works Ltd. [2009] 309 ITR 67/182 Taxman 183 had observed that if an assessment order were to incorporate the reasons for upholding the claim made by an assessee, the result would be an epitome and not an assessment order. Therefore, in the light of above legal position, it cannot be said that the Assessing Officer had not conducted enquiries on the issues which are sought to be revised by the Assessing Officer.
It is a case of the Learned Pr.CIT that the provisions of Explanation-2 are squarely applicable to the facts of the present case as the Assessing Officer had not conducted further enquiries. On bare perusal of the impugned order before us, it is clear that the Learned Pr.CIT had not pointed out any further enquiries which were required to be made by the Assessing Officer. The Learned Pr.CIT exercises the power of revision as a quasi-judicial authority, therefore, it is incumbent upon him to point out as to what further enquiries required to be made in the circumstances of the case. In a case where there is a failure on the part of the Learned Pr.CIT to point out further enquiries, the power of revision cannot be exercised u/s.263 of the Income Tax Act, 1961. In this connection, a profitable reference can be made to the decision of Hon’ble Punjab and Haryana High Court in the case of PCIT Vs. V-Co Integrated Solutions (P.) Ltd. [2025] 476 ITR 522 the relevant observations made by the Hon’ble High Court vide para 6 are as under : “6……………………. ………………………..The scope of Section 263 of the IT Act, is apparently to see whether the concerned Assessing Officer has failed to conduct a proper inquiry, and therefore, committed an error resulting in causing loss to the revenue. Simply by holding that the Assessing Officer was required to make more enquiries, would not be a valid ground for treating the order of the Assessing Officer, as erroneous and prejudicial to the interests of the revenue. The power under Section 263 of the Act cannot be invoked in such circumstances by the PCIT. The order, therefore, passed by the PCIT is not sustainable in the eyes of law and the same has been quashed by the ITAT, which does not warrant any interference by this Court in appeal.”
This decision of Hon’ble High Court was affirmed by the Hon’ble Supreme Court in the case of PCIT Vs. V-Con Integrated Solutions (P.) Ltd 476 ITR 526 by holding as under :
“2. In our opinion, the order passed by the High Court, which upheld the decision of the Tribunal, is correct on facts and in law. This case does not involve a failure by the assessing officer to conduct an investigation. Instead, according to the Revenue, it is a case where the assessing officer having made inquiries erred by not making additions.
The assessee does not have control over the pen of the Assessing Officer. Once the Assessing Officer carries out the investigation but does not make any addition, it can be taken that he accepts the plea and stand of the assessee.
In such cases, it would be wrong to say that the Revenue is remediless. The power under Section 263 of the Income Tax Act, 1961, can be exercised by the Commissioner of Income Tax, but by going into the merits and making an addition, and not by way of a remand, recording that there was failure to investigate. There is a distinction between the failure or absence of investigation and a wrong decision/conclusion. A wrong decision/conclusion can be corrected by the Commissioner of Income Tax with a decision on merits and by making an addition or disallowance.
There may be cases where the Assessing Officer undertakes a superficial and random investigation that may justify a remit, albeit the Commissioner of Income Tax must record the abject failure and lapse on the part of the Assessing Officer to establish both the error and the prejudice caused to the Revenue.
Recording the aforesaid, the special leave petition is dismissed.”
In view of the authoritative pronouncement of law by Hon’ble Supreme Court in the above case that in the case of failure by the Learned Pr.CIT to point out any further enquiries, which were required to be made by the Assessing Officer, the order passed u/s.263 of the Act cannot be sustained. In the present case as observed by us(supra), the Learned Pr.CIT had failed to point out the further enquiries which were required to be made by the Assessing Officer, therefore, we are of the considered opinion that the Learned Pr.CIT cannot exercise the power of revision.
Further, we find from the impugned order before us that the Learned Pr.CIT prior to passing the order u/s.263 of the Act, had not conducted enquiries to come to conclusion and himself decide that the order is erroneous by conducting necessary enquiry if required and necessary before the order u/s.263 of the Act passed. Such approach of the Learned Pr.CIT was held to be untenable by Hon’ble Delhi High Court in the case of Commissioner of Income-tax-V vs. Nagesh Knitwears (P.) Ltd [2012] 345 ITR 135, wherein Hon’ble High Court distinguished the action to be taken in the following cases:
“27.1 One where there is total absence of enquiry or verification in contra distinction to cases where there is inquiry but the findings are incorrect/erroneous; and where there is failure to make proper or full verification or inquiry. In the first category of cases, where there is complete lack of inquiry, the matter is settled by the Hon. Supreme Court Rampyari Devi Sarogi v. CIT [1968] 67 ITR 84 (SC)and Tara Devi Aggarwal v. CIT [1973] 88 ITR 323 (SC), wherein it has been held that where Assessing Officer has accepted a particular contention/issue without any enquiry or evidence whatsoever, the order is erroneous and prejudicial to the interest of the Revenue. In such type of cases, it is not necessary for the Commissioner to make further inquiries before cancelling the assessment order of the Income-tax Officer as explained in the case of Gee Vee Enterprises v. Additional Commissioner of Income-tax [1975] 99 ITR 375 (DELHI). However, in cases of full inquiry or partial verification or inquiry; "the CIT has to come to the conclusion and himself decide that the order is erroneous, by conducting necessary enquiry, if required and necessary, before the order under Section263 is passed. In such cases, the order of the Assessing Officer will be erroneous because the order passed is not sustainable in law and the said finding must be recorded. The Learned CIT cannot remand the matter to the Assessing Officer to decide whether the findings recorded are erroneous. In cases where there is inadequate enquiry but not lack of enquiry, again the CIT must give and record a finding that the order/inquiry made is erroneous. This can happen if an enquiry and verification is conducted by the CIT and he is able to establish and show the error or mistake made by the Assessing Officer, making the order unsustainable in Law. In some cases, possibly though rarely, the CIT can also show and establish that the facts on record or inferences drawn from facts on record per se justified and mandated further enquiry or investigation but the Assessing Officer had erroneously not undertaken the same. However, the said finding must be clear, unambiguous and not debatable.”
The Hon’ble High Court of Bombay in the case of Mirum Digital (P.) Ltd. Vs. PCIT [2026] 188 taxmann.com 469 (Bombay) after making a reference to above judgments held that where the Learned Pr.CIT had not conducted further enquiries prior to passing order u/s.263 to come to a conclusion that the assessment order is erroneous. The order of revision u/s.263 was quashed by observing as under : “11. We are further of the view that the ITAT did not appreciate that there was no prejudice caused to the revenue, as the reimbursement of expenses on account of media cost, even if included in the total income of the Appellant-Assessee, the corresponding payment of the same to media companies would qualify as a deduction, and hence have no impact on the income chargeable to tax. The ITAT has therefore proceeded to pass the impugned order without appreciating the principles of law that in revisionary proceedings, twin conditions are to be satisfied, i.e., (i) the order should be erroneous, (ii) by virtue of the order, prejudice should have been caused to the revenue.
This Court in the case of CIT v. Gabriel India Ltd. [1988] 41 Taxman 237/1989 176 ITR 349(Bombay) has held that the power of suo moto revision under Section 263(1) of the Act can be exercised only if such circumstances exist. It was held that for powers of revision under Section263 of the Act, two circumstances must exist to enable the Commissioner to exercise the revisionary jurisdiction, i.e., (i) the order is erroneous, (ii) by virtue of the order prejudice is caused to the Revenue. It is therefore to be considered firstly whether the order is said to be erroneous, and further if an Income Tax Officer (ITO) has acted in law and has made a certain assessment, the same cannot be branded as erroneous by the Commissioner simply because according to him the order should have been written more elaborately. If the ITO while making an assessment of the accounts has examined the accounts and made enquiries and applied his mind to the facts and circumstances of the case and determined the income either by accepting the account or by making the estimate itself, then the Commissioner cannot substitute the aforesaid order and reexamine the accounts by invoking Section 263 of the Act by terming the order erroneous or prejudicial to the Revenue. Relevant paragraphs of the decision are reproduced below: -
According to the Commissioner, the order of the ITO did not disclose any application of mind. He issued the notice as he felt that the expenditure in question might be a capital expenditure. But despite examining the matter at length and hearing the assessee, he could not come to any conclusion that the expenditure was not revenue expenditure but expenditure of capital nature. He referred the matter back to ITO to examine the same and to decide afresh. The Tribunal did not approve such action of the Commissioner. Therefore, the question that arises for consideration is whether the Commissioner without arriving at a finding that the order in question was erroneous can set aside the assessment in exercise of power under section 263. It may be expedient at this stage to set out section 263. Section 263, so far as relevant, runs as follows:
"263. Revision of orders prejudicial to revenue — (1) The Commissioner may call for and examine the record of any proceeding under this Act, and if he considers that any order passed therein by the Income-tax Officer is erroneous insofar as it is prejudicial to the interests of the revenue, he may, after giving the assessee an opportunity of being heard and after making or causing to be made such inquiry as he deems necessary, pass such order thereon as the circumstances of the case justify, including an order enhancing or modifying the assessment, or cancelling the assessment and directing a fresh assessment.
(2) No order shall be made under sub-section (1)—
(a) to revise an order of reassessment made under section 147, or
(b) after the expiry of two years from the date of the order sought to be revised."
From a reading of sub-section 1 of section 263, it is clear that the power of suo motu revision can be exercised by the Commissioner only if, on examination of the records of any proceedings under this Act, he considers that any order passed therein by the ITO is 'erroneous insofar as it is prejudicial to the interests of the revenue'. It is not an arbitrary or unchartered power. It can be exercised only on fulfilment of the requirements laid down in sub-section (1). The consideration of the Commissioner as to whether an order is erroneous insofar as it is prejudicial to the interests of the revenue, must be based on materials on the record of the proceedings called for by him. If there are no materials on record on the basis of which it can be said that the Commissioner acting in a reasonable manner could have come to such a conclusion, the very initiation of proceedings by him will be illegal and without jurisdiction. The Commissioner cannot initiate proceedings with a view to starting fishing and roving enquiries in matters or orders which are already concluded. Such action will be against the well-accepted policy of law that there must be a point of finality in all legal proceedings, that stale issues should not be reactivated beyond a particular stage and that lapse of time must induce repose in and set at rest judicial and quasi-judicial controversies as it must in other spheres of human activity- [See Parashuram Pottery Works Co. Ltd. v. ITO[1977] 106 ITR 1 (SC) , at page 10].
As observed in Sirpur Paper Mills Ltd. v. ITO [1978] 114 ITR 404 (AP) by Raghuveer, J.(as his Lordship then was), the Department cannot be permitted to begin fresh litigation because of new views they entertain on facts or new versions which they present as to what should be the inference or proper inference either of the facts disclosed or the weight of the circumstances. If this is permitted, litigation would have no end, 'except when legal ingenuity is exhausted'. To do so, is '. . . to divide one argument into two and to multiply the litigation'.
The power of suo motu revision under sub-section (1) is in the nature of supervisory jurisdiction and the same can be exercised only if the circumstances specified therein exist. Two circumstances must exist to enable the Commissioner to exercise power of revision under this sub-section, viz., (i) the order is erroneous; (ii) by virtue of the order being erroneous prejudice has been caused to the interests of the revenue. It has, therefore, to be considered firstly as to when an order can be said to be erroneous. We find that the expressions 'erroneous', 'erroneous assessment' and 'erroneous judgment' have been defined in Black's Law Dictionary. According to the definition/erroneous', means 'involving error; deviating from the law'. 'Erroneous assessment' refers to an assessment that deviates from the law and is, therefore, invalid, and is a defect that is jurisdictional in its nature, and does not refer to the judgment of the Assessing Officer in fixing the amount of valuation of the property. Similarly, 'erroneous judgment' means 'one rendered according to course and practice of Court, but contrary to law upon mistaken view of law, or upon erroneous application of legal principles'.
From the aforesaid definitions it is clear that an order cannot be termed as erroneous unless it is not in accordance with law. If an ITO acting in accordance with law makes a certain assessment, the same cannot be branded as erroneous by the Commissioner simply because, according to him, the order should have been written more elaborately. This section does not visualise a case of substitution of the judgment of the Commissioner for that of the ITO, who passed the order, unless the decision is held to be erroneous. Cases may be visualised where the ITO while making an assessment examines the accounts, makes enquiries, applies his mind to the facts and circumstances of the case and determines the income either by accepting the accounts or by making some estimate himself. The Commissioner, on perusal of the records, may be of the opinion that the estimate made by the officer concerned was on the lower side and left to the Commissioner, he would have estimated the income at a figure higher than the one determined by the ITO. That would not vest the Commissioner with power to re-examine the accounts and determine the income himself at a higher figure. It is because the ITO has exercised the quasi-judicial power vested in him in accordance with law and arrived at a conclusion and such a conclusion cannot be termed to be erroneous simply because the Commissioner does not feel satisfied with the conclusion. It may be said in such a case that in the opinion of the Commissioner the order in question is prejudicial to the interests of the revenue. But that by itself will not be enough to vest the Commissioner with the power of suo motu revision because the first requirement, viz., that the order is erroneous, is absent. Similarly, if an order is erroneous but not prejudicial to the interests of the revenue, then also the power of suo motu revision cannot be exercised. Any and every erroneous order cannot be the subject-matter of revision because the second requirement also must be fulfilled. There must be some prima facie material on record to show that tax which was lawfully exigible has not been imposed or that by the application of the relevant statute on an incorrect or incomplete interpretation a lesser tax than what was just has been imposed.
As observed in Dawjee Dadabhoy & Co. v. S.P. Jain [1957] 31 ITR 872 (Cal.) , at page881, "the words 'prejudicial to the interests of the revenue' have not been defined, but it must mean that the orders of assessment challenged are such as are not in accordance with law, inconsequence whereof the lawful revenue due to the State has not been realised or cannot be realised. It can mean nothing else". The aforesaid observations were also applied by the Gujarat High Court in Addl. CIT v. Mukur Corpn. [1978] 111 ITR 312 . We are of the opinion that the aforesaid interpretation given by the Calcutta High Court to the expression 'prejudicial to the interests of the revenue' is the correct interpretation.
We, therefore, hold that in order to exercise power under sub- section (1) of section 263there must be material before the Commissioner to consider that the order passed by the ITO was erroneous insofar as it is prejudicial to the interests of the revenue. We have already held what is erroneous. It must be an order which is not in accordance with the law or which has been passed by the ITO without making any enquiry in undue haste. We have also held as to what is prejudicial to the interests of the revenue. An order can be said to be prejudicial to the interests of the revenue if it is not in accordance with the law in consequence whereof the lawful revenue due to the State has not been realised or cannot be realised. There must be material available on the record called for by the Commissioner to satisfy him prima facie that the aforesaid two requisites are present. If not, he has no authority to initiate proceedings for revision. Exercise of power of suo motu revision under such circumstances will amount to arbitrary exercise of power. It is well-settled that when exercise of statutory power is dependent upon the existence of certain objective facts, the authority before exercising such power must have materials on record to satisfy it in that regard. If the action of the authority is challenged before the Court, it would be open to the Courts to examine whether the relevant objective factors were available from the records called for and examined by such authority. Our aforesaid conclusion gets full support from a decision of Sabyasachi Mukharji ,J. (as his Lordship then was) in Russell Properties (P.) Ltd. v. A. Chowdhury, Addl. CIT[1977] 109 ITR 229 (Cal.) . In our opinion, any other view in the matter will amount to giving unbridled and arbitrary power to the revising authority to initiate proceedings for revision in every case and start re-examination and fresh enquiries in matters which have already been concluded under the law. As already stated, it is a quasijudicial power hedged in with limitation and has to be exercised subject to the same and within its scope and ambit. So far as calling for the records and examining the same is concerned, undoubtedly, it is an administrative act, but on examination 'to consider' or in other words, to form an opinion that the particular order is erroneous insofar as it is prejudicial to the interests of the revenue, is a quasi-judicial act because on this consideration or opinion the whole machinery of re-examination and reconsideration of an order of assessment, which has already been concluded and controversy which has been set at rest, is set again in motion. It is an important decision and the same cannot be based on the whims or caprice of the revising authority. There must be materials available from the records called for by the Commissioner. (emphasis supplied)
Further, in the following decisions, revisionary proceedings have been quashed where adequate enquiry and specific queries were raised by the AO at the time of the original assessment order:-
i. In the case of Pr. CIT Central v. Prabhu Poly Pipes Ltd. [2025] 176 taxmann.com1005/306 Taxman 161/481 ITR 506 (SC) the AO had completed assessment proceedings under Sections 153A and 143(3) of the Act and had taken a plausible view with regard to unsecured loans and the identity, creditworthiness and genuineness of the cash creditors. The Appellant-PCIT had thereafter passed a revisionary order under Section 263 of the Act, alleging that the AO in that case had not made any enquiry about the creditworthiness and identity of loan providers and the genuineness of transactions in respect of unsecured loans. The ITAT had however, set aside the order passed by the Appellant-PCIT under Section 263, and had held that the AO had raised necessary queries with regard to the issue under consideration and on being satisfied with such details and accepting the identity, creditworthiness and genuineness of the cash creditors had taken a plausible view. The ITAT further held that the Appellant-PCIT had only given a general observation that the AO had not conducted the necessary enquiry with regard to unsecured loans and their genuineness but had not given any specific finding as to what the information was which the AO had not called for, and also had not given any comment on such information before holding the assessment order in question as erroneous and prejudicial to the interests of the revenue. The Appellant-PCIT had thereafter filed an appeal before the Calcutta High Court under Section 260-A of the Act, wherein the Court had agreed with the findings of the ITAT and held that no question of law, much less a substantial question of law arose for consideration in that case, thereafter dismissing the appeal filed by the Appellant-PCIT. Upon appeal by the Appellant-PCIT, the Supreme Court, while dismissing the SLP, had held that it found no reason to interfere with the decision of the Calcutta High Court.
ii. In CIT v. Chandan Magraj Parmar [2022] 135 taxmann.com 55/285 Taxman 565/445ITR 674 (Bombay) the facts of the case revolve around the Respondent-Assessee while joining a firm as a partner had, given an agricultural land as part of his share of capital in partnership. Subsequently, when the agricultural land was sold, the Respondent-Assessee had sought to claim an exemption in his return of income as Long Term Capital gain. The AO in that case had raised queries with regard to the claim of capital gain on transfer of land, and the Respondent-Assessee had furnished a detailed reply pertaining to the capital gain on the aforesaid agricultural land. The Appellant-PCIT had however, passed an order under Section 263 of the Act revising the assessment order, claiming that the AO had not raised any query regarding the sale of the aforesaid agricultural land. The revision order under Section 263 of the Act was challenged by the Respondent-Assessee before the ITAT, which had quashed the same and held that the claim of capital gain was accepted by the AO after making the necessary inquiry. The ITAT further held that while it was true that the AO has not passed any written detailed order while accepting the explanation of capital gains of the Respondent-Assessee, but the fact that the AO had raised queries and the Respondent-Assessee had given a detailed reply to the said query meant the AO had passed the assessment order after making necessary inquiries. Upon an appeal by the Appellant-PCIT before this Court, this Court had agreed with the findings of the ITAT and held that the order of the AO could not be branded as erroneous merely because the order did not contain the details which the Appellant-PCIT felt should have been included. It was further held that where the AO during the scrutiny assessment proceedings had raised a query which was answered by the Respondent-Assessee to the satisfaction of the AO, the same was not reflected in the assessment order by him, the Appellant-PCIT could not conclude that no proper inquiry with respect to the issue was made by the AO and enable him to assume jurisdiction under Section 263 of the Act.
14 . We are further of the view that the reliance by the ITAT on the decisions in CIT v. Ballarpur Industries Ltd. [2017] 85 taxmann.com 10 (Bombay) and Sify Software Ltd. v. Asstt. CIT [2017] 80 taxmann.com 273 (Chennai - Trib.) is not apposite to the facts of the present case to uphold the revisionary proceedings, in as much as in Ballarpur Industries (supra) and Sify Software (supra),the AO had not raised any query with regard to the deduction under section 80 HHC of the Act and with regard to the deduction claim with regard to depreciation on tangible assets respectively. Therefore, on that fact pattern, the revisionary proceedings were upheld by the Court, as the AO had not raised any queries.
15 . However, in the present case the aforesaid decisions would not have any application as held by us in the earlier paragraphs, a specific query was raised by the AO by way of the notice dated21st October 2019, issued prior to the passing of the assessment order, specifically requiring the Appellant-Assessee to file details with respect to reconciliation of26AS/CIB/AIR/OLTAS/Service Tax/STT/Sales-tax return with audited books of account and the return of income, and reconciliation of income as per return of income and 26AS statement. All these queries were duly replied to by the Appellant-Assessee, and therefore, in our view, this was not a case of lack of inquiry or inadequate enquiry on the part of the AO which rendered the assessment order dated 2nd January 2023 erroneous and prejudicial to the interest of the revenue, warranting revision proceedings under Section 263 of the Act. Further, the PCIT also had not raised any further queries or made any further enquiries prior to the passing of the order under Section 263 of the Act and proceeded to pass a bald order invoking the provisions of Section 263of the Act. The imprimatur of the ITAT to such an order of the PCIT, primarily on the ground that the Appellant-Assessee failed to appear before the PCIT during revision proceedings would amount to exercising revision proceedings without the warrant of law. This to our mind cannot be the approach of the ITAT, and further, the dismissal of the miscellaneous application filed by the Appellant-Assessee by its order dated 12th March 2024 has only added to upholding the erroneous view taken by the impugned order passed by the ITAT.
In the light of the above discussion, the appeal needs to suceed on the questions of law as raised hereinabove, which are answered in favour of the assessee and against the revenue. The impugned order dated 2 January 2023 as passed by the ITAT, is accordingly quashed and set aside.
The appeal is allowed. No costs.”
Thus, the law is settled to the extent that in the case where the Assessing Officer had conducted the enquiries and allowed the claim, the Learned Pr.CIT cannot exercise the power of revision without conducting further enquiries himself to come to conclusion that the Assessment Order is ‘erroneous’.
From the reading of the Para 9 of the impugned order before us, it is crystal clear that the Learned Pr.CIT had set-aside the assessment order to the Assessing Officer in order to conduct necessary enquiries and verification. It is settled position of law that the Power of revision cannot be exercised by the Learned Pr.CIT with a view to start a de novo or a fishing inquiry in matters or orders which are already concluded, unless he was able to hold that the Assessing Officer’s view on the issue was unsustainable in law.
The Hon’ble Delhi High Court in the case of ITO Vs. D.G.Housing Projects Ltd. 343 ITR 329 has held as under : “10. Revenue does not have any right to appeal to the first appellate authority against an order passed by the Assessing Officer. Section 263 has been enacted to empower the CIT to exercise power of revision and revise any order passed by the Assessing Officer, if two cumulative conditions are satisfied. Firstly, the order sought to be revised should be erroneous and secondly, it should be prejudicial to the interest of the Revenue. The expression 'prejudicial to the interest of the Revenue' is of wide import and is not confined to merely loss of tax. The term 'erroneous' means a wrong/incorrect decision deviating from law. This expression postulates an error which makes an order unsustainable in law.
The Assessing Officer is both an investigator and an adjudicator. If the Assessing Officer as an adjudicator decides a question or aspect and makes a wrong assessment which is unsustainable in law, it can be corrected by the Commissioner in exercise of revisionary power. As an investigator, it is incumbent upon the Assessing Officer to investigate the facts required to be examined and verified to compute the taxable income. If the Assessing Officer fails to conduct the said investigation, he commits an error and the word 'erroneous' includes failure to make the enquiry. In such cases, the order becomes erroneous because enquiry or verification has not been made and not because a wrong order has been passed on merits.
Delhi High Court in Gee Vee Enterprises v. Addl. CIT [1975] 99 ITR 375 (Delhi) has observed as under:-
"The reason is obvious. The position and function of the Income-tax Officer is very different from that of a civil court. The statements made in a pleading proved by the minimum amount of evidence may be accepted by a civil court in the absence of any rebuttal. The civil court is neutral. It simply gives decision on the basis of the pleading and evidence which comes before it. The Income-tax Officer is not only an adjudicator but also an investigator. He cannot remain passive in the face of a return which is apparently in order but calls for further inquiry. It is his duty to ascertain the truth of the facts stated in the return when the circumstances of the case are such as to provoke an inquiry. The meaning to be given to the word "erroneous" in section 263 emerges out of this context. It is because it is incumbent on the Income-tax Officer to further investigate the facts stated in the return when circumstances would make such an inquiry prudent that the word "erroneous" in section 263 includes the failure to make such an inquiry. The order becomes erroneous because such an inquiry has not been made and not because there is anything wrong with the order if all the facts stated therein are assumed to be correct."
In the said judgment, Delhi High Court had referred to earlier decisions of the Supreme Court in Rampyari Devi Saraogi v. CIT [1968] 67 ITR 84 (SC) and Smt. Tara Devi Aggarwal v. CIT [1973] 88 ITR 323 (SC), wherein it has been held that where Assessing Officer has accepted a particular contention/issue without any enquiry or evidence whatsoever, the order is erroneous and prejudicial to the interest of the Revenue. After reference to these two decisions, the Delhi High Court observed:-
"These two decisions show that it is not necessary for the Commissioner to make further inquiries before cancelling the assessment order of the Income-tax Officer. The Commissioner can regard the order as erroneous on the ground that in the circumstances of the case the Income-tax Officer should have made further inquiries before accepting the statements made by the assessee in his return."
The aforesaid observations have to be understood in the factual background and matrix involved in the said two cases before the Supreme Court. In the said cases, the Assessing Officer had not conducted any enquiry or examined evidence whatsoever. There was total absence of enquiry or verification. These cases have to be distinguished from other cases (i) where there is enquiry but the findings are incorrect/erroneous; and (ii) where there is failure to make proper or full verification or enquiry.
In the case of CIT v. Sunbeam Auto Ltd. [2011] 332 ITR 167/[2010] 189 Taxman 436 (Delhi), Delhi High Court was considering the aspect, when there is no proper or full verification, and it was held as under:- "We have considered the rival submissions of the counsel on the other side and have gone through the records. The first issue that arises for our consideration is about the exercise of power by the Commissioner of Income-tax under section 263 of the Income-tax Act. As noted above, the submission of learned counsel for the Revenue was that while passing the assessment order, the Assessing Officer did not consider this aspect specifically whether the expenditure in question was revenue or capital expenditure. This argument predicates on the assessment order, which apparently does not give any reasons while allowing the entire expenditure as revenue expenditure. However, that by itself would not be indicative of the fact that the Assessing Officer had not applied his mind on the issue. There are judgments galore laying down the principle that the Assessing Officer in the assessment order is not required to give detailed reason in respect of each and every item of deduction, etc. Therefore, one has to see from the record as to whether there was application of mind before allowing the expenditure in question as revenue expenditure. Learned counsel for the assessee is right in his submission that one has to keep in mind the distinction between "lack of inquiry" and "inadequate inquiry". If there was any inquiry, even inadequate that would not by itself give occasion to the Commissioner to pass orders under section 263 of the Act, merely because he has a different opinion in the matter. It is only in cases of "lack of inquiry" that such a course of action would be open. In Gabriel India Ltd. [1993] 203 ITR 108 (Bom), law on this aspect was discussed in the following manner (page 113):
" . . . From a rending of sub-section (1) of section 263, it is clear that the power of suo motu revision can be exercised by the Commissioner only if, on examination of the records of any proceedings under this Act, he considers that any order passed therein by the Income-tax Officer is 'erroneous in so far as it is prejudicial to the interests of the Revenue'. It is not an arbitrary or unchartered power, it can be exercised only on fulfilment of the requirements laid down in sub-section (1). The consideration of the Commissioner as to whether an order is erroneous in so far as it is prejudicial to the interests of the Revenue, must be based on materials on the record of the proceedings called for by him. If there are no materials on record on the basis of which it can be said that the Commissioner acting in a reasonable manner could have come to such a conclusion, the very initiation of proceedings by him will be illegal and without jurisdiction. The Commissioner cannot initiate proceedings with a view to starting fishing and roving enquiries in matters or orders which are already concluded. Such action will be against the well- accepted policy of law that there must be a point of finality in all legal proceedings, that stale issues should not be reactivated beyond a particular stage and that lapse of time must induce repose in and set at rest judicial and quasi-judicial controversies as it must in other spheres of human activity. (See Parashuram Pottery Works Co. Ltd. v. ITO [1977] 106 ITR 1 (SC) at page 10) . . . From the aforesaid definitions it is clear that an order cannot be termed as erroneous unless it is not in accordance with law. If an Income- tax Officer acting in accordance with law makes a certain assessment, the same cannot be branded as erroneous by the Commissioner simply because, according to him, the order should have been written more elaborately. This section does not visualise a case of substitution of the judgment of the Commissioner for that of the Income-tax Officer, who passed the order unless the decision is held to be erroneous. Cases may be visualised where the Income-tax Officer while making an assessment examines the accounts, makes enquiries, applies his mind to the facts and circumstances of the case and determines the income either by accepting the accounts or by making some estimate himself. The Commissioner, on perusal of the records, may be of the opinion that the estimate made by the officer concerned was on the lower side and left to the Commissioner he would have estimated the income at a figure higher than the one determined by the Income-tax Officer. That would not vest the Commissioner with power to re-examine the accounts and determine the income himself at a higher figure. It is because the Income-tax Officer has exercised the quasi-judicial power vested in him in accordance with law and arrived at a conclusion and such a conclusion cannot be formed to be erroneous simply because the Commissioner does not feel satisfied with the conclusion. . . . There must be some prima facie material on record to show that tax which was lawfully exigible has not been imposed or that by the application of the relevant statute on an incorrect or incomplete interpretation a lesser tax than what was just has been imposed. . . . We may now examine the facts of the present case in the light of the powers of the Commissioner set out above. The Income-tax Officer in this case had made enquiries in regard to the nature of the expenditure incurred by the assessee. The assessee had given detailed explanation in that regard by a letter in writing. All these are part of the record of the case. Evidently, the claim was allowed by the Income-tax Officer on being satisfied with the explanation of the assessee. Such decision of the Income-tax Officer cannot be held to be 'erroneous' simply because in his order he did not make an elaborate discussion in that regard."
Thus, in cases of wrong opinion or finding on merits, the CIT has to come to the conclusion and himself decide that the order is erroneous, by conducting necessary enquiry, if required and necessary, before the order under Section 263 is passed. In such cases, the order of the Assessing Officer will be erroneous because the order passed is not sustainable in law and the said finding must be recorded. CIT cannot remand the matter to the Assessing Officer to decide whether the findings recorded are erroneous. In cases where there is inadequate enquiry but not lack of enquiry, again the CIT must give and record a finding that the order/inquiry made is erroneous. This can happen if an enquiry and verification is conducted by the CIT and he is able to establish and show the error or mistake made by the Assessing Officer, making the order unsustainable in Law. In some cases possibly though rarely, the CIT can also show and establish that the facts on record or inferences drawn from facts on record per se justified and mandated further enquiry or investigation but the Assessing Officer had erroneously not undertaken the same. However, the said finding must be clear, unambiguous and not debatable. The matter cannot be remitted for a fresh decision to the Assessing Officer to conduct further enquiries without a finding that the order is erroneous. Finding that the order is erroneous is a condition or requirement which must be satisfied for exercise of jurisdiction under Section 263 of the Act. In such matters, to remand the matter/issue to the Assessing Officer would imply and mean the CIT has not examined and decided whether or not the order is erroneous but has directed the Assessing Officer to decide the aspect/question.
This distinction must be kept in mind by the CIT while exercising jurisdiction under Section 263 of the Act and in the absence of the finding that the order is erroneous and prejudicial to the interest of Revenue, exercise of jurisdiction under the said section is not sustainable. In most cases of alleged "inadequate investigation", it will be difficult to hold that the order of the Assessing Officer, who had conducted enquiries and had acted as an investigator, is erroneous, without CIT conducting verification/inquiry. The order of the Assessing Officer may be or may not be wrong. CIT cannot direct reconsideration on this ground but only when the order is erroneous. An order of remit cannot be passed by the CIT to ask the Assessing Officer to decide whether the order was erroneous. This is not permissible. An order is not erroneous, unless the CIT hold and records reasons why it is erroneous. An order will not become erroneous because on remit, the Assessing Officer may decide that the order is erroneous. Therefore CIT must after recording reasons hold that the order is erroneous. The jurisdictional precondition stipulated is that the CIT must come to the conclusion that the order is erroneous and is unsustainable in law. We may notice that the material which the CIT can rely includes not only the record as it stands at the time when the order in question was passed by the Assessing Officer but also the record as it stands at the time of examination by the CIT [see CIT v. Shree Manjunathesware Packing & Products Camphor Works [1998] 231 ITR 53 / 98 Taxman 1 (SC)]. Nothing bars/prohibits the CIT from collecting and relying upon new/additional material/evidence to show and state that the order of the Assessing Officer is erroneous.
It is in this context that the Supreme Court in Malabar Industrial Co. Ltd. v. Commissioner of Income Tax, [2000] 243 ITR 83 / 109 Taxman 66 (SC), had observed that the phrase 'prejudicial to the interest of Revenue' has to be read in conjunction with an erroneous order passed by the Assessing Officer. Every loss of Revenue as a consequence of an order of the Assessing Officer cannot be treated as prejudicial to the interest of Revenue. Thus, when the Assessing Officer had adopted one of the courses permissible and available to him, and this has resulted in loss to Revenue; or two views were possible and the Assessing Officer has taken one view with which the CIT may not agree; the said orders cannot be treated as an erroneous order prejudicial to the interest of Revenue unless the view taken by the Assessing Officer is unsustainable in law. In such matters, the CIT must give a finding that the view taken by the Assessing Officer is unsustainable in law and, therefore, the order is erroneous. He must also show that prejudice is caused to the interest of the Revenue.”
Therefore, in the light of above discussion, the Learned Pr.CIT cannot exercise the power of revision with a view to remand the matter to the Assessing Officer for the purpose of making roving / fishing enquiries in respect of concluded matter.
The Learned Pr.CIT had not made reference to any material on record suggesting that the claim for allowance of expenditure while computing the capital gains on sale of immovable property Porur Land and the allowability of short-term capital loss and on Transfer of CCDs are not clearly allowable as deduction and unsustainable under law. The submissions made by the appellant-company on the merits of the claims remain uncontroverted by the Learned Principal Commissioner of Income Tax. Nor was it case of the Learned Pr.CIT that the claims which are subject matter of revision are patently illegal an inadmissible. Therefore, it cannot be said that the Assessment Order is erroneous and prejudicial to the interests of the Revenue.
There is yet another reason as to why we are unable to sustain the order of revision. Admittedly, the Learned Pr.CIT sought to revise an assessment order passed u/s.147 read with section 143(3) of the Income Tax Act, 1961. It is an undisputed fact that the re-assessment proceedings were initiated pursuant to the action of search and seizure operations conducted in the business premises of the appellant. On the careful perusal of impugned order before us, it is crystal clear that there was no reference made by the Learned Pr.CIT to any incriminating material found having nexus with the issues sought to be revised by the Learned Pr.CIT. When the Assessing Officer himself has no jurisdiction to make such addition, the question of revision of such assessment order does not arise as the assessment order is not “erroneous’. Reference in this connection can be made to the decision of Hon’ble High Court Delhi in the case of CIT Vs. Software Consultants 341 ITR 240 wherein it is held as under : “14. For exercise of power under Section 263 of the Act, it is mandatory that the order passed by the Assessing Officer should be erroneous and prejudicial to the interest of the Revenue. In the present case, the Assessing Officer did not make any addition for the reasons recorded at the time of issue of notice under Section 148 of the Act. This position is not disputed and disturbed by the Commissioner of Income Tax in his order under Section 263 of the Act. Sequitur is that the Assessing Officer could not have made an addition on account of share application money in the assessment proceedings under Section 147/148. Accordingly, the assessment order is not erroneous. Thus, the Commissioner of Income Tax could not have exercised jurisdiction under Section 263 of the Act.”
In the light of above discussions, we are of the considered opinion that the assessment order is neither erroneous nor prejudicial to the interests of the Revenue. The Learned Pr.CIT ought not have exercised the power of the revision vested with him under the provisions of section 263 of the Income Tax Act, 1961. Therefore, the order of the Learned Principal Commissioner of Income Tax(Central), Chennai-1 dated 30.03.2026 passed u/s.263 of the Income tax Act, 1961 is hereby quashed and set-aside.
In the result, appeal filed by the assessee stands allowed. Order pronounced in the open Court on 25th August, 2026.
Sd/- Sd/- (GEORGE GEORGE K) (INTURI RAMA RAO) VICE PRESIDENT ACCOUNTANT MEMBER Chennai; िदनांक / Dated : 25th Aug, 2026 SGR, Sr.PS आदेश क� �ितिलिप अ�ेिषत / Copy of the Order forwarded to : अपीलाथ� / The Appellant. 1. ��यथ� / The Respondent. 2. 3. The CIT Chennai/Madurai/Coimbatore/Salem. 4. िवभागीय �ितिनिध, आयकर अपीलीय अिधकरण, “सी” ब�च, चे�नई / DR, ITAT Chennai. 5. गाड� फ़ाइल / Guard File. GANGADHARA RAO Digitally signed by GANGADHARA RAO SALEELA SALEELA Date: 2026.09.01 16:30:41 +05'30'
More judgments on Section 263
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- Neo Structo Construction P. Ltd., Ahmedabad vs The Pr. CIT- 3, AhmedabadITA 1216/AHD/2026[2015-2016]Status: Disposed16 Oct 2026AY 2015-2016
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- J.D. Marketing, Kolkata vs ITO, Ward 37(1), KolkataITA 1493/KOL/2026[2015-2016]Status: Disposed15 Oct 2026AY 2015-2016
- J.D. Marketing, Kolkata vs ITO, Ward 37(1), KolkataITA 1492/KOL/2026[2013-2014]Status: Disposed15 Oct 2026AY 2013-2014
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