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Facts
The assessee challenged an order passed by the Principal Commissioner of Income Tax (PCIT) under Section 263 of the Income Tax Act. The PCIT had invoked Section 263 on the grounds that the assessment order was erroneous and prejudicial to the interest of the revenue, as the assessee had allegedly furnished incomplete details regarding property sale, set off of long-term capital losses, and deduction claims.
Held
The Tribunal held that the PCIT's order under Section 263 was not justified. The Assessing Officer (AO) had made sufficient inquiries and adopted a plausible view. The Tribunal emphasized that Section 263 cannot be invoked to substitute the AO's judgment with the Commissioner's unless the order is demonstrably erroneous and prejudicial to the revenue. In this case, the AO's assessment was based on a reasonable view of the facts and evidence.
Key Issues
Whether the PCIT rightly invoked Section 263 of the Income Tax Act to revise an assessment order passed by the AO, considering the extent of inquiry conducted by the AO and the availability of plausible views.
Sections Cited
263, 143(3), 144B, 142(1), 57, 74, 41(1), 50C
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Income Tax Appellate Tribunal, “C” BENCH MUMBAI
Before: HON’BLE SHRI SANDEEP GOSAIN & SHRI PRABHASH SHANKAR
Date of Hearing 09.07.2025 Date of Pronouncement 04.08.2025 आदेश / ORDER
PER SANDEEP GOSAIN, JM:
1. The present appeal has been filed by the assessee challenging the impugned order dt. 27.03.2025 passed u/s 263 of the Income Tax Act, 1961 (‘the Act’), by the Principle Commissioner of Income Tax (PCIT), Mumbai - 42 for the assessment year 2020-21.
All the grounds raised by the assessee are interrelated and interconnected and relates to challenging the order of Ld. PCIT in invoking the Sec. 263 of the Act disregarding the exhaustive details filed by the assessee before the AO and also before Ld. PCIT. Therefore, we have decided to adjudicate these grounds through present consolidated order.
Ld. AR while relying upon the submissions filed before Ld. PCIT has challenged the order of Ld. PCIT in invoking the provisions of Sec. 263 of the Act. It was submitted that during the course of assessment all the points now raised by Ld. PCIT were inquired in detail and after going through all the details exhaustively filed by the assessee, the AO had passed order of assessment. Therefore the said order cannot be revised as the same is not ‘erroneous or prejudicial to the interest of the revenue’.
4. Whereas on the contrary, Ld. DR relied upon the orders passed by Ld. PCIT.
We have heard the counsels for both the parties, perused the material placed on record in the shape of written synopsis, judgments cited before us and the orders passed by the revenue authorities. From the records we noticed that the provisions of Sec. 263 of the Act was invoked by Ld. PCIT on the ground that the assessee had furnished only primary details relating to the transaction of the property sold, set off of LTCG and claim of deduction u/s 57 of the Act during the course of assessment proceedings. It was further noticed by Ld. PCIT that sale consideration of said property was offered short by Rs. 1,04,59,635/- and claim of set off of long term capital losses to the tune of Rs. 11,88,835/- u/s 74 of the Act remained unverified. It was further noticed that Ld. PCIT that the claim of deduction u/s 57 of the Act was also remained unverified therefore he reached to the conclusion that the assessment order passed by AO is ‘erroneous and prejudicial to the interest of the revenue’.
Whereas after having gone through the detailed submissions and documents filed by the assessee before the AO during the course of assessment, we noticed that during the course of assessment the case of the assessee was selected for scrutiny for verifying (i) Large deduction u/s 57 of the Act and (ii) Low capital gains with respect to sale consideration. Thus during the course of assessment the AO issued notice u/s 142(1) of the Act dated 14.12.2021 which is at paper book page no. 11 to 12, thereby asking for specific details regarding details of deduction u/s 57 and computation of capital gains. The notice issued by the AO thereby seeking information from the assessee is reproduced herein below:
1. Furnish computation of income for the F.Y 2019-20 relevant to the A.Y 2020-21 2. Provide details of Income(s) from other sources alongwith supporting documents. 3. Provide details of deduction claimed u/s 57 along with supporting documents.
4 Provide comparison of Income from other sources and deductions claimed u/s 57 during the F.Y 2019-20 relevant to the A.Y 2020-21 and last two years.
5. Details of asset transferred during the F.Y 2019-20 relevant to the A.Y 2020-21 6. Documentary evidence in respect of purchase cost of Capital asset.
7. Documentary evidence of cost of improvement, if any.
Documentary evidence of sale consideration received from sale of Capital asset.
9. Fair market value of capital asset for the F.Y 2019-20 relevant to the A.Y 2020-21.
The value calculated by Stamp Valuation Authority for the purpose of paying the stamp duty.
11. Calculation of capital Gain/loss for the F.Y 2019-20 relevant to the A.Y 2020-21.
12. Details of all the bank accounts alongwith the bank statement for the F.Y 2019-20 relevant to the Α.Υ 2020-21.
The index details filed by the assessee before the AO is reproduced herein below:
Even all these facts were filed before Ld. PCIT vide reply dated 21.03.2025 the same is reproduced herein below:
The assessee was served with a notice under Section 143(2) of the Income-tax Act, 1961 dated 29th June 2021, wherein the case was selected for limited scrutiny for the assessment year under reference. In response, the assessee duly submitted all requisite details and documents as sought by the Assessing Officer on 25th December 2021. Subsequently, the assessment was completed under Section 143(3) read with Section 144B of the Act on 21st September 2022, wherein the returned income of ₹15,68,590/- was accepted without any variation.
The impugned notice u/s 263 mentions that, "I have examined the assessment records in your case for A.Y. 2020-21 wherein the assessment was completed ws 143(3) r.w.s 144B of the Income Tax Act (hereinafter referred to as 'the
Act') on 21.09.2022 by accepting the Returned income i.e Rs. 15,68,590/-.
3. On perusal of the assessment records for the assessment year under consideration, it is seen that the case was selected for scrutiny under CASS on the following reasons: (i) Large deduction claimed u/s 57 (ii) Low capital gains with respect to sale consideration.
3.1 On perusal of the records, it is seen that you have furnished only primary details relating to the transaction of the sold property, set off of LTCG and claim of deduction u/s 57 of the Act during the course of assessment proceedings vide letter dated 24.12.2021 but not furnished complete details/explanation regarding non consideration of fair market value for computation of capital gain, claim of deduction w/s 57 with regards to Interest expenses and admissibility of set off of losses.
3.2 In view of the above facts and circumstances of the case, it is observed that sale consideration of the sold property was offered short by Rs. 1.04.59,635/- and claim of set off long- term capital losses to the tune of Rs. 11,88,835/- u/s. 74 remained unverified. Also, claim of deduction u/s. 57 of the Act remained unverified. This has resulted under assessment of your income for the AY concerned.
Since, the Assessing Officer passed the Assessment Order for A.Y. 2020-21 without applying his mind and without considering the above facts and without making the requisite verification. This resulted into underassessment of your income. The assessment order therefore, suffers from this infirmity and the same is erroneous in so far as it is prejudicial to the interest of the revenue.
5. Based on above facts, in the opinion of undersigned, the assessment order dated 21.09.2022 passed by the Assessing Officer. NFAC u/s 143(3) r.w.s 144B of the Income Tax Act for A.Y.2020-21 is erroneous in so far as it is prejudicial to the interest of revenue within the meaning of Explanation 2 to sub- section 1 of section 263 of the Act. You are. therefore, requested to show cause as to why the assessment w/s 143(3) r.w.s 144B of the Income Tax Act for A.Y.2020-21 should not be revised or set aside u/s. 263 of the Income-tax Act, 1961." Facts:- a) It is already noticed that the FAO had mentioned that, "In response to the notice assessee submitted a written submission along with supporting documents and details. The assessee uploaded various details, explanations and evidence in response to queries raised during assessment proceedings. The documents filled by the assessee were perused and matched with the return of income for the A.Y 2020-21. The assessee was a partner in a partnership firm and had income from house property, capital gains and other sources. b) In response to online notices and questionnaire, the assessee furnished the requisite documents on e-proceedings portal on 25/12/2021. In support of the deduction claimed, the assessee furnished the copy of details of interest paid during the F.Y.22019-20 along with copy of bank statement. The assessee furnished the details of assets transferred during the F.Y 2019- 20, copy of purchase deed along with sale deed of premise at Mazda Mansion CHS Ltd, copy of valuation certificate by stamp valuation Authority for the purpose of paying stamp duty, computation of income from capital gains, details of short-term capital gains, details of capital gains on sale of unquoted shares. In the course of assessment proceedings, the submissions with respect to reasons as per CASS was perused. Considering all the aspects of the case & based on the submissions and evidence uploaded, explanation and reasoning offered by the assessee the returned income of the assessee for the A.Y 2020-21 was accepted"
c) All details were submitted before the FAO as per index attached here with. Hence notice u/s 263 is not tenable in law. In this regard it is submitted as follows. Notice u/s 263 is not tenable: (i) Just because the FAO passed an order without making any addition and without mentioning the enquires conducted elaborately in the order, such order cannot be erroneous and prejudicial to the interest of revenue. It is not a case where no enquiry or verification was carried out by the FAO rather all the necessary enquiries were made and based on which, best possible view was taken by the FAO. (ii) Under Faceless Assessment, approval of Range head is obtained. Therefore, there is a double check on the decision, (iii) It is a settled position of law that powers u/s 263 of the Act can be exercised by the Commissioner on satisfaction of twin conditions, i.e., the assessment order should be erroneous and prejudicial to the interest of the Revenue. By 'erroneous' is meant contrary to law. Thus, this power cannot be exercised unless the Commissioner is able to establish that the order of the Assessing Officer is erroneous and prejudicial to the interest of the Revenue. Thus, where there are two possible views and the Assessing Officer has taken one of the possible views, no action to exercise powers of revision can arise, nor can revisional power be exercised for directing a fuller enquiry to find out if the view taken is erroneous. This power of revision can be exercised only where no enquiry, as required under the law, is done. It is not open to enquire in case of inadequate inquiry. This view is fortified by the decision of Hon'ble High Court of Bombay in the case of CIT vs. Nirav Modi, [2016] 71 Taxmann.com 272 (Bombay). iv) Reliance is placed on the following case laws to support our contention: - The Hon'ble supreme Court in the case of Pr. CIT vs Shreeji Prints (P.) Ltd. reported in [2021] 130 taxmann.com 294(SC) has held as under:-
"Section 69, read with section 263, of the Income-tax Act, 1961 Unexplained investments (Unsecured loans) Assessment year 2013-14 Assessee-company had received unsecured loans from two different companies Commissioner noting that said loans were shown as investment in assessee's name in balance sheet of respective companies exercised revisionary powers and passed an order without giving an opportunity to assessee of being heard, invoking Explanation 2 to section 263 - High court by impugned order held that since Assessing Officer has made inquires in details and accepted genuineness of loans receive by assessee, such view of Assessing Officer was a plausible view and same cannot to be considered erroneous or prejudicial to interest of revenue Whether SLP against said impugned order was to be dismissed - Held, Yes" In the given facts, the assertion by the Revenue that inquiry and verification was not made is ex-facie incorrect. This being the position, this is not a case of failure to investigate, but as no addition was made, the Revenue can argue that it is a case of wrong conclusion and decide for re-assessment proceedings. Therefore, to exercise jurisdiction under Section 263 of the 1961 Act, the Commissioner of Income Tax should have examined the merits and only on reaching a finding that the re-assessment order was erroneous and prejudicial to the interest of the Revenue made an addition. This is not a case of 'no inquiry and verification'; rather, it is a case of the Revenue drawing an incorrect conclusion. The difference between the two situations is clear and has different consequences. This being the position, the High Court was right in dismissing the appeal preferred by the Revenue. Similar ruling was given by the hon'ble Delhi High court in the case of PCIT Vs. Clix Finance India Ltd, Considering the aforesaid judicial pronouncements, it can be safely concluded that inadequacy of enquiry by the AO with respect to certain claims would not in itself be a reason to invoke the powers enshrined in Section 263 of the Act. The Revenue in the instant case has not been able to make out a sufficient case that the CIT has exercised the power in accordance with law. In our considered opinion, the facts of the case do not indicate that the twin conditions contained in Section 263 of the Act are fulfilled in its letter and spirit. No revisional order under section 263 of the Act can be passed to direct the Id. AO to make fresh assessrnent with respect to the issue that the Id. AO failed to verify. (v) Order cannot be said to be erroneous, if AO had adopted one of the possible views Malabar Industrial Co. Ltd vs. CIT (109 Taxman 66(SC) PCIT vs. Yes Bank Ltd (ITA No.599 of 20 15 (Bom-HC) CIT vs. Greenworld Corporation (181 Taxman 111) (SC). CIT vs. Max India Ltd 166 Taxman 188(SC) Order cannot be revised u/s.263, if AO had made reasonable enquiries CIT vs. Vikas Polymers (194 Taxman 57(Del-HC) CIT vs. Development Credit Bank Ltd 196 Taxman 329 (Bom-HC) Moil Ltd vs. CIT 8 1 taxmann.com 420 (Bom-HC)" (vi) Please note further that necessary details were called for and the same were furnished to the Assessing Officer and the assessment was accordingly completed by accepting the same. Even mere no discussion in the Assessment Order does not make the order erroneous and prejudicial to the interest of the revenue u/s 263. (vii) Please note further that necessary details were called for and the same were furnished to the Assessing Officer and the assessment was accordingly completed by accepting the same. Even mere no discussion in the Assessment Order does not make the order erroneous and prejudicial to the interest of the revenue u/s 263. (viii) Hence, Section 263 cannot be invoked to correct each and every type of alleged error, if any, committed by the A.O. There is no incorrect application of law by the A.O., nor has he made any non-application of mind. Hence the requirement of the order being erroneous is not fulfilled in the case of the assessee. Every loss of revenue as a consequence of an order of the A.O. cannot be termed as prejudicial to the interest of the revenue. When the A.O. accepted the explanation of the assessee, it cannot be treated as an order prejudicial to the interest of the revenue just because the Commissioner of Income Tax does not agree with the same. Moreover, under the recent procedures of assessment, the A.O. also consults their respective Addl.
CIT/JCIT prior to finalizing the assessment. Thus, the Assessment Order is passed under supervision of another officer after due verification of all the relevant materials submitted along with the return & also during the assessment proceedings. Hence, Section 263 cannot be invoked by ignoring the details examined by the Assessing Officer. (ix) The Assessment order would be erroneous if the A.O. had not considered all the materials or had not done a proper examination. Therefore, order u/s 263 must be based on cogent material and not on a certain hypothesis. (x) The expression "erroneous" has been defined in Black's Law Dictionary. According to the definition "erroneous" means involving error, deviating from the law. It is therefore clear that an order cannot be termed as erroneous unless it is not in accordance with law. The Section 263 does not visualize a case of substitution of the judgment of the Commissioner of Income Tax for that of the Assessing Officer unless proved to be erroneous. The error envisaged by Section 263 is not one, which depends on possibility or guesswork, but it should actually an error. The scope of interference u/s 263 is not to set aside merely unfavourable orders and bring to tax more money to treasury. The reversionary power u/s 263 cannot in any manner be equated to or regarded as approaching in any way in Appellate jurisdiction as was held in the case of V K. Rice Co. [163 ITR 129 (Mad)]. (xi) In the case of Gaberial India Ltd. [203 ITR 128 (Bom)] it was held that, " In the garb of exercising power u/s 263, the Commissioner of Income Tax cannot initiate proceedings with a view to starting fishing and rowing enquiries in matters which are already concluded. Such actions will be against the well accepted policy of law that there must be a point of finality in all legal proceedings and 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 activities as it must in other spheres of human activity." (xii) Similarly, in the case of Sakthi Charities [244 ITR 0226 (Mad)] it was held that, "The revisional powers cannot be exercised to direct the A.O. to hold another round of investigation." (xiii) Therefore, the basis condition for invoking revisionary power u/s 263 are not satisfied. (xiv) In this regard, reliance is placed on the following case laws:
In view of the above your Assessee prays that on the facts and on the circumstances of the case, the impugned notice u/s 263 is bad in law. The assessee have furnished all the explanations and information required to rebut the notice u/s 263. I hope the same shall be found self-explanatory.
In case your Honor requires any further information/clarification in this regard, the Assessee shall be obliged to furnish the same to the best of your satisfaction.
It is therefore prayed before your honour to kindly acknowledge receipt and please drop the proceedings- initiated u/s 263 and oblige.10 8. From the above details asked by the AO, we noticed that specific details regarding details of deduction u/s 57 of the Act and computation of capital gain were asked and in reply thereof the assessee had furnished all the required details of income from other sources including computation of income for the year under consideration, details of incomes from other sources along with bank statements, details of deduction claimed u/s 57 of the Act along with certain documents, details of interest income from bank and on loans to three companies along with bank statement comparison of income from other sources and deduction claimed u/s 57 of the Act during the year under consideration and the last two years, details of deduction claimed month wise, bank statement showing interest paid to sanjeev, details of asset transferred during the year under consideration and copy of purchase deed of premise at Mazda mansion Chs Ltd. These all the details have also been filed before us, which were submitted by the assessee during the course of assessment and the same are annexed 1 to 6. From the records we noticed that assessee had filed all the details on 24.12.2021 which are also placed before us in the shape of paper book which is at page No. 13 to 11 and page no. 101 to 283 which comprises of computation of income as regards IFOS and deduction u/s 57, details of IFOS i.e interest income from banks and on loans to three companies along with bank statement which are at paper book page No. 20 to 47, the details of deduction claimed month wise which are at paper book page No. 49, the bank statement also annexed showing the entire interest was paid to Bandiya Sanjee Dadlani which are at paper book page No. 56 to 69, comparison of IFOS and deduction claimed u/s 57 with earlier two years which is at paper book page 70 and in this way all the details bank statements were filed before Ld.AO with regard to computation of income under income from other sources.
Now as regard as the capital gains are concern, the assessee had filed details of STCG asset transferred i.e Aditya Birla Mutual Fund which is at paper book page No. 71, LGCG on sale of residential premises at Mazda Apartment of Rs. 23,65,291/-, capital gain on sale of unquoted equity shares which is at paper book page No. 72. Apart from the above, the purchase agreement of flat at Mazda Apartment dated 28.08.1981 which is at paper book page Nos. 73 to 100. Details of cost of improvement being repairs and renovation of Rs. 6,12,130/- which is at paper book page No. 102, Documentary evidence being society bill which are at paper book page No. 103 to 119 along with bank statement which are at paper book page 120 to 150. As regards ale deed of flat at Mazda Apartment dt. 30.01.2020 for a consideration of Rs. 7 Cr, however the stamp value of the same is Rs. 7.98 Cr which is at paper book page No. 151 to 220. The valuation report of Ambika Associates, the Govt. registered valuers dated 05.03.2020 assessing the fair market value of the property has also been placed on record and submitted during the course of assessment. The said report was prepared after physical verification and comparable sale instances which is at paper book page No. 221 to 233.
10. Another valuation report of Kishore Karamsey & Co Govt approved valuer dated 04.01.2020 for estimating the fair market value of the property as on 04.01.2020 and in this way the fair market value was assessed at Rs. 6,63,37,500/-. We also noticed that the valuer has taken Rs. 72,500 per sq feet however as per stamp valuation rate per sq feet is Rs. 68,338/-, thus as per agreement, flat is sold at Rs. 76,502 sq feet and the main reason for difference in stamp value and agreement value is that as per stamp act the fair market value is calculated on built up area and not carpet area. Now, whether the matter is required to be sent to DVO u/s 50C is the discretion of AO as Section 50C states “may”. As the assessee had supplied valuation report and rate per square feet received by assessee is higher than stamp value, AO rightly accepted the agreement value as fair market value. All the above documents and the value taken by the AO after evaluation and verifying all the documents goes to show that he had found an opinion which is sustained in law, capital gains duly submitted by the assessee.
11. We further noticed that AO had raised specific queries and assessee had filed all the details with regard to income from other sources as well as capital gains were specifically enquired into and therefore invocation of revisionary jurisdiction u/s 263 for the same issue is bad in law.
12. In this regard we draw strength from the decision of CIT Vs. Development Credit Bnk ltd (2010) 323 ITR 206 (Bom HC), it was held that “since the enquiry was specifically held with reference to the issue of capital gain by the AO in original assessment therefore invoking revisionary jurisdiction u/s 263 on the issue of capital gains was not justified”.
13. Since in our view the AO has verified the issue of ‘income from other sources and capital gains’ in the course of original assessment proceedings and adopted one possible view, therefore the exercise of jurisdiction u/s 263 of the Act by PCIT at this stage is not sustainable in law, in this regard reliance is being placed on the decision of Malbar Ind. Vs. Ltd. Vs. CIT (2000) 243 ITR 83 (SC), it has been held that “when the AO has taken one view by appreciating the facts and record just because the CIT has different view the order cannot be said to be erroneous”
14. And in the case of CIT v. Max India Ltd. (2007) 295 ITR 282 (SC) it is held that the phrase "prejudicial to the interests of the revenue" under section 263 has to be read in conjunction with the expression "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 interests of the Revenue. For example, when the Assessing officer adopted one of two courses permissible in law and it has resulted in loss of revenue or where two views are possible and the Income tax Officer has taken one view with which the Commissioner does not agree, it cannot be treated as an erroneous order prejudicial to the interests of the Revenue, unless the view taken by the Income tax Officer is unsustainable in law”
15. And in the case of CIT v. Nirav Modi [2017] 390 ITR 292 (Bom.) (HC) It is a settled position of law that “powers under section 263 of the Act can be exercised by the Commissioner on satisfaction of twin conditions viz. the assessment order should be erroneous and prejudicial to the revenue. By erroneous is meant contrary to law. Thus, this power cannot be exercised unless the Commissioner is able to establish that the order of the Assessing Officer is erroneous and prejudicial to the revenue. Thus, where there are two possible views and the Assessing Officer has taken one of the possible views, no occasion to exercise powers of revision can arise. Nor can revisional power be exercised for directing a fuller inquiry to find out if the view taken is erroneous, when a view has already been taken after inquiry. This power of revision can be exercised only where no inquiry as required under the law is done. It is not open to enquire in cases of inadequate inquiry”.
Even otherwise, Explanation 2(a) of the Act is not attracted in the facts and circumstances of the present case as the AO has accepted the legal position with regard to the allowability of IFOS and capital gains and thus in the facts of the above case it cannot be said that AO did not carry out the verification which he should have carried out. In this preposition reliance is being placed upon the decision in the case of Sir Dorabji Tata Trust v. DCIT [2020] 122 taxmann.com 274 (Mum.)(Trib) with regard to scope of Explanation 2(a) it is held as under:
"True test for finding out whether Explanation 2(a) of section 263 has been rightly invoked or not is not simply existence of view professed by Commissioner about lack of necessary inquiries and verifications, but an objective finding that Assessing Officer has not conducted, at stage of passing order, which is subjected to revision proceedings, inquiries and verifications expected, in ordinary course of performance of duties, of a prudent, judicious and responsible public servant that Assessing Officer is expected to be."
It is settled proposition of law that that unless the view of AO is unsustainable in law, revision of order cannot be made by PCIT by exercise of revision u/s 263 of the Act in order to substitution of his view for that of the AO. Since the AO in the facts of the present case has after considering the various details and explanations submitted by the assessee with regard to IFOS and capital gains had reached to logical view regarding the same. Therefore at this stage the order of AO cannot be said to be unsustainable in law. In this regard we draw strength from the decision in the case of Grasim Industries Ltd Vs. CIT (2010) 321 ITR 92 (Bom.) HC, which is held as under:
Section 263 of the Income-tax Act, 1961 empowers the Commissioner to call for and examine the record of any proceedings under the Act and, if he considers that any order passed therein, by the Assessing Officer is erroneous insofar as it is prejudicial to the interests of the revenue, to pass an order upon hearing the assessee and after an enquiry as is necessary, enhancing or modifying the assessment or cancelling the assessment and directing a fresh assessment. The key words that are used by section 263 are that the order must be considered by the Commissioner to be "erroneous insofar as it is prejudicial to the interests of the revenue". This provision has been interpreted by the Supreme Court in several judgments to which it is now necessary to turn. In Malabar Industrial Co. Ltd. v. CIT [2000] 243 ITR 831, the Supreme Court held that the provision "cannot be invoked to correct each and every type of mistake or error committed by the Assessing Officer" and "it is only when an order is erroneous that the section will be attracted". The Supreme Court held that an incorrect assumption of fact or an incorrect application of law, will satisfy the requirement of the order being erroneous. An order passed in violation of the principles of natural justice or without application of mind, would be an order falling in that category. The expression "prejudicial to the interests of the revenue", the Supreme Court held, it is of wide import and is not confined to a loss of tax. What is prejudicial to the interest of the revenue is explained in the judgment of the Supreme Court :— ". . . The phrase 'prejudicial to the interests of the 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 interests of the revenue. For example, when an Income-tax Officer adopted one of the courses permissible in law and it has resulted in loss of revenue; or where two views are possible and the Income-tax Officer has taken one view with which the Commissioner does not agree, it cannot be treated as an erroneous order prejudicial to the interests of the revenue, unless the view taken by the Income-tax Officer is unsustainable in law. . . ." (p. 88) The principle which has been laid down in Malabar Industrial Co. Ltd.'s case (supra) has been followed and explained in a subsequent judgment of the Supreme Court in CIT v. Max India Ltd. [2007] 295 ITR 2822 while interpreting the provisions of section 80HHC(3), the Supreme Court noted that the statutory provision had been amended eleven times and different views existed on the day when the Commissioner passed his order under section 263. The Court observed that "the mechanics of the section have become so complicated over the years that two views were inherently possible". Consequently, the subsequent amendment to the statutory provision, even though it was retrospective, would not attract the provisions of section 263 particularly when the provision of law, as it stood, on the date when the Commissioner passed the order under section 263, would have to be taken into account.
In CIT v. Gabriel India Ltd. [1993] 203 ITR 1081 a Division Bench of this Court observed that section 263 does not confer an arbitrary or uncharted power on the Commissioner. In considering as to whether an order is erroneous insofar as it is prejudicial to the interests of the revenue, the Commissioner must be guided by the material on the record. The power of suo motu revision under section 263(1), is in the nature of supervisory jurisdiction. Two circumstances must exist in order to enable the Commissioner to exercise the power, namely, (i) the order must be erroneous; and (ii) by virtue of the order being erroneous, prejudice must have been caused to the interests of the revenue. Section 263 does not empower the Commissioner to substitute his judgment for that of the Assessing Officer, unless the decision is held to be erroneous. Both the conditions for the exercise of the power must be fulfilled.
The order, in other words, sought to be revised, must be erroneous and must be prejudicial to the interests of the revenue.
The question as to whether the Commissioner has acted within the fold of his jurisdiction under section 263 or outside it, in the present case, must be decided with reference to the principles which have been laid down by the Supreme Court and by this Court. Section 41(1) provides that where an allowance or deduction has been made in the assessment for any year in respect of a loss, expenditure or trading liability incurred by the assessee and subsequently during any previous year, the assessee obtained whether in cash or in any other manner, any amount in respect of such loss or expenditure or some benefit in respect of such trading liability by way of remission or cessation thereof, the amount obtains or the value of the benefit accruing shall be deemed to be profits and gains of business or profession and would accordingly be chargeable to income as the income of that previous year. The State Legislature enacted the Kerala Forest Produce (Fixation of Selling Price) Act, 1978. Section 3(1) empowers the Government to fix the selling price of forest produce for the following financial year. Section 5 stipulated that after the publication of the notification under section 3, no forest produce shall be sold by the Government at a price which is less than the notified selling price. On 9-3-1979, the Government of Kerala issued notifications in exercise of its power under the Act of 1978 for the period ending 31-3-1981 and also for the period commencing from 1-4-1981, being the previous year relevant to assessment year 1982-83. The assessee had been allowed a deduction of an amount of Rs. 1.75 crores during the assessment years 1980-81, 1981-82 and 1982-83. The notifications that were issued by the State Government were challenged by the assessee before the Kerala High Court. By its judgment dated 15-4-1981, the High Court struck down the notifications insofar as they related to eucalyptus, on the ground that in fixing the prices for eucalyptus, the State Government had not followed the procedure prescribed by the Act. The Kerala High Court held that matters which were required to be considered had not been placed before the Committee which was statutorily to be constituted under the provisions of the Act and the Committee had failed to consider relevant material before making its recommendations, in regard to the price of eucalyptus. The judgment of the Kerala High Court, therefore, set aside the notifications on the ground that the mandate of the Act in fixing the price of forest produce had not been followed and that relevant consideration had not been borne in mind by the Committee. The liability of the assessee to pay arose by virtue of the provisions of section 5 of the Act, under which, no forest produce could be sold by the Government at a price, which was less than the selling price; the selling price being defined to mean that the price of forest produce fixed by the Government under section 3. The judgment of the Kerala High Court did not prohibit the Government from issuing a fresh notification. After the decision of the Kerala High Court, the Expert Committee constituted under the provisions of section 4, convened for the purposes of deciding afresh, the selling price of eucalyptus up to 31-3-1982. The Committee held its meeting on 25-3-1982, which was six days before the end of the relevant period here, and recommended the fixation of the selling price of eucalyptus between Rs. 328 to Rs. 384 per metric ton between 1978 and 1981. The Special Secretary to the State Government in the Forest and Minor Irrigation Department recorded in a note dated 27-3-1982 that the Kerala Forest Produce (Fixation of Selling Price) Rules, 1978 had been amended on 28-5-1981. Some doubt was expressed as to whether these Rules could fasten a liability with retrospective effect in the absence of an amendment to the parent legislation. The State Government, in pursuance of the judgment of the Kerala High Court proceeded to issue fresh notifications on 31-3-1981, 29-4-1981 and 29-5-1981. By the notification dated 29-5-1981, the Government refixed the selling price in the year 1981-82 with effect from 1-6-1981. On 31-3- 1982, selling prices were notified for the period from 1-4-1982. These notifications were once again challenged by the assessee in a Writ Petition before the Kerala High Court. The Petition was allowed by the Division Bench of the Kerala High Court on 28-5- 1994 and the notifications were set aside with a declaration that the prices fixed of bamboo, reed and eucalyptus were not payable by the petitioner. The judgment of the Kerala High Court did not conclude the proceedings. Special Leave Petitions were filed before the Supreme Court in which, while granting leave, interim orders were passed by the Supreme Court, directing the assessee to pay the price of forest produce at 60 per cent of the rate fixed in the notification issued by the State Government under section 3(e) of the Act, less the price already paid. The Bank Guarantees furnished by the assessee were allowed to be encashed to the aforesaid extent. The Supreme Court expressed the hope that the parties would be able to arrive at a settlement which may be "beneficial to all concerned, having regard to the checkered history of the litigation with its attendant uncertainties, and to avoid further long drawn out litigation". Eventually, a settlement was arrived at between the Government of Kerala and the assessee on 27-10-1988. By the settlement, a series of matters set out in the schedule, came to be settled and parties agreed that no payment will be due by either party to the other in respect of any of the matters mentioned in the schedule.
The narration of facts would, thus, show that the liability of the assessee in respect of the payment due for the supply of forest produce, under the Kerala Forest Produce (Fixation of Selling Price) Act, 1978, was not concluded by the judgment of the Kerala High Court dated 15-4-1981. The notifications fixing the price of eucalyptus were set aside by the Kerala High Court, on the ground that the Committee statutorily constituted under the Act, had not applied its mind to the relevant material. The liability of the assessee to pay at the price notified, arose under the Act, for the supplies of forest produce effected by the State Government to the assessee. The liability arose as a result of the supply of forest produce, the quantification of liability was liable to be made by the instrument of the notifications issued in accordance with the provisions of the Act. The view that there was no remission or cessation of the liability during the previous year, relevant to assessment year 1982-83, was a possible view having regard to the circumstances, which transpired after the judgment of the Kerala High Court. These circumstances included the following: (i) The recommendations made by the Expert Committee on 25-3-1982 for the refixation of prices of forest produce six days before the end of the financial year; (ii) The issuance of fresh notifications by the State Government; (iii) The challenge by the assessee to the fresh notifications; (iv) The judgment of the Kerala High Court dated 28-5-1984, setting aside the second set of notifications; (v) The filing of Special Leave Petitions before the Supreme Court challenging the judgment of the Kerala High Court in the second round; and (vi) The interim order passed by the Supreme Court requiring the assessee to pay at the rate of 60 per cent of the prices/notifications and allowing encashment of Bank Guarantees for that purpose; and (vii) The eventual resolution of the dispute by a settlement of 27-10-1988.
In these circumstances, when the Assessing Officer took a possible view, while passing an order of assessment, the Commissioner exceeded his jurisdiction in seeking recourse to his power under section 263. At the least, it must be held that the question as to whether the liability of the assessee had ceased in the previous year relevant to the assessment year 1982-83, was an issue on which a possible view was that there was no final or irrevocable remission or cessation of liability, within the meaning of section 41(1) of the Act, during assessment year 1982-83. This view could not, by any stretch of logic, be regarded as being unsustainable in law. The condition precedent to the exercise of jurisdiction under section 263, is that the order sought to be revised must be erroneous insofar as it is prejudicial to the interests of the revenue. Following the judgments of the Supreme Court in Malabar Industrial Co. Ltd.'s case (supra) and Max India Ltd.'s case (supra), it is now a settled principle that where the Assessing Officer has adopted one of the courses permissible in law or where two views are possible and the Assessing Officer has taken one view with which the Commissioner does not agree, it cannot be treated as an erroneous order prejudicial to the interests of the revenue unless the view taken by the Assessing Officer is unsustainable in law. In the present case, two views were inherently possible and the assessee, therefore, cannot be subjected to the exercise of the jurisdiction under section 263. The Tribunal, with respect, has adopted a rather simplistic view of the matter, in coming to the conclusion that the liability had ceased to exist, consequent upon the judgment of the Kerala High Court, dated 15-4-1981. This clearly overlooks the checkered history of the litigation. The fact that the litigation had a checkered history was noted in the interim order of the Supreme Court, which also referred to the "attendant uncertainties" and to the possibility of a "further long drawn out litigation".
16. For all these reasons, we are of the view that the order of the Tribunal was unsustainable. The reference would, consequently, be answered with the finding that the Tribunal was not justified in upholding the order of the Commissioner of Income-tax, passed under section 263, directing the Assessing Officer to include the sum of Rs. 1,75,32,600 in the total income of the assessee under section 41(1), in the previous year, relevant to assessment year 1982-83, on the ground that there had been complete cessation of the liability during that period. The reference is answered accordingly. In the circumstances of the case, there shall be no order as to costs.
Thus after having gone through the entire facts, circumstances, documents placed on record and replied filed by the assessee along with documents either before the AO or before PCIT and also keeping in view the judgments considered and discussed by us above, we are of the view that the Ld.AO had verified the issue of IFOS and Capital gain in the course of original and had passed assessment order and thus had taken a reasonable and possible view which cannot be held as “erroneous”. Therefore the order of Ld. PCIT was not justified in revising the said order. Consequently, impugned order passed by the Ld. PCIT is set aside and quashed. Accordingly the grounds raised by the assessee are allowed.
In the result, the appeal filed by the assessee stands allowed without any order as to cost.
Order pronounced in the open court on 04.08.2025 Sd/- Sd/- (PRABHASH SHANKAR) (SANDEEP GOSAIN) ACCOUNTANT MEMBER JUDICIAL MEMBER Mumbai, Dated 04/08/2025 KRK, PS आदेश की �ितिलिप अ�ेिषत/Copy of the Order forwarded to : अपीलाथ� / The Appellant 1. ��थ� / The Respondent. 2. संबंिधत आयकर आयु� / The CIT(A) 3. आयकर आयु�(अपील) / Concerned CIT 4. िवभागीय �ितिनिध, आयकर अपीलीय अिधकरण,मु�बई/ DR, ITAT, Mumbai 5. गाड� फाईल / Guard file. 6. आदेशानुसार/BY ORDER, स�ािपत �ित //True Copy//
उप/सहायक पंजीकार ( Asst. Registrar) आयकर अपीलीय अिधकरण, मु�बई मु�बई / ITAT, Mumbai मु�बई मु�बई