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Facts
The Pr. CIT passed a revision order under Section 263 against two assessment orders (AY 2019-20) of Union Bank of India and its predecessor, Andhra Bank, raising several disallowances and issues related to Section 115JB, bad debts, depreciation, and perpetual bonds. The assessee challenged this revision, arguing that the original assessment orders were framed after due enquiry, issues were settled by superior courts, and that Andhra Bank's issues could not be revised for Union Bank.
Held
The Tribunal set aside the PCIT's Section 263 order, finding that the original assessment orders were neither erroneous nor prejudicial as the AO had specifically enquired into the issues, which were also settled by superior courts. Furthermore, the PCIT initiated the revision based on a proposal without independent application of mind, and issues concerning Andhra Bank (prior to its merger with Union Bank of India) could not be revisited for the assessee for the relevant assessment year.
Key Issues
Whether the PCIT validly exercised jurisdiction under Section 263 when the AO had made due enquiries and issues were settled by higher courts; whether Section 263 proceedings initiated merely on a proposal without independent application of mind are valid; and whether issues related to a merged entity (Andhra Bank) can be revised in the hands of the successor (Union Bank of India) for a pre-merger period.
Sections Cited
263, 143(3), 144B, 170(2), 14A, 115JB, 115JB(2), 37, 6EA, 147, 154, 80HHC(3)
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Income Tax Appellate Tribunal, “F” BENCH, MUMBAI
Before: SHRI SAKTIJIT DEY, HON’BLE & SHRI NARENDRA KUMAR BILLAIYA, HON’BLE
O R D E R
PER NARENDRA KUMAR BILLAIYA, AM:
This appeal by the assessee is preferred against the order of the ld. Pr. CIT – 3, Mumbai [hereinafter “the ld. Pr. CIT”] dt. 30/03/2024 pertaining to AY 2019-20.
The grievance of the assessee reads as under:- “1. The Ld. PCIT erred in framing in the hands of Appellant bank, order u/s 263 dated 30.03.2024 against two separate assessment orders of AO viz order u/s 143(3) dated 29.09.2021 passed on the predecessor Andhra bank and order u/s 143(3) rws 144B dated 23.09.2021 passed on appellant bank, in their respective assessment of Income, contrary to provisions of sec 170 (2) of the Act. 2. Without prejudice to the above, the Ld. PCIT erred in revising the order dated 23.09.2021 on appellant bank, wherein the AO passed the order after considering material and evidences submitted during the course of assessment in respect of- (a) Disallowance u/s 14A (b) Disallowance of bad debts written off
(c) Disallowance of amounts paid for not following the internal guidelines of regulator. (d) Disallowance of interest on perpetual bonds (e) Taxing of the recovery in respect of bad debts written off.
Without prejudice the Id. PCIT erred in revising the order u/s 143(3) dated 29.09.2021 passed on predecessor bank wherein the AO passed the order after considering material and evidences submitted during the course of assessment in respect of-
(a) Depreciation on investments (b) Provision for wage arrears Without prejudice to the above even on merits In the order u/s 143(3) dated 23.09.2021 on appellant in respect of its separate assessable Income that-
The Ld. PCIT erred in directing the AO to add back the provisions which are reduced from the assets ignoring the binding decision of hon'ble ITAT in appellant's own case where it was held that the provisions of section 115JB are not applicable to appellant.
4.1. Without prejudice to above, the PCIT failed to note that the provisions are reduced from advances these amounts are written off as held by Hon'ble Apex court in the case of Vijaya Bank (323 ITR 166) and hence cannot be added back in computing book profits.
The Ld. PCIT erred in directing the AO to make further disallowance u/s 14A under normal computation and 115JB and to tax recovery in respect of bad debts written off which was not allowed as deduction in computing normal income ignoring the binding decision of Hon'ble ITAT in appellants own case.
The Ld. PCIT erred in directing the AO to disallow the amount of depreciation investments, broken period interest, amortization on securities provided as per RBI guidelines ignoring the binding Income Computation and Disclosure Standards (ICDS).
The Ld. PCIT erred in directing the AO to disallow the bad debts written off by reducing the advances in the Balance sheet ignoring the binding decision of Apex Court in case of Vijaya Bank (323 ITR 166).
The Ld. PCIT erred in directing the AO to disallow interest paid on perpetual bonds, amounts paid for not following the guidelines of regulators and to tax the notional interest on bad and doubtful debts under Rule 6EA contrary to judicial precedents.
3 In the order u/s 143(3) dated 29.09.2021 framed on the Andhra Bank (viz., predecessor) in respect of its separate income that-
9. The Ld. PCIT erred in directing the AO to disallow the interest paid on perpetual bonds and provisions which are reduced from the assets ignoring the binding decision of hon'ble ITAT in appellant's own case where it was held that the provisions of section 115JB are not applicable to appellant.
9.1. Without prejudice to above, the PCIT failed to note that the amount represented an actual liability and does not fall under any of the Explanation to section 115JB(2) providing for additions to book profits.
9.2 The Ld. PCIT failed to note that that the provisions are reduced from advances these amounts are written off as held by Hon'ble Apex court in the case of Vijaya Bank (323 ITR 166) and hence cannot be added back in computing book profits.
10. The Ld. PCIT erred in directing the AO to disallow the amount of depreciation on investments, provided as per RBI guidelines ignoring the binding Income Computation and Disclosure Standards (ICDS).
11. The Ld. PCIT erred in directing the AO to disallow the amount of provision for wage arrears contrary to judicial precedents.
12. The PCIT erred in directing the AO to examine the expenses u/s 37 without specifying any specific expenditure and concluding that the order of AO is erroneous or prejudicial to the interest of revenue.
Your appellant craves leave to add, to amend, and / or vary the grounds of appeal before or at the time of hearing.”
3. Representatives were heard at length. Case records carefully perused and the relevant documentary evidence brought on record duly considered in the light of Rule 18(6) of the ITAT Rules, 1963.
4. The entire quarrel revolves around the assumption of jurisdiction u/s 263 of the Act by the ld. Pr. CIT and holding that assessment order dated 23/09/2021 framed u/s 143(3) r.w.s. 144B of the Act is not only erroneous but also prejudicial to the interest of the revenue.
5. Before embarking on the facts of the case, let us understand the jurisprudence for the assumption of jurisdiction u/s 263 of the Act. The 4 AO may not raise any specific enquiries in respect of any specific issue but that issue may be decided in favour of the assessee by the ratio laid down by the Hon’ble Superior Courts and also by the Co-ordinate Benches in assessee’s own case. In such a scenario, due to non-enquiry by the AO, the assessment order may be erroneous but is it prejudicial to the interest of the revenue as the issues have already been decided by the Superior Courts and the Co-ordinate Bench? The answer would be “NO”. This means that the assessment order should not only be erroneous but also prejudicial to the interest of the revenue and the twin conditions have to be fulfilled before the assumption of jurisdiction u/s 263 of the Act.
6. In the case in hand, the issue relating to Section 115JB, disallowance u/s 14A, bad debts written off, interest paid on perpetual bonds, penalty levied by RBI, recovery in respect of bad debts written off, were specifically enquired by the AO during the course of scrutiny assessment proceedings to which specific replies were furnished by the assessee as evident from the copy of the submissions made by the AO exhibited in the paper book. This shows that specific queries were made to which specific replies were furnished by the assessee and considering the replies of the assessee, the assessment order was framed.
7. All the issues mentioned hereinabove were also subject matter of the appeals considered by this Bench in AY 2020-21 & 2038/Mum/2024; AY 2021-22 and have been decided in favour of the assessee and against the revenue. Therefore, insofar as, these issues are concerned, the assessment order is neither erroneous nor prejudicial to the interest of the revenue.
5 8. Coming to the issues relating to the broken period interest paid on purchase of securities, amortization on securities and unrealized interest on bad and doubtful debts, though no specific queries were raised by the AO but these issues have already been decided by the Hon’ble Supreme Court and Hon’ble Bombay High Court and the Tribunals (supra) in favour of the assessee and against the revenue. Therefore, on these issues also the assessment order is neither erroneous nor prejudicial to the interest of the revenue.
On perusal of the order of the ld. Pr. CIT at para 3.1. and onwards, we find that the ld. Pr. CIT has considered the issues which pertained to Andhra Bank. We are in AY 2019-20 and Andhra Bank merged with Union Bank of India by the Gazette Notification w.e.f. 01/04/2020. Therefore, till AY 2019-20, Andhra Bank was a separate entity. Therefore, any issue pertaining to Andhra Bank till AY 2019-20 cannot be considered in the hands of the assessee Union Bank of India. Therefore, the issues pertaining to Andhra Bank cannot make the impugned assessment order erroneous and prejudicial to the interest of the revenue.
The aforementioned discussion has to be considered in the light of the following judicial decisions.
The Hon’ble High Court of Guwahati in the case of Karan Jain vs. UOI & Ors [2024] 465 ITR 1 (Gauhati), had the occasion to consider an identical situation and held as under:- “30. Section 263 of the Act would not be invoked merely to correct a mistake or error committed by the Assessing Officer unless it has caused prejudice to the interests of the revenue. If an order is based on incorrect assumption of facts or on incorrect application of law or without applying the principles of natural justice and without application of mind, it would be treated as erroneous. If due to an erroneous order of 6 the Assessing Officer the Revenue is losing tax lawfully payable by a person, it would be certainly prejudicial to the interests of the Revenue. Reference is made to the decision of Delhi High Court in CIT v. Leisure Wear Exports Ltd. [2011] 11 taxmann.com 54/202 Taxman 130/341 ITR 166 (Delhi).
In the present case, the suo moto revisional proceeding was initiated on the basis of a proposal under section 263 of the Act dated 22.03.2021 submitted by the Assistant Commissioner of Income Tax which was duly forwarded by the Joint Commissioner of Income Tax. On the basis of the said proposal, the notice of hearing under section 263 of the Act dated 28.12.2018 was issued by the Revisional Authority. This will be evident from paragraph 3.0 of the order dated 28.12.2018 passed by the learned Principal Commissioner of Income Tax under section 263 of the Act, which reads as under- "3.0. In view thereof a proposal under section 263 of the Income Tax Act 1961, dated 22.03.221 was received from the ACIT, Circle 1, Guwahati duly forwarded by the JCIT Range-1, Guwahati. In ORDER TO EXAMINE THE MATTER a notice for hearing was issued vide this office DIN & notice No. ITBA/REV/F/REV1/2020-21/1031736689(1) dated24.03.2021 filing the case for hearing on 26.03.2021 at 12:00 PM. "
From the aforesaid, it is clear that suo moto revisional proceeding was initiated simply on the basis of a proposal under section 263 of the Act and there was no independent application of mind by the Principal Commissioner of Income Tax. From a plain reading of section 263 of the Act, it is clear that proceeding under section 263 of the Act can be initiated only when the Commissioner on the basis of materials available on record called for by him, comes to a conclusion that the order passed by the assessing authority is erroneous in so far as the same is prejudicial to the interest of Revenue. Thus, the order has to be firstly erroneous and by virtue of the order being erroneous prejudice has been caused to the interests of the revenue. Both the conditions has to be satisfied. The satisfaction must be on the material available on the record called for by the Commissioner to satisfy him prima facie that the aforesaid two requisites are present and that 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 records called for and examined by such authority.
In Baijnath Biswanath v. State of Assam [1998] 2 GLR 474 this Hon'ble Court held that the suo moto power of revision conferred on the Commissioner cannot be exercised mechanically or at the behest of some other authority other than on the own discretion of the assigned Officer. The Commissioner cannot exercise his discretion on the dictation of some other authority. In the said judgment it was held as under- "As indicated earlier, the suo moto power of revision conferred on the Commissioner is of wide amplitude. He can revise an assessment when the order of assessment passed is not in accordance with law in consequences of which the State is deprived of its lawful revenue. The power reposed on the Commissioner, no doubt, is a power of judicial nature and therefore such power is to be exercised lawfully and with due application of mind. The power cannot be exercised mechanically or at the behest of some other authority other than on the own discretion of the assigned officer. The 7 Commissioner, therefore, is not to exercise his discretion on the dictation of some other authority."
It was further held that the Commissioner is authorized to take any decision as he deems fit and is free to draw any interference from the facts available. The Commissioner, however, is to act on factual material and not on conjectures, assumptions and presumptions, else the decision will suffer from the vice of perversity.
In the present case the learned Principal Commissioner of Income Tax has initiated the proceedings simply on the basis of the proposal of the subordinate authority and has not applied his mind after perusal of the records called for by him and thereby the very initiation of the proceeding in the instant case is illegal, without jurisdiction and not tenable in law…….”
Similar view was taken by the Co-ordinate Bench in the case of Alfa Laval Lund AB v. CIT(IT/TP) [IT Appeal No. 1287 (Pun.) of 2017, dated 2-11-2021], (2022) 215 TTJ (Pune) 814, wherein the Co-ordinate Bench held as under:- “It can be seen from the CIT's order that: "A proposal for revision under s. 263 was received from Dy. CIT through the Jt. CIT". It is thus manifest that the edifice of the revision in the extant case has been laid on the bedrock of receipt of the proposal from the AO. Process of revision under s. 263 can be initiated only when the CIT calls for and examines the record of any proceeding under the Act and considers that any order passed by the AO is erroneous and prejudicial to the interests of the Revenue. The twin conditions of-(i) the CIT calling for and examining the record; succeeded by (ii) his considering the assessment order as erroneous etc.-are sine qua non for the exercise of power under this section. The use of the word 'and' between the expression 'call for and examine the record' and the expression 'if he considers that any order is erroneous' abundantly demonstrates that both these conditions must be cumulatively fulfilled by the CIT and in the same order, that is, the first followed by the second. In other words, the kicking in point for invoking jurisdiction under s. 263 is calling for and examining the record of any proceedings under the Act by the CIT leading him to consider the assessment order erroneous etc. A communication from the AO is not 'the record of any proceedings under this Act'. To put it simply, the consideration that the assessment order is erroneous and prejudicial to the interests of the Revenue should flow from and be the consequence of examination of the record of proceedings by the CIT(A). If such a consideration is not preceded by the examination of record of the proceedings under the Act, the condition for revision does not get magnetized. It is trite that a power which vests exclusively in one authority, cannot be invoked or cause to be invoked by another, either directly or indirectly. Sec. 263 confers power on the CIT to revise an assessment order, subject to certain conditions. In this case the revision was initiated on the basis of the 8 proposal sent by the AO to the CIT and not on the CIT suo motu calling for and examining the record of the assessment proceedings and thereafter considering the assessment order erroneous and prejudicial to the interests of the Revenue. The AO recommending a revision to the CIT has no statutory sanction and is a course of action unknown to the law. If AO, after passing an assessment order, finds something amiss in it to the detriment of the Revenue, he has ample power to either reassess the earlier assessment in terms of s. 147 or carry out rectification under s.
AO cannot usurp the power of the CIT and recommend a revision. No overlapping of powers of the authorities under the Act can be permitted. As the revision proceedings in this case have triggered with the AO sending a proposal to the CIT and then the latter passing the order under s. 263 on the basis of such a proposal, it became a case of jurisdiction deficit resulting into vitiating the impugned order. The impugned order is quashed on this legal issue itself.”
The Hon’ble Supreme Court in the case of Malabar Industrial Co. Ltd., 243 ITR 83 (SC), where the Hon’ble Supreme Court has laid down the following ratio:- “A bare reading of section 263 of the Income-tax Act, 1961, makes it clear that the prerequisite for the exercise of jurisdiction by the Commissioner suo moto under it, is that the order of the Income-tax Officer is erroneous in so far as it is prejudicial to the interests of the Revenue. The Commissioner has to be satisfied of twin conditions, namely, (i) the order of the Assessing Officer sought to be revised is erroneous; and (ii) it is prejudicial to the interests of the Revenue. If one of them is absent--if the order of the Income-tax Officer is erroneous but is not prejudicial to the Revenue or if it is not erroneous but is prejudicial to the Revenue-- recourse cannot be had to section 263(1) of the Act. The provision cannot be invoked to correct each and every type of mistake or error committed by the Assessing Officer, it is only when an order 7 is erroneous that the section will be attracted. An incorrect assumption of facts or an incorrect application of law will satisfy the requirement of the order being erroneous ".
14. Further, the Hon’ble Bombay High Court in the case of CIT vs. Gabriel India Ltd. reported in [1993] 203 ITR 108 (Bombay), while dealing with identical issue has held as under:- 13. We, therefore, hold that in order to exercise power under sub-section (1) of section 263 of the Act there must be material before the Commissioner to consider that the order passed by the Income-tax Officer was erroneous in so far 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 Income-tax Officer 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 Pvt. Ltd. v. A. Chowdhury, Addl. CIT . 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 quasi judicial 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 in so tar 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.
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. Moreover, in the instant case, the Commissioner himself, even after initiating proceedings for revision and hearing the assessee, could not say that the allowance of the claim of the assessee was erroneous and that the expenditure was not revenue expenditure but an expenditure of capital nature. He simply asked the Income-tax Officer to re-examine the matter. That, in our opinion, is not permissible. Further inquiry and/or fresh determination can be directed by the Commissioner only after coming to the conclusion that the earlier finding of the Income-tax Officer was erroneous and prejudicial to the interests of the Revenue. Without doing so, he does not get the power to set aside the assessment. In the instant case, the Commissioner did so and it is for that reason that the Tribunal did not approve his action and set aside his order. We do not find any infirmity in the above conclusion of the Tribunal.”
The Hon’ble Supreme Court in the case of CIT vs. Max India Ltd. reported in [2007] 295 ITR 282 (SC), had the occasion to consider a similar challenge to 263 proceedings and held as under:- “1. In our view at the relevant time two views were possible on the word 'profits' in the proviso to section 80HHC(3). It is true that vide 2005 amendment the law has been clarified with retrospective effect by insertion of the word 'loss' in the new proviso. We express no opinion on the scope of the said amendment of 2005. Suffice it to state that in this particular case when the order of the Commissioner was passed under section 263 of the Income-tax Act two views on the said word 'profits' existed. In our view the matter is squarely covered by the judgment of this Court in the case of Malabar Industrial Co. Ltd. v. CIT [2000] 243 ITR 83 as also by the judgment of 10 the Calcutta High Court in the case of Russell Properties (P.) Ltd. v. A. Chowdhury, Addl. CIT [1977] 109 ITR 229 at 243. 2. At this stage we may clarify that under para 10 of the judgment in the case of Malabar Industrial Co. Ltd. (supra) this Court has taken the view that the phrase "prejudicial to the interest 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 interest of the revenue. For example, when the 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 interest of the revenue, unless the view taken by the Income-tax Officer is unsustainable in law. According to the learned Additional Solicitor General on interpretation of the provision of section 80HHC(3) as it then stood the view taken by the Assessing Officer was unsustainable in law and therefore the Commissioner was right in invoking section 263 of the Income-tax Act. In this connection he has further submitted that in fact 2005 amendment which is clarificatory and retrospective in nature itself indicates that the view taken by the Assessing Officer at the relevant time was unsustainable in law. We find no merit in the said contentions. Firstly, it is not in dispute when the Order of the Commissioner was passed there were two views on the word 'profit' in that section. The problem with section 80HHC is that it has been amended eleven times. Different views existed on the day when the Commissioner passed the above order. Moreover the mechanics of the section have become so complicated over the years that two views were inherently possible. Therefore, subsequent amendment in 2005 even though retrospective will not attract the provision of section 263 particularly when as stated above we have to take into account the position of law as it stood on the date when the Commissioner passed the order dated 5-3-1997 in purported exercise of his powers under section 263 of the Income-tax Act.”
Considering the facts of the case in totality, in light of the decisions discussed hereinabove, we set aside the order of the ld. Pr. CIT dated 30/03/2024 and restore that of the AO dated 23/09/2021. 17. In the result, appeal of the assessee is allowed. Order pronounced in the Court on 20th June, 2025 at Mumbai. (SAKTIJIT DEY) ACCOUNTANT MEMBER Mumbai, Dated 20/06/2025 *SC SrPs *SC SrPs *SC SrPs *SC SrPs