SHANMUGANATHAN RAJASEKARAN,COIMBATORE vs. THE PRINCIPAL COMMISSIONER OF INCOME TAX, CORPORATE CIRCLE, COIMBATORE, COIMBATORE

5. On the facts and circumstance of the case, the Ld.PCIT initiated the proceedings in response to the proposal sent by the AO to set aside the assessment order and initiate proceedings u/s 263 of the Act, is not legally valid.

6. On the facts and circumstance of the case, the Learned PCIT has not appreciated the fact that the appellant regularly filing the Income Tax returns by claiming the expenditure from the consultancy charges for several years and accepted by the department in earlier years. Accordingly Learned PCIT is not justified in invoking the provision of Section 263 without following the rule of consistency.

7. On the facts and circumstance of the case, Learned PCIT has not done any enquiry while passing the order under Section 263 which is against the provisions of law.

1. Shanmuganathan Rajasekaran :- 3 -: 8. On the facts and circumstance of the case, the Learned PCIT failed to establish how the Assessment order Passed U/s 143(3) is erroneous and prejudicial to the Interest of the revenue.”

4. The assessee is an Orthopedic Surgeon specializing in Trauma and accident surgery, joint replacement etc. and is one of the Directors of Ganga Medical Centre and Hospital Pvt. Ltd, Coimbatore. The assessee has filed return on income on 29.12.2020 declaring total income of Rs. 50,79,56,840/-. The return was selected for scrutiny under CASS for verification of the following:

1) The income from house property; 2) Deduction from total income under Chapter-VIA.

4.1 Accordingly, the A.O issued notice u/s. 143(2) of the Act on 29.06.2021 specifying the two issues on which further clarification was required initially. The assessee uploaded the reply on 29.06.2021 uploading six PDF documents. The A.O as a follow up issued notice u/s. 142(1) of the Act on 18.11.2021 directing for further details such as business activities carried out in different segment on its bank accounts, details of computation of income and all other Annexures of audit report along with audit note Form-3CD, details of house property income and details regarding deduction claimed under chapter-VIA.

The assessee submitted the reply on 18.11.2021, and further notice u/s. 142(1) was issued on 11.12.2021, and the assessee uploaded 10.02.2022. Subsequently, after considering the reply, the A.O passed assessment order u/s. 143(3) of the Act accepting the return of income at Rs. 51,69,55,870/-. The A.O, in the assessment order at para 5 , has also observed that in response to statutory notice, the assessee has furnished the complete details regarding reason of the scrutiny through e-filing portal.

4.2 Subsequently, the A.O sent a proposal to Ld. PCIT on 20.12.2023 referring to the revenue audit objections raised vide No.OBS-848161 dated 25.09.2023 reproducing revenue audit objections on the issue of disallowances u/s. 14A of the Act and on the claim of expenditure of Rs. 46,96,10,933/- out of receipt from Ganga Medical Centre and Hospital to revise the assessment order u/s. 263 of the Act holding it erroneous and prejudicial to the interest of revenue. The Ld. PCIT on 04.01.2024 issued a show cause notice to the assessing to revise the assessment order under section 263 of the Act , for assessment order being erroneous and prejudicial to the interest of revenue on the two issues raised in the audit objections .

The assessee in response to show cause issued has explained that Department of Orthopedic surgeon is headed by him and unit consist Consultants, Registrar and Assistant Registrars. The team occupies the entire 5th floor of Ganga Hospital which consists facilities such as operation theatres, ICUs etc. It was also mentioned that Ganga Medical Centre and Hospital Pvt. Ltd. has provided only the building infrastructure to the assessee while entire equipment installed on the 5th floor of the hospital belongs to the assessee and out of total outpatient receipts of the assessee, the hospital retains 25% share for letting the assessee use the premises of the hospital for treating his patients and remits the remaining 75% to the assessee. However, the Ld. PCIT in the order u/s. 263 of the Act held that while the assessee has provided a breakdown of the expenses, the expenditure claimed required a detailed scrutiny to ensure its reasonableness and nexus with the professional income earned.

4.3 The Ld. PCIT on the issue of Section 14A of the Act has held that a proper verification of the disallowance calculation, including the method and currency of the components considered under Rule 8D of the Rules was not carried out by the A.O which has led to an incomplete and potentially incorrect determination of the amount. assessee to related parties, which warrants verification under 40A(2)(b) of the Act, which was not done by the A.O.

4.5 The Ld. PCIT therefore, held the order erroneous and prejudicial to the interest of revenue as per clause (a) of Explanation-2 to Section 263 of the Act and set aside the assessment order for fresh adjudication after thoroughly verifying the issues discussed above, as well as another issues for that may arise during assessment proceedings.

per the E-Assessment Scheme, 2019 dated 12.09.2019 and amendment dated 13.08.2020, the A.O was empowered to verify the relevant point as mentioned in the notice, which is the purpose of E- assessment Scheme. The Ld. A.R has submitted that the power of the A.O is not empowered to verify beyond the points mentioned in the notice, there cannot be no allegation by the Ld. PCIT for inadequate enquiry or not enquiry for further verification of the points. Further, the Ld. AR has submitted that the Ld. PCIT has not pointed out any fault with the A.O regarding the verification done with respect to the points for which scrutiny was selected and therefore, invoking the provisions of Section 263 of the Act enlarging the scope of assessment beyond the CASS is unsustainable in law. In support, the Ld. AR relied upon the followings decisions:

“1. Kesar buildcon(P) Limited Vs Principal Commissioner of Income Tax vide [2025] 178 Taxmann.com 210 Hon'ble ITAT, Ahmedabad. Page 237 to 244 of paper Book-II. 2. Vijay Rajnikant Patel Vs Principal Commissioner of Income Tax Hon'ble ITAT, Ahmedabad Bench vide page 260 to 267 of paper Book-II 3. Cholan paper and Board Private Limited Vs The PCIT Hon'ble Chennai ITAT, vide ITA 679/CHNY/2023 page 230 to 236 of Paper Book-II.

6. Malabar Industrial Co. Ltd. Vs. Commissioner of Income Tax (2000) 109 Taxman 66 (SC) - Supreme Court of India Judgment. Vide page 187 to 191 of Paper Book -II.”

263 of the Act is bad in law as the revision order was passed at the instance of audit objection which does not come under preview of Explanation 1(b) of Section 263(1) of the Act. The Ld. AR has argued that the origin for invocation of revisionary proceedings u/s. 263 of the Act is the audit objection and the Ld. PCIT cannot mechanically issue a notice u/s. 263 of the Act simply because an audit objection was raised. The revision order must be based on the Ld. PCIT own satisfaction not just audit report. The Ld. AR has submitted that the assessee has been claiming the expenditure regularly and the Ld. PCIT has also initiated revisionary proceedings u/s. 263 of the Act for A.Y 2018-19 on 21.10.2022, but he has not pointed out the allowances of the same claim of expenditure in A.Y 2018-19 and therefore, the proceedings u/s. 263 of the Act for the impugned order was not by application of independent mind, but on the instance of audit objection.

The Ld. AR has submitted that without an independent application of mind, the Ld. PCIT revisionary power cannot become an excuse for fishing or roving inquiries and relied on the case of CIT vs. Sohana Woolen Mills [2008] 296 ITR 238 (P&H). proceedings u/s. 263 of the Act on the proposal sent by A.O. The Ld. AR also drew our attention of A.O’s proposal where he has reproduced the audit objection and in the proposal itself the AO has observed that the order of A.O is erroneous and prejudicial to the interest of revenue.

The A.O therefore argued that proceeding initiated on the proposal requires to be set aside and relied upon the following case laws:

“1. Alfa Laval Lund Ab v. CIT(IT) (2021) 92 ITR 4 (SN) / (2022) 210 DTR 313 (Pune) (Trib.), 145 taxmann.com 590, 2. Volkswagen India Private Limited Vs PCIT (ITAT Pune) 291 taxman 358 3. PCIT v. M/s Sinhotia Metals and Minerals Pvt. Ltd.(Calcutta high court), 465 Itr 1, 4. Principal Commissioner of Income Tax Vs. Reeta Lakhmani - (2022) 145 taxmann.com 590 (Calcutta) High Court of Calcutta Judgment.

5. Manepalli Ranadheer, Vijayawada Vs. Income Tax Officer, Ward- 3(1), Vijayawada - ITAT. No: ITA 256 to 261/VIZ/2020 Α.Υ. 2010-11 to 2015-16 – ITAT order of Visakhaptnam Bench.”

5.3 The Ld. AR has also submitted that the assessee has regularly filing return of income by claiming the expenditure from the consultancy charges for several years and accepted by the Departments in earlier years. Therefore, the Ld. PCIT is not justified invoking the provisions of Section 263 of the Act. The Ld. AR has submitted that the Department of Orthopedic surgeon is headed by the Consultants, Assistant Consultants, Registrar and Assistant Registrars. The team occupies the entire 5th floor of Ganga Hospital which consists of facilities such as operation theatres, ICUs etc. The Ld. AR has submitted that the expenditure of this department has not been booked in the Ganga Hospital and the assessee incurred to this expenditure is filing GST returns, payments were made through banking channel to the surgeons, salaries and also to the consumable suppliers. The Ld. AR has submitted that there is no iota of evidence that leads to suspicion that the expenditure is bogus. The assessee is claiming the expenditure as a principle of consistency for several assessment years and scrutiny assessments were also completed examining the same and therefore, invoking the provision of Section 263 of the Act is not justified. In support, the Ld. AR relied upon the following case laws:

“1. Principal Commissioner of Income Tax Vs. Quest Investment 1 Advisors (P.) Ltd (2018) 96 taxmann.com 157 (Bombay) High Court of Bombay Judgment.

2. Commissioner of Income Tax Vs. Gopal Purohit (2010) 188 Taxman 140 (Bombay) - High Court of Bombay Judgment.

“1. Arul Industries Vs. Assistant Commissioner of Income Tax, Central Circle II (2025) 177 taxmann.com 607 (Madras) High Court of Madras Judgment.

2. Principal Commissioner of Income Tax, Vs. Delhi Airport Metro Express (P.) Ltd. (2018) 99 taxmann.com 382 (Delhi) - High Court of Delhi Judgment.

3. Principal Commissioner of Income Tax Vs. Earth Minerals Co. Ltd.-(2024) 162 taxmann.com 273 (SC) Supreme Court of India Judgment.

4. Principal Commissioner of Income Tax Vs. Earth Minerals Co. Ltd. -(2024) 162 taxmann.com 272 (Orissa) High Court of Orissa Judgment.

5. Earth Minerals Co. Ltd. Vs. Assistant Commissioner of Income Tax -ITAT. No. ITA 223/CTK/2019 - A.Y.2009-10 ITAT Order of Calcutta Bench.

6. Mahesh Reddy Vs. Principal Commissioner of Income Tax (2024) 167 taxmann.com 297 (Bangalore Trib.) ITAT Order of Bangalore Bench.”

6.1 The Ld. DR on the issue that proceeding under section 263 has been initiated on the basis of audit objection has submitted that record as defined in Explanation-1 to Section 263 of the Act, includes all records relating to any proceedings available at the time of examination of by the PCIT, which also includes audit objection. The Ld DR submitted that there was application of mind by the Ld. PCIT as the proposal for invoking remedial measure on audit objection sent by the A.O was at the instance of PCIT only. The Ld. DR enclosed the PCIT letter dated 19.12.2023 to DCIT in this respect.

6.2 The Ld. DR on the submission of Ld. AR that same issue was there in A.Y 2018-19 and Section 263 proceeding was open before Ld. PCIT, but he did not hold the assessment order erroneous and prejudicial to interest of revenue or ordered to be re-examined, has submitted that the A.Y 2018-19 was before the starting of Faceless scheme where there was distinction between limited scrutiny and complete scrutiny in CASS cases and A.O could not have expanded the scope of scrutiny on his own.

6.3 The Ld DR relied on the order of ITAT, Kolkata Bench in the case of Stewarts & Lloyds of India vs CIT, Circle 1 Kolkata 67 Taxmann.com 41 in support of his contention that there is no prohibition under section 263 for PCIT to act on the proposal by the Assessing Officer, provided there is application of mind by the PCIT.

The LD DR also relied on the ITAT decision in the case Sri Rajinder dated 21.07.2022 that merely because there is an audit objection, the exercise of power cannot be invalidated. The Ld. DR also submitted that the case law relied by the Ld. AR are distinguishable. The Ld DR, therefore argued that necessary inquiries and verification has not been done, which makes the assessment order erroneous in so far as prejudicial to the interest of revenue as per clause(a) of explanation 2 to section 263 of the Act.

7.1 The assessment proceeding was conducted under Faceless assessment Scheme by issuing notice 143(2) of the Act specifying the two reasons for selecting the case for scrutiny and calling for further information u/s 142(1) of the Act dated 18.11.2021, 07.12.2021 and 11.12.2021 and accepting return of income by the assessment unit, National Faceless Assessment Center(NFAC). The Ld. PCIT has held that the assessment order passed u/s 143(3) r.w.s 144B of the Act without conducting proper enquiries and verification, renders the assessment order erroneous and prejudicial to the interest on revenue as per clause (a) of Explanation-2 to Section 263 of the Act. On following account: • While assessee has provided a breakdown of expenditure on claim of expenditure of Rs 46.96 crore against the consulting fee of Rs 95.99 crore received from Ganga Medical Center and Hospital Pvt Ltd, the claim requires a detailed scrutiny to ensure its reasonableness and nexus with professional income earned;

• The A.O has not carried out, a proper verification of the disallowances calculation including the method and accuracy of the components considered under Rule 8D on disallowances of Rs 3,99,266 under section 14A of the Act; 7.2 We note that the assessment unit has examined the issues for which the case was selected for scrutiny and made further enquiry by issuing notice u/s 142(1) calling to furnish detailed computation of income and all annexure of Audit Report along with Audit note to Form 3CD, besides other details. The assessment order has been passed by the assessment unit under the faceless scheme, after observing that the assessee has furnished complete details regarding reason of the scrutiny online through e-portal. The Ld. DR has argued that under the Faceless scheme the case was selected for complete enquiry, therefore the FAO should have gone beyond the issues identified under CASS and verified each and every expenditure of profit and loss account. As per the E-assessment Scheme, it has been stated that where a case is assigned to the assessment unit, it may make a request to the National e-assessment Center for conducting of certain enquiry or verification by verification unit. The word used is “May” and it has been left to assessment unit to make request to National e- assessment center for conducting certain enquiry or verification. The assessment unit has made request to call for detailed computation of 3CD, besides other details and after being satisfied has passed assessment order. We, therefore do not agree with the arguments of Ld DR. The Ld. PCIT has not pointed out any lack of enquiry in respect of issues for which the case was selected for scrutiny. The Hon’ble Bombay High Court in CIT v. Gabriel India Ltd. (supra), has held that if the AO has taken a plausible view after enquiry, the PCIT cannot substitute his opinion merely because he feels further verification was necessary.

7.3 The Ld PCIT has initiated 263 of the Act proceeding on the basis of audit objection, as evident from the proposal of DCIT and show- cause notice of PCIT, which are verbatim reproduction of the revenue audit objection. It clearly reveals that the Ld. PCIT’s observations are without any independent verification, enquiry, or reasoning to show how the assessment order was erroneous or prejudicial to the interests of the Revenue. The Hon’ble Punjab & Haryana High Court in CIT v.

Sohana Woollen Mills (supra) has held that the PCIT must exercise independent judgment and cannot mechanically act only on audit reports. We do not countenance the arguments of Ld. DR that audit objection is part of record and part of proceeding as audit objection, information with the Assessing Officer, suggesting income chargeable to tax has escaped assessment as per section 148 of the Act for the purpose of reopening the assessment. The revisionary power of PCIT u/s. 263 of the Act is restricted till the record of passing the assessment order by the Assessing Officer .

7.4 We further note that the assessee has shown income of more than 50 Crores and the claim of expenditure in the nature of drugs and consumables, salary, professional fee, incentive welfare expenses, consultancy charges, repair and maintenance and depreciation has been allowed in all the proceeding years . This issue was also not part of issues for which case was selected for scrutiny. The principle of consistency, as enunciated by the Hon’ble Supreme Court in the case of Radhasoami Satsang v. CIT (1992) 193 ITR 321 (SC), mandates that when a particular claim has been accepted in earlier years on identical facts, deviation in a subsequent year without change in facts or law is unjustified. There is no independent enquiry or reasoning showing how the assessment order was erroneous or prejudicial to the interest of revenue, except relying on clause (a) of explanation 2 to section 263 of the Act in the order passed by Ld PCIT u/s 263 of the Shanmuganathan Rajasekaran :- 18 -: Act. The explanation -2 has been inserted wef 1.6.2015, not to enlarge the revisionary power of PCIT, but to explain the provision of section 263 of the Act, which has been interpreted by Hon’ble Supreme Court in the landmark case of Malabar Industrial Co. Ltd. Vs. Commissioner of Income Tax (supra). 7.5 In view of the above facts and judicial precedents, we hold that: • The assessment was completed after due enquiry on the issues for which the case was selected for scrutiny; • The PCIT has not brought any independent material to establish that the assessment order was erroneous and prejudicial to the interests of the Revenue; and • The revisionary proceedings were initiated mechanically, based solely on the audit objection, without independent satisfaction.

Accordingly, the impugned order passed under section 263 of the Act is quashed and appeal of assessee is allowed.

Order pronounced on 31st day of October, 2025 at Chennai.