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Facts
The assessee, M/s. India Japan Lighting Pvt. Ltd., filed its income tax return for AY 2021-22 declaring Nil income, which was processed under Section 143(1). The case was selected for scrutiny, and the Assessing Officer (AO) passed an assessment order assessing income at Nil after conducting inquiries. Subsequently, the Principal Commissioner of Income Tax (PCIT) issued a notice under Section 263 of the Income Tax Act, seeking to revise the assessment order on issues related to depreciation claims for the Gujarat plant and royalty payments to the holding company, arguing the order was erroneous and prejudicial to the revenue.
Held
The Income Tax Appellate Tribunal (ITAT) observed that the AO had indeed conducted necessary inquiries during the original assessment proceedings regarding the issues raised by the PCIT. Citing judicial precedents, the Tribunal reiterated that the PCIT cannot invoke revisional powers under Section 263 merely because of a difference of opinion or perceived inadequacy of inquiry, especially when the AO applied their mind. The Tribunal concluded that the assessment order was neither erroneous nor prejudicial to the revenue and thus, set aside the PCIT's order passed under Section 263.
Key Issues
1. Whether the Principal Commissioner of Income Tax (PCIT) was justified in invoking Section 263 to revise an assessment order where the Assessing Officer (AO) had already conducted inquiries on the disputed issues. 2. Whether an assessment order can be considered 'erroneous and prejudicial to the revenue' under Section 263 solely based on a difference of opinion by the PCIT or perceived inadequacy of inquiry, even if an inquiry was conducted.
Sections Cited
263, 143(3), 144B, 143(1), 143(2), 142(1), 40A(2)(b), 92-CA, 119
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, ‘A’ BENCH: CHENNAI
Before: SHRI MANU KUMAR GIRI & SHRI AMITABH SHUKLA
आदेश / O R D E R
PER MANU KUMAR GIRI, JM:
1. The assessee preferred an appeal against order of the Ld. Principal Commissioner of Income Tax, Chennai-4 [‘Ld.PCIT’ in short] dated 28.03.2025 for Assessment Year 2021-22.
The assessee has raised the following grounds of appeal:
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1. The order of the Principal Commissioner of Income-tax ['PCIT'], Chennai - 4 ('Learned PCIT') is erroneous, bad in law, prejudicial to the Appellant and contrary to the facts and circumstances of the case.
2. The Learned PCIT has erred in initiating the proceedings under section 263 of the Act for setting aside the order passed under section 143(3) read with section 144B of the Act ['Assessment Order'] as the same is neither 'erroneous' nor 'prejudicial to the interests of the revenue'.
3. The Learned PCIT has erred in law by not appreciating the fact that the Learned Assessment Unit, National Faceless Assessment Centre ('AO') passed the assessment order after examining all details that were called for by the Learned AO and duly submitted by the Appellant.
4. The Learned PCIT has erred by passing an order under section 263 of the Act solely for the purpose of substituting his view on the issue concerned in place of the view adopted by the Learned AO after independent application of mind.
5. The Learned PCIT has not given any specific finding as to why the order of the AO was erroneous and prejudicial to the interests of the Revenue on this issue and on what account, rather directed the Learned AO to verify.
6. The Learned PCIT has erred in passing the order under section 263 of the Act without pointing out any defect, infirmity or inadequacy in the explanation offered by the assessee on the queries made by the learned PCIT.
7. The Learned PCIT has failed in noting that simply holding that the Learned AO was required to make more enquiries is not a valid ground to hold assessment order as erroneous and prejudicial to the interests of the Revenue.
8. The Learned PCIT instead of establishing the assessment order to be erroneous, directed the Learned AO to further examine the details even after the Learned PCIT has examined the same issue.
9. The Learned PCIT failed to note that the power under Section 263 of the Income Tax Act, 1961, can be exercised by the Commissioner of Income Tax, not by way of a remand, recording that there was failure to investigate
10. The Learned PCIT failed to consider that the assessment order was passed under the Faceless Assessment Scheme, 2020 which is a team- based assessment, and hence assessment order passed cannot be considered as 'erroneous'.
The Learned PCIT failed to consider that the following the Tribunal Order in assessee's own case cannot make the assessment order as 'erroneous'. The Appellant craves leave to add to and/or to alter, amend, rescind, modify the grounds herein above or produce further documents before or at the time of hearing of this Appeal. 3. Brief facts are that the assessee company filed its Return of income for A.Y.2021-22 on 15.03.2022 declaring total income of Rs. Nil (after set-off Losses of current year amounting to Rs.2,90,77,762/- & carried forward current year losses of Rs.23,12,15,987/-). The Income Tax Return was processed by CPC. Vide intimation u/s 143(1) dated 21.10.2022, assessee's processed Income is Nil. The case was selected for scrutiny in CASS and notice under section 143(2) of the Income Tax Act, 1961(in short 'the Act') was issued and served through E-Proceeding Facility on ITBA on 28.06.2022. In response, assessee company uploaded its reply on 28.06.2022.
1. The AO after scrutinizing in all relevant records and documents passed assessment order and assed the income at NIL [no variation made in proposed income] vide order dated 05.12.2022.
4. Thereafter, the Ld.PCIT issued notice to the assessee u/s.263 of the Act. The assessee duly replied the same. However, the Ld.PCIT has rejected the arguments of the assessee and opined vide impugned order as under:
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6.1 On the issue of its claim for depreciation as well as additional depreciation in respect of the assets of Gujarat plant which was closed down before the commencement of operations, the assessee contended that the said assets were part of the block of assets and that an assets can be removed from the block only on its sale or destruction, which has not taken place in its case. Accordingly, the assessee contended that it is entitled to claim depreciation as well as additional depreciation for the assets of the Gujarat plant. On this contention of the assessee, it is noted that as per Income tax Act, an assessee can claim depreciation only if an asset has been put to use. The Hon'ble Courts have held that depreciation is also to be allowed even in respect of those assets which are in ready to use condition. The addition of an asset to the Block of Assets takes place only when the asset has been put to use or is in ready to use condition. In the instant case, the assessee has placed the various approvals obtained from the Govt. departments for setting up the plant at Gujarat. However, this does not completely establish that the said assets were in ready to use condition for which the real proof is of trial production. The AO is therefore directed to make necessary enquiries with regards to trial production undertaken for the Gujarat plant. For this trial production, the assessee would have procured raw material, incurred expenditure on electricity, man power, etc. After examining all these aspects, the AO should arrive at a conclusion as to whether the assets of Gujarat plant were in ready to use condition and thereafter decide the assessee's claim for depreciation as well as additional depreciation for the said assets of Gujarat plant.
6.2 On the issue of Royalty payment to the holding company. Mis Koito Manufacturing Company Ltd, the assessee has placed reliance on the decision of ITAT, Chennai in its own case in dated 30.04.2013 which has been decided in its favour. In respect of this issue of royalty, it is noted that subsequent to decision of ITAT Chennai dated 30.04.2013, the Hon'ble Supreme Court in the case of Honda Siel Cars India Ltd. (2017) 82 taxmann.com 212 (SC) vide its order dated 09.06.2017 has adjudicated this very issue. In the said decision of Hon'ble Supreme Court, the facts were that M/s Honda Siel Cars India Ltd. (HSCIL) had entered into a technical collaboration agreement with M/s Honda Motors Company Ltd. (HMCL), Japan for granting of license and technical know-how for manufacture and sale of automobiles. For this, HSCIL was to pay a lumpsum amount of US $ 30.5 million in 5 equal instalments and also annual royalty @4% of the sales. The Hon'ble Supreme Court held that a new business was set up with technical know-how provided by HMCL., Japan and for which HSCIL paid lump-sum technical know fees and also annual royalty to HMCL, Japan, therefore the expenditure in form of technical know-how as well as annual royalty would constitute capital expenditure since the same was incurred for setting up of new business and not for extension of an existing business of the assessee.
6.3 In the instant case, our assessee has entered into an agreement with M/s Koito Manufacturing Company Ltd, Japan (KMC, Japan) for exclusive right to manufacture and sell the products in India using the licenced technology of KMC, Japan. The assessee was conferred an exclusive right for manufacturing and selling the products in India. The royalty payment of 9 lakh US Dollars was made initially and thereafter every year, the assessee was to pay royalty at the rate of 3.5% of net sales. Thus it can be observed that the facts of the case of our assessee are quite similar to the case of M/s.Honda Siel Cars India Ltd (supra). The AO is therefore directed to examine as to whether the decision of the Hon'ble Supreme
Court on the issue of royalty dated 09-06-2017 is applicable to the facts of the case of our assessee. If the decision of the Hon'ble Supreme Court is applicable to the facts of the case of the assessee, the AO is directed to disallow the royalty payments to KMC, Japan being capital expenditure. However, appropriate depreciation is to be allowed in respect of this expenditure on account of royalty.
In view of the aforesaid discussion, the assessment order passed under section u/s 143(3) r.w.s. 144B dated 05.12.2022 by the Assessing Officer for the assessment year 2021-22 is considered to be erroneous and prejudicial to the interests of revenue, in terms of clause (a) to Explanation 2 of Sec. 263 of the I.T. Act, 1961. The same is hence partly set aside, with the direction to the Assessing Officer to make necessary enquiries as per the discussion in the preceding paragraphs in respect of the said issue(s) and pass a fresh order within the stipulated time, after providing due opportunity to the assessee of being heard.
Now, the assessee is in appeal before us.
The Ld. Counsel for the assessee submitted that during the course of assessment proceedings, assessee has in detailed submitted the documents and evidences relating to claim for depreciation as well as additional depreciation in respect of the assets of Gujarat Plant which was closed down before commencement of operation. The Ld. Counsel for the assessee has referred Paper Book-1 at Page Nos.150-152 [Sl.Nos.3, 7 & 15] which is notice u/s.142(1) of the Act was issued to the assessee dated 22.07.2022 which are as under:
3. As evident from remarks in column No. 18 of form 3CD report there have been additions in in Assets i.e. Building (Rs.145.96 crores), Plant & Machinery-rate of depreciation @ 40% (Rs.3.41 crores) Furniture & Fittings rate of depreciation 10% (Rs.44.07 lacs) Plant & Machinery- rate of depreciation @ 15% (Rs.75.50 crores). Provide corresponding copies of accounts along-with accounts of suppliers of machinery.
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7. As evident from column No.40 of Audit Report in form 3CD, the is decline in both G.P.Ratio (21.34% as against 23.25% last year) a N.P.Ratio (-15.34% as against-6.53% last year).
Explain reasons in details supported by documentary evidence. ……………………………………………………………………………….
15. Based on CbCR (Country-by Country Reporting) data on the basis of annual return filed by large multi-nationals, during F.Y.2020-211 assessee company entered into International Transactions.
Give details of all such International Transactions(both w.r.t. a) export of goods or providing services to foreign based entities and b) Import of goods or receiving services from foreign based entities).
Provide copies of all the related accounts (including foreign based entities -suppliers as well as clients) appearing in assessee company's Audit books of accounts along-with copies of Bills/vouchers & related documents.
6. The assessee replied on 30.07.2022 in detail to the queries raised by the AO vide notice dated 22.07.2022 which runs from Page Nos.162-176, at Page Nos.163-165 and further, at Page Nos.186-442. The assessee’s replies are as under:
Detailed note on activities carried out by you in the year under consideration
India Japan Lighting Private Limited (' the Company') was incorporated in December 1996 as a Joint venture between Lucas-TVS Limited, Chennai (LTVS) and Koito Manufacturing Company Limited, Japan (Koito). The Company is in the business of manufacture and sale of automotive lighting products for two-wheeler and four-wheeler. Pursuant to a supplementary shareholder agreement dated October 13, 2016 the management control was transferred to Koito and the Company has become a subsidiary of Koito.
Koito had acquired entire stake of LTVS and its associate in the Company, on 27th December 2019. Pursuant to the acquisition, India Japan Lighting Private Limited is now a 100% Wholly Owned Subsidiary (WOS) of Koito Manufacturing Company Limited, Japan.
The registered office of the Company is located at No.1, Tiruvallur High Road, Puduchatram (PO), Thirumazhisai (via), Chennai - 600124, Tamil Nadu. Company having three manufacturing facility in India, situated at Chennai Tamilnadu, Bawal Haryana and Sanand Gujarat.
We are manufacturing Automotive lighting lamps for two-wheeler and four- wheeler, starting from Moulding, Painting/Coating of the component and then final Assembly. Major Scraps are generated during Moulding and Painting/Coating process and we are selling those scrap in the market through scrap dealer.
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3. Fixed Assets Additions
Details of Fixed Assets Addition made during the year are attached as per Annexure - 3 and copy of the Bills of Fixed Assets purchase during the year whose value is more than Rs.2.5 lakhs are also attached for your ready reference.
Audited Financials as on 31.03.2021 along with Notes on accounts
Refer Annexure - 4
5. Details of Bank Accounts BRS and Bank Accounts statement
Refer Annexure-5
Details of Persons Specified under section 40A(2)(b)
Refer Annexure - 6
7. Reason for decline in G.P Ratio and N.P. Ratio
We would like to bring attention to your good office, due to Covid-19 Pandemic the company sales were badly affected during 1st quarter of 2020-2021 and gradually started increasing from 3rd quarter onwards. During pandemic there was big disruption in Supply Chain to get the material from overseas and western and southern part of India. It's impacted our Material Cost which is directly affected our Gross Profit.
Net Profit also became negative because of higher fixed cost and impairment of property, plant and equipment of Gujarat Plant due to Covid pandemic and economic slowdown in automobile sector.
15. Details of International Transaction
Refer Annexure - 14
8. The assessee also filed Reconciliation of additions between FS and Tax audit as under:
Summary of additions as per Income Tax Act, 1961
More than 180 Less than Particulars Total days 180 days COMPUTERS 7,97,700 1,80,06,489 1,88,04,189 OFFICE EQUIPMENT 9,87,823 1,84,18,895 1,94,06,718 BUILDINGS 20,42,852 1,45,75,57,569 1,45,96,00,421 FURNITURE & 18,32,580 25,74,509 44,07,089 FITTINGS SOFTWARE 22,000 1,52,29,216 1,52,51,216 PLANT & 5,24,47,856 68,31,19,282 73,55,67,138 MACHINERY Total 5,81,30,811 2,19,49,05,960 2,25,30,36,771 The assessee also filed invoices of assets from Page Nos.186-442.
The AO second time issued notice u/s.142(1) dated 11.11.2022 for AY 2021-22 asking for the following details:
7. As evident from column 18 of audit report in form 3CD, in F.Y. 2020-21, there were additions on account of (i) building Rs. 145,96,00,419/- (ii) Plant and machinery (@40%) Rs. 3,40,55,405/- and (iii) Plant and machinery (@15%) Rs. 75,49,73,854/-. In this regards provide following details/evidences:-
a. Corresponding copies of accounts b. Copies of purchase bills and corresponding documentary evidence showing date of installation w.r.t additions of Rs. 10,00,000/- and above pertaining to building as well as plant and machinery.
10. The assessee duly replied the query raised by the AO vide reply dated 30.11.2022 which runs from Page Nos.448-957 of the Paper Book, from Page Nos.462-893 of the Paper Book. The assessee filed invoices of assets. The AO third issued notice u/s.142(1) of the Act dated 12.11.2022 which was duly replied by the assessee. The Ld. Counsel for the assessee drew our attention to Para No.3 of the original assessment order dated 05.12.2022 wherein, it is specifically mentioned that assessment order has been passed after 3600 profile which is as under:
Based on i) Income Tax Return ii) Corresponding Audit Report in form 3CD dated 12.02.2022 iii) Final Accounts of the assessee company for F.Y.2020-21 iv) 360°profiling and v) Other relevant information/details, all uploaded on ITBA/e-filing portal, statutory notices u/s 142(1) dated 22.07.2022, 11.11.2022 & 12.11.2022 and having were issued and served upon assessee through its Regd. E-mail ID. 11. The Ld. Counsel for the assessee further referred order of the co- ordinate Bench of this Tribunal in the assessee’s own case vide I.T.A. Nos.
676 to 678/ Mds/2010 & 862/ Mds/ 2010 dated 10 June 2011 (For Assessment Year 2004-05. AY 2005-06 & AY 2006-07); vide Mds/2011 dated 30 April 2013 (for AY 2007-08) and vide ITA Nos.
718 & 719/Chny/2018 (for AY 2011-12 & AY 2014-15)(Pages 1231 to 1271 of Paper Book) and contended that the Ld.PCIT is wrong in invoking u/s.263 of the Act on both the issues i.e. depreciation of new plant and royalty paid to holding company.
Per contra, the CIT-DR, Ms. E. Pavuna Sundari, the AO has failed to verify and make necessary enquiries in terms of clause (a) to Explanation 2 of Section 263 of the Act. She further argued that on the royalty issue is covered in favour of the Revenue by the judgment of the Hon’ble Supreme Court in the case of M/s.Honda Siel Cars India Ltd.
We have heard the rival submissions and gone through the record, paper books and impugned order. We may refer recent judgment of the Hon’ble Delhi High Court dated 01.03.2024 passed in in the case of Pr. Commissioner of Income Tax -2, Delhi Vs M/s Clix Finance India Pvt. Ltd. which after considering section 263 of the Act and various settled judgments of the Hon’ble Supreme Court and Hon’ble High Courts held as under:
‘’15. We have heard the learned counsel appearing on behalf of the parties and perused the record.
16. Vide order dated 06.11.2019, this Court framed the following question of law:- A. Whether, in the facts and circumstances of the case, the Hon'ble ITAT was justified in quashing the order under Section 263 of the Income Tax Act?
17. The brief controversy involved in the present appeal pertains to the invocation of revisional jurisdiction under Section 263 of the Act by the CIT to set aside the original assessment order dated 30.03.2005.
18. Before adverting to the merits of the case, it is apposite to refer to the power of the revisional authority of the CIT envisaged as per Section 263 of the Act. For the sake of clarity, the relevant extract of Section 263 of the Act is reproduced as under:
‘’263. Revision of orders prejudicial to revenue (1) The [Principal Chief Commissioner or Chief Commissioner or Principal Commissioner] or 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 Assessing Officer [or the Transfer Pricing Officer, as the case may be,] is erroneous in so far as it is prejudicial to the interest 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,’ (i) an order enhancing or modifying the assessment or cancelling the assessment and directing a fresh assessment; or (ii) an order modifying the order under Section 92- CA; or (iii) an order cancelling the order under Section 92-CA and directing a fresh order under the said section.] *** [Explanation 2. ‘For the purposes of this section, it is hereby declared that an order passed by the Assessing Officer [or the Transfer Pricing Officer, as the case may be,] shall be deemed to be erroneous in so far as it is prejudicial to the interests of the revenue, if, in the opinion of the Principal [Chief Commissioner or Chief Commissioner or Principal] Commissioner or Commissioner, ‘(a) the order is passed without making inquiries or verification which should have been made; (b) the order is passed allowing any relief without inquiring into the claim; (c) the order has not been made in accordance with any order, direction or instruction issued by the Board under Section 119; or (d) the order has not been passed in accordance with any decision which is prejudicial to the assessee, rendered by the jurisdictional High Court or Supreme Court in the case of the assessee or any other person.] ***’
19. A bare reading of sub-Section (1) of Section 263 of the Act makes it abundantly clear that the said provision lays down a two-pronged test to exercise the revisional authority i.e., firstly, the assessment order must be erroneous and secondly, it must be prejudicial to the interests of the Revenue. Further, Explanation 2 to Section 263 of the Act delineates certain conditions and :: 11 ::
circumstances when the order passed by the AO can be said to be erroneous and prejudicial to the Revenue.
20. Clause (a) of Explanation 2 to Section 263 of the Act further stipulates that if an order is passed without making an enquiry or verification which should have been made, the same would bestow a revisional power upon the Commissioner. However, the said Clause or any other condition laid down in Explanation 2 does not warrant recording of the said enquiry or verification in its entirety in the assessment order.
Admittedly, in the instant case, the questionnaire dated 02.11.2004, which has been annexed and brought on record in the present appeal, would manifest that the AO had asked for the allowability of the claims with respect to the issues in question. Consequently, the respondent-assessee duly furnished explanations thereof vide replies dated 09.12.2004, 20.12.2004 and 06.01.2005. Thus, it is not a case where no enquiry whatsoever has been conducted by the AO with respect to the claims under consideration. However, this leads us to an ancillary question? whether the mandate of law for invoking the powers under Section 263 of the Act includes the cases where either an adequate enquiry has not been made and the same has not been recorded in the order of assessment or the said authority is circumscribed to only consider the cases where no enquiry has been conducted at all.
Reliance can be placed on the decision of this Court in the case of CIT v. Sunbeam Auto Ltd. [2009 SCC OnLine Del 4237], wherein, it was held that if the AO has not provided detailed reasons with respect to each and every item of deduction etc. in the assessment order, that by itself would not reflect a non- application of mind by the AO. It was further held that merely inadequacy of enquiry would not confer the power of revision under Section 263 of the Act on the Commissioner. The relevant paragraph of the said decision reads 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
:: 12 :: 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) **
A similar view was taken by this Court in the case of CIT v. Anil Kumar Sharma [2010 SCC OnLine Del 838], wherein, it was held that once it is inferred from the record of assessment that AO has applied its mind, the proceedings under Section 263 of the Act would fall in the category of Commissioner having a different opinion. Paragraph 8 of the said decision reads as under:-
In view of the above discussion, it is apparent that the Tribunal arrived at a conclusive finding that, though the assessment order does not patently indicate that the issue in question had been considered by the Assessing Officer, the record showed that the Assessing Officer had applied his mind. Once such application of mind is discernible from the record, the proceedings under section 263 would fall into the area of the Commissioner having a different opinion. We are of the view that the findings of facts arrived at by the Tribunal do not warrant interference of this court. That being the position, the present case would not be one of "lack of inquiry" and, even if the inquiry was termed inadequate, following the decision in Sunbeam Auto Ltd. (2011) 332 ITR 167 (Delhi) (page 180) : "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." No substantial question of law arises for our consideration.
In Ashish Rajpal as well, this Court was of the view that the fact that a query was raised during the course of scrutiny which was satisfactorily answered by the assessee but did not get reflected in the assessment order, would not by itself lead to a conclusion that there was no enquiry with respect to transactions carried out by the assessee.
Further, the decision of the Hon’ble Supreme Court in the case of Malabar Industrial Co. Ltd., enunciates the meaning and intent of the phrase ’prejudicial to the interests of the Revenue’, in the following words:- ’8.The phrase ‘prejudicial to the interests of the Revenue’ is not an expression of art and is not defined in the Act. Understood in its ordinary meaning it is of wide import and is not confined to loss of tax. The High Court of Calcutta in ‘Dawjee Dadabhoy & Co.v.S.P. Jain[(1957) 31 ITR 872(Cal)], the High Court of Karnataka in CITv.T. Narayana Pai[(1975) 98 ITR 422(Kant)], the High Court of Bombay in CITv.Gabriel India Ltd.[(1993) 203 ITR 108(Bom)] and the High Court of Gujarat in CITv.Minalben S. Parikh[(1995) 215 ITR 81(Guj)] treated loss of tax as prejudicial to the interests of the Revenue. 9. Mr. Abraham relied on the judgment of the Division Bench of the High Court of Madras in Venkatakrishna Rice Co.v.CIT[(1987) 163 ITR 129(Mad)] interpreting ‘prejudicial to the interests of the Revenue’. The High Court held: ‘
‘’In this context, (it must) be regarded as involving a conception of acts or orders which are subversive of the administration of revenue. There must be some grievous error in the order passed by the Income Tax Officer, which might set a bad trend or pattern for similar assessments, which on a broad reckoning, the Commissioner might think to be prejudicial to the interests of Revenue Administration’’.
In our view this interpretation is too narrow to merit acceptance. The scheme of the Act is to levy and collect tax in accordance with the provisions of the Act and this task is entrusted to the Revenue. If due to an erroneous order of the Income Tax Officer, the Revenue is losing tax lawfully payable by a person, it will certainly be prejudicial to the interests of the Revenue.
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. It has been held by this Court that where a sum not earned by a person is assessed as income in his hands on his so offering, the order passed by the Assessing Officer accepting the same as such will be erroneous and prejudicial to the interests of the Revenue. (See ‘Rampyari Devi Saraogiv CIT[(1968) 67 ITR 84(SC)] and in ‘’Tara Devi Aggarwalv.CIT[(1973) 3 SCC 482:1973 SCC (Tax) 318:(1973) 88 ITR 323].) [Emphasis supplied]
Recently, the Hon’ble Supreme Court in the case of CIT v. Paville Projects (P) Ltd. [2023 SCC OnLine SC 371], while relying upon Malabar Industrial Co. Ltd., has discussed the sanctity of two-fold conditions for the purpose of invoking jurisdiction under Section 263 of the Act. The relevant paragraph of the said decision reads as under:-
Learned counsel appearing on behalf of the assessee has heavily relied upon the decision of this Court in the case of Malabar Industrial Co. Ltd.(supra). It is true that in the said decision and on interpretation of Section 263of the Income Tax Act, it is observed and held that in order to exercise the jurisdiction under Section 263(1)of theIncome tax Act, 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. It is further observed that if one of them is absent, recourse cannot be had to Section 263(1) of the Act. ***’.
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. Rather, 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.
Notably, the ITAT, while making a categorical finding that the CIT had failed to point out any definite or specific error in the assessment order, has satisfactorily explained both the claims in question in Paragraph 8.2 of its order, which reads as under:-
‘’8.2 In the Impugned Order, the Ld. Commissioner of Income Tax-IV, Delhi held that the AO had not examined the aforesaid two issues properly and, therefore, set aside the issues for further inquiries to be conducted by the AO. As regards the first issue is concerned, we note that out of total provision of Rs. 1114.68 lacs, a sum of Rs. 7,60,76,105/- was suo moto added back in the computation of income and a further sum of Rs. 73,46,160- was disallowed by the AO in the original assessment order dated 30.3.2005. Therefore, out of Rs. 1114.68 lacs, Rs. 834.22 lacs already stood disallowed in the original assessment order. The balance amount represented actual write off which was palpably clear from page 2 of the impugned order itself. No deduction on account of any such provision was, therefore, allowed to the assessee. Hence, there is no error or prejudice to the interest of revenue. As regards second issue it was noted that interest rate swap was an actual loss and only the net loss of Rs. 114.05 lacs after setting of gain of interest rate swap was claimed as deduction. However, we find that both these issues were duly examined by the AO vide Questionnaire dated 2.11.2004 (Page 1-2 of the Paper Book) to which replies dated 9.12.2004, 20.12.2004 and 6.1.2005 (Page No. 3- 39 of Paper Book-1) were furnished and, therefore, the finding of the Ld. CIT that the issues were not examined properly was not correct. Even the Ld. CIT has not pointed out the definite and specific error in the original assessment order and observed that the inquiry made by the AO was inadequate or improper without first pointing out the error in the original assessment order passed by the AO, particularly because both the aforesaid issues were duly examined at the stage of the original assessment proceedings, hence, the impugned order is beyond jurisdiction, bad in law and void-ab-initio’’.
It is discernible from the aforenoted findings of the ITAT that both the claims were duly examined during the original assessment proceedings itself and neither there was any error nor the same was prejudicial to the interests of the Revenue. Thus, the findings of fact arrived at by the ITAT do not warrant any interference of this Court.
So far as the reliance placed by the CIT on Umashankar Rice Mill is concerned, the same is misplaced, particularly in light of the insertion of Explanation 2 to Section 263 of the Act, brought in place by the Finance Act, 2015. The said amendment markedly specifies various conditions to exercise the authority vested in the Commissioner under Section 263 of the Act, leaving no ambiguity in the interpretation of the said provision.
In view of the aforesaid, the appeal preferred by the Revenue is dismissed alongwith the pending application(s), if any’’.
The Hon'ble Supreme Court in the case of CIT vs. M.Chandra Sekhar [151 ITR 433 (SC)] has held that the presumption that A.O. has considered the details filed by the assessee was "founded" on the principle that an officer entrusted with a judicial or quasi- judicial duty must be presumed to have discharged his duties in a proper and bonafide manner. This view is confirmed by the full bench decision of the Delhi high court in CIT Vs. Kelvinator of India Ltd (256 ITR 1) (Delhi FB), was upheld by the Supreme court in Commissioner of Income Tax Vs. Kelvinator Of India Ltd ( 320 ITR 561)(SC).
The Hon’ble High Court of Bombay in the case of Marico Ltd., vs. ACIT in writ petition No.1917 of 2019 dated 21.08.2019, wherein the Hon’ble High Court has clearly pointed out once a query has been raised by the AO during the assessment proceedings and the assessee has responded to that query, it would necessarily follow that the AO has accepted the assessee’s submission, so as to not deal with that issue in the assessment order.
The Hon’ble High Court of Bombay considering another decision of the same High Court in the case of GKN Sinter Metals Ltd., vs. ACIT reported in 371 ITR 225 has categorically pointed out that an assessment order passed u/s.143(3) of the Act does not reflect any consideration of the issue, it must follow that no opinion was formed by the AO in the regular assessment proceedings. This submission was negatived by the Hon’ble Bombay High Court and the relevant paras 10 & 11 reads as under:-
‘’Another aspect argued by ld.counsel that in term of clause (a) to Explanation 2 to section 263 of the Act, reassessment order is deemed to be erroneous insofar as prejudicial to the interest of revenue. The ld.counsel for the assessee drew our attention to the decision of Hon’ble High Court of Delhi in the case of PCIT vs. Clix Finance India Pvt. Ltd., order dated 01.03.2024 and drew our attention to paras 19 & 20 explaining the provisions and particularly Explanation 2(a) as under:-
19. A bare reading of sub-Section (1) of Section 263 of the Act makes it abundantly clear that the said provision lays down a two- pronged test to exercise the revisional authority i.e., firstly, the 17:06:54 assessment order must be erroneous and secondly, it must be prejudicial to the interests of the Revenue. Further, Explanation 2 to Section 263 of the Act delineates certain conditions and circumstances when the order passed by the AO can be said to be erroneous and prejudicial to the Revenue.
Clause (a) of Explanation 2 to Section 263 of the Act further stipulates that if an order is passed without making an enquiry or verification which should have been made, the same would bestow a revisional power upon the Commissioner. However, the said Clause or any other condition laid down in Explanation 2 does not warrant recording of the said enquiry or verification in its entirety in the assessment order’’.
Even the Hon’ble High Court of Bombay in the case of PCIT vs. Shivshahi Punarvasan Prakalp Ltd., in of 2018, order dated 05.08.2022 has considered the issue of no enquiry case or inadequate enquiry even after the insertion of Explanation 2 in para 32 as under:-
“32. In this appeal, we are concerned with the assessment year 2006- 07. Prior to the insertion of Explanation 2, it was the prerogative of the Assessing Officer to determine what enquiry he wants to make while completing the assessment. We have already observed that an enquiry was made by the Assessing Officer and the assessment order passed. Therefore, the CIT could not invoke jurisdiction under Section 263 as the view taken by the Assessing Officer was a possible/plausible view. It was only if the Assessing Officer had not made any enquiry then it could be said that the order passed was erroneous. This is not a case of lack of enquiry though it may be a case of inadequate enquiry. Inadequacy of enquiry as elucidated above does not give jurisdiction to the CIT to invoke provisions of Section 263 prior to the insertion of Explanation 2. In our view, the Explanation 2 does not help the revenue in as much as the same is prospective and applicable with effect from 1st June, 2015.”
Hence, in the light of entire conspectus of matter, above judgment and cases cited at bar, we are of the considered view that the issues raised in the revisional proceedings are duly verified and inquired by the AO in detailed during original assessment proceedings. The ld. PCIT took into consideration the same set of material which were duly verified by the AO in assessment proceedings as discussed supra. The ld. PCIT cannot sit in appeal on the assessment order 05.12.2022 reversing view and findings of the AO and impose his own view of decision making process on same material. Therefore, impugned order passed by the PCIT is set aside.
In the result, appeal filed by the assessee is allowed.
Order pronounced on the 18th day of August, 2025, in Chennai.