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Facts
The assessee, a company engaged in construction, filed its return declaring a certain income. The PCIT initiated proceedings under Section 263, questioning the Assessing Officer's order, citing issues related to the cessation of liability and education cess allowance.
Held
The Tribunal held that the PCIT invoked Section 263 on a wrong appreciation of facts. The cessation of liability claim was not applicable as the interest was not from the debentures in question, and the education cess deduction was rectified by filing Form No.69.
Key Issues
Whether the PCIT's invocation of Section 263 was justified based on the facts regarding cessation of liability and education cess deduction.
Sections Cited
263, 41(1), 143(3), 40(ii), 14A
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, PUNE BENCH “A”, PUNE
Before: SHRI R. K. PANDA & MS. ASTHA CHANDRA
This appeal filed by the assessee is directed against the order dated 11.03.2025 passed u/s 263 of the Income Tax Act, 1961 (hereinafter referred to as ‘the Act’) by the Ld. PCIT, Pune-4, relating to assessment year 2020-21.
Facts of the case, in brief, are that the assesse is a company engaged in the business of construction of buildings. It filed its return of income on 21.01.2021 declaring total income of Rs.19,02,43,380/-. The return was processed u/s 143(1) of the Act and subsequently selected for complete scrutiny through CASS for the following issues:
“1. Stock Valuation 2. Taxability of business liability written off u/s 41 or any other section 3. High Creditors / liabilities 4. ICDS Compliance and Adjustment 5. High interest expenditure / finance costs”
The Assessing Officer completed the assessment u/s 143(3) of the Act on 21.09.2022 accepting the income returned by the assessee.
Subsequently the Ld. PCIT called for the record and examined the same and observed that the assessee in the computation sheet at Note No.30 has noted as under: “The Debenture Holders, vide letters dated 04/02/2019 have revised the terms of debenture agreement and waived the right to receive the interest for the Financial Year 2018-19 on Optionally Convertible Debentures”
However, the Assessing Officer has not gone through the issue of cessation of liability u/s 41(1) of the Act to the extent of Rs.7,25,50,622/-. The assessee has also not added the same to its total income. Similarly the Assessing Officer has also allowed the claim of Education Cess Allowance of Rs.16,97,508/- which is not an allowable expenditure. He, therefore, issued a show cause notice u/s 263 of the Act asking the assessee to explain as to why the order passed by the Assessing Officer should not be revised as per the provisions of section 263 of the Act.
The assessee in response to the notice issued by the Ld. PCIT on both the issues explained as under which has been reproduced by the Ld. PCIT in his order:
However, the Ld. PCIT was not satisfied with the arguments advanced by the assessee and held the order passed by the Assessing Officer as erroneous and prejudicial to the interest of Revenue for which he partly set aside the order to the file of the Assessing Officer for the limited purpose of examining the two issues for which the order was revised. The relevant observations of the Ld. PCIT read as under:
Aggrieved with such order of the Ld. PCIT, the assessee is in appeal before the Tribunal by raising the following grounds: 1] The learned Pr. CIT erred in revising the asst. order u/s and directing the A.O. to verify the issue of the income taxable u/s 41(1) on account of waiver of right to receive interest by the debenture holder. 2] The learned Pr. CIT erred in holding that the learned A.O. had failed to examine the taxability of business liability written off u/s 41(1) and hence, the asst. order to that extent was erroneous and prejudicial to the interest of the revenue. 3] The learned Pr. CIT failed to appreciate that the assessee had not claimed any expenditure of interest on the OCDs wherein there was waiver of interest in the earlier year and hence, there was no question of cessation of liability u/s 41(1) and accordingly, the learned Pr. CIT erred in revising the asst. order passed by the learned A.O.
4] The learned Pr. CIT ought to have appreciated that there was no waiver of interest in the year under consideration and hence, no amount was taxable u/s 41(1) of the Act and therefore, the question of learned A.O. verifying the said issue still simply did not arise and accordingly, the asst. order was neither erroneous nor prejudicial to the interest of the revenue. 5] The learned Pr. CIT further erred in revising the asst. order and directing the A.O. to verify the issue of allowability of cess as a deductible expenditure without appreciating that the assessee has already filed Form No.69 and therefore, question of setting aside the said issue to the file of the learned A.O. simply did not arise. 6] The appellant craves leave to add, alter, amend or delete any of the above grounds of appeal
The Ld. Counsel for the assessee referring to the notice dt 24.01.2025 issued by the Ld. PCIT submitted that he has invoked jurisdiction u/s 263 on totally wrong assumption of facts. Referring to page 58 of the paper book the Ld. Counsel for the assessee drew the attention of the Bench to the reply dated 21.02.2025 addressed to the Ld. PCIT. Referring to page 62 of the paper book he drew the attention of the Bench to the letter issued by ICICI Venture to the assessee dated 04.02.2019 mentioning the waiver of their right to receive the interest on Optionally Convertible Debentures for the financial year 2018-19 under the terms of the CCD Agreements. Referring to reverse page 62 of the paper book he drew the attention of the Bench to the letter dated 04.02.2019 issued by Kolte Patil Developers Ltd. waiving their right to receive the interest on Optionally Convertible Debentures for the financial year 2018-19 under the terms of CCD Agreements. Referring to page 63 of the paper book he drew the attention of the Bench to the letter dated 04.02.2019 issued by Umedica Investment Services Pvt. Ltd. mentioning the waiver of their right to receive the interest on Optionally Convertible Debentures for the financial year 2018-19 under the terms of CCD Agreements.
Referring to page 64 of the paper book he drew the attention of the Bench to the interest amount of Rs.7.26 crores being the interest on non-convertible debentures of KKR India Asset Finance Ltd. for financial year 2018-19. He submitted that the assessee has not claimed any interest in respect of Optionally Convertible Debentures in respect of the 3 parties who have waived their right to receive interest. Further, KKR India Asset Finance Ltd. is no way concerned with the above 3 parties. He accordingly submitted that invoking of section 263 provisions by Ld. PCIT on wrong appreciation of facts is incorrect.
So far as the issue relating to education cess is concerned, he drew the attention of the Bench to the reply given before the Ld. PCIT on this issue. He submitted that following the amendment incorporated by the Finance Act, 2022, CBDT notified Form No.69 for applying for computation of income due to disallowance of surcharge / cess. Referring to pages 65 and 66 of the paper book, he drew the attention of the Bench to the Form No.69 filed by the assessee computing its income without claiming the education cess / allowance. Referring to para 5.1 of the order of the Ld. PCIT at page 5 he drew the attention of the Bench to the reasons for invoking jurisdiction u/s 263 of the Act.
Referring to the decision of the Pune Bench of the Tribunal in the case of Desai Infra Projects (I) Ltd. vs. Pr.CIT vide order dated 23.05.2025 for assessment year 2020-21, he drew the attention of the Bench to paras 10.1 and 11 of the said order and submitted that the Tribunal in the said decision has held that even if the issue is set aside to the file of the Assessing Officer for necessary enquiry, no disallowance is called for, and therefore, no prejudice is caused to the Revenue. It was accordingly held that the proceedings u/s 263 of the Act on this issue are not warranted.
Referring to the decision of the Hon’ble Delhi High Court in the case of PCIT vs. Delhi Airport Metro Express (P.) Ltd. reported in (2018) 99 taxmann.com 382 (Del), he submitted that the Hon’ble High Court in the said decision has held that where the Commissioner set aside assessment order on ground that the assessee claimed excess depreciation on fixed asset since basic exercise of determining to what extent depreciation was claimed in excess was not undertaken by the Commissioner, order of the Commissioner was not sustainable.
Referring to the decision of the Hon’ble Delhi High Court in the case of CIT vs. Vikas Polymers reported in (2010) 194 Taxman 57 (Del), he submitted that the Hon’ble High Court in the said decision has held that the power of suo motu revision exercisable by the Commissioner is undoubtedly supervisory in nature. The opening words of section 263 empower the Commissioner to call for and examine the record of any proceeding under the Act. A bare reading of section 263 also makes it clear that the Commissioner has to be satisfied of the twin conditions, namely, (i) the order of the Assessing Officer sought to be revised is erroneous, and (ii) it is prejudicial to the interest of the revenue. If one of them is absent - if the order of the ITO is erroneous but is not prejudicial to the interest of the revenue or if it is not erroneous but it is prejudicial to the revenue - recourse cannot be had to section 263(1). It has further been held that the Commissioner cannot exercise the revisional power for making roving and fishing enquiry. He also relied on the decision of Delhi ‘I’ Bench of the Tribunal in the case of Institute of Chartered Accountants of India vs. DIT reported in (2010) 8 TAXMAN.COM 50 (Del). He accordingly submitted that since the order is neither erroneous nor prejudicial to the interest of the Revenue, therefore, despite the Assessing Officer not passed a speaking order, the same cannot be set aside under the provisions of section 263.
The Ld. DR on the other hand heavily relied on the order of the Ld. PCIT.
We have heard the rival arguments made by both the sides, perused the orders of the Assessing Officer and Ld. PCIT and the paper book filed on behalf of the assessee. We have also considered the various decisions cited before us. We find the Ld. PCIT in the instant case invoked his revisionary powers u/s 263 basically on 2 issues – (1) cessation of liability u/s 41(1) of the IT Act, 1961 on account of surrender of right to receive interest on Optionally Convertible Debentures by the Debenture Holders and (2) claim of deduction on account of Education Cess Allowance. So far as the first issue i.e. cessation of liability u/s 41(1) is concerned, we find the Ld. PCIT observed that since the debenture holders have surrendered their right to receive interest of Rs.7,25,50,622/- and the assessee has not added such cessation of liability as income u/s 41(1) of the Act but has claimed the same as expenditure and the Assessing Officer has not examined the issue of taxability of business liability written off u/s 41 or any other section, therefore, the Assessing Officer has failed to verify the same for which the order has become prima facie erroneous in so far as it is prejudicial to the interest of Revenue. So far as the 2nd issue is concerned, he noted that the assessee has claimed the deduction on account of education cess allowance of Rs.16,97,508/- which is not an allowable expenditure. Since the Assessing Officer failed to verify the same, he held that the order has become erroneous and prejudicial to the interest of Revenue for which he invoked the jurisdiction u/s 263 of the Act and set aside the issue to the file of the Assessing Officer for the limited purpose of verifying the above two issues.
It is the submission of the Ld. Counsel for the assessee that the interest debited to the Profit & Loss Account of Rs.7.26 crores is in respect of Non convertible debentures issued to KKR India Asset Finance Ltd. and it has nothing to do with the waiver of right to receive interest on account of Optionally Convertible Debentures by the 3 parties in question. Since the assessee company has not claimed any interest on debentures on OCDs in respect of the 3 parties in question, therefore, the Ld. PCIT has invoked his jurisdiction u/s 263 on account of wrong appreciation of facts. We find some force in the above arguments of the Ld. Counsel for the assessee. A perusal of various details furnished by the assessee shows that ICICI Ventures, Kolte Patil Developers Ltd. and Umedica Investment Services Pvt. Ltd. have waived their right to receive interest on Optionally Convertible Debentures and KKR India Asset Finance Ltd. has nothing to do with the above 3 parties. Since the assessee has not claimed any interest expenditure in respect of the above referred 3 debenture holders who have waived their right to receive interest, therefore, the question of offering of any amount as cessation of liability u/s 41(1) of the Act in assessment year 2020-21 simply does not arise. We, therefore, find merit in the arguments of the Ld. Counsel for the assessee that the order cannot be held as erroneous and prejudicial to the interest of Revenue on account of wrong appreciation of facts by the Ld. PCIT.
So far as the claim of deduction on account of education cess is concerned, we find the assessee no doubt has claimed deduction on account of education cess and secondary education cess paid of Rs.16,97,508/- during the year. However, following the amendment introduced by the Finance Act, 2022, the CBDT notified Form No.69 for applying for re-computation of income due to disallowance of surcharge / cess as per the Notification dated 28.09.2022. We find in compliance with this the assessee company has filed Form No.69 on 23.03.2023, copy of which is placed at pages 65 to 66 of the paper book which is as under:
We, therefore, find merit in the arguments of the Ld. Counsel for the assessee that the assessment order passed u/s 143(3) of the Act should not be considered erroneous and prejudicial to the interest of Revenue.
We find the Hon’ble Delhi High Court in the case of PCIT vs. Delhi Airport Metro Express (P.) Ltd. (supra) while quashing the proceedings u/s 263 of the Act has observed as under: “10. For the purposes of exercising jurisdiction under section 263 of the Act, the conclusion that the order of the Assessing Officer is erroneous and prejudicial to the interests of the Revenue has to be preceded by some minimal inquiry. In fact, if the Principal Commissioner of Income-tax is of the view that the Assessing Officer did not undertake any inquiry, it becomes incumbent on the Principal Commissioner of Income-tax to conduct such inquiry. All that the Principal Commissioner of Income tax has done in the impugned order is to refer to the circular of the Central Board of Direct Taxes and conclude that "in the case of the assessee-company, the Assessing Officer was duty-bound to calculate and allow depreciation on the BOT in conformity of the Central Board of Direct Taxes Circular No.9 of 2014 but the Assessing Officer failed to do so. Therefore, the order of the Assessing Officer is erroneous insofar as prejudicial to the interests of the Revenue" 11. In the considered view of the court, this can hardly constitute the reasons required to be given by the Principal Commissioner of Income-tax to justify the exercise of jurisdiction under section 263 of the Act. In the context of the present case if, as urged by the Revenue, the assessee has wrongly claimed depreciation on assets like land and building, it was incumbent upon the Principal Commissioner of Income-tax to undertake an inquiry as regards which of the assets were purchased and installed by the assessee out of its own funds during the assessment year in question and, which were those assets that were handed over to it by the DMRC. That basic exercise of determining to what extent the depreciation was claimed in excess has not been undertaken by the Principal Commissioner of Income-tax.”
We find the Co-ordinate Bench of the Tribunal in the case of Desai Infra Projects (I) Ltd. vs. Pr.CIT (supra) while quashing the 263 proceedings has observed as under:
“10.1. On a bare perusal of the sub section-1 would reveal that powers of revision granted by section 263 to the learned Commissioner have four compartments. In the first place, the learned Commissioner may call for and examine the records of any proceedings under this Act. For calling of the record and examination, the learned Commissioner was not required to show any reason. It is a part of his administrative control to call for the records and examine them. The second feature would come when he will judge an order passed by an Assessing Officer on culmination of any proceedings or during the pendency of those proceedings. On an analysis of the record and of the order passed by the Assessing Officer, he formed an opinion that such an order is erroneous in so far as it is prejudicial to the interests of the Revenue. By this stage the learned Commissioner was not required the assistance of the assessee. Thereafter the third stage would come. The learned Commissioner would issue a show cause notice pointing out the reasons for the formation of his belief that action u/s 263 is required on a particular order of the Assessing Officer. At this stage the opportunity to the assessee would be given. The learned Commissioner has to conduct an inquiry as he may deem fit. After hearing the assessee, he will pass the order. This is the 4th compartment of this section. The learned Commissioner may annul the order of the Assessing Officer. He may enhance the assessed income by modifying the order. He may set aside the order and direct the Assessing Officer to pass a fresh order. At this stage, before considering the multi-fold contentions of the ld. Representatives, we deem it pertinent to take note of the fundamental tests propounded in various judgments relevant for judging the action of the CIT taken u/s 263. 10.2. Hon'ble Supreme Court in the case of Malabar Industrial Co. Ltd. vs. CIT (2000) 243 ITR 83 (SC)has laid down following ratio with regard to provisions of section 263 of the Act: “There can be no doubt that 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 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. In the same category fall orders passed without applying the principles of natural justice or without application of mind. 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 ITO adopted one of the courses permissible in law and it has resulted in loss of revenue; or where two views are possible and the ITO 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 ITO 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 - RampyariDevi Saraogi v. CIT [1968] 67 ITR 84 (SC) and in Smt. Tara Devi Aggarwal v. CIT [1973] 88 ITR 323 (SC). [Emphasis Supplied]”
11. Now, examining the facts of the instant case in the light of the above judgments and discussions, we firstly take up disallowance u/s. 14A of the Act. The Ld.PCIT has referred to investments made by the assessee in Kalyan Raj Desai JV from which the assessee earns exempt income and secondly investment made in equity shares of Nature Delight Dairy and Dairy Products P. Ltd. From perusal of the paper book pages 30-66 regarding the documents filed in relation to Kalyan Raj Desai JV, we observe that the assessee had not made any investment in the said joint venture and the opening balance as on 01/04/2019 of Rs. 3,56,617/- is the net profit share from joint ventures for F.Y. 2018-19 and the addition during the year of Rs.1,44,42,319/- is also net profit share for joint ventures received/accrued to the assessee for the F.Y. 2019-20. Thus, it remains an admitted fact that the assessee had not made any investment out of its interest bearing funds in Kalyan Raj Desai JV and, therefore, no disallowance u/s. 14A of the Act is called for. So far as investment made in equity shares of Nature Delight Dairy and Dairy Products P. Ltd., we find that the Hon'ble Delhi High Court in the case of PCIT vs. Era Infrastructure (India) Ltd. in dated 20/07/2022 held that disallowance u/s. 14A of the Act should not exceed the exempt income earned by the assessee during the year. Respectfully following the said judgment, we find that since the dividend income has not been earned from the investment in equity shares, no disallowance u/s. 14A of the Act is called for on the alleged investment in equity shares. To conclude, we find that since the assessee had not made any investment in Kalyan Raj Desai JV and has not earned dividend income from investment in equity shares of NDDADPPL, no disallowance u/s. 14A is called for. Thus, even if the issue is set aside to the file of the Ld.AO for necessary enquiry, no disallowance will be called for and, therefore, no prejudice is caused to the Revenue.”
Since in the instant case the assessee has debited interest of Rs.7.26 crores which is on account of the non-convertible debentures issued to KKR India Asset Finance Ltd. and not in respect of OCDs in respect of 3 parties in respect of which there was waiver of interest and therefore, the Ld. PCIT could not have invoked the jurisdiction u/s 263 of the Act on the first issue based on wrong assumption of facts without doing any minimal enquiry.
So far as the second issue is concerned, since the assessee has already filed Form No.69 for assessment year 2020-21 as per amendment introduced by the Finance Act, 2022 and the CBDT Notification dated 28.09.2022 by disallowing the education cess and secondary higher education cess, therefore, the Ld. PCIT in our opinion was also not justified in invoking jurisdiction u/s 263 of the Act on the 2nd issue. In this view of the matter, we hold that the order passed by the Ld. PCIT is not sustainable in law. We, therefore, set aside the order passed by the Ld. PCIT and allow the grounds raised by the assessee.
In the result, the appeal filed by the assessee is allowed.
Order pronounced in the open Court on 30th September, 2025.
Sd/- Sd/- (ASTHA CHANDRA) (R. K. PANDA) JUDICIAL MEMBER VICE PRESIDENT पुणे Pune; दिन ांक Dated : 30th September, 2025 GCVSR आदेश की प्रतितिति अग्रेतिि/Copy of the Order is forwarded to: अपीलार्थी / The Appellant; 1. 2. प्रत्यर्थी / The Respondent 3. The concerned Pr.CIT, Pune 4. DR, ITAT, ‘A’ Bench, Pune 5. गार्ड फाईल / Guard file. आदेशानुसार/ BY ORDER, // True Copy // Senior Private Secretary आयकर अपीलीय अधिकरण ,पुणे / ITAT, Pune
S.No. Details Date Initials Designation 1 Draft dictated on 24.09.2025 Sr. PS/PS 2 Draft placed before author 26.09.2025 Sr. PS/PS Draft proposed & placed before the 3 JM/AM Second Member Draft discussed/approved by Second 4 AM/AM Member 5 Approved Draft comes to the Sr. PS/PS Sr. PS/PS 6 Kept for pronouncement on Sr. PS/PS 7 Date of uploading of Order Sr. PS/PS 8 File sent to Bench Clerk Sr. PS/PS Date on which the file goes to the Head 9 Clerk 10 Date on which file goes to the A.R. 11 Date of Dispatch of order