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Facts
The assessee claimed a deduction for 'cost of improvement' on a land sold, which was allowed by the Assessing Officer without sufficient verification. The PCIT initiated revision proceedings u/s 263, citing the AO's lack of inquiry as making the order erroneous and prejudicial to the revenue.
Held
The Tribunal held that the Assessing Officer's order allowing the cost of improvement deduction without proper inquiry was erroneous and prejudicial to the revenue, thereby upholding the PCIT's action u/s 263. The assessee's plea regarding Vivad se Vishwas Scheme was rejected.
Key Issues
Whether the PCIT was justified in invoking Section 263 given the Assessing Officer's alleged lack of inquiry into the 'cost of improvement' deduction, and whether the assessee's option for the Vivad se Vishwas Scheme precluded the revision proceedings.
Sections Cited
263, 143(2), 142(1), 143(3), 144B, 54B, 48, 10B, 54B
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 03.03.2025 passed u/s 263 of the Income Tax Act, 1961 (hereinafter referred to as ‘the Act’) by the Ld. PCIT, Pune-2, relating to assessment year 2020-21.
Facts of the case, in brief, are that the assessee is an individual and filed his return of income for the assessment year 2020-21 declaring total income of Rs.6,40,29,940/-. The case was selected for limited scrutiny under CASS to verify the following issues: a. Capital Gain deduction claimed
Accordingly statutory notices u/s 143(2) and 142(1) of the Income Tax Act, 1961 (hereinafter referred to as ‘the Act’) were issued and served on the assessee in response to which the assessee submitted his replies from time to time. The Assessing Officer completed the assessment u/s 143(3) r.w.s. 144B of the Act on 19.09.2022 by disallowing the deduction claimed u/s 54B of the Act at Rs.2,85,69,375/-.
Subsequently the Ld. PCIT examined the record and noted that the assessee during the year had sold a land for a consideration of Rs.13,75,95,200/- on which long term capital gain was offered at Rs.6,19,31,262/-. From the working of long term capital gain he noted that the assessee has claimed deduction u/s 48 of the Act on ‘cost of improvement’ on the said land amounting to Rs.1,88,85,580/- (after indexation). The said ‘cost of improvement’ has been claimed for financial years 2009-10 to 2019-20. However, no supporting evidence or document in respect of these expenses incurred on the ‘cost of improvement’ was submitted by the assessee during the course of assessment proceedings. He noted that the Assessing Officer, while passing the assessment order, has allowed these expenses as deduction u/s 48 of the Act. He referred to the amendment to the provisions of section 263 of the Act w.e.f. 01.06.2015 according to which an assessment order which is passed allowing any relief without inquiring into the claim will make such order both erroneous and prejudicial to the interest of Revenue. Since the Assessing Officer in the instant case has granted the relief on deduction claimed by the assessee u/s 48 of the Act without making suitable inquiries in respect of ‘cost of improvement’, therefore, such assessment order has been passed in violation of sub-clause (b) of Explanation 2 to section 263 of the Act. He, therefore, issued a show cause notice to the assessee asking him to explain as to why the provisions of section 263 of the Act should not be invoked. Rejecting the various explanations given by the assessee, the Ld. PCIT held that the order passed by the Assessing Officer for the impugned assessment year is erroneous and prejudicial to the interest of Revenue. He, therefore, partly set aside the order of the Assessing Officer for limited purpose of examining the issue relating to ‘cost of improvement’. The relevant observations of the Ld. PCIT from para 5 onwards read as under: “05. I have carefully gone through the facts of the case, the Assessment record and the submissions made by the assessee during the revision proceedings u/s 263 of the Act. In its submission the assessee has objected that the revision proceedings u/s 263 in this case may not be invoked citing two reasons. The assessee has stated that firstly the AO examined the cost of improvement, issued queries during the assessment proceeding and accepted the assessee's explanation. Thus, the assessment order is not erroneous and not prejudicial to revenue. The assessee has submitted various judicial pronouncements in support of his claim. Secondly, the assessee has submitted that he has filed application under Vivad se Vishwas Scheme 2024 and revision u/s 263 cannot be done in his case.
6. On perusal of the assessment order, it is clear that the case of the assessee was selected for scrutiny for verification of "Capital Gain Deduction Claims", therefore, the every deduction claimed by the assessee for arriving at Capital Gains required thorough examination by the AO. However, prima facie it is seen that the AO erroneously allowed the "Cost of Improvement" of Rs.1.88 crore (indexed) without conducting proper verification. The assessee claimed "Cost of Improvement" on the Capital Asset i.e. Land over a span of ten years (FY 2009-10 to FY 2019-20), although no substantial documentary evidence such as invoices, work orders, contractor agreements, or payment evidence was provided to substantiate these expenses. The AO should have demanded complete documentary proof and conducted a thorough examination of whether the "Cost of Improvement" was actually incurred, whether it was capital in nature, and whether it was properly indexed for tax computation. Despite the absence of supporting documents, the AO accepted the claim without making necessary inquiries, thereby allowing a deduction that may not be genuine or fully justified.
6.1 From the discussion above, it is evident that the AO has not done due diligence such as requesting complete supporting documents, examining the nature of improvement, verifying whether the expenses were actually incurred, cross-checking the assessee's bank statements and financial records to ascertain the eligibilities of these "Cost of Improvement” claimed by the assessee. It neither emanates from the order nor from the records that on the issue of "Cost of Improvement" any enquiries were made on the above lines.
7. After the introduction of Explanation 2 to Sec. 263, it has been made clear as to what kind of assessment order shall be deemed to be erroneous in so far as it is prejudicial to the interest of the revenue. The Explanation 2 to Sec. 263 is reproduced below :- "Explanation 2. – For the purposes of this section, it is hereby declared that an order passed by the Assessing Officer for 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." 7.1 From the above cited Explanation which has come into effect from 01.06.2015, it is clear that an assessment order which has been passed without making inquiries or verification which should have been made or allowing any relief without inquiring into the claim, will become both erroneous and prejudicial to the interest of revenue. Thus, it is clear that the assessment order dated 19.09.2022 has been passed in violation of sub-clause (a) and sub-clause (b) of Explanation 2 to Section 263 of the Income Tax Act, 1961.
8. The finding that the assessment order under consideration in the present proceedings falls within the ambit of the provisions of section 263 is supported by many judicial precedents. Hon'ble Allahabad High Court in the case of Bhagvandas [(2005) 272 ITR 367(ALL)] and also in the case of P.T. Lashkari Ram [(2005) 272 ITR 309(ALL)] and the Hon'ble Madras High Court in the case of Ashok Leyland Ltd. [(2003) (260 ITR 599(MAD)] have held that action under section 263 is valid where the assessment order is passed without application of mind and without conducting proper inquiry. Reliance is also placed on the decision of Hon'ble Supreme Court in the case of Malabar Industrial Co.Ltd. [(2000) (243 ITR 83(SC)], wherein it was clearly held that the Commissioner of Income tax is within his jurisdiction to set aside the assessment order if it is passed without examination of the relevant details or without application of mind. 8.1 The judgment dated November 2, 2020 of the jurisdictional Hon'ble Bombay High Court in the case of Sesa Starlite Ltd. v. Commissioner of Income Tax. Panaji, Goa [(2021) 430 ITR 121 (Bombay)] has dealt with the issue of applicability of the provisions of section 263 in detail. In this case, during the assessment proceedings, the issue of allowability of the claim of exemption under section 10B of the Income Tax Act was explained by an initial submission of the assessee and also thereafter inquired into by the Assessing Officer raising specific queries on that issue. These queries were responded to by the assessee and then the said issue was decided in the assessee's favour. Hon'ble High Court of Bombay has held in this case that the provisions of section 263 were applicable because of non-application of mind by the Assessing Officer. 8.2 In this context, reference may also be made to the decision of the Hon'ble Bombay High Court in the case of Shoreline Hotels Pvt. Ltd. vs. CIT (98 Taxman 234). In this case, it has been held that if there is failure to make inquiry by the AO, then the order of the AO becomes erroneous in so far it is prejudicial to the interest of the revenue. Similarly, it has been stated by the Hon'ble Himachal Pradesh High Court in the case of CIT vs. HP Financial Corporation Ltd. (186 Taxmann.com 105) that "an incorrect assumption of fact or an incorrect application of law satisfy the requirement of the order being erroneous". The above discussion and the judicial precedence clearly show that the provisions of section 263 are squarely applicable in this case of the assessee.
9. The second objection of the assessee against the initiation of 263 is that the assessee has filed application under Vivad se Viswas Scheme 2024 and revision cannot be done under section 263. It is seen from the available records that the assessee has filed appeal with Commissioner (Appeals) (hereinafter CIT (A)] against the impugned assessment order dated 19.09.2022 and thereafter the assessee filed application under Direct Tax Vivad Se Vishwas Scheme 2024 (hereinafter DTVSVS -2024) to settle the appeal filed with CIT (A) vide Form 1 filed on 12.12.2024. 9.1 It is the contention of the assessee that since he has filed application under DTVSVS 2024, the provision of Section 263 cannot be invoked in the case of the assessee. However, the contention of the assessee is not acceptable as the matter for which the assessee firstly filed appeal before CIT (A) and subsequently filed application under DTVSVS-2024 are completely different subject matter. The subject matter of appeal with CIT(A) is against the disallowance u/s 54B of the Act in the impugned assessment order dated 19.09.2022. Thus, the subject matter to be resolved through DTVSVS-2024 is disallowance u/s 54B of the Act. However, the subject matter of present proceedings u/s 263 of the Act is different from the subject matter of appeals with CIT (A) In the provision of section 263 of the Act, it has been mentioned that the powers of Pr. Commissioner of Income Tax u/s 263 shall extend to such matters as had not been considered and decided in such appeal. It is undisputed fact that the matter of "Cost of Improvement claimed by the assessee for arising at Capital Gains is not a subject matter before CIT(A), therefore the same is not under the purview of DTVSVS-2024 and cannot be settled by the application filed under this scheme by the assessee.
10. In the light of the above facts, I am satisfied that the assessment order dated 19.09.2022 passed for the Assessment Year 2020-21 is erroneous in so far as it is prejudicial to the interest of the Revenue. Consequently, the said assessment order dated 19.09.2022 for the A.Y.2020-21 is hereby partly set aside to the file of the A.O for the limited purpose of examining the following issues and passing fresh assessment order in the light of enquiries made: 1. To examine the "Cost of Improvement" claimed by the assesse 11. The Assessing Officer is directed to give adequate opportunity of being heard to the assessee before passing the fresh assessment order.”
Aggrieved with such order of the Ld. PCIT, the assessee is in appeal before the Tribunal by raising the following grounds:
1. Under the given facts and circumstances of the case and in law, the original assessment was completed based on "Limited Scrutiny” with respect to 'Capital Gains Deduction Claimed’. However, the Ld. Principal Commissioner of Income Tax erred in initiating revision proceedings u/s 263 on an entirely different issue i.e. cost of improvement. Hence, Proceedings u/s 263 is bad-in-law.
2. Under the facts and circumstances of the case and in law, Ld. Principal Commissioner of Income Tax is erred in not appreciating assessee's submission for cost of improvement in the proceedings u/s 263.
3. Under the facts and circumstances of the case and in law, since the assessee has applied under Direct Tax Vivad se Vishwas Scheme, 2024 hence, order u/s 263 for that year cannot be passed.
4. Under the facts and circumstances of the case and in law, Ld. Principal Commissioner of Income Tax, is erred in setting aside the Assessment Order u/s 143(3) dated 19th Sept 2022 by passing Order u/s 263.
5. The appellant craves the permission to add, amend, modify, revise, substitute, delete or alter any/all of the above grounds of appeal if deemed necessary at the time of hearing of the appeal.
The Ld. Counsel for the assessee reiterated the same arguments as made before the Ld.PCIT during the revision proceedings. He submitted that the case was selected for limited scrutiny for the purpose of capital gain deduction claimed. The Assessing Officer has inquired into all the aspects and therefore the Ld. PCIT cannot travel beyond the scope of limited scrutiny. Further, the assessee had opted for the Vivad Se Vishwas Scheme, 2024 and has paid the due taxes, therefore, the Ld. PCIT was not justified in invoking the jurisdiction u/s 263 of the Act.
Referring to the submissions of the assessee made before the Assessing Officer during the course of assessment proceedings, the Ld. Counsel for the assessee drew the attention of the Bench to the same on account of improvement expenditure which read as under: “Improvement expenditure was made for carrying AGRICULTURAL activity. I have dug / made a WELL and as well as a BORE-WELL in the said land. I have incurred development cost to make the land suitable for AGRICULTURE and not for selling the same as an NA land.”
Similarly, he drew the attention to the following submissions which were made before the Assessing Officer: “I am enclosing separately a separate chart marked as Annexure-3 which demonstrates that, I have been acquiring these lands for AGRICULTURAL purpose since last over 10-15 years. I have developed the land and made these lands as viable for AGRICULTURE. I have taken - A WELL of about 8 lac litres water - A Bore-Well giving continuous water through a 1 inch pipe-line - I have taken out many crops on these lands and sold the same in market - I have also developed an Animal stable (GOTHA) in which, I was having cows and other animals
As stated, I am enclosing the land acquisition chart marked as Annexure-3. Also enclosing chart of FOUR BOUNDRIES as Annexure-4. Also enclosing chart of cost incurred for acquiring lands marked as Annexure-5. Also enclosing chart of year-wise crops cultivated & sold, revenue therefrom, expenses thereto and net Agricultural income, marked as Annexure-6. The Agricultural income has been declared in each year's Return of Income. Copies of the past three years returns are enclosed and marked as Annexure-7. All these evidences will substantiate that, I was indeed carrying out AGRCULTURAL activity. As such, claim of exemption u/s 54B is valid and rightful.”
He accordingly submitted that the full details were given before the Assessing Officer regarding the cost improvement, therefore, the Ld. PCIT was not justified in invoking the jurisdiction u/s 263 of the Act. He also relied on the following decisions: i) Sanjeev Garg V. PCIT [2025] 175 taxmann.com 79 (Chandigarh - Trib.) ii) Ajay Agarwal V. CIT [2025] 171 taxmann.com 91 (Jaipur Trib.) iii) Mind Sports League (P.) Ltd. V. PCIT [2023] 157 taxmann.com 815 (Kolkata - Trib.) iv) Nazare Vikas Karyakari Seva Sahakari Society Ltd. V/s ITO, Ward-1, Solapur in v) Plastic Concern v. ACIT 61 TTJ (Cal) 87 vi) CIT v. Nirav Modi 390 ITR 292 (Bombay) vii) CIT Vs. Nirav Modi (2017) 77 taxmann.com 15 (SC) viii) Malabar Industrial Co. Ltd. v. CIT (243 ITR 83)
The Ld. DR on the other hand drew the attention of the Bench to the findings of the Ld. PCIT while assuming jurisdiction u/s 263 of the Act and submitted that he has thoroughly examined the issue and has observed that the Assessing Officer has not made any enquiry or verification which he should have made while allowing the claim of cost of improvement with indexation. He submitted that in view of the Explanation (2) to section 263 of the Act, the order has become erroneous and prejudicial to the interest of Revenue, therefore, the Ld. PCIT is fully justified in invoking jurisdiction u/s 263 of the Act.
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. It is an admitted fact that the assessee has claimed cost of improvement amounting to Rs.1,88,85,580/- after indexation which has been allowed by the Assessing Officer without making any enquiry or investigation which he was supposed to do. As per the Explanation (2) to section 263 of the Act which has come into force w.e.f. 01.06.2015, an assessment order which has been passed without making enquiries or verification which should have been made for allowing any claim will become both erroneous and prejudicial to the interest of Revenue. The Assessing Officer in the instant case has not asked for any details or made any enquiry regarding the cost of improvement. On being a pointed query raised by the Bench, the Ld. Counsel for the assessee fairly conceded that the Assessing Officer has not raised any query regarding this. He, however, submitted that the assessee has on his own given his submissions regarding the cost of improvement. A perusal of the submissions made before the Assessing Officer on account of cost of improvement shows that the assessee had only dug a well as well as bore-well in the said land and has stated to have incurred the above cost to make the land suitable for agriculture. However, this submission does not justify the incurring of huge expenditure to the tune of more than one crore of rupees just for digging a tube well or bore-well. The Assessing Officer has not made any enquiry on the aspect of cost of improvement. Although the case was selected for scrutiny to verify the capital gain deduction claimed, however, the Assessing Officer without making enquiry for which the case was selected for scrutiny, accepted the submissions of the assessee. Further, the submissions of the Ld. Counsel for the assessee that the Ld. PCIT cannot travel beyond the scope of limited scrutiny is without any merit since cost of improvement is a part of calculation of capital gain. The Assessing Officer was supposed to examine every aspect of capital gain deduction claimed since the case was selected for limited scrutiny to examine the capital gain deduction claimed.
So far as the argument of the Ld. Counsel for the assessee that the assessee has opted for the Vivad Se Vishwas Scheme, 2024 and therefore the PCIT cannot invoke 263 proceedings is concerned, we are of the considered opinion that the same is also without any merit. A perusal of the notice u/s 263 issued by the Ld. PCIT shows that the same was issued on 25.11.2024 whereas the assessee filed Form No.1 under the Vivad Se Vishwas Scheme, 2024 on 12.12.2024, copy of which is available at page 10 of the paper book. We find the subject matter of appeal before the CIT(A) was against the disallowance u/s 54B of the Act for which the assessee has opted for Vivad Se Vishwas Scheme. However, the issue u/s 263 is regarding the cost of improvement which has been claimed by the assessee out of sale proceeds and therefore, the issue under 263 proceedings is different from the subject matter of appeal before the Ld. PCIT and therefore, the submission of the Ld. Counsel for the assessee that since the assessee has opted for Vivad Se Vishwas Scheme, the Ld. PCIT could not have invoked jurisdiction u/s 263 of the Act, is also to be rejected. In this view of the matter and in view of the detailed reasoning given by the Ld. PCIT while partially setting aside the order of the Assessing Officer, we do not find any infirmity in the order of the Ld. PCIT. Accordingly the same is upheld and the grounds raised by the assessee are dismissed.
In the result, the appeal filed by the assessee is dismissed.
Order pronounced in the open Court on 22nd July, 2025.
Sd/- Sd/- (ASTHA CHANDRA) (R. K. PANDA) JUDICIAL MEMBER VICE PRESIDENT पुणे Pune; दिन ांक Dated : 22nd July, 2025 GCVSR आदेश की प्रतितिति अग्रेतिि/Copy of the Order is forwarded to: 1. अपीलार्थी / The Appellant; 2. प्रत्यर्थी / The Respondent 3. DR, ITAT, ‘A’ Bench, Pune 4. गार्ड फाईल / Guard file. आदेशानुसार/ BY ORDER, // True Copy // Senior Private Secretary आयकर अपीलीय अधिकरण ,पुणे / ITAT, Pune
S.No. Details Date Initials Designation 15.07.2025 1 Draft dictated on & Sr. PS/PS 18.07.2025 2 Draft placed before author 21.07.2025 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