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Facts
The assessee's assessment for AY 2020-21, framed under Section 143(3) read with Section 144B, was set aside by the PCIT under Section 263, alleging an erroneous allowance of Rs.31.80 crore as excess set-off of unabsorbed depreciation, making the order prejudicial to the revenue. The assessee contended that the AO had duly considered the facts, disallowed depreciation on goodwill, and allowed only the eligible unabsorbed depreciation from AY 2018-19, not the higher amount claimed in the ITR. Furthermore, the AO had already initiated rectification proceedings under Section 154 for the same issue.
Held
The Tribunal held that the PCIT's invocation of jurisdiction under Section 263 was factually incorrect and legally impermissible because the assessment order demonstrated conscious application of mind by the AO. The AO had conducted detailed inquiries, disallowed depreciation on goodwill, and allowed only the eligible unabsorbed depreciation. The prior initiation of rectification proceedings under Section 154 for the same issue by the AO further indicated conscious consideration, not lack of inquiry, making the PCIT's assumption of jurisdiction unsustainable.
Key Issues
Whether the Principal Commissioner of Income Tax validly invoked revisional jurisdiction under Section 263 against an assessment order, alleging erroneous allowance of excess unabsorbed depreciation set-off, when the Assessing Officer had consciously applied mind to the issue and had already initiated rectification proceedings under Section 154 for the same matter.
Sections Cited
263, 143(3), 144B, 142(1), 80IBA, 154, 143(2)
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, “B” BENCH, AHMEDABAD
Before: S/SHRI SANJAY GARG & MAKARAND V.MAHADEOKAR
This appeal by the assessee is directed against the revisionary order dated 26.03.2025 passed under section 263 of the Income Tax Act, 1961 [hereinafter referred to as “the Act”] by the Principal Commissioner of Income Tax-1, Ahmedabad [hereinafter referred to as "Ld. PCIT"], for the Assessment Year 2020–21, whereby the assessment order passed under section 143(3) r.w.s. 144B dated 27.09.2022 by the Assistant Commissioner of Income Tax, Circle-1(1)(1), Ahmedabad [hereinafter referred to as "AO"] was set aside on the ground that the said assessment order was erroneous in so far as it was prejudicial to the interests of the Revenue.
Facts of the case
The assessee is a company engaged in the business of real estate and property development. For the Assessment Year 2020–21, the assessee filed its return of income on 06.01.2021. Later the said return was revised on 30.03.2021 declaring a total income of ‘NIL’ after setting off unabsorbed depreciation loss under normal provisions against gross total income. The case was selected for scrutiny and assessment proceedings were conducted under section 143(3) r.w.s. 144B of the Act. During the course of assessment, the Assessing Officer issued multiple notices under section 142(1) seeking detailed explanations and documentary evidence regarding the computation of income, treatment of brought forward losses, claim of depreciation, and other aspects. In compliance, the assessee filed detailed written submissions including the one dated 14.09.2022 explaining the claim of unabsorbed depreciation pertaining to earlier years including A.Y. 2018–19 and 2019–20. The assessment was finally framed determining the gross total income under normal provisions at Rs.62,91,18,337 and net total income (after Chapter VI-A deductions under section 80IBA of Rs.35,98,30,738/-) at Rs.10,54,37,004. The major disallowance made by the AO in the assessment was Rs.14,87,59,399 towards depreciation claimed on goodwill, which was disallowed on the ground that the depreciation on goodwill arising out of amalgamation of Bakeri Engineering & Infrastructure Pvt. Ltd. with the assessee company had already been disallowed in earlier years, and accordingly, it could not be allowed in A.Y. 2020–21 as well. Simultaneously, the AO allowed unabsorbed depreciation to the extent of Rs.16,38,50,595 pertaining to A.Y. 2018–19 as a set off against business income under normal provisions. The computation of income as a part of the assessment order clearly reflects this allowance of brought forward unabsorbed depreciation loss.
Subsequently, the Ld. PCIT issued a show cause notice under section 263 dated 07.03.2025 proposing to revise the assessment order passed by the Assessing Officer. The PCIT observed that the assessee had filed its return of income on 06.01.2021 declaring total income at ‘NIL’ after claiming set off of brought forward depreciation losses aggregating to Rs.53,52,94,158 pertaining to A.Ys. 2016–17, 2017–18, and 2018–19. Upon examination of the assessment record and ITR schedules, the PCIT noticed that the depreciation loss pertaining to A.Ys. 2016–17 and 2017–18 had already been disallowed in the respective assessment years due to rejection of depreciation on goodwill, and hence, no depreciation loss was available for carry forward or set off for A.Y. 2020–21 from those years. The PCIT further noticed that only depreciation of Rs.16,22,84,220 was available from A.Y. 2018–19 for set off. However, while finalizing the assessment, the Assessing Officer allowed set off of brought forward depreciation to the extent of Rs.48,03,58,938 as claimed by the assessee in its return of income, which included depreciation losses pertaining to A.Ys. 2016–17 and 2017–18. The PCIT accordingly opined that the excess set off of Rs.31,80,74,718 (i.e., Rs.48,03,58,938 minus Rs.16,22,84,220) had resulted in under-assessment of income and consequent short levy of tax. It was held that the assessment order was prima facie erroneous and prejudicial to the interest of revenue to the extent of excess allowance of depreciation loss, and the AO had failed to conduct necessary verification. Consequently, the PCIT invoked his jurisdiction under section 263 of the Act and initiated proceedings to revise the assessment order on the said issue.
In response to the show cause notice, the assessee filed a detailed reply dated 19.03.2025 explaining that the depreciation on goodwill amounting to Rs.14,87,59,399 had already been disallowed by the AO in the assessment order and that the remaining unabsorbed depreciation of Rs.16,38,50,595 relating to A.Y. 2018–19 had been correctly set off against the income computed under the normal provisions. It was pointed out that the amount claimed as set off in the computation was not Rs.48.03 crore as alleged, but only Rs.16.38 crore as was actually allowed by the AO. The assessee further submitted that there was no carry forward of depreciation losses from A.Ys. 2016–17 and 2017–18, and therefore, the PCIT's premise was factually incorrect.
Despite this explanation, the Ld. PCIT proceeded to pass the impugned order dated 26.03.2025 under section 263 of the Act. In the said order, the Ld. PCIT observed that the AO had failed to verify the quantum of unabsorbed depreciation available for set off and had mechanically allowed the claim of Rs.48,03,58,938/- resulting in an erroneous order causing prejudice to the interest of the Revenue.
6. Aggrieved by the order of the Ld. PCIT, the assessee has filed the present appeal before us raising following Grounds of Appeal:
1. That on the facts and circumstances of the case and in law, the Ld. Principal Commissioner of Income Tax (PCIT) erred in invoking jurisdiction under Section 263 of the Income Tax Act, 1961 and in setting aside the assessment order passed under Section 143(3), which was neither erroneous nor prejudicial to the interests of the Revenue.
2. That the Ld PCIT erred in law and on the facts of the case in setting aside the assessment order to conduct fresh inquiry in relation to an issue which was not a subject matter of the notice issued u/s 263.
3. That the Ld PCIT erred in law and on the facts of the case in setting aside the assessment order to conduct fresh inquiry in relation to an issue which is a subject matter of rectification u/s. 154 of the Act.
4. That the Ld. PCIT erred in assuming revisionary jurisdiction merely based on an issue, without independent identification of any specific error or omission in the assessment order and travelled beyond its contention in the order u/s.263 of the Act.
5. That the Ld. PCIT failed to appreciate that the Assessing Officer had made detailed inquiries during the assessment proceedings and had applied his mind to all material facts and submissions made by the appellant, thereby making the assessment order a result of conscious examination and not a case of lack of inquiry.
That the revision order under Section 263 is bad in law since the AO's view was a plausible view, duly supported by facts and legal provisions, and hence, the order cannot be revised simply because the PCIT holds a different opinion.
That the Ld. PCIT failed to establish how the order passed by the AO was prejudicial to the interests of the Revenue, which is a mandatory condition for invoking Section 263.
8. That the appellant prays for leave to add, amend, alter or withdraw any of the above grounds at the time of hearing.
7. The Ld. Authorised Representative (AR) appearing on behalf of the assessee vehemently opposed the assumption of jurisdiction by the Ld. PCIT and submitted that the assessment order passed by the AO was after thorough and detailed verification and cannot be said to be either erroneous or prejudicial to the interest of Revenue. The Ld. AR submitted that the assessment proceedings were initiated by issuance of notice under section 143(2) dated 29.06.2021, followed by several notices under section 142(1), pursuant to which the assessee submitted detailed replies on 28.07.2021, 17.01.2022, 07.03.2022, 26.08.2022, and 18.09.2022, respectively. All such replies were duly acknowledged and considered by the AO, and copies of the same were placed in the Paper Book before us. The AR took us through each of these replies during the course of hearing and submitted that the AO had thoroughly examined all claims including the deduction under section 80IBA and set-off of brought forward unabsorbed depreciation. It was contended that the AO, after due examination, disallowed the depreciation of Rs.14,87,59,399/- claimed on goodwill, clearly referencing the same to past assessments in A.Y. 2016–17, and further clarified that such depreciation was not allowable even in future years. Simultaneously, while computing total income under normal provisions, the AO allowed set-off of Rs.16,38,50,595/- towards brought forward unabsorbed depreciation from A.Y. 2018–19 alone. The gross total income was determined at Rs.62,91,18,337/-, and this was reduced only to the extent of Rs.16.38 crore, as evident from page 7 of the assessment order. The Ld. AR submitted that the entire edifice of the revisionary assumption is factually flawed, since the PCIT proceeded on the incorrect footing that the AO had allowed set-off of the full amount of Rs.48,03,58,938/-, as claimed in the return of income. This assumption is contrary to the actual computation forming part of the assessment order, where the AO consciously allowed only the amount eligible as per records. Therefore, there was no “excess set-off” of Rs.31,80,74,718/-, as alleged.
The Ld. AR further pointed out that the assessee had furnished a detailed reply dated 19.03.2025 before the PCIT in response to the notice under section 263 dated 07.03.2025, a copy of which was also placed before us. In this reply, the assessee reiterated that (i) no depreciation pertaining to earlier years was allowed; (ii) the depreciation of Rs.16.38 crore was the balance remaining after set-off of Rs.2.31 crore in A.Y. 2019–20; and (iii) the AO had applied his mind on both depreciation disallowance and deduction under section 80IBA. Relevant computations, MAT workings, and judicial references were annexed with this reply.
The AR drew our attention to another critical fact, that the AO had already issued a notice under section 154 dated 27.11.2024, proposing rectification of the very same issue of alleged excess set-off of depreciation loss. In that notice, the AO stated that the claim of Rs.48.03 crore was erroneous to the extent of Rs.31.80 crore, and the resultant tax shortfall was Rs.14.81 crore. The assessee replied to this notice vide submission dated 17.12.2024, objecting on the ground that (i) the issue is highly debatable, and (ii) the matter is already pending before the Tribunal. Copies of the section 154 notice and reply were produced before us during hearing. The Ld. AR submitted that the pendency of rectification proceedings under section 154, prior in point of time to the 263 proceedings, shows that the AO had already applied his mind to the issue, and any action under section 263 would amount to substitution of opinion, which is impermissible in law.
The AR further submitted that the PCIT’s reliance on the ITR and Schedule UD figures without comparing it with the actual computation allowed by the AO is misplaced and reflects non-application of mind. Mere clerical reflection of incorrect carry-forward in ITR does not lead to an automatic presumption of allowance, particularly when the AO has consciously acted upon verified figures. In conclusion, the Ld. AR submitted that the revisionary order deserves to be quashed in entirety since (i) the issue was already the subject matter of rectification notice, (ii) there was due inquiry and verification by the AO, and (iii) the matter involves debatable interpretation of depreciation law and carry forward rules. Hence, there was no error, much less a prejudicial error, in the order of the AO warranting action under section 263.
The Ld. Departmental Representative (DR), on the other hand, supported the order of the PCIT. However, when queried, the Ld. DR fairly conceded that no final rectification order under section 154 has been passed by the AO as of the date of hearing.
We have carefully considered the rival contentions, perused the assessment order dated 27.09.2022, the impugned revision order passed under section 263 by the Ld. PCIT dated 26.03.2025, the assessee’s written submissions including the reply dated 19.03.2025, and the materials placed in the Paper Book. The core issue in the present appeal pertains to the validity of exercise of revisionary jurisdiction under section 263 by the Ld. PCIT, alleging that the Assessing Officer erred in allowing excess set-off of brought forward unabsorbed depreciation losses in the assessment framed under section 143(3) r.w.s. 144B for A.Y. 2020–21.
On a plain reading of the assessment order, we find that the AO has, in fact, disallowed depreciation of Rs.14,87,59,399/- claimed on goodwill, holding that the same had already been disallowed in earlier years and was not allowable in A.Y. 2020– 21. The computation of income under the head “Normal Provisions” at page 7 of the assessment order clearly reflects that only Rs.16,38,50,595/- was allowed as set-off of unabsorbed depreciation loss from A.Y. 2018–19. Thus, the assessment order, on the face of it, does not support the foundational assumption made by the PCIT that the AO allowed depreciation loss of Rs.48,03,58,938/- as claimed in the ITR. The basis for the PCIT's invocation of section 263 is the alleged mechanical allowance of Rs.48.03 crore of depreciation loss, out of which Rs.31.80 crore purportedly pertains to A.Ys. 2016–17 and 2017– 18 years in which depreciation on goodwill had already been disallowed and, therefore, not eligible for carry forward. However, the computation portion of the assessment order demonstrates that the AO allowed set-off only to the extent of Rs.16.38 crore, which, as per the records, pertains to unabsorbed depreciation of A.Y. 2018–19, post set-off of Rs.2.31 crore in A.Y. 2019–20. This figure has been consistently explained and substantiated by the assessee, both during the assessment proceedings (reply dated 14.09.2022) and in its response to the PCIT (reply dated 19.03.2025).
In this context, it is necessary to reiterate that an assessment order cannot be termed “erroneous” merely because the PCIT forms a different opinion based on a reading of the return of income or its schedules. As held by the Hon’ble Supreme Court in CIT v. Max India Ltd. [(2007) 295 ITR 282 (SC)] and Malabar Industrial Co. Ltd. v. CIT [(2000) 243 ITR 83 (SC)], two conditions must co-exist for invoking jurisdiction under section 263: (i) the assessment order must be erroneous, and (ii) such error must be prejudicial to the interest of Revenue. The absence of either renders the assumption of jurisdiction invalid. In the present case, the record clearly evidences that the AO had conducted detailed inquiries. Notices under section 143(2) and 142(1) were issued on multiple occasions, and the assessee’s replies dated 28.07.2021, 17.01.2022, 07.03.2022, 26.08.2022 and 18.09.2022, inter alia, explained the workings of unabsorbed depreciation and details of claim under section 80IBA. The AO not only disallowed depreciation on goodwill but also correctly allowed set-off of Rs.16.38 crore which was eligible under law. Thus, the assessment order is a result of conscious examination and application of mind. The finding of the PCIT that the AO failed to verify the availability of brought forward depreciation losses and also failed to verify the details of deduction u/s 80IBA, is factually unsustainable and legally untenable.
Further, the record reveals that prior to the issuance of the 263-notice dated 07.03.2025, the AO had already issued a notice under section 154 dated 27.11.2024 proposing to rectify the very same issue i.e., the alleged excess set-off of depreciation loss. In the said notice, the AO computed the excess allowance at Rs.31.80 crore and resultant tax impact at Rs.14.81 crore. The assessee objected to this proposal vide reply dated 17.12.2024, contending that the issue was already being agitated before the Tribunal and rectification under section 154 cannot be resorted to on debatable and controversial issues. The fact that the AO himself considered this matter under the rectification jurisdiction of section 154 belies the PCIT’s assumption that there was non-application of mind or lack of inquiry. The initiation of section 154 proceedings by the AO is itself a recognition of the fact that the issue is a matter of record-based computation and was consciously considered in the assessment. The pendency of such rectification proceedings, prior in time to the 263 proceedings, renders the PCIT’s assumption of jurisdiction unsustainable. If the AO had made a computational error, he was well within his power to rectify it under section 154, but such alleged computational variance cannot be elevated to an “erroneous” order under section 263, particularly when the assessment order contains an express discussion of depreciation disallowance and its treatment. It is settled law that revisionary powers under section 263 cannot be exercised to substitute the opinion of the PCIT for that of the AO where two views are possible.
We also note that the PCIT has failed to establish how the order is prejudicial to the interest of the Revenue. The allegation of prejudice is based entirely on a presumed excess set-off of Rs.31.80 crore — a presumption not borne out from the assessment record. Once this factual premise is demolished, the question of “prejudice” does not arise. The mere possibility of a computational inaccuracy or clerical inconsistency in ITR cannot be the basis for invoking drastic powers under section 263.
In view of the above discussion, we find merit in the contention of the Ld. AR that the assumption of jurisdiction under section 263 by the PCIT is factually incorrect, legally impermissible, and based on a flawed appreciation of the assessment record. The assessment order cannot be termed as “erroneous” when it records detailed findings, deals with the disallowance of goodwill depreciation, and allows set-off strictly limited to the eligible amount for A.Y. 2018–19. The fact that the AO issued a section 154 notice on the same issue further underscores that the AO had applied his mind, and the matter was not overlooked.
Accordingly, we hold that the order passed under section 263 by the Ld. PCIT is unsustainable in law and liable to be quashed. This, however, shall not affect the validity or independent adjudication of the proceedings initiated separately under section 154, which shall be decided on their own merits, in accordance with law.
In the result, the appeal filed by the assessee is allowed.
Order pronounced in the Court on 4th July, 2025 at Ahmedabad.