Consequential Assessment fails if Section 263 Revision order is quashed; Section 80P deduction restored

Issue

Whether an assessment order passed to give effect to a Revision order under Section 263 can survive if the Tribunal (and subsequently the High Court) quashes the underlying Revision order itself.

Facts

The Claim: The assessee claimed deduction under Section 80P(2)(d) on interest income received from a Co-operative Bank.
The Revision: The Principal Commissioner (PCIT) invoked Section 263, holding the allowance of this deduction as erroneous, and directed the AO to disallow it.
The Tribunal’s Intervention: The assessee appealed to the Tribunal, which quashed the PCIT’s revisionary order.
The Consequential Order: Meanwhile, before the Tribunal’s order could be implemented, the Assessing Officer (AO) had already passed an order under Section 143 read with Section 263, disallowing the deduction.
Appellate Relief: The CIT(A) deleted this addition, noting that the Tribunal (upheld by the High Court) had already quashed the Section 263 proceedings.
Revenue’s Argument: The Revenue argued that the Tribunal had quashed the revision on technical grounds without going into the merits, and thus the addition should stand.

Decision

Root and Branch: The Tribunal/Court held that the jurisdiction for the consequential assessment was derived solely from the PCIT’s order under Section 263. Once the “parent” order (Section 263) is quashed by a higher forum, the “offspring” order (the consequential assessment by the AO) automatically loses its legal foundation and cannot survive.
Finality: Since the High Court had dismissed the Revenue’s appeal against the Tribunal’s order quashing the revision, the matter had attained finality in favour of the assessee.
Ruling: The Revenue’s appeal was dismissed. The deletion of the disallowance under Section 80P was upheld.

Key Takeaways

Doctrine of Dependent Orders: In tax litigation, if the foundational order (like a Reopening Notice or a Revision Order) is set aside by a court, all subsequent proceedings (Assessment Orders, Penalty Orders, Recovery Notices) arising from it automatically collapse.

80P(2)(d) Validity: This case implicitly reaffirms that interest earned by a co-operative society from a co-operative bank is eligible for deduction, a view held by several High Courts (like Karnataka and Gujarat), despite the Revenue’s frequent challenges.

IN THE ITAT RAJKOT BENCH

ACIT

Kutch District Co-operative Milk Producers Union Ltd.

Dinesh Mohan Sinha, Judicial Member
and Dr. Arjun Lal Saini, Accountant Member

IT Appeal No. 212 (RJT) of 2025
[Assessment year 2017-18]

OCTOBER 27, 2025

Sanjay Punglia, Ld. CIT-DR for the Appellant. Akshay Modi, Id.AR for the Respondent.

ORDER

Dr. Arjun Lal Saini, Accountant Member.- Captioned appeal filed by the Revenue, pertaining to Assessment Year (AY) 2017-18, is directed against the order passed by the Learned Commissioner of Income Tax (Appeals)/National Faceless Appeal Centre, Delhi[in short ‘Ld.CIT(A)/NFAC’], under section 250 of the Income-tax Act, 1961 (hereinafter referred to as ‘the Act’), dated 09.01.2025, which in turn arises out of an assessment order passed by the Assessing Officer u/s 143(3) r.w.s. 263 of the Act.

2. The Grounds of appeal raised by the Revenue are as follows:

1. The Ld. CIT(A) has erred in law and on facts in quashing order u/s. 143(3) r.w.s. 263 read with section 144B of the I.T. Act dated 27.03.2023 when departmental appeal against the order of the Hon’ble ITAT, Rajkot in Kutch District Co-op. Milk Producers’ Union Ltd. v. Principal Commissioner of Income-tax (Rajkot – Trib.)/ITA No. 176/RJT/2022 dated 29.01.2024 is pending with Hon’ble High Court of Gujarat.

2. It is therefore prayed that the order of the Ld.CIT(A) be set aside and that of the AO be restored to the above extent.

3. The findings of the AO and the addition made by the AO may be upheld in toto.

4. The Ld. CIT(A) has erred in law and on facts in deleting the addition in respect of disallowance u/s. 80P(2)(d) of the Act 5 amounting to Rs.5,60,55,842/-, as the order passed by the Pr. CIT u/s. 263 of the Act was quashed by the Hon’ble ITAT without going into the merits of the case.

5. The Ld. CIT(A) has erred in law and on facts in not considering the fact that the interest income earned by the assessee from the Co-operative Bank is not includible for deduction u/s. 80P of the Act.

3. Learned D.R. for the Revenue, at the outset, informs the Bench that the Revenue does not wish to press ground no.1 raised by it, along with the Form No. 36, therefore, we dismiss ground no. 1 raised by the Revenue, as not pressed.

4. In respect of other grounds raised by the Revenue, the Ld. D.R. for the Revenue, argued that the Departmental appeal, which was against the order of the Hon’ble ITAT, Rajkot in Kutch District Co-op. Milk Producers’ Union Ltd. v. Principal Commissioner of Income-tax (Rajkot – Trib.)/ITA No. 176/RJT/2022 dated 29.01.2024, which was pending with Hon’ble High Court of Gujarat, has been now decided by the Hon’ble High Court of Gujarat, in favour of assessee and against the Department. Therefore, learned DR for the revenue did not have any objection, if the appeal of the revenue is dismissed, nevertheless, the learned DR also relied on the findings of the assessing officer.

5. On the other hand, ld. Counsel for the assessee also submitted that the issue is squarely covered by the judgment of the Hon’ble Gujarat High Court in assessee’s own case vide Pr. CIT v. Kutch District Co. Op. Milk Producers Union Ltd. (Gujarat), wherein the appeal of the department was dismissed by the Hon’ble Gujarat High Court. Therefore Ld. Counsel for the assessee submitted that the issue is squarely covered in favour of the assessee, hence the appeal filed by the Revenue should be dismissed.

6. We have heard the rival submissions and perused the materials available on record. We note that in the assessee’s own case original assessment order was passed by the assessing officer u/s 143(3) of the Act, on 06-11-2019. Thereafter Ld. PCIT exercised his jurisdiction u/s 263 of the Act dated 07-03-2022. Then after the Hon’ble Income Tax Appellate Tribunal, Rajkot quashed the order of the PCIT, vide order of ITAT in Kutch District Co-op. Milk Producers’ Union Ltd. (supra) Thereafter, the assessing officer has framed the appeal effect order u/s 143(3) r.w.s. 263 of the Act dated 27-03-2023 wherein the assessing officer has disallowed the deduction claimed by the assessee u/s 80P(2)(d) of the Act. Against this order, the assessee filed appeal before Ld. CIT(A) who has allowed the appeal of the assessee by following judgment of the Jurisdictional High Court of Gujarat and deleted the addition pertaining to Section 80P(2)(d) of the Act. Against this order of the Ld. CIT(A), the Revenue is in appeal before this Tribunal and the solitary grounds of the Revenue is that the deduction u/s 80P(2)(d) of the Act allowed by the Ld. CIT(A) is not in accordance with law.

7. However, meanwhile, we find that the order passed by the Tribunal, in Kutch District Co-op. Milk Producers’ Union Ltd. (supra) wherein the Tribunal has quashed the 263 proceedings, were carried by the Department in appeal before the Hon’ble High Court of Gujarat, who has dismissed the appeal of the department for the same assessment year 2017-18, in assessee’s own case vide Kutch District Co. Op. Milk Producers Union Ltd (supra) wherein it was held as follows:

“7. An inquiry made by the Assessing Officer, considered inadequate by the Commissioner of Income Tax, cannot make the order of the Assessing Officer erroneous. In view, the order can be erroneous if the Assessing Officer fails to apply the law rightly on the facts of the case. As far as adequacy of inquiry is considered, there is no law which provides the extent of inquiries to be made by the Assessing Officer. It is Assessing Officer’s prerogative to make inquiry to the extent he feels proper. The Commissioner of Income Tax by invoking revisionary powers under Section 263 of the Act cannot impose his own understanding of the extent of inquiry. There were a number of judgements by various High Courts in this regards.

8. Delhi High Court in the case of CIT v. Sunbeam Auto [2011] 332 ITR 167 (Delhi), made a distinction between lack of inquiry and inadequate inquiry. The Hon’ble court held that where the AO has prior to the completion of assessment, the same cannot be set aside u/s263 on the ground of inadequate inquiry

“12 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 items 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 “Indequate inquiry”. If there was any inquiry, even inadquate, that would not by itself, give occasion to the Commissioner to pass orders under Section 263 of the Act, merely because he has different opinion in the matter. It is only in cases of “Lack of inquiry”, that such a course of action would be open. From the aforesaid definition it is clear that an order cannot be termed as erroneous unless it is not accordance with law. If and Income-tax Officer acting in accordance with law makes a certain assessment, the same cannot be branded as erroneous by the Commissioner simply because, according to him, the order should have been written more elaborately. This Section does not visualize a case of substation of the judgement of the Commissioner for that of the Income-tax Officer, who passed the order unless the decision is held to be erroneous. Cases may be visualised where the Income-tax Officer while making an assessment examines the accounts makes enquiries applies his mind to the facts and circumstances of the case determines the income either by accepting the accounts or by making some estimates himself. The Commissioner on perusal of the records, may be of the opinion that the estimate made by the officer concerned was on the lower side and left to the Commissioner he would have estimated the income at a figure higher than the one determined by the Income-tax Officer. That would not vest the Commissioner with power to re-examine the accounts and determine the income himself at a higher figure. It is because the Income-tax Officer has exercised the quasi judicial power vested in him in accordance with law and arrived at conclusion and such a conclusion cannot be termed to be erroneous simply because the Commissioner does not feel satisfied with the conclusion. There must be some prima facie material on record to show that tax which was lawfully exigible has not been imposed or that by the application of the relevant statute on an incorrect or incomplete interpretation a lesser tax than what was just been imposed.

15. Thus even the Commissioner conceded the position that the Assessing Officer made the inquiries, elicited replies and thereafter passed the Assessment order. The grievance of the Commissioner was that the Assessing Officer should have made further inquires rather than accepting the explanation. Therefore, it cannot be said that it is a case of ‘lack of inquiry’.

9. “In Gabriel India Ltd.ITR 108 (Bombay), law on this Aspect was discussed in the following manner (page 1 13):-

“The consideration of the Commissioner as to whether an order is erroneous in so far as it is prejudicial to the interests of the Revenue, must be based on materials on the record of the proceedings called for by him. If there are no materials on record on the basis of which it can be said that the Commissioner acting in a reasonable could have to such a conclusion, the initiation of proceedings by him will be illegal and without jurisdiction. The Commissioner cannot initiate proceedings with a view to starting fishing and roving enquiries in matters or order which are already concluded. Such action will be against the well-accepting policy of law that there must be a point of finality in all legal proceedings, that stale issues should not be reactivated beyond a particular stage and that lapse of time must induce response in and set at rest judicial and quasi-judicial controversies as it must in other spheres of human activity”

10. The Mumbai ITAT in the case of Sh. Narayan Tatu Rane v. ITO, L.T.A. No. 2690/2691/Mum/2016, cit. 06.05.2016 examined the scope of enquiry under Explanation 2(a) to Section 263 in the following words:

“20. Further clause (a) of Explanation states that an order shall be deemed to be erroneous, if it has been passed without making enquiries or verification, which should have been made. In our considered view, this provision shall apply, if the order has been passed without making enquiries or verification which a reasonable and prudent officer shall have carried out in such case, which means that the opinion formed by Ld Pr. CIT cannot be taken as final one, without scrutinising the nature of enquiry or verification carried out by the AO vis-a vis its reasonableness in the facts and circumstances of the case. Hence, in our considered view, what is relevant for clause(a) of Explanation 2 to sec. 263 is whether the AO has passed the order after carrying our enquiries or verification, which a reasonable and prudent officer would have carried out or not. It does not authorise or give unfettered powers to the Ld Pr. CIT to revise each and every order, if in hi opinion, the same has been passed without making enquiries or verification which should have been made. In our view, it is the responsibility of the Ld Pr. CIT to show that the enquiries or verification conducted by the AO was not in accordance with the enquiries or verification that would have been carried out by a prudent officer. Hence, in our view, the question as to whether the amendment brought in by way of Explanation 2(a) shall have retrospective or prospective application shall not be relevant”

11. The Supreme Court of India in the case of Principal Commissioner of Income-tax, Surat-2 v. Shreeji Prints (P.) Ltd. [2 (SC) dismissed SLP filed by the assessee against order passed by High Court holding that where assessee company had received unsecured loans from two different companies and Assessing Officer had made inquires in detail and accepted genuineness of same, such view of Assessing Officer being a plausible view could not be considered erroneous or prejudicial to interest of revenue. The facts of this case were that respondent assessee has filed its return of income showing total income of Rs. 62,55,900/- which was assessed under Section 143(3) of the Act, 1961 by an assessment order dated 14th March 2016. The respondent company received unsecured loans from M/S. Georgett Tradecom Pvt. Ltd and M/S. Purba Agro Food Pvt. Ltd amounting to Rs. 2.49 Crore and the Assessing Officer allowed these unsecured loans. The Principal Commissioner of Income-tax invoked. Section 263 of the Act, 1961 for revising the assessed income of the respondent assessee. It was noticed by the PCIT that the unsecured loans obtained by the respondent assessee are shown as investment in the name of the assessee in the share application as well as in the balance sheet of the respective companies. The PCIT passed an order under Section 263 of the Act directing the Assessing Officer to pass fresh assessment order under Section 143(3) of the Act, 1961 on the aspect of unsecured loans shown by the respondent assessee. The Hon’ble Supreme Court made the following observation while deciding in favour of the assessee:

“Thus, the Tribunal has considered in detail the aspect of revisional power to be exercised by the PCIT in the facts of the case and has given finding offacts that the Assessing Officer has made inquiries in detail and after applying mind, accepted the genuineness of loans received by the respondent assessee from the aforesaid two companies and such view of the Assessing Officer is a plausible view”, and therefore, the same cannot be said to be erroneous or prejudicial to the interest of the Revenue”

12. The Supreme Court in another recent case of Principal Commissioner of Incometax 2 v. Shree Gayatri Associates(SC) held that where Pr. CIT passed a revisional order making addition to assessee’s income under Section 69A in respect of on-money receipts, however, said order was set aside by Tribunal holding that AO had made detailed enquiries in respect of on-money receipts and said view was also confirmed by High Court, SLP filed against decision of High Court was liable to be dismissed. The facts of this case were that pursuant to search proceedings, assessee filed its return declaring certain unaccounted income. The Assessing Officer completed assessment by making addition of said amount to assessee’s income. The Principal Commissioner passed a revisional order under Section 263 on ground that Assessing Officer had failed to carry out proper inquiries with respect to assessee’s on money receipt. In appeal, the Tribunal took a view that Assessing Officer had carried out detailed inquiries which included assessee’s on-money transactions and Tribunal thus set aside revisional order passed by Commissioner. The High Court upheld Tribunal’s order. The Supreme Court while dismissing the SLP filed by the Department held as under:

We have heard learned counsel for the Revenue and perused the documents on record. In particular, the Tribunal has in the impugned judgement referred to the detailed correspondence between Assessing Officer and the assessee during the course of assessment proceedings to come to a conclusion that the Assessing Officer had carried out detailed inquiries which includes assessee’s on-money transactions. It was on account of these findings that the Tribunal was prompted to reverse the order of revision. No question of law arises. Tax Appeal is dismissed”

13. In our considered view, this is not a fit case for invocation of ns of Section 263 of the Act. This is for the reason that firstly, we that the assessing officer had examined the issue in detail during course of assessment proceedings, and it is not a case where there was any apparent lack of enquiry on this aspect by the assessing officer. Secondly, the assessing officer had taken a view which is a legally plausible view and it is a well settled law that 263 proceedings cannot be resorted to by the PCIT only with the view to supplant his own view with the view taken by the assessing officer. Further, the decision of KatlaryKariana Supra was on the aspect of reopening of assessment under Section 147 of the Act and not directly on the issue of claim of reduction under Section 80P of the Act. Therefore, once it is seen from the records that the assessing officer had made due enquiries during the course of assessment proceedings on this aspect and had taken a view, which is a legally possible view, then, in our considered view PCIT cannot reason to 263 proceedings only to supplant his own view with the view taken by the Assessing Officer. Further, we observe that the PCIT has also factually erred in observing that there was no enquiry by the assessing officer on this aspect. Accordingly, in light of the facts of the instant case, and the judicial president of the subject, we hold that the order passed by PCIT under Section 263 of the Act is liable to be set aside.”

7. We are in complete agreement with the aforesaid findings of the learned ITAT.

8. In Malabar Industrial Co. Ltd. v. Commissioner of Income Tax, Kerala State ITR 83 (SC), wherein,, the Hon’ble Apex Court has held as under :-

“6. A bare reading of this provision makes it clear that the prerequisite to exercise of jurisdiction by the Commissioner suo moto under it, is that the order of the Income Tax Officer is erroneous insofar as it is prejudicial to the interests of the Revenue. 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. If one of them is absent if the order of the Income Tax Officer is erroneous but is not prejudicial to the Revenue or if it is not erroneous but is prejudicial to the Revenue recourse cannot be had to Section 263(1) of the Act.

10. 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 Saraogi v. CIT and in Tara Devi Aggarwal v. CIT.)”

9. In view of the above, no question of law much less the substantial question of law sought to be raised by the Appellant Revenue arise in the present case. Hence, the instant appeal being devoid of any merit is accordingly dismissed.”

8. Therefore, respectfully following the judgment of the Hon’ble High Court of Gujarat in the assessee’s own case (supra), we dismiss the appeal of the Revenue.

9. In the result, appeal find by the revenue is dismissed.