Revisionary Powers Under Section 263 Cannot Be Invoked When the AO’s Order is Based on a Plausible View
Issue
The primary legal issue is whether the Principal Commissioner (Pr. CIT) can exercise revisionary jurisdiction under section $263$ of the Income-tax Act, 1961, to set aside an assessment order by deeming it “erroneous,” when the Assessing Officer (AO) had already examined the issue in question and taken a view that is reasonable and legally sustainable. A secondary procedural issue was whether an inordinate delay of 305 days by the revenue in filing a Special Leave Petition (SLP) should be condoned.
Brief Facts
The assessee sold a piece of land and claimed a deduction under section $54B$ on the ground that the capital gain was reinvested in new agricultural land. The Assessing Officer examined the claim, which included issuing various show-cause notices regarding the capital gain and agricultural income, and subsequently allowed the deduction.
Later, the Pr. CIT initiated revision proceedings under section $263$, contending that the AO’s order was erroneous and prejudicial to the interest of the revenue. The reason cited was that the assessee had not placed sufficient documentary evidence before the AO to prove that agricultural activities were carried out on the land sold. The assessee objected, highlighting that the AO had, in fact, conducted an inquiry before allowing the claim. The High Court sided with the assessee, holding that the AO had taken a plausible and legally sustainable view after due examination. The revenue then appealed to the Supreme Court, but with a significant delay of 305 days.
Decision
The Supreme Court held in favor of the assessee.
The Special Leave Petition filed by the revenue was dismissed primarily on the grounds of an inordinate delay of 305 days. The Court found that the explanation provided for the delay did not constitute a “sufficient cause” to condone it.
This dismissal effectively upholds the High Court’s decision, which had quashed the Pr. CIT’s order under section $263$. The High Court’s reasoning was that the AO had examined the issue in depth before allowing the section $54B$ exemption. Therefore, the view taken by the AO was one of the possible, reasonable, and legally sustainable views, which cannot be termed “erroneous” merely because the Pr. CIT had a different opinion.
Key Takeaways
- Limited Scope of Section 263: Revisionary powers under section
$263$are not meant for the Pr. CIT to substitute their own judgment for that of the AO. These powers can only be invoked if the AO’s order is both erroneous AND prejudicial to the interests of the revenue. - A Plausible View is Not an Erroneous View: An assessment order cannot be considered “erroneous” if the AO has conducted an inquiry and taken a view that is plausible and legally sustainable. The existence of another possible view does not make the AO’s order revisable.
- Due Inquiry is Key: If the record shows that the AO applied their mind and made relevant inquiries before allowing a claim, the resulting order is generally protected from revision under section
$263$. - Limitation is Strictly Applied: The courts will not lightly condone significant delays in filing appeals. The party seeking condonation must provide a compelling and “sufficient cause” for the delay.
SUPREME COURT OF INDIA
Principal Commissioner of Income Tax
v.
Kanubhai Vanmalibhai Patel HUF
Pamidighantam Sri Narasimha and Alok Aradhe, JJ.
SLP (CIVIL) Diary No(s). 41282 OF 2025
SEPTEMBER 1, 2025
Mrs. Kalpana K. Raval for the Appellant.
ORDER
Bhargav D. Karia, J.- Heard learned advocate Mr. Karan Sanghani for the appellant and learned advocate Mr. Manish J. Shah for the respondent.
2. This appeal is filed by the Revenue under Section 260A of the Income Tax Act, 1961 (for short ‘the Act, 1961’) challenging the order dated 17.04.2023 passed by the Income Tax Appellate Tribunal, Surat Bench, Surat(for short “the Tribunal”) in Kanubhai Vanmalibhai Patel v. ITO [ITA no.60 (SRT) of 2022] for A.Y. 2016-2017 proposing the following questions of law:
| “i) | Whether on the facts and in the circumstances of the case and in law, the Hon’ble ITAT is justified in quashing the order of the Pr. CIT passed u/s. 263 and holding that decision of Assessing Officer cannot be treated as erroneous and prejudicial to the interest of revenue even though the AO has not made enquiry which should have been made in respect of the deduction claimed u/s 54B of the Act in the light of the fact that the assessment order was passed without proper application of mind in the absence of relevant documentary evidence regarding agricultural use of said land in the period of two years preceding the date of sale, rendering the assessment order erroneous in so far as it is prejudicial to the interest of Revenue in terms of Explanation 2(a) to section 263(1) of the Act?” |
| (ii) | “Whether on the facts and Circumstances of the case and in law, the order of the Hon’ble ITAT is perverse in setting aside the order u/s 263 dated 21/02/2022 on the ground that the twin conditions as enunciated under section 263 cannot be said to have been fulfilled without appreciating that the Assessing Officer got carried away with the submission of the Assessee and also the Assessing Officer has not examined the conditions as laid down u/s 54B of the Act for the period under consideration?” |
| (iii) | “Whether on the facts and circumstances of the case and in law, the Hon’ble ITAT is correct in holding that the view taken by the Assessing Officer is one of the reasonable and plausible and legally sustainable view, which cannot be said as erroneous even though the Assessing Officer has allowed the claim of deduction u/s 54B of the Act of the Assessee without making enquiry that the agricultural activities were done on the impugned land in the period of two years preceding the date of sale and that the impugned land transaction was in nature of business transaction or an adventure in the nature of trade?” |
3. Brief facts of the case are that assessee HUF filed its return of income for AY 2016-2017 on 31.03.2017 declaring loss at RS.4,53,97,120/-.
4. Case of the assessee was taken for scrutiny assessment and notice under section 143(2) and 142(1) of the Act were served upon the assessee for seeking certain information about short term/long term capital gain and agricultural income.
5. Assessment order under section 143(3) of the Act dated 13.12.2018 came to be passed accepting the returned income declared by the assessee in its return of income.
6. The assessment order was thereafter revised by the Principal Commissioner of Income Tax, Surat vide order dated 31.03.2021.
7. The assessee challenged the order dated 31.03.2021 before the Tribunal by preferring Kanubhai Vanmalibhai Patel HUF v. Pr. CIT [IT Appeal No. 38 (SRT.) of 2021, dated 10-6-2021], wherein besides challenge on merits, the assessee also raised the ground that assessee was not given adequate opportunity of hearing and submissions of the assessee were not considered.
8. The Tribunal vide order dated 10.06.2021 restored the appeal to the file of Principal Commissioner of Income Tax to consider the reply and to pass fresh order in accordance with law.
9. PCIT on perusal of the assessment order noted that the assessee and his co-owner sold the piece of land situated at Revenue Survey No.371, Vesu, Taluka Majura, District Surat for a sale consideration of Rs. 33.82 crores and claimed deduction under section 54B for Rs.17.75 crores on purchase of other agricultural land which was for commercial development. It was also recorded by the PCIT that in three preceding years, the assessee frequently transacted in land as a commodity in a large quantity and therefore, it was considered as a business of land dealing and not holding it as a capital asset. PCIT was therefore, of the opinion that land held by the assessee was stock in trade and income arising out of such sale is to be treated as business income.
10. It was also noted by PCIT that assessee before transfer of sale obtained permission from the Deputy Collector, Surat under section 63 of the Tenancy Act for selling agricultural land for non-agricultural purposes. However, no documentary evidence was placed before the Assessing Officer about agricultural activities carried out by the assessee in the said land. PCIT was therefore, of the opinion that the assessee was not eligible for deduction under section 54B of the Act.
11. In response to the show cause notice dated 23.03.2021 issued by PCIT under section 263 of the Act, the assessee could not file reply in the proper format and therefore, another notice was issued. However, assessee did not upload the reply nor sent through mail and PCIT therefore, decided the issue based on material available on record and passed the order under section 263 of the Act by setting aside the assessment order dated 12.12.2018 for AY 2016-2017 by directing the Assessing Officer to re-frame the assessment after examining the issues and after making proper inquiry.
12. Being aggrieved, the assessee preferred an appeal before the Tribunal challenging the order passed by the PCIT which was also set aside by the Tribunal on the ground of breach of principles of natural justice.
13. PCIT therefore, issued fresh show cause notice and the assessee filed reply dated 1.12.2021 raising objection that the jurisdiction under section 263 of the Act is being exercised with 2/3rd parcel of land while on 1/3rd parcel of land capital gain is already allowed. It was also pointed out that the Assessing Officer has made specific inquiry on transaction of land which were duly responded by the assessee demonstrating that the assessment order was passed after due application of mind forming conscious opinion that the sale of land was a transaction of capital gain and assessee was eligible for claiming deduction under section 54B of the Act.
14. Reliance was also placed on notice dated 23.07.2018 issued by the Assessing Officer requiring the assessee to file computation of income, profit and loss account with balance sheet which was duly responded by the assessee along with detailed reply dated 13.09.2018. The assessee also submitted copy of sale deed of the land sold during the year under consideration with copies of respective purchase deeds to show the cost of acquisition pursuant to notice dated 1.10.2018. The assessee also filed copy of purchase deed of new property so as to demonstrate that the assessee was eligible for deduction under section 54B of the Act. The assessee also submitted the details of crops grown and yield of each crop for Financial Year 2013-2014 to 20152016 along with head-wise agricultural expenses like labour, irrigation, transportation, seeds expenses, fertilizers expenses etc. and complete name, address and PAN number to whom the agricultural produce was sold during the aforesaid period justifying the claim of agriculture income with document of revenue record of Form No.6, sales bill of agriculture product, etc. in response to the evidence sought by the Assessing Officer vide reply dated 11.12.2018.]
15. The Assessing Officer also by notice dated 16.10.2018 asked various details about deduction under section 54B to 54G of the Act and sale consideration of property in income tax return which is less than the consideration reported in Form 26QB and details of long term capital gain which was replied by the assessee on 24.10.2018.
16. The assessee again responded vide reply dated 14.11.2018 to another show cause notice dated 6.11.2018 issued by the Assessing Officer which is duly reflected in para.2 of the assessment order under section 143(3) of the Act. It was therefore, contended by the assessee that the assessment order was passed after making detailed inquiry by the Assessing Officer.
17. However, PCIT passed the impugned order after considering the submissions of assessee as recorded in paragraph no.7 of his order on the ground that the assessee is involved in the business of builder as a partner in the firm Kabir Corporation having frequent dealings in purchase and sale of the land during the year under consideration. PCIT therefore, rejected the objections raised by the assessee by holding that during the assessment no cross verification or investigation was made by the Assessing Officer with regard to the sale of agricultural produce made by the assessee. It was also observed that the Assessing Officer did not make any inquiry from agriculture department or revenue agency about the crop cultivation and accepted the reply of the assessee without any further verification to ascertain the correctness of such averments made in the reply, more particularly, when the assessee did not disclose any agricultural income in preceding two assessment years. PCIT was therefore, of the opinion that there was non application of mind by the Assessing Officer and arrived at conclusion that assessment order is erroneous and prejudicial to the interest of revenue and again set aside the assessment order dated 13.12.2018 with a direction to re-frame the assessment order.
18. Being aggrieved the assessee preferred an appeal before the Tribunal. Tribunal after considering the submissions of both the sides held as under:
“13. We find that though, it was accepted by ld PCIT that the assessing officer raised question for seeking evidence of agriculture income, the assessee failed to prove that land was being used for agricultural purpose by furnishing valid documentary evidence. The assessee claimed that agricultural income was shown in all past three years, is not supported by evidence of actual carrying out of agriculture operations. No cross verification or investigation was made during assessment about the letter issued by Shree Maruti Gaushala regarding taking entire product/crops grown on the said land and donated to such Gaushala. The Assessing Officer has not made any enquiry from agriculture department or revenue agency about the crop cultivation.
14. As recorded above the ld AR for the assessee during the hearing of appeal invited our attention on the various show cause notices issued under section 142(1) and their reply filed by the assessee. We find that during assessment the assessing officer, in case of assessee, the assessing officer, vide notice dated 23/07/2018 directed assessee to file computation of income, profit and loss account with balance sheet, which was duly responded alongwith all details vide reply dated 13/09/2018. Again vide notice dated 01/10/2018, assessing officer asked the assessee to furnish copy of sale deed of the land sold during the year under consideration with copies of their respective purchase deed to show the cost of acquisition, copy of purchase deed of new property in order to clarify of deduction under Section 54B. The Assessing Officer also sought evidence regarding agriculture activities immediately preceeding year before transfer of agricultural land on which deduction under Section 54B is claimed and details of crops grown and yield of each crop for F.Y. 2013-14 to 2015-16. Details of head wise of agricultural expenses like labour, irrigation, transportation, seeds expenses fertilizer expenses etc. Complete name, address, PAN to whom the agricultural produce were sold in F.Y. 2013-14 to 201516, justification of claim of agriculture income with cogent and sufficient evidence with Hak Patra, Form-6, sales of bills of agriculture product. We find that the assessee in its reply dated 11/12/2018 furnished required details. The Assessing Officer again vide notice dated 16/10/2018 asked various details about the deduction under Section 54B to 54G of the Act and sale consideration of property in Income tax return is less than the consideration reported in Form 26QB, details of long term capital gain. The assessee further vide its reply dated 24/10/2018 furnished complete details. We find that the assessee again in response to show cause notice dated 06/11/2018, furnished the details of immovable property purchased vide its reply dated 14/11/2018. From the various reply furnished by the assessee, it can be concluded that the assessing officer thoroughly examined the issue of the deduction under section 54B. No doubt that there is no such observation about conducting such detailed inquiry, in the assessment order.
15. The Punjab & Haryana High Court in S.K. Kantilal (supra) held that when the assessee having sold the land after holding it for two decades and using it for agriculture purpose without effecting any improvement on the land, the earning from such sale of is to be treated as capital gain and not income from business and profession. Further, Punjab & Haryana High Court in Harjeet Sing Sangha (supra) also took the view that when the assessee purchased agriculture land and it was being used as such by assessee, later on it was sold in a small plots to different persons, it was held that activity could not be termed as adventure in nature of trade and cannot be taxed as business income. Again adverting to the facts of present case, the assessee before sale of land has only got its conversation from agriculture to non- agriculture purpose as it is the condition precedent for selling the land to the person who is not registered farmer in the revenue record of the State Government. The Hon’ble Gujarat High in CIT v. Sidharth J Desai (1983) 139 ITR 628 (Guj) held that there are several factor to determine the real and held that permission under section 63 of the Bombay Tenancy and Agricultural Lands Act was obtained by the assessee to sell the lands to the society for residential purposes would not, militate against the land continuing to be agricultural on the date of its sale, as the permission was obtained only about two and a half months prior to the sale. Therefore, till the land was held by the assessee its character as agricultural land was not changed either as a result of its reclassificanon in the revenue records or by the actual alteration of its use.
16. In view aforesaid legal and factual discussions coupled with the facts the assessing officer has examined the issue in depth and allow relief to the assessee. Therefore, the view taken by the assessing officer is one of the reasonable and plausible and legally sustainable, which cannot be said as erroneous.
17. We also find that before ld PCIT, it was submitted that the assessee was owner of 2/3 part which is sought to be taxed as business income, however, on remaining part of 1/3 shareholders case the department has accepted capital gain. To strengthen such contention, the assesse has filed copy of assessment order dated 067.12.2018 passed under section 143(3) in case of co- owner namely Ramesh Chandra Purshottamdas Dass Patel alongwith the copies of the notices issued by his assessing officer. Similar submissions were made before us by ld AR for the assessee. We find that on such submissions, ld PCIT while setting aside the assessment order held that such objection is not acceptable as the fact in case of co-owner of said case with regard to involvement of said person in the real estate business, frequency of land transaction, intention of that person to purchase the land for resale or for personal use etc have not been stated. And that there is no basis to raise such objection that consciously no revision was proposed in that case. In our view the observation of Id PCIT is not correct. Once, the department has accepted the capital gain in the hand of co-owner in respect of the common transaction, the assessee cannot be treated indifferently. Thus, on such principle the assessment order cannot be branded as erroneous.
18. The Supreme Court in a celebrated case of Malabar Industrial Co. Ltd. v. CIT [2000] 243 ITR 832 (SC), held that the prerequisite for the exercise of jurisdiction by the Commissioner suo-motu is that the order of the Income- tax Officer is erroneous in so far 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. It can be exercised only when an order is erroneous, the section 263 will be attracted. Further, Hon’ble Bombay High Court in CIT v. Gabriel India Ltd held that the power of suo-motu revision under sub-section (1) of section 263 is in the nature of supervisory jurisdiction and the same can be exercised only if the circumstances specified therein exist. Two circumstances must exist to enable the Commissioner to exercise power of revision under this sub-section, viz., (i) the order is erroneous; and (ii) by virtue of the order being erroneous prejudice has been caused to the interests of the revenue.
19. The Hon’ble Jurisdictional High Court in Aryan Arcade Ltd., v. PCIT (2019) 412 ITR 277 (Gujarat) held that merely because Commissioner held a different belief that would not permit him to take the order in revision, it if further held that when Assessing Officer made full enquiry, he made up his mind, the notice of revision is not valid. In CIT v. Nirma Chemical Works (P) Ltd (309 ITR 67 Gujarat) Gujarat, the Hon’ble High Court also held that when assessing officer after making due inquiries had adopted one of the view and granted partial relief, merely because Commissioner took a different view of the matter, it would not be sufficient to permit commissioner to exercise his powers under section 263. The Hon’ble Court in para 22 of its order on the objection of the revenue that there is no discussion of the issue in the assessment order held that the contention on behalf of the revenue that the assessment order does not reflect any application of mind as to the eligibility or otherwise under section 80-I of the Act requires to be noted to be rejected. An assessment order cannot incorporate reasons for making/granting a claim of deduction. If it does so, an assessment order would cease to be an order and become an epic some. The reasons are not far to seek. Firstly, it would cast an almost impossible burden on the Assessing Officer, considering the workload that he carries and the period of limitation within which an order is required to be made; and, secondly, the order is an appealable order. An appeal lies, would be filed, only against disallowances which an assessee feels aggrieved with. (* emphasis added by us).
20. Thus, in view of the above discussion the twin conditions as enunciated under section 263 cannot be said to have been fulfilled. Thus, the order passed by ld PCIT under section 263 failed in our legal scrutiny, hence order dated 21.02.2022 is set aside.”
19. From the above observations and findings arrived at by the Tribunal, it appears that the Assessing Officer while passing the assessment order made full inquiry and therefore, Commissioner having different belief would not permit him to take the order in revision. Once the Assessing Officer after making detailed inquiry has adopted one of the view and granted relief, merely because the commissioner took a different view of the matter, jurisdiction under section 263 of the Act could not have been exercised by the Commissioner. The Tribunal has also arrived at the findings of the fact that the Assessing Officer has examined the issue in depth and allowed the relief to assessee of exemption under section 54B of the Act. Therefore, view taken by the Assessing Officer is one of the reasonable, plausible and legally sustainable view which cannot be said to be erroneous. As held by the Hon’ble Supreme Court in case of Malabar Industrial Co. Ltd. v. CIT ITR 83(SC), the prerequisite for the exercise of jurisdiction of Commissioner under section 263 of the Act is that the order of the Income Tax Officer is erroneous so far as it is prejudicial to the interests of the Revenue then both the conditions are required to be satisfied, and if one of them is absent, the Commissioner cannot have recourse to section 263 of the Act. It was held that section 263 of the Act can be exercised only when order is erroneous and prejudicial to the interest of the Revenue as suo motu revisional power under sub-section(1) of section 263 is in nature of supervisory jurisdiction and same can be exercised only if circumstances specified therein existing as held by the Apex Court.
20. In view of the above findings of fact arrived at by the Tribunal that the assessment order was not erroneous, twin conditions are not fulfilled and therefore, Tribunal has rightly concluded that the order passed by PCIT under section 263 of the Act cannot be sustained by setting aside the same.
21. In view of the foregoing reasons, we are of the opinion that no question of law much-less any substantial question of law arise from the impugned order of the Tribunal.
22. Appeal, therefore, fails and is accordingly dismissed.