SECTION 263 REVISION: PCIT CAN REVISE REASSESSMENT ORDERS INDEPENDENTLY

ORDER

Rakesh Mishra, Accountant Member.- This appeal filed by the assessee is against the order of the ld. Principal Commissioner of Income Tax (Central), Kolkata-1 [hereinafter referred to as Ld. ‘PCIT’] passed u/s 263 of the Income Tax Act, 1961 (hereinafter referred to as ‘the Act’) for AY 2018-19 dated 25.03.2025. The order was passed to revise the order under section 147 read with section 143(3) dated 30.03.2023 of the ld. DCIT, Central Circle-3(3), Kolkata.

2. The assessee is in appeal before the Tribunal raising the following grounds of appeal:

“1. FOR THAT the Order passed by the Principal Commissioner of Income Tax, Central Circle, Kolkata-2 (PCIT) dated 25.03.2025 is barred by limitation of time prescribed under the Income Tax Act inasmuch as the period of limitation is applicable from the date of original assessment order dated 21.04.2021 and not the date of reassessment order dated 30.03.2023.

2. FOR THAT the Principal Commissioner of Income Tax, Central Circle, Kolkata-2 passed his Order u/s 263 on 25.03.2025 whereas the reply furnished by the assessee on 28.01.2025 was not considered in proper perspective and even the personal hearing prayed for by the assessee was not afforded and thereby, the instant Revisional Order u/s 263 is void and the nullity in the eyes of law.

3. FOR THAT in the submission dated 28.01.2025 your assessee specifically relied upon the settled case law of the Hon’ble High Court of Rajasthan in the case of Jainsons Agrochem Industries v. Principal Commissioner of Income Tax Jainsons Agrochem Industries v. Principal Commissioner of Income-tax (Rajasthan) and the judgement pronounced by the Hon’ble Income Tax appellate tribunal, Raipur Bench in the case of Hotel Babylon Continental private limited v. Principal Commissioner of income tax (Central) (Raipur Trib.) which were not discussed or overruled by the PCIT in the order u/s 263 of the Act.

4. FOR THAT the Ld. PCIT erred in law in passing the Order u/s 263 by setting aside the Order passed under section 147 r.w.s. u/s 143(3) dated 30.03.2023, which did not at all satisfy the twin conditions laid down in Section 263 of the Act.

Your appellant craves leave to add, amend, modify, rescind, supplement or alter any of the ground or grounds at the time of hearing.”

3. Brief facts of the case are that a survey under section 133A of the Income Tax Act was conducted at the office premises of the assessee M/s. Bhargab Engineering Works on 31.01.2018 and thereafter the assessee filed its original return of income on 29.10.2018 declaring total income of Rs. 81,24,420/- for the AY 2018-19. The return was taken up under scrutiny and the assessment order was passed under section 143(3) on 21.04.2021 determining the total income of the assessee at Rs. 95,28,1670/-. Subsequently the case was reopened under section 147 after following the prescribed procedure under the Act. A notice under section 148 of the Act was issued on 22.03.2022; in response to which the assessee filed the return of income showing total income of Rs. 81,24,420/- on 25.04.2022, i.e. the total income was the same as shown in the original return filed on 25.10.2018. The return was taken up under scrutiny and the total income was assessed at Rs. 96,97,730/-after making an addition of Rs.1,69,565/- to the income assessed under section 143(3) vide order dated 21.04.2021 at Rs.95,28,160/-. The ld. PCIT, Central Circle-2, Kolkata thereafter, examined the record and observed certain discrepancies from the from the assessment record and the order under section 147 r.w.s. 143(3) dated 30.03.2023 was considered as erroneous and prejudicial to the interest of the revenue within the meaning of section 263 of the Act. An opportunity of being heard vide notice dated 28.12.2024 was provided in respect of revision under section 263 of the Act and the assessee was requested to explain with supporting evidences in respect of the issues mentioned therein. The assessee was also requested to explain as to why the impugned assessment order should not be considered erroneous, in so far as it was prejudicial to the interest of the revenue within the meaning of section 263 of the Act. However, the assessee-company did not respond to the notice. Therefore, another opportunity of being heard was provided to the assessee. The assessee furnished certain reply dated 21.01.2025 and 28.01.2025 and after considering the replies of the assessee, the ld. PCIT noted that the issue regarding the non-charging of interest of Rs.52,550/- under section 234D of the Act had been covered in Form No. 2 issued on 07.03.2025, hence this issue raised vide show-cause notice was dropped. However, there was discrepancy relating to the employees’ contribution of PF and ESI, which was deposited late and beyond the due date for payment and, therefore, was not an allowable expenditure as per section 36(1)(va) of the Act, which was not considered by the ld. AO while framing the assessment under section 143(3) dated 21.04.2021 as well as while framing the assessment under section 147 read with section 143(3) dated 30.03.2023. Another sum of Rs. 45,236/- was debited to the Profit & Loss account under the head ‘Fine Penalty on Custom Duty’, but subsequently it was not disallowed in the computation of income. The issue was also not considered while framing the reassessment order under section 143(3) r.w.s. 147 dated 30.03.2023, and the expenditure claimed was required to be disallowed. Therefore, a sum of Rs. 17,03,551/- to be disallowed under section 36(1)(va) of the Act and another sum of Rs. 45,236/-, which was required to be disallowed as per Explanation 1 to sub-section (1) of section 37, were not disallowed. Hence, such failure rendered the assessment order under section 147 r.w.s. 143(3) dated 30.03.2023 erroneous as well as prejudicial to the interests of the revenue. The ld. PCIT has gone through the provisions of the Act and the arguments and the decision relied upon by the assessee in the case of CIT v. Vijay Shree Ltd. (Calcutta) by arguing that the AO has passed the impugned order prior to the judgment in the case of Checkmate Services Pvt. Ltd. v. CIT (SC) order dated 12.10.2022 and, therefore, the order cannot be said to erroneous in so far as it is prejudicial to the interests of the revenue. The assessee also placed reliance on the decision of the Hon’ble Calcutta High Court in the case of PCIT v. SPPL Property Management Pvt. Ltd (Calcutta), pronounced on 31.03.2023 and stated that the order under section 147 r.w.s. 143(3) of the Act dated 30.03.2023 being after the effective date of amendment by way of Explanation 2 to section 263 w.e.f. 01.06.2015, it was a valid ground for exercising the revisionary power under section 263 as conditions specified in Explanation 2 of section 263 were satisfied. He has further discussed the findings in the case of Checkmate Services Pvt. Ltd. (supra) as well as in the case of CIT v Maithan International (Calcutta)/[2015] 375 ITR 123 (Calcutta) relating to the role of the AO as also the decisions in the cases of Gee Vee Enterprise v. Addl. CCIT [1975] 99 ITR 375 (Delhi), 386 (Delhi High Court), Thalibal F. Jain v. ITO [1975] 101 ITR 1 (Karnataka), 6, (Karnakata High Court), Malabar Industrial Co. Pvt. Ltd. v. CIT ITR 83 (SC), 87-88 (Supreme Court), Rampyari Devi Saraogi v. CIT [1968] 67 ITR 84 (SC) and Smt. Tara Devi Aggarwal v. CIT [1973] 88 ITR 323 (SC), Gee Ve Enterprise (supra) and CIT v. Shree Manjunathesware Packing Products & Camphor Works (SC)/[1998] 231 ITR 53 (SC) and having regard to the facts and circumstances of the case and in the light of the aforesaid decision of the Hon’ble Supreme Court and the Hon’ble High Courts and considering the amendment in section 263 of the Income Tax Act w.e.f. 01.06.2015, he held that the assessment order under section 147 r.w.s. 143(3) of the Act dated 30.03.2023 passed by the ld. AO is erroneous in so far as it was prejudicial to the interests of the revenue and, therefore, is liable to be set aside. He, therefore, set aside the order by giving the finding as under:-

“15. In the result, the order passed u/s, 147 r.w.s. 143(3) of the Income Tax Act, 1961 dated 30.03.2023 is hereby set aside by exercising the power conferred upon me by section 263 of the Income Tax Act, 1961 directing the A.O to make necessary verification/inquiry on the instant issue and pass a fresh assessment order and re-compute the assessee’s income after making proper enquiries on the issues involved herein, after offering reasonable opportunity to the assessee of being heard. Further, the assessment order dated 30.03.2023 is being set aside to these limited extent for the purpose of proper and correct computation of assessed income as discussed in the proceedings under section 263 of the Income Tax Act, 1961. The AO is further directed to decide the matter as per law after giving reasonable opportunity to the assessee of being heard.”

4. Aggrieved with the order of ld. PCIT, the assessee has filed the appeal before the Tribunal.

5. Rival submissions were heard and the relevant documents have been perused. The ld. A.R. submitted that intimation under section 143(1) was issued sometime in 2019. There was a survey under section 133A of the Act on 31.01.2018 and the assessment under section 143(3) was passed on 21.04.2021. Subsequently information relating to some purchases was received and the assessment was reopened and the order under section 147 was passed on 30.03.2023. The ld. PCIT initiated revisionary proceeding on 20.12.2024, and in the order under section 263 passed, the issue relating to charging of interest under section 234D on the refund issued earlier vide intimation under section 143(1) of the Act was dropped. However, employees’ contribution on account of delayed payment of PF and ESI was allowed both in the intimation under section 143(1) as well as in the order under section 143(3), it was submitted. The issue relating to custom penalty was allowed earlier but the same was not being pressed. The ld. A.R. relied on the decision of the Hon’ble Calcutta High Court and stated that the employees’ contribution to PF & ESI was allowed by following the Hon’ble Calcutta High Court’s decision as is mentioned in pages 7 & 8 of the order of the ld. PCIT in the case of Vijay Shree Ltd. (supra). However, the ld. PCIT considered the judgment of the Hon’ble Supreme Court in the case of Checkmate Services Pvt. Ltd. and set aside the issue to the AO.

6. The ld. D.R., on the other hand, stated that the order of ld. PCIT being as per law needs to be confirmed.

7. We have considered the submissions by both the sides and also gone through the facts of the case. Ground No. 1 is relating to the order passed by the ld. PCIT, Central Circle-2, Kolkata dated 25.03.2025 being barred by limitation of time prescribed under the Income Tax Act inasmuch as the period of limitation is applicable from the date of original assessment order dated 21.04.2021 and not the date of reassessment order dated 30.03.2023. This ground of appeal is dismissed as it is evident from the order under section 263 that the ld. PCIT had revised the reassessment order dated 30.03.2023, the limitation for revising which expired on 31.03.2025 as per the provisions of sub-section (2) of section 263 of the Act. The ld. PCIT is competent to revise any order if he is of the view that the order passed by the Assessing Officer is erroneous in so far as it is prejudicial to the interests of the revenue and the limitation of powers under sub-section (2) of section 263 are not limited only to the original assessment order dated 21.04.2021 but any order, including the assessment order as well as the reassessment order, both of which can be revised as both are separate orders for the purpose of the Act and separately applicable as well before the appellate authorities. Thus, Ground No. 1 of the appeal is rejected.

8. Ground No. 2 relates to the reply of the assessee being furnished on 28.01.2025 and the reply of the assessee, not being considered properly and personal hearing prayed by the assessee being not afforded and, therefore, the revisional order under section 263 been void and nullity in the eyes of law. In this respect, it is noted that ld. PCIT issued a notice dated 20.12.2024 and another opportunity was granted vide notice dated 15.01.2025. The assessee furnished submission on 24.01.2025 and 28.01.2025, which have been mentioned in para 3 of page 4 & 5 of the order of the ld. PCIT. What is required to be given is an opportunity of being heard as has been held in the case of Commissioner of Income-tax v. Amitabh Bachchan (SC)/[2016] 384 ITR 200 (SC)/[2016] 286 CTR 113 (SC)[11-05-2016] wherein it has been held as under:

“■ The power of appeal and revision is contained in Chapter XX of the Act which includes section 263 that confers suo motu power of revision in the Commissioner. The different shades of power conferred on different authorities under the Act has to be exercised within the areas specifically delineated by the Act and the exercise of power under one provision cannot trench upon the powers available under another provision of the Act. In this regard, it must be specifically noticed that against an order of assessment, so far as the revenue is concerned, the power conferred under the Act is to reopen the concluded assessment under section 147 and/or to revise the assessment order under section 263. The scope of the power/jurisdiction under the different provisions of the Act would naturally be different. The power and jurisdiction of the revenue to deal with a concluded assessment, therefore, must be understood in the context of the provisions of the relevant sections. While doing so, it must also be borne in mind that the legislature had not vested in the revenue any specific power to question an order of assessment by means of an appeal. [Para 9]

■ Reverting to the specific provisions of section 263 what has to be seen is that a satisfaction that an order passed by the Authority under the Act is erroneous and prejudicial to the interest of the revenue is the basic precondition for exercise of jurisdiction under section 263. Both are twin conditions that have to be conjointly present. Once such satisfaction is reached, jurisdiction to exercise the power would be available subject to observance of the principles of natural justice which is implicit in the requirement cast by the section to give the assessee an opportunity of being heard. It is in the context of the above position that this Court has repeatedly held that unlike the power of reopening an assessment under section 147, the power of revision under section 263 is not contingent on the giving of a notice to show cause. In fact, section 263 has been understood not to require any specific show-cause notice to be served on the assessee. Rather, what is required under the said provision is an opportunity of hearing to the assessee. The two requirements are different; the first would comprehend a prior notice detailing the specific grounds on which revision of the assessment order is tentatively being proposed. Such a notice is not required. What is contemplated by section 263, is an opportunity of hearing to be afforded to the assessee. Failure to give such an opportunity would render the revisional order legally fragile not on the ground of lack of jurisdiction but on the ground of violation of principles of natural justice. [Para 10]

■ It may be that in a given case and in most cases it is so done that a notice proposing the revisional exercise is given to the assessee indicating therein broadly or even specifically the grounds on which the exercise is felt necessary. But there is nothing in the section to raise the said notice to the status of a mandatory show-cause notice affecting the initiation of the exercise in the absence thereof or to require the Commissioner to confine himself to the terms of the notice and foreclosing consideration of any other issue or question of fact. This is not the purport of section 263. Of course, there can be no dispute that while the Commissioner is free to exercise his jurisdiction on consideration of all relevant facts, a full opportunity to controvert the same and to explain the circumstances surrounding such facts, as may be considered relevant by the assessee, must be afforded to him by the Commissioner prior to the finalization of the decision. [Para 11]

■ In the instant case, there is no dispute that in the order passed by the Commissioner under section 263 findings have been recorded on issues that are not specifically mentioned in the show-cause notice though there are three issues mentioned in the show-cause notice which had specifically been dealt with in the order passed under section 263. [Para 12]

■ Insofar as findings contained in the order of the Commissioner beyond the issues mentioned in the show-cause notice is concerned, the Tribunal taking note of the aforesaid admitted position held that the order under section 263 was violative of principles of natural justice as far as the reasons, which formed the basis for the revision but were not part of the show-cause notice issued under section 263 were concerned. [Para 12]

■ The above ground which had led the Tribunal to interfere with the order of the Commissioner seems to be contrary to the settled position in law, as indicated above and the two decisions of this Court in Gita Devi Aggarwal v. CIT [1970] 76 ITR 496 and CIT v. Electro House [1971] 82 ITR 824. The Tribunal in its order had not recorded any finding that in course of the suo motu revisional proceedings, hearing of which was spread over many days and attended to by the authorized representative of the assessee, opportunity of hearing was not afforded to the assessee and that the assessee was denied an opportunity to contest the facts on the basis of which the Commissioner had come to his conclusions as recorded in the order passed under section 263. Despite the absence of any such finding in the order of the Tribunal, before holding the same to be legally unsustainable, the Court will have to be satisfied that in the course of the revisional proceeding the assessee, actually and really, did not have the opportunity to contest the facts on the basis of which the Commissioner had concluded that the order of the Assessing Officer is erroneous and prejudicial to the interests of the revenue. The above is the question to which the Court, therefore, will have to turn to. [Para 13]

■ On consideration of the order of the Assessing Officer as well as the order of the Commissioner it appears that the Commissioner, in the course of the revisional proceedings, had scrutinized the record of the proceedings before the Assessing Officer and noted the various dates on which opportunities to produce the books of account and other relevant documents were afforded to the assessee which requirement was not complied with by the assessee. In these circumstances, the revisional authority took the view that the Assessing Officer, after being compelled to adjourn the matter from time to time, had to hurriedly complete the assessment proceedings to avoid the same from becoming time barred. In the course of the revisional exercise, relevant facts, documents, and books of account which were overlooked in the assessment proceedings were considered. On such re-scrutiny it was revealed that the original assessment order on several heads was erroneous and had the potential of causing loss of revenue to the State. It is on the aforesaid basis that the necessary satisfaction that the assessment order was erroneous and prejudicial to the interests of the revenue was recorded by the Commissioner. At each stage of the revisional proceeding the authorized representative of the assessee had appeared and had full opportunity to contest the basis on which the revisional authority was proceeding/had proceeded in the matter. If the revisional authority had come to its conclusions in the matter on the basis of the record of the assessment proceedings which was open for scrutiny by the assessee and available to his authorized representative at all times, it is difficult to see as to how the requirement of giving of a reasonable opportunity of being heard as contemplated by section 263 had been breached in the present case. The order of the Tribunal insofar as the first issue, i.e., the revisional order going beyond the show-cause notice is concerned, therefore, cannot have acceptance. The High Court having failed to fully deal with the matter in its cryptic order, the said order is not tenable and is liable to be interfered with. [Para 14]”

9. Further, as per the provisions of section 2 (23C), “hearing” includes communication of data and documents through electronic mode; Therefore, this ground of appeal is also dismissed. As opportunity of being heard was provided in the replies filed by the assessee have been considered, therefore, this ground of appeal is also dismissed

10. In Ground No. 3, the assessee has relied upon the decision of the Hon’ble Rajasthan High Court in the case of Jainsons Agrochem Industries v. Principal Commissioner of Income-tax (Rajasthan) and the judgment of ITAT, Raipur Bench in the case of Hotel Babylon Continental Pvt. Ltd. v. PCIT (Central)  (Raipur Trib.), which were not overruled by the ld. PCIT in the order under section 263 of the Act. A perusal of the order of ld. PCIT shows that he noted the failure of the ld. AO to conduct inquiry, the provision of Explanation 2 of sub-section (1) of section 263, which have been inserted w.e.f. 01.06.2015, the decision of the Hon’ble Supreme Court rendered on 12.10.2022 in the case of Checkmate Services Pvt. Ltd. (supra) and other decisions mentioned in the order under section 263 and concluded that the re-assessment order of the AO was erroneous in so far as it was prejudicial to the interests of the revenue. It is judicially held that Hon’ble Supreme Court does not lay down a new law but only clarifies a law as it stood and, therefore, the order of the Supreme Court in the case of Checkmate Services Pvt. Ltd. (supra) is applicable from the date of insertion of section 36(1)(va) of the Act. Since this order was available before the ld. AO on the date of passing the reassessment order under section 147 dated 31.03.2023 and in the reassessment proceeding, the entire assessment order is open and in view of the third proviso, for the relevant assessment year, that the Assessing Officer may assess or reassess such income, other than the income involving matters which are the subject matters of any appeal, reference or revision, which is chargeable to tax and has escaped assessment. Further, as per clause (c) of Explanation 2 to section 147, for the purposes of section, the following shall also be deemed to be cases where income chargeable to tax has escaped assessment, namely where an assessment has been made, but (i) income chargeable to tax has been underassessed. It has been held in Commissioner of Income-tax v. Sun Engineering Works (P.) Ltd. (SC)/[1992] 198 ITR 297 (SC)/[1992] 107 CTR 209 (SC)[17-09-1992] the object and purpose of the proceedings under section 147 which are for the benefit of the revenue and not an assessee. Since the delayed payment on account of employees’ contribution towards PF and ESI was not to be deducted under section 36(1)(va) in view of the decision of the Hon’ble Supreme Court in the case of Checkmate Services (supra), therefore, it was incumbent upon the ld. AO to disallow such expenses claimed by the assessee in the re-assessment proceedings, which was not done. Therefore, not only clause (a) of Explanation (2) of sub-section (1) of section 263 was applicable as order was made without making inquiries or verification which should have been made but also clause (d) was applicable as the order had not been passed in accordance with the decision which is prejudicial to the assessee rendered by the Hon’ble Supreme Court in the case of assessee or any other person. Therefore, Ground No. 3 of the appeal is also dismissed.

11. Ground No. 4 is also rejected as the twin conditions of the order being erroneous in so far as it was prejudicial to the interests of the revenue was satisfied in view of the specific provision of clause (a) and clause (d) of Explanation 2 of sub-section (1) of section 263 of the Act, therefore, this ground of appeal is also dismissed.

12. Regarding ‘fine penalty on custom duty’ claimed as business expenditure, in view of the Explanation 1 to sub-section (1) of section 37 of the Act which states that “any expenditure incurred by an assessee for any purpose which is an offence or which is prohibited by law shall not be deemed to have been incurred or the purpose of business or profession and no deduction or allowance shall be made in this respect of such expenditure”. In any case, in the grounds of appeal before us, the assessee did not press this ground of appeal, hence, this ground is also dismissed.

13. Considering the totality of the facts and circumstance of the case, the order of ld. PCIT is upheld, who had set aside the re-assessment order on account of delayed deposit towards employees’ contributions of PF and ESI and Fine Penalty on Custom Duty.

14. In the result, the appeal of the assessee is dismissed.