Consequential verification by AO infirms PCIT's revisionary order,

Consequential verification by AO infirms PCIT’s revisionary order, but unverified CSR and TDS interest claims stand remanded.

Issue

Whether the Principal Commissioner of Income-tax (PCIT) was legally justified in invoking revisionary jurisdiction under section 263 on the grounds of “lack of enquiry” by the AO regarding three distinct items: prior period expenditures, Corporate Social Responsibility (CSR) expenses, and interest on delayed TDS/TCS remittances?

Facts

Background: The assessee, an insurance company, declared a net loss of Rs. 1,740.41 crores for Assessment Year 2020-21. The assessment was finalized under scrutiny (section 143(3) r.w.s. 144B), computing total income at Rs. 1,196.27 crores after several additions.
Prior Period Expenditure: The PCIT observed that the AO failed to verify prior period expenditures worth Rs. 14.21 crores. Applying Explanation 2(a) to section 263, the PCIT deemed the order erroneous and prejudicial to the revenue. However, in the parallel/consequential assessment proceedings triggered by this very revisionary order, the AO subsequently evaluated the documents and fully accepted that the liability had crystallized during the relevant year.
CSR & TDS Interest: The PCIT similarly invoked section 263 for a lack of verification regarding the deductibility of CSR expenses and interest paid on delayed TDS/TCS remittances under sections 201/206C. Before the Income Tax Appellate Tribunal (ITAT), the assessee explicitly conceded that the AO had indeed failed to carry out proper verification on these specific items during the original assessment.

Decision

Prior Period Expenditure: In favour of Assessee. The PCIT’s revisionary order cannot be sustained on this issue. Since the AO actively examined the documentation and accepted the validity of the prior period expenses in the consequential assessment order, the charge of “lack of enquiry” loses its leg to stand on.
CSR & TDS Interest: In favour of Revenue. The PCIT’s assumption of jurisdiction under section 263 was upheld for these two issues. Because the assessee itself admitted that the AO did not perform the necessary verification during the initial assessment, the order was demonstrably erroneous and prejudicial to the revenue, requiring a fresh examination.

KeyTakeaways

Consequential Acceptance Erases Revisionary Basis: If the AO conducts an inquiry in a set-aside proceeding and accepts the taxpayer’s explanation on merit, the PCIT’s original section 263 grievance on that specific issue becomes infructuous.
Admission of “No Enquiry” Validates Section 263: When an assessee explicitly concedes before a tribunal that the lower assessing authority failed to conduct proper verification on a high-exposure item (such as CSR or statutory interest penalties), the revisionary intervention under section 263 becomes legally bulletproof.
Explanation 2(a) Restraints: While Explanation 2(a) to section 263 gives broad powers to the PCIT to review orders passed without making inquiries, such actions must ultimately point to a tax revenue leakage. If a detailed look shows the deduction was fully legal and crystallized during the year, the prejudicial element vanishes.

IN THE ITAT CHENNAI BENCH ‘A’

United India Insurance Co. Ltd.

Principal Commissioner of Income-tax

Manu Kumar Giri, Judicial Member
and Ms. Padmavathy S., Accountant Member

IT Appeal Nos. 1571 (Chny) OF 2025
[Assessment year 2020-21]

MAY 22, 2026

S. Sundar Raman, CA for the Appellant. Ms. Harshini, Jr. Standing Counsel for the Respondent.

ORDER

Manu Kumar Giri, Judicial Member. – The present appeal filed by the assessee is directed against the order passed by the Ld. Principal Commissioner of Income Tax, Chennai-3 dated 20.03.2025 u/s 263 of the Income Tax Act, 1961 for the Assessment Year 2020-21.

2. The assessee has filed the following grounds of appeal as under:-

The Principal Commissioner of Income tax (the “PCIT”) erred both in law and on the facts of the case in setting aside the assessment order dated 26th September 2022 u/s 263 of the Act.

The PCIT erred in applying his revisional powers provided u/s 263 of the Act with respect to the following:

Under normal provisions of the Act:

Disallowance of Prior Period Expenditure;

Disallowance of Expenditure on Corporate Social Responsibility (difference between Profit & Loss Account and Tax Audit Report).

Disallowance of Interest u/s 201A/206C (for late payment of TDS).

The PCIT failed to appreciate that in the present case, the expenses were debited on basis of receipts of bills and were in the nature of routine expenses duly authorized by the Appellant’s authorized personnel and all of the expenditures in question was wholly and exclusively for the purpose of business and that the same was genuine.

The PCIT erred to note that in a going concern like the Appellant where it has more than 2000 offices, certain bills are received late and are crystalized during the accounting period when such bills are received. These types of expenses are revenue in nature and are allowable in the previous year in which they are crystalized.

The PCIT erred in not recognizing that the expenditures even though relates to an earlier period could not be a ground to deny the deduction, especially when factually crystallization of liability has happened during the current assessment year.

The PCIT failed to appreciate that none of the expenses is as a result of errors or omissions in the preparation of the financial statements of one or more previous years.

The PCIT had overlooked the fact that no deduction of the prior period expenses has been claimed in the earlier year.

The PCIT erred in not appreciating that the interest on late payment of TDS is compensatory in nature not penal in nature and hence is eligible for deduction u/s 37 of the Act.

The PCIT erred in not recognizing the well settled principle of law where AO has exercised quasi-judicial power vested in him in accordance with law and arrived at a conclusion and such a conclusion cannot be found to be erroneous u/s 263 of the Act simply because PCIT is not in agreement with the conclusion.

10.

The PCIT has failed to appreciate that his power to initiate re-examination of the settled issues and directing fresh examination just because he has a different view is not permitted u/s 263 of the Act, for the power of PCIT is not unfettered but hedged with limitation in as much as a change of opinion would not enable the PCIT to exercise jurisdiction u/s 263 of the Act, more so, when the Assessing Officer had considered the explanation/s offered by the Appellant.

11.

The Appellant, therefore, prays that the order u/s 263 of the Act may be annulled.

3. Brief facts of the case are that the assessee, United India Insurance Company Ltd., filed its return of income for the Assessment Year 2020-21 on 26.03.2021 declaring ‘Nil’ income under the normal provisions of the Act and current year loss of Rs.1,740,41,38,180/-. The assessment was completed by the Assessing Officer u/s 143(3) r.w.s. 144B of the Act on 29.09.2022 determining total income at Rs.1,196,26,85,353/- after making various additions aggregating to Rs.2,929,33,40,811/-. Subsequently, on examination of the assessment records, the Ld. PCIT observed that the Assessing Officer had not conducted enquiry and verification with regard to (i) allowability of prior period expenditure amounting to Rs.14,20,76,396/-, (ii) allowability of CSR expenditure, and (iii) allowability of interest paid u/s 201(1A)/206C of the Act for delayed remittance of TDS/TCS. Accordingly, the Ld. PCIT invoked revisional jurisdiction u/s 263 of the Act and held that the assessment order dated 29.09.2022 was erroneous in so far as it was prejudicial to the interests of the Revenue within the meaning of Explanation 2(a) to section 263 of the Act, since the assessment order had been passed without making enquiries or verification which ought to have been made. The assessment was accordingly set aside on the aforesaid limited issues with a direction to the Assessing Officer to examine the same afresh after affording adequate opportunity to the assessee.

4. Aggrieved by the order passed u/s 263 of the Act, the assessee is in appeal before the Tribunal. The Ld. AR for the assessee submitted that the assumption of jurisdiction by the Ld. PCIT u/s 263 of the Act was bad in law and unsustainable on facts. According to the Ld. AR, the Assessing Officer had completed the assessment after considering the details furnished by the assessee and therefore the revisional jurisdiction could not be invoked merely because the Ld. PCIT held a different view on the matter. The Ld. AR submitted that the prior period expenditure represented routine business expenditure incurred wholly and exclusively for the purpose of business and the liability in respect thereof had crystallised during the relevant previous year. It was submitted that the assessee, having more than 2000 offices across the country, receives certain bills belatedly and therefore such expenditure was accounted for during the year in which the bills were received and liability crystallised. It was further submitted that no deduction had been claimed in earlier years and therefore there was no question of double deduction. The Ld. AR further submitted that interest paid on delayed remittance of TDS/TCS was compensatory in nature and allowable u/s 37(1) of the Act. It was also submitted that pursuant to the revisional order passed u/s 263, the Assessing Officer in the consequential assessment order dated 27.03.2025 passed u/s 143(3) r.w.s. 263 of the Act had accepted the assessee’s claim relating to prior period expenditure of Rs.14,20,76,396/-. Therefore, according to the assessee, the very basis of revision no longer survived.

5. Per contra, the Ld. DR for the revenue strongly supported the order passed by the Ld. PCIT and submitted that the assessment order was passed without conducting any enquiry or verification on the issues relating to prior period expenditure, CSR expenditure and interest on delayed remittance of TDS/TCS. The Ld.DR submitted that Explanation 2(a) to section 263 specifically provides that an order passed without making enquiries or verification which should have been made shall be deemed to be erroneous in so far as it is prejudicial to the interests of the Revenue. According to the Ld. DR, the assessment records did not reveal any enquiry whatsoever by the Assessing Officer on the aforesaid issues. The Ld. DR further submitted that allowability of prior period expenditure required factual verification regarding crystallisation of liability, accounting treatment followed by the assessee and possibility of double deduction. However, the Assessing Officer had failed to conduct any such enquiry while completing the assessment. Therefore, the Ld. PCIT was justified in invoking revisional jurisdiction u/s 263 of the Act. Ld.DR further appraised that fact that during the hearing of appeal, the ld.AR for the assessee conceded with respect to the issues relating to ‘interest on late payment of TDS’ and ‘CSR expenses’.

6. We have heard the rival submissions, perused the material available on record and carefully gone through the order passed by the Ld. PCIT u/s 263 of the Act as well as the assessment records produced before us. The revisional jurisdiction u/s 263 of the Act can be invoked only when the twin conditions prescribed therein are satisfied, namely that the assessment order sought to be revised is both erroneous and prejudicial to the interests of the Revenue. It is a settled position of law that where the Assessing Officer has conducted enquiries, examined the details furnished by the assessee and taken a plausible view, the provisions of section 263 cannot be invoked merely because the Ld. PCIT is of a different opinion on the same set of facts. At the same time, where the assessment order is passed without making enquiries or verification which ought to have been made, Explanation 2(a) to section 263 empowers the revisional authority to invoke jurisdiction under the said provision.

7. In the present case, the Ld. PCIT invoked revisional jurisdiction on three issues, namely allowability of prior period expenditure, CSR expenditure and interest on delayed remittance of TDS/TCS. During the course of hearing before us, the Ld. AR fairly conceded the issues relating to CSR expenditure and interest paid on delayed remittance of TDS/TCS. Therefore, the dispute surviving for adjudication is confined only to the issue relating to prior period expenditure amounting to Rs.14,20,76,396/-. On perusal of the assessment records and the details placed before us, we find that the assessee had explained before the Assessing Officer that the impugned expenditure represented routine business expenditure incurred wholly and exclusively for the purpose of business and the liability in respect thereof had crystallised during the relevant previous year. It was explained that the assessee, having more than 2000 offices spread across the country, received certain bills belatedly and accordingly such expenditure was accounted for in the year in which the bills were received and liability crystallised. The assessee had also specifically contended that no deduction had been claimed in the earlier years and therefore there was no possibility of double deduction.

8. We further find merit in the contention of the assessee that pursuant to the order passed u/s 263 of the Act, the Assessing Officer in the consequential assessment proceedings carried out u/s 143(3) r.w.s. 263 of the Act vide order dated 27.03.2025 had examined the issue relating to prior period expenditure and accepted the claim of the assessee. Thus, after conducting verification in the consequential proceedings, the Assessing Officer himself was satisfied regarding the crystallisation of liability and allowability of the expenditure. Once the very issue for which revision was invoked has been examined by the Assessing Officer and the claim has ultimately been accepted, the basis on which the revisional authority formed an opinion that the assessment order was prejudicial to the interests of the Revenue no longer survives.

9. In our considered view, on the peculiar facts of the present case, the order passed by the Ld. PCIT u/s 263 of the Act cannot be sustained in respect of the issue relating to prior period expenditure. However, insofar as the issues relating to CSR expenditure and interest on delayed remittance of TDS/TCS are concerned, since the assessee itself has conceded before us that proper verification was not carried out by the Assessing Officer, the assumption of jurisdiction by the Ld. PCIT on those issues is upheld. Accordingly, the order passed by the Ld. PCIT u/s 263 of the Act is sustained only with respect to the issues relating to CSR expenditure and interest on delayed remittance of TDS/TCS. and in the light of consequential order of AO u/s 143(3) r.w.s. 263, the issue relating to prior period expenditure is set aside. Thus, the grounds raised by the assessee are partly allowed.

10. In the result, appeal filed by the assessee is partly allowed.