Consequential Assessment Automatically Becomes Void Once the Underlying Section 263 Revision Order Is Set Aside

By | July 15, 2026
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Consequential Assessment Automatically Becomes Void Once the Underlying Section 263 Revision Order Is Set Aside

Issue

Whether a consequential assessment order passed by the Assessing Officer pursuant to a revisionary direction under Section 263 can survive or be adjudicated on merits after the ITAT has quashed the underlying Section 263 revision order.

Facts

  • The assessee, a co-operative credit society, claimed a tax deduction under Section 80P on interest income earned from investments and deposits held with co-operative and commercial banks.

  • The Assessing Officer initially accepted the deduction claim in the original assessment completed under Section 143(3).

  • The Principal Commissioner of Income Tax (PCIT) subsequently exercised revisionary powers under Section 263, setting aside the original assessment and directing a fresh inquiry.

  • In line with the PCIT’s directions, the Assessing Officer completed a consequential assessment under Section 143(3) read with Sections 263 and 144B, reclassifying the interest as “Income from Other Sources” and denying the Section 80P(2)(d) deduction.

  • While the appeal against the consequential assessment was pending, the Income Tax Appellate Tribunal (ITAT) quashed the PCIT’s primary Section 263 revision order.

  • Relying on the ITAT’s order, the Commissioner (Appeals) declared the consequential assessment completely unsustainable, which the Revenue subsequently appealed.

Decision

  • In favor of the Assessee: Held that a consequential assessment order formulated solely to execute a Section 263 revision has no independent legal existence of its own.

  • In favor of the Assessee: Held that once the primary Section 263 order is set aside or quashed by a higher appellate forum, the consequential assessment automatically loses its legal foundation and cannot stand.

  • In favor of the Assessee: Held that because the consequential assessment becomes void ab initio upon the quashing of the revision order, no separate adjudication on the merits of the Section 80P disallowance is required.

Key Takeaways

  • Doctrine of Substratum: A consequential order is entirely dependent on the validity of the parent order. If the parent order (under Section 263) is declared void, any subsequent proceedings or assessments built upon it collapse automatically.

  • No Need to Argue Merits: Taxpayers contesting a consequential assessment do not need to litigate the technical merits of a tax addition (such as a Section 80P deduction denial) if they successfully have the underlying revisionary order quashed.

IN THE ITAT MUMBAI BENCH ‘E’
Income-tax Officer
v.
Yashomandir Sahkari Patpedhi Maryadit*
Amit Shukla, Judicial Member
and Girish Agrawal, Accountant Member
IT Appeal No. 4734 (Mum.) of 2026
[Assessment year 2018-19]
JULY  7, 2026
Smt. Sujatha Iyyanger, Sr. DR for the Appellant. Raveendran P.M. and Moti B. Totlani, CAs for the Respondent.
ORDER
Amit Shukla, Judicial Member. – This appeal has been preferred by the Revenue against the order dated 28.02.2026 passed by the National Faceless Appeal Centre (NFAC), arising out of the assessment framed under section 143(3) read with section 263 read with section 144B of the Income Tax Act, 1961 for the Assessment Year 2018-19.
2. The Revenue has raised various grounds of appeal challenging the action of the learned CIT(A) in allowing the assessee’s appeal. The principal grievance of the Revenue is that the learned CIT(A) erred in holding that the consequential assessment framed under section 143(3) read with section 263 does not survive after the order passed under section 263 was quashed by the Tribunal. The Revenue has further challenged the findings of the learned CIT(A) on the ground that deduction under section 80P(2)(d) in respect of interest earned from deposits with co-operative banks and commercial banks was not allowable and that such interest was liable to be assessed under the head “Income from Other Sources” in view of the decision of the Hon’ble Supreme Court in Totgars Co-operative Sale Society Ltd.
3. The brief facts, as borne out from the record, are that the assessee is a co-operative credit society engaged in accepting deposits from its members and providing credit facilities to them. For the year under consideration, it filed its return of income declaring Nil income after claiming deduction under section 80P amounting to Rs.3,66,44,343/-. The original assessment was completed under section 143(3), wherein the Assessing Officer accepted the returned income after examining the claim of deduction under section 80P.
4. Subsequently, the learned Principal Commissioner of Income Tax invoked the revisional jurisdiction under section 263 on the ground that the Assessing Officer had failed to properly examine the allowability of deduction under section 80P in respect of interest earned by the assessee from investments made with co-operative banks and other commercial banks. According to the learned Principal Commissioner, such interest was not attributable to the business of providing credit facilities to members and, therefore, deduction under section 80P(2)(a)(i) was not available. It was further observed that deduction under section 80P(2)(d) was also not admissible on the interest earned from deposits with co-operative banks. Accordingly, holding that the original assessment order was erroneous and prejudicial to the interests of the Revenue, the learned Principal Commissioner set aside the assessment with a direction to the Assessing Officer to frame a fresh assessment after proper verification.
5. Pursuant to the aforesaid revisional order, the Assessing Officer framed the consequential assessment under section 143(3) read with section 263 read with section 144B. During the reassessment proceedings, the Assessing Officer noticed that the assessee had earned interest income aggregating to Rs.9,27,95,245/- from deposits maintained with co-operative banks as well as commercial banks. The Assessing Officer held that such interest did not arise from the operational activity of providing credit facilities to members but represented income earned by deploying surplus funds and, therefore, was assessable under the head “Income from Other Sources”. The Assessing Officer further held that deduction under section 80P(2)(d) was also not available in respect of such interest and consequently brought the entire amount of interest income to tax while denying the deduction claimed by the assessee.
6. Aggrieved by the consequential assessment, the assessee preferred an appeal before the learned CIT(A). Before the first appellate authority, apart from challenging the additions on merits, the assessee specifically brought to the notice of the learned CIT(A) that the very order passed by the learned Principal Commissioner under section 263 had already been quashed by the coordinate Bench of the Tribunal vide order dated 19.06.2025. It was, therefore, submitted that once the revisional order itself had been set aside, the consequential assessment framed solely in pursuance thereof automatically ceased to survive in law and consequently no addition made therein could independently be sustained.
7. The learned CIT(A), after considering the submissions of the assessee and examining the order passed by the Tribunal under section 263, accepted the aforesaid contention. The learned CIT(A) observed that the impugned assessment had been framed exclusively in consequence of and pursuant to the directions contained in the revisional order passed under section 263. Since the Tribunal had already quashed the very order under section 263, the consequential assessment lost its legal foundation and could not independently survive. The learned CIT(A), therefore, held that the assessment order itself had become unsustainable and accordingly allowed the assessee’s appeal. Aggrieved by the aforesaid findings, the Revenue is in appeal before us.
8. We have carefully considered the rival submissions, perused the orders of the authorities below and the entire material available on record. The controversy involved in the present appeal lies in a narrow compass. The assessment impugned before the learned CIT(A) was admittedly framed under section 143(3) read with section 263 read with section 144B pursuant to the revisional order passed by the learned Principal Commissioner under section 263. The learned CIT(A), while deciding the appeal, has taken note of the undisputed fact that the very revisional order passed under section 263, which constituted the sole foundation for framing the fresh assessment, had already been quashed by the coordinate Bench of the Tribunal vide order dated 19.06.2025. Proceeding on that premise, the learned CIT(A) held that once the order under section 263 itself has ceased to exist, every consequential proceeding initiated solely in pursuance thereof would automatically fall and could not independently survive. We find ourselves in complete agreement with the aforesaid reasoning adopted by the learned CIT(A).
9. It is a well-settled principle that where the very source of jurisdiction or the foundational order is annulled by a superior appellate forum, every consequential proceeding founded exclusively upon such order also becomes unsustainable. A consequential assessment framed pursuant to an order passed under section 263 has no independent existence de hors the revisional order. The jurisdiction of the Assessing Officer to frame such assessment emanates entirely from the directions contained in the revisional order. Therefore, once the order under section 263 is set aside, the consequential assessment automatically loses its legal substratum and cannot be sustained independently on the basis of the additions made therein. In other words, when the foundation itself disappears, the superstructure erected thereon necessarily collapses.
10. We further notice that while quashing the order under section 263, the coordinate Bench of the Tribunal has categorically held that the learned Principal Commissioner was not justified in exercising revisional jurisdiction under section 263. The Tribunal recorded a specific finding that during the original assessment proceedings the Assessing Officer had called for complete details regarding the claim of deduction under section 80P and the assessee had furnished detailed submissions together with judicial precedents supporting its claim. The coordinate Bench further observed that the controversy regarding allowability of deduction under section 80P on such interest income has been a subject matter of considerable judicial debate and, therefore, the view adopted by the Assessing Officer while completing the original assessment represented one of the legally permissible views. Applying the ratio laid down by the Hon’ble Supreme Court in Malabar Industrial Co. Ltd. and CIT v. Max India Ltd. , the Tribunal held that the assessment order could not be regarded as erroneous and prejudicial to the interests of the Revenue merely because the Principal Commissioner preferred another possible view. Accordingly, the order passed under section 263 was quashed in its entirety.
11. The contention of the Revenue that the Department has not accepted the Tribunal’s order and has already preferred an appeal before the Hon’ble Bombay High Court also does not advance its case. Mere filing or pendency of an appeal before the Hon’ble High Court does not dilute the binding nature of the order passed by the Tribunal unless the operation thereof has been stayed or reversed by the competent court. Admittedly, no material has been brought before us to demonstrate that the order of the Tribunal quashing the proceedings under section 263 has either been stayed or set aside. Therefore, on the date when the learned CIT(A) adjudicated the appeal, the Tribunal’s order represented the operative and binding legal position between the parties and the learned CIT(A) was fully justified in giving effect thereto.
12. Once the consequential assessment itself is held to be non est in law, the additions made therein automatically cease to survive. Consequently, the elaborate grounds raised by the Revenue questioning the allowability of deduction under section 80P(2)(d), the applicability of the decision of the Hon’ble Supreme Court in Totgars Co-operative Sale Society Ltd., and the taxability of the impugned interest under the head “Income from Other Sources”, all become purely academic. Those issues arise only if the assessment itself survives. Since the very assessment order has become unsustainable on account of the quashing of the revisional order under section 263, no separate adjudication on the merits of the additions is called for.
13. In view of the foregoing discussion, we do not find any infirmity in the well-reasoned order passed by the learned CIT(A). The learned CIT(A) has merely given effect to the binding order of the coordinate Bench which had quashed the very foundation of the consequential assessment. We, therefore, uphold the impugned order and dismiss all the grounds raised by the Revenue.
14. In the result, the appeal filed by the Revenue is dismissed.