PCIT Can Revise Faceless Assessment Orders Where AO Fails

PCIT Can Revise Faceless Assessment Orders Where AO Fails To Enquire Into Unverified Claims

Issue

Jurisdiction under Section 263 over Faceless Assessment Orders: Whether a Principal Commissioner of Income Tax (PCIT) has the legal authority under Section 263 to revise an assessment order passed under Section 144B by the National Faceless Assessment Centre (NaFAC).
Validity of Revision for Lack of AO Inquiry: Whether the AO’s failure to verify Ind AS rent/lease expenses and potential excess bad debts claims renders the assessment order erroneous and prejudicial to the interests of the Revenue under Section 263.
Tenability of Tax Neutrality Defense: Whether an assessee can defeat Section 263 revision proceedings by claiming that an unexamined excess bad debts claim was “tax-neutral” due to a self-correction in a subsequent assessment year.

Facts

Assessment Completion: For AY 2021–22, the assessee (an NBFC) filed its return of income, which was accepted by the e-Assessment Unit without modification under Section 143(3) read with Section 144B.
Inconsistencies Identified on Verification: On examining the records, the PCIT noted two major unverified issues:
- Rent/Lease Expenses: Discrepancy between the rent/lease expenses claimed under Ind AS and the actual cash outflow reflected in the cash flow notes.
- Bad Debts Claim: The assessee claimed bad debts under Section 36(1)(vii) without adjusting prior-year credit balances, resulting in a potential excess deduction.
Revision Order Issued: The PCIT issued a show-cause notice under Section 263 and subsequently set aside the assessment order, directing the AO to make fresh inquiries.
Assessee’s Objections:
- Jurisdictional Challenge: The assessee argued that since the order was passed under Section 144B under the supervision of the Principal Chief Commissioner of Income Tax (Pr. CCIT) of NaFAC, a PCIT (being lower in rank) could not revise it.
- Merits & Tax Neutrality: The assessee contended that the bad debts claim was tax-neutral as the error was rectified in a subsequent assessment year.

Decision

Jurisdiction Upheld (In favor of Revenue): Held YES. Nothing in Section 144B indicates that an assessment order is passed by the Pr. CCIT of NaFAC. The order remains an assessment order passed by the AO/Faceless Unit; hence, the jurisdictional PCIT retains full power to revise it under Section 263. [Paras 14 and 15]
Failure to Enquire Satisfies Twin Conditions (In favor of Revenue): Held YES. The total lack of inquiry by the AO regarding the Ind AS lease expenses and bad debts claim rendered the assessment order erroneous insofar as it was prejudicial to the interests of the Revenue. [Paras 20 and 21]
Tax Neutrality Defense Rejected (In favor of Revenue): Held YES. The plea of tax neutrality across different years is untenable. Income and deductions must be properly examined and taxed in the correct assessment year. [Para 25]

Key Takeaways

PCIT Revision Powers Preserved in Faceless Regime: Passing an assessment order under the faceless scheme (Section 144B) does not elevate its administrative authority beyond the supervisory jurisdiction of the PCIT under Section 263.
Lack of Inquiry Triggers Section 263: An assessment order passed without verification or necessary inquiries into distinct financial note disclosures or statutory claims is inherently “erroneous and prejudicial to the revenue.”
Strict Application of Assessment Year Principle: Tax neutrality based on subsequent-year rectifications cannot cure an AO’s failure to examine deductions in the relevant assessment year.

IN THE ITAT CHENNAI BENCH ‘A’

Shriram Finance Ltd.

Principal Commissioner of Income-tax

ABY T. VARKEY, Judicial Member
and Inturi Rama Rao, Accountant Member

IT APPEAL No.1473 (CHNY) OF 2025
[Assessment year 2021-22]

MAY 20, 2026

Ms. Sanchita and R. Sivaraman, Advs. for the Appellant. S. Senthil Kumaran, CIT for the Respondent.

ORDER

Inturi Rama Rao, Accountant Member.- This is an appeal filed by the Assessee Company directed against the order of ld.Principal Commissioner of Income Tax, Chennai-3 dated 25.03.2025 passed under section 263 of the Income Tax Act, 1961 for the A.Y.2021-22.

2. The Assessee raised the following grounds of appeal :

“1 . The order of the Principal CIT Chennai-3, Chennai u/s 263 in DIN & Order No: ITBA/REV/F/REV5/2024-25/1075009321(1) dated 25.03.2025 is against law and facts of the case.

2. The Principal CIT Chennai-3, Chennai erred in invoking section 263 on assessment made under the provisions of section 144B as the faceless assessment made is not covered under section 263 and hence the order passed by the Principal CIT is bad in law.

3. The Principal CIT Chennai-3, Chennai erred in not appreciating the fact that only the order passed by the Assessing Officer/TPO is covered under section 263 and not faceless assessment made under the provisions of section 144B as the assessment is not made by a single officer but after consideration of the case by the following different units consisting of

(i)

Assessment unit

(ii)

Verification unit

(iii)

Technical Unit

(iv)

Review Unit

4A. Without properly appreciating the prescribed mandatory, statutory four tiers scrutiny followed before a faceless assessment is made u/s 144B, the Principal CIT erred in concluding in para 10 of his order that necessary enquiries were not made by the faceless unit without even indicating what those “necessary enquiries were and on the vague footing rushing to the conclusion that the assessment made was erroneous and prejudicial to the revenue.

4B. The Principal CIT Chennai-3, Chennai erred in directing the Assessing Officer in para 11 of his order to make “reasonable inquiries” without defining what he meant by that term

5. Without prejudice to the above ground, the following grounds are raised:

The Principal CIT Chennai-3, Chennai erred in partly setting aside the assessment order u./s. 143(3) r.w.s. 144B dated 23.12.2022 with direction to the Assessing Officer that the issues on hand viz (i) rent expenses and (i) provision for bad debts and loan impairments are to be verified in a detailed manner based on the submissions, details and documents furnished by the assessee and to pass order determining the correct income.

The Principal CIT Chennai-3, Chennai erred in not appreciating the fact that there was not excess claim of lease rent and the lease rent of Rs.98.63 crores has been claimed correctly.

The Principal CIT Chennai-3, Chennai erred in not appreciating the fact that the appellant had already offered to tax in the assessment year 202324 the excess claim of bad debts in the return of income for the assessment year 2021-22 of Rs.296.51 crores (Rs.221.40 crores in the case of Shriram Transport Finance Company Limited, the amalgamated company and Rs.75.12 crores in the case of Shriram City Union Finance Limited, the amalgamating company) and the appellant has also filed an application u/s. 154 dated 04.03.2025 for the assessment year 21-22 requesting to rectify the mistake apparent u/s 154(2) and assess the income for the AY 2021-22 and hence the Principal CIT was not correct in directing the Assessing Officer to verify the issue.

The Principal CIT Chennai-3, Chennai erred in partly setting aside the order u/s. 143(3) r.w.s. 144B as there was no under assessment of income and the order passed is not erroneous and prejudicial to the interest of the revenue.

6. For these and other grounds that may be adduced before or at the time of hearing the Income Tax Appellate Tribunal may be pleased to cancel the order passed by Principal CIT Chennai u/s.263 dated 25.03.2025.”

3. Briefly the facts of the case are that the appellant is a Company formed under Companies Act, 1956. It is engaged in the business of Non Banking Finance Company(NBFC). Shriram Finance Limited (SFL) is the rechristened name of Shriram Transport Finance Company Limited (STFC). Shriram City Union Finance Limited (SCUF) and another entity merged with Shriram Transport Finance Company Limited with effect from 01.04.2022. After that the amalgamated company name was changed to Shriram Finance Limited(SFL). The appellant company had filed the Return of Income for the Assessment Year 2021-22 filed on 31.03.2022 disclosing income of Rs.4758,39,14,590/-. The said return of income was taken up for scrutiny assessment under CASS to verify the following items :

Reason for selection of Case

•

Asiessee hai made substantial pur choses front suppliers who are (i)her Non-FilerVe) or have filed non-business ITR (ITR 1,2) or reflected a substantially lower turnover in ITR.

Case Category

CASS

4. The assessment was completed by the e-Assessment Unit of the Department (hereinafter called ‘AO’) vide order dated 23.12.2022 passed u/s.143(3) read with section 144B of the Income Tax Act, 1961 accepting the returned income.

5. Subsequently, the Learned Principal Commissioner of Income Tax, Chennai-3 on verification of the assessment record, formed an opinion that the assessment order passed is erroneous for non-verification of the following items :

“2. On perusal of the assessment records for the Assessment Year 202122, it is seen from the Memo of computation of total income, the assessee has claimed deduction towards “Rent under IndAS (rent paid towards office premises)” amounting to Rs.98,62,56,531/-. In the cash flow in Note 48 to the Financials, it is stated that the actual cash outflow towards lease liabilities during the financial year is 96.16 crores. Thus, there is a difference which has not been verified during the course of assessment proceedings.

3. It is further noticed from the assessment records for the AY 2021-22 that the Provision for impairment of loans and loan assets written off reported in the annual accounts were Rs.3128.29 crores and Rs.1509.29 crores respectively. The assessee has while computing the taxable income has adjusted the bad debts of Rs. 1509.61 crores against the provision of Rs.3128.29 crores and added back the net provision of Rs.1618.36 crores. In this connection, it is stated that as per the provisions of Sec. 36(1) (vii), assessee is entitled to claim bad debts only to the extent it exceeds the credit balance of provision for bad debts.

4. In the instant case, as seen from the records of the previous assessment year 2020-21 ITR and computation statement, there was however a balance of Rs.221.39 crores standing to the credit of the provision for bad debts account, and this was not considered for allowance of bad debts u/s.36(1)(vii). It is, therefore, observed that the bad debts should be restricted to Rs.1288.22 crores and excess claim of bad debts of Rs.221.39 crores is required to be withdrawn and brought to tax.”

6. Accordingly, a show cause notice u/s.263 of the Act was issued on 12.02.2025 calling upon the appellant to file objection as to why the assessment order should not be treated as erroneous and prejudicial to the interests of the revenue.

7. In response to the show cause notice, the appellant company filed a detailed explanation vide letter dated 26.02.2025 explaining as to how the assessment order is not erroneous. For the sake of brevity, we are not reproducing the submissions made before the Learned Principal Commissioner of Income Tax(Ld.Pr.CIT). However, Ld.Pr.CIT on due consideration of the explanation, observed that the Assessing Officer did not cause necessary enquiries which should have been done and therefore, the assessment order is erroneous and prejudicial to the interests of the revenue within the meaning of Clause(A) and Clause(B) of Explanation-2 to section 263 of the Act, accordingly, set-aside the assessment order to the file of Assessing Officer passed u/s.263 of the Income Tax Act, 1961 vide order dated 25.03.2025 to redo the assessment after making necessary enquiries and after providing an opportunity of hearing to the appellant.

8. Being aggrieved, the appellant is in appeal before us in the present appeal. The ld.Counsel submits that the assessment order which was subject matter of revision u/s.263 was passed u/s.144B of the Act on 23.12.2022. An order passed u/s.144B is not amenable to the jurisdiction u/s.263 of the Act, as it does not amount to an assessment order passed u/s.143(3) of the Income Tax Act and Explanation(1) to section 263(1) of the Act does not specify an order passed u/s.144B of the Act. He further submits that the assessment order was passed under supervision and control of NFAC headed by Principal Chief Commissioner or Principal Director General of Income Tax and therefore, the Principal Commissioner cannot invoke the powers of revision u/s.263 against 144B orders. He further submits that the assessment order was passed after considering the replies filed by the appellant company pursuant to the series of notices issued u/s.142(1) of the Act, he further submits that the issues sought to be revised by the ld.Pr.CIT were raised in those notices and duly replied by the appellant. The replies filed by the appellant are placed at page no.16 to 70 of the paper book.

9. On the merits of the issues sought to be revised u/s.263 of the Act, the ld.Counsel submits that the appellant had corrected the error in the quantification of the correct amount deductible u/s.36(1)(vii) in the Income Tax Return for the A.Y.2023-24, therefore, it is a tax neutral transaction, hence, no prejudice caused to the revenue.

10. On the other hand, ld.CIT-DR submits that assessment order passed u/s.144B is amenable to the jurisdiction u/s.263 of the Act. In this regard, he placed reliance on the decision of Co-ordinate Bench decision in the case of RDC Ventures v. PCIT in ITA No.1915/MUM/2023. He further submits that issues sought to be revised by PCIT were never examined by the Assessing Officer. Mere non-examination of the issues renders the assessment order erroneous and also he placed reliance on the decision of Hon’ble Supreme Court in the case of LG Electrification Pvt. Ltd. v. PCIT 443 ITR 45 (SC)(SC). He also submits that an assessment order can be revised in exercising of the power vested with the Commissioner u/s.263 of the Income Tax Act, 1961 based on the Audit Objections. In this regard, he placed reliance on the decision of Punjab & Haryana High Court in the case of PCIT v. Kirti Anand [2025] (Punjab & Haryana) and also the decision of ITAT Indore Bench in the case of Raj Kumar Goyal v. Pr.CIT- 2 in ITA No.438/IND/2019 vide order dated 20.11.2023.

11. In rejoinder, the ld.Counsel submits that in the case of RDC Ventures v. PCIT , Mumbai Tribunal did not consider the statutory provisions governing faceless assessments.

12. We heard the rival submissions and perused the material on record. The issue in the present appeal relates to the validity of assumption of jurisdiction u/s.263 by the Ld.Pr.CIT.

13. At the first instance, we shall take up the grounds of appeal in challenging the very jurisdiction u/s.263 of the Act. The appellant has challenged the very assumption of jurisdiction vide Grounds of Appeal Nos.2 to 4B on the ground that the assessment order passed u/s.144B of the Act is not amenable for jurisdiction u/s.263 for the following reasons :

(i)

An order u/s.144B is not one of those orders specified u/s.263 of the Income Tax Act, 1961.

(ii)

The Assessment Order u/s.144B was passed under the direction and supervision of Principal Chief Commissioner of Income Tax of National Faceless Assessment Centre, therefore, the Principal Commissioner of Income Tax who is below the rank of Principal Chief Commissioner of Income Tax cannot revise the Assessment Order.

14. The above contentions cannot be accepted for the reason that order passed u/s.144B is an order passed in exercising of the powers or in the performance of functions of the Assessing Officer assigned to him under the orders or directions issued by the Board which clearly falls under Sub-Clause(ii) of Clause(A) of Explanation(1) of sub-section(1) of the Section 263 of the Income Tax Act.

15. With regard to the contention of the appellant company that since the Faceless Assessment Order was passed under direction and supervision of Principal Chief Commissioner of Income Tax of Faceless Assessment Unit, the Principal Commissioner of Income Tax who is below the rank of Principal Chief Commissioner of Income Tax, cannot revise the assessment order in exercise of power vested with him u/s.263 of the Income Tax Act, on careful perusal of the provisions of section 144B of the Act, there is nothing to show that the assessment order passed u/s.144B of the Act is passed by Principal Chief Commissioner of Income Tax of Faceless Unit. Therefore, the contention is devoid of any merit, accordingly dismissed.

16. In the result, Ground No.2, 3, 4A & 4B filed by assessee stand dismissed.

Ground No.5 :

17. Next, we shall take up Ground of Appeal No.5 challenging the validity of assumption of jurisdiction u/s.263 of the Act.

18. The Parliament had conferred the power of revision on the Commissioner of Income Tax u/s.263 of the Act in case the assessment order passed is erroneous and prejudicial to the interests of revenue. In order to invoke the power of revision, the above two conditions are required to be satisfied cumulatively. References in this regard can be made to the decision of the Hon’ble Supreme Court in the case of Malabar Industrial Co. Ltd. v. CIT , 243 ITR 83 (SC) and in the case of CIT v. Max India Ltd. [2007] 295 ITR 282 (SC) (SC). The error in the assessment order should be one that it is not debatable or plausible view. In a case where the Assessing Officer examined the claim took one of the plausible views, the assessment order cannot be termed as an “erroneous”.

19. Now, we proceed to examine whether the assessment order passed by the Assessing Officer is erroneous or not.

20. In the present case, we proceed to examine whether there was any query by the Assessing Officer on those issues which are sought to be revised by the Learned Commissioner of Income Tax u/s.263 of the Income Tax Act. It is contended that during the course of assessment proceedings, the Assessing Officer raised the queries on those issues which are raised by the Learned Principal Commissioner of Income Tax. We had carefully perused the notices issued by Assessing Authority u/s.142(1) of the Income Tax Act and replies filed by the appellant which are placed at page no.16 to 70 of the paper book. However, we find that no query was raised by the Assessing Officer on those issues which are sought to be revised by the Learned Principal Commissioner of Income Tax, thus, the contention that those issues were raised by the Assessing Officer and replies filed by the Assessee were considered by the Assessing Authority is bereft of any evidence and therefore, cannot be accepted. In fact, during the course of hearing of the appeal, the Learned Counsel fairly conceded that there was no examination by the Assessing Officer on those issues which are sought to be revised u/s.263 of the Income Tax Act. Thus, it is an undisputable fact that there was no examination or queries raised by the Assessing Officer on issues which are subject matter of revisional proceedings u/s.263 of the Income Tax Act.

21. Further, the we find from the submissions made by the appellant company that obviously, there was mistake in the computation of correct amount of deduction u/s.36(1)(vii) of the Income Tax Act which was rectified in the subsequent assessment year i.e. A.Y.2023-24. It is a salutary principle of law that income should be taxed in the right hands and in the right year. Reference in this regard can be placed on the decision of Hon’ble Supreme Court in the case of ITO v. Ch.Atchaiah 218 ITR 239 (SC) wherein it was held as under :

“7. In our opinion, the contention urged by Dr. Gauri Shanker merits acceptance. We are of the opinion that under the present Act, the ITO has no option like the one he had under the 1922 Act. He can, and he must, tax the right person and the right person alone. By ‘right person’, we mean the person who is liable to be taxed, according to law, with respect to a particular income. The expression ‘wrong person’ is obviously used as the opposite of the expression ‘right person’. Merely because a wrong person is taxed with respect to a particular income, the Assessing Officer is not precluded from taxing the right person with respect to that income. This is so irrespective of the fact which course is more beneficial to the revenue. In our opinion, the language of the relevant provisions of the present Act is quite clear and unambiguous. Section 183 of the Act shows that where the Parliament intended to provide an option, it provided so expressly. Where a person is taxed wrongfully, he is, no doubt, entitled to be relieved of it in accordance with law but that is a different matter altogether. The person lawfully liable to be taxed can claim no immunity because the Assessing Officer[Income Tax Officer] has taxed the said income in the hands of another person contrary to law. We may proceed to elaborate.”

22. There was no option available to the Assessing Officer but to tax the income in the right year i.e. Assessment Year under consideration. Thus, the Assessing Officer had allowed a claim for deduction u/s.36(1)(vii) of the Act, which is very complex in nature without any examination whatsoever. Admittedly, there was no enquiry by the Assessing Officer on the issues which are sought to be revised by the Learned Pr.CIT. It is evident from the very submissions made by the appellant during the course of proceedings before the Learned Pr.CIT that no enquiry was conducted by the Assessing Officer on the aforementioned issues and the items on which the revision was sought to be made by the Learned Pr.CIT does not call for any interference by us having regard to the facts of the each item. We refer to a decision by the Hon’ble Bombay High Court in the case of CIT v. Ballarpur Industries Ltd. [2017] (Bombay) holding that mere taking the view by the Assessing Officer without having subjected the claim to examination would not make it a view of the Assessing Officer. A view has necessarily to be preceded by examination of the claim and opting to choose one of the possible results. In the absence of view being taken, merely because the issue itself was debatable, would not absolve the Assessing Officer of applying his mind to the claim made by the assessee and allowing the claim only on satisfaction after verification/enquiry on his part. A view in the absence of examination is no view but only a chance result. The Hon’ble High Court further went on to hold in para No.16 as under:

“16. Therefore, we are of the view that the Assessing Officer cannot abdicate his responsibility of examining the claim for deduction before allowing it. Absence of examination of the claim made by the assessee while passing an assessment order and allowing the claim made, would render the order of the Assessing Officer erroneous coupled with the fact that it is admitting prejudicial to the interest of the revenue, exercise of revisional jurisdiction u/s.263 of the Act by the ld. Commissioner of Income Tax is proper and valid.”

23. The Hon’ble Bombay High Court in the case of PCIT v. Zuari Maroc Phosphates Ltd 432 ITR 316 (Bombay) held as under :

“27. In several decisions, it has been held that it is incumbent on the Assessing Officer to investigate the facts stated in the return when the circumstance would make such an inquiry prudent and when the word “erroneous” in section 263 includes failure to make an inquiry, the order becomes erroneous when such an inquiry had been made and not because there is anything wrong with the order if all the facts stated therein are assumed to be correct. Duggal and Co. v. CIT [1996] 220 ITR 456 (Delhi); CIT v. Pushpa Devi [1987] 164 ITR 639 (Patna)and CIT v. Smt.Pushpa Devi [1988] 173 ITR 445 (Patna).

24. Even the Jurisdictional High Court in the case of K. A. Ramaswamy Chettiar v. CIT 220 ITR 657 (Madras), it was held that when an officer is expected to make inquiry of a particular item of income and if he does not make any inquiry as expected, that would be a ground to interfere with the order passed by the officer, since such an order passed by the officer is erroneous and prejudicial to the interests of the Revenue.

“12. In the case of Addl CIT v. Mukur Corpn. [1978] 111 ITR 312 (Guj.), it was held that “in the present case it was obvious that the Income-tax Officer had committed an error in not making enquiry into the details as regards both the deductions and also that want of such enquiry had resulted in prejudice to the interests of the revenue. To this extent the initiation of action under section 263 by the Commissioner was quite proper”. In Smt. Tara Devi Aggarwal v. CIT [1973] 88 ITR 323 (SC), “where an assessee is assessed on an income voluntarily return, it is not prejudicial to the interests of the revenue only if it is found that the assessment was made on the basis that the income had been earned by the assessee which was assessable. Where an income has not been earned and is not assessable, merely because the assessee wants it to be assessed in his or her hands in order to assess some others he would have been assessed in a larger amount. An assessment so made will be erroneous and prejudicial to the revenue and the Commissioner has jurisdiction under section 33B of the Indian Income-tax Act, 1922 to cancel the assessment and proceedings for assessment may be initiated under the provisions of the Act against some other assessee who, according to the income-tax authorities, would be liable for the income thereof. Therefore, the abovesaid decisions would postulate that when the ITO is expected to make an enquiry of a particular item of income and if he does not make an enquiry as expected, that would be a ground for the Commissioner to interfere with the order passed by the ITO since such an order passed by the ITO is erroneous and prejudicial to the interests of the revenue.”

25. Thus, from the above, it is clear that the assessment order is erroneous and prejudicial to the interests of the revenue not only for non-examination of issue and patently excess claim u/s.36(1)(vii) of the Act was allowed by the Assessing Officer. Therefore, we do not find any illegality in assumption of jurisdiction u/s.263 of the Act by the Learned Pr.CIT. We do not find any merit in the ground of appeal no.5 filed by the Assessee, accordingly, Ground of appeal No.5 raised by the assessee is dismissed.

26. In the result, appeal of the assessee stands dismissed