PCIT cannot revise assessment under Section 263 if the AO conducted an inquiry and took a plausible view.

I. PCIT cannot revise assessment under Section 263 if the AO conducted an inquiry and took a plausible view.

II. Section 263 revision period for non-reassessment items runs from the original assessment, not a subsequent reassessment.

I. Distinction between ‘Lack of Inquiry’ and ‘Inadequate Inquiry’ for Section 263 Revision.

Issue:

Whether a Principal Commissioner can invoke Section 263 of the Income-tax Act, 1961, to revise an assessment order on the ground that the Assessing Officer (AO) did not make an addition, even if the AO had duly examined the facts and formed a plausible opinion that no addition was necessary.

Facts:

For Assessment Year 2013-14, the assessee filed its return of income, which was initially processed under Section 143(1).
Subsequently, the assessee’s case was reopened based on information from the Investigation Wing regarding the assessee being a beneficiary of trading in “penny stock.”
The Assessing Officer (AO) made an addition under Section 68 on account of investment in the said penny stock.
The Principal Commissioner (PCIT) noted that the assessee had received gifts from friends and relatives on the occasion of her wedding and had also deposited cash in her bank account.
The PCIT observed that the AO had not made any addition regarding these gifts and cash deposits.
Consequently, the PCIT invoked Section 263, holding that the AO’s order was erroneous and prejudicial to the revenue, and directed the AO to pass a fresh assessment order on these specific points.
It was noted by the court that the Assessing Officer had duly examined the facts related to these gifts and cash deposits and had formed an opinion that no addition was necessary, based on the assessee’s reply on the subject issue.

Decision I:

The court held in favor of the assessee. It highlighted the distinction between ‘lack of inquiry’ and ‘inadequate inquiry’. It ruled that if there was any inquiry, even if deemed inadequate by the PCIT, that alone could not give occasion to pass an order under Section 263 merely because the PCIT had a different opinion in the matter. Since, in this case, the Assessing Officer had duly examined the facts and formed an opinion that no addition was necessary in view of the assessee’s reply on the subject issue, the impugned order passed by the Commissioner was not sustainable.

Key Takeaways I:

Scope of Section 263: Section 263 allows revision of an assessment order if it is “erroneous” and “prejudicial to the interest of the revenue.”
“Erroneous” – Lack vs. Inadequacy of Inquiry:
- Lack of Inquiry: If the AO completely failed to apply his mind or make any inquiry on a particular issue that should have been examined, the order can be considered erroneous.
- Inadequate Inquiry: If the AO did conduct an inquiry, but the PCIT subsequently believes that the inquiry was not deep enough or could have been more thorough, it generally does not make the order “erroneous” for the purpose of Section 263, especially if the AO took a plausible view.
PCIT Cannot Substitute Opinion: The PCIT cannot use Section 263 simply because he/she holds a different opinion on a matter that the AO has already considered and formed a view upon. The power under Section 263 is supervisory, not a power to review or substitute judgment.
AO’s Plausible View: If the AO has examined the relevant facts and taken a view that is a legally possible view, even if another view is also possible, the order cannot be revised under Section 263.

II. Limitation Period for Section 263 Revision on Non-Reassessment Items.

Issue:

When an assessment has been reopened under Section 147 and a reassessment order is passed on certain issues (e.g., penny stock), but the Principal Commissioner seeks to revise items not subject to the reassessment (e.g., gifts and cash deposits), whether the period of limitation for revision under Section 263 begins from the date of the original assessment (143(1) intimation) or from the date of the reassessment order.

Facts II:

(Same facts as Part I, where the original return was processed under Section 143(1), and then a reassessment was done under Section 147 for penny stock.)
The PCIT sought to revise the assessment regarding gifts and cash deposits, which were not the subject matter of the reassessment proceedings under Section 147.
The limitation period for passing an order under Section 263 is two years from the end of the financial year in which the order sought to be revised was passed.¹

Decision II:

The court held in favor of the assessee. It ruled that where items sought to be revised by the Commissioner were not the subject matter of reassessment, the period of limitation for revision by the Principal Commissioner would begin from the date of the original assessment and not from the reassessment in which the item was not dealt with. Therefore, the date on which the intimation under Section 143(1) was generated would be the date from which the period of limitation was to be calculated. As the Principal Commissioner’s order under Section 263 was passed after two years from such date, it was clearly barred by limitation.

Key Takeaways II:

Limitation for Section 263: Section 263 specifies a two-year limitation period for revision, calculated from the end of the financial year in which the order sought to be revised was passed.
Original Assessment vs. Reassessment:
- If the PCIT seeks to revise an issue that was specifically addressed and merged into a reassessment order, the limitation period for that specific issue would run from the date of the reassessment order.
- However, if the PCIT seeks to revise an issue that was not dealt with or examined during the reassessment proceedings (i.e., it pertains solely to the original assessment that was undisturbed by the reassessment on that point), the limitation period for that issue runs from the date of the original assessment order (or intimation under 143(1)).
Non-Merger Principle: The principle of merger dictates that only the issues specifically dealt with in a higher-level proceeding (like reassessment) merge with that order. Issues not touched upon remain governed by the original order.
Separate Jurisdictions for Different Issues: Reassessment proceedings under Section 147 are generally limited to the income that has escaped assessment. They do not automatically open up the entire original assessment for revision on all issues.
Strict Interpretation of Limitation: Tax laws’ limitation periods are to be interpreted strictly. If an order is passed beyond the prescribed time, it is invalid, regardless of its merits.

IN THE ITAT SURAT BENCH

Anushree Maheshwari

Principal Commissioner of Income-tax-1

Pawan Singh, Judicial member
and BIJAYANANDA PRUSETH, Accountant member

IT Appeal No.584 (SRT) of 2024
[Assessment Year 2013-14]

DECEMBER 26, 2024

Kaushik Kejriwal, CA for the Assessee. Ravi Kant Gupta, CIT-DR for the Revenue.

ORDER

Bijayananda Pruseth, Accountant Member. By way of this appeal, the assessee has challenged the correctness of the order passed by Ld. Principal Commissioner of Income-tax, Surat-1 [in short, ‘PCIT’], under section 263 of the Income-tax Act, 1961 (in short, ‘the Act’) dated 24.03.2024 for assessment years (AY) i.e.,2013-14, which in turn arose out of assessment order passed by National Faceless Assessment Centre, Delhi / Assessing Officer (in short, “AO”) under section 147 r.w.s. 144B of the Act on 30.03.2022. The assessee has raised the following grounds of appeal:-

Sr. No.	Relevant section(s) of the IT Act	Issues	Ground of appeal
1	263	The revisional proceedings	On the facts and circumstances of the case as well as law on the mater, the
		ordered in the case of assessee is bad in law	leanged PCiT han erreg in ordering nevssionah pgocendings in the case of aeeessee.
2	253	Prayer	The appellant craves leave to add, alter, modify or delete any or all the grounds of appeal during appeal proceedings.

2. The facts of the case in brief are that assessee filed her return of income (ROI) for the AY 2013-14 on 25.03.2014 declaring total income of Rs.9,71,420/. The return was processed u/s 143(1) of the Act on 10.11.2014. The assessee had shown long-term capital gains on sale of shares of Gemstone Investment Ltd. Subsequently, information was received from DDIT(Inv.) Unit-5(2), Mumbai that the share of Gemstone Investment Ltd. (Gemstone INV-Scrip code-531137) was a penny stock and assessee was a beneficiary from trading of the above shares. The entire transaction was treated as “accommodation entry”. On the basis of above information, case of the assessee was reopened by issue of notice u/s 148 after obtaining prior approval of the competent authority. In response to the said notice, assessee filed return of income declaring total income at Rs.10,29,740/-. The reassessment was completed u/s 147 r.w.s. 144B of the Act on 30.03.2022 determining income at Rs.15,80,740/-after making addition of Rs.4,89,000/-.

2.1 Subsequently, the Ld.PCIT called for the records and examined the same. He found that AO has completed the assessment after considering the issue on which the reasons were recorded and the assessment was reopened. However, on verification of the capital account and bank account available on record, the Ld.PCIT noticed that the assessee had shown receipt of gifts of Rs.20,00,000/- from Sitaram Mundra (HUF) and Rs.24,60,250/- from friends and relatives on the occasion of her wedding. The assessee had also deposited cash of Rs.17,05,000/- in her bank account maintained with Canara Bank. During reassessment proceedings, AO had issued a notice u/s 142(1) wherein the assessee was asked to furnish balance sheet, profit and loss account, computation of income, copy of bank statements giving narration of the entries therein. The assessee had submitted the details wherein the receipt of above gifts was reflected in the capital account. In the bank statement, cash deposit of Rs.17,05,000/- was found. Despite having all these information, AO failed to carry out any enquiries or verification on the above issues. The AO made addition on the issue on which the case was reopened. The Ld.PCIT was of the opinion that AO should also have made verification and enquiries in respect of gifts and cash deposits the failure of which result in under assessment of income of Rs.61,65,250/- (Rs.20,000,000 + Rs.24,60,250/- + Rs.17,05,000/-) and consequential shortt levy of tax of Rs.19,05,062/- along with applicable interest and penalty. Therefore, the Ld.PCIT issued show cause notice u/s 263 of the Act dated 26.10.2023 which is extracted at pages 4 to 6 of the order u/s 263 of the Act. Reply of the assessee is at para-4 (pages 6 to 12) of the above order. In the reply, it was submitted that AO had issued various queries in the notice u/s 142(1) of the Act. The assessee had submitted all details required by AO. After verifying the documents, including bank had also submitted capital account and balance sheet where entries of the impugned gifts were reflected. The said gifts were received on the occasion of the marriage of the assessee. Shri Sitaram Mundra, Karta of the HUF had gifted Rs.20,00,000/- to the assessee when the marriage was solemnized on 14.02.20213. The assessee also received gifts from other persons including relatives and friends. Their names, relation, PAN, address and amounts of gift were given to AO. Thus, the assessee had submitted all details called for by the AO including capital account, balance sheet, bank statement, etc., where the impugned gifts and cash deposits are reflected. Therefore, the order was not erroneous or prejudicial to the interest of Revenue. The assessee therefore requested to drop the proceedings u/s 263 of the Act. The assessee relied on the following decisions (i) Krishnamurthy (V.G) v. CIT v. Sun Beam Auto Ld. (2009) 31 DTR 1 (Del).

2.2 The Ld. PCIT considered the submission of the AO but did not accept it by holding that AO passed the order without proper verification / enquiry and the total income as per law, which should have been made during reassessment proceedings. He relied on the decision of Hon’ble Supreme Court in case of CIT v. Amitabh Bachchan ITR 200 (SC). He has also discussed the provisions of Section 263 including Explanation-1 and 2 and stated that interpretation of the expression “erroneous in so far as prejudicial to the interest of revenue” has been clarified by Explanation-2 to Section 263(1) which was inserted vide Finance Act, 2015 with effect from 01.01.2015. The Ld.PCIT also referred to the decision of Hon’ble Supreme Court in case of Malabar Industries Ltd. v. CIT [2000] (SC) and stated that the order of AO was erroneous and prejudicial to the interest of revenue. There was under assessment of Rs.61,65,250/- and sought levied of tax of Rs.47,62,655/-. He has also referred to the decision in case of CIT v. Paville Project Pvt. Ltd CIT v. Nagesh Knitwares Pvt. Ltd. and Ors ITR 135 (Delhi)and Gee Vee Enterprises v. Addl.CIT [1975] 99 ITR 375 (Delhi). Accordingly, assessment order passed u/s 147 r.ws. 144B was set aside with a direction to AO to pass fresh assessment order after considering the issue as may have been already considered together with the issue discussed in the order u/s 263 of the Act.

3. Aggrieved by the order of Ld.PCIT, the assessee has filed present appeal before the Tribunal. The Ld. AR of the assessee has submitted paper book containing all the details submitted during the assessment as well as revisionary proceedings u/s 263 of the Act. He submitted that the return of income filed by the assessee on 25.03.2014 was processed u/s 143(1) on 10.11.2014. The case was not selected for regular scrutiny assessment u/s 143(3) of the Act. However, based on the information from the DDIT(Inv.), the case was reopened u/s 147 of the Act by issue of notice u/s 148 on 31.03.2010. The appellant had filed return in response to the said notice declaring total income of Rs.10,29,740/-. The reasons for reopening is at page 58 of the paper book. As per the said reasons for reopening, the assessee was one of the beneficiaries of accommodation entries in trading of scrip of Gemstone Investment Ltd., a penny scrip, to the tune of Rs.4,89,000/-. The assessee had objected the issuance of notice u/s 148 which was disposed of by AO vide order dated 26.03.2022 which is at page 81 of the paper book. The assessee had filed reply to the notice issued u/s 142(1) wherein various details were called for by the AO. The balance sheet and the capital account of the assessee for the year ended 31.03.2013 is at page 119 of the paper book. The bank statement of assessee is at pages 124 and 125 of the paper book. It could be seen from the capital account that assessee had received gift of Rs.20,00,000/-from Sitaram Mundra HUF and had also received gifts from others on her weeding of Rs.24,60,250/-. The Ld. AR of the assessee submitted that marriage expenses of Rs.21,75,537/- has also been entered in the said capital account. The cash deposits of Rs.17,05,000/- are reflected in the said bank statement. After considering the reply and the details submitted by assessee, AO has Rs.4,89,000/- on account of investment in the share of M/s Gemstone Investment Ltd. He has not made addition on account of the gifts received and the cash deposited during FY 2012-13 (relevant AY 2013-14). Therefore, it was submitted that the AO has applied his mind and taken conscious decision to add the investment in penny stock and not to add any other item in the ordered u/s 147 of the Act. The Ld. AR relied on the decision of Hon’ble Supreme Court in case of CIT v. Alagendran Finance Ltd. (2007) and submitted that the order of Ld.PCIT was also time barred. He has also relied on the decisions which were referred to before the Ld.PCIT in the revision proceedings u/s 263 of the Act.

4. On the other hand, Ld.CIT-DR has strongly relied on the order passed by Ld.PCIT. He submitted that Ld.PCIT has called for the records and duly examined it including the assessment order passed/s 147 r.w.s. 144B of the Act. He has also referred to provisions of section 263 of the Act and stated that the present case is covered by the scope and ambit of Section 263 of the Act because the AO has not made any inquiry which should have been made to come to a proper conclusion.

5. We have heard rival submissions and perused materials on record. We have also deliberated upon the decisions relied upon by both parties. We have also gone through the provisions of Section 263 of the Act. We find that impugned order was passed by the AO u/s 147 r.w.s. 144B of the Act. The case was reopened based on the information received from DDIT(Inv.), Unit 5(2), Mumbai. The reasons for reopening the assessment was that assessee was a beneficiary of trading in the scrip of Gemstone Investment Ltd. which was a penny stock. The investment of the assessee in the above share was Rs.4,89,000/- which was added u/s 68 of the Act by AO in the reassessment order u/s 147 r.w.s. 144B of the Act.

5.1 It is clear from the facts narrated above and the assessment order passed by the AO that the case of the assessee was reopened because of transaction in the penny stock name, Gemstone Investment Ltd. of Rs.4,89,000/-. Hence, the question for decision against the above factual background before us is whether the AO passed an erroneous and prejudicial order by making addition of Rs.4,89,000/- and by not making any addition on account of gifts received on weeding and cash deposited in her bank account during FY 2012-13. We find that the AO had supplied reasons for re-opening to the assessee, which was objected to by the assessee. The objection was disposed of by AO. Thereafter, assessee had given reply on the issue of reopening as well as on further queries raised by the AO. After considering the reply of the assessee, the AO passed order u/s 147 r.w.s 144B of the Act by making addition of Rs.4,89,000/- towards investment in share of Gemstone Investment Ltd. He has not made any addition regarding gifts and cash deposits though assessee had furnished the details in this regard. Thus, it can be said that the AO has examined the issue and taken a considered view on the subject issue. However, the Ld.PCIT has invoked jurisdiction u/s 263 by issuing notice u/s 263 of the Act and passed an order directing the AO to pass fresh assessment order after giving opportunities of being heard to assessee.

5.2 Let us now discuss the scope and ambit of Section 263 of the Act. A bare reading of the section reveals that the Ld.PCIT can call for and examine the record of any proceedings under the Act and if he considers that any order passed by the AO is erroneous in so far as it is prejudicial to the interests of the revenue, he may after giving opportunity of hearing and after making or causing to be made such inquiry as he deems necessary, pass such order as the circumstances of the case justify.

5.3 The Hon’ble Apex Court in case of CIT v. Greenworld Corporation, ITR 81 (SC) held that the jurisdiction u/s 263 can be exercised only when both the following conditions are satisfied i.e., (i) the order of the Assessing Officer should be erroneous and (ii) it should be prejudicial to the interests of revenue. These conditions are conjunctive. An order of assessment passed by the Assessing Officer should not be interfered with only because another view is possible. The Hon’ble Apex Court in case of Max India Ltd. v. CI ITR 282 (SC) held that the Commissioner has to be satisfied of the twin conditions as stated above. If one of them is absent, recourse cannot be had to Section 263 of the Act. We find that the impugned issue of reopening and other details were duly considered by the AO at the time of re-assessment proceedings. He has considered all issues and decided to add investment in share of Gemstone Investment Ltd. and not to add on the other issues.

5.4 The submission of the Revenue is that while passing the assessment order, the AO did not consider the aspect especially as to whether the assessee has explained the gifts and cash deposits. In this regard, it may be stated that the case of assessee was reopened to examine the share transaction of Gemstone Investment Ltd. However, during the re-assessment proceedings, AO had called for capital account, balance sheet and bank statement of the assessee in addition to the issue of reopening i.e., investment and trading in share of Gemstone Investment Ltd. Assessee had furnished replies and details on issues including the issues which were not subjectmatter of reopening. In fact, from these details only, the Ld.PCIT had initiated the revisional proceedings. No other new or fresh material has been discussed by the Ld.PCIT in the order u/s 263 of the Act. From the facts discussed above, it cannot be said that the AO has not applied his mind to the details submitted by the assessee. Not making an addition of a particular issue, which has been replied to by the assessee, would not by itself lead to an inference that the AO had not applied his mind to the said issue. It is clear that the AO was satisfied with the assessee’s explanation and therefore he accepted same. The grievance of the Ld.PCIT is that the AO should have made further inquiry in respect of gifts and cash deposit rather than accepting the assessee’s explanation. Therefore, it could not be said that it was the case of “lack of inquiry”. There is a distinction between “lack of inquiry” and “inadequate inquiry”. If there was any inquiry, even inadequate, that could not, by itself, give occasion to the Ld.PCIT to pass order u/s 263 of the Act merely because he has different opinion in the matter. It is only in cases of lack of inquiry that such a course of action could be opened. In the present case, the Assessing Officer has duly examined the facts and formed an opinion that no addition is necessary in view of the reply of the assessee on the subject-issue. Therefore, the decision of Ld.PCIT that the order passed by AO was erroneous and prejudicial to the interest of revenue is not correct. Reliance for this view is based on the decision of Hon’ble Delhi High Court in case of CIT v. Sunbean Auto Ltd. [20110

5.5 The order of Ld. PCIT is not sustainable from another angle. The Ld.AR has relied on the decision of Hon’ble Supreme Court in case of Alagendran Finance Ltd. (supra) and submitted that the order of Ld.PCIT was passed beyond the time allowed under sub-section (2) of Section 263 of the Act. We find that the assessee filed return of income on 25.03.2014. The said return was processed u/s 143(1) of the Act on 10.11.2014. Thereafter, notice u/s 148 was issued on 30.30.2021. The order u/s 147 r.w.s. 144B of the Act was passed on 30.03.2022. As stated earlier, the case was reopened to examine the transaction of assessee in the shares of Gemstone Investment Ltd., which was penny stock company. The AO after calling for the details and explanation of the assessee added Rs.4,89,000/- u/s 68 of the Act on account of investment in share transaction of Gemstone Investment Ltd. to the total income returned by the assessee. He had not made any addition regarding other issue including gift and cash deposited in bank. The Hon’ble Supreme Court in case of Alagendran Finance Ltd. (supra) held that where items other than item sought to be revised by the Commissioner are the subject of reassessment, the period of limitation for revision by the Commissioner begins from the date of the original assessment not form reassessment in which the item was not dealt with. The doctrine of merger does not apply in such a case. In the present case, the issue of revision are gifts received during marriage and cash deposited in bank account. These issues were not subject-matter of re-assessment. In the reasons for reopening, the issue was investment and share transaction in a penny stock namely, Gemstone Investment Ltd. The AO had duly added Rs.4,89,000/- u/s 68 of the Act on this issue. Therefore, the items taken up by Ld.PCIT are other than the items for which the case was reopened. Hence, the period of limitation for revision by Ld.PCIT begins from the date of original assessment and not from re-assessment. In the present case, the return was filed on 25.03.2014 and same was processed u/s 143(1) of the Act on 10.11.2014. The order of reassessment u/s 147 r.w.s. 144B of the Act was 30.03.2022. Since items of revision were not the items in the reassessment proceedings, the date on which the intimation u/s 143(1) was generated i.e., 10.11.2014 would be the date from which the period of limitation was to be calculated. Therefore, two years from the end of above date would be 31.03.2016 but Ld.PCIT passed the order u/s 263 on 22.03.2024. Hence, it was clearly barred by limitation.

5.6. The ITAT Mumbai in case of Indian Education Society v. CIT

210 ITD 92 (Mumbai – Trib.) has taken a similar view and held that where Commissioner passed revision order against reassessment order in case of the assessee-trust on ground that AO had not verified accumulation and application for the year under consideration for purpose of object of the trust for which amount was set apart, however, issue dealt in revision proceedings was unrelated in character from issue of corpus donation received by the assessee which was dealt in reassessment proceedings, revision order passed by the Commissioner was to be quashed. For ready reference, the relevant fact of the order is reproduced below:

“7. We have heard both parties and perused the material on record. We have also given our thoughtful consideration to the judicial precedents relied upon. The issue dealt with by the Ld. Assessing Officer in the assessment proceeding and order passed u/s147 and the one dealt in revisionary proceeding u/s 263 and the order passed thereof by Ld.CIT(E) are altogether unrelated and different in their character. Ld.CIT(E) has sought to revise the reassessment order on a subject-matter which has not come to the notice of the Ld.AO in the re-assessment proceedings since the issue dealt by him as recorded in the reasons to believe on a different footing. For the issue raised by Ld.CIT(E) to invoke revisionary proceedings u/s 263 it had to necessarily to relate to intimation passed u/s 143(1) which falls beyond the bracket of two years prescribed u/s 263 of the Act.”

Accordingly, the ITAT Mumbai allowed appeal of the assessee. Facts of the present case are similar. The issue of reassessment proceedings and the issues of u/s 263 are different. Hence, the doctrine of merger could not apply and the date of two year would start from the date of intimation u/s 143(1) which was on 10.11.2014. Therefore, order u/s 263 was clearly barred by limitation as per the provisions under sub-section (2) of section 263 of the Act. We, accordingly, set aside the order passed u/s 263 of the Act. This ground of assessee’s appeal is allowed.

6. In the result, appeal filed by the assessee is allowed.