Principal Commissioner cannot revise an assessment under Section 263 if the AO took a plausible view after examining the issue.

Issue:

Whether the Principal Commissioner can initiate revisionary proceedings under Section 263 of the Income-tax Act, 1961, to disallow a deduction claimed by a cooperative society under Section 80P(2)(d) on interest income from cooperative banks, if the Assessing Officer (AO) had already examined the issue in detail during the original assessment and taken a legally plausible view, even if the Principal Commissioner holds a different opinion.

Facts:

For Assessment Year 2017-18, the assessee, a cooperative society, filed its return of income.
The assessment was completed under Section 143(3), accepting the returned income, which included a deduction under Section 80P(2)(d) for interest income received from cooperative banks.
The Principal Commissioner (PCIT) subsequently observed that the interest income from cooperative banks should have been taxed, and the deduction under Section 80P(2)(d) should have been disallowed.
The PCIT concluded that the Assessing Officer (AO), while completing the assessment, had not examined this issue. Therefore, the PCIT held that the assessment order was “erroneous as well as prejudicial to the interest of revenue” and initiated proceedings under Section 263.
The Tribunal, however, recorded findings that the Assessing Officer had, in fact, examined the issue of interest income from cooperative banks and the deduction under Section 80P(2)(d) in detail during the original assessment proceedings.
The Tribunal further found that the view taken by the AO was a “legally possible view.”

Decision:

The court held in favor of the assessee. It agreed with the Tribunal’s order, stating that no question of law, much less a substantial question of law, sought to be raised by the revenue arose in the instant case. The Principal Commissioner could not have resorted to Section 263 proceedings merely to supplant his own view with a view already taken by the Assessing Officer, especially when the AO’s view was a legally plausible one based on due examination.

Key Takeaways:

Scope of Section 263 (Revision of Erroneous and Prejudicial Orders): Section 263 grants the Principal Commissioner the power to revise an assessment order if it is “erroneous” and “prejudicial to the interest of the revenue.” Both conditions must be satisfied.
“Erroneous” when Inquiry Lacking: An order can be deemed erroneous if the AO did not make any inquiry or inadequate inquiry on a vital point.
“Prejudicial to Revenue” when Loss of Revenue: An order is prejudicial to the revenue if it results in a loss of legitimate tax to the exchequer.
No Revision for Plausible View: A crucial limitation on Section 263 power is that it cannot be invoked merely because the PCIT has a different opinion or believes a deeper inquiry could have been made, if the AO had already conducted an inquiry and taken a possible or plausible view in accordance with law.
Inquiry vs. Opinion: The Tribunal’s finding that the AO had examined the issue in detail during the assessment proceedings is paramount. This negates the PCIT’s assertion that the AO failed to examine the issue.
“Legally Possible View”: If the AO’s interpretation or application of the law, even if debatable, is one of the possible legal views, the assessment order cannot be termed “erroneous” for the purpose of Section 263. The PCIT cannot substitute his/her own opinion for a valid, albeit different, view taken by the AO.
Deduction under Section 80P(2)(d): This section allows a deduction for certain incomes of cooperative societies. There has been a long-standing debate and judicial pronouncements regarding whether interest income from cooperative banks is eligible for this deduction, or whether it should be taxed under “Income from other sources.” The fact that there are differing judicial views supports the idea that the AO’s decision to allow the deduction could be considered a “legally possible view.”

HIGH COURT OF GUJARAT

Principal Commissioner of Income Tax-1

Kutch District Co. Op. Milk Producers Union Ltd.

BHARGAV D. KARIA and D.N. Ray, JJ.

R/TAX APPEAL NO. 666 of 2024

MARCH 18, 2025

Karan G Sanghani, for the Appellant. Manish J Shah, for the Respondent.

ORDER

D.N. Ray, J. – Heard learned Senior Standing Counsel Mr. Karan G. Sanghani for the Appellant.

2. The present Tax Appeal is filed under section 260A of the Income Tax Act, 1961, by the Appellant, arising from the order dated 29.01.2024 passed by the Income Tax Appellate Tribunal (for short, “the ITAT”), Rajkot, in ITA No. 176/Rjt/2022 for the Assessment Year 2017-2018, proposing the following substantial questions of law:

“[A] “Whether on facts of the case as well as in law, the Income Tax Appellate Tribunal was justified in quashing the order u/s 263 of the Income Tax Act of PCIT especially when the Assessment Order passed by the Assessing Officer is unsustainable in law?”

[B] “Whether on facts of the case as well as in law, the Income Tax Appellate Tribunal was justified in quashing the order u/s 263 of the Income Tax Act of PCIT, without considering that the order has been passed without making inquiries or verification which should have been made and hence, Explanation 2 to section 263 is clearly attracted and thus, the order is to be deemed to be erroneous in so far as it is prejudicial to the interest of revenue?”

[C] “Whether on facts of the case as well as in law, the Income Tax Appellate Tribunal was justified in quashing the order u/s 263 of the Income Tax Act of PCIT when Hon’ble Jurisdictional High Court in the case of Katlary Kariyana Merchant Sahkari Sarafi Mandali Assistant Ltd. v. Commissioner of Income-tax, (Gujarat) has held that the interest derived from surplus funds invested by assessee in nature of FDRs in Cooperative Banks and Nationalized Bank, other than Co-operative Societies will certainly not fall in category to be entitled to claim deductions under section 80P(2)(a)(i) and section 80P(2)(d) of the Act?”

3. The brief facts of the case are as follows:-

3.1 The Assessee, a co-operative society, filed its return of income for the Assessment Year 2017-18 on 30.10.2017, declaring an income of Rs. 2,47,97,470/- after claiming a deduction of Rs. 5,85,90,142/- under Section 80P of the Income Tax Act, 1961.

3.2 Subsequently, the case was selected for complete scrutiny by “CASS”. The assessment was concluded under Section 143(3) of the Income Tax Act on 16.11.2019, determining the total income to be Rs. 2,61,44,050/, by making an addition of Rs. 13,46,581/- under Section 36(1)(va) read with Section 2(24)(x).

3.3 During the relevant assessment year, the Assessee derived interest income from Co-operative Banks amounting to Rs. 5,60,55,842/- and claimed a deduction under Section 80(2)(d) of the Income Tax Act, 1961. Based on this, remedial action was initiated under Section 263 of the Act.

3.4 As a result, the Principal CIT-1, Rajkot, passed an order under Section 263 of the Income Tax Act on 07.03.2022, holding that the order under Section 143(3) of the Act, dated 06.11.2019, was erroneous in relation to the issue of deduction on interest income under Section 80(2)(d) of the Act.

3.5 Dissatisfied with the order passed under Section 263 of the Income Tax Act, the Assessee appealed to the Tribunal. The Appellate Tribunal, by its order dated 29.01.2024, allowed the Assessee’s appeal and quashed the order under Section 263 of the Act.

4. Aggrieved by the decision of the Appellate Tribunal, the Revenue preferred this appeal.

5. Mr. Karan G.Sanghani, learned Senior Standing Counsel for the Appellant-Revenue submitted that it is apparent from the Assessment Order that the Assessing Officer had not applied his mind regarding the claim of the Assessee for deduction under Section 80(P)(2)(d) of the Act. Therefore, the Assessment Order must be held to have been passed without due verification /inquiry by the then Assessing Officer. Therefore, the present case should be squarely covered by Clause (a) and Clause (d) to explanation 2 of Section 263 of the Act.

6. DISCUSSION & FINDINGS :-

Section 263 of the Income Tax Act, 1961 reads as under:-

“263. Revision of orders prejudicial to revenue.

(1)The [Principal Chief Commissioner or Chief Commissioner or Principal Commissioner] or Commissioner may call for and examine the record of any proceeding under this Act, and if he considers that any order passed therein by the Assessing Officer [or the Transfer Pricing Officer, as the case may be,] is erroneous in so far as it is prejudicial to the interests of the revenue, he may, after giving the assessee an opportunity of being heard and after making or causing to be made such inquiry as he deems necessary, pass such order thereon as the circumstances of the case justify, [including,—

(i)an order enhancing or modifying the assessment or cancelling the assessment and directing a fresh assessment; or

(ii)an order modifying the order under section 92CA; or

(iii)an order cancelling the order under section 92CA and directing a fresh order under the said section].

Explanation 1.—For the removal of doubts, it is hereby declared that, for the purposes of this sub-section,—

(a)an order passed on or before or after the 1st day of June, 1988] by the Assessing Officer [or the Transfer Pricing Officer, as the case may be,] shall include—

(i) an order of assessment made by the Assistant Commissioner or Deputy Commissioner or the Income-tax Officer on the basis of the directions issued by the Joint Commissioner under section 144A;

(ii) an order made by the Joint Commissioner in exercise of the powers or in the performance of the functions of an Assessing Officer [or the Transfer Pricing Officer, as the case may be,] conferred on, or assigned to, him under the orders or directions issued by the Board or by the Principal Chief Commissioner or Chief Commissioner or Principal Director General or Director General or Principal Commissioner or Commissioner authorised by the Board in this behalf under section 120;

[(iii) an order under section 92CA by the Transfer Pricing Officer;]

(b) “record” shall include and shall be deemed always to have included all records relating to any proceeding under this Act available at the time of examination by the Principal [Chief Commissioner or Chief Commissioner or Principal] Commissioner or Commissioner;

(c) where any order referred to in this sub-section and passed by the Assessing Officer 92[or the Transfer Pricing Officer, as the case may be,] had been the subject matter of any appeal filed on or before or after the 1st day of June, 1988, the powers of the* Principal Commissioner or Commissioner under this sub-section shall extend and shall be deemed always to have extended to such matters as had not been considered and decided in such appeal.

Explanation 2.—For the purposes of this section, it is hereby declared that an order passed by the Assessing Officer [or the Transfer Pricing Officer, as the case may be,] shall be deemed to be erroneous in so far as it is prejudicial to the interests of the revenue, if, in the opinion of the Principal [Chief Commissioner or Chief Commissioner or Principal] Commissioner or Commissioner,—

(a)the order is passed without making inquiries or verification which should have been made;

(b)the order is passed allowing any relief without inquiring into the claim;

(c)the order has not been made in accordance with any order, direction or instruction issued by the Board under section 119; or

(d)the order has not been passed in accordance with any decision which is prejudicial to the assessee, rendered by the jurisdictional High Court or Supreme Court in the case of the assessee or any other person.

[Explanation 3.—For the purposes of this section, “Transfer Pricing Officer” shall have the same meaning as assigned to it in the Explanation to section 92CA.]

(2)No order shall be made under sub-section (1) after the expiry of two years from the end of the financial year in which the order sought to be revised was passed.

(3)Notwithstanding anything contained in sub-section (2), an order in revision under this section may be passed at any time in the case of an order which has been passed in consequence of, or to give effect to, any finding or direction contained in an order of the Appellate Tribunal, National Tax Tribunal, the High Court or the Supreme Court.

Explanation.—In computing the period of limitation for the purposes of sub-section (2), the time taken in giving an opportunity to the assessee to be reheard under the proviso to section 129 and any period during which any proceeding under this section is stayed by an order or injunction of any court shall be excluded.”

6.1 We find that the learned ITAT had examined the question before it in great detail and has proceeded to hold as under :- “6. We have heard the rival submissions and perused the material on record.

7. An inquiry made by the Assessing Officer, considered inadequate by the Commissioner of Income Tax, cannot make the order of the Assessing Officer erroneous. In view, the order can be erroneous if the Assessing Officer fails to apply the law rightly on the facts of the case. As far as adequacy of inquiry is considered, there is no law which provides the extent of inquiries to be made by the Assessing Officer. It is Assessing Officer’s prerogative to make inquiry to the extent he feels proper. The Commissioner of Income Tax by invoking revisionary powers under Section 263 of the Act cannot impose his own understanding of the extent of inquiry. There were a number of judgements by various High Courts in this regards.

8. Delhi High Court in the case of CIT v. Sunbeam Auto ITR 167 (Delhi), made a distinction between lack of inquiry and inadequate inquiry. The Hon’ble court held that where the AO has prior to the completion of assessment, the same cannot be set aside u/s263 on the ground of inadequate inquiry

“12 There are judgments galore laying down the principle that the Assessing Officer in the assessment order is not required to give detailed reason in respect of each and every items of deduction, etc. Therefore, one has to seefrom the record as to whether there was appication of mind before allowing the expenditure in question as revenue expenditure, Learned counsel for the assessee is right in his submission that one has to keep in mind the distinction between “Lack of inquiry” and “Indequate inquiry”. If there was any inquiry, even inadquate, that would not by itself, give occasion to the Commissioner to pass orders under Section 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 would be open. From the aforesaid definition it is clear that an order cannot be termed as erroneous unless it is not accordance with law. If and Income-tax Officer acting in accordance with law makes a certain assessment, the same cannot be branded as erroneous by the Commissioner simply because, according to him, the order should have been written more elaborately. This Section does not visualise a case of substition of the judgement of the Commissioner for that of the Income-tax Officer, who passed the order unless the decision is held to be erroneous. Cases may be visualised where the Income-tax Officer while making an assessment examines the accounts makes enquiries applies his mind to the facts and circumstances of the case determines the income either by accepting the accounts or by making some estimates himself. The Commissioner on perusal of the records, may be of the opinion that the estimate made by the officer concerned was on the lower side and left to the Commissioner he would have estimated the income at a figure higher than the one determined by the Income-tax Officer. That would not vest the Commissioner with power to re-examine the accounts and determine the income himself at a higher figure. It is because the Income-tax Officer has exercised the quasijudicial power vested in him in accordance with law and arrived at conclusion and such a conclusion cannot be termed to be erroneous simply because the Commissioner does not feel satisfied with the conclusion. There must be some prima facie material on record to show that tax which was lawfully exigible has not been imposed or that by the application of the relevant statute on an incorrect or incomplete interpretation a lesser tax than what was just been imposed.

15. Thus even the Commissioner conceded the position that the Assessing Officer made the inquiries, elicited replies and thereafter passed the Assessment order. The grievance of the Conmmissionerwas that the Assessing Officer shouldhave made further inquires rather than accepting the explanation. Therefore, itcannot be said that it is a case of ‘lack of inquiry’.

9. “In Gabriel India Ltd (Bombay), law on this Aspect was discussed in the following manner (page 1 13):-

“The consideration of the Commissioner as to whether an orcler is erroneous in so far as it is prejudicial to the interests of the Revenue, must be based on materials on the record of the proceedings called for by him. If there are no materials on record on the basis of which it can be said that the Commissioner acting in a reasonable could have to such a conclusion, the initiation of proceedings by him will be illegal and without jurisdiction. The Commissioner cannot initiate proceedings with a view to starting fishing and roving enquiries in matters or order which are already concluded. Such action will be against the well-accepting policy of law that there must be a point of finality in all legal proceedings, that stale issues should not be reactivated beyond a particular stage and that lapse of time must induce respose in and set at rest judicial and quasi-judicial controversis as it must in other spheres of human activity”

10. The Mumbai ITAT in thecase ofSh. Narayan Tatu Rane v. ITO, L.T.A. No. 2690/2691/Mum/2016, cit. 06.05.2016 examined the scope of enquiry under Explanation 2(a) to Section 263 in the following words:

“20. Further clause (a) of Explanation states that an order shall be deemed to be erroneous, if it has been passed without makingenquiries or verification, which should have been made. In our considered view, this provision shall apply, if the order has been passed without making enquiries or verification which a reasonable and prudent officer shall have carried out in such case, which means that the opinion formewd by Ld Pr. CIT cannot be taken as final one, without scrutinising the nature of enquiry or verification carried out by the AO vis-a vis its reasonableness in the facts and circumstances of the case. Hence, in our considered view, what is relevant for clause(a) of Explanation 2 to sec. 263 is whether the AO has passed the order after carrying our enquiries or verification, which a reasonable and prudent officer would have carried out or not. It does not authorise or give unfettered powers to the Ld Pr. CIT to revise each and every order, if in hi opinion, the same has been passed without making enquiries or verification which should have been made. In our view, it is the responsibility of the Ld Pr. CIT to show that the enquiries or verification conducted by the AO was not in accordance with the enquiries or verification that would have been carried out by a prudent officer. Hence, in our view, the question as to whether the amendment brought in by way of Explanation 2(a) shall have retropective or prospective application shall not be relevant”

11. The Supreme Court of India in the case of Principal Commissioner of Income-tax, Surat-2 v. Shreeji Prints (P.) Ltd. (SC) dismissed SLP filed by the assessee against order passed by High Court holding that where assessee company had received unsecured loans from two different companies and Assessing Officer had made inquires in detail and accepted genuineness of same, such view of Assessing Officer being a plausible view could not be considered erroneous or prejudicial to interest of revenue. The facts of this case were that respondent assessee has filed its return of income showing total income of Rs. 62,55,900/- which was assessed underSection 143(3) of the Act, 1961 by an assessment order dated 14th March 2016. The respondent company received unsecured loans from M/S. Georgett Tradecom Pvt. Ltd and M/S. Purba Agro Food Pvt. Ltd amounting to Rs. 2.49 Crore and the Assessing Officer allowed these unsecured loans. The Principal Commissioner of Income-tax invoked. Section 263 of the Act, 1961 for revising the assessed income of the respondent assessee. It was noticed by the PCIT that the unsecured loans obtained by the respondent assessee are shown as investment in the name of the assessee in the share application as well as in the balance sheet of the respective companies. The PCIT passed an order under Section 263 of the Act directing the Assessing Officer to pass fresh assessment order under Section 143(3) of the Act, 1961 on the aspect of unsecured loans shown by the respondent assessee. The Hon’ble Supreme Court made the following observation while deciding in favour of the assessee:

“Thus, the Tribunal has considered in detail the aspect of revisional power to be exercised by the PCIT in the facts of the case and has given finding of facts that the Assessing Officer has made inquiries in detail and after applying mind, accepted the genuineness of loans received by the respondent assessee from the aforesaid two companies and such view of the Assessing Officer is a plausible view”, and therefore, the same cannot be said to be erroneous or prejudicial to the interest of the Revenue”

12. The Supreme Court in another recent case of Principal Commissioner of Income-tax 2 v. Shree Gayatri Associates (SC), held that where Pr. CIT passed a revisional order making addition to assessee’s income under Section 69A in respect of on-money receipts, however, said order was set aside by Tribunal holding that AO had made detailed enquiries in respect of on-money receipts and said view was also confirmed by High Court, SLP filed against decision of High Court was liable to be dismissed. The facts of this case were that pursuant to search proceedings, assessee filed its return declaring certain unaccounted income. The Assessing Officer completed assessment by making addition of said amount to assessee’s income. The Principal Commissioner passed a revisional order under Section 263 on ground that Assessing Officer had failed to carry out proper inquiries with respect to assessee’s on money receipt. In appeal, the Tribunal took a view that Assessing Officer had carried out detailed inquiries which included assessee’s on-money transactions and Tribunal thus set aside revisional order passed by Commissioner. The High Court upheld Tribunal’s order. The Supreme Court while dismissing the SLP filed by the Department held as under:

We have heard learned counsel for the Revenue and perused the documents on record. In particular, the Tribunal has in the impunged judgement referred to the detailed correspondence between Assessing Officer and the assessee during the course of assessment proceedings to come to a conclusion that the Assessing Officer had carried out detailed inquiries which includes assessee’s on-money transactions. It was on account of these findings that the Tribunal was prompted to reverse the order of revision. No question of law arises. Tax Appeal is dismissed”

13. In our considered view, this is not a fit case for invocation of ns of Section 263 of the Act. This is for the reason that firstly, we that the assessing officer had examined the issue in detail during course of assessment proceedings, and it is not a case where there was any apparent lack of enquiry on this aspect by the assessing officer. Secondly, the assessing officer had taken a view which is a legally plausible view and it is a well settled law that 263 proceedings cannot be resorted to by the PCIT only with the view to supplant his own view with the view taken by the assessing officer. Further, the decision of KatlaryKariana Supra was on the aspect of reopening of assessment under Section 147 of the Act and not directly on the issue of claim of reduction under Section 80P of the Act. Therefore, once it is seen from the records that the assessing officer had made due enquiries during the course of assessment proceedings on this aspect and had taken a view, which is a legally possible view, then, in our considered view PCIT cannot reason to 263 proceedings only to supplant his own view with the view taken by the Assessing Officer. Further, we observe that the PCIT has also factually erred in observing that there was no enquiry by the assessing officer on this aspect. Accordingly, in light of the facts of the instant case, and the judicial president of the subject, we hold that the order passed by PCIT under Section 263 of the Act is liable to be set aside.”

7. We are in complete agreement with the aforesaid findings of the learned ITAT.

8. In Malabar Industrial Co. Ltd. v. Commissioner of Income Tax, Kerala State reported in”6. A bare reading of this provision makes it clear that the prerequisite to exercise of jurisdiction by the Commissioner suo motu under it, is that the order of the Income Tax Officer is erroneous insofar as it is prejudicial to the interests of the Revenue. The Commissioner has to be satisfied of twin conditions, namely, (i) the order of the Assessing Officer sought to be revised is erroneous; and (ii) it is prejudicial to the interests of the Revenue. If one of them is absent if the order of the Income Tax Officer is erroneous but is not prejudicial to the Revenue or if it is not erroneous but is prejudicial to the Revenue recourse cannot be had to Section 263(1) of the Act.

10. The phrase “prejudicial to the interests of the Revenue” has to be read in conjunction with an erroneous order passed by the Assessing Officer. Every loss of revenue as a consequence of an order of the Assessing Officer cannot be treated as prejudicial to the interests of the Revenue, for example, when an Income Tax Officer adopted one of the courses permissible in law and it has resulted in loss of revenue; or where two views are possible and the Income Tax Officer has taken one view with which the Commissioner does not agree, it cannot be treated as an erroneous order prejudicial to the interests of the Revenue unless the view taken by the Income Tax Officer is unsustainable in law. It has been held by this Court that where a sum not earned by a person is assessed as income in his hands on his so offering, the order passed by the Assessing Officer accepting the same as such will be erroneous and prejudicial to the interests of the Revenue. (See Rampyari Devi Saraogi v. CIT and in Tara Devi Aggarwal v. CIT.)”

9. in view of the above, no question of law much less the substantial question of law sought to be raised by the AppellantRevenue arise in the present case. Hence, the instant appeal being devoid of any merit is accordingly dismissed.