Section 263 Revision Quashed: Lack of Reasonable Opportunity of Hearing for Assessee
Issue:
Whether an order passed by the Principal Commissioner (PCIT) invoking revisional proceedings under Section 263 of the Income-tax Act, 1961, on the ground that an addition made by the Assessing Officer (AO) under Section 68 (unexplained cash credit) was prejudicial to the interest of the revenue, is valid if no reasonable opportunity of hearing was granted to the assessee.
Facts:
For the assessment year 2015-16, the assessee’s assessment was completed under Section 143(3), and an addition was made on account of unexplained cash credit under Section 68. Subsequently, the Principal Commissioner (PCIT) invoked revisional proceedings under Section 263, contending that the addition made by the Assessing Officer under Section 68 was prejudicial to the interest of the revenue. However, it was found that the assessee was not granted a reasonable opportunity of hearing during these revisional proceedings.
Decision:
Yes, the court held that the order passed by the Principal Commissioner was “in the teeth of principles of provisions contained in section 263” and the same was liable to be set aside. The decision was in favor of the assessee.
Key Takeaways:
- Mandatory Opportunity of Hearing under Section 263: Section 263 of the Income-tax Act, 1961, implicitly incorporates the principles of natural justice. Before the Principal Commissioner can exercise revisional powers to pass an order prejudicial to the assessee (e.g., enhancing assessment, cancelling assessment), it is mandatory to provide the assessee a “reasonable opportunity of being heard.”
- “Prejudicial to the Interest of Revenue” and “Erroneous”: To invoke Section 263, the PCIT must establish that the AO’s order is both “erroneous” and “prejudicial to the interest of the revenue.” Even if the PCIT believes the order meets these criteria, the procedural requirement of granting a hearing cannot be bypassed.
- Consequence of Natural Justice Violation: Failure to provide a reasonable opportunity of hearing is a fundamental flaw. An order passed in violation of principles of natural justice is considered invalid and is liable to be set aside by higher courts.
- Scope of “Reasonable Opportunity”: A reasonable opportunity means giving the assessee sufficient notice of the PCIT’s concerns and allowing them to present their arguments and evidence against the proposed revision.
- In Favour of Assessee: The outcome is beneficial to the assessee, as the PCIT’s revisional order is quashed, meaning the original assessment order (or at least the PCIT’s attempt to modify it) stands set aside. The revenue would then need to take further legal steps if they wish to pursue the matter, ensuring proper procedure.
- Cash Credit (Section 68): While the underlying issue was an addition under Section 68, the ruling primarily focuses on the procedural validity of the Section 263 order, emphasizing that even when dealing with potentially unexplained cash credits, due process must be followed.
HIGH COURT OF CHHATTISGARH
Income-tax Officer-3(1) Raipur
v.
Shilphy Steels (P.) Ltd.
SANJAY K. AGRAWAL and Deepak Kumar Tiwari, JJ.
TAXC No. 36 of 2022
APRIL 8, 2025
Ajay Kumrani, Adv. for the Appellant. Neelabh Dubey and Jitendra Sahu, Advs. for the Respondent.
JUDGMENT
Sanjay K. Agrawal, J. – This tax appeal preferred under Section 260A of the Income Tax Act, 1961 (for brevity “the Act, 1961) was admitted for hearing by formulating the following substantial question of law:-
“Whether the Income Tax Appellate Tribunal was justified in quashing the revisional order of the Principal Commissioner of Income Tax, passed under Section 263 of the Income Tax Act, 1961, holding that no reasonable opportunity of hearing was granted to the Assesee to set aside the order passed by the Assessing Officer while invoking Revisional Jurisdiction under Section 263 of the Income Tax Act, 1961? “
2. The aforesaid question of law has arisen on the following factual backdrop:-
| (i) | The respondent herein i.e. assessee is the company engaged in manufacturing and selling of sponge iron and MS ingots and for the assessment year 2015-16, it submitted its return on 27.09.2015 declaring taxable income of Rs. 7,99,351/- and thereafter, the return was processed under Section 143(1) of the Act, 1961, resulting into demand of Rs. 8,44,800/-. |
| (ii) | The assessment was completed on 29.12.2017 under Section 143(3) of the Act, 1961 and an addition of Rs. 9,00,00,000/- was made by the Assessing Officer (A.O.) under Section 68 of the Act, 1961 on account of unexplained cash credit. |
| (iii) | The Principal Commissioner of Income Tax (for brevity “PCIT”) invoked revisional proceedings under Section 263 of the Act, 1961 and order was passed on 26.03.2021. In which the finding has been recorded by the PCIT that the order of A.O. is prejudicial to the interest of the revenue and the PCIT directed the A.O. to conduct an assessment de novo. |
| (iv) | Feeling aggrieved by the order of the PCIT under Section 263 of the Act, 1961 the assessee/respondent herein approached before the Income Tax Appellate Tribunal (for brevity ‘ITAT’). The ITAT allowed the appeal in favour of the assesse/respondent herein against which the present appellant/Revenue has preferred an appeal under Section 260A of the Act, 1961. |
3. Mr. Ajay Kumrani, learned counsel for the appellant, would submit that the ITAT is absolutely unjustified in granting the appeal in favour of the assessee/respondent as the reasonable opportunity of hearing was granted to the respondent herein as required under Section 263 of the Act, 1961 and, therefore, present appeal deserves to be allowed and the question of law be answered in favour of the Revenue.
4. Mr. Neelabh Dubey and Mr. Jitendra Sahu, learned counsel for the respondent, would submit that order passed by the PCIT was in the teeth of Section 263 of the Act, 1961 and also in violation of the principles of law laid down by their Lordships of the Supreme Court in the matter of Commissioner of Income Tax, Mumbai v. Amitabh Bachchan (2016) 11 SCC 748 and therefore, the present appeal desserves to be dismissed.
5. We have learned counsel for the parties, considered their rival submission made herein above and perused the records minutely.
6. At this stage, it would be appropriate to notice the scope of Section 263 of the Act, 1961.
7. Section 263 of the Act, 1961 confers a supervisory power of revision on the Principal Commissioner/Commissioner in respect of orders passed by lower authorities. However, this power is hedged with strict jurisdictional conditions. The Commissioner can revise an assessment order only if:- (a) the order is “erroneous”, and (b) it is “prejudicial to the interests of the Revenue”. These two conditions are conjunctive i.e. both must be fulfilled before the power can be exercised. If either of the elements is lacking, the Commissioner does not gain jurisdiction to revise.
8. This principle was authoritatively expounded by their Lordships of the Supreme Court in the matter of Malabar Industrial Co. Ltd. v. Commissioner of Income Tax, Kerala State (2000) 2 SCC 718 and have held that “if the order is not erroneous, but is prejudicial to the revenue, or if it is erroneous, but not prejudicial to the revenue, Section 263 of the Act, 1961 cannot be invoked”. In other words, an assessment order that reflects a possible or permissible view of the law and facts cannot be branded erroneous simply because it is not to the Commissioner’s liking.
9. Further, every loss of Revenue, by itself, is not “prejudicial” to the Revenue it must be the result of an erroneous order. Conversely, an error that has no impact on Revenue cannot trigger revision. An “erroneous” order in the context of Section 263 of the Act, 1961 is when it is unsustainable in law, that is, when it involves an incorrect application of law or a clearly wrong or incomplete appreciation of facts. Crucially, an order is not erroneous merely because the Commissioner holds a different opinion on the matter.
10. The High Court of Bombay in the matter of CIT v. Gabriel India Ltd.(Bombay) observed that if the Income Tax Officer (ITO/AO) has made inquiries with regard to a particular issue, elicited responses, and then taken a view, the mere fact that the AO’s order does not discuss the issue in detail or that the Commissioner disagrees with the conclusion does not render the order erroneous and held as under:-
“The ITO’s conclusion cannot be termed as ‘erroneous’ simply because the Commissioner does not agree with it. An AO’s order cannot be held to be erroneous simply because it did not make an elaborate discussion.”
11. This salutary principle has been consistently upheld which means that where an A.O. has applied her/his mind (even if briefly) and arrived at a logical conclusion, the revisional authority cannot intervene under Section 263 of the Act, 1961 just because it has a different view or because he expected a more exhaustive reasoning in the order. To hold otherwise (Bombay) would convert the revisional power into an appellate review, which is not its intent.
12. Prejudicial to interests of Revenue as provided in Section 263 of the Act, 1961 typically meaning that the error has caused a loss of tax revenue (short levy of tax) or posed a potential threat to the Revenue’s ability to collect the rightful tax. If an error has no bearing on the taxable income (for instance, a procedural irregularity that doesn’t affect the tax computation), revision is not justified.
13. In the case of Malabar Industrial Co. (supra), the Hon’ble Supreme Court explained this phrase by giving examples:- “if the ITO adopts one of two permissible courses of action and the result is loss of Revenue, or where two views are possible and the ITO adopts one in favour of the assessee, such an order cannot be treated as prejudicial to Revenue unless the view adopted is unsustainable in law. Thus, even some degree of revenue loss is tolerated if it stems from a legitimate exercise of judgment by the A.O. Only where the A.O.’s view is patently wrong or the acceptance of the assessee’s claim is founded on no evidence at all, can the order be prejudicial requiring correction”.
14. Coming to the facts of the present case it is evident that against the order of assessee the PCIT in exercise of its revisionary power, issued show cause notice on 11.03.2021 and signed it on 15.03.2021 at 1:53 pm, requiring the assessee under Section 263 of the Act, 1961, to show cause as to why the impugned assessment so framed under Section 143(3) of the Act, 1961, should not be modified/set aside holding that such order is erroneous in so far as prejudicial to the interest of the Revenue. It is appropriate to notice here that the date of hearing was also fixed on 15.03.2021 at 4:00 pm. It appears from the record that on 15.03.2021, the assessee has not appeared for the reasons best known to him and thereafter, the final order was passed on 26.03.2021 under Section 263 of the Act, 1961 by holding that the assessement order is erroneous in so far as it is prejudicial to the interest of Revenue. The said order has been challenged by the assessee before the ITAT and the ITAT recorded the finding that the order passed by the PCIT in exercise of Section 263 of the Act, 1961 is not in accordance with law and it is in teeth of the provisions contained in Section 263 of the Act, 1961 as no reasonable opportunity of hearing was granted to the assessee/respondent and also incidentally held that the action of the A.O. is not erroneous. As such, though the PCIT has found the order of the A.O. erroneous in so far as it is prejudicial to the interest of Revenue, but no reasonable opportunity of hearing was aforded to the assessee/respondent herein to defend himself in light of provisions contained in Section 263 of the Act, 1961 and, therefore, the order of the PCIT is liable to be quashed/set aside.
15. In view of the aforesaid discussion, we are of the considered opinion, order passed by the PCIT is in teeth of principles of provisions contained in Section 263 of the Act, 1961 as no reasonable opportunity of hearing was afforded to the assessee and also in light of principles of law laid down by their Lordships of the Supreme Court in the matter of Amitabh Bachchan (supra). Since the ex parte order was passed inoking Section 263 of the Act, 1961 by the PCIT without hearing the assessee/respondent herein, the finding recorded by the PCIT that the order is erroneous in so far as it is prejudicial to the interest of Revenue, is not the correct finding based on the records and, therefore, it has rightly been set aside by the ITAT. As such, we do not find any merit in the present tax appeal. Consequently, the question of law is answered in favour of the assessee and against the Revenue. Resultantly, the tax case deserves to be and is accordingly, dismissed, leaving the parties to bear their own cost(s).