The Mumbai Bench of the Income Tax Appellate Tribunal (ITAT) has held that the Principal Commissioner of Income Tax (PCIT) cannot invoke revisionary jurisdiction under Section 263 of the Income Tax Act merely because the Assessing Officer could have conducted a more elaborate inquiry.
The bench of Pawan Singh (Judicial Member) and Om Prakash Kant (Accountant Member) ruled that once the assessment record establishes that specific queries were raised, replies and supporting documents were furnished, and the Assessing Officer considered the relevant issues, the concluded assessment cannot be reopened for a fresh fishing or roving inquiry without identifying a definite error and consequent prejudice to the Revenue.
The assessee had filed its income tax return declaring a loss of approximately Rs.7.14 crore. Following scrutiny proceedings, the Assessing Officer completed the assessment under Section 143(3) on March 31, 2024, determining the total income at approximately Rs.193.11 crore.
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The assessment included several substantial additions and disallowances. These comprised deemed rental income of Rs.26.47 lakh, disallowance of sub-leasing charges of approximately Rs.1.71 crore, disallowance of interest exceeding Rs.191.55 crore under Section 36(1)(iii), and treatment of common area maintenance charges of approximately Rs.15.48 crore as rental income instead of business income.
Subsequently, the PCIT examined the assessment record and concluded that the assessment order was erroneous insofar as it was prejudicial to the interests of the Revenue. The PCIT primarily alleged that the Assessing Officer had failed to conduct adequate inquiries or verification concerning nine matters appearing in the company’s audited financial statements.
These issues included revenue from the sale of flats and project management consultancy services, municipal charges and provisions for unfinished work, interest on delayed payment of statutory dues, increased legal fees, rent, brokerage and sundry balances written off, outstanding dues to micro and small enterprises, statutory liabilities, employee benefit provisions, related-party transactions and work-in-progress.
The PCIT set aside the assessment and directed the Assessing Officer to conduct proper inquiries and pass a fresh assessment order after providing the assessee an opportunity of hearing.
Assessee Challenges Allegation of Lack of Inquiry
Before the Tribunal, the assessee contended that the factual foundation of the PCIT’s order was incorrect. It submitted that the Assessing Officer had raised specific queries on the very issues subsequently described by the PCIT as matters that had not been examined.
The assessee produced the notices issued under Section 142(1), the relevant queries contained in those notices, its replies and the supporting documents furnished during the original assessment proceedings. According to the assessee, these records demonstrated that the Assessing Officer had applied his mind to the disputed issues.
It was further argued that the original assessment was not an order mechanically accepting the returned income. The Assessing Officer had made additions and disallowances running into hundreds of crores, including the interest disallowance exceeding Rs.191 crore. The Assessing Officer had also rejected the assessee’s treatment of CAM charges and assessed approximately Rs.15.48 crore under a different head of income.
The assessee contended that the PCIT had not independently examined its replies or established that any expenditure was inadmissible, any receipt had escaped assessment, or any statutory provision had been wrongly ignored by the Assessing Officer.
On the allegation that receipts from the sale of flats and project management consultancy services had not been examined, the Tribunal found that the Assessing Officer had specifically called for party-wise details of contract receipts and sales exceeding Rs.1 crore. The assessee furnished details concerning 118 parties in response.
The Assessing Officer also sought information on the method of revenue recognition followed in the real estate business, reconciliation of income with Form 26AS, project-wise details of unsold flats, completion certificates, and the opening and closing stock of flats.
The Tribunal observed that the Assessing Officer had separately examined the treatment of CAM charges and rejected the treatment adopted by the assessee, resulting in an addition of approximately Rs.15.48 crore. This demonstrated that the components of revenue from operations were not mechanically accepted.
The allegation that the Assessing Officer had made no inquiry into revenue from operations was, therefore, found to be contrary to the assessment record.
The PCIT had also questioned municipal charges of approximately Rs.30.37 crore and a provision of approximately Rs.10.95 crore for unfinished work, primarily because these amounts had increased substantially compared with the preceding year.
The Tribunal found that the Assessing Officer had called for information concerning the assessee’s method of accounting, revenue recognition, valuation of work-in-progress, project-wise stock of flats and the Percentage Completion Method.
The Bench held that a mere increase in an expenditure head compared with the preceding year cannot, by itself, establish that the expenditure is inadmissible or that the assessment order is erroneous.
The PCIT had not identified any particular component of the municipal charges or provision for unfinished work that was legally inadmissible but had nevertheless been allowed. The revision on this issue was consequently based on an incorrect factual premise.
The PCIT alleged that interest of approximately Rs.1.91 crore paid on delayed statutory dues had been allowed without examining Section 43B.
The Tribunal, however, found that finance costs and interest on delayed statutory dues were specifically covered by the Assessing Officer’s questionnaires. The assessee had also furnished the corresponding information.
More importantly, the Assessing Officer had extensively examined the finance costs and disallowed interest exceeding Rs.191.55 crore under Section 36(1)(iii). The record, therefore, did not support the suggestion that the finance cost claims had been accepted without examination.
The PCIT also relied on increases in legal fees, rent, brokerage and sundry balances written off to justify revision.
The disputed expenses included legal fees of Rs.1.57 crore, rent of approximately Rs.3.38 crore, brokerage of approximately Rs.3.98 crore and sundry balances written off of approximately Rs.7.79 crore.
The Tribunal found that “other expenses” had been specifically covered by a notice issued under Section 142(1), and supporting details concerning the individual expenses formed part of the assessment record.
The PCIT had not shown that any particular expense was fictitious, capital in nature, unrelated to the assessee’s business or otherwise inadmissible under the Income Tax Act. A substantial increase in expenditure over the previous year, without anything further, could not render the assessment erroneous.
The Tribunal emphasised that the depth of an inquiry cannot be judged solely by the number of sentences devoted to an issue in the final assessment order. The complete assessment record includes notices issued, replies furnished, documents produced and material considered by the Assessing Officer.
Another important issue concerned outstanding MSME trade payables of approximately Rs.3.62 crore. The PCIT alleged that the Assessing Officer had not examined their allowability under Section 43B.
The Tribunal noted that the Assessing Officer had specifically sought details of trade payables. It further pointed out that Section 43B(h), dealing with delayed payments to micro and small enterprises, was inserted by the Finance Act, 2023 with effect from April 1, 2024 and applies prospectively from Assessment Year 2024-25.
Since the case concerned Assessment Year 2022-23, the PCIT could not establish prejudice to the Revenue based on the non-application of Section 43B(h). No other statutory provision under which the outstanding MSME dues were inadmissible for the relevant year was identified.
The PCIT also referred to liabilities relating to TDS of approximately Rs.18.19 crore, professional tax of Rs.1.11 lakh, provident fund of Rs.3.77 lakh, property tax of approximately Rs.7.19 crore and GST of Rs.3.92 lakh.
The Tribunal found that the assessee had demonstrated that the entire TDS liability was paid before filing the return. The unpaid professional tax and property tax had already been disallowed in the computation of income, while the GST payable had been discharged in April. The relevant treatment was also disclosed in the tax audit report.
The PCIT did not identify any liability that had actually been claimed and allowed contrary to the applicable statutory provisions. The mere appearance of outstanding statutory liabilities in the balance sheet could not establish that the assessment order was erroneous and prejudicial to the Revenue.
Regarding provisions for gratuity and leave encashment, the Tribunal found that the unpaid amounts were disallowed by the assessee in its return and disclosed in the tax audit report.
The PCIT had not identified any specific inadmissible amount that had nevertheless been allowed by the Assessing Officer. Therefore, the allegation that the employee benefit provisions had escaped examination was also rejected.
The PCIT further alleged that financial transactions with related parties, including inter-corporate deposits, had not been examined for the applicability of deemed dividend provisions under Section 2(22)(e).
The Tribunal found that financial transactions with related parties were specifically covered by the Assessing Officer’s questionnaire. The Assessing Officer had also called for the shareholding pattern of the assessee and its subsidiary companies.
Such information was directly relevant for determining the applicability of Section 2(22)(e), which depends upon factors such as the nature of the transaction, accumulated profits and the shareholder’s substantial interest.
The PCIT had not identified any particular transaction that was incorrectly treated as falling outside Section 2(22)(e). Consequently, this allegation also failed to establish an absence of inquiry.
On the allegation concerning work-in-progress and project accounting, the Tribunal noted that the Assessing Officer had raised detailed queries relating to revenue recognition, the Percentage Completion Method, valuation of work-in-progress, unsold flats, completion certificates and opening and closing stock.
The assessee had responded to these queries and furnished supporting material. The assessment record, therefore, did not present a case where the Assessing Officer remained passive despite matters requiring examination.
The Tribunal reiterated the legal distinction between “lack of inquiry” and “inadequate inquiry.” Where no inquiry is conducted into an issue requiring verification, revision under Section 263 may be permissible. However, where the Assessing Officer raises queries, obtains information and takes a possible view, the PCIT cannot substitute his judgment merely because he would have conducted the inquiry differently.
The Bench clarified that merely issuing a questionnaire would not automatically protect every assessment from revision. If an inquiry is wholly illusory, superficial or disconnected from the relevant issue, the PCIT may still exercise jurisdiction, subject to satisfying the statutory requirements.
In the present case, however, the questions raised by the Assessing Officer substantially corresponded with the very issues subsequently characterised by the PCIT as having escaped inquiry.
The Tribunal observed that after the assessee produced the relevant notices, replies and supporting records, the PCIT did not independently examine the material or demonstrate that the answers were factually incorrect.
The PCIT did not identify any particular expenditure that was inadmissible, any receipt that had escaped assessment or any transaction to which a statutory provision had been wrongly omitted.
Instead, the assessment was set aside on the general proposition that a lack of inquiry makes an assessment order erroneous and prejudicial to the interests of the Revenue.
The Tribunal held that such an approach cannot replace the statutory requirement of demonstrating an error in the assessment order. The PCIT exercises revisional jurisdiction and cannot merely function as an administrative authority directing the Assessing Officer to undertake another investigation because a more detailed assessment was considered desirable.
Before setting aside an assessment for fresh consideration, the PCIT must arrive at a definite, issue-wise finding that the assessment order is erroneous and that the error has caused prejudice to the Revenue. The PCIT cannot remit the matter to the Assessing Officer merely to determine whether an error exists.
The Tribunal concluded that the central premise behind the PCIT’s assumption of jurisdiction—that the Assessing Officer failed to inquire into the specified matters—was not supported by the record.
Specific inquiries had been made concerning revenue, cost of construction, finance costs, expenditure, trade payables, related-party transactions, the shareholding pattern and work-in-progress. The assessee had furnished replies and supporting documents on these issues.
The substantial additions and disallowances made in the original assessment further established that the Assessing Officer had not mechanically accepted the return.
Since the PCIT failed to demonstrate any specific factual or legal error or establish the precise prejudice caused to the Revenue, the twin conditions governing Section 263 jurisdiction were not satisfied.
The ITAT set aside the PCIT’s order dated March 28, 2026. It held that Section 263 cannot be invoked merely because the revisional authority believes that further inquiries should have been made, particularly when the assessment record shows that the disputed matters were already examined.
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