The Telangana High Court has held that the revisional power under Section 264 of the Income-tax Act, 1961 can be exercised to grant relief where the same income has been subjected to tax twice, even if one part of the error originated from the assessee’s own return.

The bench of  Justice P. Sam Koshy and Justice Narsing Rao Nandikonda emphasized that Section 264 is a beneficial and remedial provision intended to protect taxpayers from over-assessment and that relief cannot be denied merely on technical grounds such as failure to file a revised return within the prescribed period. 

The petitioner/assessee was engaged in Engineering, Procurement and Construction of solar power projects and had been awarded a contract by NLC India Limited for setting up a 100 MW AC Grid Interactive Solar PV Power Project.

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The project was awarded on February 9, 2018, and was originally scheduled to be completed by April 23, 2019. It was ultimately completed on September 9, 2019. Under the contract, delay attracted liquidated damages at the rate of 2% of the contract price per month or part thereof. 

During the financial year 2019-20, the company accounted for liquidated damages of ₹16.04 crore in its Statement of Profit and Loss and claimed the amount as a deduction in its return for assessment year 2020-21.

Subsequently, following settlement of the claim with NLC, part of the provision was reversed. During financial year 2020-21, corresponding to assessment year 2021-22, the company reversed liquidated damages of ₹9.79 crore, which included ₹6.85 crore, and credited the reversal to its Profit and Loss account and offered it to tax. Its revised return for AY 2021-22 was filed on March 15, 2022. 

The difficulty arose when the assessment for AY 2020-21 was subsequently completed under Section 143(3) read with Section 144B of the Income-tax Act.

The Assessing Officer restricted the allowable liquidated damages to ₹9,19,09,623 and disallowed the balance amount of ₹6,85,02,377 under Section 28 of the Act. Importantly, this assessment order was passed on September 25, 2022, after the taxpayer had already offered the very same ₹6.85 crore amount to tax in its AY 2021-22 return. 

The statutory deadline for revising the AY 2020-21 return had already expired on May 31, 2021. Consequently, the taxpayer could not correct its earlier return to account for the subsequent disallowance.

The taxpayer accepted the disallowance and paid the tax arising from it. According to the High Court, the sequence resulted in the same ₹6,85,02,377 being brought to tax twice—once in AY 2021-22 through the reversal offered to tax and again in AY 2020-21 through the disallowance made in scrutiny assessment. 

The taxpayer approached the Principal Commissioner under Section 264 seeking reduction of its AY 2021-22 income by ₹6,85,02,377.

An initial application filed on October 28, 2022 was rejected on March 25, 2024 on the ground that, at the time of filing, there was no order relating to AY 2021-22 that could be revised under Section 264.

Meanwhile, the AY 2021-22 return had been processed under Section 143(1). An initial adjustment increased the total income to ₹2,15,47,270 and raised a demand of ₹7,54,410. Following a Section 154 rectification application, the income was restored to the returned figure of ₹1,91,27,266 and the demand was reduced to nil. However, the disputed ₹6.85 crore component continued to remain embedded in the returned income. 

Following the rejection of the first application, the taxpayer filed a fresh Section 264 application on April 3, 2024. It subsequently submitted detailed written submissions and reconciliations, including reconciliation of the NLC project turnover with Form 26AS and the books of account and reconciliation of the liquidated damages provision and its subsequent reversal. 

The Principal Commissioner nevertheless rejected the application by order dated March 27, 2026.

Before the High Court, the Income Tax Department opposed the claim on three principal grounds.

First, it contended that Section 264 could not be used to grant relief against what was essentially a voluntary act of the assessee, particularly when the taxpayer had failed to file a revised return within the prescribed period.

Second, the Revenue argued that the AY 2020-21 disallowance and the AY 2021-22 reversal were distinct events and therefore could not properly be described as double taxation.

Third, it argued that the Section 143(1) intimation for AY 2021-22 was neither erroneous nor prejudicial because it had merely accepted the income declared by the assessee. 

The High Court rejected these objections.

The Court examined the scope of Section 264, which empowers the Principal Commissioner or Commissioner to call for records and pass an order that is not prejudicial to the assessee.

Referring to judicial precedents including S.R. Koshti and Swaminarayan Mandir Trust, the Bench held that Section 264 is not restricted to correcting mistakes committed by departmental authorities. It can also cover mistakes made by an assessee that result in over-assessment. 

The Court emphasized that the absence of a revised return does not automatically prevent an assessee from invoking Section 264. In fact, the Bench observed that Section 264 provides an important remedial avenue precisely in situations where the time for filing a revised return has expired and the assessee is otherwise left without an effective remedy. 

Thus, the Commissioner could not reject the application merely because the taxpayer had been unable to revise the AY 2020-21 return within the statutory period.

The Court also rejected the Revenue’s attempt to characterize the two tax events as separate merely because they occurred in different assessment years.

The Bench noted that the same ₹6,85,02,377 formed part of the ₹9,79,12,000 reversal offered to tax for AY 2021-22. The same amount was thereafter disallowed and taxed for AY 2020-21 by an assessment order passed after the AY 2021-22 return had already been filed. 

According to the Court, the fact that the two events arose in different assessment years did not alter the substance of the matter: one and the same amount had been subjected to tax twice in the hands of the same assessee.

The Court held that Article 265 of the Constitution, which prohibits levy and collection of tax except by authority of law, does not permit such an outcome. The Revenue could not perpetuate the double taxation by drawing a technical distinction between a “disallowance” in one year and a “voluntary reversal” in another. 

An important aspect of the ruling concerns the Revenue’s argument that the Section 143(1) intimation itself was not erroneous because it merely accepted the income declared by the taxpayer.

The High Court rejected this reasoning as self-defeating.

The Bench held that the error did not necessarily lie in the mechanical processing of the return itself. Instead, it arose from the cumulative effect of two departmental orders concerning the same amount, resulting in over-assessment. This resultant over-assessment, according to the Court, falls within the class of errors that Section 264 is designed to remedy. 

The Court made a broader observation that the source of the mistake—whether attributable to the assessee, the Assessing Officer, or a combination of circumstances—is not decisive when considering relief under Section 264.

What matters is whether the assessee has suffered prejudice through over-assessment.

The Bench observed that Section 264 is fundamentally different from Section 263. While Section 263 protects the interests of the Revenue by permitting revision of orders that are erroneous and prejudicial to the Revenue, Section 264 operates as an assessee-protective and remedial provision. 

Therefore, the Commissioner could not effectively apply a Revenue-protective standard under Section 264 by treating the taxpayer’s offering of the amount to tax as a voluntary act that permanently disentitled it from relief.

The Court held that the Commissioner’s obligation to consider relief does not depend on whether the over-assessment resulted from a voluntary act of the taxpayer, an Assessing Officer’s disallowance, or both. 

The judgment also relied upon the constitutional principle contained in Article 265.

The Court referred to its earlier decision in BSCPL Infrastructure Ltd., which recognized that where tax has been recovered or retained beyond what is lawfully due, such excess taxation can constitute an error apparent on the face of the record and cannot be defeated by technicalities. 

The Bench emphasized that the Revenue cannot retain tax collected without authority of law and that there can be no estoppel against an assessee where the tax sought to be retained is not legally due.

The High Court further referred to CBDT Circular No. 14(XL-35) of 1955 dated April 11, 1955.

The circular requires tax officers not to take advantage of an assessee’s ignorance of his rights and directs officers to assist taxpayers in claiming legitimate refunds and reliefs where the record indicates that such relief is due.

In the present case, the Court noted that the taxpayer had repeatedly brought the double-taxation issue to the Department’s attention and had supplied detailed reconciliations and written submissions. 

The Bench found it difficult to reconcile such a detailed and documented claim with a summary rejection based on technical considerations.

The Court was particularly critical of the manner in which the Section 264 application had been dealt with.

It observed that despite detailed submissions, reconciliations and repeated representations over more than a year, the Principal Commissioner rejected the claim without adequately engaging with the substance of the taxpayer’s grievance.

The Bench stated that authorities exercising quasi-judicial powers under a beneficial and remedial provision such as Section 264 are expected to apply their mind to the merits, particularly where the assessee has taken steps to bring the anomaly to the Department’s notice. 

The Telangana High Court ultimately allowed the writ petition and set aside the Principal Commissioner’s order dated March 27, 2026 passed under Section 264.

The matter was remanded to the Principal Commissioner for fresh consideration of the taxpayer’s Section 264 application dated April 3, 2024, on merits and in accordance with law, keeping in view the observations made by the High Court. The Court also closed any pending miscellaneous petitions and made no order as to costs.

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