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AO’s proposal along with Principal CIT’s application of mind is the basis for passing revisionary order u/s 263

Facts of the Case:

  • The Assessee’s case was selected for limited scrutiny purpose through CASS seeking reasons for the low income in comparison to very high investments and large increase in investment in unlisted equities during the year.
  • Notices were issued in this regard against which the Assessee made its submission dated 21.09.2017 and another submission dated 11.09.2017 both of which are on record however, case was last heard on 19.07.2017.
  • The assessment order was passed by the Assessing Officer (AO) on 21.09.2017 wherein AO accepted the returned income as assessed income. Later, AO proposed to the Principal Commissioner of Income Tax (Pr. CIT) to review the assessment order by exercising the power u/s 263 of the Income Tax Act, 1961 (the Act).
  • On its review, the Pr. CIT made a prima facie observation that order passed by AO was erroneous in so far it was prejudicial to the interest of the revenue. One of the key reasons for such finding was that the assessment proceedings were conducted in haste, since it was observed from the record sheet that last date of hearing was mentioned as 19.09.2017, however, the Assessee had made its submission on 21.09.2017 and the order passed by the AO took into consideration the afore mentioned submission
  • Subsequently, Pr. CIT issued a show cause notice for initiating the proceedings u/s 263 of the Act and subsequently passed the revisionary order holding that AO has not carried out proper verification and completed the assessment without application of mind because of the above reason.
  • Thus, Assessee was in appeal before ITAT against such revision order.

Observation And Conclusion:

  • The conditions which must be satisfied to exercise the jurisdiction to pass order u/s 263 of the Act are:
  • the order passed by AO was erroneous in so far it was prejudicial to the interest of revenue and,
  • the Pr. CIT has applied its own mind on the facts available to reach the above conclusion.
  • On the condition that Pr CIT has to apply its own mind, the Hon’ble High Court of Delhi in the case of of DG Housing Finance Co. Ltd. held that Pr. CIT must come to the conclusion by itself and decide that assessment order was erroneous by conducting necessary enquiry, if required.
  • However, in case of ‘inadequate investigation’ by AO, Pr. CIT can’t direct AO to reconsider its order or ask AO to decide as to whether order was erroneous. Pr. CIT should conduct the enquiry itself to hold an order erroneous and record the reasons for the same.
  • Further, material on which Pr. CIT can rely upon includes not only the records as it stands at the time when the order was passed by the AO but also the records as it stands at the time of the examination by the Pr. CIT.
  • Also, revision cannot be made for the issues other than issues considered by the AO in assessment order.
  • Lastly, it was also mentioned that AO’s proposal to the Pr. CIT to review the order u/s 263 of the Act, is nothing more than a ‘stimuli’ or ‘suggestive’ in nature on which the Pr. CIT is required to apply its independent mind to draw the conclusion.
  • In the present case, Pr. CIT has passed the revisionary order u/s 263 of the Act by applying its own mind while relying upon the records available with it at the time of examination and conducting the necessary enquiry in holding that the order passed by AO was erroneous in so far it was prejudicial to the interest of revenue because assessment proceeding which were already concluded on 19.09.2017 however, one submission was made after that date and therefore AO didn’t take that submission into account while passing the order.
  • Hence, the revisionary order passed by Pr. CIT was good in law even though the initiation of revisionary proceedings was on the proposal of AO if Pr. CIT was satisfying the conditions to exercise its jurisdiction u/s 263 of the Act and therefore order was passed against the Assessee.

SW Point of View:

Independent application of mind is a basic condition for invoking the provisions of Section 263 of the Act. The proposal submitted by the AO to the PCIT is nothing but a stimuli for the later to apply his mind independently. In this case, the ITAT has upheld the revisionary order of Pr CIT on the basis of these settled principles.

Lakshay Prakash Jonwal, Article Assistant – Direct Tax, SW India

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