Chennai ITAT Quashes Section 263 Revision on Excess Stock Taxation

Suba Valli Vilas Vs PCIT (ITAT Chennai)

Chennai ITAT Quashes Section 263 Revision: PCIT Cannot Invoke Revision Merely to Tax Excess Stock Under Section 69B Instead of Business Income

The Chennai ITAT quashed the revision order passed under Section 263, holding that where the Assessing Officer had already conducted detailed enquiries regarding excess stock detected during search, the PCIT could not invoke revision merely because he preferred taxation under Section 69B read with Section 115BBE instead of treating the amount as business income.

The assessee, a jewellery concern, was subjected to a search under Section 132 during which alleged excess stock of gold was detected. In the assessment completed under Section 143(3), the Assessing Officer made an addition of ₹5.36 crore towards excess stock after examining the seized materials, software records, sworn statements and explanations furnished by the assessee. However, the PCIT subsequently invoked Section 263 and directed the Assessing Officer to examine taxation of the excess stock of ₹5.36 crore and an additional amount of ₹5.41 crore disclosed as creditors written off under Section 69B read with Section 115BBE.

The Tribunal noted that the very issue raised by the PCIT had already been specifically examined by the Assessing Officer during assessment proceedings through a detailed show-cause notice, wherein the assessee was asked to explain why the excess stock should not be taxed under Section 69B. After considering the explanation, the Assessing Officer consciously chose to assess the income under the normal business provisions of the Act.

The ITAT observed that the Assessing Officer had carried out adequate enquiries, analysed the software data, examined the source and nature of the excess stock, considered the assessee’s replies and thereafter adopted a plausible view permissible in law. Merely because the PCIT preferred another view regarding the head of income or rate of taxation did not render the assessment order erroneous.

The Tribunal further held that the additions arose out of the assessee’s business operations and trading activities, and therefore the Assessing Officer’s view that the income was taxable as business income under Section 28 was a legally sustainable view. It reiterated the settled principle that when two views are possible and the Assessing Officer has adopted one of the permissible views, Section 263 cannot be invoked merely because the PCIT disagrees with that view.

The ITAT also observed that the issue was already pending before the CIT(A) on merits and therefore the doctrine of merger and the proviso to Explanation 1(c) to Section 263 further restricted the PCIT’s jurisdiction. Since the Assessing Officer had conducted proper enquiries and the assessment order was not shown to be erroneous, the twin conditions of “erroneous” and “prejudicial to the interests of the Revenue” were not satisfied.

Accordingly, the Tribunal quashed the revision order under Section 263, holding that the PCIT had impermissibly attempted to substitute his opinion for that of the Assessing Officer on an issue that had already been thoroughly examined during assessment.

FULL TEXT OF THE ORDER OF ITAT CHENNAI

1. The impugned order passed by learned PCIT-1 under Section 263 dated 09.12.2025 is bad in law and is liable to be quashed as it fails to meet the jurisdictional requirements under Section 263, namely that the order sought to be revised must be both erroneous and prejudicial to the interests of the Revenue.

2. The learned PCIT erred in law in holding that the alleged excess stock must necessarily be assessed under section 69B read with section 115BBE. The Act does not mandate automatic application of section 69B merely because excess stock is alleged, the nature, source, and character of income must be determined based on facts

3. The learned PCIT erred in invoking Explanation 2(a) to section 263 by alleging lack of enquiry, whereas the records clearly demonstrate that adequate and exhaustive enquiries were conducted by the Assessing Officer on the very issues sought to be revised, including excess stock, source thereof, accounting treatment, and taxability.

4. The learned PCIT failed to appreciate that the Assessing Officer had conducted detailed enquiries during scrutiny proceedings, examined the seized materials, analyzed the software data (SACS, Jewel Bis, Dikshi), considered sworn statements, issued show cause notices, examined replies, and thereafter consciously took a plausible view while framing the assessment. Hence, the assessment cannot be revised merely because the PCIT holds a different opinion.

5. The learned Principal Commissioner of Income Tax erred in law and on facts in issuing specific directions to tax the impugned amounts under section 69B read with section 115BBE of the Income Tax Act, 1961, which directions are contrary to the statutory scheme, factual matrix, and binding judicial precedents, in doing so, the learned PCIT exceeded the scope of jurisdiction under section 263 by pre-judging the issue and dictating the manner of assessment to the Assessing Officer, rendering the impugned directions unsustainable in law.

6. The impugned revision order is based on a mere change of opinion regarding the head and rate of taxation, which is impermissible in law. Section 263 does not confer power upon the PCIT to substitute his subjective view for that of the Assessing Officer when the view taken by the Assessing Officer is one of the legally sustainable views.

7. The learned PCIT failed to appreciate that the alleged excess stock arose from business operations, suppression of profits, and trading activity, and was duly brought to tax as business income, including voluntary disclosure by the assessee prior to completion of assessment. Once the nature of income is established as business income, section 69B has no application.

For these and other grounds that may be rendered at the time of hearing it is most humbly prayed that the Hon’ble Tribunal may be pleased to quash the 263 order dated 09.12.2025 by allowing the appellants appeal and thus render justice.

2. The brief facts of the case are that there was a search action u/s. 132 of the Act on the assessee vide dated 15.02.2022. The assessee filed its return of income u/s. 139 of the Act on 29.12.2022 declaring total income at Rs.6, 93, 51, 220/-. The case of the assessee firm was selected for complete scrutiny and was assessed at Rs. 12, 29, 99, 920/- after making an addition of Rs. 5, 36, 48, 700/- on account of excess stock. The assessee being aggrieved with this order preferred an appeal before the Ld. CIT (A) and in the meantime a notice u/s. 263 of the Act was issued by the Ld. PCIT (Central), Chennai-1 vide dated 19.09.2025.

3. In response to the notice u/s. 263 of the Act issued by the Ld. PCIT (Central), Chennai-1, the assessee duly participated in the proceedings. Ultimately the Ld. PCIT (Central), Chennai-1 passed an order u/s. 263 of the Act vide dated 09.12.2025 and issued certain directions to the AO vide para 9 as under:-

“..Thus, in view of the above discussions, the assessment order u/s. 143(3) of the Act, dated 28.03.2024 is held to be erroneous and prejudicial to the interest of revenue. Therefore, I consider it appropriate to set aside the assessment order on the following issues and direct the AO to carry out necessary enquiries and verifications with regard to the issue of invoking provisions of Sec. 115BBE by making the following disallowances under section 69B of the Income Tax Act, 1961:-

1. The addition amounting to of Rs. 5, 36, 48,700/- corresponding to 12,162.48 Gms. of gold as excess stock.

2. The amount of Rs. 5, 41, 75,781/- for 12,281.66 Gms. of gold (22 Carat) as “creditors written off” disclosed by the assessee…”

4. We have gone through the order of the AO, the order of the Ld. PCIT passed u/s. 263 of the Act and submissions of the assessee along with grounds taken before us. It is observed that the issue under consideration has already been confronted to the assessee during the assessment proceedings by the AO vide show cause notice dated 21.03.2024 (reproduced below)

GOVERNMENT OF INDIA
MINISTRY OF FINANCE
INCOME TAX DEPARTMENT
OFFICE OF THE ASSISTANT COMMISSIONER
OF INCOME TAX CENTRAL CIR 3(1) CHENNAI

To,
SUBA VALLI VILAS
No.61 & 62 LAWRENCE ROAD
CUDDALORE 607002,
Tamil Nadu
India

SHOW CAUSE NOTICE

1. During the course of search & seizure operation, on analysis of both the SACS and Jewelbis Software data, there is a variation between total stock available for consumption (SACS) and total stock issued to smiths and dealers (Jewelbis). The same is reproduced as under

Vide your submission in response to notice u/s 142(1), you have submitted that the excess issue of gold is only 11,250 grams amounting to Rs. 5, 41, 75,781/- through the concept of Peak Credit theory and the same has been offered for taxation under Creditors Written off instead of ‘Amount of investment etc., not fully disclosed in the books of account’ u/s 69B of the IT Act, 1961. Further, you have not submitted as to how the figure of 11,250 grams has been arrived at. Therefore, you are required to show cause as to why the gold of 24444.14 grams amounting to Rs. 10,51,09,806/-should not be treated as ‘Amount of investment etc., not fully disclosed in the books of account’ u/s 69B of the IT Act, 1961.

2. During the course of search & seizure operation conducted at your premise u/s 132 of the IT Act, 1961, cash amounting to Rs. 2, 64,000/- was found. Therefore, you are requested to explain the sources of the cash found of Rs. 2, 64,000/-. Further, you are requested to explain as to why the same should not be treated as ‘Unexplained Money’ u/s 69A of the IT Act, 1961 for the year under consideration.

3. You have incurred expense on account of ‘Rent’ amounting to Rs. 2,64,000/-which has been paid to Shri S. Ganesan (Individual) and Shri S. Ravishankar (Individual) [Rs. 1,32,000/- each). In this regard, you are required to furnish the rent agreement, details of the property rented in, ledger account copy etc. Further, you are required to show cause as to why in absence of satisfactory documentary evidences, the same should not be disallowed.

4. On perusal of the Form 3CD, it is seen that you have accepted or taken loan or deposit in an amount exceeding the limit specified in section 269SS of the IT Act, 1961. From the table of payments received, it is seen that you have stated “No” under the column “Whether the loan or deposit was taken or accepted by cheque or bank draft or use of electronic clearing system through a bank account?” In this regard, you are required to show cause as to why penalty should not be imposed related to such transactions made in violation to provisions of section 269SS of the IT Act, 1961.

5. On perusal of the Form 3CD, 30 it is seen that you have made repayment of loan or deposit or any specified advance in an amount exceeding the limit specified in section 269T of the IT Act, 1961. From the table of payments made, it is seen that you have stated “No” under the column “Whether the repayment was made by cheque or bank draft or use of electronic clearing system through a bank account?” In this regard, you are required to show cause as to why penalty should not be imposed related to such transactions made in violation to provisions of section 269T of the IT Act, 1961.

5. We have gone through para 1 of the show cause issued by the AO and para 9 of the directions as contained in the order passed u/s. 263 of the Act by the Ld. PCIT and observe as under:-

i. The issue raised by the Ld. PCIT has already been discussed by the AO through his show cause and only after satisfying himself with a reply of the assessee, considered the income taxable under the normal provisions of the Act instead of applying section 69B r.w.s. 115BBE of the Act;

ii. As discussed (supra) vide our para 2, matter on merits and quantum is already pending before the Ld. CIT (A). Hence, the proviso to clause (c) of the Explanation (1) to section 263 of the Act will come into play and the doctrine of merger will apply. The powers available to the Ld. PCIT u/s. 263 of the Act can be exercised on the basis of the material available on record and if he feels that there should be further enquiry by the AO. In this case as mentioned (supra) the issue raised by the Ld. PCIT has already been enquired by the AO.

iii. The AO has passed the assessment order after diligently carrying out the assessment and there is no reason to assail the same on the pretext of non-application of mind / wrong application of the sections. Otherwise also, the additions made by the AO falls under the head “business income” liable to be taxed u/s. 28 of the Act and not u/s. 69B of the Act. When an assessing officer adopted one of the views permissible in the law and it has resulted in loss of revenue; or where two views are possible and the AO has taken one of the plausible view with which the Ld. PCIT does not agree, it cannot be treated as an erroneous order. The Ld. PCIT has to be satisfied with twin conditions, i.e. order must be erroneous and prejudicial to the interest of the Revenue.

iv. Here in this case first condition i.e. erroneous order is not fulfilled. In our opinion the twin condition contained in section 263 of the Act are not fulfilled in its letter and spirit.

6. In view of the above the order passed by the Ld. PCIT is set aside for the reasons that the Ld. PCIT could not be assumed jurisdiction by virtue of the provisions as contained the proviso to clause (c) of the Explanation (1) to section 263 of the Act and the issue under consideration was duly examined and verified by the AO during the original assessment proceedings itself. The assessee placed reliance on the following judicial pronouncements of various Hon’ble High Courts and Coordinate Benches as under and the same found to be rightly relied upon by the assessee and squarely applicable on the facts of the case. On the other hand, the Ld. DR has not furnished any judicial pronouncement to support his arguments and order of the Ld. PCIT.

a) High Court of Delhi – Principal Commissioner of Income Tax vs. Clix Finance India (P) Ltd.

b) High Court of Madras – Smt. Renuka Philip vs. Income Tax Officer

c) ITAT, Chennai ‘A’ Bench – ITA No.1396/Chny/2024, M/s. Madurai Power Corporation Pvt. Ltd. vs. PCIT.

d) ITAT, Chennai ‘A’ Bench – ITA No.409/Chny/2024, Mr. Prakash Chand Harish Kumar vs. ACIT.

e) ITAT, Chennai ‘A’ Bench – Krishnan Saravanan vs. Principal Commissioner of Income Tax.

f) ITAT, Chennai ‘B’ Bench – ITA No.340/Chny/2022, Kathiravan Ananthalakshmi vs. ACIT.

g) ITAT, Chennai ‘C’ Bench – ITA No.925 & 926/Chny/2024, Vanavil Estate vs. PCIT.

7. In view of the above facts and respectfully following the law laid down by the Hon’ble High Courts we quash the order of the Ld. PCIT passed u/s. 263 of the Act. In the result, grounds raised by the assessee are allowed.

8. In the result, the appeal of the assessee is allowed in above terms.

Order pronounced on the 10^th day of June, 2026, in Chennai.