City and Industrial Development Corporation of Maharashtra Limited Vs PCIT (ITAT Mumbai)
Mumbai ITAT: Section 263 Revision Invalid When AO Follows Binding High Court Decision and PCIT Acts on AO’s Proposal
The Mumbai ITAT quashed the revisionary order passed under section 263, holding that the Assessing Officer’s order could not be regarded as erroneous and prejudicial to the interests of the Revenue when it had been passed in conformity with the binding judgment of the Bombay High Court. The assessee, a statutory corporation acting as an agent of the Government of Maharashtra, had offered only its agency commission of ₹5 lakh to tax, while treating all other receipts as belonging to the State Government. The Assessing Officer accepted this position after examining the facts and following the jurisdictional High Court’s decisions. The Tribunal held that the mere fact that the Department had filed an SLP before the Supreme Court did not dilute the binding nature of the High Court judgment, and judicial discipline required the Assessing Officer to follow it. The Tribunal further held that the very initiation of section 263 proceedings was vitiated, as the Principal Commissioner had acted on a proposal received from the Assessing Officer, instead of independently calling for and examining the record as mandated by section 263. Since the revisionary authority had effectively abdicated its statutory discretion and the issue was already covered by earlier coordinate bench decisions in the assessee’s own case, the Tribunal quashed the section 263 order and restored the original assessment.
FULL TEXT OF THE ORDER OF ITAT MUMBAI
The assessee has filed the instant appeal assailing the order dated 30.03.2026 passed by learned Principal Commissioner of Income Tax (‘ld. PCIT’ for short), Mumbai, under section 263 of the Act, pertaining to assessment year (‘A.Y.’ for short) 2018-19.
2. The grounds raised by the assessee are both on the validity of exercise of jurisdiction u/s. 263 of the Act as also on merits. Before we proceed to deal with the substantive issues, it is necessary to narrate the relevant facts. The assessee is a statutory body incorporated on 17.09.2017 as a State Government Undertaking. The entire share capital being subscribed by Government of Maharashtra. The basic object of creating the assessee is to act as an Agent of the State Government as a New Town Developer and Special Planning Authority.
3. For the assessment year under dispute, the assessee did not filed any return of income. Due to non-filing of return, and based on information available in the system of the Department, assessee’s case was reopened u/s. 147 of the Act with the reason to believe that income chargeable to tax has escaped assessment. The Assessing Officer (‘A.O.’ for short), based on information available on record found that the assessee during the year had following receipts:
i. Received interest other than interest on securities amounting to Rs.25,98,07,210/-.
ii. Purchased debentures amounting to Rs.1,89,21,033/-.
iii. Made payment to contractors amounting to Rs.7,05,11,251/-.
iv. Made time deposits of Rs.15,18,15,78,507/-.
v. Received rent of Rs.74,99,56,668/-.
vi. Received rent on plant and machinery of Rs. 16,19,81,879/-.
vii. Sold immovable property amounting to Rs.7,66,00,57,772/-.
viii. Cash deposits of Rs. 1,46,89,444/-.
ix. Cash deposits in current account amounting Rs.21,42,16,451/-.
x. Cash withdrawals in current account amounting to Rs.2,16,50,000/-
4. Based on the said information, the AO initially issued a show cause notice u/s. 148A(b) of the Act and after completing the statutory formalities, he ultimately issued a notice u/s. 148 of the Act. In response to notice issued u/s. 148 of the Act, the assessee filed a return of income on 27.05.2022, declaring total income of Rs.5 lakhs. In course of assessment proceeding, the AO called upon the assessee to explain the reason for which the receipts noted above were not offered to tax. In response to the said notice, the assessee furnished detailed submissions stating that except the Agent Commission of Rs. 5 lakhs per annum received from the State Government, it had not earned any receipt in the nature of income. It was submitted that all other receipts were collected as an Agent on behalf of the Government of Maharashtra, hence, cannot be treated as income of the assessee. In this context, the assessee furnished the orders passed by Hon’ble Bombay High Court quashing the reassessment proceedings initiated on similar ground. After considering the submissions of the assessee, in the context of the facts and materials on record, the AO ultimately completed the assessment vide order dated 23.03.2024, accepting the income declared by the assessee in the return of income filed in pursuance to notice issued u/s.148 of the Act.
5. Thereafter, while examining assessment records, learned PCIT was of the view that the assessment order is erroneous and prejudicial to the interest of revenue. Accordingly, he invoked powers u/s.263 of the Act and issued a show-cause notice to the assessee requiring to explain why the assessment order should not be set aside. In response to the said notice, the assessee furnished a detailed reply, vehemently objecting to the initiation of proceedings u/s.263 of the Act. After considering the submissions of the assessee, learned PCIT ultimately concluded that the assessment order, being erroneous and prejudicial to the interest of the Revenue, needs to be revised. Having held so, he set aside the assessment order with a direction to the A.O. to pass an assessment order de novo after providing opportunity of being heard to the assessee.
6. We have considered rival submissions and perused the materials available on record. As far as the factual aspect of the issue is concerned, there is no dispute that the assessee was created by the Government of Maharashtra under Maharashtra Regional and Town Planning Act, 1966 (MRTP Act for short). The assessee was appointed as the New Town Development Authority u/s.113(3A) of the MRTP Act, and as per government resolutions and notifications issued for the development of Navi Mumbai region, the assessee was appointed as an agent for and on behalf of Government of Maharashtra. Similarly, the assessee has been appointed as an agent for development of other regions of the State other than the Navi Mumbai region. For acting as an agent of Government of Maharashtra, the assessee receives agency commission of Rs.5 lakhs per annum from the State Government. Apart from the agency commission, the assessee has no other income. It is evident, based on information available in the system of the Department indicating that various receipts accruing to the assessee in the year under consideration have not been offered to tax, as the assessee has not filed any return of income, the AO had reopened the assessment u/s. 147 of the Act. In course of assessment proceeding, the assessee had furnished detailed submissions along with the orders/ judgment of Hon’ble jurisdictional High Court regarding the status of the assessee as an agent, as also the taxability of receipts, other than the agency commission, at the hands of the assessee. After duly verifying the submissions of the assessee, in the context of orders/judgment of Hon’ble Bombay High Court, the AO ultimately accepted the contention of the assessee and completed the assessment determining the total income at the returned figure of Rs.5 lakhs. The observation of the AO while accepting assessee’s claim are as under:
The assessee in its submission stated that the business activities carried out by the assessee in the nature of town planning and development of residential as well as commercial area are not for the benefit of the state i.e. Govt. of Maharashtra but for the public at large.
The assessee has stated that it has been appointed as the ‘New Town Development Authority’ u/s 113(3-A) of the Maharashtra Regional and Town Planning Act, 1966 (“MRTP” Act) and the Government Resolutions (GRs) and Notifications issued by the State Government for the development of the Navi Mumbai Region appointed the Assessee as an agent for and on behalf of the Government of Maharashtra. Similarly, the corporation has been appointed as the “Special Planning Authority” u/s 40(1)(b) read with section 113(3A) of the MRTP Act and the Government Resolutions (GRS) and Notifications issued by the State Government for the development of the other regions of the State other than the Navi Mumbai Region as an agent for and on behalf of the Government of Maharashtra. For acting as the agent of the Government of Maharashtra, the assessee received agency remuneration of Rs. 5,00,000/-(Rupees Five Lakh only) per year for the State Government, asstipulated under the GR dated 24th January, 1972.
The assessee has also stated that the assessment proceedings of other proceedings years was completed accepting the income of Rs. 5,00,000/- only. In this regard provided the copies of the assessment orders which has been perused and it is seen that the assessment proceeding was completed accepting the return of income of the assessee of Rs. 5,00,000/-.
The assessee further submitted that the assessee had challenged reassessment proceedings seeking to reopen our assessment for assessment years 2013-14, 2016-17 and 2019-20 in Writ Petition No. 1840 of 2023, Writ Petition(L) No. 20417 of 2023 and Writ Petition(L) No. 20462 of 2023, respectively. Subsequent to e-filing of the written submissions on 07.12.2023, the Hon’ble Bombay High court has passed an order on 11.12.2023 in the aforesaid petitions quashing the reassessment, the order under section 148A(d) as well notice under section 148 of the Income Tax Act, 1961 (“the Act”) case. Copy of the High Court order dated 11.12.2023 is enclosed herewith marked as Annexure-1.
The copy of the order of Hon’ble High Court dated 11.12.2023 has been reproduced as under:
IN THE HIGH COURT OF JACATUREAT BOMBAY ORDINARY ORIGINAL CIVIL JURISDICTION
WRIT PETITION NO. 1845 OF 20/23 WITH WRIT PETITION (1) NO. 20417 OF 2023 WITH WRIT PETITION (1) NO. 20462 OF 2023
City and Industrial Development Corporation of Maharashtra Limited
Petitioner
Versus
Assistant Commissioner of Income-Tax, Circle 15(1)(2), Mumbai & Ors
Respondents
Mr. J. D. Mistri, Senior Advocate a/w Mr. Madhur Agrawal i/b Mr. Arul K. Jasani for the Peticionet
Ms. Swapna Gokhale for Respondents-Revenue in WP/1840/2023.
Mr. Akhileshwar Sharma for Respondents-Revenue in WPL/20417/2023 & WPL/20462/2023.
CORAM: K. R. SHRIRAM & DR. NEELA GOKHALE, JJ.
DATED: 11 December 2023
PC:
1. Though the petitions are listed under the caption for direction’ and for admission’, by consent all the petitions were taken up for hearing since the pleadings are completed.
2. In Writ Petition No. 1840 of 2023 Petitioner is impugning an initial notice dated 21 May 2022 issued under Section 148A(b) for Assessment Year 2013-2014, an order dated 29 July 2022 passed under Section 148A(d) and the notice dated 29 July 2022 issued under Section 148 of the Income Tax Act, 1961 (“the Act”).
3. In Writ Petition (1) No. 20417 of 2023 Petitioner is impugning an initial notice dated 11 March 2023 issued under Section 148A(b) for Assessment Year 2019-2020, an order dated 11thApril 2023 passed under Section 148A(d) and the notice dated 11th April 2023 issued under Section 148 of the Act.
4. In Writ Petition (L) No. 20462 of 2023 Petitioner is impugning an initial notice dated 31stMarch 2023 issued under Section 148A(b) for Assessment Year 2016-2017, an order dated 5th May 2023 passed under Section 148A(d) and the notice dated 5th May 2023 issued under Section 148 of the Act.
5. Various grounds have been raised in the petitions including that (a) the notice issued under Section 148 of the Act is clearly barred by limitation; (b) the notice is issued on the basis of change of opinion; (c) Petitioner is only an agent of the State Government and as the State Government itself cannot be taxed, Petitioner also cannot be taxed; (d) in any event the income of Petitioner is restricted to Rs. 5,00,000/-, which has been offered to tax and an assessment order dated 31 March 2016 has been passed accepting the same etc. Therefore, the question of any tax escaping assessment also would not arise,
6. We feel if we consider the last two grounds mentioned above, the petitions can be disposed without devoting time to consider other grounds raised in the petitions.
7. Ms. Gokhale and Mr. Sharma did not dispute the fact that there are orders passed by the Income Tax Appellate Tribunal (“IAT) accepting Petitioner to be an agent of the State Government and the income of Petitioner has been accepted to be a fixed amount of Rs. 5,00,000/-. But Ms. Gokhale and Mr. Sharma submitted that those findings by the ITAT has been impugned in certain petitions/appeals filed in this Court, which are pending. Ms. Gokhale and Mr. Sharma further submitted that the order passed by this Court in Writ Petition No. 1211 of 2009 accepting Petitioner was acting as an agent of the State Government, was passed in the context of the Maharashtra Regional and Town Planning Act, 1966 (“MRTP Act”) and not under the Act. But the fact is the findings of ITAT or of this Court in Writ Petition No. 1211 of 2009 have not been disturbed as on date.
8. We have gone through the petitions and affidavits-in-reply and also heard the Counsel.
9. In Writ Petition No. 1211 of 2009, the learned Single Judge of this Court came to a finding based on the notifications issued by the Government of Maharashtra when Petitioner was created and also subsequently, that Petitioner was the New Town Development Authority appointed under Sub-section 3(A) of Section 113 of the MRTP Act and the work of Petitioner is being carried out on behalf of the State Government. So considering the provisions of MRTP Act and notifications issued by the Stare Government, learned Single Judge of this Court has given conclusive finding that Petitioner was carrying out work on behalf of the State Government. When the matter was carried in appeal, the Division Bench of this Court in Letters Patent Appeal (“LPA”) No. 184 of 2010 in Writ Petition No. 1211 of 2009 came to a categorical finding that from bare reading of Sub-section 3(A) of Section 113 of the MRTP Act, it is crystal clear that Petitioner is declared as an agent of the State Government and this statutory status bestowed on Petitioner cannot be whittled down, nor can be elevated to any other position by an administrative decision. The Division Bench also came to a finding that Petitioner is getting only Rs. 5,00,000/- per annum towards administrative expenses and Petitioner on its own has pleaded before the ITAT that it was acting as an agent of the State Government and nothing more. The Court has also observed that the ITAT has accepted that contention of Petitioner and held that Petitioner was not liable to pay income tax on the income derived from the development activities. In another LPA No. 25 of 2012 heard by the Aurangabad Bench of this Court, the Court has accepted that the conjoint reading of the provisions under Sections 40(1)(b) & 113 of the MRTP Act and the notification dated 1 June 1973 issued by the State Government, Petitioner would be acting as Special Planning Authority and as an agent of the State Government.
10. The ITAT in its order dated 8ª August 2012 for Assessment Year 2006-2007 while considering the issue whether Petitioner should be held to be “an agent of the State or an “arm” of the State, working solely under the authority and guidelines issued through various notifications by the State, i.e., the Government of Maharashtra has come to a finding that the resolutions taking back to 1970 make it clear that Petitioner is an agent and functions as an arm of the State Government because Petitioner can only work under the control and supervision of the State Government meaning thereby Petitioner cannot make/take any decisions suo-moru.
11. The IIAT has also held Petitioner to be an agent of the State. The ITAT has also recorded that it was aware that there is an income to Petitioner by way of remuneration received from the State Government at Rs. 5,00,000/- per annum, which has to be assessed in the hands of Petitioner. The ITAT set aside the order passed by the Commissioner of Income Tax (Appeal) and directed the Assessing Officer to decide the case on merits with regard to income of Rs. 5,00,000/- received by Petitioner after allowing deduction for any expenses incurred wholly and exclusively for the purpose of earning the said income.
12. Even in the assessment order for Assessment Year 2013-2014, Le, the case at hand, passed under Section 143(3) of the Act, the Assessing Officer has accepted the returned income of Petitioners to be a fixed amount of Rs. 5,00,000/-only
13. In view of the above, in our opinion, the question of any income escaping assessment in the case of Petitioner does not and arise
14. Therefore, the notices and orders impugned in these Petitions are hereby quashed and set aside. Petitions disposed.
15. At the same time, would clarify that in the event the Revenue succeeds in its petitions/appeals pending in this Court and if it is held that Petitioner was not an agent of the State Government or Petitioner’s income is not just restricted to Rs. 5,00,000/-, Revenue will be at liberty to reopen take further steps in accordance with law. We express no opinion.
(DEL NEELA GOKHALE, J.)
(K. R. SHRIRAM, J.)
All the submissions of the assessee has been perused and verified with the supporting documents provided by the assessee and found to be in order.
In view of the facts as discussed above, and the fact that the department has accepted the return income of the assessee in assessment of other years and following the judgement of the Hon’ble High Court to considered the assessee as an agent for and on the behalf of The Government of Maharashtra, the return income of the assessee is accepted.
Conclusion drawn.
In view of the facts as discussed above, and the fact that the department has accepted the return income of the assessee in assessment of other years and following the judgement of the Hon’ble High Court to considered the assessee as an agent for and on the behalf of The Government of Maharashtra, the return income of the assessee is accepted.
7. Whereas, learned PCIT has held the assessment order to be erroneous and prejudicial to the interest of the revenue, primarily for two reasons. Firstly, for not bringing to tax various receipts at the hands of the assessee and, secondly, allowing TDS credit in absence of corresponding income. For reaching a proper conclusion qua the challenge regarding the validity of exercise of power u/s.263 of the Act, we need to look at the following observations of learned PCIT in the impugned order:
9. Analysis and Decision
9.1 I have carefully considered the submissions of the assessee. Assessee’s so defense is that it is an agent of the Government of Maharashtra. However, the assessee is a company registered under Companies Act and there is not dispute that the company is a person as per the provisions of section 2(31) of the Income Tax Act. 1961. As per the provisions of section 4, the total income of the previous year of every person is chargeable to income tax. As per the provisions of section 5, the total income of any previous year of a person’ who is resident will include all income from whatever sources derived which is received or deemed to be received in India.. accrues or arises or deemed to accrue or arise in India or accrues or arises to him outside India during the previous year. Taken these sections into consideration together, it can be said that any income of a person who is resident in India received, accrues or arises in India, or outside India during the previous year is taxable as per the provisions of the Income Tax Act, 1961. The assessee was incorporated as a Company on 19.03.1970. with a share capital which was wholly and exclusively subscribed by the Government of Maharashtra with the object of creation of New Town of Navi Mumbai, New Aurangabad, New Nasik etc. Even if a company is fully owned by the State Government, it is a separate legal entity, not the ‘State”. The company then must look to section 10 of the IT Act, 1961 to find a specific exemption. If no exemption exists in Section 10, the Company is taxable even if its shares are 100% held by the Government.
9.2 The Hon’ble Bombay High Courts has decided in assessee’s own case in AY 2006-07 in assessee’s favour considering the assessee as an agent of the State Government. However, the Department has not accepted the decision of the Hon’ble Bombay High Court on this issue and filed an SLP before Hon’ble Supreme Court. Further, for AY 2013-14, 2016-17 and 2019-20. It is further be noted that the Hon’ble High Court (Bom) has directed to look into whether assessee’s income is just restricted to Rs. 5 Lakh and has not expressed any opinion. Thus being an agent of the State is itself is not sufficient.
9.3 It is also considered necessary to clarify here that wherever the order of the Assessing Officer or of the Hon’ble Tribunal are against the stand taken by the Department in A.Y. 2006-07, remedial action if available is being taken in consonance to the stand of the Department in A.Y. 2006-07 which is that the income of the assessee after omission of section 10(20A) is taxable w.e.f. A.Y. 2003-04. If in any such order, remedial action cannot be taken, then it is due to technical reasons that action cannot be taken but it does not represent the acceptance of such orders which are deviating from the stand taken by the Department in AY. 2006-07.
8. As could be seen from the aforesaid observations of learned PCIT, though in principle he agrees that in assessee’s own case, the Hon’ble Bombay High Court has decided the issue regarding assessee’s status as an agent of the State Government in favor of the assesse, however, he has observed that since the Department has challenged the decision of Hon’ble High Court and preferred Special Leave Petition (SLP) before Hon’ble Supreme Court, the issue has to be kept alive. These very observations of learned PCIT make it clear that the assessment order cannot be held as erroneous, as the AO has abided by the decision of the Hon’ble Bombay High Court. On the contrary, had the AO not abided by the decision of Hon’ble Bombay High Court, the assessment order would not only have been erroneous but in complete violation of norms of judicial discipline. Therefore, the twin conditions of Section 263 of the Act “erroneous and prejudicial”, are not satisfied in the present case. Thus, in our view, the exercise of jurisdiction u/s.263 of the Act, in the present case, is invalid.
9. Having held so, we deem it appropriate to consider the issue of validity of exercise of jurisdiction u/s. 263 of the Act from a different perspective. In paragraph 2 of the impugned order, learned Principal CIT has observed as under:
2. In this regard, a proposal u/s. 263 of the Act from DCIT15(1)(2), Mumbai was received on 15.04.2024. The proposal was prima facie found acceptable as no exemption was ever granted to the assessee u/s 10 of the Act. Accordingly, notice for hearing dated 18.04.2024 was issued to the assessee by PCIT-6, Mumbai. Further, the case was transferred vide order u/s. 127 (2) dated 24.09.2025 to the undersigned. Thereafter, a fresh notice, upon change of incumbent, was issued to the assessee vide letter dated 02.12.2025 fixing hearing on 12.12.2025.
10. The aforesaid observations of learned PCIT make it clear that the exercise of power under Section 263 of the Act was based on a proposal/suggestion, initiated by DCIT-15(1)(2). Section 263 of the Act empowers the Revisionary Authority to revise an order prejudicial to the interest of Revenue. Sub-section (1) of Section 263 of the Act provides that the Revisionary Authority may call for and examine the record of the proceedings under this Act, and upon such examination, if any order passed by the authority mentioned therein is found to be erroneous and prejudicial to the interest of the Revenue, he may revise such order. Thus, the crucial words which needs to be given due weightage are “may call for and examine”. These words clearly indicate that the calling for and examination of the record must be a voluntary act of the Revisionary Authority without intervention of any other authority, leave aside the AO. In other words, the Revisionary Authority must act independently while exercising powers under section 263 of the Act and not at the behest of any other authority.
11. In the facts of the present appeal, it is absolutely clear that the very initiation of proceeding under section 263 of the Act is based on a proposal or suggestion from a subordinate authority. Thus, essentially, the Revisionary Authority has abdicated his powers conferred under section 263(1) of the Act to another authority. Such act on the part of the Revisionary Authority has totally vitiated the proceedings and makes the impugned order vulnerable. Thus, for the aforesaid reasons, the impugned order passed under section 263 of the Act cannot be sustained. Even otherwise also, it is a fact on record that on identical reasoning, the Revisionary Authority had exercised jurisdiction under section 263 of the Act for earlier assessment years, being A.Ys. 2014-15, 2015-16, and 2016-17. While deciding the appeals preferred by the assessee, the co-ordinate bench, through well-reasoned orders, have quashed the orders passed under section 263 of the Act. Copies of such orders have been placed on record by learned counsel for the assessee. Thus, the issues are covered in favor of the assessee by the decisions of the co-ordinate bench. In view of the aforesaid, we have no hesitation in quashing the impugned order passed under section 263 of the Act. Consequently, the assessment order is restored back to its original position.
12. Since we have disposed of the appeal, the corresponding stay application having become infructuous is dismissed.
13. In the result, the appeal is allowed and Stay Application is dismissed.
Order pronounced in the open court on 27.07.2026
