Belur Manjunath Santosh Vs DCIT (ITAT Bangalore)
Appeal Against Original Assessment Becomes Infructuous Once Assessment Is Set Aside Under Section 263: ITAT
Introduction
The Bangalore Bench of the Income Tax Appellate Tribunal (ITAT) held that appellate proceedings arising from an original assessment cannot continue independently once that assessment has been set aside under section 263 and replaced by a fresh assessment. Consequently, the Tribunal set aside the Commissioner of Income Tax (Appeals)’s order confirming the addition made in the original assessment.
The ruling came in Belur Manjunath Santosh v. DCIT, ITA No. 2004/Bang/2026, concerning Assessment Year 2019-20. The Tribunal preserved the assessee’s right to challenge the fresh assessment and directed that the pending appeal against it be decided independently on merits.
Background of the Case
The assessee, an individual engaged in supplying crushed stone and land development, filed his original return of income on 31 August 2019, declaring total income of ₹4,31,410.
A search under section 132 was conducted on 17 November 2022 in the cases of K. S. Shanthegowda and Smt. Kavya Shanthegowda. During the search, material relating to the assessee was found, suggesting cash receipts from the sale of sites in Nelamangala Layout.
The Assessing Officer subsequently completed reassessment under section 147 read with section 143(3) on 19 March 2024, adding ₹37,95,500 towards alleged cash receipts. Aggrieved, the assessee filed an appeal before the CIT(A) on 11 April 2024.
Revision Under Section 263 and Fresh Assessment
While that appeal remained pending, the Assessing Officer proposed revision under section 263, stating that the seized material reflected cash receipts of ₹39,26,105, against ₹37,95,500 considered in the original assessment.
The Principal Commissioner issued a show-cause notice and passed a revisional order on 18 March 2025, setting aside the original assessment and directing the Assessing Officer to make a fresh assessment.
According to the Tribunal’s factual discussion, the Assessing Officer passed the fresh assessment on 19 February 2026, adding ₹39,86,105. The assessee separately challenged that assessment before the CIT(A).
Nevertheless, on 31 March 2026, the CIT(A) decided the appeal against the original assessment and confirmed the earlier addition of ₹37,95,500. This appellate order became the subject of the present Tribunal appeal.
Assessee’s Additional Ground
Before the Tribunal, the assessee raised an additional ground seeking directions concerning the simultaneous existence of appellate proceedings arising from the original and fresh assessments.
The assessee argued that the original assessment had already been set aside before the CIT(A) decided the appeal. Therefore, the foundation of that appeal had ceased to exist.
Continuing both proceedings, according to the assessee, could result in parallel adjudication, inconsistent findings and overlapping tax demands.
The Tribunal admitted the additional ground because it raised a legal issue arising from subsequent orders already available on record. No fresh investigation of facts was required.
Tribunal’s Findings on the Original Appeal
The Tribunal identified the central question as whether appellate proceedings arising from the original assessment could continue after that assessment had been set aside and replaced by a fresh assessment on the same issue.
It held that an appeal under section 246A arises from a particular assessment order. Where that order itself has been set aside and a fresh assessment directed, the foundation of the pending appeal ceases to exist.
The Tribunal relied on ACIT v. Industrial Cables (India) Ltd. [1982] 14 TTJ 534 (Chandigarh), where proceedings arising from an original assessment became infructuous after revision and fresh assessment.
It also referred to ITO v. General Electric Co. of India Ltd. [1987] 20 ITD 12 (Calcutta) (TM) and Shanthi Diamonds v. ITO [1990] 33 ITD 619 (Madras) in support of the principle that appellate adjudication cannot survive independently of the underlying assessment in such circumstances.
Right to Challenge the Fresh Assessment
The Tribunal clarified that setting aside the original assessment does not extinguish the assessee’s statutory right to challenge additions made in the fresh assessment.
Referring to Sakar Patal Vibhag Jungle Kamdard Sahakari Mandli Ltd. v. ITO [1991] 39 TTJ 54 (Ahmedabad), it observed that a fresh assessment following cancellation under section 263 remains appealable.
Since the assessee had already appealed against the fresh assessment, the merits of the alleged cash receipts were to be examined in those proceedings. The Tribunal therefore declined to adjudicate independently the merits of the addition made in the superseded assessment.
Final Decision and Directions
The Tribunal held that the appeal against the original assessment had become infructuous and set aside the CIT(A)’s order dated 31 March 2026.
It expressly left all factual and legal contentions open in the appeal against the fresh assessment. The CIT(A) was directed to decide that appeal independently, in accordance with law and after providing a reasonable opportunity of hearing.
The CIT(A) must also remain uninfluenced by the findings in the appellate order set aside by the Tribunal. The additional ground was allowed, the remaining grounds were left open, and the appeal was allowed for statistical purposes.
Cases Discussed
- ACIT Vs Industrial Cables (India) Ltd. — [1982] 14 TTJ 534 (Chandigarh).
- ITO Vs General Electric Co. of India Ltd. — [1987] 20 ITD 12 (Calcutta) (TM).
- Shanthi Diamonds Vs ITO — [1990] 33 ITD 619 (Madras).
- Sakar Patal Vibhag Jungle Kamdard Sahakari Mandli Ltd. Vs ITO — [1991] 39 TTJ 54 (Ahmedabad).
FULL TEXT OF THE ORDER OF ITAT BANGALORE
The assessee has filed the present appeal against the order of the Learned Commissioner of Income Tax (Appeals)-2, Panaji [hereafter “the Ld. CIT(A)”] passed under section 250 of the Income Tax Act, 1961 (hereafter “the Act”) for A.Y. 2019-20 vide order dated 31.03.2026.
2. The assessee has raised various grounds challenging the addition of Rs. 37,95,500 made towards alleged cash receipts from sale of sites. The assessee before us has also raised the following additional ground of appeal:
“That, in the facts and circumstances of the case, where two assessment orders and corresponding appellate proceedings subsist simultaneously in respect of the same Assessment Year on the very same facts and issues, giving rise to an incongruous and legally untenable situation capable of resulting in parallel adjudication, inconsistent findings and overlapping tax demands, this Hon’ble Tribunal may be pleased to issue appropriate directions governing the course to be adopted in the present appeal vis- à-vis the proceedings arising from the fresh Assessment Order dated 11.02.2026 (pursuant to Order u/s 263 of the Income Tax Act, 1961), so as to secure the ends of justice and preserve the Appellant’s rights and contentions in their entirety.”
2.1 During the course of hearing, the assessee has raised the aforesaid additional ground seeking appropriate directions from the Tribunal in view of the subsequent proceedings arising from the order passed u/s 263 of the Act. We find that the issue raised in the additional ground arises from the subsequent orders passed by the income-tax authorities and goes to the root of the matter. The relevant facts and orders necessary for adjudication of this ground are already available on record and no fresh investigation of facts is required. Further, the additional ground raises a legal issue regarding the effect of setting aside of the original assessment order and the continuation of parallel appellate proceedings for the same A.Y. Therefore, in the interest of justice and for proper adjudication of the controversy before us, we admit the additional ground raised by the assessee and proceed to adjudicate the same.
3. The brief facts of the case are that the assessee, an individual, is engaged in the business of supplying of crushed stone and land development. The assessee filed the original return of income u/s 139(1) of the Act for the year under consideration on 31.08.2019 declaring total income of Rs. 4,31,410/-. A search u/s 132 of the Act was conducted on 17.11.2022 in the case of K S Shanthegowda and Smt Kavya Shanthegowda, wherein certain materials relating to the assessee, suggesting cash receipts from sale of sites in Nelamangala Layout, was found. The assessment was thereafter completed u/s 147 r.w.s. 143(3) of the Act on 19.03.2024 by making an addition of Rs. 37,95,500/- towards alleged cash receipts from sale of sites.
3.1 Aggrieved by the assessment order dated 19.03.2024, the assessee filed an appeal before the Ld. CIT(A) on 11.04.2024 challenging, inter alia, the aforesaid addition. During the pendency of the said appeal, the AO sent a proposal to the Ld. PCIT for exercise of revisional jurisdiction u/s 263 of the Act. The reason was that, according to the seized material, the amount of cash receipts required to be considered was Rs. 39,26,105 as against Rs. 37,95,500 considered in the original assessment order. The Ld. PCIT thereafter issued a show cause notice u/s 263 of the Act on 09.01.2025 and passed the revisional order on 18.03.2025. By the said order, the original assessment order was set aside with a direction to the AO to make a fresh assessment after considering the amount of cash receipts referred to in the revisional order.
3.2 Pursuant to the order passed u/s 263 of the Act, the AO passed a fresh assessment order on 19.02.2026. In the fresh assessment, the AO added Rs. 39,86,105/- towards cash receipts, as against the addition of Rs. 37,95,500/- made in the original assessment order. Thus, the original assessment stood replaced by a fresh assessment pursuant to the directions issued by the Ld. PCIT u/s 263 of the Act.
3.3 However, the appeal filed by the assessee against the original assessment order continued to remain pending before the Ld. CIT(A). Subsequently, the Ld. CIT(A), vide order dated 31.03.2026 passed u/s 250 of the Act, decided the said appeal and confirmed the addition of Rs. 37,95,500/- made in the original assessment order. The assessee has challenged the said order before us. At the same time, the assessee has also filed a separate appeal before the Ld. CIT(A) against the fresh assessment order passed pursuant to the order u/s 263 of the Act and the said appeal is stated to be pending.
4. The Ld. AR before us submitted that an unusual situation has arisen in the present case. The original assessment order dated 19.03.2024 had already been set aside by the Ld. PCIT u/s 263 of the Act on 18.03.2025. Pursuant thereto, the AO had also passed a fresh assessment order. Despite this position, the Ld. CIT(A) subsequently proceeded to decide the appeal arising from the original assessment order and confirmed the addition made therein.
4.1 The Ld. AR submitted that, as a result, two sets of appellate proceedings have arisen for the same A.Y. and substantially on the same issue. On one hand, the present appeal before the Tribunal arises from the order of the Ld. CIT(A) relating to the original assessment. On the other hand, the fresh assessment passed pursuant to the order u/s 263 of the Act has separately been challenged before the Ld. CIT(A). According to the Ld. AR, continuation of both sets of proceedings may result in parallel adjudication of the same issue, inconsistent findings and overlapping demand.
4.2 The Ld. AR further submitted that once the original assessment order had been set aside u/s 263 of the Act, the very foundation of the appeal pending before the Ld. CIT(A) against such assessment ceased to exist. Therefore, the Ld. CIT(A) ought not to have adjudicated the addition made in the original assessment after a fresh assessment had already been passed pursuant to the order u/s 263 of the Act. The Ld. AR accordingly submitted that appropriate directions may be issued by the Tribunal so that the rights and contentions of the assessee against the operative fresh assessment order remain protected.
5. The Ld. DR, on the contrary, vehemently supported the order passed by the Ld. CIT(A). However, the Ld. DR did not dispute the factual position that the original assessment order dated 19.03.2024 had already been set aside by the Ld. PCIT u/s 263 of the Act before the Ld. CIT(A) passed the impugned order. The Ld. DR also did not dispute that a fresh assessment had subsequently been passed pursuant to the order u/s 263 of the Act and that the assessee has separately challenged the fresh assessment before the Ld. CIT(A).
6. We have considered the rival submissions of both the parties and perused the materials available on record. The facts giving rise to the present situation are not in dispute and have been discussed in detail in the preceding paragraphs. Therefore, we are not inclined to repeat the same for the sake of brevity. Before us, the fundamental question is whether the appellate proceedings arising from the original assessment could continue after the very original assessment had already been set aside u/s 263 of the Act and replaced by a fresh assessment on the same issue.
6.1 In our considered view, once an assessment order is set aside by the competent authority u/s 263 of the Act, such assessment order cannot thereafter form the basis of further appellate adjudication. An appeal before the Ld. CIT(A) u/s 246A of the Act arises from a particular assessment order. Therefore, where that assessment order itself has been set aside and a fresh assessment has been directed, the foundation of the pending appeal against the original assessment ceases to exist.
6.2 In holding so, we find support and guidance from the decision of the Chandigarh Bench of the Tribunal in the case of Assistant Commissioner of Income-tax (Asstt.) v. Industrial Cables (India) Ltd. [1982] 14 TTJ 534 (Chandigarh). In that case, the original assessment was set aside by the Commissioner u/s 263 of the Act and a fresh assessment was thereafter made. The Tribunal held that the appeal relating to the appellate proceedings arising from the original assessment had become infructuous. The relevant findings and observations of the Hon’ble Chandigarh Bench of the Tribunal are extracted as under:
4. Before going through the merits of the issues raised by the revenue in its appeal, we are of the view that the appeal under consideration really does not have any base because the assessment order originally framed by the ITO and to that extent he considered the order of the ITO erroneous so as to be prejudicial to the interest of the revenue and he submitted that there is no mention in the said order about the dispute which are under consideration before us at this moment. But when we go through the directions of the CIT in his order under section 263 came to be disputed by the assessee in the first appeal and it was in respect of relief granted in the first appeal that the revenue has come in second appeal before us. But there is no controversy about the fact that the CIT vide his order under section 263 placed on assessee compilation at pages 15 to 22, set aside the said order on 19-2-1980 in the following words :
” The assessing officer is directed to make a fresh assessment according to law after giving a reasonable opportunity to the assessee to produce in support of it contention/contentions which may be raised by it in the course of such proceedings.”
As per the above directions the ITO reframed the assessment on 26-3-1980 and mentioned in the very first para of the said assessment order as under :
“Original assessment in this case was framed on an income of Rs. 2,47,170 on 20-2-1978 under section 143(3) by ITO Coy Circle Patiala. Later on the CIT vide his order under section 263 of the IT Act, 1961 dated 19-2-1980, set aside the assessment with the direction to frame afresh”.
It will not be out of place to mention that this order has been subject matter of appeal before AAC for the very assessment year under consideration before us, that is, 1974-75, for which the relevant previous year had ended on 31st Oct,1973 and the AAC finding stand accepted by both the assessee and the revenue.
5. Though at the time of hearing the ld. Deptl. Rep. besides making the above noted submissions that sections 250 and 263 operate in different fields and are independent o f each other, also submitted that in section 263 order, the CIT had only mentioned certain additions to be made which had not originally been done and consequential order framed afresh by the ITO, the extract from both of which we have placed above, we find the contentions of the Id. Deptl. Rep. without any force. According to us, appeal deserves to be dismissed.
6. In the result, the revenue’s appeal is dismissed.
6.3 A similar principle was considered by the Kolkata Bench of the Tribunal in Income-tax Officer v. General Electric Co. of India Ltd. [1987] 20 ITD 12 (Calcutta) (TM). It was observed that where the original assessment order had been set aside by the ld. Commissioner, such assessment ceased to exist and the appeals relating to the said non-existing assessment became infructuous. The Madras Bench of the Tribunal in Shanthi Diamonds v. Income-tax Officer [1990] 33 ITD 619 (Madras) also held that once the underlying assessment had been set aside, there remained nothing on which the appellate authority could adjudicate.
6.4 The principle emerging from the above decisions is clear. An appellate proceeding is dependent upon the existence of the order appealed against. Once that underlying order is set aside, the appellate proceedings arising exclusively from such order cannot independently continue. In the present case, the original assessment order dated 19.03.2024 stood set aside by the order of the Ld. PCIT dated 18.03.2025. The AO thereafter passed the fresh assessment order on 19.02.2026. Therefore, when the Ld. CIT(A) passed the impugned order on 31.03.2026, the original assessment order was no longer the operative assessment for the year under consideration.
6.5 We also find merit in the concern raised by the assessee through the additional ground. If the impugned order of the Ld. CIT(A), which arises from the original assessment, and the appellate proceedings arising from the fresh assessment are both allowed to proceed independently, substantially on the same issue may come to be examined in two parallel sets of proceedings. This may result in conflicting findings and overlapping consequences. Such a situation should be avoided, particularly when the original assessment itself had already been set aside before the impugned order was passed.
6.6 At the same time, setting aside of the original assessment does not take away the statutory right of the assessee to challenge the additions made in the fresh assessment. The fresh assessment passed pursuant to the order u/s 263 of the Act gives rise to a fresh cause of action. The Ahmedabad Bench of the Tribunal in Sakar Patal Vibhag Jungle Kamdard Sahakari Mandli Ltd. v. Income-tax Officer [1991] 39 TTJ 54 held that an appeal lies against an assessment order made pursuant to cancellation of the original assessment by the ld. Commissioner u/s 263 of the Act. Thus, the assessee is entitled to challenge the additions made in the fresh assessment in accordance with law. The finding recorded by the Ahmedabad Bench of the Tribunal reads as under:
Section 263 authorises the Commissioner to pass an order of enhancement or modi-fication of the assessment. If the Commissioner chooses to pass an order of enhancement or modification of the assessment he need not cancel the assessment and direct fresh assessment. No fresh assessment under section 143(3) would be involved in those cases. However, if the Commissioner chooses to cancel the assessment, then it would be obligatory on his part to have directed a fresh assessment. Once the Commissioner has opted for cancelling the assessment and directing fresh assessment, the ITO may proceed to make fresh assessment in the given case under section 143(3) only and an order passed under section 143(3) is undisputedly an appealable order under section 246(c). Once an order under section 143(3) is challenged in appeal before the appellate authority, the right of the assessee-appellant to challenge the order under section 143(3) on merits cannot be taken away by the appellate authority on the ground that such an order had been passed in pursuance of an order passed and/or in conformity with the directions given by a revisional authority under section 263. The expression of opinion by the Commissioner on any point which had appealed to him to consider the order of assessment as made by the ITO as erroneous and prejudicial to the interests of revenue and which had prompted him to set aside the assessment and to direct the ITO to make fresh assessment, should not be interpreted as taking away the right of the assessee of challenging that point before the appellate authority or divesting the appellate authority of his power of deciding such point on its own merit.
6.7 In the present case, the assessee has already filed an appeal before the Ld. CIT(A) against the fresh assessment order and the same is stated to be pending. In our view, the merits of the addition relating to the alleged cash receipts should be examined in those appellate proceedings, as the fresh assessment is now the operative assessment. It would therefore not be proper for us to independently adjudicate the merits of the addition of Rs. 37,95,500/- made in the original assessment which had already been set aside.
6.8 In view of the above discussion, we hold that once the original assessment order dated 19.03.2024 was set aside by the Ld. PCIT u/s 263 of the Act, the appeal pending before the Ld. CIT(A) against such original assessment had become infructuous. Consequently, the impugned order dated 31.03.2026 passed by the Ld. CIT(A) in respect of such original assessment cannot be sustained. We accordingly set aside the impugned order of the Ld. CIT(A) and hold that the appellate proceedings arising from the original assessment order have become infructuous.
6.9 We further make it clear that we have not expressed any opinion on the merits of the addition relating to the alleged cash receipts. The assessee shall be at liberty to raise all factual and legal contentions available to it in the appeal already filed against the fresh assessment order. The Ld. CIT(A) shall adjudicate the said appeal independently on its own merits and in accordance with law, after providing reasonable opportunity of being heard to the assessee. The Ld. CIT(A) shall not be influenced by the findings recorded in the impugned appellate order dated 31.03.2026 relating to the original assessment, since the said order has been set aside by us.
6.10 Accordingly, the additional ground raised by the assessee is allowed in the above terms. In view of our finding on the additional ground, the other grounds raised by the assessee challenging the addition on merits do not require separate adjudication and are left open.
7. In the result, the appeal filed by the assessee is allowed for statistical purposes in the terms indicated above.
Order pronounced in the open court on 28th Sept. 2026.
