Radiant Textiles Private Limited Vs PCIT (ITAT Chandigarh)
Audit Objection Cannot Rewrite an Examined Assessment: ITAT Quashes Revision of ₹10.10 Crore Insurance Write-Off
An Examined Claim Could Not Be Revisited Merely on a Different View
The Chandigarh Bench of the Income Tax Appellate Tribunal quashed a revisionary order under section 263 concerning the write-off of an insurance receivable of ₹10.10 crore.
The Principal Commissioner considered the write-off a capital loss because the insurance claim related to damaged building and plant and machinery. The Assessing Officer had accepted the deduction during scrutiny.
The Tribunal found that the Assessing Officer had specifically questioned the claim, obtained supporting documents and accepted the explanation after enquiry. The PCIT had essentially substituted his opinion without establishing the statutory conditions for revision.
The original assessment accepting returned income of ₹35.70 crore was restored.
Storm Damage and an Unsuccessful Insurance Claim
The assessee, a textile manufacturer, suffered damage to its building, plant and machinery and stock following a severe storm on 14 May 2010.
It lodged an insurance claim and reflected the amount as an insurance receivable. The claim remained disputed and was ultimately rejected by the Supreme Court on 29 June 2021.
The assessee consequently wrote off the receivable in the relevant year by debiting its profit and loss account.
Its explanation was that the claim had become permanently irrecoverable upon final rejection and that the loss had therefore crystallised during the year under consideration. It also maintained that the receivable was a business asset and its write-off was revenue in nature.
The PCIT disagreed, observing that crystallisation determines timing but does not convert a capital loss into a revenue loss.
The Assessing Officer Had Raised a Specific Query
The return was subjected to complete scrutiny. The Assessing Officer issued notices calling for information and examined the assessee’s computation, audited financial statements, bank statements and explanations.
In the show-cause notice dated 21 February 2024, he specifically questioned the insurance claim write-off and asked why the expenditure should not be disallowed.
The assessee replied on 4 March 2024, furnishing explanations and documents. These included ledger extracts of insurance claims receivable relating to building and plant and machinery for the period beginning in April 2011, and financial statements for the year ended March 2011.
The circumstances of the damage, insurance dispute, final rejection and write-off were thus placed before the Assessing Officer.
The Tribunal held that this demonstrated enquiry followed by acceptance of the claim, rather than mechanical acceptance without verification.
Audit Objection Required Independent Examination
The revision originated from an audit objection dated 7 February 2025. The audit party considered the expenditure capital in nature and inadmissible under section 37(1).
A subsequent departmental communication proposed remedial action under section 263.
The Tribunal clarified that an audit objection may legitimately trigger examination by the PCIT. Its existence does not automatically invalidate revision.
However, the statutory satisfaction must be that of the revisional authority. The PCIT must independently establish that the assessment is both erroneous and prejudicial to the Revenue.
Here, the Tribunal found that the PCIT had followed the audit party’s conclusion without adequately considering the enquiry already conducted and the plausible view adopted.
It relied on CIT Vs Sohana Woollen Mills, (296 ITR 238), Punjab and Haryana High Court, concerning the insufficiency of a mere audit objection and the possibility of another view.
Both Conditions Under Section 263 Had to Coexist
Applying Malabar Industrial Co. Ltd. Vs CIT, (243 ITR 83), Supreme Court, the Tribunal reiterated that an assessment cannot be revised merely because the Commissioner prefers another permissible view.
The decisive question was whether the Assessing Officer’s view was unsustainable in law, rather than whether the PCIT’s proposed capital classification might ultimately be correct.
The Tribunal distinguished CIT Vs Paville Projects Pvt. Ltd., (293 Taxman 38), Supreme Court, relied upon by the Revenue. That decision supported revision where a legally unsustainable assessment caused prejudice; it did not dispense with establishing those conditions on the particular facts.
The Tribunal also held that Explanation 2(a) to section 263 could not support revision when the asserted absence of necessary enquiry was contradicted by the assessment record.
Depreciation History Provided an Additional Reason
The Tribunal additionally reasoned that transferring the damaged assets’ value to insurance receivable had reduced the fixed-asset values and consequently the depreciation claimed in earlier years.
It considered that allowing the write-off upon final rejection compensated for that earlier depreciation reduction and concluded that there would ultimately be no loss of revenue.
On the cumulative reasoning, the revisionary order dated 23 March 2026 was quashed and the appeal allowed.
Author’s Comments
The judgment is strongest as an authority on revision of a claim specifically examined during scrutiny. A detailed query, documentary response and demonstrable consideration can establish enquiry even where the assessment order contains little discussion.
The audit-objection finding is equally qualified: audit information may initiate examination, but it cannot replace independent statutory satisfaction.
The depreciation reasoning should be applied cautiously. Its relevance depends on the actual asset accounting, depreciation claims and tax treatment in earlier years.
This order should not be presented as a blanket ruling that every rejected insurance claim concerning capital assets is deductible revenue expenditure. The Tribunal itself treated the central question as the validity of revision on the facts before it.
Cases Discussed
- CIT Vs Sohana Woollen Mills, 296 ITR 238 (Punjab & Haryana High Court) — Relied upon for the principle that a mere audit objection and the possibility of another view are not sufficient for exercise of revisionary jurisdiction.
- Malabar Industrial Co. Ltd. Vs CIT, 243 ITR 83 (Supreme Court) — Applied for the twin requirements that an assessment order must be both erroneous and prejudicial to the interests of the Revenue and for protection of a permissible view taken by the AO.
- CIT Vs Paville Projects Pvt. Ltd., 293 Taxman 38 (Supreme Court) — Relied upon by the Revenue and distinguished on the facts.
- Gee Vee Enterprises Vs Addl. CIT, 99 ITR 375 (Delhi High Court) — Referred to by the PCIT concerning further enquiries by the Assessing Officer.
- Sh. Surinder Pal Singh, 94 ITR (Trib.) 0458 (ITAT Chandigarh) — Followed regarding exercise of revisionary jurisdiction based on an audit objection.
FULL TEXT OF THE ORDER OF ITAT CHANDIGARH
1. By way of this appeal, the assessee assails invocation of revisionary jurisdiction u/s 263 by Ld. Pr. Commissioner of Income Tax, Patiala (Pr. CIT) for the Assessment Year (AY) 2022-23 vide impugned order dated 23-03-2026 proposing revision of an assessment as framed by Ld. Assessing Officer [AO] u/s.143(3) r.w.s. 144B of the Act on 16-03-2024 accepting returned income of Rs.35.70 Crores as filed by the assessee.
2. The Ld. AR advanced arguments supporting the assessment order and made out a case of one of the possible views as taken by Ld. AO during the course of regular assessment proceedings. The Ld. AR contended that sufficient explanations and documents were already furnished by the assessee during the course of regular assessment proceedings itself. It has further been contended that the assessment was framed with due application of mind and therefore, the revision was unjustified. The Ld. AR also raised a plea that the revision was triggered due to audit objections and there was no application of mind while proposing the impugned revision. Another argument is that Explanation-2 to Sec.263 has not been invoked in show-cause notice and therefore, the impugned revision could not be sustained.
3. The Ld. CIT-DR also raised vehement contentions supporting the impugned order and referred to the decision of Hon’ble Apex Court in the case of Paville Projects Pvt. Ltd. (293 Taxman 38). It was also contended that revision has been proposed with due application of mind and therefore, the impugned revision is sustainable in law. Having heard rival submissions and upon perusal of case records, the appeal is disposed-off as under.
Revisionary Proceedings
4.1 From the case records, it emerges that the assessee being resident corporate entity is stated to be engaged in manufacturing of textile products. The assessee filed return of income on 12.09.2022 which was subjected to complete scrutiny identifying various issues for examination. During the course of assessment proceedings, notice u/s 142(1) was issued by Ld. AO on 17.08.2023 which was duly been replied by the assessee. A final show-cause notice was issued by Ld. AO on 21.02.2024 which was also duly been responded to by the assessee. The assessment order takes note of the fact that the assessee furnished computation of income, audited financial statements, bank statements etc. in support of its submissions. Considering the replies of the assessee, the returned income stood accepted by Ld. AO and no adverse view was taken while framing the assessment on the assessee.
4.2 Subsequently, Ld. Pr. CIT proposed revision of the assessment order by invoking revision power u/s 263 and show-caused the assessee on the ground that the assessee reflected insurance receivable for Rs.10.10 Crores under the head ‘other non-current assets’ which was written-off as administrative expenses in the Profit & Loss Account. The Ld. Pr. CIT held an opinion that insurance receivable pertained to capital assets namely Building and Plant & Machinery which was evident from the fact that the instance claim was capitalized as ‘other non-current assets. The write-off of insurance receivable pertaining to capital asset was capital loss and not revenue expenditure and therefore, the same could not be allowed u/s 37(1).
4.3 The assessee refuted the allegation of Ld. Pr. CIT, inter-alia, explaining that heavy loss was incurred on account of severe storm on 14.05.2010 damaging building, Plant & Machinery and stock. An insurance claim was lodged with insurance company which was reflected as insurance receivable under current assets. The assessee’s claim was under dispute and finally rejected by Hon’ble Supreme Court on 29.06.2021. The loss ultimately stood crystallized on final rejection by Hon’ble Supreme Court. Therefore, the same was allowable in the year of crystallization. The said receivable represented a circulating business assets and not a capital asset and therefore, the write-off was revenue in nature. In fact, Ld. AO had raised specific query on this issue which was duly been explained by the assessee and the claim was accepted thereby forming a possible view. Accordingly, the proposed revision was not justified.
4.4 The Ld. Pr. CIT maintained that the write-off of a receivable pertaining to damage to a capital asset constitutes capital loss and could not be allowed as deduction u/s 37(1). The fact of crystallization does not determine the character of a loss. A capital loss does not become revenue loss merely because it is crystallized in a particular year. The question of year of allowability and question of nature of expenditure / loss was entirely separate enquiries. Since the underlying loss was capital in nature, it remains capital irrespective of the year in which the write-off is made. The Ld. AO merely called for explanation from the assessee during assessment proceedings but did not critically examine whether the write-off was capital or revenue in nature. This constitute non-application of mind. The Explanation-2 to Sec.263 was held to be applicable since the assessment order was passed without making due enquiries or verifications which should have been made and the assessment was framed allowing the relief without enquiries into the claim. The Ld. AO allowed claim of deduction u/s 37(1) without conducting mandatory legal enquiry into capital or revenue character of the write-off. Reference was made to the decision of Hon’ble Supreme Court in the case of Malabar Industrial Co. Ltd. vs. CIT (243 TR 83) and various other decisions to support the revision of the assessment order. The Hon’ble Delhi High Court in the case of Gee Vee Enterprises v Addl. CIT (99 ITR 375 (Delhi) held that the commissioner could regard the order as erroneous since Ld. AO should have made further enquiries. Finally, the assessment order was held to be erroneous and prejudicial to the interests of revenue. The Ld. AO was directed to conduct proper enquiry / verification on flagged issue and pass fresh order after affording opportunity of hearing to the assessee. Aggrieved as aforesaid, the assessee is in further appeal before us.
Our findings and Adjudication
5. From the enumerated facts, it emerges that the case of the assessee was subjected to complete scrutiny wherein various issues were identified by Ld. AO for verification / examination. For this purpose, notices were issued by Ld. AO on 17.08.2023 & 21.02.2024 calling for various details from the assessee. The assessee furnished computation of income, audited financial statements, bank statements along with explanations as called for by Ld. AO. The fact that insurance receivable was reduced to ‘nil’ by way of debit to Profit & Loss Account was duly been reflected and disclosed at appropriate places in the audited financial statements. In notice dated 21.02.2024, a specific query was raised by Ld. AO on the issue of insurance claims not receivable since no such expenses was claimed in the preceding year. The Ld. AO called for documentary evidences as to why this expense was not to be disallowed and added to the income of the assessee. The assessee, vide its reply dated 04.03.2024, furnished the explanation along with required documents in support of its claim. The ledger extracts of insurance claims receivable on Building and Plant & Machinery for the period 01.04.2011 to 30.03.2022 were duly furnished along with audited financial statements for the year ending 31.03.2011. The assessee duly explained the circumstances which ultimately resulted into rejection of this claim and the same was accordingly, debited to the Profit & Loss Account. Apparently, Ld. AO was satisfied with the aforesaid explanation of the assessee and chose to accept the claim of the assessee. In fact, the returned income was accepted on all the issues without drawing any adverse inference. Under these circumstances, it could be well said that the issues as identified during complete scrutiny including assessee’s claim of insurance receivable were duly being enquired / verified by Ld. AO after due examination of complete records including audited financial statements of the assessee and after having been satisfied with assessee’s detailed replies, the claim of the assessee stood accepted by Ld. AO. On the basis of these facts, it could be concluded that Ld. AO had taken one of the possible views in the matter which could not have been revisited by Ld. Pr. CIT u/s 263.
6. The matter could be viewed from another angle also. Undisputedly, the loss was incurred by the assessee during FY 2010-11 when the assessee suffered loss and lodged claim with the insurance company. In that year, the loss on account of Building and Plant & Machinery would be reduced from these assets in the Schedule of Fixed Assets and such reduction would be transferred to insurance claim receivable account which is reflected under current assets. Since their was corresponding reduction in the schedule of fixed assets under the head Building and Plant & Machinery during FY 2010-11, the assessee would have claimed less depreciation to the extent of reduction in the value of these fixed assets. The written down value of this year would be carried forward to succeeding years. In other words, the assessee has claimed lesser depreciation to the extent of reduction in value of fixed assets since FY 2010-11 onwards till date. In this year, the claim is ultimately rejected and the same has become irrecoverable forever. Therefore, the aforesaid loss of depreciation since FY 2010-11 is to be compensated by allowing the claim of insurance receivable at one go in this year when the loss has ultimately been crystallized. Viewed from this angle, there would ultimately be no loss of revenue by allowing the present claim. In such a scenario, the assessment order could not be held to be prejudicial to the interest of the revenue. This being so, the twin condition of Sec.263 viz. order being erroneous as well as prejudicial to the interest of the revenue remain un-fulfilled on the facts of the present case before us. Therefore, impugned revision could not be held to be justified from this angle also.
7. Another reason which supports the case of the assessee is that the sole issue of insurance receivable has apparently been flagged by Ld. Pr. CIT on the basis of audit objection dated 07.02.2025, a copy of which has been placed on record. The audit party has held that the said expenditure would be capital in nature which would require disallowance u/s 37(1). The write-off of insurance claim recoverable against capital asset would not qualify as admissible revenue expenditure. This audit objection has been communicated by Ld. DCIT, Circle, Patiala to Ld. Pr. CIT vide communication dated 23.12.2025 proposing remedial action u/s 263. Thus, the revisionary proceeding stems from audit objections which is apparent from these communications. No doubt, revision could be triggered even at the behest of audit objection, however, the requirement is that there should be an independent opinion of revisionary authority that non-consideration of the issue makes the assessment order erroneous and prejudicial to the interest of the revenue. In the present case, in our considered opinion, Ld. Pr. CIT has merely gone by the verdict of audit party without considering the fact that a possible view was already been taken by Ld. AO during the course of regular assessment proceedings. On perusal of the assessment records as well as the impugned order, we find substantial force in the contention of the assessee that the issue under consideration had already travelled through the regular assessment proceedings. The relevant details were available before Ld. AO. The assessee had specifically explained the nature and background of the insurance receivable, the circumstances in which the claim arose, the ultimate rejection thereof and the reason for debiting the amount to the Profit & Loss Account in the year under consideration. The Ld. AO, after calling for the relevant details and documentary evidences, accepted assessee’s explanation. It is true that mere initiation of proceedings u/s 263 on the basis of an audit objection cannot, by itself, render the proceedings invalid. An audit objection may constitute information and may trigger examination by the revisionary authority. However, the statutory satisfaction as contemplated u/s 263 has to be that of the Ld. Pr. CIT himself. The revisionary authority is required to independently examine the assessment record and arrive at a considered satisfaction that the assessment order is erroneous insofar as it is prejudicial to the interests of the Revenue. In the present case, the chronology of events assumes considerable significance. The issue forming the sole basis of revision was specifically examined during the assessment proceedings itself. The assessee had furnished the explanation and supporting documents. The assessment records, therefore, contained the very material which subsequently became the subject matter of the audit objection. The fact that the audit party subsequently expressed a different view regarding the allowability of the claim cannot, by itself, establish that the earlier view taken by the Ld. AO was erroneous one. The jurisdiction u/s 263 cannot be exercised merely because, subsequent to the culmination of assessment, another authority forms a different opinion on an issue which had already been examined by Ld. AO.
8. At this juncture, it would be useful to refer decision of Hon’ble Punjab & Haryana High Court in the case of CIT vs. Sohana Woollen Mills (296 ITR 238) wherein it has been held that mere audit objection and because a different view could be taken in the matter, is not sufficient enough to say that the order of the Assessing Officer was erroneous or prejudicial to the interests of the Revenue. The jurisdiction could be exercised if the Commissioner of Income-tax was satisfied that the basis for exercise of jurisdiction existed. No rigid rule could be laid down about the situation when the jurisdiction can be exercised. Whether satisfaction of the Commissioner of Income-tax for exercising jurisdiction was called for or not, has to be decided having regard to a given fact situation. This decision has been followed by co-ordinate bench of Chandigarh Tribunal in the case of Sh. Surinder Pal Singh (94 ITR (Trib.) 0458) wherein the bench held that revisionary authority was not justified in exercising his power to invoke the provisions of Sec.263 on the basis of audit objection by the audit wing. Similar view has been expressed in various other decisions of Tribunal as placed on record. The ratio of all these decisions is that although an audit objection may bring an issue to the notice of the revisionary authority, the Commissioner must independently examine the assessment record and cannot merely sustain the audit objection without demonstrating such independent application of mind. In the present case, we find that such independent application of mind do not exist.
9. Proceeding further, we are unable to accept the conclusion of the Ld. Pr. CIT that the assessment order was passed without making enquiries or verifications which ought to have been made. The distinction between “lack of enquiry” and “inadequate enquiry” is well settled. Where the AO has failed to make any enquiry on an issue which required examination, the Commissioner may, subject to satisfaction of the statutory conditions, exercise jurisdiction u/s 263. However, where the AO has made enquiry, called for relevant information and thereafter taken a view on the basis of the material available on record, the mere fact that the Commissioner considers the enquiry insufficient or reaches a different conclusion does not automatically render the assessment order erroneous. In the present case, the record demonstrates that Ld. AO had raised a specific query regarding the insurance claims receivable and the corresponding debit to the Profit & Loss Account. The assessee furnished its explanation along with ledger extracts and other supporting material. The assessee also explained the origin of the insurance claim, the damage caused to its assets, the litigation surrounding the claim and its ultimate rejection. Thus, this is not a case where the Ld. AO mechanically accepted a claim without any enquiry whatsoever. The relevant issue was before the AO, the assessee was required to substantiate the claim, the assessee furnished the requisite explanation and supporting documents and upon due consideration thereof, Ld. AO accepted the claim. The assessment order may not contain an elaborate discussion on every document furnished by the assessee. However, absence of an elaborate discussion in the assessment order cannot, in the facts of the present case, be equated with absence of enquiry when the assessment record demonstrates that the issue was specifically examined.
10. The fundamental requirement for invocation of Sec. 263 is that the assessment order must be both erroneous and prejudicial to the interests of the Revenue. These two conditions are conjunctive. The Hon’ble Supreme Court in Malabar Industrial Co. Ltd. v. CIT [2000] 243 ITR 83 (SC) has laid down the governing principle that where the AO has adopted one of the permissible views, the order cannot be treated as erroneous merely because the Commissioner prefers another view. The same principle has been reiterated in subsequent decisions. We find that the present case falls within the category where enquiry was made and a view was taken, rather than a case of total absence of enquiry. The assessee’s case was that the insurance receivable was a business receivable which ceased to be recoverable upon final rejection of the insurance claim and that the loss was accordingly crystallized in the year under consideration. The assessee supported this position by placing the relevant accounting records and the history of the insurance claim before Ld. AO. The same stood accepted by Ld. AO. The Ld. Pr. CIT has taken the view that since the original insurance claim related to damage to building and Plant & Machinery, the resultant loss necessarily retained the character of a capital loss. Whether that proposition is ultimately correct on the merits is not the decisive question for the present proceedings. The question before us is whether, in the facts and circumstances of the case, the view accepted by the AO was so unsustainable in law that the assessment order could validly be revised u/s 263. On the facts available on record, we are of the considered opinion that the answer is in the negative. The AO had before him the relevant facts and material and accepted the assessee’s explanation. At the very least, the assessment record demonstrates a plausible view having been taken after enquiry. The provisions of Sec.263 does not confer appellate jurisdiction upon the Commissioner to substitute his own view for a view already taken by the AO merely because he considers the latter view to be less appropriate. Further, at preceding para-6, we have already arrived at a conclusion that the order could not be branded as prejudicial to the interest of the revenue. This being so, impugned revision of the order could not be sustained on the facts of present case before us.
11. So far as the decision in CIT v. Paville Projects Pvt. Ltd. reported in [2023] 293 Taxman 38 (SC) (as referred to by Ld. CIT-DR) is concerned, their could be no dispute with the proposition laid down by the Hon’ble Supreme Court that where the assessment order is erroneous in law and such error is prejudicial to the interests of the Revenue, the jurisdiction u/s 263 could validly be exercised. The Hon’ble Supreme Court, while applying the principles laid down in Malabar Industrial Co. Ltd. (supra), held that where the view adopted by the AO was not legally sustainable and had resulted in loss of lawful revenue, the exercise of revisional jurisdiction was justified. However, the ratio of the said decision has to be applied to the facts of each case. This case law cannot be read as laying down a proposition that every assessment order which results in loss of revenue is automatically amenable to revision u/s 263. In the present case, unlike a situation where the AO has accepted a claim without examination, the assessment record establishes that the precise issue was raised by the AO, examined by him and explained by the assessee with supporting documents. The controversy here essentially concerns the legal characterization of the loss arising upon rejection of the insurance claim. The subsequent opinion of the Ld. Pr. CIT that the loss should be treated as capital in nature, cannot, in the circumstances before us, by itself establish that the assessment order was erroneous within the meaning of Sec. 263. On the facts of the present case, we have also concluded that ultimately there would be no loss of revenue. Accordingly, the reliance placed upon this decision do not advance the case of the Revenue.
12. The last argument of Ld. AR is that Explanation-2 to Sec.263 has not been invoked by Ld. Pr. CIT in the show-cause notice. This is an undisputed fact. In our considered opinion, Explanation-2 could not be invoked in isolation from the factual record. The deeming provision is attracted where the circumstances specified therein are established. In the present case, the assessment record itself demonstrates that Ld. AO had called for information relating to the insurance claim and the assessee had furnished the explanation and supporting documents. Therefore, the foundational fact necessary for invoking Explanation 2(a), namely that the order was passed without making enquiries or verification which should have been made, is absent. At best, the grievance of the Ld. Pr. CIT is that the enquiry conducted by the AO ought to have been more elaborate or that the AO ought to have reached a different conclusion. Such a grievance, in the facts of the present case, cannot be converted into a finding of complete absence of enquiry. The jurisdiction u/s 263 could not be exercised for conducting a fishing or roving enquiry into an issue which had already been examined during the assessment proceedings.
13. Having regard to the totality of facts and circumstances, we would hold that the assessment proceedings were conducted pursuant to complete scrutiny; Ld. AO specifically called for information concerning the insurance claim write-off; the assessee furnished the requisite explanation and documentary evidences; Ld. AO, after considering the material available on record, accepted the claim. The present case is, therefore, one of enquiry followed by acceptance of a claim and not one of complete lack of enquiry. The Ld. Pr. CIT has essentially substituted his own view for the view taken by the Ld. AO. Further, the material on record indicates that the impugned revisionary proceedings were triggered by an audit objection and the Ld. Pr. CIT has not demonstrated, with reference to the assessment record, any independent error in the assessment order which satisfies the twin conditions of Sec. 263. We have also found that ultimately there is no loss to the revenue. We accordingly hold that the jurisdiction assumed by the Ld. Pr. CIT u/s 263 of the Act is not sustainable. Consequently, the impugned order passed u/s 263 is hereby quashed and the original assessment order passed by the Ld. AO is restored.
14. The appeal stand allowed.
Order pronounced on 01st October, 2026
