Sec. 263 Revision Quashed – AO’s Detailed Enquiry on Model House & Business Expenses; Change of Opinion Invalid: ITAT Bangalore

Suvilas Properties Pvt. Ltd. Vs PCIT (ITAT Bangalore)

Sec.263 Revision Quashed – AO Had Conducted Detailed Enquiry on Model House & Business Expenses – Mere Change of Opinion Not Permissible – ITAT Bangalore

In ITA No.1140/Bang/2025, AY 2021-22, the assessee challenged revision proceedings initiated by PCIT u/s 263 alleging lack of enquiry on “Model House” expenditure and other business expenses. The AO had originally completed assessment u/s 143(3) after issuing multiple notices u/s 142(1) and verifying bills, vouchers, ledger accounts, vendor details and TDS compliance relating to business expenses aggregating to over ₹9.68 crore and other expenses of ₹6.02 crore.

The Tribunal observed that the assessment order itself recorded detailed verification by the AO (as reflected in para 3.4 and expense tables on pages 7-8), where expenses were examined and accepted as incurred wholly & exclusively for business purposes. Since the AO had conducted enquiries and taken a plausible view, the PCIT could not invoke revision merely because a different opinion was possible. ITAT reiterated that Sec.263 jurisdiction requires both conditions – order must be erroneous and prejudicial to revenue, which were absent here.

ITAT also noted that PCIT expanded directions beyond the specific issue raised (Model House expenses), which amounted to a fishing and roving enquiry. Accordingly, the revisional order dated 20-03-2025 was set aside and the original assessment order restored, allowing the assessee’s appeal.

FULL TEXT OF THE ORDER OF ITAT BANGALORE

This is an appeal filed by the assessee challenging the revisional order passed u/s. 263 of the Act by the Ld.PCIT, Bengaluru – 1 dated 20/03/2025 in respect of the A.Y. 2021-22 and raised the following grounds:

“1. The impugned order dated 20.03.2025 passed by the Principal Commissioner of Income-tax (PCIT) under section 263 of the Income-tax Act, 1961 (“the Act”) is grossly opposed to law and facts and liable to be quashed.

2. The assumption of jurisdiction under section 263 was vitiated for violation of the principles of natural justice inasmuch as the PCIT disposed of the proceedings hastily without granting the effective opportunity sought by the appellant vide letter dated 13.03.2025.

3. The PCIT erred in invoking the revisional jurisdiction without satisfying the twin jurisdictional conditions that the assessment order dated 28.12.2022 passed under section 143(3) read with section 144B was (i) erroneous and (ii) prejudicial to the interests of the Revenue.

4. The PCIT erred in proceeding to cancel the assessment and direct a fresh inquiry without recording any finding on the merits, contrary to the binding precedent of the Hon’ble Apex Court which holds that a mere difference of opinion does not confer jurisdiction under section 263 where the Assessing Officer has made due inquiry.

5. The PCIT failed to appreciate that the Assessing Officer had, during the course of assessment proceedings, issued multiple notices under sections 142(1) and 144, and after examining the voluminous details, categorically recorded a finding at pages 8-9 of the assessment order that the expenditure of Rs. 4,25,68,924/-towards ‘Model House’ and the balance business and other expenses were duly supported by bills, vouchers and ledgers and hence required no disallowance.

6. The PCIT erred in treating the assessment order as one ‘passed without making inquiries’ merely because a different view was possible; a mere difference of opinion cannot confer jurisdiction under section 263.

7. The PCIT ignored the detailed written submissions dated 15.12.2022, 26.12.2022 and 27.12.2022, wherein the appellant furnished a party-wise break-up, mode of payment, TDS details and supporting bills for the impugned Model House expenditure and other expenses, thereby demonstrating that requisite inquiries had been fully complied with.

8. Without prejudice, the PCIT ought to have appreciated that the Model House expenditure was incurred wholly and exclusively for the business purpose of marketing the SRG project, that the amount stood written off in accordance with Accounting Standards, and that corresponding TDS, GST and vendor confirmations were on record; consequently, the assessment order could not be regarded as prejudicial to the Revenue.

9. On the facts and in the circumstances of the case, the PCIT acted in excess of jurisdiction in directing a de-novo assessment, effectively subjecting the appellant to a fishing and roving enquiry which section 263 does not permit.

10. The appellant craves leave to add, amend, alter, delete or modify any of the aforesaid grounds of appeal at the time of hearing, if need be.”

2. The brief facts of the case are that the assessee is a private limited company and filed their return of income on 23/12/2021 declaring a loss of Rs. 18,59,81,322/-. The case was selected for complete scrutiny under CASS to examine the issue of business expenses. The AO had alleged that the assessee has shown a very low PBDIT ratio in specific business code and turnover range where deficiency is reported in the audit report. Notice u/s. 142(1) was issued and the assessee had not filed their reply and therefore penalty notice u/s. 272A(1)(d) of the Act was issued on 21/11/2022. Thereafter a show cause notice u/s. 144 was issued. The assessee filed their reply and sought for an adjournment. Another notice u/s. 142(1) was issued for which the assessee had furnished their submissions along with the ledger account of business expenses, rent payment ledger account and copy of agreement of sale of different units. The AO again issued a notice u/s. 142(1) and requested to furnish the bills / vouchers in respect of the said expenses. The assessee had not responded to the said notice. Thereafter a show cause notice was issued on 23/12/2022. The assessee furnished their reply on 26/12/2022 and 27/12/2022 explained the facts insofar as the disallowance of business expenses are concerned. In the said reply, the assessee had also furnished the copies of the bills and other information sought for by the AO. The assessee also explained that the expenses were incurred wholly and exclusively in connection with the business and are permissible deductions under the provisions of the Act. The assessee also submitted that their accounts were subjected to audit and in the audit report, no adverse remarks were given against the said expenses. Similarly, in respect of the disallowance of business expenses of Rs. 96,81,974/-, the assessee also submitted the bills and other information and also explained how the disallowance is not in order.

3. The AO had also proposed to treat the payment of rent to Shri Hunasagatta Mallikarjunappa Basavaraja as unexplained expenditure u/s. 69C of the Act. The assessee in their reply explained that the rent paid during the year was only Rs. 36,31,728/- on which the TDS was also deducted and also produced the ledger account showing the outstanding liability of rent. The AO considered the objections filed by the assessee along with the documents such as bills / vouchers and other relevant documents and accepted that the claim made by the assessee is in order and the said expenses are eligible for deduction under the provisions of the Income Tax Act. Insofar as the business expenses of Rs. 6,02,89,064/-, the AO accepted the explanation of the assessee that the said expenses are incurred wholly and exclusively in connection with the business and are permissible deductions under the provisions of the Act. The AO had also verified the supporting documents filed by the assessee like the details of the vendors, copies of bills / invoice along with ledger accounts and other relevant documentary evidences and thereafter accepted that the claim made by the assessee is in order and allowed the said business expenses of Rs. 6,02,89,064/- as eligible for deduction. The AO had also accepted the rent paid to the said Shri Hunasagatta Mallikarjunappa Basavaraja and the corresponding entries in the ledger account and found that the same are in order. Finally, the AO accepted the return of income filed by the assessee and to that effect, an order u/s. 143(3) was made on 28/12/2022.

4. The Ld.PCIT under the powers vested with him u/s. 263 of the Act, had alleged that the AO had not made any enquiry about the Model House expenditure and the assessee had not furnished the details of TDS and mode of payment not explained. It was further alleged that the ledger account reference not filed alongwith the submissions made on 26/12/2022 and 27/12/2022 and therefore alleged the order of the AO is an erroneous one and prejudicial to the interests of revenue and notice has been issued. The assessee sought for time but the Ld PCIT on the ground that the assessment is time barring decided the issue based on the materials available. The Ld PCIT concluded that the AO had not verified the exact nature and genuineness of the Model House expenditure and therefore the order of the AO is an erroneous one. The ld PCIT, therefore, set aside the Assessment order dated 28/12/2022 and directed the AO to carry out the necessary verification and examination of the other claim of expenses of Rs 6,02,89,062/- and business expenses of Rs 9,68,19,736/- and verify the allowability of the Model House expenditure afresh.

5. As against the said order of the Ld.PCIT, the assessee is in appeal before this Tribunal.

6. At the time of hearing, the Ld.AR submitted a paper book enclosing the submissions as well as the other documents furnished before the AO to show that the AO had called for the details about the various expenses and after going through the said replies and the documents, the AO had satisfied himself that the expenses are genuine and the said expenses are incurred wholly and exclusively in connection with the business and therefore arrived a conclusion that the expense are permissible deductions under the provisions of the Act. The Ld.AR also draw our attention to the assessment order and the copies of the notice given by the AO and the replies filed by the assessee and submitted that the AO had properly verified the documents and thereafter granted the deduction as eligible for deduction. The Ld.AR further submitted that the Ld.PCIT had failed to explain how the expenses allowed are not in accordance with the provisions of the Act and submitted that, therefore the assessment order is not an erroneous one and therefore not prejudicial to the interest of the revenue. The Ld.AR also relied on the judgments of the Hon’ble Supreme Court, Hon’ble Bombay High Court, Hon’ble Karnataka High Court and Hon’ble Madras High Court and submitted that the invoking of the powers by the Ld.PCIT under 263 of the Act is bad in law and requires to be set aside.

7. The Ld.DR submitted that the assessee had not enclosed the ledger account reference for verification and therefore the AO could not have an opportunity to verify the true nature of the model house expenditure, mode of payments, TDS compliance and therefore the order of the AO is erroneous and it is prejudicial to the interest of the revenue and prayed to dismiss the appeal. The Ld.DR also filed the written submissions dated 07/01/2025 in which the date of issue of various notices were mentioned and also relied on the judgments of the Hon’ble Supreme Court as well as the other Hon’ble High Courts and prayed to dismiss the appeal.

8. We have heard the arguments of both sides and perused the materials available on record.

9. We have perused the assessment order dated 28/12/2022 in which the AO had issued various notices and sought for the details for the expenses claimed by them. The assessee had also submitted their response on 16/12/2022, 26/12/2022 and 27/12/2022 and also furnished the documents sought for by the AO and the AO after going through the said replies and the documents, had accepted the expenses as related to the business and therefore they are eligible for deductions under the provisions of the Act. In paragraph 3.4 of the assessment order, the AO had observed as follows:

“3.4 Reasons for inference drawn that no variation is required on this issue :– On going through the above submissions furnished by the assessee i.e. financial statements details, ledger accounts, Sample bills/vouchers of business expenses along with other relevant supporting documentary evidences. The same are verified and found in order. Therefore, no adverse inference could be drawn on the issue for which the case was selected for scrutiny as under:-

In respect of business expenses:- During the year the assessee has made substantial business expenses as under:-

Other Expenses:-

In respect of this, the assessee company explained that the said expenses are incurred wholly and exclusively in connection with the business and are permissible deductions under applicable provisions of the Act. In support, the assessee company has furnished details of vendors, copies of bills/invoice alongwith ledger accounts and other relevant documentary evidences. The same are verified and found in order. Therefore, no adverse inference could be drawn on the issue.

Payment of Rent:- During the year under consideration, the assessee has made payment at Rs. 1,12,05,896/- to HUNASAGATTA MALLIKARJUNAPPA BASAVARAJA. In this regard, the assessee has furnished its compliance and explained that a litigation process is ongoing with the HUNASAGATTA MALLIKARJUNAPPA BASAVARAJA and only amount at Rs. 36,31,728/- was paid on account to rent expenditure and TDS also deducted thereon. In support assessee has furnished ledger account of rent payment and also details of TDS deducted thereon. The same are verified and found in order. Therefore, no adverse inference could be drawn on the issue.”

10. From the said finding given by the AO, it is evident that the AO had conducted enquiry and verified the details and thereafter accepted the expenses as related to the business including the model house expenditure incurred. The AO had also verified the financial statement details, ledger accounts, sample bills / vouchers of business expenses along with other relevant supporting documentary evidences and thereafter arrived a conclusion that the same are found in order. Insofar as the expenses incurred towards the model house is concerned, in the very same paragraph, the AO had observed that the details such as the vendors list, copies of bills / invoice along with ledger accounts and other relevant documentary evidences were verified and found in order. The AO being a quasi judicial authority, had made the assessment after following the proceedures and also after verifying the various details furnished by the assessee which was also evidenced in the assessment order and therefore the order of the AO could not be termed as erroneous and therefore it is prejudicial to the interest of the revenue. The Ld.PCIT being a revisional authority ought to have invoked the powers vested with him u/s. 263 of the Act when there is a blatant error or violation committed by the AO while passing the assessment order, otherwise the invoking of the said power is not correct. In the present case, the AO had correctly considered the submissions as well as the various details furnished by the assessee and thereafter accepted the claim made by the assessee. In such circumstances, the Ld.PCIT could not have invoked his powers u/s. 263 of the Act without any specific finding how the order of the AO is an erroneous one. The Ld.PCIT could have pointed out the mistake in order to invoke the provision 263 of the Act. But, on the facts of the present case, we found that the AO had not committed any error in the assessment order since the AO had properly considered the submissions as well as the details furnished by the assessee and thereafter arrived a conclusion that the expenses are incurred wholly for the purpose of business and therefore they are eligible for deduction under the provisions of the Act. The Ld.PCIT had stated that the AO had hurriedly made the assessment on 28/12/2022 and therefore he was under the presumption that the AO could not have verified the details submitted by the assessee. We do not accept the proposition since it is not the first time the assessee had submitted their reply and the details but before the last date also, the assessee submitted their partial response and finally submitted the balance details also before the AO and therefore the Ld.PCIT could not presume that the AO had hurriedly made the assessment and therefore he could not have made verification and enquiry.

11. Further, we have perused the revisional order of the Ld.PCIT in which in paragraph number 9, the Ld.PCIT had found fault with the expenses incurred towards the model house constructed for SRG Project whereas in the concluding paragraphs, he had directed the AO to verify the other expenses also. We do not think that the direction given by the Ld.PCIT is correct since he had issued notice for examining the expenditure of model house and therefore the direction given to examine the other expenses in the concluding paragraph is not in order.

12. We have also perused the judgements relied on by the assessee and the same are supporting the view taken by us. We have also perused the judgements relied on by the Ld DR which can not be equated to the facts of the present case on hand. In the present case the AO had completely verified the entire issue and thereafter accepted the return of income and therefore the revision order u/s 263 is not required.

13. In view of the above discussion we are allowing the appeal filed by the assessee by setting aside the order of the Ld.PCIT dated 20/03/2025 and restore the order of the AO dated 28/12/2022.

In the result, the appeal filed by the assessee is allowed.

Order pronounced in the open court on 16th February, 2026.