Deepa Agarwal Vs Central Circle-2 (ITAT Lucknow)
Section 263 Hearing Cannot Be a Mere Formality: ITAT Sets Aside Revision Order
Summary: The Income Tax Appellate Tribunal, Lucknow Bench, has set aside a revision order passed under Section 263 of the Income Tax Act, 1961, emphasising that the opportunity of being heard cannot be treated as a mere formality. The Tribunal observed that an assessee must receive sufficient time to explain the case and submit relevant facts and supporting material.
The Bench comprising Vice President Kul Bharat and Accountant Member Nikhil Choudhary restored the matter to the Principal Commissioner of Income Tax (Central), Kanpur, for fresh consideration after providing an adequate hearing. Both parties agreed during the hearing that the matter could be remanded.
Background of the case
The assessee filed the original return of income on 8 November 2019, declaring total income of ₹1,19,60,250 for assessment year 2019-20.
A search and seizure operation was subsequently conducted in the case of M/s. Sona Chandi Group on 6 February 2022, following which the cases were centralised. The assessee’s assessment was reopened, and a notice under Section 148 was issued on 27 March 2023.
In response, the assessee filed a return on 26 April 2023, declaring the same income as originally returned. The assessment records noted that the assessee carried on business through a proprietorship concern named M/s. Sona Chandis at Birhana Road, Kanpur.
After considering the submissions, the Assessing Officer accepted the returned income and completed the reassessment. The assessment order sought to be revised was dated 6 January 2024.
The PCIT subsequently initiated proceedings under Section 263 and issued a show-cause notice on 19 March 2026. The assessee sought a short adjournment on 24 March 2026 and submitted a reply on 27 March 2026. The PCIT passed the revision order on 30 March 2026, setting aside the assessment and directing fresh assessment after proper enquiries.
Reasons for invoking revision
The PCIT considered that the Assessing Officer had failed to conduct necessary enquiries on several issues.
These included the verification of secured and unsecured loans, the creditworthiness of lenders, the genuineness of transactions, and the difference between interest paid on borrowings and interest charged on advances. Questions were also raised regarding investment and advances in an LLP and the possible application of Section 36(1)(iii).
Other concerns related to the annual letting value of property, rental income, property investments, and business transactions with another company.
The revision order also referred to alleged bogus sales involving Shri Hari Om, proprietor of Alaskaa Commodities. The assessee disputed the relevance of those transactions, maintaining that they belonged to a separate group partnership concern, M/s. Sona Chandi, and had nothing to do with the assessee.
These matters formed part of the dispute before the Tribunal; their substantive correctness was not finally adjudicated.
Assessee’s submissions
The assessee argued that the revision order suffered from procedural defects and factual errors. The principal contention was that adequate opportunity had not been provided to explain the relevant facts before the order was passed.
Counsel specifically distinguished the assessee’s proprietorship, M/s. Sona Chandis, from the group concern referred to in the revision proceedings. According to the assessee, an adequate hearing would have enabled clarification of this distinction and other factual matters.
The assessee also contended that relevant details had already been disclosed or explained during assessment proceedings. The Departmental Representative opposed the submissions and supported the PCIT’s order.
Tribunal’s observations
The Tribunal examined Section 263 and noted its express requirement that an assessee be given an opportunity of being heard before a revision order is passed.
The Bench held that this requirement involves a meaningful opportunity to present the case. An assessee should have sufficient time to explain the circumstances and place relevant evidence on record.
The Tribunal recorded the sequence of the notice dated 19 March 2026 and the revision order dated 30 March 2026, along with the assessee’s complaint that adequate opportunity had not been provided. It also noted the contention that the order contained factual errors which could have been addressed through a reasonable hearing.
During the Tribunal proceedings, both parties agreed that the matter could be restored to the PCIT for a fresh order in accordance with law.
Decision and significance
The Tribunal set aside the revision order and remanded the matter to the PCIT. It directed that the issues be decided afresh after providing an adequate opportunity of hearing and considering the assessee’s explanation and supporting material.
Specific consideration was directed towards the contention that M/s. Sona Chandis was the assessee’s proprietorship concern.
The appeal was allowed for statistical purposes. The ruling reinforces the requirement of a meaningful hearing in revision proceedings. It leaves the substantive issues open for fresh examination by the PCIT and does not finally invalidate the proposed revision on merits.
FULL TEXT OF THE ORDER OF ITAT LUCKNOW
This appeal, by the assessee, is directed against the order of the learned Principal Commissioner of Income-tax (Central) [PCIT(Central)]-Kanpur, dated 30.03.2026, passed u/s 263 of the Income-tax Act, 1961 (hereinafter referred to as the “Act”), pertaining to the assessment year 2019-20. The assessee has raised the following grounds of appeal: –
“1. Because the PCIT(C) has erred in law and on facts in stating in Para 3 as. During the course of examination of assessment records’ in the Show Cause Notice issued u/s 263 (1) of the Act while stating in Para 2. of the impugned Order as “It has been brought to the notice of the undersigned by the Assessing Officer, such contradictory observation goes to the root of matter (being different/misguiding communication to the assessee) which is sufficient reason to quash the Order dated 30.03.2026
2. Because PCIT(C) has observed in para 9.10 of the impugned order as under:
“The failure of the Assessing Officer to consider material on record, including report from Investigation Wing xxx.”
while report from Investigation Wing has not been made available to the appellant hence may kindly be made available for defence and to meet the ends of natural Justice.
3.1 Because the PCIT(C) h as erred in law and on facts in founding basis to pass the impugned Order after relying upon the proposal of the Assessing Officer to initiate the proceedings under Section 263 of the Act on the transactions with Alaskaa as under
2 It has been brought to the notice of the undersigned by the Assessing Officer that the order passed u/s 147/143(3) of the Income Tax Act, 1961 on 06.01.2024 was erroneous in so far as it is prejudicial to the interests of the revenue in as much as the assessee had booked sales in the name of one Shri Hari Om, Prop. Alaskas Commodities, which was found to be bogus by the Investigation Wing, but the same was neither confronted by the Assessing Officer to the assessee nor any third-party verification, which was required to be done, was carried on by him during the course of re-assessment proceedings, xxx”
3.2 Because in view of the facts and circumstances of the case PCIT(C) has erred in law and on facts in observing, regarding transactions with Alaska Commodities, in Para 8.6. as under:
“Records examined by the undersigned clearly show that the Assessing Officer had with him information about booking of bogus sales by the assessee in the name of One Shri Hari Om, Prop. Alaskaa Commodities. In spite of the same, he did not confront the assessee to establish the Bonafide of the person who ostensibly had made a single purchase of Rs.50,57,000/- from her. Not only this, the Assessing Officer, himself, too. did not carry out any third- party verification with GST authorities or make independ ent enquiries, which he was required to do. Instead, sales to the person were accepted without making the necessary enquiries resulting in an assessment order which is erroneous in so far as it is prejudicial to the interest of the revenue”
while these transactions relate to group partnership concern, named, M/s. Sona Chandi having PAN: AAPFS1886F and appellant has nothing to do with this.
4.1 Because PCIT(C) has erred in law and on facts in observing on Unsecured Loans and interest paid thereon in Para 2 o f the impugned Order as under:
“Examination of assessment records further showed that the assessee had shown interest bearing secured and unsecured loans from various persons/entities and had also advanced monies to different persons and claimed interest expenses and income on the same respectively. The Assessing Officer accepted the claim of the assessee while completing assessment without seeking justification of rate of interest charged on loans advanced vis-à-vis interest paid on unsecured loans in the light of the provisions of Section 36 [1] [iii] of the Income Tax Act, 1961. No third – party verification about the creditworthiness of the lenders and genuineness of transactions was undertaken by the Assessing Officer, which he was required to do, while completing the assessment for the year under consideration.”
and directing for conducting enquiries which are uncalled for in view of facts and circumstances of the case and to pass a fresh order 4.2 Because, in view of the facts and circumstances of the c ase, PCIT(C) has erred in law and on facts in observing in Para 8.1. as under:
“A plain reading of the reply makes it very clear that the assessee has no justification for the rate of interest paid by her on loans taken vis-à- vis interest charged on loans advanced by her.”
while all transactions have been made like earlier years hence there was nothing to be examined afresh, hence fresh assessment is not called for since it amounts to change of opinion only.”
4.3 Because, in view of the facts and circumstan ces of the case PCIT(C) has erred in law and on facts in observing in Para 8.1. as under: “This, and the absence of any kind of enquiries and third- party verification on the part of the Assessing Officer, which he was required to do, to verify the claim of the assessee, has rendered the assessment order passed by him as erroneous and prejudicial to the interest of the revenue.”
while keeping in view the continuation of old loans having disclosures in earlier years for the loan as well as interest thereon, p ractically there was nothing new for enquiries.
5.1 Because PCIT(C) has erred in law and on facts in observing on share of profit from LLP in Para 2 of the impugned Order as under:
5.2 Because in view of the facts and circumstances of the case PCIT(C) has erred in law and on facts in observing in Para 8.2. regarding exempted share of income from LLP as under:
“Neither the assessee disclosed this fact during the course of assessment proceedings nor the Assessing Officer deemed it fit to enquire into the sour ce of this investment and the business expediency of sums lent to LLP unconnected to the business of the assessee.”
while everything in the matter was not only duly disclosed but also explained by Authorized Representative.
5.3 Because in view of the facts and circumstances of the case PCIT(C) has erred in law and on facts in observing in Para 8.2. regarding personal transactions as were duly shown in ITR as under:
“It is a fact on record that the Assessing Officer has abjectly failed to raise any query on the investment made by the assessee in the LLP or monies lent to it from the assessee. He has also squarely failed to undertake any kind of enquiries of his own or third- party verification, which he was required to do, in respect of investment made. Loans advanced, interest received, if any, and if no interest as received, consider the possibility of disallowance u/s 36 (1) (iii) of the Income Tax Act, 1961. Failure to do so has resulted in the passage of the assessment order which is erroneous in so far as it is prejudicial to the interest of the revenue.”
while whole matter was not only duly disclosed but also explained by Authorized Representative.
6.1 Because PCIT(C) has erred in law and on facts in observing on Income from House Property in Para 2 of the impugned Order as under:
“No enquiries, whatsoever, were made by the Assessing Officer into the working of ALV of the property from which only a small rent have been shown as against a huge outstanding housing loan.” and directing for conducting proper e nquiries and to pass a fresh order which is uncalled for while complete details were examined w.r.t . Balance Sheet/Books of accounts as well as presence of by A.R. before A.0. 6.2 Because in view of the facts and circumstances of the case PCITIC) has erred in law and on facts in observing regarding Income from House Property in Para 85. as under:
“All these details begets queries and enquiries by the Assessing Officer, which unfortunately have not been undertaken. The absence of enquiries and third party v erification, which were required to be done, hove lent the assessment order passed by the Assessing Officer as erroneous in so far as it is prejudicial to the interest of the revenue.”
while matter stands duly explained by AR based on books and Computation of Income
7. Because in view of the facts and circumstances of the case, PCIT(C) has erred in law and on facts in observing, regarding normal business transactions with M/s Radha Mohan Purushottam Das Jewels Pvt. Ltd., in Para 8.3 as under:
“The Assessin g Officer was required to query the assessee on the same and make enquiries of his own or undertake third- party verification, but he, too, has failed in this endeavour. The failure of the Assessing Officer to do so, which he was legally required to do, before passing the assessment order has resulted in a assessment order which is erroneous in so far as it is prejudicial to the interests of the revenue.”
which stands duly examined and clarified by Authorized Representative w.r.t. Books of accounts.
8. Becau se in view of the facts and circumstances of the case PCIT(C) has erred in law and on facts in observing regarding investment in MGILA/c emerald in Para 8.4. as under:
“The Assessing Officer was required, as per law, to undertake enquiries of his own, even the assessee had not submitted details suo motu or to undertake third- party verification from outside as regards the investment in property, its source and income arising out of the same based on ALV. None of this has been done thereby rendering the asses sment order passed by him as erroneous in so far as it is prejudicial to the interest of the revenue.”
while complete details were examined w.r.1. Balance Sheet/Books of accounts as well as presence of by A.R. before A.0.
9. Because in view of the facts and circumstances of the case PCIT(C) has erred on facts in observing about judicial pronouncement cited by the appellant, in Para 9.1. as under
“With due respect to the judicial pronouncements cited, the same are distinguishable not only on facts but on the position of law too. Facts borne out of records clearly show that the Assessing Officer did not make any enquiries or independent verification into the claim made by the assessee even though attendant circumstances and information available to the Assessing Officer warranted as much. The reply and documents filed by the assessee have been simply accepted as such, without enquiries, to reach an Improper satisfaction”
while in the submissions dated 27.03.2026 no judicial pronouncement was cited by the appellant
10. Because in view of the facts and circumstances of the case PCIT(C) has erred in law and on facts in observing on Section 263 Expl.2 (a) of the Act, in Para 9.2. as under “Thus, enquiry which should have been made in the opinion of CIT but not actually made by the AO, would also lead to invoking the provisions of 263. Whether the enquiries, which should have been made, are actually made by AD or not would therefore be primarily a question of facts, more so in view of the amended Explanation-2 to Sect ion 263.”
whereas necessary explanations were given by the AR to the enquiries made by A.O.
11.1 Because the case laws relied upon by the PCIT(C) have no application in the present appeal being distinguishable on facts as documentary evidences have duly been placed/disclosed before him as well, hence impugned order is liable to be quashed 11. 2 Because the case laws relied upon by PCIT(C) are distinguishable on facts which do not justify passing of the impugned Order hence hable to be quashed
12. Because PCI T(C) has erred in law and on facts in observing on jurisdiction of PCIT in Para 12 as under: Finally, the averment of the assessee that PCIT met jurisdiction under Section 263 of the Income Tax Act, 1961 because the Assessing Officer is working under his supervision and control, con only be termed as specious, to say the least The revisionary jurisdiction as laid down in the Statue works on an entirely different plane than the administrative jurisdiction where the undersigned holds forth over administrative and establishment matters over all the colleagues working in his administrative authority as the Head of department. To attribute motive on exercise of lega l jurisdiction on account of administrative over reach is in itself, a prejudiced view which is liable to be dismissed out-of-hand”
13. Because PCIT(C) has erred in law and on facts in observing on non -application of mind of A.O. in Para 13 as under:
“In view of the discussion above, it is clear that there is non- application of mind on the port of the A ssessing Officer in as much as the necessary verification of fa cts/enquiries which should have been made, have not revenue within the meaning of Section 263 read with Clause (a) of Expination-2 there under.”
14. Because the appellant prays to add or alter the grounds of appeal at the time of hearing of appeal if so warranted.
15. Because the Order appealed against is contrary to law, facts and principles of natural justice.”
2. Briefly, stated the facts are that in this case, the original return was filed on 08.11.2019, declaring total income at Rs.1,19,60,250/-. Subsequently, a search and seizure operation was conducted in the case of M/s. Sona Chandi Group on 06.02.2022, pursuant to which the cases were centralized. The case of the assessee was also reopened, and notice under section 148 of the Income- tax Act, 1961 (“Act”, for short), was issued on 27.03.2023. In response thereto, the assessee filed a return of income on 26.04.2023, declar ing the same total income of Rs.1,19,60,250/-. It is noted by the Assessing Authority that during the year under consideration, the assessee was engaged in the business under the name & style of M/s. Sona Chandis as proprietorship business with registered office at 58/3, Birhana Road, Kanpur. The Assessing Officer (“AO”, for short), after considering the submissions made by the assessee, accepted the return of income so filed and completed the assessment. Thereafter, the Ld. PCIT issued a notice u/s 263 of the Act, calling upon the assessee to show cause as to why the assessment order should not be revised. After considering the reply furnished by the assessee, the Ld. PCIT passed the impugned order, setting aside the assessment order passed by the AO and directing the AO to frame a fresh assessment after conducting proper enquiries. Aggrieved by the aforesaid order passed by the Ld. PCIT under section 263 of the Act, the assessee is in appeal before this Tribunal.
3. The assessee has taken multiple grounds a gainst the order passed u/s 263 of the Act. Apropos to the grounds of appeal, the learned Counsel for the assessee took us through the chronology of events and submitted that the order passed by the Ld. PCIT suffers from serious legal and factual infirmities. He submitted that the show- cause notice under section 263 of the Act was issued on 19.03.2026. On 24.03.2026, the assessee sought a short adjournment and, thereafter, furnished his reply to the show-cause notice on 27.03.2026. He further contended that the impugned order was passed in violation of the principles of natural justice and the statutory mandate under the provisions of section 263 of the Act. He submitted that, apart from the aforesaid procedural infirmities, the impugned order also suffers from factual errors. In this regard, he pointed out that the assessee was the proprietor of M/s. Sona Chandis, whereas the Ld. PCIT proceeded on the assumption that the assessee was merely a part of M/s. Sona Chandi Group. According to the learned Counsel, this reflects an erroneous appreciation of the facts, coupled with the alleged violation of the statutory requirements, renders the impugned order unsustainable in law.
4. On the other hand, the Ld. CIT- DR opposed the submissions a nd supported the impugned order passed by the Ld. PCIT.
5. We have heard the Ld. Representatives of the parties. It is noted that the notice under section 263 of the Act was issued on 19.03.2026 and the order revising the assessment was passed by the Ld. PCIT on 30.03.2026. The c ase of the assessee is that adequate opportunity to explain his case was not provided to factual errors, had the assessee been afforded a reasonable opportunity of being heard in accordance with the provisions of section 263 of the Act, he would have been able to explain the relevant facts and circumstances. For the sake of clarity, the relevant provisions of section 263 of the Act are reproduced as under: –
“Revision of orders prejudicial to revenue.
263. (1) The Principal Commissioner or Commissioner may call for and examine the record of any proceeding under this Act, and if he considers that any order passed therein by the Assessing Officer is erroneous in so far as it is prejudicial to the interests of the revenue, he may, after giving the assessee an opportunity of being heard and after making or causing to be made such inquiry as he deems necessary, pass such order thereon as the circumstances of the case justify, including an order enha ncing or modifying the assessment, or cancelling the assessment and directing a fresh assessment.
Explanation 1.— For the removal of doubts, it is hereby declared that, for the purposes of this sub-section,—
(a) an order passed on or before or after the 1st day of June, 1988 by the Assessing Officer shall include—
(i) an order of assessment made by the Assistant Commissioner or Deputy Commissioner or the Income- tax Officer on the basis of the directions issued by the Joint Commissioner under section 144A;
(ii) an order made by the Joint Commissioner in exercise of the powers or in the performance of the functions of an Assessing Officer conferred on, or assigned to, him under the orders or directions issued by the Board or by the Principal Chief Commissioner or Chief Commissioner or Principal Director General or Director General or Principal Commissioner or Commissioner authorised by the Board in this behalf under section 120;
(b) “record” shall include and shall be deemed always to have included all records relating to any proceeding under this Act available at the time of examination by the Principal Commissioner or Commissioner;
(c) where any order referred to in this sub- section and passed by the Assessing Officer had been the subject matter of any appeal filed on or before or after the 1st day of June, 1988, the powers of the Principal Commissioner or] Commissioner under this sub- section shall extend and shall be deemed always to have extended to such matters as had not been considered and decided in such appeal.
Explanation 2.— For the purposes of this section, it is hereby declared erroneous in so far as it is prejudicial to the interests of the revenue, if, in the opinion of the Principal Commissioner or Commissioner,—
(a) the order is passed without maki ng inquiries or verification which should have been made;
(b) the order is passed allowing any relief without inquiring into the claim;
(c) the order has not been made in accordance with any order, direction or instruction issued by the Board under section 119; or
(d) the order has not been passed in accordance with any decision which is prejudicial to the assessee, rendered by the jurisdictional High Court or Supr eme Court in the case of the assessee or any other person.
(2) No order shall be made under sub- section (1) after the expiry of two years from the end of the financial year in which the order sought to be revised was passed.
(3) Notwithstanding anything contained in sub- section (2), an order in revision under this section may be passed at any time in the case of an order which has been passed in consequence of, or to give effect to, any finding or direction contained in an order of the Appellate Tribunal, National Tax Tribunal, the High Court or the Supreme Court. Explanation.— In computing the period of limitation for the purposes of sub- section (2), the time taken in giving an opportunity to the assessee to be reheard under the proviso to section 129 and any period during which any proceeding under this section is stayed by an order or injunction of any court shall be excluded.”
6. From the above provision, it is evident that it mandates about providing an opportunity of being heard to the assessee before an order u/s 263 of the Act is passed. In our considered view, the opportunity of being heard cannot be construed as a mere formality. The assessee should be provided sufficient time to explain his case and place the relevant facts and other material on record in support of such claim. During the course of hearing before us, both parties agreed that the matter may be restored to the file of the Ld. PCIT for passing orde r afresh in accordance with law. We, therefore, set aside the impugned order and restore the matter to the file of the Ld. PCIT, who would decide the issue afresh in accordance with law after providing adequate opportunity of being heard to the assessee. The Ld. PCIT would also duly consider the explanation and other supporting material furnished by the assessee, particularly with regard to his contention that M/s. Sona Chandis is his proprietorship concern, before passing the order in accordance with law. The grounds raised in this appeal are allowed for statistical purposes.
7. In the result, the appeal of the assessee is allowed for statistical purposes.
Order pronounced in the open Court on 28/10/2026.
