Section 263 Quashed Where Assessing Officer Conducted Proper Enquiry

J.M. Housing Limited Vs PCIT (Central) (ITAT Delhi)

No Remission, No 41(1): Adequate Enquiry Means No 263: PCIT Can’t Rewrite Assessment on Change of View- PCIT Overreach Quashed

In J.M. Housing Ltd. Vs. Pr.CIT (Central), Kanpur (at Meerut), ITA No.8248/Del/2025, AY 2021-22, order dated 31.12.2025, Delhi ITAT quashed revision u/s 263 & restored original assessment.

Assessee had filed return declaring loss of ₹38.75 crore. Assessment was completed u/s 143(3) on 19.12.2022, wherein AO made addition of ₹12.48 crore u/s 68 r.w.s. 115BBE in respect of high-value trade creditors after issuing notices u/s 133(6), analysing replies of creditors & recording detailed findings on lack of creditworthiness & genuineness.

PCIT invoked section 263, alleging that AO failed to conduct proper enquiries & wrongly applied section 68 instead of section 41(1), and set aside the entire assessment order. Tribunal held that this was not a case of “no enquiry” but of adequate enquiry, merely because PCIT held a different opinion. Once AO had conducted detailed verification & applied section 68 r.w.s. 115BBE, clause (a) of Explanation-2 to section 263 could not be invoked. Tribunal further held that section 41(1) was wholly inapplicable in absence of any evidence of remission or cessation of liability.

ITAT also noted that addition u/s 68 attracted higher tax rate, hence there was no loss of revenue, which is a sine qua non for invoking section 263. Further, PCIT could not set aside the entire assessment when show-cause notice was confined only to one issue. Accordingly, revision order dated 27.03.2025 was held bad in law & quashed. Appeal was allowed in full.

FULL TEXT OF THE ORDER OF ITAT DELHI

The captioned appeal has been preferred by the assessee against order dated 25.03.2025 of the Pr. Commissioner of Income Tax, Central, Kanpur, Meerut, [hereinafter referred to as ‘ld. PCIT] arising out of assessment order dated 19.12.2022 passed u/s 143(3) of the Income Tax Act, 1961 pertaining to Assessment Year 2021-22. The word ‘Act’ herein this order would mean Income Tax Act, 1961.

2. The Registry has identified a delay of 195 days in the case, in filing of this appeal before the tribunal. In its affidavit the assessee, has pleaded that there was some confusion about the pendency of assessment proceedings and that only during his visit in December, 2025 to the office of DCIT, Central Circle-2, Noida, that it learnt of the passes of order under section 263 dated 27.03.2025 by the ld. PCIT, Central Kanpur, at Meerut. It was further submitted that the show-cause notices and other communications were sent by the Department on e-mails belonging to former director of the company and to personal e-mail ID of former Chartered Accountant, who died on 03.03.2024. All these activities contributed to the delay which was neither willful nor wanton. The assessee submitted that there will not be case of any non-compliance now. The Ld. DR objected to the condonation of delay. It was argued that no case is made out by the assessee to justify the delay. We have considered the justification put forth by the assessee and we are satisfied with their adequacy. We are also conscious of the fact that no litigant gains by intentionally delaying its own matters. Accordingly, we hereby condone the delay and proceed to adjudicate this appeal.

3. The only issue raised by the assessee through grounds of appeal no.1 to 6 is regarding invocation of her revisionary authority under section 263 by the ld. PCIT, Central Kanpur, at Meerut through his order dated 27.03.2025. As per brief factual matrix of the case, appellant had filed original Return of Income for AY 2021-22 declaring loss of Rs.38,75,09,448/-. Pursuant to issue of scrutiny proceedings, assessment under section 143(3) was completed on 19.12.2022 determining income of the assessee at Rs.31,66,62,960/-. As evident from para-5 of the assessment order, the ld. AO had noted that assessee had shown substantial purchases and high value creditors. Before the AO, the assessee merely furnished list of creditors along with ITRs and few incomplete confirmations. The ld. AO simultaneously issued notices under section 133(6) dated 29.11.2022 to sixteen creditors against whom large amounts were shown as outstanding. Out of sixteen, thirteen creditors responded electronically. The ld. AO has narrated the responses of the parties on page-6 to 9 of his order. Accordingly, the ld. AO made impugned additions of Rs.12,48,69,810/- under section 68 r.w.s. 115BBE of the Act observing as under:-

“…5.1 From the discussion made in the above table it can be seen that the assessee has been unable to explain the creditworthiness of the creditors to justify the huge purchases made by it from them. It has also failed to furnish necessary documentary evidences and establish the genuineness of purchase transaction with these creditors. In view of the above, the amount outstanding against the abovementioned major creditors to the tune of Rs.12,48,69,810/- is treated as unexplained and added u/s 68 r.w.s. 115 BBE of the IT Act, 1961. Penalty u/s 271AAC is initiated separately ”

4. Subsequently, the ld. PCIT noted that the impugned assessment order was erroneous and so far as prejudicial to the interest of the Revenue under section 263 of the Act. Consequently, notice under section 263 dated 04.12.2024 was issued with the following observations

“….3. During the course of examination of assessment records, following facts have emerged:-

The assessee had filed his return for A.Y. 2021-22 on 12.03.2022 declaring loss of RS. 38,75,09,448. Subsequently, the case was selected for scrutiny under CASS and assessment was completed u/s 143(3) of the 1.T. Act, 1961 at the total amount of Rs. 31,66,42,960/- after the addition of Rs. 9,13,88,672/- under the head of business income and Rs. 31,66,42,960 u/s 68 of the IT. Act, 1961.

On perusal of records it is noticed that, the assessee has shown huge long term borrowings in balance sheet and assessment records shows that the Assessing Officer issued notices u/s., 133(6) of the IT Act, 1961 to 16 creditors of the assessee and from whom purchases were made during the year received replies of 13 entities were received. The Assessing Officer found irregularities in purchases from 10 entities and vide para no.5 of the assessment order, Rs. 12,48,69,810/- was disallowed and added u/s 68. However, it should have been disallowed u/s 41(1) of the I.T. Act, 1961 and should be added to the total income of the assessee under the head of business income by the AO but AO failed to do so….”

4. In view of the foregoing discussed facts, the assessment order u/s 143(3) of the Income Tax Act, 1961 for the A.Y. 2021-22 passed by AO on 19.12.2022 is erroneous and prejudicial to the interest of the revenue. Therefore, the Assessment order needs to be revised u/s 263 of the Income Tax Act, 1961.

5. You are, therefore, in terms of sub section (1) of Section 263 of the Income Tax Act, 1961, required to show cause as to why the order dated 19.12.2022 for A.Y. 2021-22 passed by DCIT, Central Circle-2, Noida u/s 143(3) of the Income Tax Act, 1961 should not be considered as erroneous in so far as it is prejudicial to the interests of the revenue. You are required to furnish your reply before the undersigned via email on or before 18.12.2024 along with documentary evidences, upon which you wish to rely in support of your written submission, and/or appear for personal hearing or through Authorized Representative on 18.12.2024 at 12.30 PM. Please also note that in case of failure to comply, it shall be presumed that you have nothing to say in this regard and the matter will be decided on merits on the basis of the material available on record.”

5. Thereafter, order under section 263 dated 27.03.2025 was passed, which is as under:-

‘…6. In light of discussion in para above it is clear that there is non-application of mind on the part of Assessing Officer in as much as the necessary verification of facts/enquiries which should have been made, have not been made, making the assessment order erroneous, prejudicial to the interest of revenue in terms of Clause (a) of Explanation 2 u/s 263 of the Income Tax Act, 1961.

7. As far as the legal position is concerned, after insertion of Explanation-2, the position of law as regards to under what circumstances an order can be deemed to be c& prejudicial both, has changed substantively. Therefore after 01.06.2015 the propositions given by courts will have to be interpreted with reference to the deeming fiction now provided in the statute itself explaining the conditions wherein an order can be deemed to be erroneous & prejudicial. To avoid any confusion, it would serve the purpose if the said provisions are revisited and I cite them as under:

[Explanation 2—For the purposes of this section, it is hereby declared that an order passed by the Assessing Officer shall be deemed to be erroneous in so far as it is prejudicial to the interests of the revenue, if, in the opinion of the Principal [Chief Commissioner or Chief Commissioner Principal] Commissioner or Commissioner,-

(a) the order is passed without making inquiries or verification which should have been made; [Emphasis supplied]

(b) the order is passed allowing any relief without inquiring into the claim;

(c) the order has not been made in accordance with any 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 Supreme Court in the case of the assessee or any other person.

As per clause (a) of Explanation-2 to Section 263, lack of verification/enquiries which were required to be made is one of the conditions to deem an order to be erroneous & prejudicial both.

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8. In view of the discussions above, it is clear that there is non-application of mind on the part of the Assessing Officer in as much as the necessary verification of facts/enquiries which should have been made, have not been made, making the order erroneous and prejudicial to interest of revenue within the meaning of section 263 read with Clause (a) of Explanation-2 there under. I, therefore, under the powers conferred u/s 263 of the Income Tax Act, 1961, hereby set aside the order passed by Assessing Officer u/s 143(3) for A.Y. 2021-22 with direction to pass fresh order after conducting proper enquiries, including third party enquiries and investigations etc. into the claims made by the assessee in the IT return, considering the discussion in Paras above, after providing opportunity to the assessee also….”

6. The ld. Counsel for the assessee, Shri C.S. Anand, CA, vehemently argued against the order under section 263 submitting that the same is not in accordance with the facts on records. It has been argued that the ld. PCIT while making the impugned revision, placed reliance upon the statutory prescription contained in section 263 of the Act. It was stated that the only argument taken is that the ld. AO has not conducted the enquiries as required under clause-(a) of Explanation-2 of section 263 of the Act. The ld. Counsel submitted that as evident from the ld. AO extracted hereinabove, detailed enquiries under section 133(6) of the Act qua the impugned liabilities of Rs.12,48,69,810/- was made by the ld. AO. It was fiercely argued that therefore it is not a case of no enquiry being done by the ld. AO as alleged by the ld. PCIT. It was further argued that for an order to be erroneous in so far as it is prejudicial to the interest of the Revenue, there has to be an element of loss of tax to the Revenue by way of a short charge. The ld. Counsel submitted that in the instant case, addition has been made under section 68 r.w.s. 115BBE which attracts a higher rate of taxation vis-à-vis addition under section 41(1). It was accordingly requested that the order under section 263 dated 27.03.2025 be quashed and set-aside.

7. The ld. DR, Shri Shrikant Namdeo, forcefully argued in favour of the order of the ld. PCIT under section 263.

8. We have heard rival submission in the light of material available on record. Before proceeding further, we deem it necessary to extract the relevant statutory provisions concerning the controversy at hand being section 41(1), section 68, section 263 and section 115BBE.

Section 41(1)

“41. (1) Where an allowance or deduction has been made in the assessment for any year in respect of loss, expenditure or trading liability incurred by the assessee (hereinafter referred to as the first-mentioned person) and subsequently during any previous year,—

Explanation 1.—For the purposes of this sub-section, the expression “loss or expenditure or some benefit in respect of any such trading liability by way of remission or cessation thereof” shall include the remission or cessation of any liability by a unilateral act by the first-mentioned person under clause (a) or the successor in business under clause (b) of that sub-section by way of writing off such liability in his accounts.

Explanation 2.—For the purposes of this sub-section, “successor in business” means,—

Section-68

68. Where any sum is found credited in the books of an assessee maintained for any previous year, and the assessee offers no explanation about the nature and source thereof or the explanation offered by him is not, in the opinion of the Assessing Officer, satisfactory, the sum so credited may be charged to income-tax as the income of the assessee of that previous year :

Provided that where the sum so credited consists of loan or borrowing or any such amount, by whatever name called, any explanation offered by such assessee shall be deemed to be not satisfactory, unless,—

Provided further that where the assessee is a company (not being a company in which the public are substantially interested), and the sum so credited consists of share application money, share capital, share premium or any such amount by whatever name called, any explanation offered by such assessee-company shall be deemed to be not satisfactory, unless—

Provided also that nothing contained in the first proviso or second proviso shall apply if the person, in whose name the sum referred to therein is recorded, is a venture capital fund or a venture capital company as referred to in clause (23FB) of section 10.

Section 263

“263(1) The Commissioner may call for and examine the record of may 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 enhancing or modifying the assessment, or cancelling the assessment and directing a fresh assessment.”

Explanation 2. – For the purposes of this section, it is hereby declared that an order passed by the Assessing Officer shall be deemed to be erroneous in so far as it is prejudicial to the interests of the revenue, if, in the opinion of the Principal ‘Chief Commissioner or Chief Commissioner of Principal] Commissioner or Commissioner;-

(a) the order is passed without making 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 Supreme Court in the case of the assessee or any other person….”

Section 115BBE

“ 115BBE (1) Where the total income of an assessee –

(a) Includes any income referred to in section 68, section 69, section 69A, section 69B, section 69C, section 69D and reflected in the return of income furnished under section 139 or

(b) Determined by the Assessing Officer includes any income referred to in section 68, section 69, section 69A, section 69B, section 69C, section 69D, if such income is not covered under clause (a)

the income tax payable shall be the aggregate of –

(i) the amount of income tax calculated on the income referred to in clause (a) and clause (b), at the rate of sixty percent; and

(ii) the amount of income tax with which the assessee would been chargeable had his total income been reduced by the amount of income referred to in clause (i).”

9. The basic argument taken by ld. PCIT is non-conduct of enquiries by the ld. AO within the meaning of clause-(a) of Explanation-2 of section 263 of the Act. From a plain reading of the observations made by the ld. AO in his order under section 143(3) dated 19.12.2022(supra), it is abundantly clear that the ld. AO had conducted necessary enquiry into the issue of high value creditors. Post conduct of his enquiries and considering deficiencies in the claims of the assessee, addition amounting to Rs.12,48,69,810/- was made under section 68 r.w.s. 115BBE of the Act. Consequently, it is abundantly clear that invocation of clause-(a) of Explanation-2 of section 263 of the Act was not permissible in the matter. Simply put the assessee had made claims of certain liabilities which were extensively investigated by the ld. AO before he arrived at the conclusion of the same way liable for addition under section 68 r.w.s. 115BBE of the Act. The conclusion drawn by the ld. PCIT while exercising his revisionary authority, therefore, are not correct and not supported by facts on records.

10. The argument of the ld. PCIT that the AO ought to have made additions under section 41(1) of the Act as against under section 68 r.w.s. 115BBE of the Act have been considered and again not found to be tenable. Section 41(1) of the Act authorizes an Assessing Officer to bring to tax any amount of money in respect of which a claim of loss or expenditure has been made in earlier years as a trading liability and for which during the assessment year under consideration, the AO notes that the assessee has acquired some benefit in respect of the impugned trading liability ‘by way of remission or cessation thereof’. The statutory mandate is that there should be evidence on record to suggest some benefit to the assessee in respect of the impugned trading liability ‘by way of remission or cessation thereof’. In the instant case, no such evidence has been brought on records by the ld. PCIT to support his arguments. Invocation of section 41(1) is non-maintainable in cases where evidence of any benefit accruing to the tax payer ‘by way of remission or cessation thereof’ is missing. The argument of ld. PCIT qua invocation of section 41(1) of the Act also therefore fails.

11. This brings us to the question of validity of invocation of section 68 r.w.s. 115BBE of the Act by the ld. AO. Section 68 extracted hereinabove clearly postulates that where during the course of an assessment proceedings, the ld. AO notes any sum credited to the books of accounts of the assessee and for which the assessee either does not offers any explanation or offers unsatisfactory explanation, then the ld. AO would be authorized to add the same treating it as income. As per the factual matrix of the case, the ld. AO had noted high value trading liabilities in assessee’s books of accounts qua certain parties. The said amounts naturally were in the nature of credits to the books of accounts. The ld. AO enquired the matter with the assessee whose explanations were incomplete, deficient and hence treated as unsatisfactory by the AO. The ld. AO proceeded further by conducting his abundant enquiries under section 133(6) of the Act. Based upon his enquiries, he observed several deficiencies in the impugned entries and hence proceeded to make an addition of Rs.12,48,69,810/- under section 68 r.w.s. 115BBE of the Act. A combined reading of section 41(1) and of section 68 r.w.s. 115BBE do not indicates any mistake on the part of the ld. AO. No blame of any mischief can be attached upon the shoulder of ld. AO.

12. We have also found sufficient force in the argument of the ld. Counsel for the assessee that for an order to be erroneous in so far as it is prejudicial to the interest of the Revenue, there has to be an element of loss of tax to the Revenue by way of a short charge. The ld. Counsel submitted that in the instant case, addition has been made under section 68 r.w.s. 115BBE which attracts a higher rate of taxation vis-à-vis addition under section 41(1). The invocation of section 263 in the absence of any short charge of tax once again becomes non-maintainable.

13. We have also noted that there is a basic incongruity and incurable defect in the exercise of his revisionary authority under section 263 by the ld. PCIT which makes the order dated 27.03.2025 liable for being quashed and set-aside. A perusal of notice under section 263 dated 04.12.2024 of the ld. PCIT extracted hereinabove alludes that he was concerned with an amount of Rs.12,48,69,810/- made by the ld. AO. Further from perusal of order under section 263 dated 27.03.2025 of the ld. PCIT extracted hereinabove alludes that in para-8 of his order, he has proceeded to ‘…… set-aside the order passed by the AO under section 143(3) for AY 2021-22 with direction to pass a fresh order after conducting proper enquiries… ’ . Thus, whereas, the ld. PCIT
had challenged the addition of an amount of Rs.12,48,69,810/- made by the ld. AO, he proceeded to set-aside the entire order. Pertinently as evident from page-13/14 of the order of the ld. AO, the addition of an amount of Rs.12,48,69,810/- was only one out of several other additions made by the Assessing Officer. Therefore, by disputing only one addition of an assessment order, the ld. PCIT cannot set-aside the entire order containing several other additions. It is settled principle of law that no revisionary authority can be exercised by a PCIT in respect of issues not contested through his/her notice under section 263.

14. Accordingly, we are of the considered view that there is no infirmity in the action of the ld. AO in making the addition of an amount of Rs.12,48,69,810/- under section 68 r.w.s. 115BBE. We are also of the considered view that consequently the exercise of revisionary authority under section 263 by the ld. PCIT, Central Kanpur, at Meerut, vide his order dated 27.03.2025 is not based upon correct understanding of the facts and appreciation of the statutory provisions governing the matter. We therefore quash and set-aside the order under section 263 dated 27.03.2025of the ld. PCIT, Central Kanpur, at Meerut. All the grounds of appeal nos. 1 to 6 raised by the assessee are allowed.

15. In the result, the appeal of the assessee is allowed.

Order pronounced in the open court on 31^st December, 2025.