Karaj Singh Vs PCIT (ITAT Chandigarh)
Section 263 Is Not a Licence for a Second Fishing Expedition
Chandigarh ITAT Quashes Revision of a Scrutinised Assessment
In Karaj Singh v. PCIT (Central), ITA No. 642/Chandi/2026, concerning Assessment Year 2022-23, the Chandigarh Tribunal held that an assessment cannot be revised merely because the Principal Commissioner considers that the Assessing Officer should have undertaken further verification.
The Tribunal found that the Assessing Officer had raised detailed queries, examined the assessee’s explanations and supporting documents, and adopted a legally permissible view. The Revenue had not established the twin requirements that the assessment was erroneous and prejudicial to its interests.
The Bench comprising Shri Manoj Kumar Aggarwal, Accountant Member, and Shri Rajesh Damodarlal Sharma, Judicial Member, pronounced its order on 1 October 2026. It quashed the section 263 order and restored the original assessment.
Three Issues Triggered Revision
The assessee, a resident individual engaged in mining activities, filed a belated return disclosing agricultural income of ₹4.82 lakh.
His case was selected for complete scrutiny to examine high liabilities compared with income or receipts, and low income compared with TCS receipts relating to mining and quarrying.
The Assessing Officer issued notices under section 142(1), considered the replies and completed the assessment on 31 March 2024. He disallowed ₹35 lakh of professional or consultancy charges, but drew no other adverse inference.
Subsequently, following an internal audit inquiry, the Principal Commissioner initiated revision on three issues: ₹16.85 lakh described as CSR expenditure, ₹38.29 lakh payable towards a Rehabilitation and Restoration Fund, and alleged inadequate verification of mining and quarrying activities.
The Principal Commissioner directed fresh examination through a speaking assessment order.
Environmental Compliance Expenditure Was Not Corporate CSR
The assessee explained that the ₹16.85 lakh expenditure was incurred as a compulsory condition for maintaining environmental clearance for his mining business.
He was an individual, and the expenditure was not voluntary corporate social responsibility spending under the Companies Act. It was incurred for business purposes.
The Principal Commissioner nevertheless questioned whether Explanation 2 to section 37(1) had been examined.
The Tribunal accepted the assessee’s explanation. It held that the expenditure related to the mining business and was allowable under section 37(1).
It also emphasised that the assessee was not covered by the corporate CSR regulations. On these facts, there was no occasion to invoke the CSR restriction proposed by the Principal Commissioner.
Refundable Deposits Could Not Be Disallowed as Claimed Expenditure
The second issue concerned ₹38.29 lakh shown as payable under the Rehabilitation and Restoration Fund.
The assessee explained that the amount represented refundable security, and no corresponding expenditure had been claimed in the profit and loss account.
The Tribunal found that these were refundable deposits and that the assessee had not claimed the amount as expenditure in his financial statements.
Consequently, there was no question of disallowance under section 43B. Revision could not be sustained on this issue either.
The finding exposes a basic defect in the proposed adjustment: the Revenue sought to disallow an expenditure deduction that had not been claimed.
Assessment Records Demonstrated Actual Inquiry
On mining activities, the Tribunal examined the assessment correspondence rather than relying solely on the brevity of the assessment order.
The detailed notice dated 18 August 2023 sought financial statements, purchase details, loans, advances, creditors, outstanding expenses, GST details and information concerning TDS or TCS applicability.
Specific queries required supporting bills and vouchers for major expenses and documentary evidence for royalty instalments. Further information was sought through another notice dated 26 December 2023.
The assessee responded through detailed replies dated 9 December 2023, 20 January 2024 and 11 March 2024, furnishing explanations, financial records, GST summaries and royalty-payment evidence.
The Tribunal concluded that the scrutiny issues had been enquired into and verified with due application of mind. The Principal Commissioner’s allegation of inadequate examination did not establish an error in the accepted explanation.
Explanation 2 Does Not Confer Unrestricted Revisionary Power
The Tribunal relied on Malabar Industrial Co. Ltd. v. CIT, 243 ITR 83 (SC) and CIT v. Max India Ltd., 295 ITR 282 (SC) concerning the statutory conditions for revision and the protection of permissible views.
It also referred to CIT v. Sunbeam Auto Ltd., 332 ITR 167, distinguishing lack of inquiry from an inquiry considered inadequate.
Relying on ITO v. DG Housing Projects Ltd., 343 ITR 329, it emphasised that the revisional authority must establish how the assessment is erroneous, rather than remand merely to discover whether an error exists.
The Tribunal held that Explanation 2(a) to section 263 could not be read as allowing revision whenever further inquiry appeared possible. The Principal Commissioner had not shown that the assessee’s explanation was factually incorrect or legally unsustainable.
Author’s Comments
The decision demonstrates the importance of preserving assessment queries, replies and supporting documents. A concise assessment order may still follow substantial inquiry, and the complete record can establish that fact.
The ruling also requires precision in identifying the proposed error. Environmental compliance expenditure cannot automatically be treated as corporate CSR, and a refundable deposit cannot be disallowed as expenditure when no deduction was claimed.
The Tribunal restored the original assessment, including its existing ₹35 lakh disallowance. Its conclusion was that revision required an established error causing revenue prejudice; the possibility of asking more questions was insufficient on these facts.
Cases Discussed
- Malabar Industrial Co. Ltd. v. CIT, 243 ITR 83 (SC) — Relied upon for the requirement that an assessment must be both erroneous and prejudicial to the interests of the Revenue before revisionary jurisdiction under section 263 can be exercised, and for the principle that a permissible view adopted by the AO cannot be revised merely because the Commissioner disagrees.
- CIT v. Max India Ltd., 295 ITR 282 (SC) — Relied upon for the principle that where two views are possible and the AO adopts a legally permissible view, revision cannot be invoked merely because the Commissioner prefers another view.
- CIT v. Sunbeam Auto Ltd., 332 ITR 167 (Delhi High Court) — Relied upon to distinguish a complete lack of inquiry from an allegedly inadequate inquiry; once an inquiry has been conducted, perceived inadequacy alone does not justify revision.
- ITO v. DG Housing Projects Ltd., 343 ITR 329 (Delhi High Court) — Relied upon for the principle that the revisional authority must itself establish the error and cannot merely remit the matter to the AO for further inquiry to determine whether the assessment is erroneous.
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 (Central), Gurgaon (Pr. CIT) for the Assessment Year (AY) 2022-23 vide impugned order dated 09-03-2026 proposing revision of an assessment as framed by Ld. Assessing Officer [AO] u/s.143(3) of the Act on 31-03-2024 wherein Ld. AO disallowed consultancy charges for Rs.35 Lacs.
2. The Ld. AR advanced arguments supporting the fact that there was no error in the assessment order which has prejudiced the revenue. The Ld. CIT-DR also advanced arguments supporting the impugned revisionary order. Having heard rival submissions and upon perusal of case records, the appeal is disposed-off as under.
3. From the case records, it emerges that the assessee being resident individual filed return of income u/s 139(4) declaring agricultural income of Rs.4.82 Lacs. The case was selected for complete scrutiny to examine twin issues of high liabilities as compared to low income / receipts and low income from TCS receipts – mining and quarrying. During the course of assessment proceedings, various notices were issued by Ld. AO u/s 142(1) from time-to-time which were duly been responded to by the assessee. Upon perusal of assessee’s reply, Ld. AO disallowed profession charges of Rs.35 Lacs stated to be paid to two entities. No other adverse inference was drawn against the assessee in the assessment order.
4. Subsequently, Ld. Pr. CIT, upon perusal of case records and pursuant to internal audit enquiry, show-caused the assessee on 05.01.2026 flagging three issues i.e., (i) Claim of CSR expenditure for Rs.16.85 Lacs; (ii) Amount of Rs.38.29 Lacs shown as payable under the head ‘Rehabilitation and Restoration fund, requiring disallowance u/s 43B; (iii) Inadequate verification of mining and quarrying activity. The assessee, vide its reply dated 05.01.2026, refuted the allegations of Ld. Pr. CIT and assailed revision of the order. On the issue of CSR expenditure stated to be incurred by the assessee as compulsory condition of maintaining environmental clearance, it was explained that the assessee was an individual and expenses were not voluntary CSR under the Companies Act rather the expenses were incurred wholly for its business. On the issue of Rehabilitation and Restoration Fund, it was stated that no such expenditure was claimed in the Profit & Loss Account rather the amount was a refundable security. Therefore, the question of disallowance u/s 43B would not arise. On the issue of mining activities, it was stated that during the course of assessment proceedings, the assessee provided ledgers, mining contracts and proof of royalty payments. The complete quantitative sales records were filed and reconciled with GST returns. The assessee duly furnished royalty payment challans, ledgers and DDs in support of its activities. However, Ld. Pr. CIT maintained that the applicability of Explanation-2 to Sec.37(1) was not examined on CSR expenditure. No documentary evidence was furnished for rehabilitation and restoration fund and Ld. AO failed to verify the same. The assessment record does not contain any discussion on mining activities. The Ld. AO failed to independently verify extraction, royalty payment and reconciliation with GST / TCS returns and sales. Accordingly, the assessment was alleged to be erroneous and prejudicial to the interest of the revenue in terms of Explanation-2 to Sec.263. The Ld. AO was accordingly directed to pass speaking order on the flagged issues after opportunity of hearing to the assessee. Aggrieved, the assessee is in further appeal before us.
Our findings and Adjudication
5. From the enumerated facts, it clearly emerges that the assessee’s case was subjected to complete scrutiny wherein Ld. AO identified twin issues viz. high liabilities as compared to low income / receipts and low income from TCS receipts – mining and quarrying. During the course of assessment proceedings, various notices were issued by Ld. AO on these issues u/s 142(1) from time-to-time which were duly been responded to by the assessee. In detailed notice dated 18.08.2023 the assessee was required to furnish various explanations and documents which include its financial statements, details of purchases, unsecured loans, advances, details of payments / expenses claimed by the assessee along with applicability of TDS / TCS on these items, copy of account of all sundry creditors, complete details of advances received from customers, details of expenses payable as reflected in the Balance Sheet, complete details of GST. In Q.No.21, the assessee was required to substantiate its major expenses along with supporting bills and vouchers. In Q.No.22, the assessee was required to furnish complete details of royalty installment along with documentary evidences. In subsequent notice dated 26.12.2023, the assessee was required to file further information on fixed assets, unsecured loans, payment made to Yamuna Oils, advances, sundry creditors etc. These notices were duly responded to by the assessee in its replies dated 09.12.2023, 20.01.2024 & 11.03.2024. The assessee also filed GST system Summary in GSTR-3B in support of its trading transactions. An order was also passed u/s 74(8) of Haryana GST Act on 21.08.2025 dropping discrepancy proceedings against the assessee. The ledger extract evidencing payment of royalty and challans thereof was also furnished by the assessee. Considering these replies, the claim of the assessee stood substantially accepted by Ld. AO except for disallowance of professional charges for Rs.35 Lacs. Under these circumstances, it could be well said that the issues as identified during complete scrutiny were duly being enquired / verified by Ld. AO and after having satisfied with assessee’s detailed replies, the claim of the assessee stood accepted by Ld. AO.
6. The first issue as flagged in impugned order is the expenditure of Rs.16.85 Lacs as claimed by the assessee. This expenditure is stated to be incurred as compulsory condition of maintaining environmental clearance. This expenditure is related to assessee’s mining business and allowable u/s 37(1). Pertinently, the assessee is an individual and it is not covered under CSR regulations which are applicable to corporate entities only and not to an individual. Therefore, there arises no occasion to invoke Explanation-2 to Sec. 37(1) as proposed by Ld. Pr. CIT. The second issue is amount of Rs.38.29 Lacs which is shown as payable under ‘Rehabilitation and Restoration fund’. These are, undisputedly, mere refundable deposits and no such an expenditure as ever been claimed by the assessee in its financial statements. This being so, there is no question of disallowing the same u/s 43B. Therefore, revision could not be done on both these issues. We order so.
7. The last of the issues is qua verification of mining and quarrying activity. From enumerated facts, it is quite clear that the assessee, in its various replies, furnished plethora of explanation along with supporting documents in support of its financial transactions. In reply to detail queries as raised in various notices u/s 142(1), the assessee furnished its replies on 09.12.2023, 20.01.2024 & 11.03.2024. The copies of the same have been placed on record. In these replies, the assessee furnished detailed explanation on each of the issues and also filed supporting documents which include its financial statements, GST system Summary in GSTR-3B, ledger extract evidencing payment of royalty and various other documents. Considering these replies, the claim of the assessee stood substantially accepted by Ld. AO except for disallowance of professional charges for Rs.35 Lacs. On these facts, the allegation of Ld. Pr. CIT is to be considered as ill-founded. In our considered opinion, due enquiries were made by Ld. AO on all the issues as identified during complete scrutiny and the assessee’s claim stood accepted with due application of mind. A plausible view was taken which is not shown to be contrary to law. On the given facts, it could not be said that the assessment order was prejudicial to the interest of the revenue, in any manner.
8. The short question before us is whether, on the facts of the present case, the assessment order could be regarded as erroneous and prejudicial to the interest of the revenue merely because, according to the Ld. Pr. CIT, the AO ought to have undertaken further verification of some of the issues. In our considered opinion, the revisionary power u/s 263 is a supervisory power and its exercise is conditioned upon satisfaction of the twin requirements that the assessment order is erroneous as well as prejudicial to the interest of the revenue. The Hon’ble Supreme Court in its landmark case of Malabar Industrial Co. Ltd. v. CIT [243 ITR 83 (SC)] has held that an incorrect assumption of facts or an incorrect application of law may render an order erroneous, but where the AO adopts one of the courses permissible in law or where two views are possible and the AO has taken one such view, the order cannot be branded as erroneous merely because the Commissioner does not agree with it. The same principle has been reiterated in CIT v. Max India Ltd. (295 ITR 282). Equally important is the distinction between lack of enquiry and inadequate enquiry. The Hon’ble Delhi High Court in CIT v. Sunbeam Auto Ltd. (332 ITR 167) held that where Ld. AO has conducted an enquiry, the mere fact that such enquiry was considered inadequate by the Commissioner would not, by itself, justify assumption of jurisdiction u/s 263. The Court specifically recognized that it is only in cases of lack of enquiry that such jurisdiction can ordinarily be exercised.
9. On the facts of the present case, we find that assessment records clearly demonstrate that the issues as flagged for complete scrutiny were duly enquired / verified by Ld.AO and a plausible view was taken in the matter. In these circumstances, we are unable to accept the proposition that there was no enquiry by the AO. The enquiry was in fact initiated by the AO, the assessee was called upon to explain the discrepancy, the assessee furnished detailed explanation which stood accepted by Ld. AO. The Ld. AO was apparently fully satisfied with assessee’s explanation. Once a plausible view has been taken with due application of mind, the assessment order could not be branded as erroneous and prejudicial to the interest of the revenue.
10. In our considered opinion, the revision u/s 263 could not be exercised merely to conduct fishing or roving enquiry. It must be demonstrated as to how the assessment order is erroneous which has caused prejudice to the revenue. Our aforesaid view is as per the ratio of Hon’ble Delhi High Court in the case of ITO vs. DG Housing Projects Ltd. (343 ITR 329). In this decision, it was held by Hon’ble Court that AO is both an investigator and an adjudicator. A distinction has to be drawn between a case where the AO has not conducted any enquiry or examined any evidence whatsoever (“lack of inquiry”) from one (i) where there is enquiry but the findings are erroneous; and (ii) where there is failure to make proper or full verification or enquiry (“inadequate inquiry”). The fact that the assessment order does not give any reasons for allowing the claim is not by itself indicative of the fact that the AO has not applied his mind on the issue. All the circumstances have to be seen. A case of lack of enquiry would by itself render the order being erroneous and prejudicial to the interest of the revenue. In a case where there is inquiry by the AO, even if inadequate, the CIT would not be entitled to revise u/s 263 on the ground that he has a different opinion in the matter. Also, in a case where the AO has formed a wrong opinion or finding on merits, the CIT has to come to the conclusion and himself decide that the order is erroneous, by conducting necessary enquiry before passing the Sec. 263 order. The CIT is entitled to collect new material to show how the order of the AO is erroneous. The CIT cannot remand the matter to the AO for further enquiries or to decide whether the findings recorded are erroneous without a finding that the order is erroneous and how that is so. A mere remand to the AO implies that the CIT has not decided whether the order is erroneous but has directed the AO to decide the aspect which is not permissible. On facts, as the CIT had doubts about the valuation and sale consideration received, he ought to have examined the said aspect himself and given a finding on the merits on how the consideration was understated. The ratio of this decision squarely applies to the facts of present case before us. In the present case, Ld. Pr. CIT has not established that the explanation furnished by the assessee on the flagged issues was factually incorrect or legally unsustainable.
11. The Ld. Pr. CIT has referred to Explanation-2(a) to Sec.263. However, the said explanation could not be read in isolation so as to confer an unfettered power upon the revisionary authority to revise every assessment in which, in his subjective opinion, further enquiry could have been made. The statutory provision has to be read consistently with the settled principles governing Sec.263. Even after the insertion of Explanation 2, there remains a distinction between lack of enquiry and inadequacy of enquiry and that the revisionary authority must establish error in the assessment order which has prejudiced the revenue. The findings of Ld. Pr. CIT do not satisfy the jurisdictional requirements of Sec.263. There is no finding that the view as adopted by Ld. AO was unsustainable in law. Once the AO has examined the issue and adopted a view which is legally permissible, the same could not be displaced merely because another course of enquiry was possible.
12. Finally, on the totality of facts and circumstances, we would hold that the twin conditions as contemplated u/s 263 are not satisfied in the present case. The assessment order is neither shown to be erroneous nor prejudicial to the interest of the revenue in the manner as contemplated by law. We, accordingly, hold that Ld. Pr. CIT was not justified in invoking the revisional jurisdiction u/s 263 of the Act. The impugned order passed u/s 263 is, therefore, set aside and quashed and the assessment order originally passed by Ld. AO stand restored back.
13. The appeal stand allowed.
Order pronounced on 01st October, 2026
