Does statute bar initiation of proceedings u/s. 263 when an appeal is pending before CIT(A)?

Very recently the Jaipur bench of the Tribunal in the case of Virendra Singh Bhadauriya Vs PCIT while quashing the order of 263 on the footing that there is no indication as to lack of enquiry/no enquiry, rejected the specific contention of the Assessee on jurisdiction of initiation of Section 263 that mere pendency of appeal before CIT(A) is no bar for initiation of revisionary proceedings u/s. 263 by overlooking the principles of doctrine of merger.

In the instant case, Assessee sold an immovable property and invested the sale proceeds in 2 residential properties jointly alongwith his wife in the same locality for the convenience of the family members and his intention was clear to avoid disputes between his 2 sons regarding immovable properties subsequent to his life. He claimed 54F treating 2 residential units to be a single unit “a residential house” and also invested in REC/NHAI bonds thereby declaring taxable LTCG at Rs.8,65,274/-. The AO re-computed the LTCG holding that as per Sec.54F an assessee can purchase/construct a new house property and therefore is entitled to claim 54F on one residential unit only. Aggrieved by this an appeal has been preferred before CIT(A) and pending disposal.

In the meantime, Ld. PCIT invoked 263 relying on Proviso (ii) to Sec. 54F(1) denies the claim of deduction when an assessee purchases any residential property other than the new asset and in the instant case the Assessee had invested in 2 properties and therefore, 54F allowed by the AO is erroneous and prejudicial to the interest of revenue.

On appeal to the ITAT, Assessee contended that;

(i)  Initiation of 263 proceedings is barred when the larger issue is pending before CIT(A) – Contention Rejected by ITAT 

(ii) 263 order doesn’t point out the fact that there is lack of enquiry or no enquiry – ALLOWED

The Tribunal found that there is no dissatisfaction recorded as to there is no lack of enquiry or no enquiry at all and that the AO has applied the provisions of Sec.54F  and applied his mind by allowing deduction u/s.54F to the extent of Assessee’s share in respect of one residential house.

With respect to the jurisdiction of initiation of 263, the Assessee relied on various decisions to support his argument that the clause (c) of Sec. 263(1) puts a bar on initiation of 263 proceedings when an appeal is pending before CIT(A). The Tribunal on a wrong footing held that clause (c) of Sec.263 doesn’t restrict the initiation of 263 when the appeal is pending before CIT(A).

“Revision of orders prejudicial to revenue

263(1)…

(a)  to (b)

(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 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.“

A bare perusal of the section makes it clear that when an issue that hasn’t been subject matter of appeal before CIT(A) can only be revised u/s.263. For instance, if the AO frames an assessment on 3 issues and an appeal to CIT(A) has been preferred challenging only 1 issue, the other 2 issues unchallenged before CIT(A) is open for the PCIT/CIT to revised u/s.263. This is because both the Appellate authority – CIT(A) and Principal Commissioner PCIT falls in the same cadre and the law doesn’t allow the same to revised when an appeal is subject to prosecution before the same platform.

Here, attention is brought to the decision of the Madras High Court in the case of Smt. Renuka Philip Vs ITO [2019] reported as 409 ITR 567 wherein the facts are similar to the facts of the instant appeal. Here, the assessee claimed deduction 54 which the AO ignored and gave relief u/s.54F. When the order of AO was under challenge before the CIT(A), revisionary proceedings u/s.263 was initiated by PCIT holding that the claim of 54F granted by AO is erroneous and prejudicial to the interest of revenue. For sake of clarity, the sequence of  orders are as under;

The Hon’ble High court while deciding the assumption of jurisdiction u/s.263 held that the same is not exercisable under certain circumstances and relied on clause (c) of Sec.263 and held as under;

22. The above explanation makes it clear that when the appeal is pending before the Commissioner, the exercise of jurisdiction under Section 263 of the Act is barred. The Commissioner in the order dated 14.03.2012 states that the appeal pertains to the claim made by the assessee under Section 54 of the Act and it has got nothing to do with the order passed by the Assessing Officer under Section 54F of the Act. The said finding rendered by the Commissioner is wholly unsustainable, since the assessee went on appeal against the re-assessment order dated 31.12.2009 stating that his claim for deduction under Section 54 of the Act should be accepted.

23. Therefore, in the process of considering as to what relief the assessee is entitled to, the Assessing Officer held that the assessee is entitled to claim deduction under Section 54F of the Act and assigned certain reasons for that. Therefore, the larger issue was pending before the Commissioner of Appeals, and in such circumstances, the Commissioner could not exercise power under Section 263 of the Act on account of the statutory bar. Therefore, on this ground also, the assumption of jurisdiction under Section 263 of the Act was wholly erroneous.

This decision has been followed by the Allahabad High Court in the case of CIT Vs Vam Resorts and Hotels (P) Ltd reported as 418 ITR 723. Here, an assessment was framed u/s.143(3) adding back excessive development expenses claimed to the returned income against which an appeal was filed before CIT(A). During the pendency of the appeal, PCIT invoked 263 proceedings and sought to revise the order of AO and consequent giving effect orders were also passed by the AO accordingly. The sequence of events are as under;

In both the decisions referred above, 263 proceedings had been initiated when the larger issue was pending before CIT(A) and the same had been subsequently decided by CIT(A).

Albeit in the instant case, CIT(A) is yet to dispose of the appeal, the statute restricts and imposes condition as to initiation of 263. In the instant case, the finding of the Tribunal is misconceived and failed to appreciate the law. The relevant portion is extracted as under;

From the above proposition of law, we notice that the power of learned PCIT or Learned CIT under the provisions of Sec.263 shall extend to such matters as had not been considered and decided in such appeal. Admittedly, the appeal filed by the assesse against the order of assessment passed u/s.143(3) dated 26^th Dec 2017 has so far not been considered or decided by the learned CIT(A), therefore the objection of the assesse that no proceeding u/s.263 of the Act can be initiated or taken when the appeal is pending before Ld.CIT(A) is not sustainable and is thus rejected.  

It is to be noted that the judgments referred above weren’t brought to the notice of the Tribunal as well. But there are many other judgments that were relied on by the Assessee. In any event, when the law is clear and gives a plain meaning, the tribunal ought to have applied the same. Albeit the Tribunal quashed the order u/s.263 on one aspect, the plea pertaining to the jurisdictional aspect was rejected without appreciating law.

Though it’s a settled proposition that when the larger issue is pending for adjudication before the appellate authority – CIT(A), the PCIT/CIT is barred from invoking revisionary powers on the light of the doctrine of merger, various tribunals take a different stand which is violative of the principles of judicial hierarchy.