Byrapura Gowde Gowda Deepu Vs DCIT (ITAT Bangalore)
Summary: A search produced diaries, loose sheets and digital records containing notings of transactions running into crores. The Assessing Officer examined the material, verified a sample of more than 2,000 supporting documents, made third-party enquiries and added ₹2.30 crore to the assessee’s income. The PCIT nevertheless set aside the assessment under section 263, primarily because he considered the verification insufficient.
The Bengaluru ITAT has quashed that revision. Its finding was that the PCIT wanted a wider enquiry, but had not established that the assessment already made was erroneous and prejudicial to the interests of the Revenue.
Search, Scrutiny and a Substantial Addition
The assessee was an architect and Vastu consultant carrying on business through a proprietorship concern. He returned income of ₹46,97,800 for AY 2023–24. A search under section 132 was conducted on 14 October 2023, during which the search team found substantial cash, jewellery, luxury watches, pocket diaries, scribbling pads, loose sheets and digital records.
The return was selected for compulsory scrutiny. The Assessing Officer examined the seized material and completed the assessment on 31 March 2025 at ₹2,77,42,580, making an addition of ₹2,30,44,780. Thus, he had neither accepted the returned income nor accepted the assessee’s explanation in full.
Soon afterwards, the PCIT issued a show cause notice under section 263. In his view, the seized notings involved transactions of about ₹71 crore, but the Assessing Officer had verified only 10% to 12% of the more than 2,000 bills, vouchers and receipts produced by the assessee. The PCIT questioned whether the entries represented estimates or actual receipts and payments, whether the persons named had been identified, and whether the notings had been independently corroborated. He set aside the assessment for fresh examination and cross-verification.
Was This a Case of No Enquiry?
The assessee argued that the PCIT’s own notice acknowledged that an enquiry had taken place. His objection concerned how much the Assessing Officer had verified, rather than a complete failure to examine the seized material.
The Tribunal examined the assessment order in detail. The Assessing Officer had considered the seized diaries and loose sheets, the statements recorded during and after the search, the assessee’s subsequent explanations and retraction, and the digital Excel sheets. He had called for bills, vouchers and receipts; issued notices under section 133(6) and summons under section 131(1); and examined responses from third parties.
The Assessing Officer had also analysed the figures in the seized material and the assessee’s working. He rejected the percentage proposed by the assessee, applied his own rates and made the ₹2.30 crore addition. These steps showed, in the Tribunal’s view, a continuing process of enquiry and an independent decision.
The Tribunal therefore rejected the PCIT’s characterisation of the assessment as one passed without the enquiries contemplated by Explanation 2(a) to section 263. The PCIT could consider the sample too small, but that opinion did not turn enquiries actually conducted into no enquiry.
PCIT Must Establish the Error
The ITAT relied on ITO v. DG Housing Projects Ltd., where the Delhi High Court distinguished an absent enquiry from one considered inadequate by the revisional authority. Where the Assessing Officer has enquired and reached a conclusion, the Commissioner must examine the matter and identify why that conclusion is erroneous. He cannot set aside the assessment merely to ask the Assessing Officer to investigate further and discover whether an error exists.
The Tribunal also referred to PCIT v. Shreeji Prints (P.) Ltd., CIT v. Gabriel India Ltd. and the Supreme Court’s decision in Malabar Industrial Co. Ltd. v. CIT. The governing requirement remains that the assessment must be both erroneous and prejudicial to the Revenue. Section 263 cannot be invoked simply because the PCIT would have chosen a larger sample or a different method of verification.
Here, the PCIT had conducted no independent enquiry establishing that the Assessing Officer’s conclusion was wrong. His order directed further investigation into the same material without a positive finding of error. That was insufficient to sustain the revision.
Later Assessments Could Not Supply the Missing Basis
The PCIT had also referred to assessments for other years that reached different conclusions. The Tribunal noted a significant timing issue: the assessment for AY 2023–24 was completed on 31 March 2025, and the section 263 notice was issued on 15 April 2025. The assessment orders for the other years relied upon were passed only on 31 March 2026. They did not exist when revision was initiated and could not have supplied the PCIT’s satisfaction at that point. Those assessments were also stated to be under appeal.
Nor could the limited time available to complete the original assessment establish an error. What mattered was the enquiry actually made and the material actually considered, not how close the order was to the statutory deadline.
The ITAT accordingly quashed the PCIT’s section 263 order and restored the assessment dated 31 March 2025. The assessee’s appeal was allowed.
Author’s Comments
This decision does not say that verification of 10% to 12% of documents will always suffice. The outcome rested on the assessment record as a whole: examination of seized material, third-party verification, analysis of digital records, rejection of part of the assessee’s explanation and a substantial addition. The Assessing Officer had formed a view after enquiry.
The ruling is a reminder that section 263 is a power to revise an established error, not a means to order another investigation in the hope of finding one. Where the PCIT considers an enquiry inadequate, the revisional order must demonstrate the error in the view already taken. A direction to “verify further”, without that finding, cannot replace the two statutory conditions for revision.
Cases Discussed
- ITO v. DG Housing Projects Ltd. (2012) 343 ITR 329 (Delhi) — distinction between lack of enquiry and inadequate enquiry; Commissioner must establish the error before remitting the matter for further enquiry.
- PCIT v. Shreeji Prints (P.) Ltd. [2021] 130 taxmann.com 294 (SC) — fuller enquiry cannot be ordered merely because the revisional authority considers the AO’s enquiry insufficient.
- CIT v. Gabriel India Ltd. [1993] 71 Taxman 585 (Bombay) — further enquiry or fresh determination requires a prior conclusion that the assessment is erroneous and prejudicial to Revenue.
- Reliance Payment Solutions Ltd. v. PCIT [2022] 136 taxmann.com 277 (Mumbai-Trib.) — relied upon regarding limits of revision where the AO has already made enquiry.
- Malabar Industrial Co. Ltd. v. CIT (2000) 243 ITR 83 (SC) — an assessment must be both erroneous and prejudicial to Revenue before Section 263 jurisdiction can be exercised.
FULL TEXT OF THE ORDER OF ITAT BANGALORE
The present appeal has been instituted by the assessee against the order of the Principal Commissioner of Income Tax, Central Bangalore (in short “Ld. PCIT”) passed under section 263 of the Income Tax Act, 1961 (in short “Act”) for the assessment year 2023-24.
2. In the memo of appeal, the assessee has raised 11 grounds of appeal. However, all the grounds are interconnected and effective issue raised is that the Ld. PCIT erred in setting aside the assessment order by holding as erroneous in so far it is prejudicial to the interest of revenue under section 263 of the Act.
3. The brief facts of the case on hand are that the assessee is engaged in the profession of an architect, vastu consultant, etc through a proprietorship concern, Design Studio and Architect (DSA). The assessee is also a partner in the firm M/s Shri Balaji Saravara and M/s DSC Constructions & Developers. For the captioned AY, the assessee filed its ROI under section 139(1) of the Act on 29-09-2023, offering an income to taxation to the tune of Rs. 46,97,800/- only.
3.1 Subsequently, the assessee was subject to search proceedings under section 132 of the Act as on 14th October 2023. During the search, in addition to cash of Rs. 41,21,52,000/-, jewellery worth Rs. 10.43 Cr, and luxury watches worth Rs. 1.7557 Cr, the search team found and impounded various documents in the form of diaries/scribbling pads/loose sheets. In relation to the materials found during the search, the statement of the assessee under section 132(4) & 131(1) of the Act was recorded on various occasions during the search proceedings as well as during the post-search proceedings. The statements of other persons such as employees & associates of the assessee and certain persons to whom the assessee has provided services were also recorded in relation to the search materials.
3.2 As a result of the search proceedings, the return of the assessee for the A.Y. 2023-24 was selected for compulsory scrutiny and finally, the assessment came to be completed under section 143(3) of the Act vide order dated 31st March 2025 by assessing the total income at Rs. 2,77,42,580/- as against the returned income of Rs. 46,97,800/-.
3.3 Subsequently, the Ld. PCIT issued a show cause notice under section 263 of the Act, dated 15th April 2025. The Ld. PCIT observed that a search u/s 132 of the Act resulted in the seizure of incriminating notings/documents relating to A.Y. 2023-24, involving transactions aggregating to approximately Rs. 71 crores. During the assessment proceedings, although the assessee produced more than 2,000 bills, vouchers and payment receipts relating to clients/customers. However, Ld. AO verified only about 10% to 12% of these documents and completed the assessment. Accordingly, the Ld. PCIT was of the opinion that the assessment order is erroneous & prejudicial to the interest of revenue on the following aspects:
1. The true nature of the transactions reflected and noted in the seized documents was not fully examined.
2. The identity of the persons involved in or connected with the transactions (in the seized documents) was not established.
3. It was not ascertained whether the amounts recorded in the seized noting represented estimates or actual receipts, receivables, payments or payables.
4. No independent investigation or enquiry was conducted to corroborate the seized material with the assets or other supporting evidence.
3.4 On the above basis, the Ld. PCIT formed a prima facie opinion that the assessment order had been passed without making the necessary enquiries and verifications which ought to have been conducted, rendering the assessment order erroneous in so far as it is prejudicial to the interests of the Revenue within the meaning of Explanation 2(a) to section 263 of the Act.
3.5 In response to the notice issued u/s 263 of the Act, the assessee submitted that he is an architect, Vastu consultant, and contractor. He follows the cash system of accounting and offers income to tax only when the amount is actually received. The AO completed the assessment on 31.03.2025 after examining the seized materials and made an addition of Rs. 2,30,44,780/- based on the entries found in the seized loose sheets.
3.6 The assessee submitted that during the search and post-search, his statement was recorded u/s 132(4) of the Act, wherein he explained that the cash found and seized as well as the entries appearing in the seized material represented business transactions. According to the assessee, the Investigation Wing never disproved these statements.
3.7 The assessee further submitted that the Investigation Wing had examined three persons whose names appeared in the seized materials. These persons confirmed on oath that they had availed architectural services from the assessee. After the case was handed over to the AO in September 2024, the AO also carried out detailed enquiries and cross-verification. As many as 53 persons were examined, and they confirmed that they had availed architectural services from the assessee. Further, 24 persons also confirmed the same in response to the notices issued u/s 133(6) of the Act.
3.8 It was also submitted that the AO and the Joint Commissioner had carried out detailed enquiries over several months. The AO obtained confirmations from about 250 to 300 customers relating to the relevant six assessment years. Therefore, the observation of the Ld. PCIT that only 10% to 12% of the bills had been verified was factually incorrect.
3.9 The assessee also explained the reason for collection of substantial amounts during F.Y. 2023-24. He had entered into a registered agreement for purchase of an immovable property worth Rs. 60 crores. Accordingly, the assessee collected funds aggressively during that year. The entire receipts were offered to tax in A.Y. 2024-25. The assessee also denied ownership of the seized loose pads and stated that the handwriting appearing therein did not belong to him.
3.10 On the legal issue, the assessee submitted that jurisdiction u/s 263 of the Act can be exercised only when the assessment order is both erroneous and prejudicial to the interests of the Revenue. Both conditions must exist together. In the present case, the AO had conducted detailed enquiries before passing the assessment order. Therefore, merely because the Ld. PCIT was of the view that a larger number of invoices should have been verified, the assessment order could not be revised u/s 263 of the Act.
3.11 The assessee further submitted that this was not a case of lack of enquiry. At the most, the Ld. PCIT could consider the enquiry made by the AO to be inadequate. Inadequate enquiry cannot be treated the same way as a complete absence of enquiry. The proceedings u/s 263 of the Act cannot be invoked merely because the Ld. PCIT would have conducted the enquiry in a different manner.
3.12 It was further submitted that the Ld. PCIT was required to form his own independent opinion before invoking jurisdiction u/s 263 of the Act. The proceedings could not be based merely on the Appraisal Report or on the opinion or estimates suggested by the Investigation Wing.
3.13 Lastly, the assessee submitted that the AO had already made an addition of Rs. 2,30,44,780/-. According to the assessee, this addition was itself made without finding any corresponding undisclosed tangible asset. Therefore, the assessment order could not be regarded as prejudicial to the interests of the Revenue so as to justify revision u/s 263 of the Act.
3.14 However, the Ld. PCIT rejected the assessee’s submissions. The Ld. PCIT observed that seized materials in the form of loose sheets reflected unexplained money of Rs. 36.45 crores and unexplained expenditure of Rs. 1.74 crores. Further, the digital evidence seized during the search reflected unexplained money of Rs. 33.34 crores and unexplained expenditure of Rs. 11.60 lakhs. The seized material was handed over to the AO only in September 2024. Though the AO issued notices calling for the names, addresses and other details of the persons appearing in the seized material, sufficient time was not available to conduct enquiries from all such persons.
3.15 The Ld. PCIT further observed that although the AO conducted certain enquiries, the verification was based only on the list furnished by the assessee and not on the specific entries appearing in the seized material. The identities of the concerned persons, the nature of the transactions, and the correlation of the seized entries with actual receipts and payments were not properly examined.
3.16 The Ld. PCIT also observed that the assessee’s plea regarding inadequate enquiry was without merit since the AO had failed to make the necessary enquiries required on the basis of the seized materials itself. The contention regarding “dumb documents”, absence of corroborative evidence, change of opinion, and borrowed satisfaction was also rejected. It was further noticed that in the assessments of the other assessment years, the Ld. AO conducted extensive enquiries and reached conclusions different from those in the year under consideration. This demonstrated that proper verification had not been undertaken for the year under consideration.
3.17 Accordingly, the Ld. PCIT held that the assessment order had been passed without making the enquiries and verifications which ought to have been made. Therefore, the order is erroneous in so far as it was prejudicial to the interests of the Revenue within the meaning of section 263 read with Explanation 2(a) of the Act. The assessment order was consequently set aside with a direction to the AO to frame a fresh assessment after conducting proper examination, enquiries and cross-verification in accordance with law.
4. Being aggrieved by the order of the learned PCIT, the assessee filed an appeal before us and submitted that the assumption of jurisdiction by the Ld. PCIT u/s 263 of the Act was wholly without authority of law, as the assessment order was passed after detailed enquiry and application of mind by the AO. It was contended that the revision proceedings were initiated merely because the Ld. PCIT was of the view that a larger number of invoices or customers ought to have been verified. Such a different perception regarding the adequacy of enquiry amounts only to a change of opinion and cannot render the assessment order erroneous.
5. The Ld. AR before us submitted that, throughout the search and post-search proceedings, the assessee explained that the entries in the scribbling pads/diary/note represented tentative project estimates, fee proposals, and initial consultations given to prospective clients. They did not necessarily represent actual income received by the assessee. The assessee maintained that the professional income actually earned by him had been duly offered to tax.
5.1 The Ld. AR further submitted that the AO after considering the seized materials and conducting enquiries, passed the assessment order u/s 143(3) of the Act on 31.03.2025. The AO did not accept the assessee’s explanation in its entirety and made an addition of Rs. 2,30,44,780/- as business income u/s 28 of the Act. Thus, according to the Ld. AR, the assessment order itself showed that the AO had independently examined the matter and had not simply accepted the assessee’s explanation.
5.2 The Ld. AR submitted that the Ld. PCIT issued a show-cause notice u/s 263 of the Act observing that the materials recording the transactions about Rs. 71 crores relating to AY 2023-24 had been seized, whereas the AO had verified only about 10 to 12% of 2,000 plus bills and vouchers produced by the assessee. The learned AR contended that the notice issued by Ld. PCIT itself confirmed that the AO conducted the enquiry. The dispute of the Ld. PCIT was only that the sample selected by the AO was not large enough. It is not a case of “lack of enquiry”. At the highest, the objection of the Ld. PCIT is regarding the extent or adequacy of the enquiry made by the AO.
5.3 In this regard, the Ld. AR relied upon the decision of the Hon’ble Delhi High Court in the case of ITO v. DG Housing Projects Ltd. reported in (2012) 343 ITR 329 (Delhi), particularly paragraphs 16 to 18. It was submitted that where an AO has conducted an enquiry, but the ld. Commissioner considers that enquiry inadequate, the ld. Commissioner cannot invoke revision merely because he wants a further or deeper enquiry. In such a case, the ld. Commissioner must examine the records himself, conduct the necessary enquiry and record a positive finding showing how the assessment order is erroneous. He cannot merely set aside the assessment and direct the AO to conduct a fresh investigation to find out whether an error exists. The Ld. AR submitted that no such independent enquiry was undertaken by the Ld. PCIT in the present case. Instead, the matter was simply remanded to the AO for a fresh decision, taking into account the assessment orders for other years.
5.4 The Ld. AR also referred to Explanation 2(a) to section .263 of the Act. It was submitted that the deeming provision applies where an order is passed without making enquiries or verification which ought to have been made. According to the Ld. AR, it cannot be applied merely because enquiries were made but the Ld. PCIT considers them insufficient or incomplete. It is submitted that the Ld. PCIT had not identified any particular enquiry which was completely omitted by the AO. Reliance in this regard was placed upon the decision of the Hon’ble Gujarat High Court in PCIT v. Shreeji Prints reported in 130 Taxmann.com 294
5.5 The Ld. AR then took us through the assessment order to demonstrate the enquiries actually carried out by the AO. He submitted that in the assessment order, the AO considered the statement of the assessee recorded u/s 131 of the Act and investigated the notings appearing in the seized diaries and scribbling pads. Thus, the seized material was specifically examined by the AO who also examined the statements of persons whose names appeared in connection with the seized materials. Those persons confirmed on oath that they had approached the assessee for architectural consultancy and estimates. Therefore, the identity of the persons connected with the entries was also examined by the AO. Further, the AO evaluated those statements along with the seized pads. On such examination, the AO recorded findings regarding the assessee’s activity of providing architectural consultation and estimates to customers and making informal notings in pocket diaries and pads. The AO also examined whether income from the identified transactions formed part of the regular books and considered the source of cash found and seized during the search.
5.6 The Ld. AR further submitted that the assessee had produced more than 2,000 bills, vouchers and payment receipts. The AO examined the veracity of these documents by conducting third-party enquiries on a random basis. Summons u/s 131 of the Act and notices u/s 133(6) of the Act were issued. Those persons confirmed receipt of consultancy services from the assessee. Across the relevant search years, approximately 600 enquiries were initiated and more than 500 were completed.
5.7 The Ld. AR submitted that paragraphs 14(v) and 15 of the assessment order also showed that the AO considered client confirmations, depositions and responses received pursuant to notices issued u/s 131 and 133(6) of the Act. On this basis, the AO examined the assessee’s business model as well as the cash system of accounting followed by him. Vide para 17 of the assessment order, the AO examined the location of the bills, vouchers and receipts and also made enquiries regarding the persons with whom such documents were kept. Therefore, it was incorrect to suggest that the AO had not examined the documents or the persons connected with them. Furthermore, the AO also made detailed enquiries regarding the digital Excel files seized from the assessee’s mobile phone. Through the statements recorded during the assessment, the assessee explained the figures in these sheets. The AO did not blindly accept this explanation. As recorded in paragraph 18 of the assessment order, the AO independently carried out logical and arithmetical analysis of the underlying data. The AO thereafter applied his mind and reached the conclusion. Therefore, this was clearly not a case of lack of enquiry.
5.8 The Ld. AR again submitted that section 263 of the Act cannot be invoked merely because the Ld. PCIT would have preferred a larger sample, a different method of enquiry or a higher estimate. Reliance was placed upon CIT v. Gabriel India Ltd. [1993] 71 Taxman 585 (Bombay), particularly paragraph 11, and Reliance Payment Solutions Ltd. v. PCIT [2022] 136 taxmann.com 277 (Mumbai-Trib.), particularly paragraphs 7 to 9. According to the Ld. AR, whether a particular diary entry represented an actual receipt or merely a proposal or estimate was a factual issue which the AO had already examined through detailed verification.
5.9 Furthermore, regarding the Ld. PCIT observation that no enquiry conducted by the AO with respect to corroborating assets. The Ld. AR submitted that during the search no asset was found other than cash of Rs. 41.25 crore, jewelry and valuable watches which were impounded and inventoried. The cash found during the search has been offered to tax in the A.Y. 2024-25. Question regarding the notings in note pad/ diaries etc. is whether those notings represent actual transaction or mere estimation or proposal. This is factual determination and the AO has duly undertaken detailed verification in this regard.
5.10 The Ld. AR then challenged the direction of the Ld. PCIT requiring the AO to complete the fresh assessment “in line with” the assessments made for AYs 2019-20 to 2022-23 and AY 2024-25. It is submitted that the assessment order for the present AY 2023-24 was passed on 31.03.2025 and the notice u/s 263 of the Act was issued merely 14 days thereafter, on 15.04.2025. However, the assessment orders for AYs 2019-20 to 2022-23 and AY 2024-25, on which the Ld. PCIT subsequently relied, were passed only on 31.03.2026. When the Ld. PCIT invoked jurisdiction u/s 263 of the Act on 15.04.2025, these subsequent assessment orders did not even exist. Therefore, at the point when jurisdiction was invoked, those orders could not have provided any reason to regard the assessment order for AY 2023-24 as erroneous or prejudicial to the interests of the Revenue. The phrase “record” for the purpose of s. 263 of the Act refers to the materials available for examination by the Ld. PCIT. Revision cannot be justified on the basis of hindsight or evidence subsequently gathered during proceedings for other assessment years. Therefore, assessments subsequently completed for other years could not form the basis for revising the assessment for AY 2023-24. In any event, the assessment orders for AYs 2019-20 to 2022-23 and AY 2024-25 were themselves pending in appeal before the Ld. CIT(A) and had not attained finality.
5.11 The Ld. AR also challenged the observation of the Ld. PCIT that the assessment proceedings were completed without sufficient enquiries because of the statutory time limit. It was submitted that a time constraint by itself cannot justify revision u/s 263 of the Act. Otherwise, every assessment completed close to the statutory limitation date would become liable to revision.
5.12 The Ld. AR also rebutted the Revenue’s contention that the assessee supplied the customers’ names rather than the AO directly identifying them from the seized materials. It was submitted that the loose entries did not contain complete addresses. Therefore, the AO required the assessee to furnish the necessary identifying details. The assessee supplied those details. This enabled the AO to issue notices and independently verify the transactions. According to the Ld. AR, this was a normal method of conducting assessment enquiries and did not make the enquiries invalid.
5.13 The Ld. AR finally concluded his argument by contending that the AO had made detailed and extensive enquiries into the seized materials, statements, bills and vouchers, third-party confirmations and digital Excel sheets. The AO independently analysed the materials, rejected parts of the assessee’s explanation, and made additions. Thus, there was no lack of enquiry. The disagreement of the Ld. PCIT relates to the extent and manner of enquiry made by the AO. The Ld. PCIT had not himself conducted any further enquiry or recorded a positive finding establishing an error in the assessment order. It was therefore submitted that the conditions necessary for invoking jurisdiction u/s 263 of the Act were not satisfied and the impugned revision order was liable to be quashed.
6. The learned DR, on the contrary, vehemently supported the order passed by the Ld. PCIT u/s 263 of the Act. The Ld. DR submitted that during the search, substantial cash, jewellery and watches were found. Several pocket diaries, loose sheets and digital data were also seized. The assessee was examined on oath on several occasions. He had explained various entries as relating to his business receipts and payments outside the regular books. However, the AO did not properly verify these statements and the seized entries.
6.1 The Ld. DR further submitted that the addition of Rs. 2,30,44,780/- was not arrived at by examining the seized entries. The AO substantially adopted the working furnished by the assessee on 19.03.2025. The assessee had applied a rate of 2% to certain project values. The AO merely substituted the rates of 2.5% and 15%. The basic project values themselves were not verified with the seized entries, clients, vouchers or other evidence.
6.2 The Ld. DR also pointed out that several important enquiries remained incomplete. The client-wise details and confirmations for the year under consideration were not obtained. The basis of the percentage adopted for computing income was not verified. The assessee had himself stated that Rs. 4.70 crores offered in A.Y. 2024-25 represented income of earlier years. However, no exercise was made to determine how much of such income related to the year under consideration.
6.3 The Ld. DR submitted that this was not a case of merely inadequate enquiry or a change of opinion. According to him, necessary enquiries on the seized entries themselves were not made. The assessment was completed on 31.03.2025 when several matters were still pending for verification. The assessee had also sought further time for obtaining confirmations from clients, but the assessment was completed without waiting for the same.
6.4 The Ld. DR further opposed the assessee’s contention that the seized papers were merely dumb documents. He submitted that the assessee had himself claimed ownership of the seized annexures and had explained most of the pages during his statements. He had also stated that several transactions were outside his regular books. Therefore, the nature and effect of these entries required proper examination by the AO.
6.5 Accordingly, the Ld. DR submitted that Explanation 2(a) to section 263 of the Act was clearly attracted, since the assessment order was passed without making enquiries and verification which ought to have been made. He therefore prayed that the order passed by the Ld. PCIT u/s 263 of the Act be upheld and the appeal of the assessee be dismissed.
7. We have considered the rival contentions of both the parties, perused the materials available on record, and carefully gone through the assessment order dated 31.03.2025 and the order passed by the Ld. PCIT u/s 263 of the Act. The short issue before us is whether the assessment order was passed without making enquiries or verification which ought to have been made. The Ld. PCIT has invoked Explanation 2(a) to section 263 of the Act mainly on this basis. According to the Ld. PCIT, the AO did not fully examine the seized materials. The Ld. PCIT was also of the view that the AO ought to have made further enquiries from a larger number of persons.
7.1 In the above factual background, we perused the assessment order carefully and note that the AO had examined the issues & facts arising from the search proceedings in considerable detail. It is not a case where the AO accepted the returned income without examining the materials found during the search.
7.2 In paras 1 to 10 of the assessment order, the AO has discussed the search proceedings in detail. The AO referred to the cash of Rs. 41.21 crores, jewellery, and luxury watches found during the search. The AO has also discussed the pocket diaries, scribbling pads and loose sheets seized during the search. More importantly, the AO has referred to the statements of the assessee recorded during the search and post-search proceedings. The AO also considered the statements of the assessee’s employees, associates, and certain customers. The AO thereafter recorded his understanding that the assessee was providing architectural and consultancy services and that the seized materials contained notings relating to such activities. Thus, the very foundation of the assessment was the materials found during the search.
7.3 The assessment order further shows that the AO did not stop at the search material. In paras 11 to 13, the AO considered the assessee’s replies filed during the assessment proceedings. The AO also specifically examined the retraction affidavit filed by the assessee. The AO considered the explanation regarding the nature of the entries appearing in the seized materials and the assessee’s claim regarding the percentage of fees earned on the projects. Therefore, the AO also considered the assessee’s subsequent explanation and retraction while taking a possible view.
7.4 The extent of enquiry becomes still clearer from para 14 of the assessment order. The assessee had produced more than 2,000 bills, vouchers and payment receipts relating to his customers. The AO did not simply accept these documents. Notices u/s 133(6) of the Act were issued for independent verification. Summons u/s 131(1) of the Act were also issued. Persons were examined and their statements were recorded. Responses received to the notices u/s 133(6) of the Act were also examined. The AO thereafter recorded the result of such verification. Thus, there was independent enquiry by the AO. The assessee had also specifically pointed out before the Ld. PCIT that several persons had confirmed having availed architectural services from him.
7.5 Paras 15 to 18 of the assessment order are also important. The AO considered the assessee’s explanation regarding the cash seized and the income offered as a result of the search. The AO did not accept the assessee’s explanation in full. The AO thereafter summoned the assessee and recorded his statement u/s 131(1) of the Act on 19.03.2025. The assessee was specifically questioned regarding the seized materials, the nature of his services, the manner of charging fees and the Excel sheets found during the search. The AO also independently examined the manner in which the figures appearing in those Excel sheets were to be understood. Thus, the AO applied his own mind to the seized materials and did not merely accept the explanation offered by the assessee.
7.6 This position becomes even clearer from para 19 of the assessment order. The AO noted that the Excel sheet furnished by the assessee during the assessment proceedings had been prepared on the basis of the notings appearing in the seized pocket diaries, scribbling pads and loose sheets. The relevant para of the assessment order is reproduced below:
19. During his statement recorded before this office on 19.03.2025, the assessee provided specific details regarding the income earned from the noting of transactions in pocket diaries/scribbling pads and excel sheets in an annexure. On perusal of this annexure, it has been seen that the assessee had computed commission income earned at @2%, and income from planning/ supervision/ execution @5% to 12% of the project value/estimate from the notings appearing in pocket diaries/ loose sheets and in excel sheets, which are tabulated as below:
7.7 The AO analysed the figures assessment year-wise. He correlated the figures appearing in the seized materials with the working furnished during the assessment proceedings. Thereafter, the AO did not accept the income computation of the assessee as it was explained by the assessee.
7.8 In fact, the AO specifically disagreed with the percentage adopted by the assessee. The assessee had computed income at a lower percentage. After examining the vouchers and the nature of services, the AO held that a higher percentage was required to be adopted. He accordingly recomputed the income and made an addition of Rs. 2,30,44,780 for the year under consideration. The assessment was finally completed at a total income of Rs. 2,77,42,580 as against the returned income of Rs. 46,97,800.00.
7.9 Therefore, the record clearly shows a continuous process of enquiry. The AO considered the seized materials. He considered several statements recorded during and after the search. He examined the retraction affidavit. He called for bills and vouchers. He issued notices u/s 133(6) of the Act. He issued summons u/s 131(1) of the Act. He recorded further statements. He examined the Excel sheets and interpreted the entries appearing therein. Finally, he estimated the income on the basis of his appreciation of the materials.
7.10 In these circumstances, we are unable to accept the finding of the Ld. PCIT that the assessment was completed without making necessary enquiries or verification. The fact that the Ld. PCIT considered the enquiry made by the AO to be insufficient cannot convert the present case into one of “no enquiry”. In the light of the above observation of the assessment order, we are of the considered opinion that the AO has made inquiry and, based on such inquiry, drawn an inference. However, the learned PCIT found the inquiry made by the AO to be insufficient.
7.11 We note that the main objection of the Ld. PCIT is regarding the extent of verification carried out by the AO. According to the Ld. PCIT, more persons and more transactions ought to have been verified. However, the show-cause notice itself records that the AO had verified about 10% to 12% of more than 2,000 bills, vouchers and payment receipts produced by the assessee. Thus, the case of the Ld. PCIT itself proceeds on the basis that enquiry was made by the AO. The dispute is essentially regarding the extent of such enquiry. Once the AO conducted enquiries, made third-party verification and thereafter took a view on the basis of the materials before him, the assessment order, in our considered view, cannot be treated as one passed without enquiry merely because the Ld. PCIT considered that the verification should have been wider or deeper.
7.12 In this regard, we find support from the decision of the Hon’ble Delhi High Court in ITO v. DG Housing Projects Ltd. (2012) 343 ITR 329 (Delhi). The Hon’ble High Court has explained the distinction between lack of enquiry and inadequate enquiry. Where an enquiry has been made by the AO, but the ld. Commissioner considers the same to be inadequate, the ld. Commissioner has to himself examine the matter and record a finding as to how the assessment order is erroneous. He cannot merely set aside the assessment and direct the AO to conduct further enquiry to find out whether any error exists. The relevant observation of the Hon’ble Delhi High Court is extracted as under:
16. Thus, in cases of 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, if required and necessary, before the order under Section 263 is passed. In such cases, the order of the Assessing Officer will be erroneous because the order passed is not sustainable in law and the said finding must be recorded. CIT cannot remand the matter to the Assessing Officer to decide whether the findings recorded are erroneous. In cases where there is inadequate enquiry but not lack of enquiry, again the CIT must give and record a finding that the order/inquiry made is erroneous. This can happen if an enquiry and verification is conducted by the CIT and he is able to establish and show the error or mistake made by the Assessing Officer, making the order unsustainable in Law. In some cases possibly though rarely, the CIT can also show and establish that the facts on record or inferences drawn from facts on record per se justified and mandated further enquiry or investigation but the Assessing Officer had erroneously not undertaken the same. However, the said finding must be clear, unambiguous and not debatable. The matter cannot be remitted for a fresh decision to the Assessing Officer to conduct further enquiries without a finding that the order is erroneous. Finding that the order is erroneous is a condition or requirement which must be satisfied for exercise of jurisdiction under Section 263 of the Act. In such matters, to remand the matter/issue to the Assessing Officer would imply and mean the CIT has not examined and decided whether or not the order is erroneous but has directed the Assessing Officer to decide the aspect/question.
17. This distinction must be kept in mind by the CIT while exercising jurisdiction under Section 263 of the Act and in the absence of the finding that the order is erroneous and prejudicial to the interest of Revenue, exercise of jurisdiction under the said section is not sustainable. In most cases of alleged “inadequate investigation”, it will be difficult to hold that the order of the Assessing Officer, who had conducted enquiries and had acted as an investigator, is erroneous, without CIT conducting verification/inquiry. The order of the Assessing Officer may be or may not be wrong. CIT cannot direct reconsideration on this ground but only when the order is erroneous. An order of remit cannot be passed by the CIT to ask the Assessing Officer to decide whether the order was erroneous. This is not permissible. An order is not erroneous, unless the CIT hold and records reasons why it is erroneous. An order will not become erroneous because on remit, the Assessing Officer may decide that the order is erroneous. Therefore CIT must after recording reasons hold that the order is erroneous. The jurisdictional precondition stipulated is that the CIT must come to the conclusion that the order is erroneous and is unsustainable in law. We may notice that the material which the CIT can rely includes not only the record as it stands at the time when the order in question was passed by the Assessing Officer but also the record as it stands at the time of examination by the CIT [see CIT v. Shree Manjunathesware Packing & Products Camphor Works [1998] 231 ITR 53 / 98 Taxman 1 (SC)]. Nothing bars/prohibits the CIT from collecting and relying upon new/additional material/evidence to show and state that the order of the Assessing Officer is erroneous.
18. It is in this context that the Supreme Court in Malabar Industrial Co. Ltd. v. Commissioner of Income Tax, [2000] 243 ITR 83 / 109 Taxman 66 (SC), had observed that the phrase ‘prejudicial to the interest of Revenue’ has to be read in conjunction with an erroneous order passed by the Assessing Officer. Every loss of Revenue as a consequence of an order of the Assessing Officer cannot be treated as prejudicial to the interest of Revenue. Thus, when the Assessing Officer had adopted one of the courses permissible and available to him, and this has resulted in loss to Revenue; or two views were possible and the Assessing Officer has taken one view with which the CIT may not agree; the said orders cannot be treated as an erroneous order prejudicial to the interest of Revenue unless the view taken by the Assessing Officer is unsustainable in law. In such matters, the CIT must give a finding that the view taken by the Assessing Officer is unsustainable in law and, therefore, the order is erroneous. He must also show that prejudice is caused to the interest of the Revenue.
7.13 In the present case, the Ld. PCIT has not conducted any such independent enquiry. He has mainly directed the AO to undertake further examination and cross-verification. Therefore, the ratio of the above decision supports the case of the assessee. The Ld. AR had specifically relied upon this decision for this proposition.
7.14 We also find support from the decision of the Hon’ble Gujarat High Court in Pr. CIT v. Shreeji Prints (P.) Ltd., which has been affirmed by the Hon’ble Supreme Court by dismissal of the Revenue’s SLP reported in [2021] 130 taxmann.com 294 (SC). In that case, the AO had made enquiries and, after considering the material, had taken a plausible view. The Hon’ble Gujarat High Court held that the revisional power u/s 263 of the Act cannot be exercised merely to direct a fuller enquiry when the AO has already made enquiries and applied his mind. It was further held that Explanation 2(a) to section 263 of the Act does not permit the Ld. PCIT to set aside an assessment merely because, in his opinion, further or more detailed enquiry was required. The Hon’ble Supreme Court found no reason to interfere with the said decision and dismissed the SLP filed by the Revenue. The relevant observation of the Hon’ble High Court reads as under:
53.3 Applicability: This amendment has taken effect from 1st day of June, 2015.”
“17 We thus find merit in the plea of the assessee that the Revisional Commissioner is expected show that the view taken by the AO is wholly unsustainable in law before embarking upon exercise of revisionary powers. The revisional powers cannot be exercised for directing a fuller inquiry to merely find out if the earlier view taken is erroneous particularly when a view was already taken after inquiry. If such course of action as interpreted by the Revisional Commissioner in the light of the Explanation 2 is permitted, Revisional Commissioner can possibly find fault with each and every assessment order without himself making any inquiry or verification and without establishing that assessment order is not sustainable in law. This would inevitably mean that every order of the lower authority would thus become susceptible to section 263 of the Act and, in turn, will cause serious unintended hardship to the tax payer concerned for no fault on his part. Apparently, this is not intended by the Explanation. Howsoever wide the scope of Explanation 2(a) may be, its limits are implicit in it. It is only in a very gross case of inadequacy in inquiry or where inquiry is per se mandated on the basis of record available before the AO and such inquiry was not conducted, the revisional power so conferred can be exercised to invalidate the action of AO. The AO in the present case has not accepted the submissions of the assessee on various issues summarily but has shown appetite for inquiry and verifications. The AO has passed after making due enquiries issues involved impliedly after due application of mind. Therefore, the Explanation 2 to section 263 of the Act do not, in our view, thwart the assessment process in the facts and the context of the case. Consequently, we find that the foundation for exercise of revisional jurisdiction is sorely missing in the present case.
7.15 The above principle is also supported by the decision of the Hon’ble Bombay High Court in CIT v. Gabriel India Ltd. [1993] 71 Taxman 585 (Bombay) and the decision of the Coordinate Bench in Reliance Payment Solutions Ltd. v. PCIT [2022] 136 taxmann.com 277 (Mumbai-Trib.). The provision of 263 of the Act cannot be invoked merely because the Ld. PCIT would have preferred a larger sample, a different method of enquiry or further verification. The relevant observation of the Hon’ble Bombay High Court in case of Gabriel India Ltd. reads as under:
14. We may now examine the facts of the present case in the light of the powers of the Commissioner set out above. The ITO in this case had made enquiries in regard to the nature of the expenditure incurred by the assessee. The assessee had given detailed explanation in that regard by a letter in writing. All these are part of the record of the case. Evidently, the claim was allowed by the ITO on being satisfied with the explanation of the assessee. Such decision of the ITO cannot be held to be ‘erroneous’ simply because in his order he did not make an elaborate discussion in that regard. Moreover, in the instant case, the Commissioner himself, even after initiating proceedings for revision and hearing the assessee, could not say that the allowance of the claim of the assessee was erroneous and that the expenditure was not revenue expenditure but an expenditure of capital nature. He simply asked the ITO to re-examine the matter that, in our opinion, is not permissible. Further inquiry and/or fresh determination can be directed by the Commissioner only after coming to the conclusion that the earlier finding of the ITO was erroneous and prejudicial to the interests of the revenue. Without doing so, he does not get the power to set aside the assessment. In the instant case, the Commissioner did so and it is for that reason that the Tribunal did not approve his action and set aside his order. We do not find any infirmity in the above conclusion of the Tribunal.
15. In the light of the foregoing discussion, we answer the question referred to us in the affirmative, that is, in favour of the assessee and against the revenue.
7.15 The ratio of the above decisions squarely supports the assessee in the present case. As discussed above, the AO has made extensive enquiries into the seized materials and has taken a conscious view after examining the evidence. Therefore, merely because the Ld. PCIT considered that further or wider verification ought to have been made, the assessment order cannot be held to be erroneous and prejudicial to the interests of the Revenue.
7.16 Moving ahead we further note that the Ld. PCIT has observed that no investigation was made to find out corroborating assets. In this regard we find that during the search no material was found or brought on record suggesting that the assessee had any undisclosed assets or investments other than cash, jewellery and valuable watches. The cash found has already been offered to tax and valuable watches & jewellery are duly considered. As far as the notings and scribing in dairies or notepad or loose sheet etc are concerned, we note that the AO has analysed and made inquiry to the extent of his satisfaction and reached to conclusion that the notings and scribing in the seized documents pertains to the assessee’s business activity of architect services and consultancy services. The view undertaken by the AO as observed earlier is one of the possible views based on materials on record and after their independent analysis & verification. Therefore, we are of the considered view that the Ld. PCIT observation that no investigation or enquiry conducted to find out corroborating asset is devoid of merits and does not hold good.
7.17 We also do not find merit in the contention of the Ld. DR that the AO merely adopted the working furnished by the assessee. The assessment order shows otherwise. The working furnished by the assessee was based on the notings appearing in the seized material. The AO independently examined those figures. He also did not accept the percentage adopted by the assessee. He substituted his own rates and consequently made an addition of Rs. 2,30,44,780/-. Therefore, it cannot be said that the AO accepted the assessee’s working without application of mind. On the contrary, after receiving such details, the AO issued notices and summons and independently verified the transactions. The fact that the AO rejected part of the assessee’s explanation and made a substantial addition further shows that he had independently examined the materials before him.
7.18 We also find substance in the contention of the Ld. AR regarding the reliance placed by the Ld. PCIT on assessments for AYs 2019-20 to 2022-23 and AY 2024-25. The assessment order for the year under consideration was passed on 31.03.2025 and the notice u/s 263 of the Act was issued on 15.04.2025. However, the assessment orders for the other years referred to by the Ld. PCIT were passed only on 31.03.2026. Thus, these assessment orders did not exist when the Ld. PCIT initiated proceedings u/s 263 of the Act. They could not, therefore, have formed the basis for the Ld. PCIT’s satisfaction at the time of initiation that the assessment order for the year under consideration was erroneous and prejudicial to the interests of the Revenue. Further, the assessments for the other years were stated to be pending in appeal before the Ld. CIT(A) and had not attained finality. Each assessment year has also to be examined on its own facts. Therefore, the subsequent assessments cannot, by themselves, establish that the view taken by the AO for the present year was erroneous.
7.19 We further note that the Ld. PCIT has also referred to the limited time available with the AO for completing the assessment. In our view, this circumstance cannot by itself establish that the assessment order is erroneous. The validity of the assessment should be examined on the basis of the enquiries actually made and the materials considered by the AO. An assessment order should not be revised merely because it was completed close to the statutory time limit. In the present case, as already discussed above, the assessment order itself records the enquiries made by the AO. Therefore, in our considered view, the limited time available with the AO cannot be a ground for invoking section 263 of the Act.
7.20 It is also relevant to note that the Ld. PCIT has ultimately set aside the assessment for further examination, enquiry and cross-verification. However, there is no positive finding in the impugned order demonstrating that the conclusion already reached by the AO on the basis of the enquiries made by him was erroneous. The power u/s 263 of the Act cannot be exercised merely to conduct another round of enquiry into the same material. This principle is supported by the decisions in DG Housing Projects Ltd., Shreeji Prints (P.) Ltd., Gabriel India Ltd. and Reliance Payment Solutions Ltd. referred to in the above paragraphs.
7.21 The Hon’ble Supreme Court in Malabar Industrial Co. Ltd. v. CIT (243 ITR 83) has held that the assessment order must be both erroneous and prejudicial to the interests of the Revenue before jurisdiction u/s 263 of the Act can be exercised. In the present case, the assessment order shows a continuous process of enquiry. The AO examined the seized materials and the statements recorded during the search and post-search proceedings. He considered the assessee’s replies and retraction. He examined more than 2,000 bills, vouchers and payment receipts on a sample basis. He made third-party verification by issuing notices u/s 133(6) of the Act and summons u/s 131(1) of the Act. He examined the digital Excel sheets and independently interpreted the entries therein. Finally, he rejected part of the assessee’s explanation, adopted his own percentage and made an addition of Rs. 2,30,44,780/-. These facts clearly demonstrate application of mind by the AO.
7.22 Therefore, considering the assessment order as a whole, we are of the view that this is not a case of lack of enquiry. The disagreement of the Ld. PCIT is substantially with the extent and manner of enquiry made by the AO. The Ld. PCIT has not brought any material on record through his own enquiry to demonstrate that the view taken by the AO was erroneous. Instead, the Ld. PCIT directed a further and wider enquiry into the same material. In the facts of the present case and in view of the principles laid down in the decisions discussed above, this is not sufficient to hold the assessment order erroneous and prejudicial to the interests of the Revenue.
7.23 Accordingly, the conditions necessary for invoking jurisdiction u/s 263 of the Act are not satisfied. We therefore quash the impugned order passed by the Ld. PCIT u/s 263 of the Act and restore the assessment order dated 31.03.2025. Hence, the grounds of appeal raised by the assessee are accordingly allowed.
8. In the result, the appeal of the assessee is allowed.
Order pronounced in the open court on 16th Sept. 2026
