Sec. 263 Cannot Be Invoked When AO Follows One of Two Possible Views: Chhattisgarh HC
PCIT Vs Mahavir Ashok Enterprises Pvt Ltd (Chhattisgarh High Court)
In a significant ruling, the Chhattisgarh High Court has held that the revisional authority, under Section 263 of the Income Tax Act, 1961, cannot invoke the provision if the Assessing Officer (AO) has followed one of the two possible views available in law. This judgment arose in the case of Principal Commissioner of Income Tax (PCIT) Vs. Mahavir Ashok Enterprises Pvt. Ltd., and the court underscored the principles governing the invocation of revisional powers under Section 263.
Background
Mahavir Ashok Enterprises Pvt. Ltd., engaged in the business of trading gold ornaments, bullion, diamonds, and other precious metals, was subject to a survey conducted under Section 133A of the Income Tax Act on March 6, 2017. During this survey, the company declared excess stock worth ₹2,25,75,951, which was later reflected in the income tax return for the assessment year 2017-18.
The return of income was scrutinized by the Assessing Officer (AO), who added a small amount to the disclosed income and taxed the entire income at a 30% rate under the general provisions of the Income Tax Act. However, the Principal Commissioner of Income Tax (PCIT), in exercising his revisional powers under Section 263, argued that the surrendered excess stock should have been treated as unexplained investment under Section 69 of the Income Tax Act and taxed at a higher rate of 60% plus surcharge and cess under Section 115BBE.
PCIT’s Revision under Section 263
The PCIT noted that the AO failed to properly scrutinize the assessee’s claim of excess stock and did not apply the appropriate provisions of Sections 69 and 115BBE. Consequently, the PCIT issued a notice under Section 263, finding the AO’s order both erroneous and prejudicial to the interests of the Revenue. The PCIT set aside the original assessment order, directing the AO to reassess the issues after conducting fresh inquiries.
In response, the assessee challenged the PCIT’s order before the Income Tax Appellate Tribunal (ITAT). The ITAT ruled in favor of the assessee, holding that the AO’s order was not erroneous as it was based on one of the two legally permissible views.
ITAT’s Decision
The ITAT ruled that the AO had exercised his discretion by considering the excess stock as business income and taxing it under the regular provisions. This decision, according to the ITAT, was a plausible view and could not be considered erroneous just because the PCIT disagreed with the approach. The ITAT set aside the PCIT’s order, reinstating the original assessment.
Chhattisgarh High Court Ruling
The Revenue, dissatisfied with the ITAT’s ruling, appealed the decision in the Chhattisgarh High Court under Section 260A of the Income Tax Act. The core issue was whether the ITAT was correct in holding that there was no tangible material for the PCIT to invoke Section 263 and whether the AO’s decision was erroneous.
After reviewing the arguments, the Chhattisgarh High Court sided with the ITAT, reinforcing that Section 263 could not be invoked merely because the PCIT preferred an alternative view. The court referenced the Supreme Court’s judgment in Malabar Industrial Co. Ltd. Vs. CIT, which established that two conditions must be satisfied for invoking Section 263:
The order must be erroneous.
The order must be prejudicial to the interests of the Revenue.
The court emphasized that when an AO adopts one of the two legally sustainable views, the order cannot be considered erroneous. Furthermore, the mere existence of a different view does not justify revisional action under Section 263.
Key Takeaways
Scope of Section 263 – Section 263 of the Income Tax Act allows the revisional authority to modify or cancel the AO’s order if it is found to be both erroneous and prejudicial to the interests of the Revenue. However, as per the Malabar Industrial Co. Ltd. ruling, if the AO adopts one of the two possible legal views, the order cannot be labeled as erroneous.
Two Possible Views Principle – The Chhattisgarh High Court reiterated that if the AO’s view is legally permissible, even if it results in a lower tax liability, the revisional authority cannot invoke Section 263 simply because it disagrees with the AO’s approach.
Burden on PCIT – The revisional authority bears the burden of proving that the AO’s order is erroneous and prejudicial to Revenue interests. In this case, the PCIT failed to demonstrate any fundamental legal flaw in the AO’s approach, which was based on a plausible interpretation of the Income Tax Act.
Conclusion
The ruling in PCIT Vs. Mahavir Ashok Enterprises Pvt. Ltd. is a significant affirmation of the judicial principle that revisional powers under Section 263 cannot be exercised arbitrarily. It reinforces the idea that the AO’s decision, if based on a legally permissible interpretation, cannot be overturned merely because the revisional authority holds a differing opinion. This judgment provides important clarity on the scope and limits of Section 263, ensuring that taxpayers are protected from unnecessary revision when the AO adopts a rational view within the bounds of law.
Respondent is represented by Mr. Ashish Goyal, Advocate through Video Conferencing and Mr. Priyanshu Gupta, Advocate
FULL TEXT OF THE JUDGMENT/ORDER OF CHHATTISGARH HIGH COURT
The sole substantial question of law involved and formulated on 22-2023 for decision of this tax appeal preferred under Section 260A of the Income Tax, 1961 (for short, ‘the IT Act’), states as under: –
“Whether the learned Tribunal was correct in holding in the attending facts and circumstances of the case that there was no tangible material before the revisional authority for directing the Assessing Officer to make inquiries with regard to applicability of Sections 69 and 115BBE of the Income Tax Act, 1961 in connection with unexplained investment of Rs.2,25,75,951/-?”
[For the sake of convenience, the appellant will be referred hereinafter as ‘Revenue’ and the respondent will be referred hereinafter as ‘assessee’.]
2. The assessee Company is engaged in the business of trading of Gold Ornaments, Gold Bullion, Diamond Ornaments & precious metals and derives income from them. The assessee’s case was selected for compulsory scrutiny consequent upon the survey action carried out at the business premises of the assessee under Section 133A of the IT Act on 6-3-2017. During the course of survey proceedings, excess stock of ₹ 2,25,75,951/- was found which the assessee surrendered as his income for the assessment year 2017-18 and thereafter, the assessee filed income tax return for the said assessment year in response to the notice under Section 142(1) of the IT Act declaring total income of ₹ 2,36,89,620/- as profit and gains from business or profession which includes the impugned excess stock of ₹ 2,25,75,951/-.
3. The assessee filed return of income electronically on 30-11-2018 declaring total income of ₹ 2,36,89,620/- vide acknowledgment No.369948171200118. On 21-12-2017, a notice under Section 142(1) of the IT Act was issued by the Assessing Officer, Central Circle to file return of income by 20-1-2018 which the assessee filed and on 18-9-2018, return of income was selected under compulsory scrutiny after due approval of the competent authority and notice under Section 143(2) of the IT Act was issued and ultimately, the Assessing Officer issued show cause notice to the assessee under Section 263 of the IT Act that the assessee Company has shown very small net profit ratio in comparison to the net profit shown in the previous two years, which the assessee replied, however, the Assessing Officer did not find the explanation satisfactory and added only ₹ 1,42,715/- and the entire income was taxed at the rate of 30% along with surcharge and cess by order dated 21-12-2019.
4. The revisional authority i.e. the Principal Commissioner of Income Tax (PCIT) finding that the Assessing Officer (AO) has failed to verify the claim of the assessee of excess purchase and further finding that there is no application of mind on the part of the AO to verify the claim of the assessee in the return of income and also finding that the assessment order passed under Section 144 of the IT Act is erroneous as well as it is prejudicial to the interest of the Revenue, proceeded to issue notice under Section 263 of the IT Act on the ground that the assessee had disclosed additional income of ₹ 2,25,75,951/- after finding the excess stock of jewellery of same value during the survey proceedings on 6-3-2017 and the same should have been declared as unexplained investment by the assessee under Section 69 of the IT Act which should have been taxed under Section 115BBE of the IT Act and it should have been taxed at the rate of 60% + surcharge and cess. The assessee replied the notice under Section 263 of the IT Act stating that the assessee is a Company engaged in trading of Gold Ornaments, Gold Bullion, Diamond Ornaments and precious metals and that the assessee Company follows mercantile system of accounting over the years consistently and there is no deviation from the method of accounting followed by the assessee Company during the year under consideration, and prayer was made to drop the proceeding initiated under Section 263 of the IT Act. Finally, after considering the reply filed by the assessee, the PCIT by its order dated 27-32021 came to the conclusion that the assessing authority did not make proper inquiry and having satisfied that the assessment order is erroneous and it is prejudicial to the interest of the Revenue in view of Explanation 2 to Section 263 of the IT Act, set aside the assessment order and remanded back the matter to the AO for fresh adjudication of the issues by conducting necessary inquiries and passing fresh assessment order after giving adequate opportunity to the assessee.
5. Feeling dissatisfied and aggrieved by the order of the PCIT, invoking the revisional jurisdiction under Section 263(1) of the IT Act, the assessee preferred appeal under Section 253 of the IT Act before the ITAT branding the same as unsustainable and stating that Section 263 of the IT Act is not attracted and thus, the learned PCIT could not have invoked Section 263. The ITAT by its impugned order dated 29-9-2021 passed in ITA No.46/RPR/2021, allowed the appeal and set aside the order of the PCIT holding that there is no reason and justification for exercising the revisional power under Section 263 of the IT Act and restored the order passed by the AO.
6. Being aggrieved against the order of the ITAT setting aside the order of the PCIT and restoring the order of the AO, the Revenue has preferred this appeal in which substantial question of law has been formulated and set-out in the opening paragraph of this order.
7. Mr. Amit Chaudhari, learned counsel appearing for the appellant herein / Revenue, would submit that the ITAT has committed grave legal error in granting the appeal, as the assessee has failed to satisfactorily explain the nature and source of cash transactions adding ₹ 2,25,75,951/- as additional income as excess stock of jewellery of same value was found during the survey proceedings and as such, the impugned order of the ITAT deserves to be set aside.
8. Mr. Ashish Goyal, learned counsel appearing for the respondent / assessee Company, would support the order of the ITAT and submit that the ITAT has clearly recorded a finding holding that both the conditions to invoke Section 263(1) of the IT Act namely, the order was erroneous as well as it was prejudicial to the interest of the Revenue, are not attracted and in that view of the matter, the appeal deserves to be dismissed.
9. We have heard learned counsel for the parties and considered their rival submissions made herein-above and also went through the record with utmost circumspection.
10. In order to consider the plea raised at the Bar, it would be appropriate to notice Section 263(1) of the IT Act, which states as under: –
“263. Revision of orders prejudicial to revenue.—(1) The Principal Chief Commissioner or Chief Commissioner or Principal Commissioner or Commissioner may call for and examine the record of any proceeding under this Act, and if he considers that any order passed therein by the Assessing Officer or the Transfer Pricing Officer, as the case may be, 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,—
(i) an order enhancing or modifying the assessment or cancelling the assessment and directing a fresh assessment; or
(ii) an order modifying the order under section 92CA; or
(iii) an order cancelling the order under section 92CA and directing a fresh order under the said section.
Explanation 1.—For the removal of doubts, it is hereby declared that, for the purposes of this sub-section,—
(a) an order passed on or before or after the 1st day of June, 1988, by the Assessing Officer or the Transfer Pricing Officer, as the case may be, shall include—
(i) an order of assessment made by the Assistant Commissioner or Deputy Commissioner or the Income-tax Officer on the basis of the directions issued by the Joint Commissioner under section 144A;
(ii) an order made by the Joint Commissioner in exercise of the powers or in the performance of the functions of an Assessing Officer or the Transfer Pricing Officer, as the case may be, conferred on, or assigned to, him under the orders or directions issued by the Board or by the Principal Chief Commissioner or Chief Commissioner or Principal Director General or Director General or Principal Commissioner or Commissioner authorised by the Board in this behalf under section 120;
(iii) an order under section 92CA by the Transfer Pricing Officer;
(b) “record” shall include and shall be deemed always to have included all records relating to any proceeding under this Act available at the time of examination by the Principal Chief Commissioner or Chief Commissioner or Principal Commissioner or Commissioner;
(c) where any order referred to in this sub-section and passed by the Assessing Officer or the Transfer Pricing Officer, as the case may be, had been the subject-matter of any appeal filed on or before or after the 1st day of June, 1988, the powers of Principal Commissioner or Commissioner under this subsection shall extend and shall be deemed always to have extended to such matters as had not been considered and decided in such appeal.
Explanation 2.—For the purposes of this section, it is hereby declared that an order passed by the Assessing Officer or the Transfer Pricing Officer, as the case may be, 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 or 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.
Explanation 3.—For the purposes of this section, “Transfer Pricing Officer” shall have the same meaning as assigned to it in the Explanation to section 92CA.”
11. A careful perusal of Section 263(1) of the IT Act would show that it is the essential condition to invoke Section 263 that the Commissioner must find that the order of assessment is erroneous firstly and secondly, that the order of the assessing authority is prejudicial to the interests of the revenue. The Commissioner of Income Tax has power to take into consideration all records available at the time of examination by him. ‘Record’ would mean all records relating to proceeding available at the time of examination with the Commissioner. (See Commissioner of Income Tax, Bangalore v. Shree Manjunatheaware Packing Products & Camphore Works1.)
12. The Supreme Court in the matter of Malabar Industrial Co. Ltd V. Commissioner of Income Tax, Kerala State2 has held that two conditions precedent for exercise of the revisional power under Section 263(1) of the IT Act namely, (i) the order of the Assessing Officer sought to be revised is erroneous; and (ii) it is prejudicial to the interests of the Revenue, have to be satisfied. It is further held that if one of them is absent, recourse cannot be had to Section 263(1), and observed as under: –
“6. A bare reading of this provision makes it clear that the prerequisite to exercise of jurisdiction by the Commissioner suo motu under it, is that the order of the Income Tax Officer is erroneous insofar as it is prejudicial to the interests of the Revenue. The Commissioner has to be satisfied of twin conditions, namely, (i) the order of the Assessing Officer sought to be revised is erroneous; and (ii) it is prejudicial to the interests of the Revenue. If one of them is absent — if the order of the Income Tax Officer is erroneous but is not prejudicial to the Revenue or if it is not erroneous but is prejudicial to the Revenue — recourse cannot be had to Section 263(1) of the Act.
7. There can be no doubt that the provision cannot be invoked to correct each and every type of mistake or error committed by the Assessing Officer; it is only when an order is erroneous that the section will be attracted. An incorrect assumption of facts or an incorrect application of law will satisfy the requirement of the order being erroneous. In the same category fall orders passed without applying the principles of natural justice or without application of mind.
8. The phrase “prejudicial to the interests of the Revenue” is not an expression of art and is not defined in the Act. Understood in its ordinary meaning it is of wide import and is not confined to loss of tax. The High Court of Calcutta in Dawjee Dadabhoy & Co. v. S.P. Jain3, the High Court of Karnataka in CIT v. T. Narayana Pai4, the High Court of Bombay in CIT v. Gabriel India Ltd.5 and the High Court of Gujarat in CIT v. Minalben S. Parikh6 treated loss of tax as prejudicial to the interests of the Revenue.
10. The phrase “prejudicial to the interests of the 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 interests of the Revenue, for example, when an Income Tax Officer adopted one of the courses permissible in law and it has resulted in loss of revenue; or where two views are possible and the Income Tax Officer has taken one view with which the Commissioner does not agree, it cannot be treated as an erroneous order prejudicial to the interests of the Revenue unless the view taken by the Income Tax Officer is unsustainable in law. It has been held by this Court that where a sum not earned by a person is assessed as income in his hands on his so offering, the order passed by the Assessing Officer accepting the same as such will be erroneous and prejudicial to the interests of the Revenue. (See Rampyari Devi Saraogi v. CIT7 and in Tara Devi Aggarwal v. CIT8.)”
13. The principle of law laid down in Malabar Industrial Co. Ltd. (supra) has recently been followed by their Lordships of the Supreme Court with approval in the matter of Commissioner of Income-tax v. Paville Projects Pvt. Ltd.9.
14. Reverting to the facts of the present case in light of the decisions of the Supreme Court in Malabar Industrial Co. Ltd. (supra) and Paville Projects Pvt. Ltd.’s case (supra), it has to be seen whether the order of the assessing authority sought to be revised was erroneous and whether it was prejudicial to the interests of the Revenue. In the present case, the Principal Commissioner of Income Tax i.e. the revisional authority though recorded a finding that the order is erroneous and prejudicial to the interests of the Revenue, but only on the basis that no inquiry has been conducted on the issue and it smacks non-application of mind by the Assessing Officer, reached to the conclusion that the order sought to be revised is erroneous and prejudicial to the interests of the Revenue and proceeded to invoke jurisdiction under Section 263(1) of the IT Act and proceeded to quash the order of the assessing authority. However, in appeal preferred by the assessee before the ITAT, the ITAT in paragraph 7 of the order impugned, has proposed two issues which state as under: –
“7. In exercise of powers conferred under section 263 of the Act, the PCIT has proposed revision of the assessment order on two counts:
i) The excess stock surrendered by the assessee during the survey, returned as business income, is liable to be considered as unexplained investment under section 69 of the Act and consequently tax was required to be enforced in terms of section 115BBE of the Act.
ii) The figures of purchase in the in the audited accounts drawn as on 31.03.2017 were not reconciled with the figures in the Trial Balance as on the date of survey i.e. 06.03.2017.”
15. The above stated two issues have been considered by the ITAT against the Revenue. With regard to the first issue, the learned ITAT relying upon the decisions of two High Courts namely, the Rajasthan High Court in the matter of Principal Commissioner of Income Tax – Central, Jaipur v. Aacharan Enterprises (P.) Ltd.10 and the Calcutta High Court in the matter of Principal Commissioner of Income Tax Officer, Burdwan v. Subarna Rice Mill11, has reached to the conclusion that surrender of undisclosed business income would not attract the penal provisions contained in Section 115BBE of the IT Act, and proceeded to hold that such an undisclosed business income has been considered as business income of the assessee. Similarly, with regard to the second issue, the ITAT in its order has held in favour of the assessee and against the Revenue. However, in this regard, it would be appropriate to notice that the Assessing Officer has issued specific show cause notice dated 18-12-2019 wherein identical question was raised and the assessee was required by the AO to show cause as to why the amount of ₹ 2,25,75,951/- be not treated as unexplained investment under Section 69 of the IT Act and the tax rate prescribed under Section 115BBE of the IT Act be not imposed against which the assessee on 19-12-2019 filed reply stating that excess business stock of ₹ 2,25,75,951/- found during the course of survey proceedings in the business premises of the assessee Company in the year under consideration is duly entered and disclosed in the books of accounts as business income which is included in the net profit. The assessee has further stated in the reply that the assessee Company is engaged in retail trading of Gold and Silver Ornaments since so many years and the object for which the Company is incorporated is also trading of Gold and Silver Ornaments. It has also been stated in the reply that the business activity of the assessee company is also accepted and assessed as such in earlier year assessments and as the excess business stock found during survey proceedings under the IT Act during the year under consideration in the business premises of the assessee Company and duly recorded in the books of accounts of the concerned year, Section 69 of the IT Act would not be attracted to the assessee Company. The assessee has also stated in the reply that as far as nature and source of investments is concerned, the investments are in the form business stock of Gold and Silver Ornaments found in the business premises and explanation of the business source of investments given on the basis of documents available in the business premises during the course of survey proceedings by the Director of the assessee Company was very well verified by the survey team and accepted, and hence, the excess stock of ₹ 2,25,75,951/- declared during the course of survey proceedings in the business premises cannot be treated as unexplained investment under Section 69 of the IT Act and as Section 69 does not attract in this situation, question of applicability of tax rate of 60% under Section 115BBE of the IT Act does not arise. The AO considered the reply and found substance in the submission raised on behalf of the assessee and only added ₹ 1,42,715/- to the business income of the assessee for the year under consideration.
16. In this regard, decision of the Supreme Court in the matter of Commissioner of Income Tax, (Central) Ludhiana v. Max India Limited12 may be noticed herein profitably in which their Lordships have held that every loss of revenue as a consequence of an order of the Assessing Officer cannot be treated as prejudicial to the interest of the Revenue. When the Income Tax Officer adopted one of the courses permissible in law and it has resulted in loos of revenue; or where two views are possible and the Income Tax Officer has taken one view with which the Commissioner does not agree, it cannot be treated as an erroneous order prejudicial to the interest of the Revenue, unless the view taken by the Income Tax Officer is unsustainable in law.
17. In this case also, the Assessing Officer has issued specific show cause notice to the assessee as to why the excess stock of ₹ 2,25,75,951/- be treated as unexplained investment under Section 69 of the IT Act which the assessee replied stating that the said excess business stock was found during survey proceedings under the IT Act during the year under consideration in the business premises of the assessee Company and duly recorded in the books of accounts of the concerned year and thus, Section 69 of the IT Act would not be attracted to the assessee Company, as excess stock would not be treated as undisclosed income within the meaning of Section 69, which the AO has accepted and taken it as one of the possible views and which the ITAT has accepted holding to be the correct view.
18. In that view of the matter, we are of the considered opinion that both the twin conditions, namely, the order of the Assessing Officer sought to be revised is erroneous and it is prejudicial to the interests of the Revenue, are not satisfied at all to invoke the jurisdiction under Section 263 of the IT Act, as the Assessing Officer has passed the order of assessment after conducting inquiry. As such, the learned PCIT is absolutely unjustified in invoking the jurisdiction under Section 263 of the IT Act which has rightly been set-aside by the ITAT.
19. In that view of the matter, we answer the substantial question of law in favour of the assessee and against the Revenue.
20. Consequently, the tax appeal deserves to be and is accordingly dismissed leaving the parties to bear their own cost(s).
Notes:
1 AIR 1998 SC 1478 : (1998) 1 SCC 598
2 (2000) 2 SCC 718
3 (1957) 31 ITR 872 (Cal)
4 (1975) 98 ITR 422 (Kant)
5 (1993) 203 ITR 108 (Bom)
6 (1995) 215 ITR 81 (Guj)
7 (1968) 67 ITR 84 (SC)
8 (1973) 3 SCC 482 : 1973 SCC (Tax) 318 : (1973) 88 ITR 323
9 (2023) 453 ITR 447
10 (2020) 273 Taxman 85 (Raj)
11 (2018) 257 Taxman 509 (Cal)
12 (2007) 15 SCC 401
