PCIT's revision under section 263 quashed for failing to independently examine assessment records before initiating proceedings

The ITAT PUNE-AT quashed a revision proceeding under section 263 initiated by the PCIT regarding taxability of government grants. The tribunal held that the PCIT failed to independently examine the assessment record and instead relied solely on the AO's request for revision dated 22-03-2018. The court ruled that both conditions under section 263 - calling for and examining records, and independently determining the order as erroneous and prejudicial to revenue - must be cumulatively satisfied by the CIT alone. Since the PCIT exercised jurisdiction wrongfully without independent examination, the revision was quashed in favor of the assessee.

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Issues Involved:
1. Legality of invoking revision jurisdiction under Section 263 of the Income-tax Act, 1961.
2. Taxability of Government grants as capital or revenue receipts.

Summary:

Issue 1: Legality of invoking revision jurisdiction under Section 263 of the Income-tax Act, 1961

The assessee filed appeals against the common order passed by the Principal Commissioner of Income-tax (PCIT) under Section 263 for the assessment years 2012-13 and 2013-14. The PCIT issued a show cause notice based on the assessment proceedings for A.Y. 2014-15, observing that the assessee had received Government grants which were taxable but taken as capital receipts. The PCIT directed the AO to frame the assessment afresh after conducting enquiries and verification. The Tribunal noted that the PCIT's initiation of revision was premised solely on the report submitted by the AO requesting for the revision of the assessment order. The Tribunal emphasized that Section 263(1) mandates the Commissioner to call for and examine the record of any proceeding and then consider if the order is erroneous and prejudicial to the interests of the revenue. The Tribunal found that the PCIT did not independently call for and examine the records but acted solely on the AO's report. Citing the judgments in Smt. Sumitra Devi Khirwal Vs. CIT and CIT Vs. Bhagat Shyam & Co., the Tribunal highlighted that the satisfaction of the CIT is paramount and must be based on an independent examination of the records. The Tribunal concluded that the PCIT exercised his jurisdiction to initiate the revision proceedings in a wrongful manner.

Issue 2: Taxability of Government grants as capital or revenue receipts

The assessee contended that the Government grants were capital receipts not chargeable to tax, citing the SC decision in the case of PJ Chemicals. However, the PCIT found the contention unacceptable, referring to the SC decision in Sahney Steel & Press Works Limited Vs. CIT, which held that incentives received year after year after the commencement of production are to be treated as revenue receipts. The Tribunal did not delve into the merits of the issue, as it quashed the revision proceedings on the legal ground of wrongful exercise of jurisdiction by the PCIT.

Conclusion:

In view of the wrongful exercise of jurisdiction by the PCIT, the Tribunal set aside the impugned order passed under Section 263 for both assessment years. Consequently, the appeals were allowed.

Order pronounced in the Open Court on 19th October, 2023.

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