CIT cannot invoke Section 263 powers when assessment order is not erroneous and prejudicial to revenue

The ITAT Delhi ruled in favor of the assessee in a revision case under Section 263. The CIT questioned cash deposits in bank accounts during an assessment completed under Section 143(3) read with Section 147. The tribunal held that for exercising power under Section 263, the AO's order must be both erroneous and prejudicial to revenue interest. Since the AO made no addition regarding the reasons recorded in the Section 148 notice, and this position remained undisturbed by the CIT, the assessment order was not erroneous. Therefore, the CIT lacked jurisdiction to invoke Section 263 powers.

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Issues Involved:
1. Jurisdiction u/s 263 of the Income Tax Act.
2. Erroneous and prejudicial assessment order.

Summary:

This appeal by the assessee challenges the order of the Principal Commissioner of Income Tax (PCIT) dated 26.02.2020 for the Assessment Year (A.Y.) 2010-11, where the PCIT assumed jurisdiction u/s 263 of the Income Tax Act and held the assessment order as erroneous and prejudicial to the interest of the Revenue.

The assessee was served a notice u/s 148 of the Income Tax Act, 1961, as the Assessing Officer (AO) had reason to believe that income had escaped assessment. The notice was based on the assessee's failure to file a return of income for A.Y. 2010-11 and a cash deposit of Rs. 12,00,000 in his bank accounts. The assessee satisfactorily explained the sources of this cash deposit, and the AO accepted the returned income without making any additions.

The PCIT issued a notice u/s 263, pointing out discrepancies such as the sale of a car for Rs. 9,31,516 and the purchase of immovable property for Rs. 28,26,580 without furnishing evidence. The PCIT deemed the assessment order u/s 143(3) r.w.s 147 as erroneous and prejudicial to the interest of the Revenue, and thus proposed to revise it.

The Tribunal referred to a similar case, Shri Paramjit Singh in ITA No. 446/DEL/2022, and the Delhi High Court's decision in CIT Vs. Software Consultants, where it was held that for exercising power u/s 263, the AO's order must be both erroneous and prejudicial to the interest of the Revenue. In the present case, the issues prompting the AO to reopen the assessment were duly considered, and no additions were made, which was not disturbed by the PCIT.

Moreover, the Tribunal cited the High Court's ruling that the AO could not make additions on issues not connected to the reasons for reopening the assessment. The Tribunal found that the AO's acceptance of the assessee's explanations was justified and that the PCIT's order u/s 263 was not warranted.

Consequently, the Tribunal set aside the PCIT's order dated 26.02.2020 and restored the AO's order dated 23.08.2017, allowing the appeal of the assessee.

The order was pronounced in the open court on 03.04.2024.

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