HC quashes PCIT's Section 263 revisional proceeding for failure to independently examine records before initiation

The HC quashed a suo moto revisional proceeding initiated by PCIT u/s 263 of the Income Tax Act. The court held that the PCIT failed to independently apply his mind and merely acted on a subordinate's proposal without examining records. The proceeding was initiated for non-disclosure of long-term capital gain in computation sheet despite it being shown in capital account. The court found no prejudice to revenue interests and ruled the revisional proceeding illegal, without jurisdiction, and unsustainable in law, emphasizing that both conditions of the order being erroneous and prejudicial to revenue must be satisfied.

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Issues Involved:
1. Validity of the Show Cause Notice and ex-parte Order issued u/s 263 of the Income Tax Act, 1961.
2. Whether the Assessment Order dated 28.12.2018 was erroneous and prejudicial to the interest of the revenue.
3. Compliance with procedural requirements u/s 263 of the Act.

Summary:

1. Validity of the Show Cause Notice and ex-parte Order issued u/s 263 of the Income Tax Act, 1961:
The petitioner challenged the Show Cause Notice dated 24.03.2021 and the subsequent ex-parte Order dated 28.03.2021 issued by respondent No. 2 u/s 263 of the Income Tax Act, 1961, for the assessment year 2017-18. The petitioner argued that the notice and order were issued without sufficient time to respond and were based on arbitrary grounds.

2. Whether the Assessment Order dated 28.12.2018 was erroneous and prejudicial to the interest of the revenue:
The petitioner contended that for the Principal Commissioner to exercise revisional power u/s 263, the order must be both erroneous and prejudicial to the interest of the revenue. The discrepancy of Rs. 5,30,257/- in long-term capital gains was cited as the basis for the revision. However, the petitioner argued that this amount was exempt from tax and thus did not cause any prejudice to the revenue.

3. Compliance with procedural requirements u/s 263 of the Act:
The Court examined whether the procedural requirements u/s 263 were followed. It was found that the Principal Commissioner initiated proceedings based on a proposal from a subordinate authority without independently examining the records. The Court emphasized that the power u/s 263 is supervisory and can only be exercised if the order is erroneous and prejudicial to the revenue, which was not established in this case.

Conclusion:
The Court concluded that the non-disclosure of Rs. 5,30,257/- in the computation sheet did not cause any prejudice to the revenue as the amount was exempt from tax. The initiation of proceedings u/s 263 was deemed illegal and without jurisdiction. Consequently, the Show Cause Notice dated 24.03.2021 and the ex-parte Order dated 28.03.2021 were set aside and quashed. The writ petition was allowed, and the case was disposed of.

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