PCIT's Section 263 revision quashed for factual errors in subsidiary share investment assessment

The ITAT Bangalore held that the PCIT's revision under section 263 was unjustified. The assessee had invested in subsidiary company shares, acquiring them at Rs. 13.52 per share (not Rs. 10 face value as incorrectly stated by PCIT), paying Rs. 3,282,98,42,109 for 252,41,61,440 shares. The ITAT found the PCIT made factually incorrect observations and that no error existed in the AO's assessment order. Since the twin conditions for invoking section 263 (error prejudicial to revenue) were not satisfied, the assessee's appeal was allowed.

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Issues:
Jurisdiction under section 263 of the Income Tax Act, 1961.

Analysis:
The judgment pertains to an appeal arising from an order passed under section 263 of the Income Tax Act, 1961 for the assessment year 2017-18. The appellant, a company, had filed its original return declaring income under normal provisions and u/s 115JB. The assessment was completed by the AO, following which the Principal Commissioner of Income Tax (PCIT) issued a notice proposing to revise the order. The PCIT observed discrepancies related to the acquisition of shares in a subsidiary company and alleged unexplained cash credits leading to a tax shortfall. The appellant contested the notice, providing explanations and supporting documents. The PCIT, however, maintained that the appellant had paid an excess amount for acquiring shares, leading to an erroneous assessment prejudicial to revenue. The appellant challenged this decision before the ITAT.

The ITAT analyzed the facts and submissions. It noted that the appellant had acquired shares as per a Share Transfer Agreement at a price higher than the face value mentioned by the PCIT. The ITAT emphasized that the error in the assessment should be prejudicial to revenue to invoke section 263. It found that the PCIT had made factually incorrect observations regarding the share acquisition, as evidenced by the agreement and supporting documents. The ITAT concluded that there was no error on the part of the AO in framing the assessment, as the appellant had paid the correct amount for the shares. Consequently, the ITAT allowed the appeal of the assessee, ruling in favor of the appellant.

In summary, the judgment revolves around the validity of the jurisdiction assumed by the PCIT under section 263 of the Income Tax Act, 1961. The ITAT found that the PCIT's observations were factually incorrect, and the appellant had paid the correct amount for the shares as per the agreement. Therefore, the ITAT allowed the appeal, emphasizing that for section 263 to apply, there must be a prejudicial error in the assessment, which was not the case here.

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