2025 (4) TMI 1136 - HC - Income Tax

PCIT's Section 263 revision order quashed for denying reasonable hearing opportunity to assessee before ex parte decision

The HC upheld ITAT's decision quashing PCIT's revision order under Section 263. The PCIT had found the AO's order erroneous and prejudicial to revenue ... Validity of Revision u/s 263 - ITAT held that order passed by the PCIT in exercise of Section 263 of the Act, 1961 is not in accordance with law as no reasonable opportunity of hearing was granted to the assessee/respondent and also incidentally held that the action of the A.O. is not erroneous. HELD THAT:- Where an A.O. has applied her/his mind (even if briefly) and arrived at a logical conclusion, the revisional authority cannot intervene under Section 263 of the Act, 1961 just because it has a different view or because he expected a more exhaustive reasoning in the order. To hold otherwise would convert the revisional power into an appellate review, which is not its intent. Prejudicial to interests of Revenue as provided in Section 263 of the Act, 1961 typically meaning that the error has caused a loss of tax revenue (short levy of tax) or posed a potential threat to the Revenue's ability to collect the rightful tax. If an error has no bearing on the taxable income (for instance, a procedural irregularity that doesn't affect the tax computation), revision is not justified. Though the PCIT has found the order of the A.O. erroneous in so far as it is prejudicial to the interest of Revenue, but no reasonable opportunity of hearing was aforded to the assessee/respondent herein to defend himself in light of provisions contained in Section 263 and, therefore, the order of the PCIT is liable to be quashed/set aside. We are of the considered opinion, order passed by the PCIT is in teeth of principles of provisions contained in Section 263 of the Act, 1961 as no reasonable opportunity of hearing was afforded to the assessee and also in light of principles of law laid down in the matter of Amitabh Bachchan [2016 (5) TMI 493 - SUPREME COURT] Since the ex parte order was passed invoking Section 263 by the PCIT without hearing the assessee/respondent herein, the finding recorded by the PCIT that the order is erroneous in so far as it is prejudicial to the interest of Revenue, is not the correct finding based on the records and, therefore, it has rightly been set aside by the ITAT. As such, we do not find any merit in the present tax appeal. Consequently, the question of law is answered in favour of the assessee and against the Revenue. 1. ISSUES PRESENTED and CONSIDEREDThe core legal question considered by the Court was whether the Income Tax Appellate Tribunal (ITAT) was justified in quashing the revisional order passed by the Principal Commissioner of Income Tax (PCIT) under Section 263 of the Income Tax Act, 1961, on the ground that no reasonable opportunity of hearing was granted to the assessee before setting aside the order passed by the Assessing Officer (A.O.). This central issue involved examining the scope and limits of the revisional jurisdiction under Section 263, the procedural fairness owed to the assessee, and the legal standards for determining when an order is erroneous and prejudicial to the interests of the Revenue.2. ISSUE-WISE DETAILED ANALYSISIssue: Scope and Conditions for Exercising Revisional Power under Section 263 of the Income Tax Act, 1961The Court examined the legal framework governing the revisional power of the Principal Commissioner/Commissioner under Section 263 of the Act. This provision allows the revisional authority to call for and examine the record of any proceeding under the Act and to modify or annul any order passed by the Assessing Officer if the order is found to be 'erroneous' and 'prejudicial to the interests of the Revenue.' Both conditions are conjunctive and must be satisfied for the revisional jurisdiction to be validly exercised.The Court relied heavily on authoritative precedents, particularly the Supreme Court's decision in Malabar Industrial Co. Ltd. vs. Commissioner of Income Tax, Kerala State, which clarified that an order is erroneous only if it is unsustainable in law due to incorrect application of law or a clearly wrong or incomplete appreciation of facts. Mere disagreement with the A.O.'s conclusion or expectation of more elaborate reasoning does not render an order erroneous. Additionally, a loss of revenue must be directly attributable to such an erroneous order for it to be considered prejudicial. The Court emphasized that if the A.O. adopts one of two permissible views, even if it results in revenue loss, revision is not justified unless the view is patently wrong or unsupported by evidence.The Court also cited the Bombay High Court's ruling in CIT v. Gabriel India Ltd., which held that the absence of detailed discussion by the A.O. does not make the order erroneous if the A.O. has made inquiries and arrived at a logical conclusion. This principle prevents the revisional power from being converted into an appellate review.Issue: Whether Reasonable Opportunity of Hearing Was Granted to the Assessee Before Passing the Revisional OrderThe Court scrutinized the procedural history of the case, noting that the PCIT issued a show cause notice on 11.03.2021 and signed it on 15.03.2021 at 1:53 pm, fixing the hearing on the same day at 4:00 pm. The assessee did not appear for the hearing on 15.03.2021, and the PCIT passed the revisional order on 26.03.2021, holding the A.O.'s order erroneous and prejudicial to the Revenue and directing reassessment.The ITAT found that the revisional order was passed without affording the assessee a reasonable opportunity of hearing, which is a mandatory requirement under Section 263 and the principles of natural justice. The Court agreed with the ITAT's finding that the absence of a proper hearing rendered the revisional order invalid. The Court observed that the PCIT's finding of error and prejudice was not supported by a proper hearing or sufficient evidence and was thus unsustainable.Issue: Application of Law to the Facts and Treatment of Competing ArgumentsThe Revenue contended that the reasonable opportunity was granted as per the provisions and that the revisional order was justified. The assessee argued that the revisional order was passed ex parte without adequate hearing, violating the principles established by the Supreme Court in Commissioner of Income Tax, Mumbai v. Amitabh Bachchan, which mandates that the assessee must be given a reasonable opportunity to defend the assessment order before it is set aside.The Court analyzed these submissions in light of the record and found that the opportunity given was insufficient and that the PCIT failed to properly consider the assessee's defense. The Court emphasized that the revisional jurisdiction under Section 263 is not an appellate jurisdiction and cannot be exercised merely because the Commissioner disagrees with the A.O.'s view. The Court held that the revisional power must be exercised strictly within the legal parameters, ensuring procedural fairness.3. SIGNIFICANT HOLDINGSThe Court held that:'Section 263 of the Act, 1961 confers a supervisory power of revision on the Principal Commissioner/Commissioner in respect of orders passed by lower authorities. However, this power is hedged with strict jurisdictional conditions. The Commissioner can revise an assessment order only if the order is 'erroneous' and it is 'prejudicial to the interests of the Revenue'. These two conditions are conjunctive i.e. both must be fulfilled before the power can be exercised.''An assessment order that reflects a possible or permissible view of the law and facts cannot be branded erroneous simply because it is not to the Commissioner's liking.''The ITO's conclusion cannot be termed as 'erroneous' simply because the Commissioner does not agree with it. An AO's order cannot be held to be erroneous simply because it did not make an elaborate discussion.''If the ITO adopts one of two permissible courses of action and the result is loss of Revenue, or where two views are possible and the ITO adopts one in favour of the assessee, such an order cannot be treated as prejudicial to Revenue unless the view adopted is unsustainable in law.''Since the ex parte order was passed invoking Section 263 of the Act, 1961 by the PCIT without hearing the assessee/respondent herein, the finding recorded by the PCIT that the order is erroneous in so far as it is prejudicial to the interest of Revenue, is not the correct finding based on the records and, therefore, it has rightly been set aside by the ITAT.'The Court concluded that the revisional order passed by the PCIT was invalid as it was passed without affording the assessee a reasonable opportunity of hearing, and the order of the A.O. was not found to be erroneous or prejudicial based on the evidence. Consequently, the ITAT's decision to quash the revisional order was upheld, and the appeal by the Revenue was dismissed.