2025 (11) TMI 1148 - AT - Income Tax

s.263 order quashed for invoking Explanation 2 without show-cause notice or opportunity to be heard

ITAT, Delhi set aside the PCIT's revision order under s.263 that invoked Explanation 2 without issuing a show-cause notice or affording the assessee an ... Revision u/s 263 - Power of CIT to set aside the reassessment order passed u/s 147/144B - Invocation of Explanation 2 to section 263 of the Act without issuing show cause notice and providing opportunity to the assessee - appellant has claimed exemption of long term capital gain u/s 10(38) - HELD THAT:- As could be seen from the show cause notice issued by the Ld. PCIT u/s 263 of the Act for revision of the reassessment order, nowhere it was proposed by the Ld. PCIT for invoking the Explanation 2 to section 263 of the act in the case of the assessee. We observed from the order of the Ld. PCIT passed u/s 263 PCIT invoked the Explanation 2 to section 263(1) of the Act to hold that the reassessment order to be erroneous in so far as it is prejudicial to the interest of the Revenue. Invocation of Explanation 2 to section 263 of the Act without issuing show cause notice and providing opportunity to the assessee amounts to not adhering to the principles of natural justice and therefore is unsustainable in law as held in the case of PCIT vs. M/s Shree Ji Prints P. Ltd. [2020 (2) TMI 1021 - GUJARAT HIGH COURT]. The SLP filed by the Revenue against this decision of the Hon’ble Gujarat High Court was also dismissed by the Apex Court in the case of PCIT vs. M/s Shree G Prints Pvt. Ltd. [2021 (9) TMI 108 - SUPREME COURT] We also observed that following the decision of M/s Shree G Prints Pvt. Ltd. [2020 (2) TMI 1021 - GUJARAT HIGH COURT] and [2021 (9) TMI 108 - SUPREME COURT] the coordinate bench of ITAT Delhi in the case of Ashok Kumar Jain [2025 (6) TMI 648 - ITAT DELHI] quashed the order passed u/s 263 for invoking Explanation 2 to section 263 of the Act while passing the order u/s 263 without confronting to the assessee in the show cause notice issued by the Ld. PCIT as held it is well settled that show-cause notice u/s 263 of the Act does not mention that the Explanation 2 to section 263 is going to be invoked. So, invocation of the Explanation in order without confronting the assessee is not appropriate and sustainable in law. Therefore, the impugned order passed by Ld. PCIT is not sustainable and is set aside. Ground of appeal of assessee allowed. ISSUES PRESENTED AND CONSIDERED 1. Whether a reassessment completed under section 147 read with section 144B, where the AO did not make the additions for the specific escaped income recorded in the reasons to reopen, is a valid assessment. 2. Whether non-disposal of objections filed by the taxpayer against reopening under section 148 by passing a speaking order renders the reassessment order void/invalid. 3. Whether the Principal Commissioner of Income Tax (PCIT) could exercise revisionary jurisdiction under section 263 to set aside a reassessment order that is alleged to be erroneous and prejudicial to the revenue, when the reassessment itself is contended to be invalid. 4. Whether invocation of Explanation 2 to section 263(1) in the final revisional order (alleging failure of the AO to examine/investigate) without specifically notifying the taxpayer in the section 263 show-cause notice that Explanation 2 would be invoked, violates principles of natural justice and is sustainable. 5. Whether inadequacy of inquiry by the AO, without more, can itself justify exercise of revisionary powers under section 263. 6. Whether a reassessment passed after requisite departmental approvals (e.g., sanction/approval under section 274(2)(a) or internal sanction proforma) is immune from revision under section 263. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Validity of reassessment where AO does not make additions corresponding to reasons to reopen Legal framework: Reopening under section 147 requires cogent reasons recorded forming a reason to believe that income has escaped assessment. Reassessment completed under section 147 r.w.s. 144B must address the matter for which reopening was initiated. Precedent treatment: The Tribunal treated higher court authorities holding that where the assessment does not give effect to the reasons recorded for reopening (i.e., no addition made for the matter for which the case was reopened), the reassessment is invalid. Interpretation and reasoning: The AO's reasons recorded alleged receipt of accommodation entries of Rs. 85,09,000 and that exempt long-term capital gain of around Rs. 82,85,883 required scrutiny. Yet, on completion the AO made a small unexplained cash credit addition (Rs. 2,23,117) not corresponding to the recorded reason. The Tribunal found this mismatch fatal: the reassessment did not adjudicate the very issue on basis of which section 147 proceedings were initiated. Ratio vs. Obiter: Ratio - where the reassessment order fails to address/add for the specific escaped income identified in reasons recorded, such reassessment is invalid. Conclusion: The reassessment under section 147 r.w.s. 144B is invalid because it did not make the additions for the escaped income which formed the basis for reopening. Issue 2 - Effect of non-disposal of objections to reopening without a speaking order Legal framework: When objections to reopening are filed by the assessee under section 148/147 proceedings, the AO must consider and dispose of those objections by a reasoned/speaking order before proceeding to complete reassessment. Precedent treatment: The Tribunal relied on binding directions from higher courts that non-disposal of objections by a speaking order violates law and renders subsequent assessment proceedings unsustainable. Interpretation and reasoning: The assessee raised objections dated 24.12.2021 to reasons recorded; the AO did not pass any speaking order disposing of those objections prior to completing reassessment. Given established precedent requiring disposal of objections, the Tribunal held that the reassessment without such disposal contravened judicial directions. Ratio vs. Obiter: Ratio - failure to dispose of objections by a speaking order before completing reassessment renders the assessment void/unsustainable. Conclusion: The reassessment is unsustainable because the AO did not dispose of the assessee's objections by a speaking order as required. Issue 3 - Power of PCIT under section 263 to revise an invalid reassessment Legal framework: Section 263 empowers revision where an assessment order is erroneous and prejudicial to revenue. But the exercise is constrained by validity of the order under revision and principles of natural justice. Precedent treatment: The Tribunal treated authorities holding that revisionary power cannot be exercised in respect of an order that is invalid on fundamental grounds; additionally, where procedural infirmities exist in the assessment, revisional proceedings may be unsustainable. Interpretation and reasoning: Because the reassessment itself was held invalid on two independent grounds (failure to make additions corresponding to reasons to reopen; non-disposal of objections), the Tribunal concluded that the PCIT's attempt to revise that reassessment under section 263 was not permissible. The Court viewed the PCIT's order as an attempt to correct an assessment that was void, which is not a sustainable exercise of revisionary jurisdiction. Ratio vs. Obiter: Ratio - Revision under section 263 cannot be sustained where the underlying order sought to be revised is itself invalid for procedural/fundamental infirmities. Conclusion: The revision by the PCIT under section 263 is unsustainable because it sought to revise an invalid reassessment order. Issue 4 - Invocation of Explanation 2 to section 263(1) without specific notice in the show-cause violates natural justice Legal framework: Explanation 2 to section 263(1) permits treating an assessment as escaped where AO failed to carry out necessary enquiries; however, principles of natural justice require that the taxpayer be put on notice if the revisional authority proposes to invoke Explanation 2 so the assessee may respond. Precedent treatment: The Tribunal followed apex and High Court authority that invocation of Explanation 2 in the revisional order without indicating in the show-cause notice that Explanation 2 would be relied upon breaches natural justice and is unsustainable. Interpretation and reasoning: The show-cause notice issued did not indicate that Explanation 2 would be invoked. Nevertheless the PCIT invoked Explanation 2 in the final revisional order to hold the assessment erroneous. The Tribunal found that failure to confront the assessee with this specific ground in the notice deprived the assessee of an opportunity to meet the allegation - a violation of principles of natural justice - and that relevant higher court precedent mandates quashing in such circumstances. Ratio vs. Obiter: Ratio - Explanation 2 cannot be invoked in the revisional order unless the taxpayer was specifically notified in the section 263 show-cause notice that Explanation 2 would be invoked, affording an opportunity to respond. Conclusion: Invocation of Explanation 2 in the revisional order without prior specification in the show-cause notice is violative of natural justice and renders the revision unsustainable. Issue 5 - Whether mere inadequacy of inquiry by AO suffices for revision under section 263 Legal framework: Section 263 requires an assessment order to be erroneous and prejudicial to revenue; jurisprudence restricts exercise of revision where it is only alleged that AO conducted inadequate inquiries unless such inadequacy leads to an erroneous and prejudicial order. Precedent treatment: The Tribunal noted authorities that hold inadequacy of inquiry alone does not automatically confer power of revision under section 263; a tangible error prejudicial to revenue must be demonstrated. Interpretation and reasoning: The PCIT's recitals criticized the AO for not conducting independent enquiries. However, the Tribunal observed that (i) when the underlying reassessment was itself invalid for the reasons noted above, and (ii) the PCIT did not properly confront the assessee with invocation of Explanation 2, the PCIT could not sustain revision on the broad ground of inadequate inquiry alone. Ratio vs. Obiter: Ratio - Allegation of inadequate inquiry by the AO, without more, is insufficient to justify section 263 revision; concrete error prejudicial to revenue must be shown and procedurally afforded to the assessee. Conclusion: The PCIT could not validly exercise revision on the sole premise of inadequate inquiry, especially where procedural defects in the reassessment and failure to give specific notice of Explanation 2 existed. Issue 6 - Effect of departmental approvals on revisional jurisdiction Legal framework: Certain assessments/reassessments require internal approvals; the question is whether such approvals preclude subsequent revision under section 263. Precedent treatment: The Tribunal noted the contention that departmental approvals (e.g., sanction/approval) were obtained, but did not treat approval as an absolute bar to revision. The decision did not rest on this ground because the reassessment was invalid for other reasons. Interpretation and reasoning: The assessee argued that reassessment passed after obtaining requisite approvals could not be subjected to revision. The Tribunal did not decide this as a determinative point; rather it proceeded to quash the revision on the independently established procedural and substantive infirmities in the reassessment and on natural justice grounds relating to Explanation 2. Ratio vs. Obiter: Obiter - The issue of immunity from revision by virtue of internal approvals was noted but not finally adjudicated as the decision rested on other conclusive grounds. Conclusion: Not decided as a ratio; the Tribunal disposed of the appeal on other grounds and therefore did not hold that approvals bar revision under section 263. Final Disposition The revisional order under section 263 was quashed and the appeal allowed because (a) the reassessment under section 147 r.w.s. 144B was invalid for failing to address the specific escaped income and for non-disposal of objections by a speaking order, and (b) the PCIT invoked Explanation 2 to section 263(1) in the revisional order without giving prior notice in the show-cause, thereby violating principles of natural justice; therefore the revision was unsustainable in law.