Revision under Section 263 quashed as PCIT lacked independent inquiry, cannot replace AO's plausible, approved view

ITAT allowed the assessee's appeal and quashed the revisionary order passed u/s 263. It held that the PCIT's assumption of jurisdiction was invalid as no independent inquiry or verification was conducted to demonstrate that the assessment order was erroneous and prejudicial to the interests of the Revenue. The PCIT merely alleged inadequate inquiry by the AO, reproduced the show cause notice and portions of the assessee's reply, but did not examine or discredit the materials on record. Since the AO had adopted a possible view after inquiry and with prior approval of the Additional CIT, the PCIT could not lawfully substitute his subjective standard of inquiry.

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1. ISSUES PRESENTED AND CONSIDERED

1.1 Whether the assumption of revisionary jurisdiction under section 263 was valid when the Principal Commissioner alleged lack of enquiry by the Assessing Officer regarding sales promotion and packing expenses.

1.2 Whether, on the facts, the assessment order could be treated as "erroneous in so far as it is prejudicial to the interests of the Revenue" in terms of section 263, in the absence of any independent enquiry or verification undertaken by the Principal Commissioner.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1 & 2: Validity of assumption of jurisdiction under section 263 and requirement of enquiry by the Principal Commissioner

Legal framework (as discussed)

2.1 The Court noted that section 263 mandates that the Principal Commissioner may revise an order "after giving the assessee an opportunity of being heard and after making or causing to be made such inquiry as he deems necessary". The second limb, relating to making necessary enquiry, was treated as a mandatory safeguard against arbitrary revision.

Interpretation and reasoning

2.2 The Court found from the impugned order that the Principal Commissioner had not conducted any enquiry whatsoever: no independent verification was carried out, no third-party enquiry was initiated, no books of account were called for, and no evidence was examined beyond what was already on record. The order merely reproduced the show cause notice issued by the Assessing Officer and inferred lack of enquiry.

2.3 The assessee had specifically asserted, and the Principal Commissioner had reproduced in the revisionary order, that detailed submissions with over 100 pages of documentary evidence (including ledger accounts, sales invoices, bank statements and GST returns) were filed before the Assessing Officer in response to the show cause notice. The Principal Commissioner nonetheless concluded that no credible evidence was produced, without examining or objectively dealing with such materials or giving reasons for discarding them.

2.4 The Court held that a mere allegation that the Assessing Officer did not conduct adequate enquiry cannot justify exercise of section 263 powers unless the Principal Commissioner himself undertakes an enquiry and brings material on record to demonstrate an error rendering the order erroneous and prejudicial to the interests of the Revenue.

2.5 The Court further observed that it is well-settled that where the Assessing Officer has taken a possible view after conducting certain enquiries, the Principal Commissioner cannot substitute his own standard or degree of enquiry unless the view taken is shown to be perverse or unsustainable in law. In this case, the assessment order was passed with the prior approval of the Additional CIT, and no specific legal error or perversity in the Assessing Officer's approach was identified by the Principal Commissioner.

Conclusions

2.6 The Court concluded that the Principal Commissioner did not satisfy the statutory requirement of making or causing to be made such enquiry as he deemed necessary under section 263, and had proceeded only on a general assumption of inadequacy of enquiry by the Assessing Officer.

2.7 In the absence of any independent enquiry or demonstrated legal error, the assessment order could not be held to be "erroneous in so far as it is prejudicial to the interests of the Revenue".

2.8 Consequently, the assumption of jurisdiction under section 263 was held to be not sustainable in law, and the revisionary order was quashed. The appeal was allowed.

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