2026 (1) TMI 600 - AT - Income Tax

Capital gains valuation dispute where faceless AO's verified FMV based on registered valuer upheld; Pr.CIT's s.263 revision quashed

Whether revision under s.263 was sustainable where PCIT quashed assessment based on AO's proposal challenging capital gains valuation. The Tribunal held ... Validity of revision proceedings u/s 263 - revising the assessment framed by the AO u/s.143(3) r.w.s.144B - indexation on fair market value and indexed cost of improvement, taxable long term capital gain came - HELD THAT:- We find that in this case a piece of land was sold at Nagpur for Rs. 70.08 crore as against stamp duty valuation of Rs. 68.72 crore. The fair market value of the land was determined at Rs. 21.16 crore by the Registered Valuer of the assessee. After considering indexation on fair market value and indexed cost of improvement, taxable long term capital gain came to be Rs. 5.99 crore, which was offered to tax. Fair market value as per the DVO as on 01.04.2001 has been determined at Rs. 18.06 crore on an illegal referral of the case to him. The Faceless Assessment Unit had not accepted this valuation of DVO and a clear-cut remark was made in the assessment order that the returned income has been accepted after verification of documents. As per the JAO, the valuation report was not considered by the Faceless Assessment Unit and, therefore, CIT was approached for intervention u/s.263 of the Act. Invocation of provision of Section 263 of the Act on the proposal of AO is not sustainable under the Act as has been held in the case of Reeta Lakhmani [2022 (11) TMI 1177 - CALCUTTA HIGH COURT] wherein it has been held that the order passed by the Pr.CIT based on the proposal forwarded by the AO is not sustainable. As in the case of Sinforte [2022 (1) TMI 1297 - CALCUTTA HIGH COURT] and Britannia Industries Ltd. [2025 (7) TMI 767 - CALCUTTA HIGH COURT] wherein it has been held that where the valuation was determined on scientific basis and all facts were scrutinized by the AO in the course of assessment, the PCIT could not have invoked jurisdiction u/s 263 of the Act. We are inclined to quash the impugned order passed by the Pr.CIT, Kolkata-2 u/s.263 - Appeal of assessee allowed. 1. ISSUES PRESENTED AND CONSIDERED (i) Whether the Principal Commissioner validly assumed revisional jurisdiction under section 263 to set aside a scrutiny assessment, when the initiation was based on a proposal/approach made by the Assessing Officer rather than an independent application of mind by the revisional authority. (ii) Whether, on the facts recorded in the assessment order (acceptance of returned income after verification) and the scrutiny conducted during assessment, the assessment could be treated as 'erroneous and prejudicial to the interest of the revenue' so as to justify revision under section 263 in relation to valuation/fair market value matters. 2. ISSUE-WISE DETAILED ANALYSIS Issue (i): Validity of invoking section 263 on the Assessing Officer's proposal Legal framework (as discussed by the Tribunal): The Court applied the requirement that section 263 can be exercised only when the statutory preconditions for revision are satisfied and the revisional authority must independently apply its mind and record reasons before issuing a show-cause notice. The Tribunal treated initiation merely 'on the proposal of the AO' as legally unsustainable, relying on the jurisdictional principle that the revisional authority cannot act mechanically at the instance of the Assessing Officer. Interpretation and reasoning: The Tribunal found, on the record before it, that the Assessing Officer/JAO approached the revisional authority alleging that the faceless unit had not considered a valuation report, and that this formed the basis for the revisional intervention. The Tribunal held that invoking section 263 'on the proposal of AO' is not sustainable, and affirmed that the revisional authority must itself form the requisite satisfaction rather than acting as a conduit for the Assessing Officer's objections to the completed assessment. Conclusion: The assumption of jurisdiction under section 263, being founded on the Assessing Officer's proposal rather than a valid independent exercise by the revisional authority, was held invalid; the revisional order was liable to be quashed on this ground. Issue (ii): Whether the assessment was 'erroneous and prejudicial' in relation to valuation/FMV and scrutiny already undertaken Legal framework (as applied in the Tribunal's reasoning): The Tribunal proceeded on the requirement that revision under section 263 is permissible only if the assessment order is both 'erroneous' and 'prejudicial to the interest of the revenue,' and that where the assessment reflects scrutiny/verification of material, revision cannot be used to re-open matters already examined on facts. Interpretation and reasoning: The Tribunal noted the factual matrix: sale consideration exceeded stamp duty valuation; the assessee's fair market value was supported by a registered valuer; long-term capital gain was computed after indexation and offered to tax; and although a DVO valuation existed, the faceless assessment unit did not accept it and expressly recorded that the returned income was accepted 'after verification of documents.' The Tribunal treated this as indicative that the assessment was completed after examination of material, and further observed that in such circumstances-where valuation was determined on a scientific basis and facts were scrutinized during assessment-revision under section 263 was not justified. Conclusion: Given the assessment's recorded verification and the scrutiny of valuation-related facts, the Tribunal held that section 263 could not be invoked to disturb the completed assessment on the stated valuation premise; the revisional order was quashed and the appeal was allowed.