2025 (3) TMI 141 - AT - Income Tax

Revision u/s 263 - while calculating the net profit from the business and deductions u/s 80IC the amount of duty draw back was also included by the assessee in contravention of the provisions of the Act as the amount of duty draw back was to be added to the total income separately after excluding it from the profit and loss account and net profit thus AO has not considered and examined the above mentioned issue HELD THAT - Invoking the provision u/s 263 of the Act it is necessary to establish the twin conditions i.e. firstly order in question must be erroneous and secondly it must be prejudice to the interest of the Revenue and fulfillment of about twin conditions is mandatory prior to invoked power u/s 263 of the Act and it is also relevant here that the PCIT while invoking the power u/s 263 of the Act supposed to enquire into or examine the matter before reaching any conclusion. Bare perusal of the material available on record with regard and also in the light of the aforesaid well established principle of law lead us to draw inference that the issue which was before the AO regarding duty draw back was properly examined by the AO and decided in favour of the assessee and PCT has not taken any enquiry as required by law or site any plausible or cogent reason to reach conclusion that the impugned assessment order was erroneous and prejudice to interest of Revenue and instead of enquiry himself the PCIT observe that it was incumbent to the officer to investigate the matter stated in the return and only on this basis the Ld. PCIT directed to examine the issue and send back to the Ld. AO. Explanation 2 to Section 263 does not give unfettered power to Ld. PCIT to revise each and every order to examine the issue which is already been properly examined by the Ld. AO. Impugned order passed by the PCIT void ab initio and beyond the jurisdiction and liable to set aside and quashed. Decided in favour of assessee.

1967 (5) TMI 10 - SC

ISSUES PRESENTED and CONSIDERED

The core legal questions considered in this judgment are:

Whether the order passed by the Principal Commissioner of Income Tax (PCIT) under Section 263 of the Income Tax Act, 1961, was valid, particularly concerning the duty drawback issue.
Whether the assessment order dated 30.12.2016 was erroneous and prejudicial to the interests of the Revenue, thereby justifying the invocation of Section 263 by the PCIT.
Whether the Commissioner of Income Tax (Appeals) erred in dismissing the appeal as infructuous without adjudicating on the merits of the case.

ISSUE-WISE DETAILED ANALYSIS

1. Validity of the PCIT's Order under Section 263

Legal Framework and Precedents: Section 263 of the Income Tax Act empowers the PCIT to revise any order passed by the Assessing Officer if it is erroneous and prejudicial to the interests of the Revenue. The judgment refers to precedents, including the Supreme Court's decision in Malabar Industrial Co. Ltd., which establishes the twin conditions for invoking Section 263: the order must be erroneous and prejudicial to the Revenue.
Court's Interpretation and Reasoning: The Tribunal emphasized that both conditions must be met for Section 263 to be applicable. The Tribunal found that the PCIT did not demonstrate that the assessment order was erroneous or prejudicial to the Revenue, as the Assessing Officer had examined the duty drawback issue during the assessment proceedings.
Key Evidence and Findings: The Tribunal noted that the Assessing Officer had raised queries regarding the duty drawback and had received satisfactory explanations from the assessee. The Tribunal found no evidence of lack of inquiry or erroneous application of law by the Assessing Officer.
Application of Law to Facts: The Tribunal applied the legal principles from relevant precedents to conclude that the PCIT's invocation of Section 263 was unjustified, as the Assessing Officer had conducted a proper inquiry.
Treatment of Competing Arguments: The Tribunal considered the PCIT's argument that the order was erroneous due to insufficient inquiry but found it unsupported by evidence, as the Assessing Officer had indeed examined the relevant issues.
Conclusions: The Tribunal concluded that the PCIT's order under Section 263 was void ab initio and beyond jurisdiction, as it failed to establish the twin conditions necessary for invoking Section 263.

2. Dismissal of Appeal by CIT(A) as Infructuous

Legal Framework and Precedents: The appeal process under the Income Tax Act requires the CIT(A) to adjudicate on the merits of the case unless the appeal is rendered moot by subsequent developments.
Court's Interpretation and Reasoning: The Tribunal found that the CIT(A) erred in dismissing the appeal as infructuous without addressing the merits. The Tribunal noted that the CIT(A) should have considered the grounds of appeal and provided a decision based on the merits.
Key Evidence and Findings: The Tribunal observed that the CIT(A) dismissed the appeal based on the PCIT's order under Section 263, which the Tribunal found to be invalid.
Application of Law to Facts: The Tribunal applied the principles of appellate adjudication, emphasizing the need for the CIT(A) to decide on the merits of the case rather than dismissing it as infructuous.
Treatment of Competing Arguments: The Tribunal considered the CIT(A)'s rationale for dismissal but found it lacking in legal basis, given the Tribunal's finding on the invalidity of the PCIT's order.
Conclusions: The Tribunal directed the CIT(A) to adjudicate the appeal afresh on its merits, providing a meaningful opportunity for the assessee to present its case.

SIGNIFICANT HOLDINGS

Verbatim Quotes of Crucial Legal Reasoning: "Explanation 2 to Section 263 of the Act does not give unfettered power to Ld. PCIT to revise each and every order to examine the issue which is already been properly examined by the Ld. AO."
Core Principles Established: The invocation of Section 263 requires the establishment of both an erroneous order and prejudice to the Revenue. Adequate inquiry by the Assessing Officer precludes the exercise of revisional power under Section 263.
Final Determinations on Each Issue: The Tribunal set aside the PCIT's order under Section 263 as void and beyond jurisdiction. It remitted the matter back to the CIT(A) for fresh adjudication on the merits, ensuring the assessee is given a fair opportunity to present its case.

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