ITAT Quashes PCIT’s Order u/s 263 for Relying on Audit Objection [Read Order]

The Chandigarh bench of the Income Tax Appellate Tribunal (ITAT) held that Section 263 of the Income Tax Act, 1961, which empowers the Principal Commissioner of Income Tax (PCIT) to revise assessments, cannot be invoked solely on the basis of an audit objection.

In March 2018, the assessee, Vaneet Gupta, was served an income tax notice u/s 148, questioning a ₹1.1 crore investment on a property and ₹43.2 lakh cash deposits in a joint bank account.

In response, he explained that the property belonged to his wife and was transferred to him via a sale deed, with payment made at that time. He also clarified that the joint bank account with his wife had already been assessed during the relevant assessment year.

In March 2019, an audit objection raised concerns about the Assessing Officer’s (AO) failure to examine the bank deposits of the assessee, but the AO confirmed to the Commissioner (Audit) that they were duly examined.

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In 2021, the PCIT issued a Section 263 notice for non-examination of the bank account and passed an ex parte order due to the assessee's absence. The assessee moved to ITAT, claiming COVID-19 as reason for the absence, thus the tribunal remanded the case to the PCIT. In January 2022, the PCIT issued a fresh Section 263 notice, and the assessee submitted the required details.

But, in February 2022, the PCIT issued another notice under Section 263, this time raising additional issues beyond the bank account, thereby expanding the scope of proceedings.

Comprehensive Guide of Law and Procedure for Filing of Income Tax Appeals, Click Here

Sudhir Sehgal, counsel for the petitioner, argued that the Section 263 notice, issued solely on an audit objection, lacked independent application of mind by the PCIT. Referring to Ganga Plywood Ltd. vs. PCIT (2021) and similar cases, he maintained that such notices are invalid without the authority’s independent satisfaction.

The counsel also stressed that ITAT had remanded the case to PCIT for a specific issue; hence, PCIT couldn't expand its scope by introducing new issues. He also pointed out that the statutory two-year limitation for issuing a Section 263 notice had already lapsed before the fresh notice dated February 2022, making the PCIT’s order unsustainable.

The department’s counsel, Kusum Bansal, supported the PCIT’s order u/s 263 and argued that the PCIT was right to raise new issues in the new notice. The counsel said that the original assessment didn't involve a proper inquiry, arguing that the AO didn't assess correctly.

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After hearing both sides, the tribunal led by Rajpal Yadav (Vice President) and Dr. Krinwant Sahay (Accountant Member) acknowledged that the AO thoroughly examined all transactions during the assessment and that the assessee provided all necessary information about the deposits.

It was also noted that the PCIT's second notice, which raised new issues, was beyond the two-year limitation for initiating proceedings, making it invalid.

Comprehensive Guide of Law and Procedure for Filing of Income Tax Appeals, Click Here

The bench quashed the PCIT’s order, noting the lack of application of mind by the PCIT, and referred to the precedents raised by the assessee in support of their argument. It held that the PCIT cannot initiate proceedings solely based on audit objections without applying their mind.

To Read the full text of the Order CLICK HERE

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