No Errors or Infirmities Found in Assessment Order Prejudicial to Revenue’s Interest: ITAT sets aside order passed by PCIT u/s 263 of Income Tax Act [Read Order]

The Delhi bench of the Income Tax Appellate Tribunal ( ITAT ) recently made a significant decision, overturning an order passed by the Principal Commissioner of Income Tax ( PCIT ) under section 263 of the Income Tax Act, 1961. The ITAT found no errors or infirmities prejudicial to the revenue's interest in the assessment order, thereby setting aside the PCIT's decision.

The case involved an assessee who is a subsidiary of a listed company, indicating that the assessee falls under the category of a company in which the public are substantially interested. Consequently, the provisions of section 56(2)(vii)(b) do not apply to the assessee. Therefore, the concerns raised by the PCIT for assuming jurisdiction under Section 263 of the Income Tax Act were deemed baseless and lacking support from any provisions of the Act.

The ITAT emphasized the role of the Assessing Officer (AO) as not only an adjudicator but also an investigator. The AO cannot remain passive when faced with a return that appears in order but warrants further inquiry. It is incumbent upon the AO to verify the facts stated in the return when circumstances provoke such inquiry. The interpretation of the word "erroneous" in section 263 of the Income Tax Act emerges from this context, encompassing cases where there has been a failure to conduct necessary inquiries.

The ITAT reiterated the established legal principle that the Commissioner can exercise powers under Section 263 only when twin conditions are met: the assessment order should be erroneous and prejudicial to the interest of the Revenue. The term "erroneous" refers to actions contrary to law. Therefore, the Commissioner must establish that the AO's order was both erroneous and prejudicial to the interest of the Revenue before invoking this power.

In the case at hand, the PCIT's observations for Assessment Year (A.Y.) 2014-15 regarding the assessee's status as a deemed private limited company were found to be unsupported by demonstrative material evidence. Notably, such remarks were absent in A.Y. 2015-16.

The bench comprising Yogesh Kumar U.S. (Judicial member) and N.K. Billaiya (Accountant member), did not identify any error or infirmity in the assessment order that could render it erroneous and prejudicial to the interest of the Revenue. Consequently, the ITAT set aside the PCIT's order and reinstated that of the Assessing Officer dated 22nd December 2016.

To Read the full text of the Order CLICK HERE

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