Invalid Re-Assessment By AO Cannot Be Subject Matter Of Revision Under Section 263 Of Income Tax Act: ITAT Mumbai

The Assessing Officer (AO) had reopened assessment for the relevant years on the ground that the Assessee had failed to disclose true and full facts necessary for the purpose of assessment and thereby issued a notice under Section 148 of the Income Tax Act, 1961. The re-assessment proceedings against the Assessee were completed in 2018, with the AO accepting the return of income of the Assessee. The re-assessment was sought to be revised by the Principal Commissioner of Income Tax (PCIT) against which the Assessee filed an appeal before the ITAT.

The revenue authorities contend that the assessment was sought to be revised by the PCIT on the ground that the AO had wrongly not disallowed the deduction of 'investment transaction fees', prima facie capital in nature, while computing the business income of the Assessee. It was submitted that since the deduction was not disallowed in the re-assessment proceedings, the re-assessment framed by the AO was erroneous since it was prejudicial to the interest of the revenue under Section 263 of the Act.

Section 263 of the Act gives power to specified income tax authorities to revise orders passed under the Act if they consider that any order passed by the Assessing Officer is erroneous in so far as it is prejudicial to the interests of the revenue.

The court observed that the Commissioner of Income Tax (Appeal) (CIT (A)) in its order had already adjudicated upon the disallowance of the 'investment transaction fees' under Section 14A of the Act and the very same transaction was sought to be considered and added by the PCIT in his revision proceedings under Section 263 of the Act. The court held that the order passed by the CIT (A) had become final since no appeal was preferred by the Assessee. Also, the appeal filed by the revenue authorities against the order of CIT (A) was dismissed by the ITAT. The court observed that as per the provisions of Clause (c) of Explanation 1 to Section 263(1) of the Act, a matter which has already been considered and decided by the CIT (A) cannot be the subject matter of revision by the PCIT under Section 263 of the Act.

Additionally, the court held that even though no addition to taxable income was made by the AO under the re-assessment proceedings, there would be no prejudice caused to the revenue since the additional disallowance of expenditure in relation to non-taxable income would be made by the AO under Section 14A of the Act in consonance with the CIT (A)'s order. The court observed that, since there would be no prejudice caused to the interest of the Revenue, one of the pre-requisites of seeking revision of orders under Section 263 of the Act had failed. Also, the court noted that the re-assessment was not valid in law since the AO had not made any addition to Assessee's income despite having a reason to believe that Assessee's income had escaped assessment. The court held that when an assessment framed by AO is invalid in law, the said invalid order cannot be the subject matter of revision under Section 263.

"When an assessment framed by the ld. AO is unsustainable in the eyes of law, the said invalid and illegal order cannot be subject matter of section 263 proceedings. On this count also, the revision order passed by the ld. PCIT u/s.263 of the Act deserves to be quashed."

The court quashed the revision order passed by the PCIT under Section 263 of the Act, allowing Assessee's appeal.

Case Title: Aishwarya Rai Bachchan Versus The Principal Commissioner Of Income Tax, Mumbai

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