CIT Cannot Invoke Section 263 Revision Where Assessing Officer Adopts a Plausible View After Inquiry

The Respondent-Assessee is a charitable institution registered under Section 12AA context of the Income Tax Act, 1961.

For Assessment Year (AY) 2017-18, the Assessee filed a Return of Income declaring Nil income, claiming exemptions under Section 11.

During scrutiny, the Assessing Officer (AO) issued notices under Sections 143(2) and 142(1), to which the Assessee provided details regarding the accumulation and utilization of income.

The AO passed an assessment order on 12th December 2019, accepting the Nil income.

Subsequently, the CIT (Exemptions) initiated revisionary proceedings under Section 263, alleging the order was erroneous and prejudicial to the Revenue because the AO failed to verify the utilization of ₹6 crores from a previously accumulated sum of ₹14.51 crores.

The ITAT set aside the CIT’s revisionary order.

The Revenue appealed to the High Court.

1. Whether the ITAT was justified in setting aside the Section 263 order when the AO allegedly failed to make inquiries regarding the utilization of accumulated income of ₹6 crores?

2. Whether the lack of detailed examination of supporting documents by the AO rendered the assessment order "erroneous and prejudicial to the interest of revenue" under the doctrine established in Malabar Industrial Co. Ltd.?

3. Whether the invocation of Explanation 2 to Section 263 was valid without confronting the Assessee in the show-cause notice?

Section 263 of the Income Tax Act, which permits revision of orders that are "erroneous insofar as they are prejudicial to the interests of the revenue".

Malabar Industrial Co. Ltd. v. CIT (243 ITR 83), establishing that twin conditions (erroneousness and prejudice) must be satisfied for revision, and a possible view taken by the AO cannot be substituted by the Commissioner's view.

CIT v. Gabriel India Ltd. (176 ITR 349), holding that "erroneous" does not mean an order that lacks an elaborate written discussion if an inquiry was conducted.

PCIT v. Shreeji Prints Pvt. Ltd. (130 taxmann.com 294), stipulating that Explanation 2 to Section 263 cannot be invoked unless the Assessee is specifically confronted with it in the show-cause notice.

The Court observed that the AO had indeed issued specific queries regarding the accumulation of funds under Section 11(2) and received detailed responses, including board resolutions and Form No. 10, prior to passing the assessment order.

Consequently, this was not a case of "no inquiry," but at most a case of "inadequate inquiry" in the eyes of the Commissioner, which does not vest jurisdiction under Section 263.

The Court reasoned that if the AO takes a plausible view after considering the material, the Commissioner cannot invoke revisionary powers merely to conduct a "fishing or roving inquiry".

The Court noted that under Section 11(3)(c), the taxability of unutilized accumulated funds would only arise after the expiry of five years (AY 2022-23), making the Commissioner’s interference in AY 2017-18 premature on that specific ground.

The Court found the CIT’s reliance on Explanation 2 to Section 263 procedurally flawed as it was not mentioned in the show-cause notice.

The assessment order was not erroneous or prejudicial since the AO had conducted inquiries and taken a plausible view.

The Commissioner cannot substitute his opinion for that of the AO or initiate de novo inquiries where the AO has already applied his mind to the records.

The High Court dismissed the Revenue's appeal with no costs.