Bombay High Court admits appeal on sustainability of assessment framed pursuant to quashed Section 263 order in case of PCIT Vs Tetra Pak India Pvt Ltd

Background of the dispute

The matter arises from an order of the Income Tax Appellate Tribunal (“ITAT”) dated 24 May 2019 in ITA No. 1609/PUN/2013 relating to A.Y. 2005-06, in the case of PCIT Vs Tetra Pak India Pvt Ltd before the Bombay High Court.

The core controversy revolves around the effect of setting aside a revisional order passed under Section 263 of the Income Tax Act 1961, and the consequent fate of a fresh assessment framed under Section 143(3) read with Section 263.

In the impugned ITAT order, the assessee’s appeal was allowed on the premise that the very revisional order passed by the Commissioner of Income Tax under Section 263, on the strength of which a fresh assessment was framed, had already been annulled by the Tribunal in the assessee’s earlier appeal in Tetra Pak India Pvt. Ltd. — ITA No. 733/PN/2011, A.Y. 2005-06, order dated 18.11.2016 (ITAT). In that earlier decision, the Tribunal had categorically held that the Commissioner was not justified in invoking revisionary jurisdiction under Section 263.

Once the Section 263 revisional order was set aside, the ITAT, in the later appeal, held that the subsequent assessment framed under Section 143(3) read with Section 263 had no independent existence and could not stand on its own. Using this reasoning, the ITAT treated the fresh assessment as invalid.

The Revenue challenged this conclusion before the Bombay High Court, resulting in the present appeal.

ITAT’s reasoning in the impugned order

The ITAT’s decision in the impugned appeal in ITA No. 1609/PUN/2013 essentially proceeded on a foundational juristic point:

  • The revisional order of the Commissioner under Section 263 had already been struck down by the Tribunal in ITA No. 733/PN/2011 for the same assessee and same assessment year.
  • The Tribunal in that earlier order dated 18 November 2016 held that the Commissioner was not validly exercising jurisdiction under Section 263.
  • Given that the fresh assessment had been framed solely pursuant to the now-invalid Section 263 order, the ITAT held that such assessment lacked an independent legal footing.
  • The ITAT concluded that once the Section 263 foundation was removed, every consequential action, including the fresh assessment order passed under Section 143(3) read with Section 263, automatically fell.

On this basis, the assessee’s appeal was allowed and the fresh assessment was treated as invalid.

Questions of law proposed by Revenue

The Revenue carried the matter to the Bombay High Court, contending that the ITAT’s approach was legally flawed. Two questions were projected as substantial questions of law.

Question (A): Validity of fresh assessment after Section 263 order set aside

The first and principal question framed by the Revenue was:

“A. Whether on facts and circumstances of the case the ITAT was justified in holding that the fresh assessment order u/s 143(3) rws 263 subsequent to revision order u/s 263 is invalid merely on grounds that it does not have legs to stand as the revision order has already been set aside?”

This question directly targets the ITAT’s conclusion that the consequential assessment order cannot survive once the underlying revisional order is quashed.

Question (B): Transfer pricing computation and PLI adjustment

The second proposed question of law dealt with the merits of transfer pricing and the computation adopted by the assessee. The Revenue raised the following: