ITAT Delhi Curtails PCIT’s Section 263 Powers Where AO Has Already Conducted Proper Enquiry

Background and Context

The Delhi Bench of the Income Tax Appellate Tribunal in the case of Clix Capital Services Pvt. Ltd Vs PCIT (ITAT Delhi) examined whether the Principal Commissioner of Income Tax (PCIT) could validly invoke revisional jurisdiction under Section 263 of the Income Tax Act 1961 for Assessment Year (AY) 2018-19.

The core controversy centred on whether the assessment order passed under Section 143(3) read with Section 144B was:

  1. Erroneous, and
  2. Prejudicial to the interests of the Revenue,

which are the two mandatory pre-conditions for exercise of power under Section 263 as laid down by the Supreme Court in Malabar Industrial Co Ltd 243 ITR 83 (SC) and Max India Ltd 295 ITR 282 (SC).

The assessee, Clix Capital Services Pvt. Ltd, is a Non-Banking Finance Company (NBFC) engaged primarily in commercial, consumer and MSME lending activities. It is registered with the Reserve Bank of India and derives income mainly from financing and related operations.

Assessment Proceedings: Key Facts

  • The assessee filed its original return of income under Section 139(1) for AY 2018-19 and subsequently filed a revised return on 29.03.2019 declaring a loss of Rs. 10,68,63,896/-.

  • The case was selected for complete scrutiny, covering, inter alia:

    • Claim of “Any Other Amount Allowable as Deduction” in Schedule BP
    • Depreciation claim
    • Investments/advances/loans
    • Refund claim
    • Business loss
    • ICDS compliance and adjustments
    • Expenditure relating to exempt income
    • Items of “Other Income” reported in Schedule A-OI but not credited to the Profit and Loss Account

  • The assessment was ultimately framed under Section 143(3) read with Section 144B on 15.09.2021, determining total loss at Rs. 10,29,20,424/-, after making a single disallowance of Rs. 39,43,471/- towards delayed deposit of employees’ contribution to PF and ESI, paid beyond the due dates under the respective statutes.

PCIT’s Revision under Section 263

Subsequently, the PCIT initiated revisionary proceedings under Section 263, holding that the assessment order was both erroneous and prejudicial to the interests of the Revenue. The PCIT did not disturb the PF/ESI disallowance but directed a fresh examination on several major heads of income and expenditure, namely:

  1. Legal and professional expenses of Rs. 15.99 crores,
    Loan origination cost of Rs. 15.19 crores, and
    Direct Selling Agent (DSA) cost of Rs. 10.16 crores,
    for their allowability under Section 37 in light of auditors’ observations and notes to the financial statements.

  2. Other expenses aggregating to Rs. 43.11 crores, including year-end provisions of Rs. 7.91 crores, with a direction to the Assessing Officer (AO) to:

    • Verify the correctness of each item of expense, and
    • Add back the entire year-end provision of Rs. 7.91 crores in the computation of income.

  3. Cost allocation charges of Rs. 12.07 crores, to be verified and examined.

  4. Finance cost of Rs. 40.35 crores (including interest on term loans from banks of Rs. 29.57 crores, finance lease obligation of Rs. 14 lakhs and discount on commercial papers of Rs. 9.49 crores), with directions to:

    • Examine the nature of each component,
    • Correlate it with the corresponding income, and
    • Allow deduction only after such verification.

  5. Depreciation of Rs. 23.68 crores, alleged by PCIT to be incorrectly claimed, on the premise that:

    • The assessee had offered interest and principal of only Rs. 90 lakhs relating to depreciated assets,
    • Interest on borrowings should have been capitalised, and
    • Ownership of certain assets (especially those on lease) was not established.

  6. Employee benefit expenses of Rs. 28.50 crores, to be re-examined in detail to determine admissibility.

The assessee challenged the Section 263 order before the ITAT, arguing that the AO had already conducted thorough enquiries on all these aspects and had taken a plausible view based on material on record.

The Tribunal began by reiterating the settled law that for invoking Section 263, the PCIT must cumulatively establish:

  • The assessment order is erroneous, and
  • Such error is prejudicial to the interests of the Revenue.

Even if one limb fails, Section 263 cannot be applied. The Tribunal relied upon:

  • Malabar Industrial Co Ltd 243 ITR 83 (SC)
  • Max India Ltd 295 ITR 282 (SC)

The Tribunal further emphasised that where the AO has in fact made enquiries during assessment, the mere absence of detailed discussion in the assessment order does not imply non-enquiry or non-application of mind. On this proposition, it referred to decisions such as:

  • CIT Vs. Sunbeam Auto Ltd 332 ITR 167 (Del)
  • CIT Vs. Anil Kumar Sharma 335 ITR 83 (Del)
  • CIT Vs. Amalgamations Ltd 238 ITR 963 (Mad)
  • Hari Iron Trading Company Vs. CIT 263 ITR 437 (P&H)
  • CIT Vs. Eicher Ltd 294 ITR 310 (Del)
  • CIT Vs. Gabriel India Ltd 203 ITR 108 (Bom)

The Tribunal clarified that an AO is not expected to write an elaborate thesis in every order. What matters is whether relevant enquiries were in fact made and considered, not whether each enquiry is meticulously recorded in the final assessment order.

Issue-wise Analysis by the ITAT

AO’s Enquiry

During assessment, the AO issued several notices under Section 142(1):