ITAT Delhi shuts down Section 263 revision where AO had already formed a possible view

The Delhi Bench of the Income Tax Appellate Tribunal in Mukul Rohatgi Vs PCIT (ITAT Delhi) examined the scope of revisional jurisdiction under Section 263 of the Income Tax Act 1961 for Assessment Year 2020-21. The Tribunal ultimately annulled the revision order passed by the PCIT, holding that the preconditions for invoking Section 263 were not satisfied, subject only to a limited verification regarding the cost of acquisition of one mutual fund.

The ruling provides detailed guidance on three critical issues:

  1. Tax treatment of capital gains from certain mutual funds (long-term vs short-term; applicability of Section 112A)
  2. Determination of Annual Letting Value (ALV) for multiple high-value properties in India and abroad
  3. Whether failure to initiate penalty proceedings under Section 271C can be a valid ground for revision under Section 263

The Tribunal underlined that:

  • For Section 263 to be validly exercised, the assessment order must be both erroneous and prejudicial to the interests of the Revenue.
  • Merely preferring a different view, or seeking deeper enquiry without any concrete material, does not authorize revision.
  • PCIT must record specific reasons and supporting material to show error and prejudice; general doubts, assumptions, or internet-based “yield” estimates are insufficient.

Background of the case

  • The assessee is a designated Senior Advocate practicing before the Hon’ble Supreme Court of India.
  • Assessment for AY 2020-21 was completed under Section 143(3) read with Section 144B by the NFAC on 28 September 2022.
  • The Assessing Officer (AO) assessed income at ₹ 2133,46,92,080 after:
    • Disallowance under Section 24(b) of ₹ 2,44,77,708, and
    • Disallowance under Section 14A read with Rule 8D of ₹ 2,40,10,848.

The PCIT examined the assessment records and issued a show cause notice dated 11 March 2025 under Section 263, proposing to revise the assessment on three broad grounds:

  1. Capital gains on mutual funds – treatment as long-term capital gains under Section 112A at concessional rate of 10% vs normal rate as short-term gains.
  2. ALV of various properties – allegedly low or nil ALV and alleged lack of adequate enquiry by AO.
  3. Non-initiation of penalty under Section 271C – for failure to deduct TDS under Section 194C.

The Tribunal considered each issue in detail.

Issue 1: Capital gains on mutual funds – equity-oriented or not?

PCIT’s stand

The assessee had disclosed long-term capital gains on sale of several funds, claiming benefit of Section 112A by treating them as equity-oriented funds held for more than 12 months. The PCIT noted six such funds and opined that they were not equity-oriented funds. On this basis, he:

  • Recharacterized the gains as short-term capital gains taxable at normal rates, as the holding period was allegedly below 36 months; and
  • Recomputed short-term capital gains at ₹ 21,27,22,989;
  • Directed reduction of long-term capital gains from ₹ 2,89,46,691 to ₹ 80,42,324.

The revision order treated the AO’s original view as erroneous for failure to correctly examine the nature of these funds.

Assessee’s submissions

Before the Tribunal, the assessee produced:

  • Capital gains statements of the relevant schemes, namely:

    • Axis Dynamic Equity Fund-Direct Plan-Growth
    • BNP Paribas Liquid Fund
    • DSP BlackRock Dual Advantage Fund
    • ICICI Prudential Regular Gold Savings Fund
    • SBI Gold Fund Regular Plan
    • Tata Income Fund Regular Plan

  • ISIN codes of each fund to demonstrate their character;

  • Evidence that these funds were held for more than 12 months; and

  • Materials already filed during the original scrutiny proceedings before the AO.

The assessee contended that:

  1. All six funds were indeed equity-oriented as per the scheme features.
  2. Full details had been produced during the assessment; the AO had examined and consciously accepted the claim under Section 112A.
  3. The PCIT had not pointed out any specific error or cited any material to show that these were not equity-oriented funds.
  4. At most, the PCIT was seeking to substitute his view for the AO’s, which is not permitted under Section 263.

The assessee, however, accepted that:

The purchase cost of SBI Gold Fund (taken at purchase price) could be reverified by the AO and the assessee would submit supporting documentation.

Revenue’s counter

The Departmental Representative argued that:

  • The AO had not conducted any proper verification of the funds; and
  • In light of Explanation to Section 263, the PCIT was within his powers to direct a de novo assessment on this issue.

Tribunal’s findings on mutual funds

The Tribunal carefully reviewed the material produced by the assessee, including statements from the fund houses and ISIN codes. It observed:

  • The documentation clearly described the funds (e.g., Axis Dynamic Equity Fund-Direct Plan-Growth with ISIN INF846K01A29) as equity-oriented.
  • The holding periods exceeded twelve months, making them eligible for concessional tax under Section 112A.
  • These very details had been before the AO during scrutiny; the AO had formed a view after examination.

The Tribunal held:

  • The AO’s conclusion that these were equity-oriented funds taxable under Section 112A was a possible and plausible view.
  • The PCIT did not record any reason or bring any material explaining how or why these funds were not equity-oriented.
  • Without specific findings, the PCIT could not simply recast the AO’s conclusion as “erroneous”.

Accordingly: