ITAT Delhi Strikes Down Section 263 Revision: Fresh Issues Beyond SCN Held Without Jurisdiction

Case Background and Overview

KPA Apparels Private Limited Vs ITO (ITAT Delhi)

The Income Tax Appellate Tribunal, Delhi Bench, recently delivered a significant ruling in the matter of KPA Apparels Private Limited, where the assessee successfully challenged a revisionary order issued by the Principal Commissioner of Income Tax (PCIT) under Section 263 of the Income Tax Act, 1961, pertaining to Assessment Year 2020-21.

The original assessment in this matter had been concluded under Section 143(3), with the Assessing Officer (AO) accepting the declared loss after thoroughly examining the documents and information submitted by the assessee throughout the scrutiny proceedings. The revision was triggered by a revenue audit objection alleging contraventions of Sections 269SS and 269T of the Act, specifically concerning loan acceptance and repayment practices said to attract penalties under Sections 271D and 271E respectively.

This ruling carries substantial precedential value on several important issues — the permissible scope of revision proceedings, the distinction between lack of enquiry versus inadequate enquiry, and the non-applicability of Section 269T to transactions effected through journal entries.

Facts of the Case

The assessee, KPA Apparels Private Limited, filed its return of income for AY 2020-21 on 08.02.2021, declaring a total loss of Rs. 39,49,687/-. Following scrutiny proceedings, the AO completed the assessment vide order dated 17.09.2022, accepting the declared loss after examining all submissions made in response to various notices.

Subsequently, the PCIT initiated revision proceedings based on a revenue audit objection that flagged two issues:

  1. Receipt of loans aggregating Rs. 1,48,50,000/- from M/s New Delhi Exports House, allegedly in violation of Section 269SS, making the assessee liable for penalty under Section 271D.

  2. Repayment of loans amounting to Rs. 3,99,47,000/- reported by the auditor in Form 3CD as having been made otherwise than through crossed cheques, bank drafts, or electronic modes, allegedly in violation of Section 269T, attracting penalty under Section 271E.

A show cause notice dated 13.02.2025 was issued to the assessee in connection with these two issues.

Assessee's Explanation Before PCIT

In response to the show cause notice, the assessee furnished the following explanations:

  • **Regarding Section 269SS😗* The loan amount of Rs. 1,48,50,000/- was received from M/s New Delhi Exports House entirely through banking channels, and therefore no violation of Section 269SS was involved.

  • **Regarding Section 269T😗* The closing balance of loan liability of Rs. 2,88,47,000/- standing in the name of M/s New Delhi Exports House was not repaid in cash. Instead, pursuant to a tripartite agreement dated 31.03.2020 executed among the assessee, M/s New Delhi Exports House, and Smt. Kusum Uppal (a partner of M/s New Delhi Exports House), the outstanding loan was transferred through a journal entry from the account of M/s New Delhi Exports House to the ledger account of Smt. Kusum Uppal. The loan liability itself was never extinguished — only the identity of the creditor changed.

PCIT's Findings

While the PCIT accepted the explanation relating to Section 269SS and dropped proceedings on that count, the revision order went beyond the issues raised in the show cause notice in two significant respects:

  1. The PCIT introduced a fresh allegation that the assessee had violated Section 73 of the Companies Act, 2013 (Prohibition on acceptance of deposits from public) by accepting the loan from M/s New Delhi Exports House, and further contravened Section 185 of the Companies Act, 2013 (Loans to directors, etc.) by advancing the loan to Smt. Kusum Uppal, in addition to the alleged violation of Section 269T.

  2. The PCIT separately observed, in paragraph 8 of the revision order, that the AO had accepted expenses of Rs. 6,14,89,161/- without conducting adequate enquiry or investigation — an issue that was never part of the original show cause notice.

On this basis, the PCIT concluded that the assessment order passed under Section 143(3) was erroneous and prejudicial to the interests of the Revenue, and set it aside under Section 263.

Grounds of Appeal Before ITAT

The assessee filed an appeal before the Tribunal raising the following primary contentions:

  • The revisionary order dated 17.03.2025 was void ab initio as it was passed without jurisdiction.
  • The twin conditions required for invoking Section 263 — that the order must be both erroneous and prejudicial to the interests of the Revenue — were not cumulatively satisfied.
  • The AO had conducted proper and sufficient enquiries; this was not a case of absence of enquiry.
  • The PCIT impermissibly introduced new issues in the revision order which were absent from the show cause notice, depriving the assessee of a fair opportunity of hearing.
  • Penalty proceedings under Section 271E are independent of assessment proceedings and cannot form the basis for holding an assessment order erroneous.
  • A journal entry transferring loan liability does not constitute repayment of a loan, and therefore Section 269T is not attracted.