Pune ITAT Holds Section 263 Revision Invalid Where AO’s Enquiry Is Adequate and View Is Plausible

Background of the Dispute

The matter concerns the exercise of revisionary jurisdiction under Section 263 of the Income Tax Act 1961 by the Commissioner of Income Tax (IT&TP), Pune (PCIT), in relation to an assessment framed u/s 143(3) r.w.s. 144C for AY 2020-21.

The assessee, Digital Risk Mortgage Services LLC, is a company incorporated in the United States of America and is a non-resident for Indian tax purposes. It has a branch office in Pune, operating under the name Digital Risk Mortgage Services LLC, India, providing offshore services to its Head Office and associated group entities. The Indian branch constitutes a permanent establishment in India.

For AY 2020-21, the assessee:

  • Filed its return of income u/s Section 139(1) on 12.02.2021
  • Declared total income of Rs.17,82,17,280/-
  • E-filed Form 3CEB, tax audit report, and Form 56F
  • Claimed deduction u/s Section 10AA and Section 80JJAA

The case was selected for complete scrutiny, and the Assessing Officer (AO) ultimately determined total income at Rs.18,89,75,632/- under an order dated 08.04.2022 passed u/s Section 143(3) r.w.s. Section 144C. In this order, the AO allowed the assessee’s claims u/s Section 10AA and Section 80JJAA.

Subsequently, the CIT(IT&TP) invoked Section 263, set aside the assessment on the ground that the AO allegedly did not carry out proper and meaningful enquiries regarding the eligibility of the deductions u/s Section 10AA and Section 80JJAA, and directed fresh examination by the AO.

The assessee challenged this revisionary order before the Pune ITAT.

Grounds Raised by the Assessee

In appeal before the Tribunal, the assessee essentially raised the following legal and factual contentions:

  1. The notice and order issued under Section 263 were without jurisdiction and contrary to the foundational conditions of that provision.
  2. The original assessment u/s Section 143(3) r.w.s. Section 144C was neither erroneous nor prejudicial to the interest of the Revenue, and therefore outside the scope of Section 263.
  3. The AO had already verified the issues later cited as grounds for revision; hence, revision could not be invoked merely because the PCIT desired a different or deeper enquiry.
  4. The PCIT’s action was inconsistent with the ratio in Malabar Industrial Co. Ltd. vs. CIT, 243 ITR 83 (SC), as there was no demonstration that the assessment order was both erroneous and prejudicial to the Revenue.
  5. The claims u/s Section 10AA and Section 80JJAA were legally tenable and had been examined and accepted by the AO after detailed scrutiny; such accepted claims could not be used as a basis to assume jurisdiction u/s Section 263.

The assessee also reserved the right to modify, add, or withdraw grounds as necessary.

Key Facts Relating to the Assessment Proceedings

AO’s Enquiries During Scrutiny

The assessment was selected for complete scrutiny under CASS, with one of the flagged issues being:

“Deduction claimed for industrial undertaking u/s 801A/801AB/801AC/IB/IC/IBA/80ID/80IE/10A/10AA.”

In the course of the scrutiny:

  • The AO issued multiple notices u/s Section 142(1) raising specific queries on:
    • Eligibility of the deduction claimed u/s Section 10AA
    • Eligibility of the deduction u/s Section 80JJAA
  • The assessee furnished extensive responses, explaining and evidencing:
    • The nature of the SEZ unit and non-SEZ unit
    • Employee-wise details, including salary, period of employment, working days
    • Employee transfers from non-SEZ to SEZ unit
    • Computation of eligible new employees for Section 80JJAA

On 28.01.2022, the AO issued a detailed show-cause notice specifically on the Section 10AA claim. The assessee replied comprehensively (as placed at pages 610–620 of the paper book). After considering all material, the AO did not disturb the deductions u/s Section 10AA and Section 80JJAA while finalizing the assessment on 08.04.2022, though he made certain other additions u/s Section 40(a)(ia) and Section 40(a)(i).

The paper book filed before the Tribunal contained, inter alia:

  • Notices u/s Section 142(1)
  • Show-cause notice dated 28.01.2022
  • Replies dated 16.01.2022 and other dates
  • Employee-wise lists and salary details (e.g., at page 379)
  • Movement of employees between Pune unit and Chennai SEZ unit

These documents demonstrated that the AO had made targeted enquiries and the assessee had supplied all relevant data.

PCIT’s Reasoning in the Section 263 Order

The CIT(IT&TP) invoked Section 263, primarily on two planks:

1. Alleged Inadequate Enquiry on Section 10AA

The PCIT concluded that: