Section 263 Revision Falls When Reassessment Lacked Jurisdictional Foundation Under Section 151: Varada Mercantile Pvt. Ltd. vs PCIT (ITAT Mumbai)

Overview of the Dispute

The Mumbai Bench of the Income Tax Appellate Tribunal delivered a significant ruling in Varada Mercantile Pvt. Ltd. Vs PCIT (ITAT Mumbai), ITA Nos. 6608 & 6609/M/2026, decided on 23 September 2026, covering Assessment Years 2016–17 and 2017–18. The central question was not whether the assessee had genuinely received loans — that had already been examined and accepted during reassessment — but whether the Principal Commissioner of Income Tax could legitimately exercise revisionary powers under Section 263 of the Income Tax Act, 1961 over reassessment orders that were themselves founded on jurisdictionally defective approvals.

The Tribunal's answer was unequivocal: where the approval required under Section 151 was not obtained from the authority the statute mandates, the reassessment order is non-est in law, and a void order cannot supply the lawful foundation that Section 263 revision requires.

Background Facts

The Assessee and the Loan Transactions

Varada Mercantile Pvt. Ltd. had filed returns for both AYs declaring Nil income after accounting for current-year losses. For AY 2016–17, the returned loss was Rs. 12,98,271/-; for AY 2017–18, it was Rs. 26,95,532/-. The assessee had received loans from M/s. Aneri Fincap Limited (formerly M/s. Farry Industries Limited). The transactions under scrutiny were:

Why Reassessment Was Triggered

The Department received actionable intelligence through the Insight Portal following a search and seizure action under Section 132 conducted on 06.11.2019 in the case of the One World Group. The statement of Shri Rajesh G. Mehta, recorded on 08.11.2019, alleged that M/s. Aneri Fincap Limited was engaged in routing accommodation entries. On this basis, both assessments were reopened with respect to the loans received by the assessee from that concern.

The Reassessment Proceedings and Their Outcome

After the reassessments were initiated, the Assessing Officer issued notices under Section 143(2) and Section 142(1). The assessee responded comprehensively, producing:

• Loan agreements and confirmations
• Ledger accounts and bank statements
• Cash-flow statements and disbursement letters
• The lender's financial statements and income-tax particulars
• The lender's RBI registration certificate
• Evidence of subsequent loan repayment
• Interest particulars (for AY 2017–18)

The Assessing Officer recorded that he had verified the banking channel through which the loans were received and their subsequent repayment. Both reassessments, completed on 22.05.2023 under Section 147 read with Section 144B, resulted in acceptance of the returned income.

The PCIT's Revisionary Action

The Principal Commissioner was dissatisfied. Taking the view that the Assessing Officer had mechanically accepted the documents without genuinely examining the search information, the creditworthiness of the lender, or the genuineness of the transactions, the PCIT invoked Explanation 2(a) to Section 263. By two separate orders dated 27.03.2026, both reassessment orders were partly set aside with directions to conduct fresh verification and enquiry.

The Jurisdictional Objection: Approval Under Section 151

The Statutory Framework

Before the Tribunal, the assessee's Authorised Representative pivoted away from the merits of the revision and attacked the jurisdictional foundation of the entire reopening. The argument centered on Section 151 of the Income Tax Act, 1961, which at the relevant time prescribed:

(i) Principal Commissioner or Principal Director or Commissioner or Director — where three years or less have elapsed from the end of the relevant assessment year.

(ii) Principal Chief Commissioner or Principal Director General or, where there is no Principal Chief Commissioner or Principal Director General, Chief Commissioner or Director General — where more than three years have elapsed from the end of the relevant assessment year.

The statute thus establishes a time-linked hierarchy. As the three-year mark had passed for both AYs before the July 2022 orders under Section 148A(d) and notices under Section 148 were issued, approval was mandatorily required from the authority specified under Section 151(ii).

The Supreme Court's Position in Rajeev Bansal

The binding authority on this question is the Supreme Court's decision in Union of India v. Rajeev Bansal, [2024] 469 ITR 46 (SC). The Tribunal reproduced and applied the following passages:

"Section 151 imposes a check upon the power of the Revenue to reopen assessments. The provision imposes a responsibility on the Revenue to ensure that it obtains the sanction of the specified authority before issuing a notice under Section 148. The purpose behind this procedural check is to save the assessees from harassment resulting from the mechanical reopening of assessments." (para 73)

"Grant of sanction by the appropriate authority is a precondition for the assessing officer to assume jurisdiction under Section 148 to issue a reassessment notice. Section 151 of the new regime does not prescribe a time limit within which a specified authority has to grant sanction. Rather, it links up the time limits with the jurisdiction of the authority to grant sanction. Section 151(ii) of the new regime prescribes a higher level of authority if more than three years have elapsed from the end of the relevant assessment year. Thus, non-compliance by the assessing officer with the strict time limits prescribed under Section 151 affects their jurisdiction to issue a notice under Section 148." (para 76)

The Supreme Court also clarified in para 81 of Rajeev Bansal that the directions issued in Union of India v. Ashish Agarwal, [2022] 444 ITR 1 (SC) did not dispense with the approval requirements applicable to orders under Section 148A(d) and notices under Section 148.

Year-Wise Analysis of the Approval Defect

AY 2016–17: Clear Jurisdictional Shortfall