Section 263 Revision Unsustainable Where AO Conducted Adequate Inquiry and Adopted a Legally Permissible View: Bombay High Court

Overview of the Dispute

The Bombay High Court recently adjudicated upon a Revenue appeal filed under Section 260A of the Income Tax Act, 1961, challenging the Income Tax Appellate Tribunal's order dated 21 March 2023. The ITAT had ruled in favour of the assessee — a firm engaged in real estate development — by holding that the revision order passed by the Principal Commissioner of Income Tax (PCIT) under Section 263 for Assessment Year 2014-15 was legally unsustainable. The High Court, after a careful examination of the facts and settled legal principles, upheld the ITAT's decision and dismissed the Revenue's appeal, finding that no substantial question of law arose for its consideration.

Background Facts: The Assessee and Its Projects

The assessee operated as a builder and developer and was engaged in the construction of two residential projects — "Spring" and "Taloja" — during the relevant assessment period. For recognition of revenue from construction activities, the assessee consistently followed the project completion method of accounting, under which profits from a project are offered to tax only upon its completion, typically evidenced by the receipt of an occupancy certificate.

During AY 2014-15:

  • The "Spring" project reached completion, and revenue from the same was accordingly recognized and offered to tax.
  • The "Taloja" project remained under construction and was therefore shown as closing work-in-progress.
  • The assessee declared a net profit of ₹45,25,572, closing work-in-progress of ₹1,59,11,745, and taxable income of ₹1,14,800 after applying the permissible deductions and disallowances under the Income Tax Act, 1961.
  • The return of income was filed electronically on 30 September 2014.

Scrutiny Assessment and Subsequent Revision Proceedings

Scrutiny Under Section 143(3)

The return was selected for scrutiny under the Computer Assisted Scrutiny Selection (CASS) mechanism. Notices under Section 143(2) and Section 142(1) of the Income Tax Act, 1961 were duly issued. After completing the scrutiny proceedings, the Assessing Officer (AO) passed an assessment order dated 26 December 2016 under Section 143(3), determining the total income at ₹1,23,09,324 as against the returned income of ₹1,14,800.

Initiation of Revision by PCIT Under Section 263

Following the conclusion of the assessment, the PCIT-II, Thane initiated revisionary proceedings under Section 263 of the Income Tax Act, 1961, on the basis of a survey action carried out under Section 133A on 16 October 2014.

The survey had revealed on-money receipts aggregating to ₹60,82,34,643 pertaining to the sale of flats in the "Spring-I" and "Spring-II" projects. Of this total:

  • ₹52,85,95,577 had already been offered to tax in AY 2013-14, corresponding to the Spring-I project.
  • The balance amount of ₹7,96,39,066, pertaining to the Spring-II project and received during Financial Year 2013-14 (relevant to AY 2014-15), had allegedly not been brought to tax.

The PCIT held that the AO, while completing the assessment for AY 2014-15, had failed to examine the taxability of this balance amount. Invoking clause (a) of Explanation 2 to Section 263 — which deems an assessment order erroneous if passed without making the necessary inquiries or verification — the PCIT set aside the AO's order dated 26 December 2016 with a direction for de novo assessment.

ITAT's Decision: Revision Order Quashed

The assessee appealed before the ITAT, which allowed the appeal and quashed the PCIT's revision order. The key findings of the Tribunal were as follows: