Mumbai ITAT Quashes Section 263 Revision Order — AO's Compliance with Bombay High Court Ruling Cannot Be Termed Erroneous

Background and Overview

The Mumbai bench of the Income Tax Appellate Tribunal rendered a significant ruling in the case of City and Industrial Development Corporation of Maharashtra Limited Vs PCIT (ITAT Mumbai), holding that a revisionary order passed under Section 263 of the Income Tax Act, 1961 was legally unsustainable. The Tribunal concluded that when an Assessing Officer follows a binding judgment of the jurisdictional High Court, the resulting assessment order cannot be characterised as erroneous or prejudicial to the interests of the Revenue — the twin conditions that are mandatory for invoking Section 263.

The ruling carries wide significance for assessees and tax practitioners alike, as it reinforces the principle of judicial discipline binding on tax authorities and also addresses a procedural infirmity that goes to the root of the revisionary jurisdiction itself.

The assessee in this case is a statutory body established under the Maharashtra Regional and Town Planning Act, 1966 (MRTP Act). It was incorporated on 17.09.2017 as a State Government Undertaking, with the entire share capital subscribed by the Government of Maharashtra. The primary mandate of this corporation was to act as an agent of the State Government in the capacity of a New Town Developer and Special Planning Authority.

By virtue of notifications and Government Resolutions issued from time to time, the assessee was appointed:

  • As the New Town Development Authority under Section 113(3A) of the MRTP Act, to oversee development of the Navi Mumbai region on behalf of the State Government.
  • As the Special Planning Authority under Section 40(1)(b) read with Section 113(3A) of the MRTP Act, for development of other regions within Maharashtra.

For discharging these agency functions, the assessee received a fixed agency commission of Rs. 5 lakhs per annum from the Government of Maharashtra, as stipulated under the Government Resolution dated 24th January, 1972. The assessee consistently maintained that this was its only taxable income, all other receipts being collected in a fiduciary capacity on behalf of the State.

How the Assessment for AY 2018-19 Unfolded

Non-Filing of Return and Reopening

For the Assessment Year 2018-19, the assessee did not file any return of income. Based on information available in the departmental system, the case was reopened under Section 147 of the Income Tax Act, 1961, on the ground that income chargeable to tax had escaped assessment.

The Assessing Officer identified the following significant financial transactions during the year:

  1. Interest received (other than interest on securities) — Rs. 25,98,07,210
  2. Purchase of debentures — Rs. 1,89,21,033
  3. Payments made to contractors — Rs. 7,05,11,251
  4. Time deposits — Rs. 15,18,15,78,507
  5. Rent receipts — Rs. 74,99,56,668
  6. Rent on plant and machinery — Rs. 16,19,81,879
  7. Proceeds from sale of immovable property — Rs. 7,66,00,57,772
  8. Cash deposits — Rs. 1,46,89,444
  9. Cash deposits in current account — Rs. 21,42,16,451
  10. Cash withdrawals from current account — Rs. 2,16,50,000

Issuance of Notices and Filing of Return

Following the prescribed statutory procedure, the AO issued a show cause notice under Section 148A(b) of the Act and subsequently issued a formal notice under Section 148. In response, the assessee filed a return of income on 27.05.2022, declaring a total income of Rs. 5 lakhs.

Assessee's Position Before the AO

During the course of assessment proceedings, the assessee furnished detailed submissions explaining that: