ITAT Delhi on Section 263 in Search Assessments: Prior 153D Approval Curbs Revisional Jurisdiction

Background of the Dispute

This appeal before the ITAT Delhi concerned Manohar & Filaments Pvt. Ltd. Vs PCIT (Central)-3, ITA No. 2645/Del/2025 for A.Y. 2017-18. The controversy revolved around whether the Principal Commissioner of Income Tax (PCIT) could validly exercise revisional jurisdiction under Section 263 over an assessment framed under Section 153C/143(3) when such assessment had already been completed with statutory prior approval under Section 153D.

The assessee challenged the Section 263 order of the PCIT (Central)-3, Delhi dated 11.03.2025 on multiple grounds, primarily contending that:

  • The Section 263 order was without jurisdiction and barred in law.
  • The original assessment under Section 153C/143(3) was properly framed after obtaining mandatory Section 153D approval.
  • The PCIT directed further enquiries into an alleged non-genuine loan of ₹5,50,000/- which neither emerged from any seized material nor found place in the satisfaction note related to the search under Section 132.

The Tribunal ultimately quashed the Section 263 order, holding that the PCIT could not invoke revisional powers in the given factual and legal framework.

Grounds Raised by the Assessee

The assessee raised several grounds before the Tribunal, the core ones being:

  1. The initiation of revisional proceedings under Section 263 was invalid as the PCIT wrongly assumed jurisdiction, rendering the order illegal and time-barred.
  2. The PCIT erred in branding the original Section 153C/143(3) assessment as erroneous and prejudicial to the interests of the Revenue.
  3. The directions issued under Section 263 were allegedly vague, unsustainable and liable to be struck down.
  4. The PCIT ignored that the assessment had been passed after obtaining due sanction from the Joint Commissioner under Section 153D.
  5. The PCIT wrongly concluded that the Assessing Officer (AO) had failed to conduct necessary enquiries or verifications.
  6. The direction to carry out detailed verification on an alleged non-genuine loan of ₹5,50,000/- was unjustified.
  7. The Section 263 order was asserted to be arbitrary, violative of natural justice and beyond the statutory confines of Section 153C.

In essence, the assessee’s challenge was twofold:

  • Jurisdictional: Once Section 153D approval is granted, PCIT cannot simply revisit the assessment under Section 263 unless the approval itself is examined and held to be erroneous and prejudicial.
  • Substantive scope: In a Section 153C search-related, unabated assessment, additions or enquiries cannot travel beyond incriminating material found during search and the AO’s satisfaction note.

Reliance on Prior 153D Approval

The assessee’s authorised representative strongly stressed that the assessment for A.Y. 2017-18 was completed under Section 153C (and not a regular scrutiny under Section 143(3)) after obtaining mandatory prior approval under Section 153D from the competent authority.

Placing reliance on judicial precedents, it was argued that:

  • Where an assessment order is passed after obtaining prior approval under Section 153D, the same authority cannot subsequently exercise revisional powers under Section 263 to overturn what had already been approved.
  • Unless the PCIT also questions and holds the Section 153D approval order itself to be erroneous and prejudicial to the interests of the Revenue, the assessment cannot independently be branded as such.

The assessee relied heavily on: