Supreme Court on Section 263: When an Assessment with Inquiry Cannot Be Revised

The Supreme Court in PCIT Vs NYA International (Supreme Court of India) has once again drawn a firm line on when revisional powers under Section 263 of the Income Tax Act 1961 can be invoked. The decision underscores that once the Assessing Officer (AO) has undertaken inquiry and verification, the Principal Commissioner of Income Tax (PCIT) cannot invoke Section 263 on the mere premise that a different or “better” conclusion should have been reached.

This ruling is especially important in the context of reassessment proceedings under Section 147/Section 148, particularly where issues such as undisclosed bank accounts and eligibility for deduction under Section 10AA are examined during reassessment.

Case Background: PCIT Vs NYA International

Return, Original Assessment and Reassessment

M/s. Nya International filed its return of income for Assessment Year 2012-13 on 16.08.2012, declaring NIL income. The case was selected for scrutiny, and an order under Section 143(3) of the Income Tax Act 1961 was passed on 25.03.2015.

Subsequently, information was received from DDIT (Ivn) Unit-7(2), Mumbai indicating that the assessee was holding a bank account bearing no. 550011032480 with ING Vysya Bank. The account allegedly contained aggregate credit entries amounting to Rs.70,13,43,319/-, and the same was not reflected in the return of income.

During the relevant year, the assessee had also claimed deduction under Section 10AA of Rs.87,21,44,414/-.

On the basis of the above information:

  • Proceedings were reopened under Section 147.
  • Notice under Section 148 was issued.
  • A reassessment order was ultimately passed on 31.12.2019.

In this reassessment, the AO:

  • Examined the ING Vysya Bank account and entries therein, and
  • Disallowed the deduction under Section 10AA to the extent of Rs.87,21,44,414/-, making a corresponding addition.

However, no separate addition was made solely on account of the credit entries of Rs.70,13,43,319/- in the ING Vysya Bank account, after the AO undertook his inquiry and applied his mind.

Invocation of Section 263 by Principal CIT

The Principal CIT (Surat), exercising revisionary jurisdiction under Section 263, observed that the assessee was maintaining three bank accounts:

  • Two bank accounts with Allahabad Bank, and
  • One account with ING Vysya Bank,

and these accounts were stated to be not disclosed in the income tax return for AY 2012-13.

The Principal CIT took the view that:

  • The AO had allegedly not conducted proper or adequate inquiry, and
  • The reassessment order dated 31.12.2019 was therefore erroneous and prejudicial to the interests of the Revenue within the meaning of Section 263.

Accordingly:

  1. A show cause notice under Section 263 was issued to the assessee.
  2. After considering submissions, the Principal CIT set aside the reassessment order dated 31.12.2019.
  3. The AO was directed to reframe the assessment after fresh examination.

The assessee challenged this revisional order dated 18.02.2022 before the Income Tax Appellate Tribunal (ITAT), Surat.

Findings of the ITAT and Gujarat High Court

ITAT’s Analysis and Decision

The Income Tax Appellate Tribunal, Surat, took note of the complete reassessment record and observed that the AO had squarely addressed both grounds recorded in the Section 148 notice:

  1. The credit entries of Rs.70,13,43,319/- in the ING Vysya Bank account, and