Madras High Court: Bar on Exercise of Revisionary powers u/s 263 of IT Act If Orders Are Passed After Application of Mind

Madras High Court: Bar on Exercise of Revisionary powers u/s 263 of IT Act If Orders Are Passed After Application of Mind

The Madras High Court (HC), on 30 March 2021, in the case titled M/s Virtusa Consulting Services Pvt. Ltd. (Appellant/ Assessee) v. The Deputy Commissioner of Income-tax, Income Tax, Chennai (Respondent/ Revenue) ruled that to invoke the power under Section 263 of the Income Tax Act (IT Act) two essential conditions must be fulfilled that comprise of – i) Assessment order is erroneous; and ii) It is prejudicial to the interest of Revenue.

The HC bench comprising of Justices TS Sivagnanam and RN Manjula noted that the revision powers conferred on the Principal Commissioner of Income Tax (PCIT) under Section 263 of the IT Act cannot be invoked only on account of a change in opinion if the assessment order has been passed after due application of mind.

The factual matrix of the case is that in 2010 an income tax return was submitted by the assessee which was selected for scrutiny. The assessing officer (AO) opined that deductions claimed by the assessee under Section 10A of the IT Act were wrongly computed and a rectification order was passed in 2014.

The PCIT however, in 2016 issued notice invoking Section 263 of the IT Act and, it set aside the previous regarding the deductions claimed under Section 10A of the IT Act.

It was claimed that the assessment order was erroneous and prejudicial to Revenue. No separate books of account were maintained with respect to 10A units and non-10A units. An appeal was filed challenging the 2016 revision order and the same was dismissed by the Income Tax Appellate Tribunal (ITAT), Chennai.

An appeal was filed before the HC by the assessee and it ruled that "For invoking the power under Section 263 of the Act, the twin conditions are to be cumulatively satisfied, viz., the assessment order should be erroneous and the assessment order should be prejudicial to the interest of Revenue."

The HC further clarified that even if one of the two conditions is absent then the power conferred on the PCIT cannot be invoked.

It added that "If there is material to show that the Assessing Officer (AO) did apply his mind to the said issue and then arrived at the permissible deduction under Section 10A of the Act, the order passed by the AO cannot be branded as being 'erroneous' and if the power under Section 263 of the Act could not have been invoked solely for the reason that the assessment order is prejudicial to the interest of Revenue."

The HC relied on the judgment of the case titled Kumar Rajaram v. Income-tax Officer and it had considered the scope of Section 263 of the IT Act. The Court observed that revision powers could not be exercised in that case given that it was invoked on account of mere change of opinion.

The Court heard the parties at length and concluded that the PCIT's order was erroneous and the HC found it erroneous based on the following grounds-

- The AO called for details, the details were produced, and thereafter, the assessment was completed. Hence, the findings of the PCIT that there was no inquiry into the matter at all were erroneous. The Court rejected the assumption of jurisdiction under Section 263 IT Act.

- The AO had applied his mind while passing an order of 2014 and hence, the PCIT wrongly held that the assessment order was erroneous.

- The AO completed the assessment based on the materials and documents placed before him and there is nothing to suggest that the conclusion arrived at by him was unsustainable in law, justifying invoking the revisional jurisdiction under Section 263 of the Act

- The PCIT failed to decide the issue of whether it is mandatory for the assessee to maintain separate books of accounts. If in case it is mandatory then the alternate submission made by the assessee that they have maintained separate profit and loss accounts and the same was submitted to the AO.

- As per the clarification issued in the circular dated 17 January 2013, by the CBDT there is no requirement to maintain separate books of account. Hence, the conclusion of the PCIT that it is necessary to maintain separate books of account is not sustainable.

The Court held that the order of the ITAT was erroneous as it upheld the findings of the PCIT were invalid in itself.

It concluded that "The Tribunal while testing the correctness of the order passed by the PCIT has also not dealt with the issues, which were specifically pleaded by the assessee. Therefore, we are to necessarily hold that the order passed by the Tribunal is also erroneous."