2025 (4) TMI 859 - AT - Income Tax

Revision u/s 263 - AO failed to examine the allowability of Provision for Loans to Joint Venture (MGCL) and Impairment Loss HELD THAT - We wish to clarify that at this stage we are not adjudicating the allowability of the said claims on merits. The revisionary order passed u/s 263 of the Act merely directs the AO to examine these claims afresh and frame a reasoned assessment after proper verification. Therefore no finding is being recorded by us on the applicability of the judicial precedents cited by the AR or the correctness of the assessee s claim under section 37(1) of the Act or any other provision. The allowability or otherwise of these claims shall be determined by the AO in accordance with law after considering the submissions and evidence placed before him during the remand proceedings. We are of the considered view that the assessment order is vitiated due to complete absence of inquiry on two material items having a substantial bearing on the determination of taxable income under the normal provisions of the Act. The explanations and accounting entries now furnished by the assessee were not subjected to verification during the original assessment and hence do not cure the error at the stage of revision. PCIT was justified in invoking section 263 and directing the AO to reframe the assessment after examining the nature and allowability of the impugned items. The revisionary order is valid in law and does not suffer from any jurisdictional or procedural infirmity. Appeal of the assessee is dismissed.

Summary

ISSUES PRESENTED and CONSIDERED

The core legal questions considered in this judgment are:

• Whether the assessment order dated 05.12.2017, passed under section 143(3) of the Income Tax Act, 1961, is erroneous and prejudicial to the interests of the Revenue, justifying the invocation of section 263 by the Principal Commissioner of Income Tax (PCIT).
• Whether the failure to issue a fresh notice under section 143(2) after the filing of a revised return makes the assessment order void ab initio, and consequently, whether the revisionary proceedings under section 263 are maintainable.
• Whether the PCIT was correct in setting aside the assessment order for lack of inquiry into the allowability of the provision for loans to a Joint Venture and the impairment loss, and directing the Assessing Officer (AO) to reframe the assessment.

ISSUE-WISE DETAILED ANALYSIS

1. Validity of the assessment order in the absence of a fresh notice under section 143(2):

• Relevant legal framework and precedents: The requirement for issuance of a notice under section 143(2) is a procedural mandate for valid assessment proceedings. The Tribunal emphasized that section 263 assumes a valid assessment order, and any jurisdictional defect in the assessment should have been challenged through appropriate legal remedies.
• Court's interpretation and reasoning: The Tribunal held that the assessment order had attained finality and was not challenged by the assessee through an appeal or any other legal remedy. The Tribunal is not the appropriate forum for a collateral challenge to the validity of the assessment order during section 263 proceedings.
• Conclusions: The additional ground of appeal regarding the absence of a fresh notice under section 143(2) was dismissed as not maintainable, being a collateral challenge not germane to the section 263 proceedings.

2. Invocation of section 263 for lack of inquiry into material items:

• Relevant legal framework and precedents: Section 263 empowers the PCIT to revise an assessment order if it is erroneous and prejudicial to the interests of the Revenue. The Tribunal referred to Explanation 2 to section 263, which considers an order erroneous if passed without making inquiries or verification that should have been made.
• Court's interpretation and reasoning: The Tribunal found that the AO had not examined the allowability of the provision for loans to a Joint Venture and the impairment loss. The absence of inquiry into these material claims constituted non-application of mind, rendering the assessment order erroneous and prejudicial to the Revenue.
• Key evidence and findings: The Tribunal noted the lack of any discussion or reference in the assessment order regarding the examination of the provision for loans and impairment loss. The PCIT's order did not direct a specific disallowance but required the AO to re-examine these claims.
• Application of law to facts: The Tribunal upheld the PCIT's direction to the AO to reframe the assessment after proper inquiry, as the original assessment lacked inquiry into significant claims affecting taxable income.
• Conclusions: The Tribunal affirmed the PCIT's order under section 263, finding it valid and justified in law.

SIGNIFICANT HOLDINGS

• Core principles established: The Tribunal reiterated that section 263 proceedings presuppose a valid assessment order. Any jurisdictional defect in the assessment should be challenged through appropriate legal remedies, and not collaterally in section 263 proceedings.
• Final determinations on each issue: The Tribunal dismissed the additional ground regarding the absence of a fresh notice under section 143(2) as not maintainable. It upheld the PCIT's invocation of section 263, affirming the need for inquiry into the material claims of provision for loans and impairment loss.

The appeal of the assessee was dismissed, affirming the PCIT's order to set aside the assessment and directing the AO to reframe it after due inquiry.