2025 (7) TMI 37 - AT - Income Tax

Revision u/s 263 - consequential order u/s.143(3) r.w.s. 263 of the IT Act passed by AO when the order u/s.263 of IT Act passed by PCIT had been set aside by ITAT - HELD THAT - A copy of the order of the Co-ordinate Bench of this Tribunal in 2024 (8) TMI 39 - ITAT AHMEDABAD has been brought on record. It is found that the Tribunal had held that the original assessment order passed u/s 143(3) of the Act on 18.12.2017 was not erroneous and prejudicial to the interest of the revenue. Therefore the exercise of jurisdiction by the Ld. PCIT under Section 263 of the Act was not held as valid and accordingly the order under Section 263 of the Act dated 26.08.2021 was set aside by the Tribunal. When the order under Section 263 stands set aside the assessment order passed in consequence to the said order cannot survive. Further when the order of the AO was held as void there was no necessity to adjudicate the various additions as made by the AO in the assessment order on merits. Therefore the Ld. CIT(A) had rightly cancelled the assessment order passed under Section 144 read with Section 263 of the Act. We do not find anything wrong with the decision of the Ld. CIT(A). Merely because the Department had challenged the order of ITAT before the Hon ble High Court it does not change the legal perspective. Appeal of the Revenue is dismissed.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered by the Tribunal in this appeal are:

(a) Whether the order passed under Section 263 of the Income Tax Act, 1961 (the Act) by the Principal Commissioner of Income Tax (PCIT) was valid, given that it was set aside by the Tribunal in an earlier appeal;

(b) Whether the consequential assessment order passed by the Assessing Officer (AO) under Section 144 read with Section 263 of the Act survives after the setting aside of the Section 263 order;

(c) Whether the First Appellate Authority (CIT(A)) erred in not adjudicating the case on merits, particularly regarding additions made by the AO on account of unexplained investments and disallowances under various provisions of the Act;

(d) Whether the CIT(A) erred in deleting the additions made by the AO under Sections 69 and 56(2)(vii) of the Act related to unexplained investments in immovable property and agricultural land, and disallowance under Section 14A read with Rule 8D;

(e) The legal effect of the pendency of the Revenue's appeal against the Tribunal's order before the Hon'ble High Court on the survival of the assessment order.

2. ISSUE-WISE DETAILED ANALYSIS

Issue (a) and (b): Validity of Section 263 order and survival of consequential assessment order

Relevant legal framework and precedents: Section 263 of the Income Tax Act empowers the PCIT to revise an assessment order if it is found to be erroneous and prejudicial to the interests of the Revenue. However, such revision must be justified on the grounds of error and prejudice. The validity of a Section 263 order is subject to judicial scrutiny, and if found invalid, the consequential assessment order passed pursuant to it cannot survive.

Court's interpretation and reasoning: The Tribunal referred to its earlier order in ITA No.296/Ahd/2022 dated 30.05.2024, wherein it was held that the original assessment order passed under Section 143(3) on 18.12.2017 was neither erroneous nor prejudicial to Revenue's interest. Consequently, the exercise of jurisdiction by the PCIT under Section 263 was invalid, and the Section 263 order dated 26.08.2021 was set aside.

The Tribunal reasoned that once the Section 263 order is quashed, the assessment order passed in consequence thereto (under Section 144 read with Section 263) cannot survive as it lacks legal foundation. The Tribunal emphasized that the validity of the consequential assessment order is intrinsically linked to the validity of the Section 263 order.

Key evidence and findings: The Tribunal relied on its own prior order setting aside the Section 263 order and noted the absence of any stay granted by the Hon'ble High Court on that order. The Revenue's pending appeal before the High Court was acknowledged but held not to affect the legal position at present.

Application of law to facts: Since the Section 263 order was invalidated by the Tribunal, the subsequent assessment order passed under Section 144 read with Section 263 lacked jurisdictional basis and was void. Therefore, the CIT(A) correctly held that the consequential assessment order does not survive.

Treatment of competing arguments: The Revenue contended that the CIT(A) erred in allowing relief on a technical ground without adjudicating merits, and that the pendency of the High Court appeal should preserve the assessment order. The Tribunal rejected this, stating that the absence of a stay means the Tribunal's order is binding, and the merits of the additions need not be examined until the validity of the Section 263 order is settled conclusively.

Conclusions: The Tribunal upheld the CIT(A)'s decision to cancel the assessment order passed under Section 144 read with Section 263, as the foundational Section 263 order was set aside. The pendency of the High Court appeal does not alter this legal position.

Issue (c), (d), and (e): Deletion of additions made by AO under Sections 69, 56(2)(vii), and disallowance under Section 14A read with Rule 8D

Relevant legal framework and precedents: Section 69 of the Act deals with unexplained investments, allowing the AO to treat such investments as income if the assessee fails to satisfactorily explain the source. Section 56(2)(vii) pertains to income arising from the difference between stamp duty value and purchase value of immovable property. Section 14A read with Rule 8D relates to disallowance of expenditure incurred in relation to exempt income.

Court's interpretation and reasoning: The Tribunal did not delve into the merits of these additions because the assessment order containing these additions was a direct consequence of the invalid Section 263 order. Since the foundational order was set aside, the additions made in the consequential assessment order could not be sustained.

Key evidence and findings: The Tribunal noted that the CIT(A) had deleted these additions following the setting aside of the Section 263 order. There was no independent examination of the factual or evidentiary basis for these additions at the appellate stage.

Application of law to facts: The Tribunal applied the principle that an assessment order passed without valid jurisdiction cannot be sustained, and hence the additions made therein are also invalidated by operation of law.

Treatment of competing arguments: The Revenue argued that the CIT(A) should have examined the additions on merits. The Tribunal rejected this view, emphasizing that merit adjudication is unnecessary when the assessment order itself is void.

Conclusions: The Tribunal affirmed the deletion of the additions by the CIT(A) on the ground that the assessment order was invalid. Therefore, the additions under Sections 69, 56(2)(vii), and disallowance under Section 14A were not sustained.

Issue (e): Effect of pendency of Revenue's appeal before Hon'ble High Court

Relevant legal framework and precedents: The pendency of an appeal before a higher court does not automatically stay or suspend the operation of the lower appellate authority's order unless a stay is specifically granted.

Court's interpretation and reasoning: The Tribunal observed that no stay was granted by the High Court against the Tribunal's order setting aside the Section 263 order. Therefore, the Tribunal's order remains binding and operative.

Key evidence and findings: The Tribunal noted the pending appeal before the High Court but emphasized the absence of any stay or injunction.

Application of law to facts: The Tribunal held that the pendency of the appeal does not affect the legal status of the assessment order or the CIT(A)'s order.

Treatment of competing arguments: The Revenue's contention that the pendency should preserve the assessment order was rejected.

Conclusions: The Tribunal confirmed that the pendency of the High Court appeal does not alter the legal effect of the Tribunal's order or the CIT(A)'s consequential relief to the assessee.

3. SIGNIFICANT HOLDINGS

"When the order under Section 263 stands set aside, the assessment order passed in consequence to the said order cannot survive."

"The original assessment order passed under Section 143(3) of the Act on 18.12.2017 was not erroneous and prejudicial to the interest of the revenue. Therefore, the exercise of jurisdiction by the Ld. PCIT under Section 263 of the Act was not held as valid and accordingly the order under Section 263 of the Act dated 26.08.2021 was set aside by the Tribunal."

"Merely because the Department had challenged the order of ITAT before the Hon'ble High Court, it does not change the legal perspective. No stay was granted by the Hon'ble High Court against the order of the Tribunal setting aside the order under Section 263 of the Act passed by the PCIT."

Core principles established include:

• The validity of a consequential assessment order depends on the validity of the Section 263 order; if the latter is set aside, the former cannot survive.
• The Tribunal's order is binding unless stayed by a higher court; pendency of appeal alone does not preserve the assessment order.
• Merit adjudication of additions is unnecessary when the assessment order is void ab initio due to invalid jurisdictional exercise.

Final determinations:

• The Section 263 order passed by PCIT was invalid and set aside by the Tribunal.
• The consequential assessment order passed under Section 144 read with Section 263 was void and rightly cancelled by the CIT(A).
• The additions made by AO under Sections 69, 56(2)(vii), and disallowance under Section