Section 263 IT Act | Revisional Authority Must Examine AO’s Enquiry Depth Before Invoking Jurisdiction : ITAT Nagpur

The Income Tax Appellate Tribunal (ITAT), Nagpur Bench, has set aside a revision order passed by the Principal Commissioner of Income Tax (PCIT) under Section 263 of the Income Tax Act, 1961, emphasizing that the revisional authority cannot invoke its powers without first examining the Assessing Officer’s (AO) enquiries and the records leading to prior approval under Section 153D. The judgment underscores that the AO’s order cannot be deemed erroneous merely because the PCIT disagrees with the conclusions drawn, particularly when the AO has conducted due enquiries and the assessee has furnished substantial documentary evidence.

Background & Facts

The Dispute

The assessee, Kumar Builders, a partnership firm engaged in road construction and maintenance on a contract and sub-contract basis, filed its return of income for the Assessment Year (AY) 2022-23, declaring an income of Rs. 76,17,040. The case was selected for compulsory scrutiny assessment under Section 143(3) of the Act following a search and survey action under Sections 132 and 133A in the Tri Connect Group. During the assessment, the AO examined payments of Rs. 1,47,12,318 made to various parties, treating them as bogus expenditures. The AO rejected the assessee’s submissions and evidences, making an addition of Rs. 21,81,078 (15% of Rs. 1,45,40,521) on account of alleged bogus purchases. Additionally, the AO made an addition of Rs. 13,75,056 (later rectified to Rs. 41,28,168) as commission income for providing accommodation entries to a searched party, determining the total income at Rs. 1,11,73,170.

Key Facts

• 15.03.2019: Return filed for AY 2022-23 declaring income of Rs. 76,17,040
• 24.05.2023: CBDT instructions issued for compulsory scrutiny due to search/survey in Tri Connect Group
• 31.12.2023: AO issued notice under Section 142(1) seeking details of payments of Rs. 1,47,12,318
• Assessment Proceedings: AO examined ledger confirmations, bills, affidavits, GST returns (GSTR-2B), and e-way bills submitted by the assessee
• Assessment Order: AO treated Rs. 1,45,40,521 as bogus expenditure, adding 15% (Rs. 21,81,078) and Rs. 13,75,056 as commission income
• 29.03.2023: AO passed rectification order under Section 154, enhancing the commission addition to Rs. 41,28,168

Procedural History

• 27.01.2026: PCIT issued notice under Section 263, alleging the assessment order was erroneous and prejudicial to the Revenue
• 24.03.2026: PCIT passed revision order, holding:
  • The AO should have fully rejected the bogus expenditure instead of restricting addition to 15% profit rate, relying on PCIT-5 Mumbai vs. Kanak Impex (India Ltd.) (ITA 791 of 2021)
  • The accommodation entry addition should have been Rs. 23,18,818 instead of Rs. 13,75,056
• 11.06.2026: ITAT heard the appeal
• 12.06.2026: ITAT pronounced judgment, allowing the assessee’s appeal

The Parties' Positions

For the Assessee

• The AO had conducted thorough enquiries and examined all relevant evidences, including affidavits, ledger confirmations, tax invoices, e-way bills, and GST returns
• The decision in Kanak Impex was inapplicable as the assessee had proved the genuineness of purchases with documentary evidence
• The AO’s rectification order under Section 154 had already enhanced the addition to Rs. 41,28,168, which was more than the alleged escaped income
• The assessment was completed after prior approval under Section 153D, and the PCIT failed to examine the approval records

For the Revenue

• The AO failed to conduct necessary enquiries, such as verifying the existence of suppliers, their manufacturing/trading capacity, and transport documents
• Despite seized material and statements establishing bogus purchases, the AO mechanically applied a 15% gross profit rate without reasoning
• The assessment order was erroneous as it did not fully reject the bogus expenditure, relying on Kanak Impex

Relief Sought

The assessee sought quashing of the PCIT’s revision order dated 24.03.2026, arguing that the AO’s order was not erroneous or prejudicial to the Revenue.

The Legal Issue

The central question was whether the PCIT could invoke Section 263 to revise the AO’s assessment order without:

1. Examining the AO’s enquiries and the evidences submitted by the assessee, and
2. Considering the records leading to prior approval under Section 153D of the Act.

Arguments Presented

For the Assessee

• Relied on Commissioner of Income Tax (Exemptions) v. Impact Foundation (India) ([2026] 186 taxmann.com 143 (Bombay)), where the Bombay High Court held that the revisional authority must conduct independent enquiries to show that the AO’s order was unsustainable in law
• Cited CIT v. Gabriel India Ltd. ([1988] 41 Taxman 237 (Bombay)) and CIT v. Nagesh Knitwears (P.) Ltd. ([2012] 22 taxmann.com 309 (Delhi)), which established that Section 263 cannot be invoked merely because the revisional authority disagrees with the AO’s conclusions if the AO has conducted due enquiries
• Argued that the AO’s rectification order had already addressed the alleged escaped income, rendering the PCIT’s revision redundant
• Contended that the PCIT failed to examine the prior approval records under Section 153D, which was a prerequisite for invoking revisional jurisdiction

For the Revenue

• Contended that the AO’s order was erroneous as it did not fully reject the bogus expenditure, relying on Kanak Impex
• Alleged that the AO failed to verify the genuineness of the transactions, such as the existence of suppliers and transport documents
• Argued that the AO mechanically applied a 15% profit rate without providing reasoning, despite seized material establishing bogus purchases

The Court's Analysis

The ITAT critically examined the PCIT’s revision order and the AO’s assessment proceedings, making the following observations:

1. AO’s Enquiries Were Sufficient: The AO had issued notices under Section 142(1), seeking details of payments, bank statements, and books of accounts. The assessee submitted ledger confirmations, affidavits, tax invoices, e-way bills, and GST returns (GSTR-2B), which the AO verified on a test-check basis. The AO found no discrepancies in the books of accounts and discredited the assessee’s evidences only after examining them.

   "The Assessing Officer specifically mentions in the assessment order that the assessee has produced books of accounts for inspection and the same has been verified on test check basis but no discrepancy whatsoever was pointed out of the books of accounts."

2. Revisional Authority’s Failure to Examine Rectification Order: The AO had passed a rectification order under Section 154 on 29.03.2023, enhancing the addition to Rs. 41,28,168. The PCIT issued the revision notice on 27.01.2026 without considering this rectification order, indicating a lack of due diligence in examining the assessment records.

3. Legal Precedents on Section 263: The ITAT relied on Impact Foundation and Gabriel India Ltd., which held that the revisional authority cannot invoke Section 263 merely because it disagrees with the AO’s conclusions. The revisional authority must independently verify that the AO’s order is unsustainable in law or lacks enquiry. In this case, the AO had conducted enquiries, and the assessee had furnished substantial evidence, which the PCIT failed to discredit.

   "The directions issued by Ld. Revisional Authority for further enquiries and an investigation in comprehensive manner is nothing but an attempt to substitute a higher wisdom to the one exercised by Ld. A.O."

4. Prior Approval Under Section 153D: The ITAT noted that the assessment was completed after prior approval under Section 153D. The PCIT failed to examine the approval records, which were essential to determine whether the assessment order was erroneous. The ITAT relied on the Delhi Benches’ decision in ITA No. 1890 to 1893/Del/2024, which held that the revisional authority must examine both the AO’s records and the approval records before invoking Section 263.

   "Without giving a finding that the prior approval u/s 153D was vitiated and was also erroneous so far as prejudicial to the interest of the Revenue, the assessment order independently cannot be held to be erroneous so far as prejudicial to the interest of the Revenue."

5. Genuineness of Transactions: The ITAT observed that the assessee had furnished affidavits from parties, ledger confirmations, tax invoices, e-way bills, and GST returns, which corroborated the genuineness of the transactions. The AO’s conclusion that the purchases were bogus was based on seized material, but the assessee’s evidence was not adequately rebutted. The ITAT held that the PCIT’s allegation of lack of enquiry was unfounded.

The Verdict

The ITAT allowed the assessee’s appeal, quashing the PCIT’s revision order dated 24.03.2026. The Tribunal held that the PCIT had wrongly exercised its powers under Section 263 without examining the AO’s enquiries, the assessee’s evidences, or the prior approval records under Section 153D. The impugned order was set aside, and the AO’s assessment order was restored.

What This Means For Similar Cases

Revisional Authority Must Examine AO’s Enquiries and Approval Records

• Section 263 cannot be invoked merely because the revisional authority disagrees with the AO’s conclusions. The revisional authority must independently verify that the AO’s order is unsustainable in law or lacks enquiry
• Practitioners must argue that the PCIT failed to examine:
  • The AO’s enquiries and the evidences submitted by the assessee
  • The records leading to prior approval under Section 153D
• Reliance on Impact Foundation, Gabriel India Ltd., and Nagesh Knitwears is crucial to establish that the AO’s order cannot be deemed erroneous without proof of lack of enquiry

Evidences Submitted by Assessee Must Be Rebutted

• The ITAT emphasized that the assessee had furnished affidavits, ledger confirmations, tax invoices, e-way bills, and GST returns to establish the genuineness of transactions
• The AO’s order cannot be deemed erroneous if the assessee’s evidences are not adequately rebutted. Practitioners should ensure that all documentary evidence is placed on record and highlighted during proceedings
• The revisional authority must point out specific infirmities in the assessee’s evidence to justify invoking Section 263

Rectification Orders Must Be Considered

• The PCIT’s failure to consider the AO’s rectification order under Section 154 was a critical flaw in the revision proceedings
• Practitioners should ensure that all subsequent orders, including rectification orders, are brought to the revisional authority’s notice to avoid allegations of lack of due diligence