During appellate proceedings against order u/s 263, validity of original assessment order can be examined
In a recent judgment, ITAT Delhi held that during the course of appellate proceedings against the order passed u/s 263 of the Act, the validity of the assessment order from which such proceedings have been originated could be examined and if original assessment order itself is null and void, the same could not be the subject matter of revision under section 263 of the Act.
ABCAUS Case Law Citation:
4443 (2025) (03) abcaus.in ITAT
Important Case Laws relied upon by Parties:
NTPC Ltd. reported in 229 ITR 383 (SC)
In the instant case, the assessee had challenged the order passed u/s 263 of the Act by the Principal Commissioner of Income Tax on the basis of audit objections.
The appellant assessee was HUF and had filed the return of income which included income from the sale of share claimed as exempted u/s 10(38) of the Act. The return was processed u/s 143(1) and accepted.
Thereafter, the case is reopened by way of issue of notice u/s 148 and after obtaining various details from the assessee and careful consideration of the same, the Assessing Officer accepted the income declared by assessee vide order passed u/s 147 r.w.s 144B of the Act.
Thereafter, the PCIT found the order so passed is erroneous in so far as prejudicial to the interest of Revenue and show cause notice was issued to explain as to why the order passed u/s 144 r.w.s 144 of the Act should not be set aside and fresh assessment be directed.
After considering the submissions of the assessee, the PCIT was of the opinion that the order passed u/s 147 r.w.s 144B was erroneous in so far as the prejudicial to the interest of Revenue and by setting aside the same order, directed the AO to pass a fresh assessment and re-compute the assesee’s income after making enquiries with respect to the issue of long term of capital gain received in the form of accommodation entries of the two companies which was claimed as exempt u/s 10(38) of the Act by the assessee.
During the course of hearing, before the Tribunal the assessee submitted an additional legal ground and contended that I was purely legal in nature and required no further verification, therefore, the same deserved to be admitted. The additional ground was admitted for adjudication and was taken up first.
By the legal ground, the assessee had challenged the initiation of proceedings u/s 148 of the Act and submitted that where the very foundation of reopening of assessment was invalid, the consequent revision order passed u/s 263 is nullity and void ab initio. The assessee submitted that during the course of re-assessment proceedings also, assessee has objected the reopening of the assessment which were stated to have been disposed of. It was stated that the reasons recorded for reopening of the assessments showed that the same were vague and had not specified the specific details of the transactions carried out by the assessee which were claimed as bogus long term capital gain.
The assessee further drew attention to the reasons where the AO observed that assesse had obtained bogus accommodation entries. It was submited that the assessee had earned long term capital from sale of two companies and all these facts were available before the AO in the return of income filed by assesse, and had not recorded the proper findings in the reasons so recorded. He thus, prayed that when the reasons were not clear and unambiguous and had not clarified as to how the AO had recorded the satisfaction for reopening the assessment, the same was bad in law. Once the reopening is based on wrong appreciation of facts, the consequent order passed u/s 263 has no legs to stand. He thus, prayed that the orders passed u/s 147 & 143(3) along with order 263 deserves to be quashed.
The Tribunal observed that no doubt that the assessee had challenged the order passed by the Pr. CIT u/s.263 of the Act, however, since the assessee had raised the issue of validity of reassessment order, the Bench would first answer the question as to whether or not such legality of the re-assessment framed could be examined in appellate proceedings challenging the order passed u/s 263 of the Act.
The coordinate bench of Mumbai Tribunal in the case of Westlife Development Ltd. reported in (2016) 49ITR (T) 406 (Mumbai) held that during the course of appellate proceedings against the order passed u/s.263 of the Act, the validity of the assessment order from which such proceedings have been originated could be examined.
The Tribunal observed that the coordinate bench of ITAT Mumbai had held that during the course of appellate proceedings against the order passed u/s 263 of the Act, the validity of the assessment order from which such proceedings have been originated could be examined. The question before the Co-ordinate Bench was whether the assessee can challenge the jurisdictional validity of order passed under section 143(3) in the appellate proceedings taken up for challenging the order passed under section 263? The Co-ordinate Bench found that this issue is not res integra and had been decided in many judgments by various courts including Hon’ble Supreme Court. The Co-ordinate Bench on the basis of several decisions held that it can safely held that as per law, the assessee should be permitted to challenge the validity of order passed under section 263 on the ground that the impugned assessment order was non-est.
In another case also, Co-ordinate Bench Mumbai held that when an assessment framed by the AO is unsustainable in the eyes of law, the said invalid and illegal order cannot be subject matter of section 263 proceedings.
The Tribunal further noted that Co-ordinate Bench of ITAT Ahmedabad had held that where the assessment order passed by ITO itself was null and void, the same could not be the subject matter of revision under section 263 of the Act.
In view of the observations made by the coordinate benches of the Tribunal the Tribunal opined that the validity of order passed u/s 263 of the Act on the ground that the re-assessment order from which the said proceedings emerged out was nonest, can be challenged in appellate proceedings against u/s 263 of the Act. Thus, following the decisions of the coordinate benches of the Tribunal, the Tribunal held that in the present appellate proceedings against the order of the Pr. CIT u/s 263 of the Act, the validity of the order passed u/s.147/143(3) of the Act can be examined.
From the perusal of the reasons recorded the Tribunal observed that the Assessing Officer had not given the details of transactions of capital gain alleged as the accommodation entry in the shape of penny stock. The Assessing Officer further observed that the assessee had obtained bogus accommodation entries from one company whereas the assessee had declared long term capital gain from the sale of two companies. It was also a matter fact that in ITR-2 filed by the assessee, the relevant details of the capital gains from each script is to be filled in Such ITR-2 was available before the AO when he recorded the reasons before issue of notice u/s 148 of the Act. It appeared that Assessing Officer had recorded the reasons in mechanical manner without any independent application of mind and without making any enquiry nor making any other of verification the information received by him with the information available on record. From the face of the reasons, it was clear that they are incomplete and vague, therefore, the notice issued u/s 148 in the case of the assessee was bad in law and consequently order passed u/s 147 r.w. s 144B was invalid.
The Tribunal further held that since the order passed u/s 144 r.w.s.144B of the Act was an invalid order, any further proceedings originated from the said order cannot be held as valid proceedings which includes the revisionary proceedings initiated by the Pr. CIT u/s 263 of the Act.
Accordingly, the Tribunal quashed the revisionary order passed u/s 263 of the Act as the reassessment order passed u/s 144/143(3) was already held as invalid. Thus, the additional grounds of appeal was allowed.
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