ITAT Quashes Revision Order Passed by PCIT u/s 263 on Donation to Political Party

The assessee submitted the return for AY 2020-21 on 05/02/2021, reporting total income of Rs. 1,01,09,280. The case was chosen for limited scrutiny (CASS) to check deductions under Chapter VI-A. The Assessing Officer sent a detailed notice under section 142(1) dated 05/11/2021, requesting section/sub-section-wise details and supporting documentary evidence. The assessee, in return, filed a detailed response dated 17/11/2021, attaching audited accounts, computation of income, bank statements and donation receipts, including donations amounting to Rs. 30,00,000 in the year, out of which Rs. 15,00,000 was donated to the Kisan Party of India. Upon check of material on record, the Assessing Officer allowed the claim for deduction under section 80GGC and finalised the assessment by order dated 25/08/2022 passed u/s 143(3) r.w.s. 144B.

Thereafter, the Principal Commissioner (PCIT) examined the assessment record, noted that the recipient political party had been subject to search u/s 132 in March 2021, and observed audit/search material suggesting a modus operandi of donations being returned in cash after deduction of commission. The PCIT issued notice u/s 263 and set aside the assessment as alleged to be erroneous and prejudicial to the interests of Revenue and directed a de novo assessment.

Issue Raised: Whether the Principal Commissioner validly invoked revisionary jurisdiction under Section 263 where the Assessing Officer had issued a specific notice u/s 142(1), obtained replies with receipts and bank transactions, verified the documents and accepted the deduction under Section 80GGC, i.e., whether the assessment order was both “erroneous” and “prejudicial to the interests of the Revenue” in absence of any incriminating material directly linking the assessee’s donation to the alleged bogus racket.

ITAT’s Decision: The Tribunal recorded that the AO had called for specific details, taken on record the reply dated 17/11/2021 with receipts and bank statements, and recorded verification before accepting the claim in the order dated 25/08/2022. It further noted that although a search was conducted in the case of the political party (March 2021), the PCIT had not produced any seized document, statement or other incriminating material that specifically connected the assessee’s donation to the alleged bogus donation racket. The revisional order proceeded on general observations and audit objections without establishing a direct nexus to the assessee’s transactions.

The settled test that both error and prejudice must coexist for Section 263 to be invoked (as discussed in Malabar Industrial Co. Ltd. v. CIT and High Court precedents relied on in the order),the Tribunal held that the AO had reasonably assumed in enquiry and that assumption of jurisdiction by the PCIT was an impermissible substitution of opinion. The order dated 27/03/2025 under Section 263 was therefore quashed and appeal was granted.

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