ITAT Quashes Section 263 Revision, Says PCIT Cannot Reopen Assessment for Mere Inadequate Inquiry

The ITAT Mumbai has set aside the Section 263 revisionary order, holding that the assessment order could not be treated as erroneous and prejudicial to the interests of the Revenue merely because the Principal Commissioner of Income Tax (PCIT) believed that further enquiries should have been conducted.

The tax authorities had carried out a search operation on Alankit Group under Section 132 of the Income Tax Act on October 18, 2019. In that operation, the AO found certain incriminating material pertaining to the assessee, Mridul Shashikant Khandelwal. Accordingly, a satisfaction note was recorded by the assessing officer of the non-searched person (assessee).

Thereafter, a notice dated September 26, 2022, under Section 153C of the Act was issued. In response to the same, the assessee filed his income tax return (ITR) for the Assessment Year 2014-2015, declaring a total income of Rs 10.88 lakh. The AO accepted the declared income without making any further additions.

However, later the PCIT noted that the AO had failed to properly verify the alleged accommodation entry transactions and that the assessment order was passed without adequate enquiry. Consequently, it issued a show cause notice (SCN) dated August 14, 2025, to the assessee in exercise of its powers granted under Section 263 of the Act. In the notice, the assessee was asked to explain “as to why the assessment order should not be treated as erroneous and prejudicial to the interests of the Revenue”.

The PCIT did not find the submissions made by the assessee acceptable and ultimately set aside the assessment order dated March 16, 2024, and remanded the case back to the AO with directions to freshly consider the assessment after conducting necessary enquiries and verifications on all issues involved, including those specifically identified, and after granting a fair opportunity of hearing to the Assessee.

The assessee, being dissatisfied with the PCIT’s decision, filed the present appeal before the ITAT Mumbai. When the tribunal analysed the complete case, it noted that the AO had in fact conducted several enquiries, issued multiple notices, and examined the seized material before accepting the returned income. Relying on the principle laid down by the Delhi High Court in CIT v. Sunbeam Auto Ltd, the Tribunal reiterated that Section 263 can be invoked only in cases of a complete lack of inquiry and not merely because the Commissioner considers the inquiry inadequate.

Accordingly, the Section 263 order was quashed and the assessee’s appeal was allowed.