Revision Under Section 263 Invalid Without Error and Prejudice, Rules HC

The petitioner, Mr Dilip Patel, challenged two revision notices issued by the Principal Commissioner of Income Tax under Section 263 of the Income Tax Act, 1961. The notices sought to revise an assessment order dated June 19, 2023, on two grounds: first, that the Assessing Officer (AO) failed to initiate penalty proceedings under Section 271D for alleged cash transactions, and second, that the AO adopted a lower valuation of land based on a DVO report instead of a higher figure mentioned in a seized Memorandum of Understanding (MoU).

During the assessment, the AO had examined the seized MoU, recorded the statement of a broker indicating that the deal did not materialise due to title disputes, and relied on the DVO’s valuation of Rs. 28.50 crores. Based on this, the AO still made an addition of Rs. 8.25 crores to the petitioner’s income.

Main Issue: Whether revision under Section 263 is valid when (i) the AO had no jurisdiction to initiate penalty proceedings at the relevant time, and (ii) the AO had adopted a plausible view after due inquiry?

HC’s Decision: The Gujarat High Court ruled in favour of the petitioner and quashed both revision notices. It held that the Commissioner had wrongly assumed jurisdiction under Section 263. On the issue of penalty, the Court found that the legal framework empowering AOs to impose a penalty under Section 271D applied only to orders passed on or after April 1, 2025. Since the assessment order was passed in June 2023, the AO could not have initiated such proceedings, and therefore, no error could be attributed to him. On valuation, the Court observed that the AO had conducted a proper inquiry and taken a reasoned decision by considering all relevant materials, including the MoU, broker’s statement, and DVO report.

This constituted a “plausible view” in law, which cannot be substituted by the Commissioner merely because another view is possible. The Court further noted that the assessment order was not prejudicial to the interests of the Revenue, as a substantial addition had already been made. Reiterating that both conditions, error and prejudice, must coexist for invoking Section 263, the Court held that neither was satisfied. It also upheld the maintainability of the writ petition, observing that when notices are issued without jurisdiction, the existence of an alternative remedy is no bar to judicial review.

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