The Bombay High Court has held that an income tax assessment order cannot be sustained when the underlying revision order under Section 263 of the Income Tax Act has already been quashed by the Income Tax Appellate Tribunal (ITAT). The Court clarified that merely because the Revenue has challenged the Tribunal’s decision before the High Court, the Assessing Officer (AO) does not automatically regain jurisdiction to proceed with an assessment based on the quashed revision order.
The judgment was delivered in Principal Commissioner of Income Tax-2, Mumbai v. The Bombay Dyeing and Manufacturing Co. Ltd., concerning Assessment Year 2015-16.
Background of the Case
The dispute arose from an order passed by the Principal Commissioner of Income Tax (PCIT) under Section 263 of the Income Tax Act on March 18, 2020. Section 263 empowers the PCIT or Commissioner to revise an assessment order where it is considered erroneous and prejudicial to the interests of the Revenue.
The assessee, The Bombay Dyeing and Manufacturing Co. Ltd., challenged the revision proceedings before the Income Tax Appellate Tribunal. On September 13, 2021, the ITAT quashed and set aside the PCIT’s Section 263 order.
However, despite the Tribunal having already annulled the revision order, the Assessing Officer subsequently passed an assessment order dated October 31, 2021 under Section 143(3) read with Section 263.
The assessee challenged this assessment order. The Commissioner of Income Tax (Appeals) (CIT(A)) allowed the assessee’s appeal and annulled the assessment. The CIT(A) held that once the Section 263 order had been quashed, the Assessing Officer could not proceed with an assessment under Section 143(3) read with Section 263 on the basis of that non-existent order.
Revenue’s Challenge Before the Tribunal
The Revenue challenged the CIT(A)’s decision before the Income Tax Appellate Tribunal. The Tribunal, however, found no error in the CIT(A)’s decision and rejected the Revenue’s appeal.
The Revenue thereafter approached the Bombay High Court under Section 260A of the Income Tax Act, which provides for an appeal to the High Court where a substantial question of law arises from an ITAT order.
The Revenue pointed out that it had separately challenged the ITAT’s earlier decision quashing the Section 263 order. That challenge was pending before the High Court.
The Revenue therefore contended that the present matter should be admitted and considered along with the pending appeal concerning the validity of the Section 263 order.
Bombay High Court Rejects Revenue’s Argument
The Division Bench comprising Justice G.S. Kulkarni and Justice Dr. Neela Gokhale rejected the Revenue’s contention.
The Court observed that once the Tribunal had quashed the Section 263 order, there was no subsisting revision order on the basis of which the Assessing Officer could lawfully proceed with an assessment under Section 143(3) read with Section 263.
The Court specifically held that the mere pendency of the Revenue’s appeal against the ITAT order did not revive the quashed Section 263 order.
In substance, the Court held that an order which has been set aside cannot be treated as continuing to operate merely because the Revenue has challenged the decision before a higher forum.
No Jurisdiction Without a Subsisting Section 263 Order
The Bombay High Court emphasized the importance of the existence of a valid and operative Section 263 order.
Since the ITAT had already quashed the PCIT’s revision order on September 13, 2021, the Assessing Officer had no valid foundation for passing the subsequent assessment order dated October 31, 2021 under Section 143(3) read with Section 263.
The Court therefore agreed with the CIT(A) and ITAT that the assessment could not be sustained.
The Court also found that the Revenue’s appeal did not give rise to any substantial question of law, as required for interference under Section 260A. Consequently, the High Court dismissed the Revenue’s appeal.
Revenue’s Separate Appeal Remains Open
Importantly, the Court did not finally decide the Revenue’s separate challenge against the ITAT’s order quashing the Section 263 proceedings.
The Court clarified that if the Revenue ultimately succeeds in that pending appeal, the appropriate legal consequences would follow. In such a situation, a fresh assessment order could be passed in accordance with law.
Thus, the judgment does not prevent the Revenue from pursuing its challenge against the original Section 263 order. It only establishes that, during the period when that order stood quashed and no contrary order had been passed by a competent court, the Assessing Officer could not proceed on its basis.
Key Takeaway for Taxpayers
The ruling provides an important safeguard for taxpayers facing assessment or reassessment proceedings founded upon a quashed or non-subsisting statutory order.
The decision reinforces the principle that tax authorities must exercise jurisdiction on the basis of a valid and operative legal foundation. The mere filing of an appeal does not, by itself, revive an order that has already been quashed.
For taxpayers, the judgment highlights the importance of examining the jurisdictional foundation of an assessment order, particularly where the assessment is consequential to revision proceedings under Section 263.
Case Details
Case: Principal Commissioner of Income Tax-2, Mumbai v. The Bombay Dyeing and Manufacturing Co. Ltd.
Case No.: Income Tax Appeal (L.) No. 20200 of 2024
Assessment Year: 2015-16
Court: Bombay High Court
Relevant Provisions: Sections 143(3), 260A and 263 of the Income Tax Act