Kerala High Court Upholds PCIT’s Power under Section 263 to Revise Flawed Assessment without Proper Inquiry

Introduction

In the case of Cochin International Airport Ltd. v. The Assistant Commissioner of Income Tax, Corporate Circle-1(1), Kochi[i], the Kerala High Court has reiterated the conditions under which revisional jurisdiction under s. 263 of the Income-Tax Act, 1961 (‘Act’), may be validly exercised. The Court upheld the decision of the Income Tax Appellate Tribunal (‘ITAT’), affirming the validity of revisional jurisdiction exercised by the Principal Commissioner of Income Tax (‘PCIT’). It ruled that the assessment order passed by the Assessing Officer (‘AO’) was both erroneous and prejudicial to the interests of the Revenue.

Brief Facts

• Cochin International Airport Ltd. (‘Appellant’), a domestic company engaged in the operation and maintenance of the Cochin Airport.  For the assessment year (‘AY’) 2012-13, the Appellant filed its return of income (‘ROI’) declaring an income of Rs. 134.43 crores, which was later revised to Rs. 11.88 crores after claiming deductions under s. 80-IA of the Act for operating an infrastructure.

• In the said AY, the Appellant also claimed a deduction of Rs. 1,00,33,280/- towards provision for bad and doubtful debts, which was shown in the profit and loss account and treated as a write-off in its ROI. Simultaneously, the Appellant reduced this amount from trade receivables and short-term advances in the balance sheet.

• The ROI was selected for scrutiny and assessed under s. 143(3) vide order dated 27.03.2015. During the assessment proceedings, the AO asked for a breakdown of the provision for bad and doubtful debts through a notice. The Appellant responded by referencing the Hon’ble Supreme Court’s decision in Vijaya Bank v. Commissioner of Income Tax[ii]. After considering this reply, the AO accepted the explanation and issued the assessment order.

• The PCIT, upon reviewing the assessment order, found it erroneous and prejudicial to the Revenue’s interest and invoked s. 263 of the Act to revise the assessment order. Thereafter, a show cause notice (SCN) was issued, and after considering the Appellant's reply, the PCIT found it unsatisfactory and directed the AO to re-examine the issue.

• The Appellant preferred an appeal against the PCIT’s order before the ITAT. However, the ITAT upheld the PCIT’s order, resulting in the present appeal by the Appellant before this court.

Held

The Court dismissed the appeal and affirmed the decision of the ITAT, which was in favour of the Respondent. The Court further made the following observations:

• The Court held that PCIT was justified in invoking s. 263 of the Act as the assessment order was both erroneous and prejudicial to the interests of the Revenue.

• The Court further held that AO failed to conduct proper inquiries or verification regarding the deduction claimed for bad and doubtful debts and mechanically accepted the Appellant’s claim without adequate scrutiny or reasoning, which clearly shows a lack of application of mind.

• The Court also observed that the role of the AO is not limited to adjudication but also to investigation and verification of claims.

• The Court placed reliance on the Hon’ble Supreme Court’s decision in Malabar Industrial Co. Ltd. v. Commissioner of Income Tax [iii], clarified that an order is considered erroneous only if it is based on an incorrect assumption of facts, misapplication of law and lack of inquiry or reasoning.

• The Court held that the invocation of s. 263 of the Act was justified because it was a case of lack of inquiry rather than a mere change of opinion. The Court further held that Appellant’s reliance on Vijaya Bank (supra) and Commissioner of Income Tax (Central), Ludhiana v. Max India Ltd.[iv] was misplaced, as those cases involved proper inquiries by the AO, whereas in this case, no such inquiry was conducted.

• The Court lastly concluded that the PCIT had acted within the scope of his revisional jurisdiction, and the ITAT correctly upheld the revision order. There was no procedural or jurisdictional error in the exercise of powers under s. 263 of the Act.

Our Analysis

The decision of the Hon’ble Court highlights the need for thorough scrutiny in assessment proceedings. It highlights the PCIT’s authority to revise flawed assessments under s. 263 of the Act when there’s a lack of proper inquiry.  This case also clearly points out that mere book entries by the Assessee without a clear intention to write off the amount or conclude the transaction as settled do not amount to actual discharge or waiver of liability. The decision further reinforces the critical role of AO’s in conducting diligent and thorough inquiries during assessment proceedings. It serves as a guiding precedent, emphasizing the importance of procedural rigour, accountability, and the balanced exercise of powers to ensure fairness in the tax administration system.

End Notes

[i] 2025 KER 298 dated 07.01.2025.

[ii] (2010) 323 ITR 166.

[iii] 2000 SCC OnLine SC 371.

[iv]  (2007) 15 SCC 401.

Authored by Mohammad Sarfaraj Idrisi, Advocate at Metalegal Advocates. The views expressed are personal and do not constitute legal opinions.