Can a PCIT introduce new issues in a Section 263 order without mentioning them in the Show Cause Notice? 

1. Issue 

The central issue before the Income Tax Appellate Tribunal (ITAT), Delhi Bench ‘B’, was whether the Principal Commissioner of Income Tax (PCIT) validly exercised revisionary jurisdiction under Section 263 of the Income-tax Act, 1961, when: 

1. The PCIT travelled beyond the scope of the original Show Cause Notice (SCN); and 

2. The Assessing Officer (AO) had already conducted adequate enquiries on the very issues for which revision was sought. 

In simpler terms could the PCIT revise an assessment order merely because he disagreed with the AO’s conclusions, or introduce fresh issues not mentioned in the SCN? 

2. Facts Relating to the Issue 

NKC Projects Pvt. Ltd., a real estate developer based in Jaipur, filed its return declaring income of ₹30.54 crore for AY 2020–21. 
The case was selected for complete scrutiny to examine matters like stock valuation, refund claim, unsecured loans, ICDS compliance, taxability of liabilities, and written-off creditors. 

After multiple rounds of detailed queries under Section 142(1), the AO passed an assessment order under Section 143(3), accepting the returned income — satisfied that all explanations were properly substantiated. 

Subsequently, the PCIT, Delhi-4, issued a show cause notice under Section 263 alleging: 

1. Non-examination of creditors outstanding for over three years. 

2. Improper verification of bad debts (₹56.81 lakh – M/s Aditya Logistics Pvt. Ltd.). 

3. Lack of enquiry on increased other expenses. 

4. Non-disallowance of delayed PF/ESI payments. 

However, while passing the final order dated 19.03.2025, the PCIT dropped two issues (bad debts and other expenses) but introduced four new ones — namely: 

• Lack of enquiry on ICDS/AS-7 compliance 

• Improper verification of refund claims 

• Inadequate enquiry on closing stock and opening stock reconciliation 

• Purchases from non-filers of income tax returns 

The assessee challenged the order before the ITAT. 

3. Arguments of the Appellant (Assessee) 

The assessee contended that the PCIT’s order was: 

1. Without jurisdiction, as new issues were introduced in the final order without prior mention in the SCN — violating principles of natural justice. 

2. The AO had conducted detailed enquiries on every issue — including ICDS, PF/ESI, stock, creditors, and refunds — and accepted the assessee’s replies after due verification. 

3. Once the AO took a plausible view, the PCIT could not substitute his opinion merely because he believed further verification was warranted. 

4. Twin conditions of Section 263 — “erroneous and prejudicial to the interests of the Revenue” — were not satisfied simultaneously. 

5. Allegations based on post-assessment events (like the 2024 survey) cannot justify revision of a 2022 order. 

4. Arguments of the Respondent (Revenue) 

The Revenue, represented by the CIT-DR, defended the PCIT’s revision by asserting that: 

• The AO failed to make proper and independent verification, merely reproducing the assessee’s submissions. 

• The lack of deep investigation rendered the order both erroneous and prejudicial. 

• Reliance was placed on Herbalife International India Pvt. Ltd. vs. CIT (Karnataka HC), emphasizing that an assessment lacking due enquiry invites Section 263 action. 

5. Decision of the Court 

The ITAT Delhi Bench, comprising Shri Yogesh Kumar U.S. (JM) and Shri Manish Agarwal (AM), held in favour of the assessee and quashed the PCIT’s revision order. 

Key observations: 

1. PCIT exceeded jurisdiction — introducing new issues beyond those cited in the SCN violated Section 263 procedure and natural justice. 

2. AO conducted sufficient enquiries — on creditors, PF/ESI, stock, refunds, and ICDS compliance; merely differing with his conclusions cannot justify revision. 

3. Issues based on post-assessment events (like survey findings of 2024) cannot be used to label the assessment “erroneous.” 

4. The AO’s view on PF/ESI was legally correct at the time (prior to Checkmate Services Pvt. Ltd. judgment dated 12.10.2022). 

5. The ITAT reaffirmed that Section 263 applies only when both error and prejudice coexist, not when there’s mere disagreement or alternate interpretation. 

Accordingly, the PCIT’s order under Section 263 was quashed in entirety and the assessee’s appeal allowed. 

6. Reason for Such Decision 

The ITAT’s rationale rested on well-settled principles of law: 

• Jurisdictional restraint: PCIT cannot invoke Section 263 on new issues not included in the SCN — as established in Shail Gas Pvt. Ltd. vs. PCIT (ITA 630/Del/2021) and affirmed by Orissa, Madras, and Delhi High Courts. 

• No “change of opinion”: Once the AO has enquired and taken a view, the PCIT cannot label it “inadequate enquiry.” 

• Twin conditions under Section 263: Both erroneousness and prejudice to Revenue must coexist — absence of either nullifies jurisdiction. 

• Temporal relevance: Events post-assessment (like survey findings) fall outside the “record” as defined in Explanation 1(b) to Section 263. 

In essence, the Tribunal reminded the Department that Section 263 is not a tool to re-evaluate assessments or conduct fishing inquiries. 

7. Case Laws Relied Upon 

1. Shail Gas Pvt. Ltd. vs. PCIT (ITA No. 630/Del/2021) – ITAT Delhi 
   Revision beyond SCN and “limited scrutiny” scope held invalid. 

2. Pr. CIT vs. Shreeji Prints Pvt. Ltd. (2021) 130 taxmann.com 294 (SC) – Supreme Court 
   AO’s plausible view cannot be substituted by PCIT; Section 263 not applicable. 

3. PCIT vs. NYA International (SLP Diary No. 1845/2025) – Supreme Court 
   Differentiated between lack of enquiry and wrong conclusion; revision invalid without clear error and prejudice. 

4. PCIT vs. Clix Finance India Ltd. (Delhi HC, 2024) 
   Mere inadequacy of enquiry not ground for invoking Section 263. 

5. PCIT vs. V. Con Integrated Solutions Pvt. Ltd. (SC, 2025) 
   AO’s conclusion post-investigation cannot be replaced by PCIT’s alternate view. 

8. Applicability of the Judgment 

This judgment carries precedential weight for real estate companies, infrastructure contractors, and large taxpayers frequently targeted under Section 263. 

Key implications: 

• PCIT must confine revision to issues mentioned in SCN. 

• Fresh grounds introduced without notice render revision invalid. 

• Adequate enquiry ≠ erroneous assessment. Once the AO applies his mind, revision cannot be sustained. 

• Events post-assessment (like surveys or audits) cannot be grounds for retrospective revision. 

• Checkmate Services ruling cannot be applied to earlier assessments retrospectively.