Sec 264 of IT Act, and Beneficial & Remedial Powers Of Principal Commissioner

The High Court of Telengana set aside the order passed by the Principal Commissioner of Income Tax, Hyderabad., under section 264 of the Income Tax Act., and remanded back the matter for the fresh consideration of the petitioner's application.

Background: The petitioner, M/s. Premier Solar Power Tech Private Limited, was engaged in the business of Engineering, Procurement and Construction of solar power projects. It had undertaken a 100 MW Grid Interactive Solar PV Power Project for NLC India Limited under a contract awarded in February 2018. Although the project was scheduled for completion by April 2019, it was completed only in September 2019, resulting in liquidated damages under the contract.

The petitioner accordingly charged ₹16.04 crore as liquidated damages in its books and claimed the amount as a deduction for Assessment Year (AY) 2020-21. Subsequently, upon settlement of the claim, part of the provision was reversed in the following years. During AY 2021-22, the petitioner reversed ₹9.79 crore, which included ₹6.85 crore, and credited the amount to its Profit & Loss Account. It consequently offered the reversed amount to tax while filing its return for AY 2021-22 on 15.03.2022.

The complication arose when the petitioner's return for the earlier AY 2020-21 was subsequently scrutinised. By assessment order dated 25.09.2022, the Assessing Officer restricted the deduction claimed towards liquidated damages and disallowed ₹6.85 crore under Section 28 of the Income Tax Act. The petitioner accepted the disallowance and paid the tax arising therefrom. However, by that point, the very same ₹6.85 crore had already been offered to tax in AY 2021-22. Further, the time for filing a revised return for AY 2020-21 had already expired on 31.05.2021.

It was contended by the petitioner that the same amount had effectively been taxed twice—once in AY 2020-21 by virtue of the disallowance and again in AY 2021-22 because it had been included in the income returned for that year.

The petitioner initially approached the Principal Commissioner under Section 264, seeking reduction of the income for AY 2021-22 by ₹6.85 crore. The first application was rejected on the ground that, at the time of filing, there was no order for AY 2021-22 capable of being revised. The petitioner further contended that Section 264 is a wide and beneficial provision intended to provide relief to an assessee who has been over-assessed, and there is no restriction preventing the Commissioner from correcting an error committed by the assessee itself.

The High Court rejected the Revenue's objections and held that Section 264 confers wide, beneficial and remedial powers upon the Principal Commissioner/Commissioner to correct an over-assessment, even where the mistake has been committed by the assessee itself.

The High Court relied upon the settled principle that once an assessee demonstrates that it has been over-assessed, the Commissioner cannot refuse relief merely because the mistake originated in the assessee's return or because a revised return was not filed within the prescribed period.

The Court found that the present case was a clear instance of the same income being taxed twice in the hands of the same assessee.

The Bench rejected the Revenue's argument that the Section 143(1) intimation was not erroneous merely because it had accepted the return as filed. And further held section 264 was intended to address precisely such situations like the present case.

The High Court also emphasised that the Article 265 of the Constitution reads that a tax can be levied and collected only with authority of law. And in the present case the Revenue has recovered or retained tax beyond what is lawfully due, technicalities cannot be permitted to defeat the assessee's substantive right to relief.

Importantly, the Court distinguished the nature of Sections 263 and 264.

While Section 263 is concerned with protecting the interests of the Revenue where an order is erroneous and prejudicial to it, Section 264 is an assessee-protective provision, intended to remedy prejudice caused to the assessee through over-assessment.

The Principal Commissioner's approach of treating the petitioner's offering of income as a "voluntary act" disentitling it from relief effectively imported a Revenue-protective standard into a provision designed to protect the assessee.

In conclusion, the High Court allowed the writ petition and set aside the Principal Commissioner's order dated 27.03.2026 rejecting the petitioner's application under Section 264. The matter was remanded to the Principal Commissioner for fresh consideration on merits and in accordance with law, keeping in view the observations made by the Court.

Bench: Justice P. Sam Koshy and Justice Narsing Rao Nandikonda.