Commissioner Of Income-Tax v. Shri Bhagwan Das

1. The Income-tax Appellate Tribunal, Allahabad, has referred the follow-ing question of law under section 256(1) of Income-tax Act, 1961 (herein-after referred to as “the Act”), for the opinion of this court:

“Whether, on the facts and in the circumstances of the case, the order of the Commissioner of Income-tax was rightly set aside by the Tribunal ?”

2. Briefly stated the facts giving rise to the present revision are as follows:

The respondent-assessee is an individual. For the assessment year 1973-74, the relevant previous year being April 1, 1972 to March 31, 1973, the respondent filed his return of income showing an income of Rs. 10,450. Notice under section 143(2) of the Act was issued. In response the respondent appeared and after discussion, the Income-tax Officer, Circle-II (9), Kanpur, vide order dated November 27, 1976, assessed a total income of Rs. 24,750. He granted exemption of income from agriculture amounting to Rs. 30,446 and income from poultry-farming amounting to Rs. 33,849. The Commissioner of Income-tax initiated proceedings under section 263 of the Act on the ground that in making the assessment the Income-tax Officer did not make any enquiry or investigation as regards the nature, source or extent of income derived from agriculture and poultry-farming or investment from which these incomes arose. Further, the Income-tax Officer also did not take any steps to verify whether the income from these sources as claimed was fully exempt. In response to the notice issued under section 263, the respondent appeared before the Commissioner of Income-tax and stated that he has maintained proper accounts for these sources of income and will be in a position to produce evidence and proof to subs-tantiate his claim. The Commissioner of Income-tax passed an order set-ting aside the assessment made by the Income-tax Officer with a direction to reframe the assessment after making full and proper investigation in the nature, sources and extent of the income earned from these sources and the source of the investment made for earning these incomes. In doing so, the Income-tax Officer will give full and proper opportunity to the assessee to present his side of the respondent. The respondent feeling aggrieved, preferred an appeal before the Income-tax Appellate Tribunal. The Tribunal vide order dated November 27, 1979, had allowed the appeal filed by the respondent-assessee and had set aside the order of the Commissioner of Income-tax passed under section 263. The Tribunal, while doing so had held as follows:

“In our view, there is a case for interference in the order of the Commissioner of Income-tax. The requirement of the provisions of section 263 of the Act are that the order of the Income-tax Officer should be erroneous in so far as it could be prejudicial to the interests of the Revenue. The Commissioner nowhere applied his mind in respect of the order of the Income-tax Officer being erroneous or prejudicial to the interests of the Revenue. Besides the above, we have noted that during the original assessment proceedings, the assessee, in support of his claim for exemption of agricultural and poultry-farm income from tax, the assessee filed copies of certain agreements and after considering the same, the Income-tax Officer allowed exemption to the assessee. Thus, it is a case of change of opinion on the part of the Commissioner which is not warranted under the provisions of section 263 of the Act. In view of this matter, the order of the Commissioner is reversed and the appeal filed by the assessee is allowed.”

3. We have heard Shri A.N Mahajan, learned standing counsel appearing for the Revenue. In spite of service of notice, nobody has put in appearance and the court vide order dated February 11, 2004, held the services to be deemed sufficient under the rules of the court and directed for hearing of the revision. Shri A.N Mahajan, learned standing counsel, submitted that from a perusal of the assessment order, it would be seen that the Income-tax Officer had not applied his mind as to whether the income which has been claimed by the respondent-assessee has been earned or whether it is exempted in full or in part.

4. Thus, the order granting exemption to income from agriculture and poultry farming has been without any application of mind. The Commissioner of Income-tax was, therefore, fully justified in taking the recourse to proceedings under section 263 of the Act and after giving an opportunity of hearing to the assessee, had rightly set aside the assessment order as the same was erroneous and prejudicial to the inter-ests of the Revenue. He relied upon the decision of the hon'ble Supreme Court in the case of Malabar Industrial Co. Ltd. v. CIT, [2000] 243 ITR 83.

5. Having heard learned counsel for the Revenue, we find that in the assessment order, there is no discussion regarding the question as to whether the amount of income shown by the assessee which is being claimed to be exempt has actually been earned by him or not and, further, whether the entire amount of income from agriculture and poultry-farming is exempt from tax. The Commissioner of Income-tax has rightly initiated proceedings under section 263 of the Act as exemption has been granted without any application of mind. The apex court in the case of Malabar Industrial Co. Ltd., [2000] 243 ITR 83, while interpreting section 263 of the Act, held as follows (page 87):

“A bare reading of this provision makes it clear that the prerequi-site to the exercise of jurisdiction by the Commissioner suo motu under it, is that the order of the Income-tax Officer is erroneous in so far as it is prejudicial to the interests of the Revenue. The Commissioner has to be satisfied of twin conditions, namely, (i) the order of the Assessing Officer sought to be revised is erroneous; and (ii) it is prejudicial to the interests of the Revenue. If one of them is absent— if the order of the Income-tax Officer is erroneous but is not pre-judicial to the Revenue or if it is not erroneous but is prejudicial to the Revenue—recourse cannot be had to section 263(1) of the Act.

There can be no doubt that the provision cannot be invoked to cor-rect each and every type of mistake or error committed by the Assessing Officer. It is only when an order is erroneous that the section will be attracted. An incorrect assumption of facts or an incorrect appli-cation of law will satisfy the requirement of the order being errone-ous. In the same category fall orders passed without applying the prin-ciples of natural justice or without application of mind”

(emphasis1 supplied

6. Thus, an order, which has been passed without application of mind, will also fall under the expression erroneous and prejudicial to the interests of the Revenue. Since the Income-tax Officer has granted exemption to the assessee in respect of income from agriculture and poultry-farming without any discussion and without any application of mind, respectfully following the aforesaid decision, we are of the opinion that the Tribunal had com-mitted error in holding that the assessment order in so far as it granted exemption to income from agriculture and poultry-farming was not erro-neous or prejudicial to the interests of the Revenue. We, therefore, answer the question referred to us in the negative, i.e, in favour of the Revenue and against the assessee. Since nobody has put in appearance on behalf of the assessee, there shall be no order as to costs.