Commissioner Of Income-Tax v. Smt. Minalben S. Parikh.

PREJUDICIAL TO THE INTERESTS OF REVENUE--Test.

Ratio :

The main criterion to determine whether the order of the assessing officer is prejudicial to the interests of the revenue is that whether by that order the legitimate dues to the revenue are realised or not.

Held :

In considering the question as to whether an order is prejudicial to the interests of the revenue or not is to address oneself to the question whether the legitimate revenue due to the exchequer has been realised or not or can be realised or not, if his orders under consideration are allowed to stand.

For arriving at this conclusion, it becomes necessary and relevant to consider whether the income in resepct, of which tax is to be realised, has been subjected to tax or not or if it is subjected to tax whether it has been subjected to tax at a rate at which it could yield the maximum revenue in accordance with law or not. If income in question has been taxed and legitimate revenue due in respect of that income had been realised, though as a result of erroneous order having been made in that respect in our opinion, the CIT cannot exercise powers for revising the order under s. 263 merely on the basis that the order under consideration is erroneous. If the material in that regard is available on the record of the assessee concerned, the CIT cannot exercise his powers by ignoring that material which links the income concerned with the tax realisation made thereon. The two questions are inter-linked and the authority exercising powers under s. 263 is under an obligation to consider the entire material about the existence of income and the tax which is realisable in accordance with law and further what tax has in fact been realised under the alleged assessment orders.

Application:

Also to current assessment years.

A. Y. :

1975-76 Income Tax Act 1961 s.263 JUDGMENT RAJESH BALIA J. - At the instance of the Commissioner of Income-tax, Gujarat State III, Ahmedabad, the Income-tax Appellate Tribunal, Ahmedabad, has referred the following question of law arising out of its order :

"(1) Whether, on the facts and in the circumstances of the case, the Appellate Tribunal has been right in law in setting aside the order of the Commissioner of Income-tax made under section 263 of the Income-tax Act, 1961 ? "

The husband of the respondent-assessee, namely, Shri Kumudchandar Chimanlal, was a partner in a firm, Atmaram Maneklal and Sons. He had a one-sixth share in the profits as well as in the losses under clause 10 of the deed of partnership dated February 16, 1970, wherein it was provided that on the death or retirement of any partner or on the admission of a new partner, the firm shall not be dissolved. The said Kumudchandar expired on October 19, 1973, leaving behind his widow, Minalben, and three minor children. Smt. Minalben was inducted as a partner in the said firm. In the deed of partnership dated October 23, 1973, it was stated she is being inducted in the place of Kumudchandra and her share was the same as that of her late husband, namely, one-sixth share. According to a declaration made by Smt. Minalben on November 9, 1973, the three children were declared to be entitled to have a right in the share from the firm, Atmaram Maneklal and Sons, in equal ratio as she and her three children were entitled to share the estate of the late Shri Kumudchandra each having 1/4th share therein. As the partners were prepared to take only one of them as a partner in the place of the late Shri Kumudchandra, only Smt. Minal Devi was inducted into the firm as a partner. Smt. Minalben disclosed 1/4th of one-sixth profit from the said firm in her income. The three minor children who were being separately assessed also included 1/4th of one-sixth profit of the firm falling to the share of Smt. Minalben in their respective returns. The assessments of the assessee as well as The three minor children were accordingly completed on that basis.

The Commissioner of Income-tax, in exercise of the powers under section 263 of the Income-tax Act, 1961 (hereinafter referred to as "the Act"), set aside the order of the Income-tax Officer in the case of Smt. Minalben and directed him to pass a fresh order in accordance with law. He was of the opinion that the order passed by the Income-tax Officer bringing to tax only 1/4th of the share in the hands of Smt. Minalben was, therefore, erroneous and prejudicial to the interests of the Revenue.

In the appeal, the Tribunal arrived at the conclusion that the order of the Income-tax Officer bringing to tax only 1/4th of one-sixth share in the profit of the firm in the hands of Minalben was erroneous inasmuch as, in its opinion, Shri Kumudchandra was a partner in his individual capacity. On his death, he ceased to be a partner and his heirs do not automatically step into his shoes. The partnership deed was drawn up on October 23, 1973, admitting Smt. Minalben as a partner. The mere fact that she was described as having been taken as a partner in the place of her husband would not mean that she represented all the heirs of Shri Kumudchandra. Accordingly, her unilateral declaration also was not adequate and did not create an overriding title in favour of the other heirs of the late Kumudchandra. However, the Tribunal was further of the view that, in the facts and circumstances of the present case, the order of the Income-tax Officer cannot be said to be prejudicial to the interests of the Revenue. The Tribunal found that 75 per cent. of the remaining share was already taxed in the assessments of three minors. The minors have also substantial income. Those assessments were set aside. The Tribunal further found that all the connected records were relevant before the action contemplated was passed by the Commissioner of Income-tax. Action had to be justified not only with reference to the assessees records, but other records directly linked with the inquiry. It was clear from the assessees record that, according to the assessee, 75 per cent. of the income was taxable elsewhere. It was but necessary that the learned Commissioner of Income-tax should know whether those 75 per cent. were taxed. The Tribunal went on to observe that, in its view, the order under section 263 of the Act would necessarily result in double taxation of the same income to the extent of 75 per cent. of the share of Smt. Minalben. That share has already been taxed in the assessment of these minors and the effect of the order under section 263 of the Act would be to tax it again in the assessment of Smt. Minalben for this very year. Such double taxation is not permissible. In view of the aforesaid conclusions, the Tribunal quashed the order of the Commissioner of Income-tax revising the assessment order of Smt. Minalben for the assessment year 1975-76.

Learned counsel for the Revenue urged that the Tribunal having found that the order passed by the Income-tax Officer including only 25 per cent. of the share received from the firm, Atmaram Maneklal and Co., in the assessment of Smt. Minalben was erroneous, it was not justified in quashing the order of the Income-tax Officer on the ground that it would result in double taxation.

It would be necessary to notice the provisions of section 263 of the Act for examining the validity of the arguments of learned counsel for the Revenue. Section 263 of the Act reads as under :

"263. (1) The Commissioner may call for and examine the record of any proceeding under this Act, and if he considers that any order passed therein by the Assessing Officer is erroneous in so far as it is prejudicial to the interests of the Revenue, he may, after giving the assessee an opportunity of being heard and after making or causing to be made such inquiry as he deems necessary, pass such order thereon as the circumstances of the case justify, including an order enhancing or modifying the assessment, or canceling the assessment and directing a fresh assessment.

Explanation. - For the removal of doubts, it is hereby declared that, for the purposes of this sub-section, an order passed by the Assessing Officer shall include -

(a) an order of assessment made on the basis of directions issued by the Deputy Commissioner under section 144A or section 144B; and

(b) an order made by the Deputy Commissioner in exercise of the powers or in performance of the functions of an Assessing Officer conferred on, or assigned to, him under clause (a) of sub-section (1) of section 125 or under sub-section (1) of section 125a. . . ."

The necessary requirement for exercise of the powers under section 263 of the Act is the conclusion of the Commissioner of Income-tax in respect of two aspects. Firstly, he must consider that the order passed by the Assessing Officer is erroneous and after reaching this conclusion, he derives jurisdiction to pass an order under section 263 of the Act only if he further considers it to be prejudicial to the interests of the Revenue. In other words, the two conditions must be satisfied before the Commissioner can exercise the powers under section 263 of the Act, namely, the order of the assessing authority must be found to be erroneous and further it must also be found to be prejudicial to the interests of the Revenue. Unless both the conditions are satisfied, the Commissioner does not get jurisdiction to pass an order under section 263 of the Act revising the assessment order. It is not necessary that every order which is found erroneous is also prejudicial to the interests of the Revenue.

What is meant by the words "prejudicial to the interests of the Revenue" has not been defined. However, giving the ordinary meaning to the words used in the statute, they must mean that the orders under consideration are such as are not in accordance with law and in consequence whereof, the lawful revenue due to the State has not been realised or cannot be realised. In the case of Dawjee Dadabhoy and Co. v. S. P. Jain [1957] 31 ITR 872, the Calcutta High Court opined about the object behind the provisions of section 33B of the Act which reads as under (at page 881) :

"There is no doubt about the object to be achieved by the Act, namely, to see that the State is enabled to raise the maximum revenue and that the revenue is collected according to law. Section 33B, like the other sections, namely, section 33a or 34, is calculated to stop the gaps through which there may be escape of realisation of the revenue. Obviously, it was considered that the other provisions in the Act - wide as they are - did not properly attain this object. Section 33A granted a power of revision to the Commissioner but it was subject to the condition that the order should not be prejudicial to the assessee. Section 33B confers power which enables the Commissioner to interfere with the orders of the Income-tax Officer, where such orders are considered prejudicial to the interests of the Revenue. The powers under section 33B can only be invoked in the case of persons in whose favour orders have been made or assessments Have been effected which are considered prejudicial to the interests of the Revenue. The words, prejudicial to the interests of the Revenue, have not been defined, but it must mean that the orders of assessment challenged are such as are not in accordance with law, in consequence whereof the lawful revenue due to the State has not been realised or cannot be realised. It can mean nothing else."

Section 263 of the Act of 1961 corresponds to section 33B of the Act of 1922. Referring to the provisions of section 263, the Division Bench of the Gujarat High Court in the case of Addl. CIT v. Mukur Corporation [1978] 111 ITR 312, agreeing with the observations made in Dawjee Dadabhoys case [1957] 31 ITR 872 (Cal), observed as under (headnote) :

"The words prejudicial to the interests of the Revenue in section 263 have not been defined, but they must mean that the orders of assessment challenged are such as are not in accordance with law, in consequence whereof the lawful revenue due to the State has not been realised or cannot be realised."

In this connection, we may also refer to the decision of the Supreme Court in the case of Smt. Tara Devi Aggarwal v. CIT [1973] 88 ITR 323. It was a case wherein the assessee had filed voluntary returns of income for several assessment years and it was assessed on the basis of voluntary returns filed by her and the tax was paid thereon. The Commissioner passed an order canceling the assessment for the assessment year 1960-61 and directing the Income-tax Officer to make a fresh assessment according to law after making inquiry with regard to the jurisdiction and the business carried on by the assessee, the possession of initial capital, acquisition and sale of ornaments, purchase of plot of land and resources and the money invested in the name of the assessee. The Commissioner has held that the assessments made by the Income-tax Officer were made post-haste without making any inquiry or investigation into the antecedents of the assessee.

The order of the Commissioner was challenged, inter alia, on the ground that the assessee having voluntarily filed returns and paid taxes thereon, it cannot be said that the assessment order was prejudicial to the interests of the Revenue so as to empower the Commissioner to revise his order under section 33B of the Act of 1922. The Supreme Court, negativing the contention of the assessee, observed as under (at page 328) :

"It is not, as submitted by the learned advocate, prejudicial to the interests of the Revenue only if it is found that the assessment for the year was disclosed on the basis that an income had been earned which is assess-able. Even where an income has not been earned and is not assessable, merely because the assessee wants it to be assessed in his or her hands in order to assist someone else who would have been assessed to a larger amount, an assessment so made can certainly be erroneous and prejudicial to the interests of the Revenue."

From the aforesaid, it can well be said that the well-settled principle in considering the question whether an order is prejudicial to the interests of the Revenue or not is to address oneself whether the legitimate to revenue due to the exchequer has been realised or not or can be realised or not if the order, under consideration are allowed to stand. For arriving at this conclusion, it becomes necessary and relevant to consider whether the income in respect of which tax is to be realised, has been subjected to tax or not or if it is subjected to tax, whether it has been subjected to tax at the rate at which it could yield the maximum revenue in accordance with law or not. If the income in question has been taxed and legitimate revenue due in respect of that income has been realised, though as a result of erroneous order having been made in that respect, in our opinion, the Commissioner cannot exercise the powers for revising the order under section 263 of the Act merely on the basis that the order under consideration is erroneous. If the material in that regard is available on the record of the assessee concerned; the Commissioner cannot exercise his powers by ignoring that material which links the income concerned with the tax realisation made thereon. The two questions are interlinked and the authority exercising the powers under section 263 of the Act is under an obligation to consider the entire material about the existence of income and the tax which is realisable in accordance with law and further what tax has in fact been realised under the alleged assessment orders.

From the facts found by and appearing from the Tribunals order, which are not in dispute, we are of the opinion that the Commissioner had not addressed himself to this relevant inquiry and the Tribunal was right in coming to the conclusion that if the order of the Commissioner is allowed to stand, it would result in double taxation of the very income which is quite contrary to the scheme of the Act and which is never the purpose of exercise of powers under section 263 of the Act. Even the Commissioner has not found that permitting the assessment order passed in respect of Smt. Minalben to stand would result in loss of revenue so as to be "prejudicial to the interests of the Revenue", nor is it the case of the Revenue that if the order under consideration is allowed to stand, it would result in lesser revenue than what has been realised by the erroneous assessment of the income in question in the hands of four different assessees for the relevant assessment years. In that view of the matter, in our opinion, the aforesaid question referred to this court at the instance of the Revenue has to be answered in the affirmative, in favour of the assessee and against the Revenue.

The Tribunal has also referred the following question for our opinion at the instance of the assessee :

"(2) Whether, on the facts and in the circumstances of the case and in law, the Tribunal was right in holding that there was no overriding title or diversion of income before the assessee received the share from the firm of Messrs. Atmaram Maneklal and Co. ? "

However, in spite of service, no one has appeared on behalf of the assessee. Since the person at whose instance the aforesaid question has been referred has not chosen to appear, we are not inclined to examine and answer that question. Hence, we decline to answer the same. The reference accordingly stands disposed of with no order as to costs.