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  • 1990-91 Income Tax Act 1961 s.263 Revision under s. 263--VALIDITY--Notice under s. 263
  • SECTION 263 INCOME TAX ACT 1961
  • 1990-91 Income Tax Act 1961 s.263 JUDGMENT B.C.
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  • 1990-91 Income Tax Act 1961 s.263 Revision under s. 263--VALIDITY--Notice under s. 263
  • SECTION 263 INCOME TAX ACT 1961
  • 1990-91 Income Tax Act 1961 s.263 JUDGMENT B.C.
Smart Summary

Structured Summary of the Provided Legal Opinion

Factual and Procedural Background

The petitioner filed a return of income with audited final accounts and a tax audit report on September 26, 1991. The Assessing Officer (AO) passed an assessment order on March 29, 1993: disallowing investment allowance but allowing depreciation claimed by the assessee. On January 16, 1995, the Commissioner of Income-tax issued a notice under section 263 of the Income-tax Act, 1961 (annexure "C"), on two grounds: (1) that excess allowance of depreciation was given on increased value of assets due to foreign exchange rate fluctuations and (2) that excess refund interest under section 244A (amounting to Rs. 5,96,902) should be withdrawn because the return was filed late (return filed September 26, 1991, against appointed date December 21, 1990). The petitioner responded with a detailed reply dated February 3, 1995 and challenged the validity of the notice in this petition.

The record shows that for assessment year 1989-90 the AO had permitted deduction on fluctuation-added cost and that the Commissioner had accepted that position in relation to 1989-90 relying on a Supreme Court decision (Arvind Mills). Despite that, for assessment year 1990-91 the Commissioner issued the impugned notice under section 263 challenging the same point.

Legal Issues Presented

  1. Whether the Commissioner's issuance of a notice under section 263 was valid when the Assessing Officer had allowed depreciation by following law laid down by higher courts (specifically on allowance for exchange-rate-fluctuation-added cost)?
  2. Whether the show-cause notice under section 263 seeking withdrawal of interest allowed under section 244A was valid, or was it vague for not specifying the basis or period of delay attributable to the assessee?

Arguments of the Parties

Petitioner's Arguments (Mr. Shah)

  • The notice under section 263 is bad, illegal and contrary to law because the AO's order on depreciation was in consonance with binding authority, including the Supreme Court decision in Commissioner of Income Tax, Gujarat v. Arvind Mills Ltd. and the Gujarat High Court decision in New India Industries Ltd. v. CIT (1993) which permitted depreciation on fluctuation-added cost.
  • Income-tax authorities are bound to follow decisions of the High Court and the Supreme Court; if they initiate proceedings contrary to such law the proceedings would be invalid.
  • As the Commissioner had accepted the position for the earlier year (1989-90) relying on the Apex Court, there was no reason to issue the notice for 1990-91; the Commissioner should have dropped proceedings once the controlling authority decisions were pointed out.

Revenue's Arguments (Mr. Thakore)

  • The Department is aggrieved by the New India Industries Ltd. decision and had preferred a Miscellaneous Civil Application (MCA) under section 260 seeking a certificate of fitness, and may contemplate filing a special leave petition to the Supreme Court; thus, the ratio may not be final.
  • With respect to interest under section 244A, the Commissioner contended that interest amount (Rs. 5,46,902 noted in submissions) required withdrawal because the return was filed late and there may have been delay attributable to the assessee affecting the refund period.

Table of Precedents Cited

Precedent Rule or Principle Cited For Application by the Court
Commissioner Of Income Tax, Gujarat v. Arvind Mills Ltd. [1992] 193 ITR 255 (Supreme Court) Permitting allowance of depreciation on cost increased by exchange-rate fluctuations; principle that cost may include fluctuation-added liability under s.43A. The court treated this apex court decision as controlling and concluded that the AO's allowance of depreciation following that decision was not erroneous.
New India Industries Ltd. v. CIT [1993] 203 ITR 933 (Gujarat High Court) Interpreted section 43A and held that additional liability due to exchange rate fluctuation arises when asset is purchased and thus can be included for depreciation computation. The court relied on its earlier holding (citing the apex court) to conclude the assessee was entitled to claim benefit of fluctuation-added liability; used this to find the AO's order valid.
CIT v. Widia (India) Ltd. [1992] 193 ITR 475 (Karnataka High Court) Consistent High Court view supporting allowance of depreciation on fluctuation-added cost. Referenced by petitioner as part of consistent judicial authority endorsing the AO's approach; court treated these authorities as binding on assessing authorities.
East India Commercial Co. Ltd. v. Collector of Customs, AIR 1962 SC 1893 Principle that law declared by the highest court in a State is binding on authorities/tribunals under its superintendence; proceedings initiated contrary to such law would be invalid. The court invoked this principle to emphasize that authorities must follow established High Court/Supreme Court rulings and cannot initiate proceedings contrary to such settled law.
Russell Properties Pvt. Ltd. v. Addl. CIT [1977] 109 ITR 229 (Cal) Authority referenced regarding appropriate remedy and limits of judicial intervention (cited in context of remedy being with appropriate agency). The court cited this decision to illustrate that grievances of the Revenue that concern wider policy or repeated divergence should be addressed by appropriate agencies, not by undermining adherence to binding judicial rulings.
K. N. Agrawal v. CIT [1991] 189 ITR 769 (All) Authority referenced alongside Russell Properties on limits of review and appropriate channels for correcting legal positions. Cited to support the court's view that permitting Commissioners to disregard binding decisions because appeals or revisions may be contemplated would create judicial indiscipline; remedy lies elsewhere.

Court's Reasoning and Analysis

The court's analysis proceeded in two principal strands corresponding to the two grounds in the Commissioner's notice.

  1. Depreciation issue (exchange-rate fluctuation):
    • The court examined the statutory language of section 43A and prior judicial authorities (notably the Supreme Court in Arvind Mills and this court's decision in New India Industries Ltd.) which interpret section 43A as covering additional liability arising from exchange-rate fluctuations once the assessee becomes owner and starts using the asset.
    • For assessment year 1989-90 the Commissioner had accepted the assessee's position relying on Arvind Mills; the AO for 1990-91 had followed the same settled law. The court found no error in the AO's order because it adhered to controlling judicial decisions.
    • The court explicitly rejected the proposition that the Commissioner can refuse to follow a binding court decision simply because the Revenue might contemplate filing a special leave petition or other appeal: such a practice would create judicial indiscipline and is not a valid ground for exercising revision under section 263.
    • The court held that where an Assessing Officer acts in conformity with a binding decision of a higher authority, his order cannot be characterized as "erroneous" for the purpose of section 263 merely because the Revenue hopes to challenge that precedent.
  2. Interest under section 244A (vagueness of notice):
    • Section 244A(2) provides that if refund proceedings are delayed for reasons attributable to the assessee, the period of delay attributable to him is to be excluded from interest. The Assessing Officer is entrusted with deciding the relevant period for interest after examining the facts.
    • The court found that the Commissioner’s show-cause notice did not indicate any specific material or reasons why the delay in the refund proceedings was attributable to the assessee, nor the period sought to be excluded; the notice therefore was vague.
    • The court observed that if the Commissioner believed delay was attributable to the assessee, that fact should have been indicated in the notice; merely asserting that refund interest should be withdrawn without specifying facts or period renders the notice invalid.
    • The court noted that no material was placed even by affidavit before the court to substantiate any contention that the delay was attributable to the assessee.

On both strands the court applied the relevant statutory provisions and binding precedents without expanding the law beyond what those authorities established. The court emphasized adherence to binding judicial pronouncements and the procedural requirement that a show-cause notice must concretely state the basis for the proposed revision.

Holding and Implications

Core Ruling: The court quashed and set aside the impugned notice issued by the Commissioner under section 263 (annexure "C") and made the rule absolute; no order as to costs.

Implications:

  • The Assessing Officer's allowance of depreciation based on the law laid down by higher courts (as applied per Arvind Mills and New India Industries Ltd.) was not held to be erroneous or prejudicial; therefore, revision under section 263 was not justified on that ground.
  • The show-cause notice seeking withdrawal of interest granted under section 244A was held to be vague and therefore invalid; the Commissioner’s notice failed to specify the basis or period of delay attributable to the assessee.
  • The court stated that merely because the department may contemplate filing a special leave petition or other appeal, the Commissioner cannot ignore or refuse to follow a decision when the court has settled the law in question; this position was applied to the facts of the case.
  • Application: The opinion expressly notes that its conclusions apply "also to current assessment years." (As stated in the opinion.)

Disposition in the source opinion: "In the result, the impugned notice at annexure 'C' is quashed and set aside. Rule made absolute accordingly. No order as to costs."

    Garden Silk Mills Ltd. v. Commissioner Of Income-Tax.

    --Order of assessing officer based on law laid down by High Court.

    Ratio:

    Merely because revenue is contemplating to file SLP Commissioner cannot refuse to follow decision of court settling the law, therefore, order of assessing officer based on High Court decision was not erroneous and prejudicial, revision under section 263 not justified.

    Held:

    Assessing officer had allowed deduction relying on the law laid down by the courts and, therefore, it does not call for interference by CIT. It is not the case that the law laid down is otherwise. Merely because the department is contemplating to file an SLP, the CIT cannot refuse to follow the decision when the court has settled the law in question. It may happen that the decision of an appellate authority or the Tribunal pertaining to an earlier assessment year on a particular point is in favour of the assessee and that is followed in the assessment relating to subsequent assessment year. It may happen that the CIT may consider that such a decision of the appellate authority or the Tribunal is not in accordance with law and may also find that such a decision is subject-matter of further appeal or revision as the case may be. Therefore, merely because revenue is contemplating to file SLP Commissioner cannot refuse to follow decision of court settling the law, therefore, order of assessing offifer based on High Court decision was not erroneous and prejudicial, revision under section 263 not justified.

    Application:

    Also to current assessment years.

    A. Y.:

    1990-91 Income Tax Act 1961 s.263 Revision under s. 263--VALIDITY--Notice under s. 263 for withdrawal of excess interest allowed under s. 244A was vague.

    Ratio:

    Revision under section 263 was not valid because withdrawal of interest allowed under 244A was on the basis of notice which was vague.

    Held:

    In the show-cause notice, nothing is indicated. The notice is, therefore, vague. It may be that the Commissioner might have come to the conclusion from the record of the case that there is delay attributable to the assessee but then in that case, the same should have been mentioned in the notice. In the absence of that it can be said that the notice is vague. The assessing officer before whom the proceedings commenced and concluded, who is seized of the facts of the case, would be the best person to mention in his order if at all he is of the view that the delay in concluding has occasioned due to the delay caused by the assessee. Even by filing affidavit before this court, no material is placed. Therefore, in the absence of any material, it can be said that the notice is vague.

    Application:

    Also to current assessmentyears.

    A. Y.:

    1990-91 Income Tax Act 1961 s.263 JUDGMENT B.C. Patel, J.

    1. The petitioner filed a return of income along with audited final accounts and tax audit report on September 26, 1991. The Assessing Officer passed an order of assessment on March 29, 1993, disallowing investment allowance and allowing depreciation claimed. The respondent herein, the Commissioner of Income-tax, issued a notice under section 263 of the Income-tax Act, 1961 (hereinafter referred to as "the Act"), on January 16, 1995, vide annexure "C" to the petition, to which the petitioner submitted and elaborate reply on February 3, 1995. As mentioned in the notice, the notice has been issued on the following two grounds to the assessee which are as under :

    (1) On verification, it is noticed that excess allowance of depreciation was given on increased value of assets due to fluctuations in rates of foreign currency during the period you remained debtor in respect of plant and machinery. Entire outstanding liability was enhanced due to devaluation of Indian rupee which was not correct because the cost of asset is to be determined only on actual payment of foreign currency and not on fluctuations in exchange rate after the agreement is made.

    (2) It is also noticed that excess grant of refund under section 244A was allowed to you. As you had filed the return late on September 26, 1991, as against December 21, 1990, interest under section 244A amounting to Rs. 5,96,902 requires to be withdrawn.

    The petitioner has challenged the issuance of the said notice in this petition.

    2. It is contended by the learned advocate for the petitioner that the issuance of the notice under section 263 of the Act is bad, illegal and contrary to law. So far as depreciation is concerned, the Assessing Officer has passed an order of assessment in consonance with the law and the notice could not have been issued in view of the decision of the apex court in the case of Commissioner Of Income Tax, Gujarat v. Arvind Mills Ltd.. [1992] 193 ITR 255, the decision of this court in the case of New India Industries Ltd. v. CIT [1993] 203 ITR 933 (Guj) and the Karnataka High Court in the case of CIT v. Widia (India) Ltd. [1992] 193 ITR 475. The consistent view taken by this court following the principles laid down by the ape court and other High Courts is that depreciation is to be allowed on the fluctuation added cost.

    3. Mr. Shah submitted that with regard to interest, the notice is absolutely vague and it does not give any reason as to why the authority issuing notice is not in agreement with the view taken by the Assessing Officer or that there is delay in the assessment which can be attributed to the assessee.

    4. It transpires from the record that for the assessment year 1989-90, the Assessing Officer permitted deduction on fluctuation added cost. On the ground raised at Sr. No. 1 for the year 1989-90, a notice under section 263 of the Act was issued by the Commissioner. The order passed by the Commissioner for the assessment year 1989-90 under section 263 of the Act is annexed to the petition at annexure "D". The language of section 43A(1) of the Act, speaks of an increase or reduction in the liability of the assessee as expressed in Indian currency for making payment towards the whole or a part of the cost of an imported asset or for repayment of the whole or a part of the moneys borrowed in foreign currency specially for the purpose of acquiring the capital asset, as a result of exchange rate fluctuations. The Commissioner accepted the case of the assessee for the assessment year 1989-90, relying on the decision of the apex court in the case of Arvind Mills [1992] 193 ITR 255, and held that for the purpose of allowance of depreciation, there is no pre-condition of actual repayment of foreign currency loan and the Assessing Officer has not erred in law in allowing the claim of the assessee as regards depreciation. In spite of this, for the assessment year 1990-91, the Commissioner has issued the impugned notice contending that excess allowance of depreciation given on increased value of assets due to fluctuations in rates of foreign currency is not in accordance with law as in his opinion the cost of asset is to be determined on actual payment of foreign currency and not on fluctuations in exchange rate after the agreement is made.

    5. This court had an occasion to consider the scope of section 43A of the Act and the additional liability due to fluctuations in the rate of exchange, in the case of New India Industries Ltd. v. CIT [1993] 203 ITR 933. One of the questions referred to this court was as under (at page 936) :

    "Whether, on the facts and in the circumstances of the case, the Tribunal was justified in not holding that, on the basis of the mercantile system of accounting, the additional liability had arisen at the end of the accounting year and the same was of revenue nature and/or capital nature includible in the cost of the machinery ?"

    This court held that (at page 940) :

    "In view of this clear pronouncement of the Supreme Court, the only aspect which we are required to examine is as to whether the liability of the assessee can be said to have increased on account of devaluation of the rupee in the relevant previous year. In our opinion, when the assessee purchased assets at a price, its liability to pay the same arose simultaneously. Merely because the said liability was to be discharged in instalments, it cannot be said that the liability and did not exist or accrue till the instalments become due and payable. It was that liability which had increased on account of fluctuation in the rate of exchange. In our opinion, therefore, the case of the assessee fell squarely within the sweep of section 43A, and it was thus entitled to claim the benefit of that section during the assessment year 1973-74. In our opinion, the contention raised on behalf of the Revenue that the liability to pay the price of the asset arose only when the instalments became due and payable cannot be accepted for the reason that we are considering a provision which is made, inter alia, for the purpose of determining the allowability of depreciation allowance. If the assessee becomes the owner of the machinery and starts using the same, it would become entitled to depreciation allowance. It is for the purpose of working out the amount of depreciation that one has to look at the cost of the asset in respect of which depreciation is claimed. It is in this context that we have to consider as to when the liability can be said to have arisen. If the contention raised on behalf of the Revenue is accepted, then it would defeat the very purpose of the provision. As pointed out by the Supreme Court, section 43A was introduced with a view to mitigate hardships which were likely to be caused to the assessees as a result of fluctuation in the rate of exchange."

    Observing thus, the court held the Tribunal was not right in holding that the assessee was not entitled to claim the benefit on the basis of this additional liability resulting from the exchange rate fluctuation. In other words, the court held that the assessee is entitled to claim the benefit on the basis of additional liability resulting from the exchange rate fluctuation.

    6. Mr. Shah, the learned advocate for the petitioner, submitted that in light of the above, there was no question for the Commissioner to issue a show-cause notice and more particularly, when it was brought to his notice, he ought to have dropped the proceedings. Mr. Shah further submitted that the Commissioner being the highest officer in the Revenue Department in the State of Gujarat, must be aware about the law laid down by the apex court as well as by this court and if decisions are not followed, it would call for a serious action. Mr. Shah submitted that the authorities are bound by the decision of this court and the authorities are bound to follow the same. He also drew our attention to the decision of the apex court in the case of East India Commercial Co. Ltd. v. Collector of Customs, AIR 1962 SC 1893, wherein the apex court held that (at page 1905) :

    "We, therefore, hold that the law declared by the highest court in the State is binding on authorities or Tribunals under its superintendence, and that they cannot ignore it either in initiating a proceeding or deciding on the rights involved in such a proceeding. If that be so, the notice issued by the authority signifying the launching of proceeding contrary to the law laid down by the High Court would be invalid and the proceedings themselves would be without jurisdiction."

    Mr. Shah submitted that in spite of a number of decisions to the effect that the income-tax authorities are bound to follow the decisions of the High Court and the Supreme Court, they are not following them. He further submitted that in certain cases, even after drawing their attention to the law laid down by the courts, they are not dropping the proceedings. If there are contrary decisions of this court or there is no decision on a particular point, Mr. Shah submitted that the Commissioner may issue a notice, but in the instant case, the law is laid down by the apex court and there is no alternative but to follow the decision. Mr. Shah submitted that for the previous assessment year, the Commissioner, relying on the decision of the apex court, permitted deduction on fluctuating currency rate, but, for the subsequent year, on the same issue, has issued a notice. This, in the submission of Mr. Shah, is ignoring the judgment of the court. We find much substance in what Mr. Shah stated. The Assessing Officer had allowed deduction relying on the law laid down by the courts and, therefore, it does not call for interference by the Commissioner. It is not the case that the law laid down is otherwise.

    7. Mr. Thakore, learned counsel for the Revenue, submitted that as stated in the affidavit filed on behalf of the Revenue, the Department being aggrieved by the decision of this court in the case of New India Industries Ltd. v. CIT [1993] 203 ITR 933 has preferred a MCA under section 260 of the Act now seeking a certificate of fitness before this court on September 28, 1993, and the Department may contemplate filing of special leave petition before the Supreme Court against that decision, and, therefore so far as the Income-tax Department is concerned, the ratio as laid down by this court has not become final at this stage. Mr. Thakore was not in a position to convey to us what is the fate or stage of the said application or whether a special leave petition is filed or not. However, one thing is to be kept in mind, and what is, a decision rendered by this court relying on the judgment of the apex court is a binding decision. We are of the view that merely because the Department is contemplating to file a special leave petition, the Commissioner cannot refuse to follow the decision when the court has settled the law in question. It may happen that the decision of an appellate authority or the Tribunal pertaining to an earlier assessment year on a particular point is in favour of the assessee and that is followed in the assessment relating to the subsequent assessment years. It may happen that the Commissioner may consider that such a decision of the appellate authority or the Tribunal is not in accordance with law and may also find that such a decision is the subject-matter of further appeal or revision as the case may be. He may expect that the higher court or authority may decide in favour of the Revenue, but that may take a number of years. He may be of the view that by the time of decision of the higher court or authority arrives, a number of years may elapse by which time the exercise of the power under section 263 may become barred. When an Assessing Officer has passed an order on the basis of the law laid down by the court, can it be said that the Assessing Officer's order is erroneous ? We are of the view that exercising of the power to review in such a situation is not in accordance with law for the simple reason that the order of the assessing authority cannot be said to be erroneous as he has rendered the decision following the decision of a higher authority or a court on the same point. It is required to be note that the decisions reached by the Tribunal or the High Court are binding upon the Assessing Officer and discipline demands that he should follow the decision of the Tribunal or the High Court, as the case may be. It is not open for him to ignore the same on the ground that the Tribunal's or the High Court's ruling on the question is the subject-matter of revision or appeal before the higher forum. If he is permitted to take such a view, it would introduce nothing but judicial indiscipline, which is not called for. It would lead to a chaotic situation. The grievance of the Revenue may be real and substantial in certain cases but such situation cannot be provided for by judicial interpretation by courts but only by an appropriate agency (Russell Properties Pvt. Ltd. v. Addl. CIT [1977] 109 ITR 229 (Cal) and K. N. Agrawal v. CIT [1991] 189 ITR 769 (All).

    8. The next question is the legality of the notice pertaining to interest. The return is filed on September 26, 1991, as against December 21, 1990. Under section 244A, all the powers are to be exercised by the Assessing Officer for allowing interest on the refund. sub-section (2) of the said section reads as under :

    "If the proceedings resulting in the refund are delayed for reasons attributable to the assessee, whether wholly or in part, the period of the delay so attributable to him shall be excluded from the period for which interest is payable, and where any question arises as to the period to be excluded, it shall be decided by the Chief Commissioner or Commissioner whose decision thereon shall be final."

    Mr. Thakore submitted that the interest amount of Rs. 5,46,902 requires to be withdrawn. We put a pointed question as to whether the amount which is to be withdrawn is for a period between December 21, 1990, and September 26, 1991, i.e., the appointed date, for filing the return and the actual date on which the return is filed, or is it for the period of delay which can be attributed to the assessee in deciding the proceedings to which there was no answer. Looking to the language used in sub-section (2) of section 244a, it is very clear that the Assessing Officer, considering the facts before him, will have to determine whether the assessee is entitled to refund or not and if he is entitled to refund, then for what period he is entitled to interest. In the show-cause notice, nothing is indicated. The notice is, therefore, vague. It may be that the Commissioner might have come to the conclusion from the record of the case that there is delay attributable to the assessee but then in that case, the same should have been mentioned in the notice. In the absence of that, it can be said that the notice is vague. The Assessing Officer before whom the proceedings commenced and concluded, who is seized of the facts of the case, would be the best person to mention in his order if at all he is of the view that the delay in concluding has occasioned due to the delay caused by the assessee. Even by filing the affidavit before this court, no material is placed. Therefore, in the absence of any material, it can be said that the notice is vague so far as the second question is concerned.

    9. In the result, the impugned notice at annexure "C" is quashed and set aside. Rule made absolute accordingly. No order as to costs.

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    Comments

    Garden Silk Mills Ltd. v. Commissioner Of Income-Tax.
    (Jun 27, 1996)