Citation Codes

Equivalent Citations

citation codes

Case Number

Income-tax Reference No. 174 of 1989

Judges

M.S Shah
K.A Puj, JJ.

Acts

Sections 142(2) and 143(1), of the Income-tax Act, 1961,
SECTION 263 INCOME TAX ACT 1961

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Smart Summary

Structured Summary of the Opinion (Reference relating to Section 263, Income-tax Act, 1961)

Factual and Procedural Background

The Revenue referred two questions of law to the court concerning the assessment year 1981-82 relating to whether the Income-tax Appellate Tribunal (Tribunal) was correct in setting aside an order passed by the Commissioner of Income-tax under Section 263 of the Income-tax Act, 1961, and whether the Tribunal's conclusion was sustainable in law.

The assessee is a partnership firm engaged in the purchase and sale of ornaments and jewellery. The firm filed a return showing a net loss of Rs. 2,777. The Income-tax Officer (ITO), after issuing notices under Sections 142(2) and 143(1) and considering material and explanations produced by the assessee, framed an assessment determining total income at Rs. 32,900 (the Tribunal's order also records that the ITO framed assessment on total income of Rs. 34,350).

The Commissioner of Income-tax, considering material including a search on November 28, 1992 (during which unaccounted cash of Rs. 1,80,000 and silver jewellery valued at Rs. 7,02,728 were seized), concluded that the ITO's assessment order under Section 143(3) was erroneous and prejudicial to the interests of the Revenue because the ITO had not carried out adequate investigation while adding certain amounts or accepting the assessee's explanations. The Commissioner set aside the ITO's order under Section 263 and directed a fresh order after necessary investigations.

The assessee appealed to the Tribunal. The Tribunal, after hearing parties and considering authorities cited, set aside the Commissioner's order under Section 263, finding it difficult to hold that the ITO had not properly investigated the matter and observing that the ITO had raised relevant enquiries (including under Section 142(1) in view of a search under Section 132), obtained information, made certain additions, and taken a particular view after considering material on record. The Tribunal held that the Commissioner was not justified in invoking Section 263 merely because a "better" assessment could have been framed.

Legal Issues Presented

Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was right in law in setting aside the order made by the Commissioner of Income-tax under Section 263 of the Income-tax Act, 1961?
Whether the conclusion reached by the Appellate Tribunal in setting aside the order made by the Commissioner of Income-tax under Section 263 of the Income-tax Act, 1961, is even otherwise sustainable in law?

Arguments of the Parties

Revenue's Arguments

The material available with the Income-tax Officer was not properly considered while finalising the assessment; therefore the assessment order is erroneous and prejudicial to the interests of the Revenue.
Before passing the assessment order the Income-tax Officer ought to have made full enquiry and investigation; failure to do so caused loss to the Revenue and justified action under Section 263.
Relied on the decision of the Supreme Court in CIT v. Shree Manjunathesware Packing Products and Camphor Works, [1998] 231 ITR 53, in support of this contention.

Assessee's Arguments

Relied on the Supreme Court decision in Malabar Industrial Co. Ltd. v. CIT, [2000] 243 ITR 83, which sets out the twin conditions for exercise of jurisdiction under Section 263: (i) the order of the Assessing Officer is erroneous, and (ii) it is prejudicial to the interests of the Revenue. Both conditions must be satisfied.
Emphasized that an order which represents one of two permissible views or where the Assessing Officer has applied mind and taken a view on the material cannot be treated as erroneous merely because the Commissioner prefers a different view.

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
CIT v. Shree Manjunathesware Packing Products and Camphor Works, [1998] 231 ITR 53	Relied upon by the Revenue; the opinion records the Revenue's reliance but does not state the decision's specific principle in the text of this opinion.	Recorded as relied upon by Revenue's counsel. The court's reasoning in the opinion does not adopt any specific proposition from this decision as quoted in the text.
Malabar Industrial Co. Ltd. v. CIT, [2000] 243 ITR 83	The headnote (quoted in the opinion) sets out the conditions for exercise of jurisdiction under Section 263: the Commissioner's satisfaction must be based on (i) the order being erroneous and (ii) prejudicial to the interests of the Revenue; both conditions must co-exist. The headnote further explains that Section 263 is not to be used to correct every mistake; an incorrect assumption of fact, incorrect application of law, order passed without applying mind, or without following natural justice will qualify as erroneous; but where one of several permissible views is taken by the Assessing Officer, the Commissioner cannot treat it as erroneous unless it is unsustainable in law.	The court relied on and followed the principles laid down in this decision. The opinion expressly applies the Malabar formulation to conclude that Section 263 could not be invoked on the facts of the present case where the ITO had considered material and taken a view.

Court's Reasoning and Analysis

The court's analysis proceeds from the principles set out by the Supreme Court in Malabar Industrial Co. Ltd.'s case. That decision (quoted in the opinion) establishes that the Commissioner's power under Section 263 can be exercised only when two conditions co-exist: (i) the order of the Assessing Officer is erroneous, and (ii) it is prejudicial to the interests of the Revenue. The court emphasizes that Section 263 is not a vehicle to correct every error; an incorrect assumption of fact, incorrect application of law, failure to apply mind, or breach of natural justice would render an order "erroneous" for this purpose, but mere existence of an alternative view or a different assessment that might be "better" does not suffice.

Applying these principles to the present facts, the court relies on the Tribunal's factual findings that:

The assessee produced relevant material and offered explanations in response to notices under Sections 142(1) and 143(2).
The Income-tax Officer had raised necessary enquiries (including pursuant to a search under Section 132) and was aware of the gravity of the situation and the Revenue's interests.
After obtaining information, the ITO framed the assessment, rejecting portions of the assessee's explanations and making additions.

From those findings the court concludes that the Commissioner simply disagreed with the view taken by the ITO. Because the material was on record and the ITO had considered it and reached a particular conclusion, the court holds that a mere difference of view does not empower the Commissioner to invoke Section 263. The court thus finds that the prerequisites for invoking Section 263 (an order both erroneous and prejudicial to the Revenue) are not established on the facts: the Tribunal reasonably concluded that the ITO had applied his mind and carried out necessary enquiries, and therefore the Commissioner's action was not justified.

Holding and Implications

HOLDING: The court answered both referred questions in the affirmative in favour of the assessee and against the Revenue, concluding that the Tribunal was correct in setting aside the Commissioner's order passed under Section 263.

Implications:

Direct effect: The Commissioner's order under Section 263 (setting aside the ITO's assessment and directing a fresh assessment) was set aside by the Tribunal and that conclusion is upheld by this court. The reference is disposed of and there is no order as to costs.
Broader implications: The opinion applies and follows the legal principles from Malabar Industrial Co. Ltd. v. CIT regarding the limited scope of Section 263 — specifically that Section 263 cannot be invoked merely because a different (or arguably better) view might have been possible; both error and prejudice to Revenue must be shown. The opinion does not purport to lay down any new precedent beyond applying the Malabar test to the facts of this case.

This summary is strictly confined to the information contained in the provided opinion. No information has been invented or inferred beyond that text.

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Commissioner Of Income-Tax v. Arvind Jewellers

1. At the instance of the Revenue, the following questions of law are referred for the opinion of this court for the assessment year 1981-82 :

"1. Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was right in law in setting aside the order made by the Commissioner of Income-tax under Section 263 of the Income-tax Act, 1961 ?

2. Whether the conclusion reached by the Appellate Tribunal in setting aside the order made by the Commissioner of Income-tax under Section 263 of the Income-tax Act, 1961, is even otherwise sustainable in law ?"

2. The assessee is a partnership firm and had filed its return of income disclosing a net loss of Rs. 2,777 in the business of purchase and sale of ornaments and jewellery. The Income-tax Officer issued notices under Sections 142(2) and 143(1), of the Income-tax Act, 1961, along with the requirement letter. After considering the material produced by the assessee and the explanation offered, the Income-tax Officer has framed the assessment determining the total income at Rs. 32,900. The Commissioner of Income-tax has found the said order of the Income-tax Officer erroneous and prejudicial to the interests of the Revenue and, therefore, issued notice under Section 263 of the Act. The Commissioner was of the view that there was search at the business premises of the assessee-firm and the residential premises of the assessee-firm and residential premises of the partners on November 28, 1992. During the course of search, unaccounted cash amounting to Rs. 1,80,000 was seized. Similarly, silver ornaments and jewellery valued at Rs. 7,02,728 were seized. While finalising the assessment for the assessment year 1981-82, the Income-tax Officer has added Rs. 15,000 as the assessee's income from undisclosed sources represented by the credits in the accounts of seven parries as mentioned in the order under Section 263 of the Act. After narrating in detail the facts of the case as well as the explanation offered by the assessee in reply to the notice issued under Section 263 of the Act, the Commissioner of Income-tax has come to the conclusion that the assessment order passed by the Income-tax Officer under Section 143(3) for the assessment year in question determining the total income at Rs. 32,900 is erroneous and prejudicial to the interests of the Revenue, in so far as the Income-tax Officer has not carried out any investigation either while adding certain amounts in the total income or while accepting the explanations on the various points as discussed in the said order. The Commissioner of Income-tax has, therefore, set aside the order passed by the Income-tax Officer under Section 143(3) of the Act with a direction to pass a fresh order in accordance with law after carrying out necessary investigations with regard to various explanations offered by the assessee.

3. Being aggrieved by the said order, the assessee preferred an appeal before the Income-tax Appellate Tribunal and objected to the order so passed by the Commissioner. The Tribunal has considered the rival submissions of the parties at great length and also referred to and relied on the authorities cited by the respective parties. The Tribunal has observed in para. 7 of its order that from the material already brought on record, it is difficult to hold that the Income-tax Officer has not properly investigated and enquired into the case in depth. The Tribunal has found from the notice issued by the Income-tax Officer under Section 142(1) of the Act that the Income-tax Officer had raised all possible enquiries in view of a search conducted under Section 132 of the Act. The Tribunal has further observed that the Income-tax Officer was fully aware of the gravity of the situation and the interests of the Revenue. After obtaining necessary information from the assessee, the Income-tax Officer has framed the assessment wherein he had not accepted the explanation given by the assessee in its entirety and had in fact made certain additions. The Tribunal has further taken the fact into account that as against the total loss of Rs. 2,777 shown by the assessee, the Income-tax Officer had framed the assessment on a total income of Rs. 34,350. In this view of the matter, the Tribunal was of the view that the Commissioner of Income-tax was not justified in initiating the proceedings under Section 263 of the Act. It was further observed by the Tribunal that merely on the ground that on the material already brought on record, better assessment could have been framed than that framed by the Income-tax Officer, the action under Section 263 cannot be taken. After considering all the issues, the Tribunal has set aside the order of the Commissioner of Income-tax and it is that order which is under challenge before us in this reference.

4. Heard Mrs. Mouna Bhatt, learned counsel appearing for the applicant-Revenue, and Mr. R.K. Patel, learned advocate appearing for the respondent-assessee. The Revenue's case was, as canvassed by Mrs. Bhatt, that since the material which was available with the Income-tax Officer was not considered while finalising the assessment, the order passed on that basis is erroneous and prejudicial to the interests of the Revenue. According to the Revenue, before passing the order, full enquiry and investigation ought to have been made by the Income-tax Officer and since this was not done, it has caused loss to the Revenue and in this view of the matter, the order so passed was erroneous and prejudicial to the interests of the Revenue and the Commissioner was justified while taking action under Section 263 of the Act. In support of her contention, she had relied on the decision of the Supreme Court in the case of CIT v. Shree Manjunathesware Packing Products and Camphor Works, [1998] 231 ITR 53.

5. Mr. R.K. Patel, learned advocate appearing for the respondent-assessee, has drawn our attention to the decision of the Supreme Court in the case of Malabar Industrial Co. Ltd. v. CIT, [2000] 243 ITR 83 wherein the Supreme Court has observed as under (headnote) :

A bare reading of Section 263 of the Income-tax Act, 1961, makes it clear that the prerequisite for 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 prejudicial 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. The provision cannot be invoked to correct 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 application of law will satisfy the requirement of the order being erroneous. In the same category fall orders passed without applying the principles of natural justice or without application of mind. The phrase 'prejudicial to the interests of the Revenue' is not an expression of art and is not defined in the Act. Understood in its ordinary meaning it is of wide import and is not confined to loss of tax. The scheme of the Act is to levy and collect tax in accordance with the provisions of the Act and this task is entrusted to the Revenue. If due to an erroneous order of the Income-tax Officer, the Revenue is losing tax lawfully payable by a person, it will certainly be prejudicial to the interests of the Revenue. The phrase 'prejudicial to the interests of the Revenue' has to be read in conjunction with an erroneous order passed by the Assessing Officer. Every loss of revenue as a consequence of an order of the Assessing Officer, cannot be treated as prejudicial to the interests of the Revenue, for example, when an Income-tax Officer adopted one of the courses permissible in law and it has resulted in loss of revenue, or where two views are possible and the Income-tax Officer has taken one view with which the Commissioner does not agree, it cannot be treated as an erroneous order prejudicial to the interests of the Revenue unless the view taken by the Income-tax Officer is unsustainable in law.

6. From the above observations made by the Supreme Court, it is clear that the provisions of section 263 cannot be invoked to correct 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 and incorrect assumption of facts or an incorrect application of law will satisfy the requirement of the order being erroneous. The Supreme Court has also made it clear that the phrase "prejudicial to the interests of the Revenue" has to be read in conjunction with an erroneous order passed by the Assessing Officer and that every loss of revenue as a consequence of an order of the Assessing Officer cannot be treated as prejudicial to the interests of the Revenue. It was further emphatically stated that when an Income-tax Officer adopted one of the courses permissible in law and it has resulted in loss of revenue, or where two views are possible and the Income-tax Officer has taken one view with which the Commissioner does not agree, it cannot be treated as an erroneous order prejudicial to the interests of the Revenue unless the view taken by the Income-tax Officer is unsustainable in law.

7. Coming to the facts of the present case, it is the finding of fact given by the Tribunal that the assessee has produced relevant material and offered explanations in pursuance of the notices issued under Section 142(1) as well as Section 143(2) of the Act and after considering the materials and explanation, the Income-tax Officer has come to a definite conclusion. The Commissioner of Income-tax did not agree with the conclusion reached by the Income-tax Officer. Section 263 of the Act does not empower him to take action on these facts to arrive at the conclusion that the order passed by the Income-tax Officer is erroneous and prejudicial to the interests of the Revenue. Since the material was there on record and the said material was considered by the Income-tax Officer and a particular view was taken, the mere fact that a different view can be taken, should not be the basis for an action under Section 263 of the Act and it cannot be held to be justified.

8. In view of this and following the principles laid down by the Supreme Court in Malabar Industrial Co. Ltd.'s case [2000] 243 ITR 83, we are of the view that having regard to the facts and circumstances of the case, the Tribunal was justified in setting aside the order passed by the Commissioner of Income-tax under Section 263 of the Act. We, therefore, answer both the questions in the affirmative, i.e., in favour of the assessee and against the Revenue.

9. The reference is, accordingly, disposed of with no order as to costs.

Commissioner Of Income-Tax v. Arvind Jewellers

Structured Summary of the Opinion (Reference relating to Section 263, Income-tax Act, 1961)

Factual and Procedural Background

Legal Issues Presented

Arguments of the Parties

Revenue's Arguments

Assessee's Arguments

Table of Precedents Cited

Court's Reasoning and Analysis

Holding and Implications

Commissioner Of Income-Tax v. Arvind Jewellers

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