Bookmark
PDF
Share
CaseIQ

Commissioner Of Income-Tax v. Mehsana District Co-Operative Milk Producers Union Ltd.

Gujarat High Court

Apr 2, 2003

Judgment

Subsequent
References

CaseIQ

Important Paras

Please sign up to view Important Paras.

Smart Summary (Beta)

Structured Summary of the Legal Opinion

Factual and Procedural Background

The Income-tax Appellate Tribunal, Ahmedabad Bench "B", referred a question to this Court under Section 256(2) of the Income-tax Act, 1961 concerning whether the Tribunal erred in allowing the assessee's appeal and quashing an order of the Commissioner under Section 263, thereby restoring the order of the Income-tax Officer (ITO).

Relevant facts and procedural history stated in the opinion:

Assessment year: 1979-80. For the previous year ended 31 March 1979 the assessee filed a return on 31 July 1979 declaring "nil" income.
The ITO allowed a deduction under Section 80HH for a new industrial undertaking in a backward area.
With respect to relief under Section 80J for project No. 2 (a powder plant started on 1 November 1972), the ITO allowed Rs. 8,40,624 to be carried forward as the profit of the new undertaking.
The Commissioner, by an order dated 11 September 1984, exercised powers under Section 263, held the assessment order to be erroneous and prejudicial to the Revenue, and set aside the ITO's order as regards relief granted under Sections 80HH and 80J with directions for fresh assessment and recomputation (including a finding that Rs. 49,88,158 had been improperly included from head office account in computing capital for Section 80J).
The Tribunal allowed the assessee's appeal, quashed the Commissioner's order under Section 263 and restored the ITO's order. The Tribunal held (a) the Commissioner could not exercise Section 263 where the ITO's order was made pursuant to directions under Section 144B(4), and (b) the ITO's order regarding Section 80J had merged with an appellate order of the Commissioner of Income-tax (Appeals) dated 31 January 1984, hence was not subject to revision under Section 263. For Section 80HH, the Tribunal accepted the assessee's consistent, rational method of apportioning expenses between old and new units.

Legal Issues Presented

Whether, on the facts and in the circumstances of the case, the Tribunal erred in law and fact in allowing the appeal of the assessee and quashing the order of the Commissioner of Income-tax under Section 263 and restoring the order of the Income-tax Officer?

Arguments of the Parties

The opinion does not contain a detailed account of the parties' legal arguments.

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
CIT v. Shri Arbuda Mills Ltd. [1998] 231 ITR 50	Interpretation of Section 263(1) (and its Explanation, Clause (c)) — Commissioner’s powers extend only to matters not considered and decided in appeal.	Used to conclude that Section 263 could not be invoked where the ITO's order had already been subjected to appeal and the appellate order had been made; thus the Commissioner could not revise the ITO's order on the Section 80J issue which had merged in an appellate order.
CIT v. Shashi Theatre Pvt. Ltd. [2001] 248 ITR 126	Division Bench holding that revisional powers under Section 263 do not extend to matters on which the appellate authority has bestowed consideration and given a decision.	Relied upon to support the conclusion that the Commissioner could not exercise Section 263 over matters already considered by the appellate authority (specifically the Section 80J issue).
Tamil Nadu Civil Supplies Corporation Ltd. v. CIT [2003] 260 ITR 82	Supreme Court holding that orders passed by the Income-tax Officer pursuant to directions by Inspecting Assistant Commissioner under Section 144B (and similarly 144A) are not excluded from revision under Section 263; phrase "order passed by the Income-tax Officer" includes such orders.	Applied to conclude that the Tribunal erred in holding that the Commissioner could not exercise revisional powers under Section 263 in respect of ITO orders made pursuant to directions under Section 144B(4). The Court rejected the Tribunal’s preliminary-objection finding on this point.
CIT v. Shreyas Land Development Corporation — I.T.R. No. 120 of 1986 (decided 9 July 2001)	Decision of this Court following the Andhra Pradesh High Court's approach that orders made pursuant to superior authority directions are revisable.	Cited as additional authority aligning with the Supreme Court's view in Tamil Nadu Civil Supplies Corp that revisional power under Section 263 extends to ITO orders made under directions such as Section 144B.
CIT v. East Coast Marine Products (P.) Ltd. [1990] 181 ITR 314	Andhra Pradesh High Court decision supporting the revisability of ITO orders made pursuant to directions (followed by other courts).	Referenced as the earlier authority followed by this Court in Shreyas Land Development Corporation and to support the conclusion that the Tribunal's preliminary objection on this point was unsustainable.
Malabar Industrial Co. Ltd. v. CIT [2000] 243 ITR 83	Interpretation of "prejudicial to the interests of the Revenue" under Section 263(1): read with 'erroneous order'; where two views are possible, the AO's view cannot be treated as erroneous and prejudicial unless it is unsustainable in law.	Applied to the Section 80HH issue: since the ITO adopted a rational and consistent basis of apportionment of expenses (and two views were possible), his order could not be treated as erroneous and prejudicial to the Revenue. Thus revisional power under Section 263 was not attracted on that point.

Court's Reasoning and Analysis

The Court's analysis proceeds in distinct steps addressing the two principal aspects contested before it: the scope of revisional powers under Section 263 in two contexts (orders merged by appeal and orders made pursuant to directions under Section 144B), and the substantive correctness of the ITO's apportionment for Section 80HH relief.

1. Effect of merger by appeal on revisional power (Section 80J):

The Court noted the ITO's decision on Section 80J had been taken up in appeal and an appellate order of the Commissioner of Income-tax (Appeals) was made on 31 January 1984 prior to the Commissioner's revisional order dated 11 September 1984. Consequently, the ITO's order on that issue had merged into the appellate order and there was no operative ITO order remaining to be revised under Section 263.
The Court relied on precedent (Shri Arbuda Mills and Shashi Theatre) which holds that Section 263 powers extend only to matters not considered and decided in appeal; therefore Section 263 could not be invoked in the present circumstances on the Section 80J issue.

2. Scope of revisional power where an ITO acts on directions under Section 144B(4):

The Tribunal had held that the Commissioner could not exercise Section 263 where the ITO's order was made pursuant to directions under Section 144B(4). The Court found this to be contrary to the Supreme Court's authoritative decision in Tamil Nadu Civil Supplies Corporation Ltd. v. CIT which affirmed that orders passed by an ITO pursuant to directions under Sections 144A/144B are still "orders passed by the Income-tax Officer" for the purposes of Section 263 and therefore revisable by the Commissioner.
Accordingly, the Court held that the Tribunal erred in upholding the assessee's preliminary objection on this ground; the Tribunal's preliminary-objection finding could not be sustained in the light of Supreme Court authority and supporting decisions of this Court and the Andhra Pradesh High Court.

3. Substantive assessment of the Section 80HH deduction:

The Tribunal had made a factual finding that the assessee consistently apportioned overhead expenses between the two units on a rational basis (using a ratio of 5.5:4.5) for the assessment years including 1978-79 and 1980-81, and that the same method had been accepted by the Department in earlier years.
Applying the principle from Malabar Industrial Co. Ltd. v. CIT, the Court observed that Section 263 is not a tool to correct every mistake; it applies when the ITO's order is erroneous and prejudicial to the Revenue. Where two views are possible and the ITO has taken a rational view, it is not open to treat it as erroneous unless it is unsustainable in law.
The Department did not demonstrate that the apportionment method was improper or irrational in the earlier years. The Court thus concluded it could not overturn the Tribunal's factual finding or label the ITO's order as erroneous and prejudicial on the Section 80HH point.

4. Overall synthesis:

While the Tribunal was wrong in holding that revisional powers under Section 263 could never be exercised in respect of ITO orders made pursuant to directions under Section 144B(4), the Tribunal was correct in setting aside the Commissioner's revisional order in this case because (a) the Section 80J matter had merged in an earlier appellate order and was therefore beyond revision, and (b) the Section 80HH matter involved a rational, consistently applied apportionment which could not be labelled as an erroneous order prejudicial to the Revenue.

Holding and Implications

The question referred is answered in favour of the assessee and against the Revenue.

Direct effects and consequences as stated in the opinion:

The Court quashed the Commissioner's order passed under Section 263 and restored the order of the Income-tax Officer in respect of the matters before it.
The Tribunal's preliminary-objection finding (that orders made by the ITO pursuant to directions under Section 144B(4) are not revisable) was held to be erroneous in law, because Supreme Court authority permits revision of such ITO orders; however this error did not alter the final result in favour of the assessee on the facts of this case.
No orders as to costs were made; the reference was disposed of accordingly.
No broader or new precedent was announced by this decision beyond the application of existing authorities cited; the Court applied and reconciled earlier decisions to the facts before it. (The opinion does not purport to create a novel rule beyond the precedents relied upon.)

Show all summary ...

1. The Income-tax Appellate Tribunal, Ahmedabad Bench "B", has referred the following question for the opinion of this court pursuant to the directions issued under Section 256(2) of the Income-tax Act, 1961 :

"Whether, on the facts and in the circumstances of the case, the Tribunal has not erred in law and facts in allowing the appeal of the assessee and quashing the order of the Commissioner of Income-tax under Section 263 and restoring the order of the Income-tax Officer ?"

2. The relevant assessment year was 1979-80. For the previous year ended March 31, 1979, the assessee filed a return of income on July 31, 1979, declaring "nil" income. The assessee was allowed deduction under Section 80HH in respect of the new industrial undertaking in the backward area. As regards the relief claimed under Section 80J of the Act in respect of its project No. 2, i.e., the powder plant which was started from November 1, 1972, the Income-tax Officer allowed the amount of Rs. 8,40,624 to be carried forward as the profit of the new undertaking.

3. The decision of the Income-tax Officer was taken up in revision under Section 263 of the Act by the Commissioner, who by order dated September 11, 1984, held that the assessment order was erroneous and prejudicial to the interest of the Revenue, and set aside the order as regards the relief granted under Sections 80HH and 80J with a direction to the Income-tax Officer to make fresh assessment in accordance with law, after making necessary inquiries for determining the profits of the old and new units for the purpose of determining the quantum of deduction admissible under Section 80HH of the Act. The Income-tax Officer was further directed to compute the capital for the purpose of relief under Section 80J in accordance with law. The Commissioner found that the relief under Section 80J was not properly worked out, because the Income-tax Officer had included a sum of Rs. 49,88,158 on the head office account in computing the capital.

4. The Tribunal allowing the appeal of the assessee held that since the Income-tax Officer had made an order pursuant to the direction of the Inspecting Assistant Commissioner under Section 144B(4) of the Act, the Commissioner could not have exercised his revisional powers under Section 263 of the Act. The Tribunal upheld the preliminary objection of the assessee against the exercise of powers under Section 263 by the Commissioner on that ground. As regards the relief under Section 80J, the Tribunal held that the order of the Income-tax Officer was carried in appeal and had merged with the order of the Commissioner of Income-tax (Appeals) dated January 31, 1984, which was passed prior to the making of the order by the Commissioner on September 11, 1985, under Section 263 of the Act. The Tribunal noted that the question of computation of relief under Section 80J was the subject-matter of the appeal before the Commissioner of Income-tax (Appeals), who had dealt with that aspect in paragraph 8 of the appellate order. The Commissioner, therefore, could not have exercised his revisional powers in respect of the relief granted under Section 80J of the Act to the assessee. As regards the relief granted under Section 80HH of the Act, the Tribunal found that a consistent approach was adopted in respect of the earlier previous years by the assessee who divided the expenses on a rational basis of proportion of milk used in production of the two plants, new and old. It was held that when a consistent basis was adopted and it was a rational basis, the fact that any other order could also be passed would not mean that the order of the Income-tax Officer was erroneous and prejudicial to the interests of the Revenue. The Tribunal, therefore, set aside the order of the Commissioner made under Section 263 of the Act and restored the order of the Income-tax Officer.

5. It is obvious that when the decision of the Income-tax Officer on the aspect of deduction granted under Section 80J was already considered by the Commissioner of Income-tax (Appeals), who had made an order earlier than the revisional order made by the Commissioner under Section 263, the order of the Income-tax Officer as regards such deduction under Section 80J had already merged in the appellate order. There was, therefore, no order of the Income-tax Officer which could have been revised by the Commissioner under Section 263 on the question of grant of benefit of Section 80J of the Act to the assessee. The Supreme Court in the case of CIT v. Shri Arbuda Mills Ltd. [1998] 231 ITR 50, in the context of the provisions of Section 263(1) of the Act, referring to the Explanation, Clause (c) thereof, held that the powers of the Commissioner under Sub-section (1) of Section 263 extended to such matters as had not been considered and decided in appeal. It, therefore, necessarily follows that the powers under Section 263 could not have been invoked when the order taken in revision was already subjected to appeal and the appellate order was made in respect thereof as was made in the instant case. The Division Bench of this court in CIT v. Shashi Theatre Pvt. Ltd. [2001] 248 ITR 126, has in terms held that the revisional powers under Section 263 did not extend to matters on which the appellate authority had bestowed consideration and given a decision. It is thus clear that the Commissioner could not have exercised his revisional powers under Section 263 against the order of the Income-tax Officer granting deduction under Section 80J of the Act, which order was appealed against and had merged in the order of the Commissioner of Income-tax (Appeals), which was made on January 31, 1984, prior to the making of the revisional order.

6. The Tribunal upheld the preliminary objection of the assessee that the revisional power under Section 263 could not have been exercised in cases where the order was made by the Income-tax Officer pursuant to the direction issued by the Inspecting Assistant Commissioner under Section 144B(4) of the Act. This finding of the Tribunal is clearly contrary to the decision of the Supreme Court in Tamil Nadu Civil Supplies Corporation Ltd. v. CIT [2003] 260 ITR 82, in which the Supreme Court referring to the uniformity of interpretation given by the several High Courts to the provisions of section 263 read with section 144b, upheld the decision of the High Court that the order made by the Income-tax Officer on the basis of directions given by the Inspecting Assistant Commissioner under Section 144B was revisable by the Commissioner. The Supreme Court held that in its view, having regard to the subsequent amendments to the Act issued from time to time there was no scope for limiting the phrase "order passed by the Income-tax Officer" in Section 263 to exclude orders passed by the Income-tax Officer on the directions of a superior authority either under Section 144A or 144B of the Act. In our view, therefore, the Tribunal committed an error in upholding the preliminary objection of the assessee. Learned counsel for the assessee very fairly submitted that the decision of the Tribunal upholding the preliminary objection of the assessee on this count cannot be sustained, being contrary to the decision of the Supreme Court, in Tamil Nadu Civil Supplies Corporation Ltd.'s case [2003] 260 ITR 82, and also against the decision of this court rendered in CIT v. Shreyas Land Development Corporation--I. T. R. No. 120 of 1986 decided on July 9, 2001, which has followed the decision of the Andhra Pradesh High Court in the case of CIT v. East Coast Marine Products (P.) Ltd. [1990] 181 ITR 314.

7. The only question that now remains to be considered is whether the Tribunal was justified in setting aside the order of the Commissioner in respect of deduction granted under Section 80HH of the Act. The Tribunal has found as a matter of fact that the assessee has adopted a consistent approach in the earlier years for apportioning the expenditure between the two units, old and new, which was accepted by the Department. In paragraph 9 of its order, the Tribunal has, in terms, observed that the method followed by the assessee of dividing the overhead expenses on a proportionate basis in the proportion of 5.5 : 4.5 was adopted for the assessment year 1978-79 as well as 1980-81, It was held that when such consistent basis was adopted there was no reason to interfere in the matter when it was not shown to be irrational. It is well settled that the provisions of Section 263(1) cannot be invoked to correct each and every type of mistake or error committed by the Assessing Officer, and it is only when the order is erroneous that the section will be attracted. The Supreme Court in Malabar Industrial Co. Ltd. v. CIT [2000] 243 ITR 83 has observed 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. It was held that when 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. It is not shown how the method followed by the assessee to divide the expenses for the purpose of claiming relief under Section 80HH was improper or unacceptable. The Income-tax Officer as well as the Tribunal have found that the expenses were apportioned on a rational basis and it would not be open for this court to go beyond that finding which appears to have been reached on the basis of the material on record which showed that in the earlier years the same proportion for dividing the expenses was consistently followed. The Department has not been able to show that for those earlier two years any objection was raised against such apportionment.

8. For the foregoing reasons, while holding that the Tribunal had committed an error in upholding the preliminary objection of the assessee against the revisional exercise of powers under Section 263 of the Act in the context of the order made by the Income-tax Officer pursuant to the direction issued by the Inspecting Assistant Commissioner under Section 144B(4) of the Act, we hold that the Tribunal has not committed any error in allowing the appeal of the assessee and quashing the order of the Commissioner of Income-tax passed under Section 263 of the Act and in restoring the order of the Income-tax Officer. The question referred to us is, therefore, answered in favour of the assessee and against the Revenue. The reference stands disposed of accordingly with no orders as to costs.