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Commissioner Of Income-Tax v. Shalimar Housing And Finance Ltd.

Madhya Pradesh High Court
Apr 15, 2009
Smart Summary (Beta)

Structured Summary of the Opinion

Factual and Procedural Background

A search and seizure operation under section 132(1) of the Income-tax Act, 1961 was conducted at the respondent-assessee's premises from 21 February 2002 to 13 March 2002. The Assessing Officer (AO) framed a block assessment under section 158BC on 17 September 2004 and made several additions. The assessee appealed to the Commissioner of Income-tax (Appeals)-II, Bhopal, who issued an order dated 5 October 2005 allowing the appeal in part.

The Commissioner of Income-tax (revisionary jurisdiction) examined the assessment records for the block period (1 April 1995 to 27 February 2002) and observed that the AO had failed to consider certain issues: (i) alleged undervaluation of "work-in-progress" (WIP) — discrepancy between seized documents and assessee's value amounting to Rs. 18,41,35,526; (ii) admission by a director (Shri Vijay Meerchandani) of receipt of salary and perquisites not recorded in books; (iii) inconsistency between additions made in individual director assessments and additions in the assessee-company's assessment; and (iv) unexplained deposits in the accounts of a cooperative bank run by the assessee (protective addition made in the bank's assessment which the Commissioner considered should have been considered in the assessee-company's assessment).

The Commissioner issued a notice under section 263, concluded that the AO's assessment dated 17 September 2004 was "erroneous and prejudicial to the interest of the Revenue", set aside the assessment under section 158BC read with section 144 and directed the AO to frame the assessment afresh after proper enquiries and after affording the assessee an opportunity of hearing.

The assessee appealed to the Income-tax Appellate Tribunal (Tribunal). The Tribunal allowed the appeal, set aside the Commissioner of Income-tax's order under section 263, and restored the Assessing Officer's assessment order. The Tribunal analysed the factual matrix (WIP, director salaries, unexplained deposits), applied the principle that where two views are possible an AO's order adopting one such view cannot be treated as erroneous unless unsustainable in law, and held that the Commissioner had not legally assumed jurisdiction under section 263. The Tribunal also clarified that its order did not express any opinion on the merits of the pending appeals against the CIT(A)'s order.

The Revenue (appellant) sought special leave / appeal under section 260A of the Act. The Supreme Court heard argument and considered whether the Tribunal was justified in dislodging the Commissioner of Income-tax's order under section 263.

Legal Issues Presented

  1. Whether in the obtaining factual matrix the Income-tax Appellate Tribunal was justified in holding that the action taken by the Commissioner of Income-tax under section 263 of the Income-tax Act, 1961 was not justified despite a recorded finding of suppression of work-in-progress to the extent of Rs. 18,41,35,526 (substantial question of law admitted for consideration).
  2. More broadly, whether the Tribunal was justified in dislodging the order passed by the Commissioner of Income-tax under section 263 in the factual circumstances of this case (i.e., whether the Commissioner validly exercised revisionary jurisdiction under section 263).

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. K.L Rajput

This information was not available in the provided opinion.

This information was not available in the provided opinion.

Commissioner Of Income-Tax v. Simplex Metalica

This information was not available in the provided opinion.

This information was not available in the provided opinion.

Gill Pack Ltd., Indore v. CIT

This information was not available in the provided opinion.

This information was not available in the provided opinion.

Commissioner Of Income-Tax v. Bharath Earth Movers Ltd.

This information was not available in the provided opinion.

This information was not available in the provided opinion.

Commissioner Of Income Tax, Kohlapur v. Jaykumar B. Patil

This information was not available in the provided opinion.

This information was not available in the provided opinion.

Straw Products Ltd. v. Asst. CIT

This information was not available in the provided opinion.

This information was not available in the provided opinion.

CIT v. Shri Arbuda Mills Ltd.

This information was not available in the provided opinion.

This information was not available in the provided opinion.

Sujata Grover v. Deputy CIT

This information was not available in the provided opinion.

This information was not available in the provided opinion.

Remex Constructions / Remex Electricals v. ITO

This information was not available in the provided opinion.

This information was not available in the provided opinion.

Oil India Ltd. v. CIT

This information was not available in the provided opinion.

This information was not available in the provided opinion.

Commissioner Of Income-Tax v. Gabriel India Ltd.

This information was not available in the provided opinion.

This information was not available in the provided opinion.

CIT v. Kanda Rice Mills

This information was not available in the provided opinion.

This information was not available in the provided opinion.

Commissioner Of Income-Tax v. Shiv Hari Madhu Sudan

This information was not available in the provided opinion.

This information was not available in the provided opinion.

Commissioner Of Income-Tax v. G.K. Kabra

This information was not available in the provided opinion.

This information was not available in the provided opinion.

Smt. Lila Choudhury v. CIT Precedent cited for the proposition that if the Commissioner has not applied an independent mind / no independent mind is applied by the Commissioner then revision proceedings may be invalid. The Tribunal relied on this decision to support its view that the Commissioner had not legally assumed jurisdiction under section 263 because no independent mind was applied in the revision proceedings.
B and A Plantation and Industries Ltd. v. CIT Precedent cited for the proposition that if no independent mind is applied by the Commissioner, revision proceedings are not valid. The Tribunal treated this authority as supporting the proposition that the present case involved a Commissioner who had not applied an independent mind and therefore revision under section 263 was not valid.
CIT v. Ban-warilal Banshidhar Principle cited: where a gross/gross/net profit rate is applied, it takes care of trading adjustments and there may be no need for a separate trading addition. The Tribunal relied on this decision to show that once a profit rate is applied (gross/net), separate trading additions (e.g., for WIP) may not be necessary; this supported the Tribunal's view that the AO's approach could not be treated as erroneous.
Jamnadas T. Mehta v. ITO Principle cited: scope of section 263 is to set right distortions and not to review an order; where two views are possible an Assessing Officer's choice cannot be revised unless unsustainable in law. The Tribunal relied on this decision to support its conclusion that the AO had taken one of the possible views and that section 263 could not be invoked merely because the Commissioner preferred a different view.
Mrs. Khatiza S. Oomerbhoy v. ITO Principle cited: where two views are possible and the AO takes one permissible view, the Commissioner cannot treat the order as erroneous merely because he disagrees. The Tribunal cited this authority to reinforce the proposition that divergent but permissible views taken by the AO do not render an order erroneous under section 263.
L. Saroja Principle cited: protective assessment qua the person sought to be covered under section 158BB cannot be sustained (as stated by the Tribunal). The Tribunal cited this decision to support its conclusion that a protective assessment (as to unexplained deposits) could not be sustained and therefore did not justify invoking section 263 in the assessee's case.
CIT v. Max India Ltd. Principle cited: the phrase "prejudicial to the interests of the Revenue" must be read with "erroneous"; not every loss of revenue is "prejudicial"—if the AO adopts one of two permissible courses the order is not erroneous unless unsustainable in law. The Supreme Court relied on this decision (and Malabar Industrial) to state the foundational principle that loss of revenue alone does not make an AO's order prejudicial and that section 263 cannot be invoked where the AO adopted a legally sustainable view.
Malabar Industrial Co. Ltd. v. CIT Referred to in support of the principle stated in Max India Ltd.: interpret "prejudicial to the interests of the Revenue" in conjunction with "erroneous", and the limits on revisionary power under section 263. The Court relied on Malabar Industrial as part of the authority underpinning the proposition in Max India, used to emphasize that the Commissioner cannot reopen assessments simply because another view is preferable.
Commissioner Of Income-Tax v. (1) Associated Food Products P. Ltd. Principle cited: exercise of section 263 requires the Commissioner to have formed a satisfaction based on adequate material that the AO's order is erroneous and prejudicial; two requisites must be present and the exercise is quasi-judicial, not administrative. The Supreme Court cited this decision to show that the Commissioner did not demonstrate the required satisfaction (or focus on the consequence on revenue) and therefore the revision under section 263 was impermissible in the absence of such foundation.

Court's Reasoning and Analysis

The Supreme Court framed the central inquiry as whether, given the factual matrix, the Tribunal was justified in setting aside the Commissioner of Income-tax's order under section 263. The Court proceeded as follows (relying only on the content of the opinion):

  1. The Court examined section 263, including clause (c) of subsection (1), which extends the Commissioner's powers to matters not considered and decided in an appeal. The Court emphasized that clause (c) shows the Commissioner's powers extend only to matters that were not considered and decided in an appeal.
  2. The Court reviewed the Tribunal's detailed analysis of the factual issues that the Commissioner relied upon in invoking section 263 — specifically: the alleged undervaluation of work-in-progress (WIP), the directors' salary and perquisites issue, and the unexplained deposits in the cooperative bank run by the assessee.
  3. On the WIP issue, the Tribunal found: (a) no specific evidence from the search indicated undervaluation of stock; (b) there was no physical verification of WIP on the date of search (a fact not disputed by Revenue); (c) the AO had applied section 145 (rejection of books) and used a net profit rate to compute undisclosed income (addition of Rs. 6.97 crores) and separately made a WIP-related addition of Rs. 83.99 lakhs; and (d) in subsequent regular assessments the AO applied a net profit rate and did not make a separate

    Structured Summary of the Opinion

    Factual and Procedural Background

    A search and seizure operation under section 132(1) of the Income-tax Act, 1961 was conducted at the respondent-assessee's premises from 21 February 2002 to 13 March 2002. The Assessing Officer (AO) framed a block assessment under section 158BC on 17 September 2004 and made several additions. The assessee appealed to the Commissioner of Income-tax (Appeals)-II, Bhopal, who issued an order dated 5 October 2005 allowing the appeal in part.

    The Commissioner of Income-tax (revisionary jurisdiction) examined the assessment records for the block period (1 April 1995 to 27 February 2002) and observed that the AO had failed to consider certain issues: (i) alleged undervaluation of "work-in-progress" (WIP) — discrepancy between seized documents and assessee's value amounting to Rs. 18,41,35,526; (ii) admission by a director (Shri Vijay Meerchandani) of receipt of salary and perquisites not recorded in books; (iii) inconsistency between additions made in individual director assessments and additions in the assessee-company's assessment; and (iv) unexplained deposits in the accounts of a cooperative bank run by the assessee (protective addition made in the bank's assessment which the Commissioner considered should have been considered in the assessee-company's assessment).

    The Commissioner issued a notice under section 263, concluded that the AO's assessment dated 17 September 2004 was "erroneous and prejudicial to the interest of the Revenue", set aside the assessment under section 158BC read with section 144 and directed the AO to frame the assessment afresh after proper enquiries and after affording the assessee an opportunity of hearing.

    The assessee appealed to the Income-tax Appellate Tribunal (Tribunal). The Tribunal allowed the appeal, set aside the Commissioner of Income-tax's order under section 263, and restored the Assessing Officer's assessment order. The Tribunal analysed the factual matrix (WIP, director salaries, unexplained deposits), applied the principle that where two views are possible an AO's order adopting one such view cannot be treated as erroneous unless unsustainable in law, and held that the Commissioner had not legally assumed jurisdiction under section 263. The Tribunal also clarified that its order did not express any opinion on the merits of the pending appeals against the CIT(A)'s order.

    The Revenue (appellant) sought special leave / appeal under section 260A of the Act. The Supreme Court heard argument and considered whether the Tribunal was justified in dislodging the Commissioner of Income-tax's order under section 263.

    Legal Issues Presented

    1. Whether in the obtaining factual matrix the Income-tax Appellate Tribunal was justified in holding that the action taken by the Commissioner of Income-tax under section 263 of the Income-tax Act, 1961 was not justified despite a recorded finding of suppression of work-in-progress to the extent of Rs. 18,41,35,526 (substantial question of law admitted for consideration).
    2. More broadly, whether the Tribunal was justified in dislodging the order passed by the Commissioner of Income-tax under section 263 in the factual circumstances of this case (i.e., whether the Commissioner validly exercised revisionary jurisdiction under section 263).

    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. K.L Rajput

    This information was not available in the provided opinion.

    This information was not available in the provided opinion.

    Commissioner Of Income-Tax v. Simplex Metalica

    This information was not available in the provided opinion.

    This information was not available in the provided opinion.

    Gill Pack Ltd., Indore v. CIT

    This information was not available in the provided opinion.

    This information was not available in the provided opinion.

    Commissioner Of Income-Tax v. Bharath Earth Movers Ltd.

    This information was not available in the provided opinion.

    This information was not available in the provided opinion.

    Commissioner Of Income Tax, Kohlapur v. Jaykumar B. Patil

    This information was not available in the provided opinion.

    This information was not available in the provided opinion.

    Straw Products Ltd. v. Asst. CIT

    This information was not available in the provided opinion.

    This information was not available in the provided opinion.

    CIT v. Shri Arbuda Mills Ltd.

    This information was not available in the provided opinion.

    This information was not available in the provided opinion.

    Sujata Grover v. Deputy CIT

    This information was not available in the provided opinion.

    This information was not available in the provided opinion.

    Remex Constructions / Remex Electricals v. ITO

    This information was not available in the provided opinion.

    This information was not available in the provided opinion.

    Oil India Ltd. v. CIT

    This information was not available in the provided opinion.

    This information was not available in the provided opinion.

    Commissioner Of Income-Tax v. Gabriel India Ltd.

    This information was not available in the provided opinion.

    This information was not available in the provided opinion.

    CIT v. Kanda Rice Mills

    This information was not available in the provided opinion.

    This information was not available in the provided opinion.

    Commissioner Of Income-Tax v. Shiv Hari Madhu Sudan

    This information was not available in the provided opinion.

    This information was not available in the provided opinion.

    Commissioner Of Income-Tax v. G.K. Kabra

    This information was not available in the provided opinion.

    This information was not available in the provided opinion.

    Smt. Lila Choudhury v. CIT Precedent cited for the proposition that if the Commissioner has not applied an independent mind / no independent mind is applied by the Commissioner then revision proceedings may be invalid. The Tribunal relied on this decision to support its view that the Commissioner had not legally assumed jurisdiction under section 263 because no independent mind was applied in the revision proceedings.
    B and A Plantation and Industries Ltd. v. CIT Precedent cited for the proposition that if no independent mind is applied by the Commissioner, revision proceedings are not valid. The Tribunal treated this authority as supporting the proposition that the present case involved a Commissioner who had not applied an independent mind and therefore revision under section 263 was not valid.
    CIT v. Ban-warilal Banshidhar Principle cited: where a gross/gross/net profit rate is applied, it takes care of trading adjustments and there may be no need for a separate trading addition. The Tribunal relied on this decision to show that once a profit rate is applied (gross/net), separate trading additions (e.g., for WIP) may not be necessary; this supported the Tribunal's view that the AO's approach could not be treated as erroneous.
    Jamnadas T. Mehta v. ITO Principle cited: scope of section 263 is to set right distortions and not to review an order; where two views are possible an Assessing Officer's choice cannot be revised unless unsustainable in law. The Tribunal relied on this decision to support its conclusion that the AO had taken one of the possible views and that section 263 could not be invoked merely because the Commissioner preferred a different view.
    Mrs. Khatiza S. Oomerbhoy v. ITO Principle cited: where two views are possible and the AO takes one permissible view, the Commissioner cannot treat the order as erroneous merely because he disagrees. The Tribunal cited this authority to reinforce the proposition that divergent but permissible views taken by the AO do not render an order erroneous under section 263.
    L. Saroja Principle cited: protective assessment qua the person sought to be covered under section 158BB cannot be sustained (as stated by the Tribunal). The Tribunal cited this decision to support its conclusion that a protective assessment (as to unexplained deposits) could not be sustained and therefore did not justify invoking section 263 in the assessee's case.
    CIT v. Max India Ltd. Principle cited: the phrase "prejudicial to the interests of the Revenue" must be read with "erroneous"; not every loss of revenue is "prejudicial"—if the AO adopts one of two permissible courses the order is not erroneous unless unsustainable in law. The Supreme Court relied on this decision (and Malabar Industrial) to state the foundational principle that loss of revenue alone does not make an AO's order prejudicial and that section 263 cannot be invoked where the AO adopted a legally sustainable view.
    Malabar Industrial Co. Ltd. v. CIT Referred to in support of the principle stated in Max India Ltd.: interpret "prejudicial to the interests of the Revenue" in conjunction with "erroneous", and the limits on revisionary power under section 263. The Court relied on Malabar Industrial as part of the authority underpinning the proposition in Max India, used to emphasize that the Commissioner cannot reopen assessments simply because another view is preferable.
    Commissioner Of Income-Tax v. (1) Associated Food Products P. Ltd. Principle cited: exercise of section 263 requires the Commissioner to have formed a satisfaction based on adequate material that the AO's order is erroneous and prejudicial; two requisites must be present and the exercise is quasi-judicial, not administrative. The Supreme Court cited this decision to show that the Commissioner did not demonstrate the required satisfaction (or focus on the consequence on revenue) and therefore the revision under section 263 was impermissible in the absence of such foundation.

    Court's Reasoning and Analysis

    The Supreme Court's analysis, as reflected in the opinion, proceeded on the following reasoning (presented step by step and limited to the text of the opinion):

    1. The Court observed that section 263(1)(c) extends the Commissioner’s powers only to matters that had not been considered and decided in an appeal. Therefore, if an appellate authority (CIT(A)) has considered an issue, the Commissioner cannot, in exercise of section 263, revisit that same issue merely because he disagrees with the appellate view.
    2. The Court noted the Tribunal had closely examined the factual matrix on three core facets raised by the Commissioner: (a) the alleged suppression/undervaluation of work-in-progress; (b) alleged undisclosed payment of salary and perquisites to directors; and (c) unexplained deposits in the cooperative bank and the protective additions in the bank's assessment. The Tribunal concluded these matters had been examined and dealt with by the Commissioner of Income-tax (Appeals) in its order dated 5 October 2005.
    3. On the WIP issue, the Tribunal's factual findings (as recorded and reproduced by the Court) included that no specific evidence from the search proved undervaluation of stock, there was no dispute that no physical verification of WIP was done on the date of search, the AO had rejected books under section 145 and applied a net profit rate to compute undisclosed income, and that in subsequent assessments the AO did not make a separate WIP addition because the profit-rate approach operated to cover trading adjustments (a position supported by the Ban-warilal decision cited by the Tribunal). The Tribunal concluded the AO had taken one of the possible views and therefore the AO's order could not be treated as erroneous and prejudicial merely because the Commissioner disagreed.
    4. Regarding payment of salary to directors, the Tribunal noted that the Commissioner had based his conclusion in part on a statement of one director (Vijay Meerchandani) which had not been confronted to other directors or the assessee-company; the Tribunal relied upon the principle that a third person's statement cannot be used as evidence against another unless it was put to that other person. The Tribunal also recorded that the AO had made additions and that the CIT(A) had deleted those additions; on the principle of merger the Commissioner could not validly take up the same matter under section 263.
    5. As to unexplained deposits/protective additions, the Tribunal pointed out timing facts: the assessee's block assessment was dated 17 September 2004, whereas the bank's block assessment was passed on 7 February 2005 — therefore on the date of the assessee's assessment the bank's order did not exist and could not have been considered by the AO. The Tribunal held that the AO and the CIT(A) had considered the issue and, again invoking merger, concluded there was no basis for section 263 proceedings on this ground.
    6. The Court referred to higher authority (CIT v. Max India Ltd. and Malabar Industrial Co. Ltd.) for the legal proposition that the phrase "prejudicial to the interests of the Revenue" must be read with "erroneous": loss of revenue per se is not sufficient; where two views are possible and the AO takes one permissible view, the Commissioner cannot treat the order as erroneous unless the view is unsustainable in law.
    7. The Court further relied on the Associated Food Products judgment (quoted by the Court in the opinion) to note that exercise of section 263 is quasi-judicial and requires formation of an opinion based on adequate material that the AO's order is erroneous and prejudicial; the Commissioner must show satisfaction and focus on the consequence for revenue — mere conclusion that AO's order is wrong is not enough.
    8. Applying these legal principles and reviewing the Tribunal’s detailed factual appraisal, the Court concluded that the Tribunal had properly considered the facts, that the CIT(A) had dealt with the matters, and therefore the Commissioner of Income-tax was not competent to assume revisionary jurisdiction under section 263 in the facts of this case.
    9. The Court observed that the Tribunal expressly stated that its findings would not amount to an expression of opinion on the merits of the case (i.e., the Tribunal confined itself to the limited question of validity of revision under section 263).

    Holding and Implications

    Holding: The Supreme Court dismissed the appeal of the Revenue and thereby upheld the Tribunal's decision. The core ruling is emphasized as:

    APPEAL DISMISSED

    Direct implications (as set out in the opinion):

    • The order of the Commissioner of Income-tax dated 8 December 2006 (exercising jurisdiction under section 263 and setting aside the AO's assessment) is set aside.
    • The order of the Assessing Officer dated 17 September 2004 (block assessment under section 158BC read with section 144) is restored.
    • There shall be no order as to costs.

    Broader implications: The opinion holds that where an appellate authority (CIT(A)) has considered an issue, and where the AO has adopted one of two permissible views — and that view is sustainable in law — the Commissioner cannot exercise revisionary jurisdiction under section 263 merely because he disagrees. The Court found no substantial question of law arose from the facts of this case. The opinion does not purport to lay down any novel general proposition beyond applying settled principles (i.e., it restores the Tribunal's factual conclusion and relies on existing authorities).

Show all summary ...

The judgment of the court was delivered by

Dipak Misra, J.:— The present appeal preferred under section 260A of the Income-tax Act, 1961 (for brevity “the Act”), was admitted on the following substantial question of law:

“Whether in the obtaining factual matrix, the Income-tax Appellate Tribunal is justified in holding that the action taken by the Commissioner of Income-tax under section 263 of the Act is not justified despite the fact that a finding had been recorded by the said authority as regards the suppression of work-in-progress for a sum of Rs. 18,41,35,526?”

2. The facts which are necessary to be adumbrated for adjudication of this appeal are, that a search and seizure operation was carried out under section 132(1) of the Act in the premises of the respondent-assessee and the said operation commenced on February 21, 2002, and was concluded on March 13, 2002. The Assessing Officer framed the block assessment order under section 158BC on September 17, 2004, and made several additions against the assessee. Being dissatisfied with the aforesaid order the assessee preferred an appeal before the Commissioner of Income-tax (Appeals)-II, Bhopal, who, vide order dated October 5, 2005, allowed the appeal in part. When the matter stood thus, the Commissioner of Income-tax, Bhopal, examined all the records of the assessment of the assessee-respondent for the block period April 1, 1995, to February 27, 2002, and observed that while framing the order of assessment on September 17, 2004, for the block period the Assessing Officer had failed to consider certain issues, namely, (i) from the project, wise analysis it was perceptible the “work-in-progress” as per the seized documents amounted to Rs. 26,83,97,827 as against Rs. 8,42,62,301 as arrived at by the assessee which resulted in undervaluation of the work-in-progress to the extent of Rs. 18.41 crores; (ii) that Shri Vijay Mirchan-dani, director of the company had categorically admitted to have received the salary and perquisite which were not recorded in the books of account of the assessee-company; (iii) that the Assessing Officer in the individual case of the directors had held that each director had been paid salary and perquisites to the tune of Rs. 84,000 but while framing the assessment of the assessee salary and perquisites of only one director was added to the income of the assessee-company; and (iv) that during the assessment proceedings of M/s. Jhemeshwar Nagrik Sahkari Bank Ltd., which is run by the assessee, it could not explain the deposit of Rs. 79,40,246 and, therefore, the addition of the said amount was made in the case of the bank on protective basis with the finding that the above addition should be considered on substantive basis in the hands of various depositors and also protective addition should be made in the hands of the assessee but the same was not considered by the Assessing Officer while framing the assessment in the assessee-company's case. Because of the aforesaid grounds the assessment order was considered to be erroneous and prejudicial to the interest of the Revenue and a notice under section 263 of the Act was issued to the assessee. The Commissioner of Income-tax considered both the submissions of the assessee and upon a perusal of the assessment records came to hold that the assessment order passed by the Assessing Officer on September 17, 2004, was erroneous and prejudicial to the interest of the Revenue and accordingly in exercise of jurisdiction under section 263 of the Act set aside the assessment made under section 158BC read with section 144 of the Act and directed the Assessing Officer to frame the assessment de novo after carrying out proper inquiries and investigation after affording an opportunity of hearing to the assessee.

3. Being aggrieved by the aforesaid order the assessee preferred an appeal before the Tribunal and the Tribunal allowed the appeal and set aside the order of the Commissioner of Income-tax and restored that of the Assessing Officer. The Tribunal referred to the decisions rendered in CIT v. K.L Rajput, [1987] 164 ITR 197 (MP) [FB]; Commissioner Of Income-Tax v. Simplex Metalica, [1987] 164 ITR 202 (MP) [FB], Gill Pack Ltd., Indore v. CIT, 4 TTJ 326, Commissioner Of Income-Tax v. Bharath Earth Movers Ltd., [1998] 234 ITR 535 (Kam), Commissioner Of Income Tax, Kohlapur v. Jaykumar B. Patil, [1999] 236 ITR 469 (SC), Straw Products Ltd. v. Asst. CIT, [2001] 252 ITR 444 (Cal), CIT v. Shri Arbuda Mills Ltd., [1998] 231 ITR 50 (SC), Sujata Grover v. Deputy CIT, [2002] 74 TTJ (Delhi) 347, Remex Constructions/Remex Electricals v. ITO (First), [1987] 166 ITR 18 (Bom), Oil India Ltd. v. CIT, [1982] 138 ITR 836 (Cal), Commissioner Of Income-Tax v. Gabriel India Ltd., [1993] 203 ITR 108 (Bom), CIT v. Kanda Rice Mills, [1989] 178 ITR 446 (Commissioner Of Income-Tax v. Shiv Hari Madhu Sudan, [1998] 233 ITR 649 (Raj) and Commissioner Of Income-Tax v. G.K Kabra., [1995] 211 ITR 336 (AP) and many other decisions and eventually concluded as follows:

“11. As noted above, the Assessing Officer has examined all the seized records and investigated all the issues subject-matter of the proceeding under section 263 and thereby took one of the possible views in the matter while framing the block assessment order, the order of the Assessing Officer cannot be treated as erroneous and prejudicial to the interest of the Revenue. The reply of the assessee is not considered by the learned Commissioner of Income-tax in proper perspective and hence proceedings under section 263 are not valid. We are fortified in our view by the decision of the Gauhati High Court in the case of Smt. Lila Choudhury v. CIT, [2007] 289 ITR 226, the hon'ble Gauhati High Court in the case of B and A Plantation and Industries Ltd. v. CIT, [2007] 290 ITR 395 (Gauhati) held that if no independent mind applied by the Commissioner, revision proceeding not valid. The present case before us appears to be the same. The decision cited by learned Departmental representative are, therefore, clearly distinguishable on facts and are not applicable to advance the contention of the learned senior Departmental representative.

12. Considering the facts, circumstances and discussion above, we are of the view that the learned Commissioner of Income-tax has not legally assumed the jurisdiction under section 263 of the Income-tax Act. The order of the learned Commissioner of Income-tax dated December 8, 2006, is set aside and quashed. The order of the Assessing Officer is restored. The appeal of the assessee is accordingly allowed.”

4. It is worth noting the Tribunal further clarified that as the appeals preferred by the assessee and the Department were pending disposal before the Tribunal against the order of the Commissioner of Income-tax (Appeals) dated October 5, 2005, the finding and observation given in the order of the Tribunal shall not tantamount to expression of any opinion on the merits of the case.

5. We have heard Mr. Rohit Arya, learned senior counsel along with Mr. Sanjay Lal for the appellant-Revenue and Mr. Sumit Nema, learned counsel for the respondent.

6. The real thrust of the matter is whether in the obtaining factual matrix the Tribunal is justified in dislodging the order passed by the Commissioner of Income-tax under section 263 of the Act. Section 263 of the Act reads as under:

“263. Revision of orders prejudicial to Revenue.—(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 cancelling 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,—

(a) an order passed on or before or after the 1st day of June, 1988, by the Assessing Officer shall include—

(i) an order of assessment made by the Assistant Commissioner or Deputy Commissioner or the Income-tax Officer on the basis of the directions issued by the Joint Commissioner under section 144A;

(ii) an order made by the Joint Commissioner in exercise of the powers or in the performance of the functions of an Assessing Officer conferred on, or assigned to him under the orders or directions issued by the Board or by the Chief Commissioner or Director General or Commissioner authorised by the Board in this behalf under section 120;

(b) ‘record’ shall include and shall be deemed always to have included all records relating to any proceeding under this Act available at the time of examination by the Commissioner;

(c) where any order referred to in this sub-section and passed by the Assessing Officer had been the subject-matter of any appeal, filed on or before or after the 1st day of June, 1988, the powers of the Commissioner under this sub-section shall extend and shall be deemed always to have extended to such matters as had not been considered and decided in such appeal.”

7. On a perusal of clause (c) of the aforesaid provision it is vivid that the aforesaid section clearly stipulates that the powers of the Commissioner shall extend to such matters as had not been considered and decided in such appeal. On a perusal of the order passed by the learned Commissioner in exercise of powers under section 263 of the Act the first issue that arises for consideration relates to work-in-progress. On a perusal of the order passed by the Commissioner of Income-tax (Appeals), dated October 5, 2005, it is luminescent that the appellate authority has adverted to the same. The Tribunal while dwelling upon the same has opined thus:

“8.2 It is not in dispute that in this case search was concluded in the assessee's group and as such block assessment was passed. We are of the view that even if there is an amendment in Chapter XIX-B in the definition of undisclosed income under section 158B(b) and 158BB(1), the scheme or purpose of enacting Chapter XTV-B has not undergone a major change in the sense that the block assessment pertained to a number of years distinct from assessment under section 143(3) pertaining to a single assessment year. The block assessment could be made in respect of undisclosed income if during the block period undisclosed income is recovered as a result of evidence found during the course of search and not as a result of other documents or material which came to possession of the Assessing Officer subsequent to the conclusion of search operation unless and until such material or document is relatable to such evidence recovered during the course of the search. The amended definition of section 158BB clearly suggests that some evidence is to be found as result of search operation and it is only thereafter the remaining part of the provision come into play. The ‘work-in-progress’ is a part of trading item and in the case of the assessee could also be treated as stock-in-trade. No specific evidence or material is found during the course of search to show that the assessee shown under valuation of the stock. The details filed by the learned Departmental representative in the paper book are the calculation of the Assessing Officer. It is settled accounting position that closing stock could be shown in the accounts/balance-sheet at the end of the accounting year. No evidence is brought on record that the assessee could not show the details of ‘work-in-progress’/closing stock in the balance-sheet and the regular returns. Learned counsel for the assessee vehemently submitted that no physical verification of ‘work-in-progress’ was done on the date of the search. This contention of the learned counsel for the assessee is not in dispute by the Revenue. The Assessing Officer considering the reply of the assessee and explanation on the ‘work-in-progress’, expenses, and examining the books of account was of the view that the assessee has not produced complete books of account because the same were incomplete. The only option left with the Assessing Officer was to reject the books results of the assessee under section 145 of the Income-tax Act which the Assessing Officer did in this case and took the figure of disclosed sales and undisclosed sales and directed to apply net profit rate of 15 per cent, on the consolidated sales to make the addition of Rs. 6.97 crores being undisclosed income in the block period. Separate addition in one year was also made on account of ‘work-in-progress’ being undisclosed income in a sum of Rs. 83.99 lakhs. It is not a denying of fact that in the subsequent assessment years 2002–03 and 2003–04 the Assessing Officer after the block assessment order on the same set of facts did not make separate addition on account of undisclosed ‘work-in-progress’ because he has applied a net profit rate of 10 per cent, to work out the profit. The hon'ble Allahabad High Court in the case of CIT v. Ban-warilal Banshidhar, [1998] 229 ITR 229 held that once the gross profit rate is applied, it would take care of everything and there is no need to make separate (trading) addition. In this case separate addition was made on account of bogus purchase which order of the authorities below was not approved. The above facts, therefore, show that when the Assessing Officer applied a net profit rate of 15 per cent, though in the subsequent regular assessment the Assessing Officer in the case of the same assessee on the identical facts applied a net profit rate of 10 per cent. Therefore there is no reason to term the order of the Assessing Officer to be erroneous and prejudicial to the interest of the Revenue. The Income-tax Appellate Tribunal, Pune Bench, (Third Member) in the case of Jamnadas T. Mehta v. ITO, [2002] 257 ITR (AT) 90 (Pune) held that the scope of section 263 can be resorted to only for setting right distortions and not for reviewing the order of the Income-tax Officer. The Assessing Officer taking note of two possible views cannot be revised. It was further held where two views are possible, and the Assessing Officer has taken one view with which the Commissioner of Income-tax does not agree it cannot be treated as an erroneous order prejudicial to the interest of the Revenue, unless the view taken by the Assessing Officer is unsustainable in law. The Income-tax Appellate Tribunal, Mumbai Bench in the case of Mrs. Khatiza S. Oomerbhoy v. ITO, [2006] 100 ITD 173, took the same view and held that every loss of the Revenue cannot be treated as prejudicial and if the Assessing Officer has adopted one of the courses permissible under the law of where two views are possible and the Assessing Officer has taken the one to which the Commissioner of Income-tax does not agree the order cannot be treated as erroneous. Considering the finding in the impugned order, we find that even the learned Commissioner of Income-tax did not mention that the view adopted by the Assessing Officer was not possible or sustainable in law. The similar issue is considered by the learned Commissioner of Income-tax (Appeals) in the order dated October 5, 2005. Therefore, on the principle of merger, the learned Commissioner of Income-tax was also not justified in invoking the jurisdiction under section 263 of the Income-tax Act.”

8. As regards payment of salary to the directors the Tribunal in paragraph 8.3 has expressed the view as under:

“8.3 The learned Commissioner of Income-tax in paragraph 4 of the impugned order noted that one of the directors Shri Vijay Meer-chandani admitted in statement to have received salary/perquisite from the assessee-company, which raises the doubt that the other directors might have also received the salary. The learned Commissioner of Income-tax noted that this issue was taken up in the cases of all the directors in their individual cases and additions are made. Therefore, on the same pattern he was of the view that addition should be considered in the case of the assessee-company. The learned Commissioner of Income-tax also noted that in the individual cases the learned Commissioner of Income-tax (Appeals) deleted the addition. On going through these facts we find that the learned Commissioner of Income-tax merely on presumption found that the order of the Assessing Officer is erroneous and prejudicial to the interest of the Revenue on account of payment of salary and perquisite to the directors. The Commissioner of Income-tax (Appeals) in the case of Harish Meerchandani, one of the directors vide order dated April 25, 2005, deleted the similar addition in his individual case in the block assessment. The basis of the learned Commissioner of Income-tax has therefore, no leg to stand and, therefore, cannot be the basis for reopening the assessment under section 263 of the Income-tax Act. It is also settled law that statement of third person cannot be read in evidence unless it is put to the person against whom it has to used in evidence. At no stage such statement of Vijay Meerchandani was confronted to any of the other directors or the assessee-company and nothing is specified as to how it has any relevance in their cases. Therefore, there is no basis to initiate proceedings under section 263 on this issue. Moreover, this fact is recorded by the Assessing Officer in the assessment order at pages 79, 80 and 96 and made the addition in the case of the assessee-company in a sum of Rs. 3,00,000 each in all the block assessment. The learned Commissioner of Income-tax (Appeals) vide order dated October 5, 2005 deleted the same addition therefore, on the principle of merger, such matter could not be taken up by the learned Commissioner of Income-tax under section 263 of the Income-tax Act.”

9. As far as unexplained deposit is concerned, the Tribunal in paragraph 8.4 has stated thus:

“8.4 The learned Commissioner of Income-tax in paragraph 5 also noted that protective assessment is to be made in the case of the assessee being unexplained deposits in the case of Jhameshwar Nagrik Sahkari Bank Ltd., the Assessing Officer made addition of Rs. 85 lakhs on this issue in the block assessment order being unexplained deposit in Jharneshwar Nagrik Sahkari Bank Ltd. The learned Commissioner of Income-tax (Appeals) deleted the addition, vide order dated October 5, 2005. Even as per the learned Commissioner of Income-tax the deposits were in the names of various account holders and, therefore, directed that this issue ought to have been considered in the assessment of the present assessee. The block assessment order in the case of the assessee was made on September 17, 2004, whereas block assessment order in the case of Jhameshwar Nagrik Sahkari was passed on February 7, 2005, therefore, there is no question of the same being considered in the case of the assessee-company because on the date of the block assessment order, the assessment order of the bank did not exist. Since this issue is considered in detail by the Assessing Officer as well as by the learned Commissioner of Income-tax (Appeals), therefore, on the principle of merger the same could not have been considered in the proceeding under section 263 of the Income-tax Act. The Income-tax Appellate Tribunal, Madras Bench, in the case of L. Saroja, [2001] 76 ITD 344, held that protective assessment qua the person sought to be covered under section 158BB cannot be sustained. Therefore, there is no basis for initiating the proceedings under section 263 on this issue.”

10. From the aforesaid it is crystal clear that the Tribunal has adverted to the factual position in a detailed manner and has appreciated those issues that have been taken up by the Commissioner of Income-tax while exercising jurisdiction under section 263 of the Act it and has held that the said facets have already been dealt with by the Commissioner of Income-tax (Appeals) and, therefore, by virtue of clause (c) of section 263(1) the Commissioner of Income-tax was not competent to assume the jurisdiction and direct for reassessment. In this context we may profitably refer to the decision in CIT v. Max India Ltd., [2007] 295 ITR 282 (SC) wherein their Lordships relying on the earlier decision rendered in Malabar Industrial Co. Ltd. v. CIT, [2000] 243 ITR 83 (SC) has held thus (headnote):

“The phrase ‘prejudicial to the interests of the Revenue’ in section 263 of the Income-tax Act, 1961, has to be read and in conjunction with the expression ‘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 interest of the Revenue. For example, when the Assessing Officer adopts one of the two courses permissible in law and it has resulted in loss of revenue, or where two views are possible and the Assessing Officer has taken one view with which the Commissioner does not agree, it cannot be treated as an erroneous order prejudicial to the Revenue, unless the view taken by the Assessing Officer is unsustainable in law.”

11. In this regard we may fruitfully refer to the decision in Commissioner Of Income-Tax v. (1) Associated Food Products P. Ltd., [2006] 280 ITR 377 (MP) wherein it has been held as under (page 384):

“In view of the aforesaid pronouncement of law and taking into consideration the language employed under section 263 of the Act, it is clear as crystal that before exercise of powers two requisites are imperative to be present. In the absence of such foundation exercise of a suo motu power is impermissible. It should not be presumed that initiation of power under suo motu revision is merely an administrative act. It is an act of a quasi-judicial authority and based on formation of an opinion with regard to existence of adequate material to satisfy that the decision taken by the Assessing Officer is erroneous as well as prejudicial to the interests of the Revenue. The concept of ‘prejudicial to the interests of the Revenue’ has to be correctly and soundly understood. It precisely means an order which has not been passed in consonance with the principles of law which has in ultimate eventuality affected realisation of lawful revenue either by the State has not been realised or it has gone beyond realisation. These two basic ingredients have to be satisfied as sine qua non for exercise of such power. On a perusal of the material brought on record and the order passed by the Commissioner it is perceptible that the said authority has not kept in view the requirement of section 263 of the Act inasmuch as the order does not reflect any kind of satisfaction. As is manifest the said authority has been governed by a singular factor that the order of the Assessing Officer is wrong. That may be so but that is not enough. What was the sequitur or consequence of such order qua prejudicial to the interest of the Revenue should have been focussed upon. That having not been done, in our considered opinion, exercise of jurisdiction under section 263 of the Act is totally erroneous and cannot withstand scrutiny. Hence, the Tribunal has correctly unsettled and dislodged the order of the Commissioner.”

12. In the case at hand, as is evident from the order passed by the Tribunal, the Tribunal has adverted to the facts in detail and has expressed the view that the Commissioner of Income-tax (Appeals) had dealt with the aspects in his order dated October 5, 2005. Once the same has been dealt with, in exercise of appellate jurisdiction, the order cannot be regarded as incorrect and prejudicial to the interest of the Revenue on the basis of which the Commissioner of Income-tax can exercise jurisdiction under section 263 of the Act. We have reproduced the paragraphs in extenso from the order passed by the Tribunal only to highlight that the matter has been dealt with by the Commissioner of Income-tax (Appeals) and the Tribunal has analysed the same in proper perspective. It is also worth noting that the Tribunal has expressed the view that the finding given by the Tribunal would not tantamount to expressing on the merits of the case. In our considered opinion, the entire case hinges on facts and the Tribunal has properly dealt with it and, therefore, no substantial question of law arises.

13. Consequently, the appeal has to pave the path of dismissal, which we direct. There shall be no order as to costs.