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.