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M/S Rain Commodities Ltd., Hyderabad () v. The Dy. Cit 3(1), Hyderabad ().

Income Tax Appellate Tribunal

Dec 24, 2010

Judgment

Subsequent
References

CaseIQ

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Summary of the Tax Appeal Opinion (Accountant Member: Chandra Poojari)

Factual and Procedural Background

The assessee is a limited company incorporated on 15-3-1974 engaged in manufacturing and trading of cement. The assessee filed its return of income on 31-10-2004 and the assessment under section 143(3) was completed by an order dated 8-12-2006.

The Commissioner of Income Tax (CIT) issued a notice under section 263 dated 11-7-2008 alleging that the Assessing Officer's (AO's) order was erroneous and prejudicial to the interests of revenue because the AO omitted to assess profit under section 115JB, resulting in a short computation of tax of Rs. 7,33,55,613.

The assessee submitted written submissions (dated 20-8-2008) contending that gains arising on transfer of assets to a wholly owned subsidiary are exempt under section 47(iv) and therefore not taxable under section 115JB, relying on judicial precedents. The assessee also challenged the validity of section 263 proceedings (contention stated in the record).

The CIT passed an order under section 263 directing the AO to recompute book profit by treating the gain arising on transfer of assets to the subsidiary (RIL) — which the assessee claimed was exempt under section 47(iv) — as part of book profit. The assessee appealed to the Tribunal.

The Tribunal referred the matter to a Special Bench. The Special Bench (in Rain Commodities Ltd. v. Dy. CIT [2010] 40 SOT 265 (Hyd.)) held that section 47(iv) has no application in computing book profits under section 115JB and that computation of income under normal provisions and computation of book profit under section 115JB are two parallel computations; accordingly, exempt capital gains are not excluded from book profit unless the statute so provides.

The assessee filed a Miscellaneous Application under section 254(2) raising two specific questions: (i) whether the AO has power to recompute book profits under section 115JB by considering the profit & loss account prepared as per Schedule VI of the Companies Act, 1956; and (ii) whether the Commissioner was justified in invoking section 263. The Tribunal (MA No.128/H/2010) held there was no error in the Special Bench's order and directed the division bench to consider the legality of the exercise of jurisdiction under section 263, which was taken up for adjudication.

Legal Issues Presented

Whether the Assessing Officer has the power to recompute the book profits under section 115JB of the Income-tax Act by considering the profit and loss account prepared as per Schedule VI of the Companies Act, 1956.
Whether the Commissioner was justified in invoking the provisions of section 263 of the Income-tax Act (i.e., whether the CIT could revise the AO's order on the grounds that it was erroneous and prejudicial to the interests of revenue).
Whether section 263 can be invoked where the Assessing Officer had, according to the assessee, made full disclosure and taken one of the possible views (i.e., whether a difference of opinion or reliance on judicial precedents available to the AO would preclude exercise of revisionary jurisdiction).

Arguments of the Parties

Assessee's Arguments

The gain arising on transfer of assets to a wholly owned subsidiary is exempt under section 47(iv) and therefore should not be included in computation of book profits under section 115JB.
The Assessing Officer had before him all documents and information and had applied his mind; he adopted one of the possible views supported by judicial precedents, so the CIT could not invoke section 263 merely because the CIT disagreed with that view (i.e., no mere change of opinion justification for revision).
The judicial precedents relied upon during assessment were in favour of the assessee; there was no adverse judicial precedent on point at the time and, therefore, proceedings under section 263 were invalid and void ab initio.
The assessee relied specifically on Malabar Industrial Co. Ltd. v. CIT, Mrs. Khatiza S. Oomerbhoy v. ITO, and Mrs. Girdharilal B. Rohra v. CIT to show limitations on the scope of section 263.

Departmental Representative's Arguments

The Assessing Officer did not compute income under section 115JB at all and did not discuss the treatment of profit on sale of assets to the subsidiary in the assessment proceedings; the AO failed to consider the issue and this constitutes an error prejudicial to revenue.
Failure by the AO to examine relevant issues or to make inquiries that should have been made amounts to an erroneous order prejudicial to the interest of the revenue and justifies the CIT invoking section 263.
The Department relied on several authorities (Gee Vee Enterprises, Emery Stone Manufacturing Co., Duggal & Co., Bhagwan Das, Thermal Systems (Hyd.) (P.) Ltd., and Appollo Tyres Ltd. v. CIT) to support the proposition that the CIT may revise an AO's order where the AO has failed to make requisite inquiries or apply his mind leading to prejudice to revenue.

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
Rain Commodities Ltd. v. Dy. CIT [2010] 40 SOT 265 (Hyd.)	Held that section 47(iv) has no application in the computation of book profits under section 115JB; computation under normal provisions and book profit computation are parallel, and exempt capital gains are not excluded from book profit unless statute provides.	The Special Bench's conclusion that exempt capital gains under section 47(iv) are not excluded from book profits under section 115JB is set out as background and formed part of the factual-procedural matrix relied on in the present proceedings.
Malabar Industrial Co. Ltd. v. CIT [2000] 243 ITR 83/109 Taxman 66 (SC)	Every loss of revenue does not necessarily amount to being prejudicial to the interests of revenue; if the AO adopts one of the courses permissible in law or takes one of two possible views, that alone does not make the order erroneous unless the view is unsustainable in law.	The court relied on this principle to frame the threshold for invoking section 263 — distinguishing between permissible differences of view and orders that are unsustainable in law causing prejudice.
Mrs. Khatiza S. Oomerbhoy v. ITO [2006] 100 ITD 173 (Mum.)	Enumerated principles for exercise of section 263: CIT must record satisfaction that AO's order is both erroneous and prejudicial; incorrect assumption of facts or law suffices; section 263 not for correcting every mistake; an order without application of mind is erroneous; CIT must have material on record to form satisfaction; if AO examined accounts and applied mind, CIT cannot substitute his estimate.	The court used these detailed principles to set out the legal limits and safeguards governing invocation of section 263, and to assess whether those requirements were met on the facts.
Mrs. Girdharilal B. Rohra v. CIT [2004] 86 TTJ (Mum.) 177	To assume jurisdiction under section 263, the CIT must be prima facie satisfied, based on material on record, that the AO's order is erroneous and prejudicial; the power cannot be exercised casually or arbitrarily and needs material showing how lack of enquiry caused prejudice.	The court relied on this authority to emphasize that the CIT's satisfaction must be based on material and that mere assertion without material is insufficient; it applied this standard in evaluating the AO's conduct and the CIT's invocation of section 263.
Gee Vee Enterprises v. Additional Commissioner of Income Tax [1975] 99 ITR 375 (Delhi)	Authority cited in support of the proposition that failure to examine or inquire into material matters may render an AO's order open to revision as being erroneous and prejudicial to revenue.	The Department relied on this case to show precedent for revising orders where the AO failed to make necessary inquiries; the court considered it among authorities supporting exercise of section 263 in such circumstances.
CIT v. Emery Stone Manufacturing Co. [1995] 213 ITR 843/83 Taxman 643 (Raj.)	Authority cited for supporting the view that the AO's failure to examine issues can justify revision under section 263.	The court noted this and similar authorities as supporting the Department's stance that failure of the AO to examine the section 115JB issue amounted to an erroneous order prejudicial to revenue.
Duggal & Co. v. CIT [1996] 220 ITR 456/[1994] 77 Taxman 331 (Delhi)	Another authority cited for the principle that lack of proper inquiry by the AO may render the order erroneous and prejudicial.	Relied upon by the Department and noted by the court as part of the body of jurisprudence supporting exercise of revisionary powers where the AO has not applied his mind.
CIT v. Bhagwan Das [2005] 272 ITR 367/142 Taxman 1 (All.)	Cited to support the proposition that revision under section 263 is available where an order is erroneous and prejudicial, particularly due to failures in the assessment process.	Included among the authorities that the departmental representative relied on; the court considered these authorities in framing the applicable legal principles.
Thermal Systems (Hyd.) (P.) Ltd. v. Asstt. CIT [2010] 122 ITD 376 (Hyd.)	Cited in support of the Department's contention that the Assessing Officer's failure to examine relevant issues may warrant exercise of revisionary powers.	Noted by the court as one of the precedents relied on by the Department in arguing that the AO had not applied his mind and that the order was erroneous and prejudicial.
Appollo Tyres Ltd. v. CIT [2002] 255 ITR 273/122 Taxman 562 (SC)	Cited by the Department as an authority relevant to the scope of revisionary powers and prejudice to revenue (specific principle as cited in the record: supportive of the Department's position).	Referenced by the Department and considered by the court among the authorities supporting the propriety of invoking section 263 where an AO's order is shown to be erroneous for lack of enquiry or application of mind.

Court's Reasoning and Analysis

The court undertook a structured examination of the authorities and the facts on record to decide whether the CIT was justified in invoking section 263.

First, the court distilled the legal principles from the authorities relied upon by both sides:

From Malabar Industrial Co. Ltd., the court extracted that not every loss of revenue arising from an AO's order is necessarily prejudicial to the interests of revenue; when an AO adopts a course permissible in law or takes one of two possible views, such an order is not erroneous for purposes of section 263 unless the view is unsustainable in law.
From Mrs. Khatiza S. Oomerbhoy, the court set out a set of safeguards and requirements for exercise of revisionary power under section 263: the CIT must record satisfaction that the order is both erroneous and prejudicial; an incorrect assumption of fact or law can make an order erroneous; section 263 is not a tool to correct every mistake; an order without application of mind is erroneous; the CIT must have material on record to reach satisfaction; and if the AO examined accounts and applied his mind, the CIT cannot substitute his view.
From Mrs. Girdharilal B. Rohra, the court emphasized that the CIT's assumption of jurisdiction under section 263 must be based on material on record and cannot be casual or arbitrary; the CIT must point to material showing how lack of enquiry caused prejudice to revenue.

Having set out these legal principles, the court examined the assessment order and the record. The court observed:

The Assessing Officer did not apply his mind to the provisions of section 115JB: no separate computation or discussion of book profit was recorded, and there was no discussion or methodology of computation in the assessment order.
The AO appeared to have accepted the assessee's computation of book profit as furnished, without conducting the necessary enquiries or recording reasons for acceptance; the assessment order was cryptic and silent on the issue raised by the CIT.
No additional facts, according to the court, were necessary for the AO to conclude that the book profit under section 115JB was wrongly computed; the AO failed to examine the facts and did not record reasons for his conclusion.
Given the failure to make requisite enquiries and to record reasons, the court held that the AO's order amounted to an order passed without application of mind and therefore fell within the meaning of "erroneous" under section 263 (as including failure to make enquiry).

On these findings the court concluded that the conditions for exercise of revisionary power under section 263 (i.e., that the AO's order is erroneous and prejudicial to the interests of revenue and that the CIT's satisfaction is based on material) were satisfied: the assessment order was erroneous for want of proper enquiry and that error caused prejudice to revenue.

Holding and Implications

Holding: The appeal of the assessee is APPEAL DISMISSED.

Implications:

Direct effect on the parties: The CIT's order under section 263 directing the Assessing Officer to recompute book profits (to take into account the gain claimed by the assessee) is upheld by dismissal of the assessee's appeal; the assessment order was held to be erroneous for want of application of mind and prejudicial to revenue.
Broader implications: The opinion applies established principles (as discussed in Malabar, Khatiza, and Girdharilal) limiting the scope of section 263 to cases where the AO's order is shown to be erroneous and prejudicial on the basis of material; it reinforces that failure by the AO to make necessary enquiries or to record reasons can render an order erroneous. The opinion does not purport to set a new precedent beyond applying these authorities to the facts of the case.

End of summary — All statements above are based exclusively on the contents of the provided opinion.

Show all summary ...

ORDER

Chandra Poojari, Accountant Member. - This appeal preferred by the assessee is directed against the order of passed under section 263 of the IT Act dated 23-3-2009.

2. Brief facts of the case are that the assessee is a limited company incorporated on 15-3-1974 and engaged in the business of manufacturing and trading of cement. The assessee has filed its return of income on 31-10-2004 and the assessment was completed under section 143(3) vide order dated 8-12-2006. The CIT had issued a notice under section 263 of the Act dated 11-7-2008 stating that the order of the Assessing Officer is erroneous insofar as it is prejudicial to the interest of the revenue on the contention that the assessment under section 143(3) has been completed omitting to assess profit under section 115JB resulting in short computation of tax to the extent of Rs. 7,33,55,613. The assessee had filed written submissions dated 20-8-2008 explaining that the gain arising on transfer of assets to wholly owned subsidiary being exempt under section 47(iv ) is not taxable under section 115JB of the Act based on various judicial precedents.

2.1 The assessee also submitted that the precedents under section 263 is invalid and void ab intio. The CIT considered the submissions and passed an order under section 263 of the Act directing the Assessing Officer to compute the book profit of the assessee after considering the gain arising on transfer of assets to RIL which is exempt under section 47(iv) as part of book profit. The assessee has preferred an appeal before the Tribunal against the order of CIT under section 263. The Hon'ble Tribunal was of the opinion that in view of the different decisions of the Tribunals/Courts the matter should be referred to Special Bench. Accordingly, the Special Bench vide order dated 2-7-2010 in Rain Commodities Ltd. v. Dy. CIT [2010] 40 SOT 265 (Hyd.) had held that the section 47( iv) of the Act has no application in the computation of book profits under section 115JB. It was also held that computation of income under normal provisions of the income-tax and the book profit are two parallel computations. In the absence of exclusion of exempt capital gains in the computation of book profit under the provisions of section 115JB of the Act, the assessee is not entitled for the same. Against this order the assessee company had filed Miscellaneous Application under section 254(2) of the Act on the following grounds:

(i) Whether the Assessing Officer has the power to recompute the books profits under section 115JB of the Act by considering the profit and loss account prepared as per Schedule VI of the Companies Act 1956.
(ii) Whether the Commissioner was justified in invoking the provisions of section 263 of Act.

2.3 The Tribunal vide order dated 31-8-2010 in MA No. 128/H/2010 held that there was no error in the order of the Special Bench of the Tribunal under section 254(2) of the Act. As the Tribunal has directed the division bench to consider the issue of legality of exercise of jurisdiction under section 263 of the Act in its order of the Special Bench, this issue was taken up for adjudication.

2.4 The assessee's counsel submitted that the CIT erred in invoking the provisions of revision under section 263. The assessee further submitted that once the assessee has made full disclosure in the books of account and the Assessing Officer has taken one of the possible views, the CIT cannot revise the order of Assessing Officer based on the change of opinion.

2.5 Further, the assessee submitted that all the documents and the information based on which the revision was invoked had been available with the Assessing Officer and the Assessing Officer has applied his mind in determining the income of the assessee. It was contended that the assessee has relied the various decisions of Tribunal while calculating the book profits and arrived at the conclusion in absence of the jurisdictional HC decision which cannot be the reason for revision under section 263.

2.6 The learned counsel for the assessee placed reliance on the following decisions to support his contention :

(i) Malabar Industrial Co. Ltd. v. CIT [2000] 243 ITR 83/109 Taxman 66 (SC)
(ii) Mrs. Khatiza S. Oomerbhoy v. ITO [2006] 100 ITD 173 (Mum.)
(iii) Mrs. Girdharilal B. Rohra v. CIT [2004] 86 TTJ (Mum.) 177

2.7 Further, he submitted that there was no judicial precedent against the assessee on the issue of taxability of capital gains exempt under section 47(iv) of the Act while computing book profits under section 115JB of the Act. In fact, all the judicial precedents cited during the course of submission were in favour of the assessee.

2.8 According to him, in the absence of any negative judicial precedents in relation of aforementioned issued against the assessee proceedings initiated under section 263 of the Act are invalid and void.

3. The learned departmental representative submitted that a perusal of the assessment order shows that the Assessing Officer had not even computed the income under section 115JB, leave along undertake any discussion on the treatment to be accorded to profit on sale of assets to its subsidiary. It is also a fact that the Assessing Officer had not raised any issue regarding the liability of the assessee under section 115JB at all in the course of the assessment proceedings, whether by way of notices/letters to the assessee or otherwise. She submitted that failure of the Assessing Officer to examine the issue amounts to an error prejudicial to revenue for which the CIT is empowered to invoke section 263. She placed reliance on the following judgments:

(i) Gee Vee Enterprise…Petitioner v. Additional Commissioner Of Income Tax… [1975] 99 ITR 375 (Delhi)
(ii) CIT v. Emery Stone Manufacturing Co. [1995] 213 ITR 843/83 Taxman 643 (Raj.)
(iii) Duggal & Co. v. CIT [1996] 220 ITR 456/[1994] 77 Taxman 331 (Delhi).
(iv) CIT v. Bhagwan Das [2005] 272 ITR 367/142 Taxman 1 (All.).
(v) Thermal Systems (Hyd.) (P.) Ltd. v. Asstt. CIT [2010] 122 ITD 376 (Hyd.)

4. The learned Departmental Representative submitted that the issue before the CIT is only w.r.t. whether the order passed by the Assessing Officer is erroneous orders prejudicial to the interest of revenue. She submitted on merit the Special Bench vide order dated 2-7-2010 decided the issue regarding the computation of book profit under section 115JB against the assessee as such the order of the Assessing Officer is erroneous and there is loss of revenue as a consequence of erroneous order of the Assessing Officer. Hence, it is prejudicial to the interest of the revenue. The Assessing Officer has the committed error in computing the book profit only. The Assessing Officer has also not applied his mind while computing book profit. She further relied on the following judgments:

1. Gee Vee Enterprises ( supra)
2. Emery Stone Mfg. Co. ( supra)
3. Duggal & Co. ( supra)
4. Bhagwan Das ( supra)
5. Thermal Systems (Hyd.) (P.) Ltd. ( supra)
6. Appollo Tyres Ltd. v. CIT [2002] 255 ITR 273/122 Taxman 562 (SC)

5. We have heard both the parties and perused the materials available on record. Let us examine the decision relied by the learned authorised representative in the case of Malabar Industrial Co. Ltd. (supra). In this case it was held that:

"Every loss of revenue as a consequence of an order of the Assessing Officer, cannot be treated as prejudicial to the interests of the Revenue. For example, when the ITO adopted one of the courses permissible in law and it has resulted in loss of revenue, or where two views are possible and the ITO 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 ITO is unsustainable in law."

5.1 In the case of Mrs. Khatiza S. Oomerbhoy (supra) wherein it was held that:

(i) the commissioner must record satisfaction that the order of the Assessing Officer is erroneous and prejudicial to the interests of the revenue. Both the conditions must be fulfilled.
(ii) an incorrect assumption of facts or an incorrect application of law will suffice for the requirement of order being erroneous.
(iii) section 263 cannot be invoked to correct each and every type of mistake or error committed by the Assessing Officer and it is only when an order is erroneous, that the section will be attracted.
(iv) if the order is passed without application of mind, such order will fall under the category of erroneous order.
(v) every loss of revenue cannot be treated as prejudicial to the interests of the revenue and if the Assessing Officer has adopted one of the courses permissible under law or where two views are possible and the Assessing Officer has taken one view with which the Commissioner not agree, it cannot be treated as an erroneous order, unless the view taken by the Assessing Officer is unsustainable under law.
(vi) If while making the assessment, the Assessing Officer examines the accounts, make enquiries, applies his mind to the facts and circumstances of the case and determines the income, the Commissioner, while exercising his power under section 263, is not permitted to substitute his estimate of income in place of the income estimated by the Assessing Officer.
(vii) The Assessing Officer exercises quasi-judicial power vested in him and if he exercises such power in accordance with law and arrives at a conclusion, such conclusion cannot be termed to be erroneous simply because the Commissioner does not feel satisfied with the conclusion.
(viii) The Commissioner, before exercising his jurisdiction under section 263 must have material on record to arrive at a satisfaction.
(ix) If the Assessing Officer has made enquiries during the course of assessment proceedings on the relevant issues and the assessee has given detailed explanation by a letter in writing and the Assessing Officer allows the claim on being satisfied with the explanation of the assessee, the decision of the Assessing Officer cannot be held to be erroneous simply because in his order he does not make an elaborate discussion in that regard.
(x) The jurisdiction under section 263 cannot be utilized as an instrument for reopening concluded proceedings on flimsy grounds or on assumption.

5.2 In the case of Girdharilal B. Rohra (supra) wherein it was held that :

"It is now well settled position of law that in order to assume jurisdiction under section 263 the CIT must satisfy himself prima facie that the order of the Assessing Officer is erroneous and prejudicial to the interests of Revenue. Such satisfaction must be based on the material on record. The assumption of jurisdiction under section 263 cannot be made in a casual and arbitrary manner and if there is no material on record to satisfy prima facie that the aforesaid two conditions are present then the provision of section 263 cannot be invoked. While passing the order under section 263 it is expected that the CIT should be prima facie satisfied about the erroneous nature of the assessment which has caused prejudice to the Revenue. Beyond stating that no further enquiries are made, there should be some material which must be pointed out to show how lack of an enquiry has caused prejudice to the Revenue. This has not been done by the CIT in the present case."

6. From the aforesaid discussions, it is apparent that prejudicial to the interest of revenue appearing section 263 is conjunction with the expression 'erroneous' and that every loss of revenue as a consequence of an order of the Assessing Officer cannot prejudice to the interest of Revenue. In case, where the Assessing Officer adopts one of the courses permissible in law where two views are plausible the CIT cannot exercise his power under section 263 to defer with the Assessing Officer even if there has been a loss of revenue. On the other hand, when the Assessing Officer takes a view it is patently unsustainable, the CIT can exercise his powers where the loss of revenue results as a consequence of the view taken by the Assessing Officer. It is also clear that while passing the order under section 263, the CIT has to be examined not only the assessment order but also the entire facts on the record. Further, when a regular assessment is made it has to be presumed that it has been passed upon proper application of mind. The ITO is not only the adjudicator but also an investigator. He cannot be remained passive in face of an order when it calls for further enquiry. He has to ascertain the truth of the facts stated by the assessee. It is incumbent on the part of the Assessing Officer to make further investigation of the facts stated by the assessee when circumstances would make such an enquiry is prudent. The word 'erroneous' in section 263 includes failure to make such an enquiry by the Assessing Officer. The assessment order becomes erroneous because such an enquiry is not made and not because there is anything wrong with the facts stated therein or assumed to be correct. An incorrect assumption of facts or an incorrect application of law will satisfy the requirement of being erroneous. An order passed by the Assessing Officer without application of his mind is said to be an erroneous order. In the facts of the present case, we find that the Assessing Officer has not applied his mind to the provisions of section 115JB. No additional facts were necessary before the Assessing Officer to come to the conclusion that the book profit under section 115JB is wrongly computed. The Assessing Officer not examined the facts before him. The order passed by the Assessing Officer is very cryptic. There is no discussion or methodology of computation of book profit. It seems that he has accepted the computation of book profit as furnished by the assessee. It cannot be said that the Assessing Officer is aware of any of the Tribunal orders on the issues involved. The order of the Assessing Officer is erroneous for want of proper enquiry. He has not recorded reasons for accepting the return of the assessee as submitted by it on the impugned issue. The Assessing Officer without making any enquiry accepted the claim of the assessee without recording any reasons at all. The assessment order is silent about the issue raised by the CIT. He has not examined the merit of the claim of the assessee. We cannot say that he has taken one of the permissible views in accordance with law. He has not taken any view, except blindly accepting the view of the assessee on the issue. In this case, the failure of the Assessing Officer to make an enquiry with regard to the claim of the assessee and to record such a reason, why he is taking particular view, makes the assessment order erroneous and prejudicial to the interest of the revenue. As such, we are of the opinion that there is no merit in the arguments of the assessee's counsel.

7. In the result, the appeal of the assessee stands dismissed.