Revision order passed without confronting assessee with material in possession of CIT breached principles of natural justice. Though variance in SCN and order passed u/s 263 did not invalidate it.
ABCAUS Case Law Citation:
ABCAUS 2138 (2017) (12) HC
The Challenge/Grievance:
The assessee had challeneged the order of the Tribunal upholding the revisionary order passed u/s 263 of the Income tax Act, 1961 (the Act) by the Commissioner of Income Tax (CIT/DIT)
Brief Facts of the Case:
The Assessee is a company incorporated in Australia, and was a subsidiary of company incorporated in United Kingdom. The primary business of the Assessee was to carry on exploration and production of oil and gas in India. For this purpose, it had acquired participating interest in five oil and gas blocks.
In respect of each of the oil and gas blocks, the Assessee entered into a Joint Operating Agreement ( “JOA”), with other Joint Venturers. Also, to carry on exploration and operations, qua each of the blocks, the Assessee entered into, “Unincorporated Joint Venture Agreements” ( “UJV”) with other joint venturers. Under each PAC and/or JOA, the assessee was appointed as an operator for each of the five (5) UJVs.
In respect of the relevant assessment year, the Assessee filed its return claiming deduction under Section 80IB(9) of the Act towards purported profits and gains derived by the subject undertakings from production and refining of mineral oil.
The deduction claimed was attributable to two gas fields. Namely, the Satellite Gas Field (SGF Unit) and Laxmi Gas Field (LGF unit).
The return of the assessee was subjected to scrutiny notice under Section 143(2) of the Act which was followed by a questionnaire asking the assessee to justify the claim for deduction made under Section 80IB of the Act.
The assessee, replying to the questionnaire, filed reply giving the relevant details and workings. The Assessee also stated that the computation of the deduction claimed under Section 80IB had been made on the same basis as was done in the preceding AYs. The Chartered Accountant’s (CA’s) certificate for each of the two gas fields, i.e., SGF unit and LGF unit, the Audit Report in the prescribed form i.e., 10CCB, and the Profit and Loss Account, were also filed by the Assessee.
The Assessing Officer, thereafter, completed the assessment and passed the Assessment Order under Section 143(3) making certain disallowances with respect to expenses claimed but accepting the deduction claimed under Section 80IB(9) of the Act.
However, Director of Income Tax (International Taxation) [DIT], issued a Show Cause Notice (SCN) to the Assessee under Section 263 on the ground that the order passed by the Assessing Officer under Section 143(3) was erroneous, in so far as it was prejudicial to the interest of the Revenue. The reasons mentioned in the SCN stated that the claim of the assessee for deduction u/s 80IB(9) had not been computed in accordance with the provisions of section 80IB(13) read with section 80IA(5).
Responding to the notice, the Assessee furnished a reply and one hearing in the matter was held by the DIT. No further hearing was held, thereafter.
The DIT, in his revisionary order made observations with regard to SGF unit and LGF unit with respect to their eligibility for the deduction claimed. The DIT was of the view that the Assessing Officer had allowed the Assessee’s claim for deduction under Section 80IB(9) without examining the issue, as required under law.
Consequently, the assessment made was set aside and a direction was issued to the Assessing Officer to examine the allowability of deduction under section 80IB and to recompute the same. In other words, a direction was issued to make a fresh assessment keeping in mind the observations made by the DIT, in his order passed u/s 263.
The assessee company challenged the order of the DIT before the Tribunal but with no benefit as the Tribunal, however, dismissed the appeal.
Before the Tribunal the assessee raised an additional ground that the DIT could not travel beyond the SCN, and that, if, he chose to travel beyond the SCN, adequate opportunity had to be given before passing a final order. The Tribunal though allowed with the proposition of law as conceived in the additional ground filed by the Assessee, sustained the order of the DIT.
Aggrieved by the order and judgment of the Tribunal the assessee was before the Hon’ble High Court in the present appeal.
The Substantial Questions of Law framed/pressed for determination:
1. Whether the Income Tax Appellate Tribunal was correct in upholding the order of Commissioner of Income Tax u/s 263 of the Income Tax Act, 1961 inspite of the fact that the show cause notice dated 21.01.2009 seeking revision, was apparently at variance to the order u/s 263 of the Income Tax Act, 1961
2. Whether the order of Income Tax Appellate Tribunal is sustainable in law despite the fact that, no show cause notice was given by the Commissioner of Income Tax, requiring the assessee to show cause that, no deduction is admissible to it, u/s 80IB (9) of the Income Tax Act, 1961 ?
3. Whether the Income Tax Appellate Tribunal has failed to appreciate that the show cause notice u/s 263 of the Income Tax Act, 1961 was based on vague assertion unsupported by any material and therefore in the absence of any material or show cause notice provided to the assessee, no order u/w 263 of the Income Tax Act, 1961 to hold that the order of assessment u/s 143(3) of the Income Tax Act, 1961 was erroneous, is sustainable in law ?
4. Whether the finding of the Income Tax Appellate Tribunal that the deduction had not been worked out in accordance with Section 80IB(13) of the Income Tax Act, 1961 is correct, since it overlooks that the said sub-section (13) refers to sub-section (7) to (12) of Section 80IB of the Income Tax Act, 1961 on the basis of which the Income Tax Appellate Tribunal has held that the order can be said to be erroneous and prejudicial to the interest of revenue ?
5. That without prejudice and even otherwise, was the Income Tax Appellate Tribunal correct in law in upholding that the assessee/undertaking did not satisfy the requirements of Section 80IB(5) of the Income Tax Act, 1961 and therefore it was not entitled to get deduction u/s 80IB(5) of the Income Tax Act, 1961 ?
6. Whether the Tribunal has correctly invoked the provisions of Section 292 B of the Income Tax Act, 1961, which has absolutely no application in the circumstances of the case ?
Observations made by the High Court:
The Hon’ble High Court summarised the broad principles of law, which are required to be kept in mind by the Commissioner, while exercising his power under Section 263 of the Income Tax Act, 1961:
Broad principles of law governing exercise of Revisionary Powers u/s 263
(i) The power is supervisory in nature, whereby the Commissioner can call for and examine the assessment records.
(ii) The Commissioner can revise the assessment order if the twin conditions provided in the Act are fulfilled, that is, that the assessment order is not only erroneous but is also prejudicial to the interest of the Revenue. The fulfilment of both the conditions is an essential prerequisite. [See Malabar Industrial Co. Ltd Vs. CIT (2000) 243 ITR 83(SC)]
(iii) An order is erroneous when it is contrary to law or proceeds on an incorrect assumption of facts or is in breach of principles of natural justice or is passed without application of mind, that is, is stereo-typed, in as much as, the Assessing Officer, accepts what is stated in the return of the assessee without making any enquiry called for in the circumstances of the case, that is, proceeds with “undue haste”. [See Gee Vee Enterprises vs ACIT, Delhi-I & Ors. (1975) 99 ITR 375]
(iv) The expression “prejudicial to the interest of the Revenue” while not to be confused with the loss of tax will certainly include an erroneous order which results in a person not paying tax which is lawfully payable to the Revenue. [See Malabar Industrial Co. Ltd.].
(v) Every loss of tax to the Revenue cannot be treated as being “prejudicial to the interest of the Revenue”. For example, when the Assessing Officer takes recourse to one of the two legally viable courses or where there are two views possible and the Commissioner does not agree with the view taken by the Assessing Officer which has resulted in a loss.[See CIT vs Max India Ltd. (2007) 295 ITR 282 (SC)]
(vi) There is no requirement of issuance of a notice before commencing proceedings under Section 263 of the Act. What is required is adherence to the principles of natural justice by granting to the assessee an opportunity of being heard before passing an order under Section 263. [CIT Vs. Electro House (1971 82 ITR 824 (SC)].
(vii) If the Assessing Officer acts in accordance with law his order cannot be termed as erroneous by the Commissioner, simply because according to him, the order should have been written “more elaborately”. Recourse cannot be taken to Section 263 to substitute the view of the Assessing Officer with that of the Commissioner.[See CIT vs Gabriel India Ltd (1993) 203 ITR 108(Bom)]
(viii) The exercise of statutory power under Section 263 of the Act is dependent on existence of objective facts ascertained from prima facie material on record. The evaluation of such material should show that tax which was lawfully exigible was not imposed. [See Gabriel India Ltd].
The Hon’ble High Court observed that the SCN, which was issued by the DIT, adverted only to the fact that the deduction claimed by the Assessee under Section 80IB(9) had not been computed in accordance with the provisions of Section 80IB(13) read with Section 80IA(5) of the 1961 Act. Via this SCN, the DIT gave an opportunity to the Assessee not only to prefer objections, but also to have them heard in person.
The Hon’ble High Court observed that even according to the Tribunal, the assessee during the course of the scrutiny had furnished the relevant material, which was necessary to claim the deduction under Section 80IB qua the SGF unit and LGF unit. In fact, the material furnished, which included the audit report, clearly, provided in no uncertain terms the requisite information. The information inter alia, detailed out the date of commencement of operation; the initial assessment year; when, the deduction was claimed; the quantum of deduction claimed; whether or not the profit and loss account qua the said activity in order to claim deduction under Section 80IB had been filed, for the first time ; and, lastly, the basis, on which, common expenses had been allocated. Thus, the Assessing Officer having been supplied with the information and the documents, allowed the deduction vis-avis the claim made under Section 80IB in totality.
The Hon’ble High Court observed that there were other aspects, which, the DIT had found fault with, while, revising the Assessing Officer’s order. However the Hon’ble High Court opined that all those aspects could have been answered by the Assessee, only, if, the SCN issued by the DIT had, clearly, articulated these concerns. Whereas the only aspect, which the DIT highlighted in the SCN, was that, the claim for deduction made by the Assessee under Section 80IB(9) had not been computed in accordance with the provisions of Section 80IB(13) read with 80IA(5).
The Hon’ble High Court opined that the Tribunal’s observation that there was no variance between the SCN and the order of the DIT was factually not correct.
The Hon’ble High Court clarified that without a doubt, there is no requirement in law to issue a notice under Section 263 of the 1961 Act, but, once, the DIT chooses to issue, he should specify as to why the assessment order is erroneous and prejudicial to the interest of the Revenue.
The Hon’ble High Court clarified that even, if, the SCN had not adverted to the areas of concern and/or objections that the revising authority may have vis-a-vis the assessment order, the revisionary jurisdiction would have been, rightly, exercised, as long as at the time of hearing, the DIT had confronted the Assessee with the concerns, and/or, objections, he has, vis-a-vis, the assessment order, and discloses to the Assessee, the material, if any, he had in his possession, which led him to believe that the assessment order passed is both erroneous and prejudicial to the interest of the Revenue.
The Hon’ble High Court opined that if, the Assessee is not confronted with material, which is available with the DIT, which has caused him to exercise the revisional power vested in him under Section 263, the exercise of jurisdictional would be irregular. Section 263 of the 1961 Act confers powers on the DIT to revise the assessment order, albeit, after giving the Assessee an opportunity of being heard, and after making and causing such enquiry to be made, as may be deemed necessary. Failure to put to the Assessee areas of concern and/or objection and underlying material, if any, that the DIT may have in his possession would turn the exercise of granting an oral hearing an empty formality.
The Hon’ble High Court observed that as per the records of the Revenue, there was nothing to suggest that the concerns and/or objections that the DIT were put to the Assessee. There was nothing on record which would suggest that the DIT had confronted the Assessee with any material, in particular, with regard to the conclusion that he has reached which is that the two units, that is, SGF and LGF units, were not separate undertakings and hence, not eligible to claim deduction under Section 80IB.
The Hon’ble High Court clarified that the decision/judgment of the Hon’ble Supreme Court in the case of Amitabh Bachchan which was relied upon by the Revenue does not articulate a different principle. Inviting attention to para 11 of the judgment the Hon’ble High Court emphasised the following lines of the judgment,
“Of course, there can be no dispute that while the C.I.T. is free to exercise his jurisdiction on consideration of all relevant facts, a full opportunity to controvert the same and to explain the circumstances surrounding such facts, as may be considered relevant by the assessee, must be afforded to him by the C.I.T. prior to the finalization of the decision……”
The Hon’ble High Court observed that a close scrutiny of the facts of the judgement of the Supreme Court would show that the reason the appeal of the Revenue was allowed, was that, the record did not show that the revisional authority had not given an opportunity to the Assessee to controvert, the facts on the basis of which it had concluded that the order of the Assessing Officer was erroneous and prejudicial to the interest of the Revenue.
The Hon’ble High Court noted that in the case in hand, the departmental file did not show that the concerns raised by the DIT, in his order or the material, if any, that he had in his possession were put to the Assessee. Therefore, there had been a breach of the principles of natural justice.
The Hon’ble High Court opined that the Tribunal, in the impugned judgement and order, skipped the vital issue. It did not return any finding that the concerns articulated in the order of the DIT were put to the Assessee with an opportunity to rebut the same.
The Hon’ble High Court noted that the Tribunal erred in holding that since, the SCN did not refer to the provisions of Section 80IB(5), it could not be construed as a cardinal error rendering the proceedings void or invalid, as the lacunae could be cured, by taking recourse to Section 292B. The Hon’ble High Court opined that Section 80IB(5) has no relevance for claiming deduction under Section 80IB(9). Therefore, the observation that the defect could be cured by taking recourse to Section 292B was, in a sense, superfluous.
Decision/ Conclusion/Held:
Question No. 1 was answered in favour of the Revenue and against the Assessee.
Question No. 2 was answered in favour of the Revenue and against the Assessee.
Question No. 3 was answered in favour of the Assessee and against the Revenue.
Question No. 4 was answered in favour of the Assessee and against the Revenue.
Question No. 5 was answered in favour of the Assessee and against the Revenue.
Question No. 6 was answered in favour of the Assessee and against the Revenue.
The matter was remanded to the DIT, for passing a fresh order after articulating his concerns/objections in writing and also confront the Assessee with the material, on which, he wished to place reliance before passing an order under Section 263.
Download Full Judgment
