Exercise of power by CIT u/s 263 is barred when appeal u/s 250 is pending. “record” means what is available at the time of examination by CIT
ABCAUS Case Law Citation:
ABCAUS 3131 (2019) (08) HC
Important case law relied upon by the parties:
Malabar Industrial Co. Ltd. vs. Commissioner of Income Tax, 243 ITR 83 (SC)
Commissioner of Income Tax vs. Development Credit Bank Ltd., 323 ITR 83(SC),
CIT vs. Gabriel India Ltd., 203 ITR 108 (Bombay)
CIT vs. Krishna Capbox Ltd, (2015) 372 ITR 310
CIT v. Fine Jewellery (India) Ltd.) [2015] 372 ITR 303/230 Taxman 641/55 taxmann.xom 514 (Bom.)
CIT vs. Ram Narain Goel, 224 ITR 180 (P & H)
J. P. Srivastava & Sons vs. CIT, 111 ITR 326 (Alld)
CIT vs. Arvind Jewellers, 259 ITR 502 (Gujrat),
Smt. Renuka Philip vs. ITO (2018)409 ITR 567 (Mad)
The instant appeal was filed by the Revenue challenging the order of the ITAT as perverse in setting aside the order U/s 263 of the Income Tax Act 1961 (the Act) on grounds that A.O. had already conducted inquiry on issues on which order U/s 263 was passed when no such embargo has been put in the language of the Section 263.
The respondent assessee was a Company whose return of income was processed under Section 143(1) of the Act. The case of the Company was selected for scrutiny and notices under Section 143(2) and 142(1) were issued.
The assessee produced the books of account and replied the various queries raised by the Assessing Officer. The Order under Section 143(3) of the Act was passed by the assessing officer after making disallowance towards development expenses.
The assessee challenged the assessment order passed under Section143(3) of the Act by filing Appeal before the CIT(A) under Section 250 of the Act. The CIT(A) allowed the appeal of the assessee on the ground that addition made by AO was without any basis, as the word “appear” to be excessive was stated in the order of the AO and such addition made in a cavalier and casual manner could not be sustained.
During the pendency of the appeal, the Commissioner of Income Tax, exercising power under Section 263 of the Act, issued notice to the assessee. The notice was replied by the assessee, however CIT directed the A.O. to look into applicability of Section 40-A(3) and Section 40(a)(ia) of the Act.
After the remand AO again issued notice under Section 142(3)/263 of the Act to the assessee. The assessee did not appear before the assessing authority and the assessing officer passed assessment order under Section 263/143(3) of the Act making several disallowances.
While the remand proceedings were pending before the assessing authority the assessee approached the Income Tax Appellate Tribunal, challenging the order under Section 263 of the Act passed by the Commissioner of Income Tax.
The ITAT allowed the appeal of the assessee setting aside the order passed by the CIT under Section 263 of the Act.
Aggrieved, the Revenue had preferred the instant appeal before the Hon’ble High Court.
The contention of the Revenue was that the assessing officer had disallowed much lesser expenses without any inquiry and had accepted the rest of the amount as land development expenses in the profit and loss account, as such, the CIT had rightly remanded the matter to the assessing authority exercising revisional power as the order of A.O. was erroneous and pre-judicial to the interest of revenue. He further submitted that the Tribunal had passed the order impugned after assessment order had been passed by the assessing authority after remand, and Tribunal should not have set aside the same, but should have relegated the matter to assessing authority directing the assessee to appear before the same and produce books of account to verify the queries so raised.
Per contra, the assessee submitted that the assessment order was passed after notice under Sections 143(2) and 142(1) of the Act was issued to assessee raising various queries and the assessee had appeared before the Assessing Officer number of times and furnished books of account and replied. Further, the CIT in its show cause notice dated had accepted the fact that on examination of record, assessment order was passed after inquiry which according to him was not proper.
Thus, it was contended that the proceedings under Section 263 of the Act cannot be invoked by the CIT when there is no material to hold that order was erroneous and pre-judicial to the interest of revenue and it would not be invoked to correct each and every type of mistake and error committed by A.O.
The assessee submitted that appeal before the CIT(A) was pending, as such, the CIT had no jurisdiction to revise the order, in view of Clause (c) of Explanation-1 to Section 263 of the Act, which provides that when appeal is pending before the Commissioner, the exercise of jurisdiction under Section 263 of the Act is barred.
It had also been contended that remand by the CIT was wrong. It was further submitted that all the documents in evidence as proofs and the queries so raised by the assessing officer was submitted and replied by the assessee and the CIT wrongly invoked the jurisdiction under Section 263.
The assessee also submitted that the argument of Department relying upon fresh assessment order made by the assessing officer under Section 263/143(3) of the Act for the purpose of Section 263 of the Act was not sustainable, as according to him definition of expression “record” as per Clause (b) of Explanation to Section 263 of the Act includes all the records relating to Section 263 proceedings available at the time of examination by the CIT only, and not in subsequent order or fresh order passed thereafter under Section 263/143(3) of the Act, which could justify the proceedings under Section 263 carried out by the CIT.
The Hon’ble High Court observed that the revenue tried to establish that ITAT was not correct in setting aside the order passed by the Commissioner under Section 263 of the Act, on the ground, that assessee had not furnished entire details regarding the contracts, which was cancelled and also the A.O. not looking into the provisions of Section 40(a)(i-a) of the Act whereby such expenses on which the T.D.S. was liable to be deducted, but was not actually deducted were required to be disallowed and added back under the said provisions of the Act.
On the other hand, the contention of assessee was that the A.O. after considering the entire books of account and the reply furnished by the assessee passed the assessment order under Section 143(3) of the Act. Further, perusal of the assessment order revealed that A.O. had considered all the books of account and further it had required the assessee, the entire information for the relevant assessment years along with copy of bank statement, narration of debit and credit entries, and other details.
The Hon’ble High Court opined that the case was not where the CIT found that the assessment order was erroneous and it is prejudicial to the interest of the revenue, as the A.O. after the case of the assessee was selected in scrutiny had required the assessee to furnish all the documents and only after the production of the said documents and his satisfaction the assessment order was passed under Section 143(3) of the Act.
The Tribunal on the issue of pre-requisite for exercising power by the Commissioner under Section 263 of the Act, relied upon decisions of the Hon’ble Supreme Court and various High Courts as under:
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Hon’ble Supreme Court |
“A bare reading of Section 263 of the Income Tax Act, 1961 makes it clear that the prerequisite for the exercise of jurisdiction by the Commissioner suo moto under it, is that the order of the Income-tax Officer is erroneous insofar as it is prejudicial to the interests of the revenue. The Commissioner has to be satisfied of twin conditions, namely, (i). the order of the Assessing Officer sought to be revised is erroneous; and (ii) it is prejudicial to the interests of the revenue. If one of them is absent – if the order of the Income-tax Officer is erroneous but is not prejudicial to the revenue or if it is not erroneous but is prejudicial to the Revenue – recourse cannot be had to Section 263(1) of the Act. The provision cannot be invoked to correct each and every type of mistake or error committed by the Assessing Officer; it is only when an order is erroneous that the section will be attracted.” |
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Bombay High Court |
“Held, dismissing the appeal, that there was no basis or justification for the Commissioner to invoke the provisions of Section 263. The Assessing Officer after making an enquiry and eliciting a response from the assessee came to the conclusion that the assessee was entitled to depreciation on the value of securities held on the trading account. The Commissioner could not have treated this findings to be erroneous or to be prejudicial to the interests of the Revenue. The observation of the Commissioner that the Assessing Officer had arrived at a finding without conducting an enquiry was erroneous, since an enquiry was specifically held with reference to which a disclosure of details was called for by the Assessing Officer and furnished by the Assessing Officer and furnished by the assessee. The Tribunal was justified in holding that recourse to the powers under Section 263 was not warranted in the facts and circumstances of the case. |
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Gujarat High Court |
‘Held, that the finding of fact by the Tribunal was that the assessee had produced relevant material and offered explanation in pursuance of the notices issued under Section 142(1) as well as section143(2) of the Act and after considering the material and explanations, the Income-tax Officer had come to a definite conclusion. Since the material was there on record and the said material was considered by the Income-tax Officer and a particular view was taken, the mere fact that different view can be taken should not be the basis for an action under Section 263. The order of revision was not justified.” |
|
Bombay High Court |
“Held, that the Income-tax Officer in this case had made enquiries in regard to the nature of the expenditure incurred by the assessee. The assessee had given detailed explanation in that regard by a letter in writing. All these were part of the record of the case. Evidently, the claim was allowed by the Income-tax Officer on being satisfied with the explanation of the assessee. This decision of the Income-tax Officer could not be held to be “erroneous” simply because in his order he did not make an elaborate discussion in that regard. Moreover, in the instant case, the Commissioner himself, even after initiating proceedings for revision and hearing the assessee, could not say that the allowance of the claim of the assessee was erroneous and that the expenditure was not revenue expenditure but an expenditure of capital nature. He simply asked the Income-tax Officer to re-examine the matter. That was not permissible. The Tribunal was justified in setting aside the order passed by the Commissioner of Income-tax under Section 263.” |
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Allahabad High Court |
“We are of opinion that the approach of the Commissioner is erroneous. The failure of the Income-tax Officer to deal with the claim of the assessee in the assessment order may be an error, but an erroneous order by itself is not enough to give jurisdiction to the Commissioner to revise it under Section 33B. It must further be shown that the order was prejudicial to the interests of the revenue. It is not each and every order passed by the Income-tax Officer which can be revised under Section 33B. Section 33B contemplates a notice to the assessee. In response to the notice the assessee may show to the Commissioner that the order sought to be revised is not prejudicial to the interests of the revenue. In that event, the Commissioner would have no jurisdiction to take any further action. He would be competent to take action only if he rejects the plea of the assessee. It thus becomes necessary for the Commissioner to examine the merits of the objection raised by the assessee. He cannot delegate that power to the Income-tax Officer by setting aside the assessment order and directing him to make a fresh assessment after taking into consideration the objection of the assessee.” |
Exercise of power by CIT u/s 263 is barred when appeal u/s 250 is pending
The Hon’ble High Court noted that Clause (c) of Explanation 1 to Section 263 of the Act provides that when an appeal is pending before the Commissioner, the exercise of jurisdiction under Section 263 of the Act by CIT is barred. Thus, in the present case, the CIT wrongly exercised jurisdiction under Section 263 of the Act by remanding back the matter to assessing authority, while the appeal was decided by CIT (A) thereafter. Thus, the order passed by the ITAT did not suffer from any irregularity and needed no interference.
“record” means what is available at the time of examination by CIT
The Hon’ble High Court opined that the word “record” appearing in Clause (b) of Explanation-1 to Section 263 means the record available at the time of examination by the Commissioner of Income Tax and not any material or record available subsequent to his examination or exercise of power under Section 263. Thus, any order passed by the AO in the assessment proceedings after the remand by the CIT could not be looked upon and the argument made by the revenue for relying upon the fresh assessment order under Section 263/143(3) of the Act could not be accepted in view of the above provision of law.
The Hon’ble High Court also opined that in the instant case, the Tribunal had recorded specific finding of fact that the assessing authority had examined each and every aspect of the case on which the remand order hinges, as such the remand order was not sustainable in the eyes of law.
The Hon’ble High Court opined that the revenue had failed to make any case for interference in the order of the ITAT, as the CIT had proceeded to remand the matter back to the assessing authority while the appeal of the assessee was pending under Section 250 and the power of exercise under Section 263 was barred by Clause (c) to Explanation 1 of Section 263 of the Act. Further, the remand order by the CIT was based merely on suspicion and presumption.
The appeal was accordingly dismissed as devoid of merit.
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