Income Tax Appellate Tribunal Delhi has ruled that that an order can be revised if and only if the twin conditions, viz., one that the order is erroneous and two – that to that extent it is prejudicial to the interest of the Revenue co-exist. An order, which is only erroneous but not prejudicial, cannot be revised. Likewise an order, which is only prejudicial to the interest of the Revenue but not erroneous, cannot be revised. ITAT also laid down The fundamental principles/guidelines  regarding the powers of the Commissioner under section 263.

Case Details:
I.T.A. No. 2726/DEL/2013   Assessment Year :2008-09
M/s Singhal Construction Company (appellant) vs Commissioner of Income Tax (Respondent)
Date of Order: 01-10-2015

Facts of the Case:
The assessee company filed its return which was processed u/s. 143(1) on the returned income. The case has been selected to be completed under scrutiny through Selective scrutiny and accordingly, notice u/s. 143(2) was issued. Thereafter various notices u/s. 143(2) and 142(1) alongwith questionnaire were issued and served upon the assessee. In response to the aforesaid notices Authorised Representative of the assessee attended the hearing from time to time and the case was discussed with him. Books of accounts, bills / vouchers etc. produced which were examined by the AO. After considering all the facts, details submitted by the assessee and after examination of books / documents and after discussion of the various issue, the assessment was completed on returned income u/s. 143(3) of the I.T. Act, 1961.

CIT examined the record and found that the assessment was completed by AO without proper enquiry on several counts. CIT was of the view that the order passed by the AO is erroneous and prejudicial to the interest of revenue. He held that in the case of M/s. Malabar Industries, the Hon'ble Apex court has held that incorrect assumption of facts or incorrect application of law, will satisfy the requirement of the order being erroneous; order passed by the AO is without applying the principles of natural justice or without application of mind.

Held: Revision order u/s 263 passed by Commission cancelled..

Excerpts from the ITAT Order:

we are of the considered opinion that this is not a fit case for revising the assessment order. The reasons for our above conclusion are that the twin conditions, viz., the assessment order should be erroneous in so far as it is prejudicial to the interests of revenue do not co-exist in this case. The assessee had filed return of income for the year under consideration and had disclosed the entire requisite details alongwith return of income during the year under consideration. During the assessment proceedings, the ld. AO examined all the relevant evidences produced before him, either alongwith the return or during the assessment proceedings, and has accepted the gift as genuine. The AO called for the entire details on the issue in dispute.

We find that the revisional power conferred on the Commissioner under this section is of wide amplitude. It enables the Commissioner to call for and examine the record of any proceeding under the Act. The revisional power under section 263 cannot be exercised in respect of a matter which falls within the power to assess escaped income under section 147 of the Act. The revisional power is a quasi-judicial one hedged with limitation and has to be exercised subject to the same and within its scope and ambit. So far as calling for the records and examining them is concerned, undoubtedly, it is an administrative act but on examination “to consider” or in other words, to form an opinion that particular order is erroneous is so far as it is prejudicial to the interests of the Revenue, is a quasi-judicial act because on this consideration or opinion the whole machinery of re-examination and reconsideration of an order of assessment, which has already been concluded and controversy which has been set at rest, is again set in motion. It is an important decision and the same cannot be based upon the whims and the fancies or the caprice of the revising authority.

There must be material(s) available from the records called for by the Commissioner. The Commissioner must give reasons for passing an order. He is bound by the decisions of the Hon’ble Supreme Court and jurisdictional High Court. The Commissioner must come to a firm conclusion on the point that error in the order has resulted in prejudice to the interests of the Revenue. He has to apply his mind for coming to a firm conclusion which should be based on proper material and he must mention that material in his order. The Commissioner may under this section pass such an order as the circumstances of the case justify, including an order enhancing or modifying the assessment or canceling the assessment and directing a fresh assessment, or any other order to the detriment of the assessee. But a mistake or omission in the assessment order would not justify the setting aside of the whole order.

 

From the plain reading of the above provision it is manifestly clear that an order can be revised if and only if the twin conditions, viz., one that the order is erroneous and two – that to that extent it is prejudicial to the interest of the Revenue co-exist. Or in other words, an order can be revised if it is both erroneous as well as prejudicial to the interests of the Revenue. An order, which is only erroneous but not prejudicial, cannot be revised. Likewise an order, which is only prejudicial to the interest of the Revenue but not erroneous, cannot be revised. To put it in, still simpler words, it is mandatory for the Commissioner to revise an order that both the above conditions must “co-exist”. An order which is not “erroneous” cannot be revised even if it is prejudicial to the interest of the Revenue, and the vice-versa.

The “prejudice” that is contemplated under S. 263 is the prejudice to the Income Tax administration as a whole. The revision has to be done for the purpose of setting right distortions and prejudices caused to the Revenue in the above context. The fundamental principles which emerge from the several cases regarding the powers of the Commissioner under section 263 may be summarized below:-

(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 ful- filled.

(ii) 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.

(iii) An incorrect assumption of facts or an incorrect application of law will suffice for the requirement of order being erroneous.

(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 interest 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 does 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, makes 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 exercise quasi- judicial power vested in him and if he exercise 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 allowed 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.

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