The issue raised in all the above writ petitions filed by two assessees, who are husband and wife, with respect to three assessment years, being 2008-09, 2009-10 and 2010-11, is the legality of the show cause notices issued by the Commissioner of Income Tax under Section 263 of the Income Tax Act, 1961 [for brevity “the Act”]. The assessments were completed by the Assessing Officer and the Commissioner, by separate orders under Section 263 in the case of each of the assessees for the respective assessment years, sought to revise the assessment orders; produced as Exhibit P7 in all the writ petitions.
2. The factual aspects need not be gone into at this stage.
Suffice it to notice that certain expenditure of the assessee, which had not been taken into account by the Assessing Officer as “income” and the allowance of deduction on expenditure far in excess of the income received were the subject matter of all the notices issued.
The Commissioner's jurisdiction under Section 263 or rather the palpable lack of it in the subject years is the grievance highlighted.
3. The learned counsel Sri.N.J.Mathews in his inimitable style, forcefully but with elegant restrain urges before Court that the power exercised by the Commissioner under Section 263 in the instant cases cannot at all be sustained and the show cause notices are to be struck down by this Court. To invoke the jurisdiction under Article 226 of the Constitution, the learned counsel places reliance on the decision in Siemens Ltd. v. State of Maharashtra [2007 (1) KLT 88 (SC)], to contend that if the issuance of a show cause notice is totally without jurisdiction, then necessarily this Court is competent to invoke its powers under Article 226, despite the opportunity available for the assessee to convince the Commissioner about the illegality of exercise of such revisory jurisdiction, as such; as also on facts. The learned counsel would term the power available under Section 263 to be a composite power, clothing the Commissioner with the power to issue notice, afford an opportunity for hearing the assessee and pass reasoned orders. But, however, only and only if the jurisdictional foundation to invoke such powers are satisfied. For such jurisdictional foundation to be available, the two essential elements, specifically mandated by the words employed in Section 263, being the erroneous nature of the orders, resulting in prejudice to the revenue, should exist together. No proceedings could be taken only on either of the aforesaid reasons being available and the jurisdictional foundation presupposes the existence of both.
4. The learned counsel places reliance on the decision of the Hon'ble Supreme Court in Malabar Industrial Co. Ltd. v. CIT [(2000) 243 ITR 83 (SC)] to buttress the aforesaid contention. The meaning of “erroneous” is urged before this Court placing reliance on CIT v. Gabriel India Ltd. [(1993) 203 ITR 108 (Bom)] and C.I.T. v. Mehrotra Brothers [(2004) 270 ITR 157 (M.P.)]. The learned counsel has also placed reliance on C.I.T. v. EIMCO- K.C.P. Limited [(1984) 147 ITR 603 (Mad.], Rajendra Singh v.
Superintendent of Taxes [(1990) 79 STC 10], Jindal Photo Films Ltd. v. Deputy Commissioner of Income Tax [(1998) 234 ITR 170 (Delhi)], CIT v. Sunbeam Auto Ltd. [(2009) 332 ITR 167 (Delhi)] and CIT v. Anil Kumar Sharma [(2010) 335 ITR 83 (Delhi)].
5. It is contended that when assessee has placed all materials before the Assessing Officer and the same has been considered by the officer passing the assessment orders, then there would be no scope under Section 263 to re-open such assessments. It is also urged that a computation error could be rectified by the Department under Section 154 and any new material coming to the notice of the Assessing Officer could be applied by resort to a re-opening under Section 147. On facts, it is submitted that Exhibits P3 and P4 would indicate that the Commissioner of Income Tax, who has now revised the order under Section 263, was consulted before the assessment order was passed. In view of the consultation, the Commissioner cannot now revise the order under Section 263 of the Act, is the plea. The assessee is entitled to seek a logical conclusion of proceedings; he/she having placed the entire transactions in the relevant years. The incompetence of the Assessing Officer cannot result in the assessee being kept on tender hooks till exhaustion of 'legal ingenuity' by the Department, is the argument.
6. Learned Senior Counsel for Government of India (Taxes) Sri.P.K.R.Menon would contend that the plea of harassment made by the petitioners cannot be looked into by this Court, especially since that cannot be a reason to strike down a show cause notice. The legislature in its wisdom having provided measures to plug evasion and ensure payment of revenue due; the action of the Commissioner neither can be assailed on the ground of harassment nor can it be termed 'legal ingenuity'. The impugned orders being only a show cause notice, it is the argument of the learned Senior Counsel that there is no reason why this Court should interfere at this stage and all contentions could be raised before the Commissioner. The learned Senior Counsel would rely on the decisions in Appollo Tyres Ltd. Deputy CIT [(2014) 360 ITR 36 (Ker)] and CIT v. English Indian Clays Ltd. [(2011) 331 ITR 219 (Ker)], to contend that even when there was no application of mind by the Assessing Officer or when the procedure adopted is patently wrong, the Commissioner could invoke the powers under Section 263.
7. In Malabar Industrial Co. Ltd. (supra), the Hon'ble Supreme Court was concerned with a revision made by the Commissioner under Section 263 of the Act. The brief facts were that the assessee, having entered into an agreement for sale of an estate, was paid compensation by the purchaser, who was not able to satisfy the terms of payment; of consideration. The compensation paid was claimed as a deduction, since it was in lieu of loss of agricultural income. The claim having been allowed by the Assessing Officer, the Commissioner sought to revise the same. The Hon'ble Supreme Court, as pointed out by the learned counsel for the petitioner, found that to invoke Section 263, necessary ingredients are the erroneous nature of the order and that it caused prejudice to the interests of the revenue and it was categorically declared that existence of one such reason would not clothe the authority with the power under Section 263. However, it was declared that “an incorrect assumption of facts or an incorrect application of law will satisfy the requirement of the order being erroneous” (sic). Orders which are passed without applying the principles of natural justice or without application or mind were also held to be falling within the category of “erroneous” orders.
8. With respect to the phrase “prejudicial to the interest of the revenue”, the expression was held to be of wide import and not confined to loss of tax. The view expressed by the High Court of Madras that prejudice would be caused only when the order establishes a bad trend or bad pattern on a general reckoning was held to be an interpretation too narrow to merit acceptance. Every loss of revenue as a consequence of an order of the Assessing Officer though was not held to be possible of being treated as “prejudicial to the interests of the revenue”, the Supreme Court by way of an illustration also noticed a case where there is a divergence of opinion, which would not in effect be considered as an order prejudicial to the interest of the revenue. In the said case, the order of the Assessing Officer, allowing the claim of exemption, was held to be one made without application of mind, since there was absolutely no material on record to show that the amount represented compensation for agricultural loss. The revision under Section 263 was, hence, upheld.
9. Reliance was placed on Gabriel India Ltd. (supra) to contend that an erroneous assessment refers to an assessment rendered contrary to law or on a mistaken view of law or upon erroneous application of legal principles and does not at all refer to the efficacy of the judgment of an Assessing Officer. The Bombay High Court, in the said decision, was concerned with an expenditure claimed by the assessee as 'revenue expenditure', the same having been incurred in merging two industrial plants of the assessee. The Assessing Officer had called for an explanation from the assessee and had considered the detailed explanation placed on record by the assessee before allowing the claim for deduction. However, there was no discussion in so far as the allowance of the deduction and, hence, the Commissioner revised the order under Section 263 for non-application of mind, since the Commissioner was of the opinion that the expenditure would be a 'capital expenditure'. It was only in such circumstance that the High Court of Bombay held that the opinion of the Commissioner alone cannot form the basis of the revision under Section 263. The Commissioner's view that there was no elaborate discussion was held to be insufficient to invoke the powers under Section 263. With respect to the power under Section 263, the Division Bench clearly said so:
“It must be an order which is not in accordance with the law or which has been passed by the Income-tax Officer without making any enquiry in undue haste”.
The decision of the Gauhati High Court in Rajendra Singh (supra) is a verbatim reproduction of the above principle, but relating to a revision under the sales-tax enactment.
10. Mehrotra Brothers (supra) was a case in which the Assessing Officer had considered the records, the evidence produced and expressed satisfaction about the genuineness of a cash credit transaction. The order passed under Section 263, on the vague ground that the Assessing Officer did not make a proper enquiry, was set aside by the Tribunal, which was confirmed by the High Court of Delhi.
11. EIMCO- K.C.P. Limited (supra) considered the question whether the pendency of an appeal by the assessee before the first Appellate Authority would disentitle the Commissioner from exercising power under Section 263. The Court found the power under Section 263 does not in any manner conflict with the appellate power.
12. The Delhi High Court in Sunbeam Auto Ltd. (supra) looked at an order under Section 263 seeking to revise an assessment order allowing the claim of revenue expenditure with respect to the expenses incurred by an automobile spare parts manufacturer, on purchase of tools and dyes. The revision was attempted on the ground that the assessment order merely allowed the claim without any discussion. The High Court having found from the records that the Assessing Officer had made enquiries about the expenditure, upon which the assessee had offered detailed explanation, held that the mere lack of elaborate discussions cannot be held to be erroneous. Following Malabar Industrial Co. Ltd. (supra), it was also held that mere difference in view cannot lead to a finding of prejudice being caused to the Revenue.
13. The finding in Sunbeam Auto Ltd. (supra), which has some bearing in the instant case is:
“There must be some prima facie material on record to show that tax which was lawfully exigible has not been imposed or that by the application of the relevant statute on an incorrect or incomplete interpretation a lesser tax than what was just has been imposed”.
The Court drew a distinction between “lack of inquiry” and “inadequate inquiry” and held that only in the case of the former; Section 263 could be invoked. Anil Kumar Sharma (supra) followed this decision and the revision attempted was found to be bad again for the reason of the records having revealed an enquiry having been properly undertaken, and the apparent lack of reasons in the order for allowing a claim being not sufficient ground to invoke Section 263.
14. Jindal Photo Films Ltd. (supra) was concerned with a reopening of assessment under Section 147, made for reason only of a deduction having been granted wrongly. It was held that the Assessing Officer was not seized of any new material or information and the mere change of opinion could not lead to reopening on the ground of escaped assessment. Touching upon the jurisdictional infirmity, it was held so in para 20:
“It is also equally well settled that if a notice under section 148 has been issued without the jurisdictional foundation under Section 147 being available to the Assessing Officer, the notice and the subsequent proceedings will be without jurisdiction, liable to be struck down in exercise of writ jurisdiction of this court. If 'reason to believe' be available, the writ court will not exercise its power of judicial review to go into the sufficiency or adequacy of the material available. However, the present one is not a case of testing the sufficiency of material available. It is a case of absence of material and hence the absence of jurisdiction in the Assessing Officer to initiate the proceedings under sections 147/148 of the Act”.
15. That the power under Section 263 is available to the Department only on the order being “erroneous in so far as it is prejudicial to the interests of the revenue”, calls for no debate or argument. Section 263 provides for the Commissioner to call for and examine the record of any proceedings under the Act and in the event of there being any error which results in prejudice to the interest of the revenue, it also confers the power to revise the order passed by the Assessing Officer either by enhancing or modifying or cancelling assessment or directing a fresh assessment to be made. The proceedings under Section 263, as rightly pointed out by the learned Senior Counsel, along with the powers for rectification and re-opening under Section 154 and 147, are powers available to the Department and its officers to ensure that the entire tax is assessed as levied by the statute. While the assessee has remedies under the statute to challenge that portion of an assessment causing prejudice to him/her; the aforesaid provisions ensure avoidance of prejudice to the Revenue. As held by the Division Bench judgment of the Madras High Court in EIMCO- K.C.P. Limited (supra); Section 263 contemplates “not so much a power but a duty on the Commissioner's part to set right an order passed by the ITO” (sic). The Commissioner, under Section 263, is the “custodian of the interests of the Revenue” (sic). It is the illegality of the order of an Assessing Officer or the total non-application of mind which is sought to be curbed by the revisory powers conferred under Section 263.
16. The decisions of the various High Courts relied upon by the petitioners dilates on the power under Section 263 in consonance with the decision of the Hon'ble Supreme Court in Malabar Industrial Co. Ltd. (supra). The said well-established proposition does not at all aid the petitioners in the instant case, since the action contemplated herein is again in consonance with such powers. Furthermore, two Division Benches of this Court has delved upon this question. English Indian Clays Ltd. (supra) was a case in which two claims of depreciation were allowed, one in part and the other in whole. The assessee was found to have claimed a similar depreciation in the earlier year, which was found to be bogus and it was conceded by the assessee by settling the tax liability under the Kar Vivad Samdahan Scheme. The Commissioner found that the claim was allowed by the Assessing Officer without reference to the original assessment and without examining the eligibility of the assessee. The assessment having been made in a cursory manner granting huge amount as depreciation, was found to be erroneous in so far as causing prejudice to the interests of the revenue. The records were found to have revealed that the depreciation claimed was totally unsubstantiated. The Division Bench of this Court reversed the order of the Tribunal which set aside the order of the Commissioner under Section 263.
17. Appollo Tyres Ltd. (supra). was a case in which the Commissioner invoked Section 263 to consider specifically the nine points on which the Assessing Officer had failed to apply his mind. The contention that the Assessing Officer did consider the said nine points and was not required to make a roving enquiry item-wise, while accepting the returns of the assessee, was found to be not sustainable.
18. In the present case, one of the contentions raised is that the assessment order has been passed after 21 months and the same was finalised after discussion with the Commissioner of Income Tax. The petitioner relies on Exhibit P3 and P4 to contend that the same would clearly reveal that consultation was made with the Commissioner of Income Tax by the Assessing Officer prior to the finalisation of the same. This Court, however, on Exhibit P3 and P4 alone is not to assume that such consultation had been made. The quasi-judicial authorities under the enactment will have to act within the jurisdiction conferred by the statute and independently as also not under dictates of the superior officers. But for Exhibits P3 and P4 there is nothing on record to show that Exhibit P1 has been passed after consultation with the Commissioner, who has passed the impugned orders, Exhibit P7; nor is it pleaded that there is any such office procedure available.
19. The next contention urged by the learned counsel appearing for the petitioners is that a revision under Section 263 could be made only if there is a legal infirmity in the order. The present orders, all having dealt with fact situations, are essentially additions attempted to be made, which the Commissioner does not have the authority under Section 263, is the contention. It is to be noticed that the Commissioner, while passing Exhibit P7 orders, which are separately produced in all the writ petitions, has specifically noticed that the Assessing Officer has failed to take into account the entire information available with the Department. The contention of the petitioners that what is now sought to be included under Section 263, has already been considered, is not evident from the assessment orders. The issues specifically dealt with in the impugned notices are not seen discussed by the Assessing Officer, except the expenditure for foreign travel. This is a case where the entire materials on record were not considered by the Assessing Officer. The Commissioner had taken into account the information available to the Department, as revealed from the records called for under Section 263, and found many transactions to have been omitted to be considered by the Assessing Officer.
20. The Commissioner has found that the order is erroneous for reason of the Assessing Officer having not applied his mind to a number of factual aspects available in the records. These inter alia relate to the expenditure incurred by the assessees in developing landed property, construction of buildings, renovation and alteration of residential apartments and those incurred in travelling to various countries abroad. It also takes note of expenditure allowed far in excess of that permissible; and even beyond the income declared. The same would, hence, definitely be an erroneous procedure adopted by the Assessing Officer, wherein the entire materials available to the Department had not been taken into account, resulting in prejudice to the interests of the revenue. The Commissioner, by the impugned orders has not attempted a substitution of his opinion to that of the Assessing Officer; but has taken cognizance of the 'lack of enquiry' with respect to certain transactions as distinguished from 'insufficient enquiry'. This reveals clear non-application of mind by the Assessing Officer; as has been noticed by the two separate Division Benches of this Court in Appollo Tyres Ltd. and English Indian Clays Ltd. (both supra).
21. On the strength of the above findings, this Court is of the definite opinion that no interference can be made at the stage of show cause notice. The petitioners would have their remedies before the Commissioner of Income Tax, who shall definitely consider the objections placed before him and pass reasoned orders as is mandated under Section 263. With respect to the power of the Commissioner under Section 263 to issue a show cause notice in the nature of the orders impugned in the writ petitions, this Court is of the opinion that it was perfectly proper and legal and within the powers of the Commissioner under Section 263 of the Act to have issued such notices.
In the result, the writ petitions shall stand dismissed; declining invocation of the extra-ordinary powers under Article 226. However; making it clear that this Court has not looked at any of the additions, or materials which are the basis of the revision notified by the Commissioner, as noticed in the impugned orders, the sustainability of which is open to challenge by the petitioners herein, before the Commissioner. The parties are directed to suffer their respective costs.
vku.
Sd/-
K.Vinod Chandran, Judge ( true copy )