Gauhati High Court on a humane approach and powers of the Commissioner under Section 264.

The Hon'ble Gauhati High Court, Aizawl Bench has set aside the revisional order dated 30.12.2024 passed under Section 264 of the Income Tax Act, 1961 and remanded the matter back to the revisional authority.

The principal controversy before the Court was whether the petitioner, a Mizo tribal woman engaged in retail and wholesale distribution of FMCG products in Mizoram, is entitled to the exemption under Section 10(26) of the Income Tax Act, which is available to members of Scheduled Tribes in respect of income that accrues or arises within the State of Mizoram.

A demand of Rs. 28 crore was raised, primarily on account of large cash deposits of Rs. 29 crore in her bank account and a significant variance between her Income Tax Return and her GSTR-9C filing.

The Hon'ble Court observed that Section 69A can be invoked only upon satisfaction of certain cumulative conditions, namely: (a) the assessee is found to be the owner of money, bullion, jewellery or other valuable articles; (b) such assets are not recorded in the books of account, if any, maintained by the assessee; and (c) the assessee either fails to offer any explanation regarding the nature and source of such assets, or the explanation furnished is not, in the opinion of the Assessing Officer, satisfactory.

In this context, it was the petitioner's case that she had furnished her profit and loss account and balance sheet, which could not have been prepared in the absence of underlying books of account. It was therefore contended that the finding of the respondent authorities that the petitioner had not maintained books of account is erroneous.

The observation of the Hon'ble Supreme Court in the case of UNION OF INDIA Versus GARWARE NYLONS LTD. - 1996 (9) TMI 123 - Supreme Court was referred to, wherein it was held that the burden of proof is on the taxing authorities to show that the particular case or item in question is taxable in the manner claimed by them. Mere assertion in that regard is of no avail. There should be material, whether oral or documentary. It is for the taxing authorities to lay evidence in that behalf even before the first adjudicating authority.

The Hon'ble Court observed that, in the present case, the petitioner, by furnishing such documents as were feasible in a faceless online assessment and in the revisional proceedings under Section 264 conducted at Shillong, had prima facie demonstrated the existence of material in support of her claim for exemption. In such circumstances, if any doubt persisted with regard to the source or situs of her income, it was incumbent upon the respondent authorities to seek further clarification or undertake verification, including by visiting the petitioner's place of business.

In this regard, reliance was placed on the decision of the Hon'ble Supreme Court in Pannalal Binjraj And Another Versus The Union Of India And Others (And Other Cases) - 1956 (12) TMI 1 - Supreme Court, wherein it was observed that a humane and considerate administration of the provisions of the Income Tax Act would go a long way in allaying the apprehensions of assessees and if that is done in the true spirit, no assessee will be in a position to charge the Revenue with administering the provisions of the Act with 'an evil eye and unequal hand'. The Court further observed that, to minimise inconvenience, the tax authorities may, where necessary, visit the assessee's place of residence or business for the purpose of examining accounts and evidence, rather than placing the entire burden upon the assessee.

The Hon'ble Court held that the power of revision under Section 264 vests in the authority specified therein. The revisional authority may, either suo motu or on an application made by the assessee, call for the records of any proceeding under the Act in which an order has been passed, and may make or cause to be made such enquiry as it deems necessary. Thereafter, subject to the provisions of the Act, it may pass such order as it thinks fit, provided that the order is not prejudicial to the assessee.

Reliance was placed on the decision in M/s. Orissa Rural Housing Development Corporation Ltd., Versus The Assistant Commissioner of Income Tax, Circle-I(I), Bhubaneswar And another. - 2012 (11) TMI 764 - ORISSA HIGH COURT, wherein a Division Bench of the Orissa High Court, in the facts of that case, held that Section 264 of the Income Tax Act provides an alternative remedy to an assessee who does not wish to pursue the appellate remedy. Hon'ble Court while agreeing with the said view of the Division Bench, held that since the remedy provided under Section 264 of the Income Tax Act is an alternative remedy, it would be necessary for the revisional authority to not only call for the records of any proceeding under the Act where orders have been passed, but to also enquire or cause an enquiry and thereafter, pass any such order as found to be fit and proper which however should not be prejudicial to the assessee.

The Hon'ble Court observed that in the present case, the manner in which the application for revision has been considered by the revisional authority, in the considered view of this Court appears to be short of what has been prescribed by Section 264 of the Income Tax Act. Uploading of documents and conducting of the proceeding in a faceless manner without an enquiry or causing an enquiry in the considered view of this Court would amount to lack of humane approach as observed and held by the Apex Court in Pannalal Binjraj (Firm) vs. Union of India (supra).

Therefore, the impugned order dated 30.12.2024 was set aside and the matter was remanded back to the revisional authority to reconsider the revision filed by the petitioner afresh by giving the petitioner due opportunity to project and present her case.

Arguments Advanced in the Written Submissions Not Expressly Considered by the Court - Left Open for the Revisional Authority

Several substantial legal contentions advanced in the petitioner's written submissions were not specifically adjudicated on merits by the High Court in this judgment; they are, by necessary implication, left open to be urged and decided in the remanded revision under Section 264. A brief note on those submissions is set out below.

A. Applicability of Section 69A - Nature of 'Money' and 'Other Valuable Article'

It was argued that routine business-related bank deposits and withdrawals cannot constitute 'money' or 'other valuable article' within the meaning of Section 69A, which was inserted to address income screened through acquisition of high-priced items such as bullion, gold, and jewellery. Reliance was placed on the Supreme Court's judgment inM/s. D.N. SINGH Versus COMMISSIONER OF INCOME TAX, CENTRAL, PATNA AND ANOTHER - 2023 (5) TMI 746 - Supreme Court, which held that the phrase 'other valuable article' must be read ejusdem generis with bullion, jewellery, and money - i.e., it must refer to high-priced articles procured to conceal income

B. Tax Cannot Be Levied on Gross Receipts; Only Profits Are Taxable

It was submitted that the Revenue erred in adding the entire gross bank deposits of Rs. 29 crore under Section 69A without accounting for corresponding withdrawals made for the purchase of goods. Reliance was placed on the Supreme Court's judgment in CIT, Coimbatore v. Lakshmi Machine Works [(2007) 290 ITR 667 (SC)], which held that the charge under the Act is on income, profits and gains, and not on gross receipts. This submission was not expressly considered by the Hon'ble Court and is left open for the revisional authority.

C. Non-Applicability of Sections 44AA and 44AB to Exempt Income

The petitioner argued that the statutory obligations under Sections 44AA (maintenance of books of account) and 44AB (audit) arise only for the purpose of computing total income, and that income falling under Section 10 does not form part of total income under the Act. Accordingly, an assessee whose entire income is exempt under Section 10(26) cannot be faulted for non-maintenance of accounts under Section 44AA or non-audit under Section 44AB. Reliance was placed on Smt. Rekha Bharat Chheda. Versus Assistant Commissioner Of Income-tax, Circle - 23 (3), Mumbai. - 2006 (7) TMI 245 - ITAT BOMBAY-E and Commissioner of Income-tax, Hisar Versus Market Committee, Sirsa - 2012 (10) TMI 569 - PUNJAB AND HARYANA HIGH COURT.

D. Wide Powers of the Revisional Authority and Obligation to Examine Errors in the Return

It was submitted that the powers of the Commissioner under Section 264 are wide enough to correct errors in the return itself, including the petitioner's inadvertent mis-declaration of her exempt income as Rs. 2,89,56,255/- instead of the correct figure of Rs. 28,95,625/-. Reference was made to CBDT Circular No. 14(XL-35) of 1955, which places a duty on Income Tax Officers to assist assessees in claiming legitimate reliefs, and to the judgments in Dattatraya Gopal Bhotte Versus Commissioner Of Income-Tax, Poona Range, Poona - 1984 (2) TMI 55 - BOMBAY High Court and Pramod R. Agarwal v. PCIT [(2023)]. These submissions were not expressly decided upon by the Hon'ble Court and are left open for the revisional authority to consider in the fresh proceedings.

V. Conclusion

The Hon'ble High Court's judgment is a significant pronouncement on the obligation of faceless assessment and revisional authorities to adopt a humane, enquiry-based approach rather than passing orders on the basis of documentary deficiencies alone, particularly where the assessee resides or carries on business in remote areas. The Court has unambiguously held that the revisional authority under Section 264 is not a passive reviewing forum but must actively enquire into and consider the case on merits.

The matter was argued by Advocate Vinay Kumar Shraff on behalf of the petitioner.