2002 (9) TMI 385 - AT - Income Tax

Partners' capital introduced from gifts and low GP/NP scrutiny in firm assessment; s.263 revision partly set aside.

The dominant issue was whether revision under s.263 could be sustained on the basis that the AO allegedly failed to examine low GP/NP and the genuineness ... Scope of section 263 - Revision - words 'prejudicial to the interests of the revenue' - survey u/s 133A - Low gross profit (g.p.) and net profit declared by the assessee was low and the Assessing Officer has not examined the reasons thereof - genuineness of receipts - capital account of the partners indicated certain gifts received by the partners which was introduced by the partners as capital contribution in the assessee’s firm - expression 'erroneous', 'erroneous assessment' and 'erroneous judgment' - HELD THAT:- Though section 263 vests powers in the Commissioner in subjective terms but even when an enactment vests discretion in any authority that does not mean that it was a matter only of subjective satisfaction and such authority has not to judge the circumstances in an objective manner. We have, therefore, examined the facts of the case which were relied on by the Commissioner in enhancing setting aside the assessment by invoking the provisions of section 263 of the Act. From a reading of section 263(1), it is clear that power of suo moto revision can be exercised by the Commissioner only if an examination of any proceedings under the Income-tax Act, he considers that any order passed thereon by the Assessing Officer, was 'erroneous' in so far as it is prejudicial to the interests of the revenue'. It is not an arbitrary or uncluttered power. It can be exercised only on fulfilment of the requirements laid down in section 263(1). The expression 'erroneous', 'erroneous assessment' and 'erroneous judgment' have been defined in Black Law Dictionary, 6th Edition page 542. According to definition, 'erroneous' means 'involving error; deviating from the law'. 'Erroneous assessment' refers to an assessment that deviates from the law and is, therefore, invalid, and is a defect that is jurisdictional in its nature. Similarly, 'erroneous judgment' means one rendered according to course and practice of court, but contrary to law, upon mistaken view of law, or upon erroneous application of legal principles. The prejudice contemplated under section 263 is prejudice to the Income-tax Administration as a whole. Section 263 is to be invoked not as a jurisdictional character or as a review of a subordinates orders in exercise of the supervisory power but it is to be invoked and employed only for the purpose of setting right distortions and prejudice to the revenue. As mentioned earlier, the Commissioner by invoking the provisions of section 263 has the power to enhance or modify the assessment. He has also the powers to cancel the assessment and direct fresh order. In the instant case, the Commissioner found the order passed by the Assessing Officer to be erroneous in so far as it was prejudicial to the interest of revenue. The Commissioner chose to cancel the assessment and asked for fresh investigation in some of the matters. He set aside the order and enhanced the assessment made by the Assessing Officer on the issue. Though section 263 vests powers in the Commissioner in subjective terms but even when an enactment vests discretion in any authority that does not mean that it was a matter only of subjective satisfaction and such authority has not to judge the circumstances in an objective manner. We have, therefore, examined the facts of the case which were relied on by the Commissioner in enhancing setting aside the assessment by invoking the provisions of section 263 of the Act. Once the immediate source was already disclosed, the question of any further investigation could have arisen in the case of the individual partner and not in the case of the firm. As the assessee had already discharged his onus cast on it under section 68 of the Act, the question of making further investigation in the matter and that too in the case of a firm did not arise. We, therefore, hold that the Assessing Officer had applied his mind before coming to the conclusion and, therefore, his order cannot be said to be erroneous in so far as prejudicial to the interest of the revenue. The order passed by the Commissioner in respect of those issues where he has directed the Assessing Officer to examine the matter afresh in cancelled. In the result, the appeal filed by the assessee is partly allowed. Issues Involved:1. Under-statement of profit.2. Low gross profit (g.p.) and net profit.3. Genuineness of capital contributions by partners.Summary of Judgment:1. Under-statement of Profit:The Commissioner identified an under-statement of profit amounting to Rs. 3,433. The assessee accepted this addition, and the Tribunal upheld the Commissioner's jurisdiction u/s 263 of the Income-tax Act to this extent.2. Low Gross Profit (g.p.) and Net Profit:The Commissioner noted that the g.p. and net profit declared by the assessee were low and that the Assessing Officer (AO) had not examined the reasons. The assessee argued that a chart indicating sales and g.p. for earlier years was submitted to the AO, showing a higher g.p. rate in the year under consideration compared to previous years. The Tribunal found that the AO had considered the survey operation u/s 133A and the g.p. rate, thus applying his mind. Therefore, the AO's order could not be deemed erroneous.3. Genuineness of Capital Contributions by Partners:The Commissioner questioned the genuineness of gifts received by partners and introduced as capital contributions. The assessee provided detailed explanations and evidence for these contributions, which were already on record with the AO. The Tribunal held that the AO had examined these details in the individual cases of the partners, and thus, the AO's order was not erroneous. The Tribunal canceled the Commissioner's order directing further investigation into these capital contributions.Conclusion:The Tribunal partly allowed the appeal, upholding the Commissioner's jurisdiction u/s 263 regarding the under-statement of profit but canceling the directions for further investigation into the g.p. and capital contributions.