High Court affirms IT Commissioner's powers under sec 263 for verifying deductions. Special Bench ruling not binding.

The High Court upheld the Commissioner of Income-tax's jurisdiction under section 263 of the Income-tax Act, finding the Income-tax Officer's failure to properly verify deductions as erroneous and prejudicial to the Revenue. The Court clarified that a Special Bench decision does not bind a Division Bench, emphasizing the need for proper verification of expenses under specific sub-clauses of section 35B(1)(b). It was held that materials not on record at the time of assessment can be considered for invoking jurisdiction under section 263. The case was decided in favor of the Revenue with no order as to costs.

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Issues Involved:
1. Jurisdiction of Commissioner u/s 263 of the Income-tax Act.
2. Precedence of Special Bench vs. Division Bench decisions of the Tribunal.
3. Consideration of materials not on record at the time of assessment.

Summary:

Issue 1: Jurisdiction of Commissioner u/s 263 of the Income-tax Act
The Tribunal referred to the question of whether the Income-tax Officer (ITO) committed an error prejudicial to the interests of the Revenue by allowing the assessee's claim for deduction u/s 35B without proper verification. The Commissioner of Income-tax (CIT) found that the ITO's order was erroneous and prejudicial to the Revenue, as the ITO allowed deductions without verifying if the expenses fell under the specific sub-clauses of section 35B(1)(b). The CIT issued a notice and after considering the assessee's reply, directed a fresh assessment, disallowing deductions for freight, clearing, and inspection charges. The Tribunal's decision was based on the assumption that the ITO followed a Division Bench decision, which was factually incorrect. The Supreme Court in CIT v. Stepwell Industries Ltd. [1997] 228 ITR 171 and CIT v. Hero Cycles Pvt. Ltd. [1997] 228 ITR 463 established that the onus is on the assessee to prove that the expenditure falls within the ambit of sub-clauses of section 35B(1)(b). The High Court upheld the CIT's jurisdiction u/s 263, noting that the ITO's failure to examine the factual position rendered the assessment order erroneous and prejudicial to the Revenue.

Issue 2: Precedence of Special Bench vs. Division Bench decisions of the Tribunal
The Tribunal had a difference of opinion on whether a Special Bench decision takes precedence over a Division Bench decision. The Judicial Member opined that a Special Bench decision is not binding on a Division Bench, while the Accountant Member held that a Special Bench decision should be preferred. The Third Member concurred with the Judicial Member, stating that the ITO is not bound to follow a Special Bench decision unless it is brought to his notice. The High Court reframed the question and concluded that the ITO's order was erroneous as it did not examine whether the expenses fell under the specific sub-clauses of section 35B(1)(b). The High Court noted that the provisions of sub-clause (iii) of section 35B(1)(b) are unambiguous and expenditure incurred in India does not qualify for deduction, as settled by the Supreme Court in Stepwell Industries Ltd.

Issue 3: Consideration of materials not on record at the time of assessment
The Tribunal held that materials not on record at the time of assessment cannot form part of the record for invoking jurisdiction u/s 263. The High Court, however, referred to the Supreme Court judgment in CIT v. Shree Manjunathesware Packing Products and Camphor Works [1998] 231 ITR 53, which held that the expression "record" in section 263 includes the record available at the time of examination by the CIT, not just the material available to the ITO. Thus, question No. 3 was answered in the negative, against the assessee and in favor of the Revenue.

The reference was disposed of with no order as to costs.

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