2006 (12) TMI 101 - HC - Income Tax

Tax Authority Overstepped: Revisional Actions Quashed Due to Reliance on Audit Report Without Independent Judgment.

The HC concluded that the Commissioner of Income-tax exceeded his jurisdiction by initiating revisional proceedings under section 263 based solely on an ... Writ petition - challenged the Order passed by the Commissioner of Income-tax u/s 263 - Power to revise the reassessment order - rectification vested u/s 154 - HELD THAT:- From a plain reading of section 263 of the Income-tax Act, it is clear that the power of the Commissioner of Income-tax to initiate suo motu revisional proceeding can be exercised only if the circumstances specified therein exist. Two circumstances must co-exist to enable a Commissioner to exercise power of suo motu revision. These circumstances are: (i) the order must be an erroneous one and (ii) because of being an erroneous order, the order must have become prejudicial to the interests of the Revenue. Unless both these ingredients are present in a given case, it is not legally permissible for a Commissioner to initiate suo motu proceeding under section 263 of the Act. In the present case, it is after examination of the books of account u/s 43B of the Act that the assessing authority has allowed the deduction on account of bonus in exercise of its powers u/s 143(3). The Assessing Officer having acted within his jurisdiction in allowing the claim of bonus as deduction, it was not open to the Commissioner of Income-tax to consider the said order as erroneous merely because in his view, a certain amount of bonus, allowed as deduction, should have been disallowed, particularly when the impugned order of the Commissioner does not show how the order of assessment can be said to be an order passed without jurisdiction or an order passed beyond jurisdiction or wholly contrary to jurisdiction. In the case at hand, the order, initiating rectification proceedings u/s 154, as well as the order revising the assessment u/s 263, were passed on the basis of one and the same audit objection. While exercising revisional jurisdiction, the revisional authority must bear in mind that the principles of natural justice do not permit the decision of a quasi-judicial authority, such as a Commissioner of Income-tax, to be influenced by any other authority. Thus, the Commissioner, in the present case, could not have initiated a suo motu revisional proceeding on the basis of the said audit report. Had, on the basis of the audit report, the Commissioner came to his own finding that the assessing authority, while making the assessment, or the authority empowered to rectify a turnover, which had escaped assessment, has acted without jurisdiction, revisional jurisdiction could have been exercised. Emphasised the Supreme Court, in the case of Sirpur Paper Mill Ltd. v. CWT [1970 (4) TMI 4 - SUPREME COURT], that while exercising power, the Commissioner must have an unbiased mind and decide the dispute according to the procedure which is consistent with the principles of natural justice and cannot permit his mind to be influenced by the dictation of another authority. When a rectification proceeding is initiated u/s 154 and a final order dropping the rectification proceeding is passed, the effect is that the assessment order has merged into the order made in the rectification proceeding. In the case at hand, the assessment order, dated March 11, 1998 had merged into the order dated January 7, 2000. In such circumstances, without interfering with the order dated January 7, 2000, the order dated March 11, 1998 could not have been reached by the revisional authority and set aside. Viewed thus, it is clear that the impugned notice dated January 24, 2000 and the order dated March 28, 2000, passed by the Commissioner u/s 263, are absolutely without jurisdiction and not tenable in law. Thus, it is clear that the Commissioner of Income-tax initiated the revisional proceeding influenced by the objection raised by the internal audit party and has not applied his independent mind, while passing the impugned order. Hence, the impugned order is liable to be set aside and quashed. In L. Hirday Narain v. ITO [1970 (7) TMI 2 - SUPREME COURT] the apex court has made it clear that if a writ petition is not dismissed in limine but is entertained despite availability of an alternative remedy and the parties were heard on the merits, it would be unjustified for the High Court to dismiss the writ petition on the ground of availability of an alternative remedy. Considered thus, it is clear that When exercise of revisional jurisdiction could not be shown to be an exercise of power within the jurisdiction of the Commissioner, and when this court has riot dismissed the writ petition in limine and has already heard the writ petition on the merits, it would not be fair and just to dismiss the writ petition on the ground of availability of an alternative remedy. Therefore, when there was no lack of jurisdiction on the part of the assessing authority, in passing the order of assessment and the assessing authority had not exceeded its jurisdiction in passing the order of assessment, the order cannot be termed erroneous, within the meaning of section 263, to enable the Commissioner of Income-tax to invoke powers under section 263 of the Act. Hence, this writ petition succeeds. The impugned notice as well as the order passed by the Commissioner are hereby set aside and quashed. Writ petition shall stand disposed of. Issues Involved:1. Jurisdiction of the Commissioner of Income-tax to initiate suo motu revision under section 263 of the Income-tax Act.2. The validity of the notice and order issued by the Commissioner under section 263.3. The interplay between sections 154, 147, and 263 of the Income-tax Act.4. The impact of an audit report on the exercise of revisional jurisdiction.5. The applicability of writ jurisdiction under Article 226 of the Constitution of India in tax matters.Detailed Analysis:1. Jurisdiction of the Commissioner of Income-tax to Initiate Suo Motu Revision under Section 263:The court emphasized that the Commissioner of Income-tax's power to initiate suo motu revision under section 263 can only be exercised if two conditions are met: the order must be erroneous and prejudicial to the interests of the Revenue. An erroneous order refers to a jurisdictional error, not merely an incorrect assessment. The court cited several precedents, including Rajendra Singh v. Superintendent of Taxes and Santalal Mehendi Ratta (HUF) v. Commissioner of Taxes, to support the view that the error must be jurisdictional in nature.2. The Validity of the Notice and Order Issued by the Commissioner under Section 263:The court held that the Commissioner cannot interfere with an order merely because it is erroneous or prejudicial to the Revenue. The order must be both erroneous and prejudicial. The court pointed out that the Commissioner had not provided reasons for considering the assessment order erroneous. The Commissioner's reliance on the audit report without independent application of mind was also criticized. The court referred to Sirpur Paper Mill Ltd. v. CWT and Jeewanlal (1929) Ltd. v. Addl. CIT to emphasize that the Commissioner must exercise independent judgment.3. The Interplay between Sections 154, 147, and 263 of the Income-tax Act:The court noted that sections 154, 147, and 263 operate in distinct fields. Section 154 deals with rectification of mistakes apparent from the record, section 147 with reopening of assessments, and section 263 with revisional jurisdiction. The court held that once a rectification proceeding under section 154 is initiated and dropped, the Commissioner cannot invoke section 263 on the same facts without showing that the dropping of the rectification proceeding was improper. The court cited State of Kerala v. K. M. Cheria Abdulla and Co. and Santalal Mehendi Ratta (HUF) v. Commissioner of Taxes to support this view.4. The Impact of an Audit Report on the Exercise of Revisional Jurisdiction:The court held that the Commissioner cannot initiate revisional proceedings solely based on an audit report. The Commissioner must apply his independent mind and not be influenced by the audit report. The court referred to Sirpur Paper Mill Ltd. v. CWT to emphasize that the Commissioner must act impartially and not be dictated by another authority.5. The Applicability of Writ Jurisdiction under Article 226 of the Constitution of India in Tax Matters:The court held that when the exercise of power under section 263 is without jurisdiction, the High Court can interfere under Article 226. The availability of an alternative remedy does not bar the High Court from exercising its writ jurisdiction if the order is without jurisdiction. The court cited Shree Automobiles P. Ltd. v. Commissioner of Taxes and Bhopal Sugar Industries Ltd. v. D. P. Dube to support this view.Conclusion:The court concluded that the Commissioner of Income-tax had exceeded his jurisdiction by initiating revisional proceedings under section 263 based on an audit report without independent application of mind. The rectification proceeding under section 154 had already been dropped, and the Commissioner's action amounted to an encroachment on the powers of the assessing authority. The court set aside and quashed the impugned notice and order issued by the Commissioner under section 263.