2015 (3) TMI 1227 - HC - Income Tax

Court upholds validity of notice under Section 263, clarifies doctrine of merger.

M/s Mehra Brothers Partnership Firms Filling Versus Commissioner Of Income Tax And 3 Others

The court upheld the validity of the notice issued under Section 263 of the Income Tax Act, 1961, finding that the conditions for invoking Section 263 ... Allowing exemption under Section 10B - revision u/s 263 - Held that:- Assessing Officer, under some misconception of fact or law, as the case may be, did not address himself to the applicability of Section 10B and proceeded on assumption that assessee has rightly claimed exemption under Section 10B(1) of Act, 1961. This wrong assumption on the part of Assessing Officer whether of fact or law, apparently was erroneous and also caused prejudice to the interest of Revenue, for the reason that tax lawfully payable to department on previous income, earned by assessee in the assessment year 2011-12 would stand lost, if assessment order is not revised. We therefore, have no hesitation in holding that the twin conditions for attracting Section 263(1) of Act, 1961, exist in the case in hand and therefore, to that extent Commissioner was justified in exercising power under Section 263(1) of Act, 1961 by issuing notice in question. We find that claim of assessee seeking exemption under Section 10B of Act, 1961 for assessment year 2011-12, was not doubted by Assessing Officer. Applicability of Section 10B of Act, 1961 for assessment year 2011-12, as claimed by assessee, was accepted by him. Thus, this aspect was not in appeal at any stage. It is only on the question of 'quantum of profit' for which exemption was claimed that the appeal was filed. The Assessing Officer discussed the matter and found that instead of ₹ 4,97,28,163.45 which was claimed by assessee, it was entitled to exemption to the extent of ₹ 4,61,90,179.58 under Section 10B and there is taxable income of ₹ 3537980/-. On taxability of aforesaid amount, assessee preferred appeal and only that aspect was considered by CIT(A) as also Tribunal. At no stage, the issue whether assessee was entitled to claim exemption under Section 10B at all or not, having already exhausted beyond the period of exemption permissible under Section 10B, was not a subject matter of consideration before appellate authorities. Hence, this question was open to be looked into by Commissioner. Issues Involved:1. Validity of the notice issued under Section 263 of the Income Tax Act, 1961.2. Applicability of the doctrine of merger.3. Jurisdiction of the Commissioner of Income Tax (CIT) under Section 263.Issue-wise Detailed Analysis:1. Validity of the Notice Issued Under Section 263 of the Income Tax Act, 1961:The petitioner challenged the notice issued by the Commissioner of Income Tax (CIT) under Section 263, which proposed the revision of the assessment order dated 19th March 2014. The petitioner argued that the assessment order was set aside in appeal by CIT(A) and thus merged with the appellate order. Therefore, there was no assessment order for the CIT to revise. The court, however, held that for Section 263 to be attracted, there must exist an erroneous order of assessment that is prejudicial to the interest of Revenue. It was found that the Assessing Officer had wrongly allowed the exemption under Section 10B for the 11th year, which was not permissible. This incorrect assumption of fact or law was erroneous and prejudicial to the interest of Revenue. Thus, the twin conditions for attracting Section 263 were satisfied, and the notice issued was valid.2. Applicability of the Doctrine of Merger:The petitioner contended that the doctrine of merger applied, and after the decision of the Tribunal, no assessment order existed. The court examined the concept of 'merger' and noted that in taxing statutes like the Income Tax Act, 1961, the Legislature has adopted the doctrine of 'partial merger'. Explanation 'C' to Section 263(1) clarifies that the powers of the Commissioner extend to matters not considered and decided in an appeal. In this case, the issue of the applicability of Section 10B for the assessment year 2011-12 was not considered by the appellate authorities. Therefore, the CIT was within jurisdiction to issue the notice under Section 263.3. Jurisdiction of the Commissioner of Income Tax (CIT) Under Section 263:The court analyzed whether the CIT had the jurisdiction to issue the notice under Section 263. It referred to the Supreme Court's interpretation in Malabar Industrial Company Ltd. Vs. CIT, which established that for Section 263 to be invoked, the order must be erroneous and prejudicial to the interest of Revenue. The court found that the Assessing Officer's failure to address the inapplicability of Section 10B for the 11th year was an erroneous order causing prejudice to the Revenue. Thus, the CIT had the jurisdiction to issue the notice under Section 263.Conclusion:The court concluded that the notice issued by the CIT under Section 263 was valid and in accordance with the law. The doctrine of merger did not apply to the extent that it would prevent the CIT from exercising revisional powers. The writ petition was dismissed for lacking merit.