2012 (3) TMI 227 - HC - Income Tax

Commissioner's s.263 revision set aside for failing to record independent reasons; doubts or directions to AO insufficient

INCOME TAX OFFICER Versus DG HOUSING PROJECTS LTD

HC held the Commissioner's exercise of revisionary powers under s.263 was unjustified and set aside his order, upholding the Tribunal. The HC found the ... Validity of revisionary powers exercised by Commissioner u/s 263 on ground that A.O. has not examined aspect of full value of consideration and that high-yielding asset could not be disposed off at such a low value - erroneous and prejudicial to revenue - assessee claimed long-term capital loss on sale of immovable property in year 2003 for 70 lacs, purchased in year 1997 for 69.63 lacs - Held that:- A.O. is both an investigator and an adjudicator. If the A.O. fails to conduct enquiry, he commits an error and the word 'erroneous' includes failure to make the enquiry. In cases where there is inadequate enquiry but not lack of enquiry, again the CIT must give and record a finding that the order/inquiry made is erroneous. An order is not erroneous and prejudicial to the interest of Revenue, unless the CIT hold and records reasons why it is erroneous. In the present case, the findings recorded by the Tribunal are correct as the CIT has not gone into and has not given any reason for observing that the order passed by the Assessing Officer was erroneous. The finding recorded by the CIT is that “order passed by the Assessing Officer may be erroneous”. The CIT had doubts about the valuation and sale consideration received but the CIT should have examined the said aspect himself and given a finding that the order passed by the Assessing Officer was erroneous. He came to the conclusion and finding that the Assessing Officer had examined the said aspect and accepted the respondent's computation figures but he had reservations. The CIT in the order has recorded that the consideration receivable was examined by the Assessing Officer but was not properly examined and therefore the assessment order is “erroneous”. The said finding will be correct, if the CIT had examined and verified the said transaction himself and given a finding on merits. As held above, a distinction must be drawn in the cases where the Assessing Officer does not conduct an enquiry; as lack of enquiry by itself renders the order being erroneous and prejudicial to the interest of the Revenue and cases where the Assessing Officer conducts enquiry but finding recorded is erroneous and which is also prejudicial to the interest of the Revenue. In latter cases, the CIT has to examine the order of the Assessing Officer on merits or the decision taken by the Assessing Officer on merits and then hold and form an opinion on merits that the order passed by the Assessing Officer is erroneous and prejudicial to the interest of the Revenue. In the second set of cases, CIT cannot direct the Assessing Officer to conduct further enquiry to verify and find out whether the order passed is erroneous or not. The CIT is patently wrong in mentioning and stating that Schedule III to the Wealth Tax Act, 1957 was not applicable but, the Assessing Officer should have adopted the said formula/method. The aforesaid reasoning cannot be accepted and does not show or establish that the assessment order was erroneous. Therefore, we upheld the order of Tribunal setting aside the order of CIT since CIT has not examined the said aspect himself and has not given any finding/reason for observing that the order passed by the A.O. was erroneous – Decided against the Revenue. 1. ISSUES PRESENTED AND CONSIDERED 1. Whether the Commissioner of Income Tax was justified in invoking Section 263 to set aside an assessment order on the ground that the order of the Assessing Officer was 'erroneous and prejudicial to the interests of Revenue' where the Assessing Officer had examined the transaction and accepted the assessee's computation subject to a nominal addition? 2. Whether the Commissioner could remand the matter to the Assessing Officer for fresh inquiry under Section 263 without recording an independent finding that the assessment order was erroneous and prejudicial to Revenue? 3. Whether the Commissioner could apply the valuation method in Schedule III to the Wealth Tax Act (or require such application) in assessing full value of consideration for income-tax purposes without establishing that the sale consideration declared was understated? 2. ISSUE-WISE DETAILED ANALYSIS Issue 1: Validity of exercise of power under Section 263 where Assessing Officer had examined the transaction Legal framework: 2.1. Section 263 empowers the Commissioner to call for and examine records and, if he considers an order passed by the Assessing Officer is erroneous in so far as it is prejudicial to Revenue, to pass such order as circumstances justify, after giving opportunity to the assessee. Two cumulative conditions: (i) the order must be erroneous, and (ii) prejudicial to the interest of Revenue. Precedent treatment (followed/distinguished): 2.2. Principles from previous decisions (including authority recognizing Assessing Officer as both investigator and adjudicator) are applied: where there is total lack of enquiry by Assessing Officer, omission itself may render the order erroneous (distinguished factual matrix where there was no enquiry). Authorities requiring that where Assessing Officer has conducted enquiry and applied mind, Commissioner cannot lightly substitute his opinion are followed. Interpretation and reasoning: 2.3. The Court explains distinction between (a) lack of enquiry (no investigation) and (b) inadequate inquiry or erroneous findings after enquiry. Where Assessing Officer did not conduct any enquiry, Commissioner may treat the order as erroneous without further inquiry. But where the Assessing Officer has conducted enquiries and arrived at a conclusion, the Commissioner must himself examine the record and if he considers the conclusion unsustainable in law, record clear reasons and a finding that the order is erroneous; he cannot merely remand to Assessing Officer for further enquiry without first forming that conclusion. 2.4. The power under Section 263 is not arbitrary; it cannot be used as a device to re-open concluded matters on mere disagreement. The Commissioner must base his conclusion on materials on record and, if necessary, may collect additional material, but must record a clear, unambiguous finding that the order is erroneous and prejudicial to Revenue before directing fresh assessment. Ratio vs. Obiter: 2.5. Ratio: Commissioner cannot remand for further inquiry or direct reassessment under Section 263 in respect of orders where the Assessing Officer has conducted enquiries unless the Commissioner himself records a clear finding that the original order is erroneous and prejudicial to Revenue. Obiter: explanatory remarks on the breadth of 'prejudicial to the interest of Revenue' and the non-arbitrary exercise of Section 263. Conclusion: 2.6. Where Assessing Officer examined the sale transaction and accepted the computation (save for a nominal addition), the Commissioner's mere expression of doubt without recording a definitive finding of error was insufficient to sustain revision under Section 263. The Commissioner must either conduct necessary verification and record reasons showing the assessment is unsustainable in law or refrain from invoking Section 263. Issue 2: Remitting the matter to Assessing Officer under Section 263 without CIT forming a finding of error Legal framework: 3.1. Section 263 permits the Commissioner to cancel an assessment and direct fresh assessment after forming the view that the order is erroneous and prejudicial. The Commissioner is required to give an opportunity of being heard and may make such inquiry as he deems necessary. Precedent treatment (followed/distinguished): 3.2. Decisions are relied upon that distinguish cases of lack of inquiry (where Commissioner may step in) from cases where the Assessing Officer made inquiries and exercised judgment; in the latter, the Commissioner must form and record an independent finding of error before remitting or revising. Interpretation and reasoning: 3.3. The Court reasons that remitting to Assessing Officer to decide whether his order was erroneous amounts to abdication of the Commissioner's duty under Section 263: the jurisdictional precondition is the Commissioner's own conclusion that the order is erroneous. The Commissioner cannot delegate the threshold determination to the Assessing Officer by way of remand without recording reasons why the order is erroneous and prejudicial. Ratio vs. Obiter: 3.4. Ratio: Remand under Section 263 without a prior Commissioner's finding that the order is erroneous and prejudicial is impermissible. Obiter: commentary on the rare circumstances where additional material may justify exercise of Section 263. Conclusion: 3.5. Remand to the Assessing Officer without an independent recorded finding of error by the Commissioner is not sustainable; the Commissioner was required to examine and record why the assessment order was unsustainable in law before directing fresh assessment. Issue 3: Applicability of Schedule III to Wealth Tax Act valuation method for determining full value of consideration Legal framework: 4.1. Question arises whether Schedule III formula of the Wealth Tax Act can be applied to determine whether declared sale consideration is understated for income tax assessment; Section 263 enquiry can rely on materials on record and additional material to show error. Precedent treatment (followed/distinguished): 4.2. The Court notes that Commissioner asserted applicability of Schedule III valuation method, but did not show that the registering authority enhanced stamp duty or that any discrepancy in declared consideration had been established on record; authorities permit Commissioner to rely on record and material to justify revision, but must record a finding. Interpretation and reasoning: 4.3. The Court finds the Commissioner's reasoning on Schedule III incorrect as a ground to hold the assessment order erroneous where the Assessing Officer had examined the transaction and the sale deed was registered without any enhancement of stamp duty by the registering authority. Mere assertion that the Assessing Officer should have applied Schedule III without demonstrating understatement of consideration on record does not establish that the assessment order was erroneous or prejudicial. Ratio vs. Obiter: 4.4. Ratio: Commissioner cannot rely on invocation of Schedule III valuation method to set aside an assessment unless the material indicates that the declared consideration was understated or that the method is mandatorily applicable; absent such material or a recorded finding, reliance on Schedule III does not make the order erroneous. Obiter: remarks on circumstances where Schedule III might be relevant if supported by record. Conclusion: 4.5. The Commissioner's invocation of Schedule III without evidentiary foundation or a recorded finding of understatement does not render the assessment order erroneous; the ground fails to justify revision under Section 263. Cross-references and Overall Conclusion 5.1. Issues 1-3 are interlinked: the power under Section 263 requires a clear recorded finding of error based on materials on record (and, if necessary, additional inquiries by the Commissioner), not merely doubts or a direction to reassess. The Commissioner's concerns about valuation and applicability of Schedule III (Issue 3) were not transformed into a recorded conclusion of error (Issue 1), and remand (Issue 2) without such a conclusion was impermissible. 5.2. Conclusion: The Tribunal correctly set aside the Section 263 order because the Commissioner failed to record a definitive, non-debatable finding that the assessment order was erroneous and prejudicial to Revenue; mere reservations or directions for fresh inquiry were inadequate to invoke Section 263.