2012 (4) TMI 222 - HC - Income Tax

Revisional powers under s.263 available for erroneous, prejudicial assessments; remand for merits on s.54F exemption

HC held that revisional jurisdiction under s. 263 may be exercised where an assessment is erroneous and prejudicial to Revenue, including cases based on ... Validity of revisionary powers exercised by CIT u/s 263 - Assumption of jurisdiction - erroneous and prejudicial to the interest of the Revenue - expression 'erroneous' 'erroneous assessment and erroneous judgment' - exemption u/s 54F for LTCG on sale of shares granted by A.O. - CIT suo-moto assumed jurisdiction on ground that AO failed to make any enquiry while accepting genuineness of the share transaction - Tribunal set aside order of CIT - Reference to Larger bench - Held that:- We have already referred to judgments of this Court in Rajendra Singh [1989 (7) TMI 317 - GAUHATI HIGH COURT] and two Single Bench judgments following the said judgment in Bongaigaon Refinery and Petrochemicals Ltd. [2006 (9) TMI 125 - GAUHATI HIGH COURT] and Shyam Sundar Agarwal [2003 (1) TMI 662 - GAUHATI HIGH COURT] as also the second Division Bench judgment in Daga Entrade P. Ltd. [2009 (2) TMI 431 - GAUHATI HIGH COURT]. No doubt, in Rajendra Singh, an observation was made that erroneous assessment referred to the defect which is jurisdictional in nature, as against substitution of one view for the other, merely on the ground that a different view was possible. If read as a whole, the judgment does not exclude error in assessment order, by ignoring relevant material. Not holding such inquiry as is normal and not applying mind to relevant material would certainly be ‘erroneous’ assessment warranting exercise of revisional jurisdiction. Judgment has to be read as a whole and an observation during the course of reasoning in the judgment should not be divorced from the context in which it was used. The judgment is neither to be interpreted as an Act of Parliament nor as a holy book. If this principle is kept in mind, we do not find any conflict in the view taken in Rajendra Singh and Daga Entrade P. Ltd. Disagreement in Daga Entrade P. Ltd. is only to the interpretation which limits the ratio of the judgment by relying only one sentence in isolation divorced from the entire judgment. An incorrect assumption of facts or an incorrect application of law will satisfy the requirement of the order being ‘erroneous’ non application of mind and omission to follow natural justice is in same category. Accordingly, we hold that Daga Entrade P. Ltd. lays down correct law and the same is not in conflict with the earlier order of this Court in Rajendra Singh. Jurisdiction under Section 263 can be exercised whenever it is found that the order of assessment was erroneous and prejudicial to the interest of the Revenue. Cases of assessment order passed on wrong assumption of facts, on incorrect application of law, without due application of mind or without following principles of natural justice are not beyond the scope of Section 263 of the Act. The matter may now be placed before the Division Bench for decision on merits. Issues Involved:1. Jurisdiction under Section 263 of the Income Tax Act, 1961.2. Definition and scope of 'erroneous' and 'prejudicial to the interest of revenue'.3. Conflict between judgments in Commissioner of Income Tax vs. Daga Entrade P. Ltd. and Rajendra Singh vs. Superintendent of Taxes and others.Issue-wise Detailed Analysis:1. Jurisdiction under Section 263 of the Income Tax Act, 1961:The core issue revolves around the interpretation of Section 263, which grants the Commissioner the power to revise any order passed by the Assessing Officer (AO) if it is deemed erroneous and prejudicial to the interest of the revenue. The judgment elucidates that this power is meant to correct errors that cause revenue loss, and it is not a substitute for the AO's power to make assessments. The provision aims to address orders that are erroneous due to incorrect facts, misapplication of law, or lack of inquiry.2. Definition and Scope of 'Erroneous' and 'Prejudicial to the Interest of Revenue':The judgment references several precedents to clarify the terms 'erroneous' and 'prejudicial to the interest of revenue'. It cites Malabar Industrial Co. Ltd. vs. CIT, which states that an order is erroneous if it involves an incorrect assumption of facts or incorrect application of law. Additionally, an order passed without applying the principles of natural justice or without proper inquiry can also be deemed erroneous. The judgment from Rajendra Singh further elaborates that an order must be both erroneous and prejudicial to the revenue. The Gauhati High Court in Daga Entrade P. Ltd. emphasized that the Commissioner's revisional power is not confined to jurisdictional errors but extends to orders ignoring relevant material, causing revenue loss.3. Conflict Between Judgments in Commissioner of Income Tax vs. Daga Entrade P. Ltd. and Rajendra Singh vs. Superintendent of Taxes and Others:The judgment addresses the conflict between two Division Bench decisions. In Rajendra Singh, it was held that for an order to be revised under Section 263, it must be erroneous and prejudicial to the revenue, with an emphasis on jurisdictional defects. However, in Daga Entrade P. Ltd., the court held that the revisional power under Section 263 is not limited to jurisdictional errors but includes errors arising from ignoring relevant material. The larger Bench clarified that the term 'jurisdictional error' should be understood in a broader sense, encompassing errors due to lack of inquiry or application of mind.Conclusion:The judgment concludes that the decision in Daga Entrade P. Ltd. is correct and not in conflict with Rajendra Singh. It affirms that the jurisdiction under Section 263 can be exercised whenever an assessment order is erroneous and prejudicial to the revenue, including cases where the AO failed to make necessary inquiries or applied the law incorrectly. The matter is remitted to the Division Bench for a decision on merits.