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 wrong assumptions of fact, incorrect application of law, non-application of mind, or failure to follow principles of natural justice. Tribunal had set aside CIT's suo motu assumption of jurisdiction concerning exemption under s. 54F for LTCG on sale of shares; the matter was remitted to a Division Bench for determination on merits.

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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.

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