2014 (7) TMI 50 - HC - Income Tax

Court affirms Commissioner's show cause notice power under Section 263.

PV. Sreenijin Versus The Commissioner of Income Tax (Central)

The Court upheld the legality of show cause notices issued by the Commissioner of Income Tax under Section 263 of the Income Tax Act, 1961. It emphasized ... Revision u/s 263 - Validity of show cause notice u/s 263 - an order erroneous and prejudicial to revenue – Allowability of deduction on expenses far in excess of the income received - the contention of the assessee that assessment order was passed after consultation with the CIT - Held that:- there is nothing on record to show that order has been passed after consultation with the Commissioner, who has passed the impugned orders nor is it pleaded that there is any such office procedure available - Decided against the assessee. Next contention of the assessee is that, revision under Section 263 could be made only if there is a legal infirmity in the order. - Held that:- The issues specifically dealt with in the impugned notices are not seen discussed by the Assessing Officer, except the expenditure for foreign travel. This is a case where the entire materials on record were not considered by the Assessing Officer. The Commissioner had taken into account the information available to the Department, as revealed from the records called for under Section 263, and found many transactions to have been omitted to be considered by the Assessing Officer. - contentions of the assessee rejected - Decided against the assessee. It would have definitely be an erroneous procedure adopted by the AO, wherein the entire materials available to the Department had not been taken into account, resulting in prejudice to the interests of the revenue – Commissioner has not attempted a substitution of his opinion to that of the AO, but has taken cognizance of the 'lack of enquiry' with respect to certain transactions as distinguished from 'insufficient enquiry'- this reveals clear non-application of mind by the AO – Relying upon [M/s. Appollo Tyres Ltd. Versus The Deputy Commissioner of Income Tax 2013 (10) TMI 1233 - KERALA HIGH COURT] - no interference can be made at the stage of show cause notice - assessee would have their remedies before the CIT, who shall definitely consider the objections placed before him and pass reasoned orders as is mandated u/s 263 - With respect to the power of the Commissioner u/s 263 to issue a show cause notice in the nature of the orders in the writ petitions, it was perfectly proper and legal and within the powers of the Commissioner u/s 263 of the Act – thus, invocation of extra-ordinary powers u/s 226 is declined – Decided against Assessee. Issues Involved:1. Legality of the show cause notices issued by the Commissioner of Income Tax under Section 263 of the Income Tax Act, 1961.2. Jurisdiction of the Commissioner under Section 263.3. Whether the Commissioner can revise an assessment order if the Assessing Officer has already considered all materials.4. The scope of judicial review under Article 226 of the Constitution in the context of Section 263 notices.Detailed Analysis:1. Legality of the Show Cause Notices:The primary issue in the writ petitions is the legality of the show cause notices issued by the Commissioner of Income Tax under Section 263 of the Income Tax Act, 1961. The petitions concern three assessment years: 2008-09, 2009-10, and 2010-11. The assessments completed by the Assessing Officer were sought to be revised by the Commissioner through separate orders under Section 263, which were challenged by the assessees.2. Jurisdiction of the Commissioner under Section 263:The petitioners argued that the Commissioner's jurisdiction under Section 263 was not validly invoked. They contended that the power under Section 263 is a composite power that can only be exercised if the jurisdictional foundation, which includes the erroneous nature of the orders and resulting prejudice to the revenue, is satisfied. The petitioners relied on various judgments, including Malabar Industrial Co. Ltd. v. CIT, to assert that both elements must coexist for the Commissioner to have jurisdiction.3. Consideration of All Materials by the Assessing Officer:The petitioners argued that since all materials were placed before and considered by the Assessing Officer, there was no scope for reopening the assessments under Section 263. They also contended that any computation error could be rectified under Section 154 and any new material could be addressed through reopening under Section 147. They further argued that the Commissioner had been consulted before the assessment order was passed, and thus, could not revise the order under Section 263.4. Judicial Review under Article 226 of the Constitution:The petitioners invoked Article 226 of the Constitution, arguing that the show cause notices were issued without jurisdiction. They relied on the decision in Siemens Ltd. v. State of Maharashtra to assert that the Court could intervene if the show cause notice was issued without jurisdiction. However, the respondents contended that the plea of harassment could not be a ground to strike down the show cause notice and that all contentions could be raised before the Commissioner. They cited decisions like Appollo Tyres Ltd. v. Deputy CIT to support the Commissioner's power under Section 263.Judgment Analysis:Jurisdictional Foundation:The Court emphasized that for the Commissioner to invoke Section 263, the order must be erroneous and prejudicial to the interests of the revenue. The Court referred to the Supreme Court's decision in Malabar Industrial Co. Ltd., which clarified that an incorrect assumption of facts or incorrect application of law would render an order erroneous. The Court also noted that orders passed without applying the principles of natural justice or without application of mind are considered erroneous.Consideration of Materials:The Court found that the Assessing Officer had failed to take into account the entire information available with the Department. The Commissioner's orders under Section 263 indicated that the Assessing Officer did not consider several transactions, including expenditures on developing property, construction, and foreign travel. The Court held that the Commissioner's action was not a substitution of opinion but a recognition of the lack of inquiry.Judicial Review:The Court concluded that it could not interfere at the stage of the show cause notice. The petitioners were directed to raise their objections before the Commissioner, who would consider them and pass reasoned orders as mandated under Section 263. The Court held that the issuance of the show cause notices was within the Commissioner's powers under Section 263.Conclusion:The writ petitions were dismissed, and the Court declined to invoke its extraordinary powers under Article 226. The Court clarified that it did not examine the merits of the additions or materials forming the basis of the revision and that the sustainability of these issues could be challenged before the Commissioner. The parties were directed to bear their respective costs.