2024 (6) TMI 1494 - AT - Income Tax

Section 263 limited to orders erroneous and prejudicial to revenue; permissible AO views and enquiries not revisionable

M/s Osaka Alloys and Steel P. Ltd. Versus Dy. Commissioner of Income Tax, Circle-II, Jalandhar.

ITAT Amritsar - AT held that s.263 cannot be invoked to correct every mistake by the AO; it applies only where an order is erroneous and prejudicial to ... Revision u/s 263 - CIT(A) held calculation of book profit by allowing the deduction u/s 80IB was incorrect - HELD THAT:- the provision u/s 263 cannot be invoked to correct each, and every type of mistake or error committed by the AO it is only when an order is erroneous as also prejudicial to revenue’s interest, that the provision will be attracted. An incorrect assumption of the fact or an incorrect application of law will satisfy the requirement of the order being erroneous. The phrase 'prejudicial to the interest of the Revenue' must be read in conjunction with an erroneous order passed by the AO. Every loss of Revenue because of the order of the AO cannot be treated as prejudicial to the interest of the Revenue. If the AO has adopted one of the two or more courses permissible in law and it has resulted in loss of revenue, or where two views are possible and AO has taken one view with which the CIT does not agree, it cannot be treated as an erroneous order prejudicial to the interest of the Revenue, unless the view taken by the AO is totally unsustainable in law. This view gets supports from Malabar Industrial Co. Ltd. [2000 (2) TMI 10 - SUPREME COURT] In the present case, that the necessary enquiries were being made by the AO. It is pertinent to mention that the view of ld. AO being a plausible view, and therefore, the assessment order could not be considered erroneous or prejudicial to interest of revenue - we do not concur with the Pr.CIT that the AO did not verify the deduction claimed by the appellant and that the order was passed without application of mind. Accordingly, we hold that the Ld. Pr.CIT finding, and observation are infirm and perverse to the facts on record - Appeal filed by the assessee is allowed 1. ISSUES PRESENTED AND CONSIDERED 1. Whether the exercise of jurisdiction under section 263 was valid where the Principal Commissioner held the assessment order to be erroneous and prejudicial to revenue for allowing a deduction in computing book profit under section 115JB by treating certain receipts as deductible (deduction claimed under section 80IB or treated as capital receipts) without independent verification. 2. Whether the Principal Commissioner complied with the statutory and judicially prescribed threshold for invoking section 263, including making independent enquiries or establishing that the assessing officer's order was both erroneous and prejudicial to the interests of the revenue. 3. Whether the assessing officer's view (accepting the assessee's explanation and documentary submissions regarding treatment of receipts and deduction) constituted a plausible view such that revisional jurisdiction under section 263 could not be invoked. 2. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Validity of invoking section 263 on alleged incorrect computation of book profit under section 115JB (treatment of receipts/deduction) Legal framework: Section 263 permits revision where an assessment order is erroneous and prejudicial to the interests of revenue; section 115JB prescribes computation of book profit for MAT with specified adjustments, and deduction under section 80IB is not among the permitted adjustments for book profit. Precedent treatment: The Court applied established principle that both limbs (erroneous order and prejudice to revenue) must be satisfied before invoking section 263, and that the power is not unfettered to correct every error. Relevant judicial guidance requires the revisional authority to satisfy itself of absence of necessary enquiries before setting aside. Interpretation and reasoning: The Principal Commissioner concluded the assessing officer erred by allowing reduction from book profit by treating amounts (including alleged section 80IB deduction or capital receipts) contrary to the adjustments permissible under section 115JB. However, the Tribunal examined the record and found that the assessee had produced ledgers, explanations and documentary evidence before the assessing officer and that the AO examined and verified these during assessment proceedings. The Tribunal emphasised that where an assessing officer accepts an explanation supported by documents after enquiry, it cannot be treated as per se erroneous for revisional interference unless the view is wholly unsustainable. Ratio vs. Obiter: Ratio - Section 263 cannot be invoked where AO has made enquiries and adopted a plausible view based on record; a mere difference of opinion does not satisfy the twin conditions for revision. Obiter - General observations on the nature of receipts (capital vs revenue) and examples of prejudice to revenue when two views exist. Conclusion: The Principal Commissioner's exercise of section 263 on this factual matrix was not sustainable because the AO had made enquiries and reached a plausible conclusion on the treatment of the receipts/deduction; the assessment order was not shown to be erroneous and prejudicial as required. Issue 2 - Requirement of independent enquiry by revisional authority before setting aside assessment under section 263 Legal framework: Jurisdictional requirement that the revisional authority must be satisfied on material that the assessment order is erroneous and prejudicial; where the revisional authority relies on absence of enquiry, it must itself make or demonstrate minimal enquiry to establish the deficiency before directing restoration for fresh adjudication. Precedent treatment: The Tribunal relied on established judicial dicta holding that clause permitting revision is not a licence to correct every mistake and that the revisional authority must not act merely on disagreement with the AO's view without undertaking its own scrutiny of available material or making inquiries. Interpretation and reasoning: The Tribunal noted that the Principal Commissioner purported to set aside the assessment on ground that AO had not made necessary inquiries, yet the record showed documentary submissions and ledger evidence were before the AO and were considered. The Tribunal referred to the standard that the revisional authority should undertake minimal inquiry to establish that the AO failed to apply mind and that the order is prejudicial; absent such independent probing, restoration to AO is inappropriate. Ratio vs. Obiter: Ratio - Revisional authority must perform or demonstrate adequate inquiry itself before invoking section 263 on grounds of lack of enquiry by the AO. Obiter - Commentary on the limited scope of Explanation 2 clause (a) to section 263 and on the concept of unfettered revisional power. Conclusion: The Principal Commissioner failed to undertake or record requisite independent enquiry; therefore the invocation of section 263 on that basis was invalid and the order was quashed. Issue 3 - Whether the assessing officer's view was plausible such that revisional power could not be exercised Legal framework: When multiple reasonable views are possible on a question of fact or law, the assessing officer's adoption of one plausible view is protected from revision unless that view is wholly unsustainable in law. Precedent treatment: The Tribunal applied the principle that loss of revenue resulting from adoption of a permissible view by the AO does not automatically render the order prejudicial; only a totally unsustainable or perverse view attracts section 263 revision. Interpretation and reasoning: The Tribunal found the AO had examined documents and submissions, and that his approach represented a plausible view. The Principal Commissioner's contrary conclusion amounted to mere disagreement rather than demonstration that the AO's view was legally untenable. The Tribunal observed that acceptance of documentary explanations on treatment of receipts and resulting book profit computation by the AO cannot be set aside without showing the AO's view was not maintainable. Ratio vs. Obiter: Ratio - An assessing officer's plausible view, founded on records and enquiries, precludes invoking section 263 unless that view is totally unsustainable. Obiter - Examples where revisional jurisdiction is appropriately exercised (e.g., absence of any enquiry, patently erroneous factual assumption). Conclusion: The AO's view was plausible and supported by materials, and therefore not a ground for section 263 revision; the revisional order was perverse to the facts and is quashed. Cross-reference and overall conclusion Cross-reference: Issues 1-3 are interrelated - the correctness of invoking section 263 depended on (a) whether the AO had failed to make necessary inquiries, (b) whether the AO's acceptance of the assessee's treatment was a plausible view, and (c) whether the revisional authority conducted its own enquiry before setting aside the order. The Tribunal's factual findings on AO's enquiry and documentary record inform the legal conclusions on all three issues. Overall conclusion: The revisional order under section 263 was quashed because the statutory twin conditions were not satisfied on the record - the AO had conducted enquiries, adopted a plausible view supported by documents, and the Principal Commissioner did not undertake the necessary independent enquiry to establish that the assessment order was both erroneous and prejudicial to revenue.