2024 (1) TMI 1485 - HC - Income Tax

Revision jurisdiction under section 263: supervisory power denied where AO adopted a reasonable, non erroneous view, revision quashed

Revision jurisdiction under section 263 was examined on whether the assessing officer's inquiry was erroneous and prejudicial to Revenue; the court found ... Revision u/s 263 - as per CIT AO has not examined the conditions as laid down u/s 54B for the period under consideration - HELD THAT:- AO while passing the assessment order made full inquiry and therefore, Commissioner having different belief would not permit him to take the order in revision. Once the AO after making detailed inquiry has adopted one of the view and granted relief, merely because the commissioner took a different view of the matter, jurisdiction under section 263 of the Act could not have been exercised by the Commissioner. Tribunal has also arrived at the findings of the fact that the AO has examined the issue in depth and allowed the relief to assessee of exemption u/s 54B of the Act. Therefore, view taken by the AO is one of the reasonable, plausible and legally sustainable view which cannot be said to be erroneous. As held in case of Malabar Industrial Co. Ltd. [2000 (2) TMI 10 - SUPREME COURT] the prerequisite for the exercise of jurisdiction of Commissioner under section 263 of the Act is that the order of the Income Tax Officer is erroneous so far as it is prejudicial to the interests of the Revenue then both the conditions are required to be satisfied, and if one of them is absent, the Commissioner cannot have recourse to section 263 of the Act. It was held that section 263 of the Act can be exercised only when order is erroneous and prejudicial to the interest of the Revenue as suo motu revisional power under sub-section (1) of section 263 is in nature of supervisory jurisdiction and same can be exercised only if circumstances specified therein existing as held by the Apex Court. Thus, assessment order was not erroneous, twin conditions are not fulfilled and, therefore, Tribunal has rightly concluded that the order passed by PCIT under section 263 of the Act cannot be sustained by setting aside the same. Decided in favour of assessee. ISSUES PRESENTED AND CONSIDERED 1. Whether the revisional power under section 263 can be exercised where the Assessing Officer has allowed deduction under section 54B after making inquiries reflected in record, and the revisional authority forms a different view as to eligibility? 2. Whether both 'twin conditions' for exercise of section 263 - (i) that the assessment order is erroneous and (ii) that it is prejudicial to the revenue - were satisfied on the facts, including absence of documentary proof of agricultural activity and allegations of land-dealing/business? (Related: whether failure to undertake cross-verification by the AO renders the order erroneous.) 3. Whether the view taken by the Assessing Officer in allowing section 54B deduction was a reasonably sustainable legal view (thus immune from revision under section 263), notwithstanding contrary materials and perceived non-application of mind? 4. Whether differential treatment of co-owners in respect of the same transaction (capital gain accepted for one co-owner and suspected as business income for the other) could justify revisional action against one co-owner. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Scope of section 263 where AO has made inquiries and taken a view Legal framework: Section 263 confers supervisory/revisional jurisdiction on the Commissioner to revise an assessment if the order of the Assessing Officer is 'erroneous insofar as it is prejudicial to the interests of the revenue.' Exercise of the power requires the Commissioner to be satisfied of both components (erroneous + prejudicial). Precedent treatment: The court applied the established principle from the apex authority that both prerequisites must co-exist and that mere disagreement by the Commissioner is insufficient to invoke section 263. Jurisdictional High Court decisions emphasising that where the AO has made enquiries and formed a view, revision is impermissible, were treated as applicable. Interpretation and reasoning: The Tribunal found documentary record of multiple notices and detailed replies, demonstrating that the AO called for and received material relating to purchase/sale deeds, computation, crop details, expenses, buyers, and sales bills. Even if the assessment order did not narrate each step, the AO had in fact examined the evidence. The reviewing authority's contrary belief did not convert the AO's order into an erroneous order within the meaning of section 263. Ratio vs. Obiter: Ratio - Supervisory jurisdiction under section 263 cannot be exercised merely because the Commissioner forms a different view where the AO has made inquiries and adopted a reasonably sustainable view. Obiter - Observations on what an assessment order need not contain in terms of detailed reasons (echoing High Court guidance) were relied on but are reiterative. Conclusions: The Tribunal correctly held that reassessment under section 263 was not permissible where the AO had made inquiries and adopted a plausible, legally sustainable view; hence section 263 could not be validly invoked on the facts. Issue 2 - Application of the 'twin conditions' of error and prejudice under section 263 Legal framework: The two conditions are conjunctive - (i) the AO's order must be erroneous and (ii) that erroneous order must be prejudicial to revenue. Absence of either prevents exercise of revisionary power. Precedent treatment: The Tribunal relied on authoritative jurisprudence setting out the twin-condition test and related High Court authorities limiting exercise of section 263 where the AO undertook inquiries and adopted one of reasonable views. Interpretation and reasoning: The revisional authority recorded concerns (absence of documentary evidence of agricultural activity, frequent land transactions indicating business). The Tribunal, however, analysed the record of notices and the assessee's comprehensive replies (including deed copies, crop details, expense heads, buyers' details, sale bills and revenue records). The Tribunal concluded that there was evidence on record and that the AO had examined the critical issues even if the assessment order did not elaborate those inquiries. Cross-reference: See Issue 1 regarding sufficiency of AO's inquiry and the legal consequence for section 263. Ratio vs. Obiter: Ratio - Both conditions for section 263 were not satisfied; therefore revision was impermissible. Obiter - Comments on specific factual adequacy of agriculture evidence are subsidiary to the primary conclusion. Conclusions: The twin conditions were not established: the assessment order could not be characterised as erroneous and prejudicial in the circumstances, and the revisional order therefore failed legal scrutiny. Issue 3 - Whether AO's view was a reasonable and legally sustainable view Legal framework: Where the AO adopts one of two or more plausible views after enquiry, that view is protected from being overturned merely because the Commissioner prefers another view; judicial review of the AO's choice is limited to situations where the AO's view is unsustainable or perverse. Precedent treatment: The Tribunal followed the principle that an assessing officer's view is to be respected if it is reasonable and plausible; it relied on controlling authorities to this effect. Interpretation and reasoning: Considering the factual matrix - long holding, permission for non-agricultural sale shortly before transfer, documentary responses to multiple notices, and precedent authorities recognizing sale after long agricultural use as capital gain - the Tribunal held the AO's conclusion permitting section 54B deduction was a defensible legal position. The Revisional authority's emphasis on lack of cross-verification was insufficient to render the AO's view perverse when material was before the AO. Ratio vs. Obiter: Ratio - The AO's view was reasonably plausible and legally sustainable; hence not amenable to revision under section 263. Obiter - Discussion of analogous fact-pattern decisions regarding classification of land sale proceeds as capital gain rather than business income served explanatory purposes. Conclusions: The AO's decision to allow section 54B was a sustainable view; consequently, the Tribunal correctly held that the decision could not be said to be erroneous. Issue 4 - Permissibility of differential treatment of co-owners as a basis for revisional action Legal framework: Consistency among co-owners' tax treatment for the same transaction is a relevant factor; factual heterogeneity between co-owners can, however, justify different tax outcomes if supported by material. Precedent treatment: Applied general administrative-law principles that inconsistent departmental treatment requires factual basis; where revenue accepted capital gain for co-owner in respect of the same transaction, the principle of non-arbitrariness applies unless material distinguishes the co-owners. Interpretation and reasoning: The Tribunal found that once the revenue accepted capital gain for one co-owner in respect of the common transaction, there was no basis to subject the present assessee to revision unless the revisional authority could point to material differentiating the co-owner's intention, frequency of transactions, or business involvement. The PCIT's mere assertion that such distinctions were not examined did not suffice to sustain revision. Ratio vs. Obiter: Ratio - Differential treatment without factual basis cannot justify exercise of section 263; this formed part of the Tribunal's factual conclusion. Obiter - Observations on what differentiating material would be relevant are illustrative. Conclusions: The mere fact that a co-owner's assessment treated the transaction differently did not legitimise revisional action against the assessee absent distinct factual justification; this supported the conclusion that section 263 was inapplicable. Overall Conclusion Adopted by the Court The Tribunal's conclusions were affirmed: the AO had made enquiries and adopted a reasonably sustainable view in allowing deduction under section 54B; the revisional authority failed to satisfy the conjunctive twin conditions for exercise of section 263 (error + prejudice); mere disagreement by the Commissioner, absence of expansive reasons in the assessment order, or alleged lack of cross-verification by the AO did not render the assessment order erroneous. No substantial question of law arose from the impugned Tribunal order and the appeal was dismissed.