2006 (1) TMI 173 - AT - Income Tax

Tribunal Upholds Revision of AO's Order: Sale of Import Entitlement Licenses Loss Deemed Erroneous and Prejudicial to Revenue.

The Tribunal dismissed the assessee's appeal, upholding the CIT's order under section 263 of the Income-tax Act. It confirmed that the AO's acceptance of ... Validity Of order passed by the Ld. CIT u/s 263 - export turnover - business loss on sale of license - deduction u/s 37(1) - deduction u/s 80HHC while processing the return u/s 143(1) - HELD THAT:- No dispute that the Assessing Officer had earlier taken into consideration and allowed deduction u/s 80HHC with reference to the import entitlements of Rs. 73,01,184 in assessment year 1996-97 obtained by the assessee. Thus, the assessee first claimed and obtained, in assessment year 1996-97,100% deduction on the said import entitlements u/s 80HHC on the basis of their mere receipt from the Government and without selling them. The assessee thereafter sold those licences and claimed loss of Rs. 13,90,096 on their sale in the assessment year under appeal. In other words, the assessee was claiming in the assessment year under appeal further deduction of Rs. 13,90,096 on account of the alleged loss over and above the deduction of Rs. 73,01,184 allowed by the Assessing Officer u/s 80HHC in assessment year 1996-97 on the basis of mere receipt of import licences. In our view, it was a fit case for the learned Commissioner to exercise his revisional jurisdiction u/s 263 which he rightly exercised by cancelling the assessment order and directing the Assessing Officer to pass a fresh order in accordance with law after giving a reasonable opportunity of hearing to the assessee. In our view, the assessee should have no grievance in that the learned Commissioner has simply asked the Assessing Officer to consider the claim of the assessee as per law. The assessee can neither contend nor expect that loss returned by it should be accepted by the Department without proper scrutiny and objective consideration of the issues by the Assessing Officer. Thus, it is mere failure on the part of the Assessing Officer to make the necessary inquiries or to examine the claim made by the assessee in accordance with law, which renders the resultant order erroneous and prejudicial to the interest of the revenue. Nothing more is required to be established in such a case. One would not know as to what would have happened if the Assessing Officer had made the requisite inquiries or examined the claim of the assessee in accordance with law. He could have accepted the assessee's claim. Equally, he could have also rejected the assessee's claim depending upon the results of his enquiry or examination into the claim of the assessee. Thus, the formation of any view by the Assessing Officer would necessarily depend upon the results of his inquiry and conscious, and not passive, examination into the claim of the assessee. If the Assessing Officer passes an order mechanically without making the requisite inquiries or examining the claim of the assessee in accordance with law, such an order will clearly be erroneous in law as it would not be based on objective consideration of the relevant materials. It is therefore, the mere failure on the part of the Assessing Officer in not making the inquiries or not examining the claim of the assessee in accordance with law that per se renders the resultant order erroneous and prejudicial to the interest of the revenue. Nothing else is required to be established in such a case to show that the order sought to be revised is erroneous and prejudicial to the interests of the revenue. The provisions of section 263 would loose significance if they were to be interpreted in a manner that prevented the Commissioner from revising the erroneous order passed by the Assessing Officer, which was prejudicial to the interest of the revenue. In fact, such a course would be counter productive as it would have the effect of promoting arbitrariness in the decisions of the Assessing Officers and thus destroy the very fabric of sound tax discipline. If erroneous orders, which are prejudicial to the interest of the revenue are allowed to stand, the consequences would be disastrous in that the honest tax payers would be required to pay more than others to compensate for the loss caused by such erroneous orders. Thus, we are of the view that the orders passed on an incorrect assumption of facts or incorrect application of law or without applying the principles of natural justice or without application of mind or without making requisite inquiries will satisfy the requirement of the order being erroneous and prejudicial to the interest of the revenue within the meaning of section 263. Before we conclude the matter, we wish to clarify that the observations made by us in the preceding paragraphs are in the context of the provisions of section 263. They have been made in order to examine the legality of the impugned order passed by the learned Commissioner u/s 263. The Assessing Officer is however free to decide the matter in the fresh round of assessment initiated as a result of the order of the learned Commissioner on merits and in accordance with law without being influenced by the aforesaid observations. Thus, the appeal filed by the assessee is dismissed. Issues Involved:1. Legality of the order passed by the Commissioner of Income-tax under section 263 of the Income-tax Act.2. Deductibility of the loss incurred by the appellant on the sale of import entitlement licenses.3. Whether the Assessing Officer's acceptance of the loss claimed by the assessee was erroneous and prejudicial to the interest of the revenue.4. Applicability of section 80HHC and section 37(1) in the context of the claimed loss.5. Jurisdiction of the Commissioner under section 263 to revise the Assessing Officer's order.Detailed Analysis:1. Legality of the Order Passed by the Commissioner of Income-tax under Section 263:The appeal was filed against the order passed by the Commissioner of Income-tax (CIT) under section 263 of the Income-tax Act, 1961. The CIT had found that the Assessing Officer (AO) had accepted the loss claimed by the assessee without proper examination, making the AO's order erroneous and prejudicial to the interest of the revenue. The CIT issued a show-cause notice under section 263 and, after considering the assessee's response, set aside the AO's order, directing a fresh assessment.2. Deductibility of the Loss Incurred by the Appellant on the Sale of Import Entitlement Licenses:The assessee had shown the value of import entitlement licenses in the closing stock of the assessment year 1996-97 and claimed a deduction under section 80HHC. In the assessment year 1998-99, the assessee sold the remaining licenses and incurred a loss of Rs. 13,90,096, which was claimed as a deduction under section 37(1). The CIT held that since the value of the licenses was already considered for deduction under section 80HHC in the earlier year, the further deduction for the loss on their sale was untenable.3. Whether the Assessing Officer's Acceptance of the Loss Claimed by the Assessee was Erroneous and Prejudicial to the Interest of the Revenue:The CIT found that the AO had accepted the loss claimed by the assessee without any objective consideration or evaluation of the issues involved. The AO's order was deemed to be mechanically passed without application of mind, making it erroneous and prejudicial to the interest of the revenue. The Tribunal upheld this view, stating that the AO's failure to make necessary inquiries or examine the claim rendered the order erroneous and prejudicial to the revenue.4. Applicability of Section 80HHC and Section 37(1) in the Context of the Claimed Loss:The assessee argued that the deduction under section 80HHC in the assessment year 1996-97 and the business loss on the sale of licenses in the assessment year 1998-99 were different claims and their admissibility depended on the fulfillment of statutory conditions. The Tribunal, however, held that the assessee could not claim a further deduction for the loss on the sale of licenses already considered for deduction under section 80HHC. The Tribunal emphasized that an exporter cannot suffer a loss on the sale of import licenses obtained as incentives without paying any cost for them.5. Jurisdiction of the Commissioner under Section 263 to Revise the Assessing Officer's Order:The Tribunal examined the legality of the CIT's order under section 263, which empowers the Commissioner to revise an erroneous and prejudicial order passed by the AO. The Tribunal held that the AO's order was erroneous due to the lack of proper examination and inquiry into the assessee's claim. The Tribunal supported the CIT's jurisdiction under section 263, stating that the AO's failure to make necessary inquiries or examine the claim rendered the order erroneous and prejudicial to the revenue.Conclusion:The Tribunal upheld the CIT's order under section 263, dismissing the appeal filed by the assessee. The Tribunal emphasized the importance of proper examination and inquiry by the AO in making assessments and supported the CIT's jurisdiction to revise erroneous and prejudicial orders. The assessee's claim for the loss on the sale of import entitlement licenses was found to be untenable, and the AO's acceptance of the claim without proper scrutiny was deemed erroneous and prejudicial to the revenue.