2002 (12) TMI 13 - SC - Income Tax

Section 263 invalid where Commissioner recorded no reasons while AO relied on contemporaneous precedent treating power subsidy as capital receipt

Commissioner of Income-Tax Versus GM Mittal Stainless Steel P. Ltd.

The SC held that the Commissioner's revision under s.263 was invalid because he recorded no reason showing the Assessing Officer erred; the AO had applied ... Revision of assessment orders under section 263 - power subsidy treatment - Revenue contend that within the State they could refuse to follow the jurisdictional High Court's decision - HELD THAT:- In this particular case, the Commissioner has not recorded any reason whatsoever for coming to the conclusion that the Assessing Officer was erroneous in deciding that the power subsidy was a capital receipt. Given the fact that the decision of the jurisdictional High Court was operative at the material time, the Assessing Officer could not be said to have erred in law. The fact that this court had subsequently reversed the decision of the High Court would not justify the Commissioner in treating the Assessing Officer's decision as erroneous. The power of the Commissioner under section 263 of the Income-tax Act must be exercised on the basis of the material that was available to him when he exercised the power. At that time, there was no dispute that the issue whether the power subsidy should be treated as capital receipt had been concluded against the Revenue. The satisfaction of the Commissioner, therefore, was based on no material either legal or factual which would have given him the jurisdiction to take action under section 263 of the Income-tax Act. If at the time when the power u/s 263 was exercised the decision of the jurisdictional HC had not been set aside by this court or at least had not been appealed from, it would not be open to the Commissioner to have proceeded on the basis that the HC was erroneous and that the AO who had acted in terms of the High Court's decision had acted erroneously. Issues:1. Revision of assessment orders under section 263 of the Income-tax Act, 1961 based on power subsidy treatment.2. Justification of the Commissioner's revision decision.3. Interpretation of the law regarding power subsidy treatment.4. Application of High Court decisions in assessment proceedings.5. Exercise of Commissioner's power under section 263 objectively.Issue 1: Revision of assessment orders under section 263:The case involved the revision of assessment orders for the years 1985-86 and 1986-87 under section 263 of the Income-tax Act, 1961. The Assessing Officer treated power subsidy as a capital receipt instead of revenue, following a High Court decision. The Commissioner sought to revise these orders without providing specific reasons for considering them erroneous.Issue 2: Justification of the Commissioner's revision decision:The Tribunal found the Commissioner's exercise of power under section 263 to be incorrect due to the lack of reasons provided for deeming the assessment orders erroneous. The High Court, on a reference, ruled against the Revenue and in favor of the assessee, emphasizing the necessity for the Commissioner to establish the Assessing Officer's error and its prejudicial impact on revenue.Issue 3: Interpretation of the law regarding power subsidy treatment:The Revenue authorities argued that a subsequent Supreme Court decision contradicted the earlier High Court ruling on power subsidy treatment. They contended that the Commissioner was justified in revising the assessment orders based on the new legal interpretation. However, the Court held that the Commissioner's satisfaction must be objectively justifiable and cannot be arbitrary.Issue 4: Application of High Court decisions in assessment proceedings:The Court analyzed the relevance of High Court decisions in assessment proceedings. It differentiated situations where decisions under appeal could justify revision proceedings from cases where the issue was conclusively settled by the High Court. The Court emphasized that the Commissioner's power under section 263 should be based on existing legal and factual circumstances.Issue 5: Exercise of Commissioner's power under section 263 objectively:The Court dismissed the appeals, emphasizing that the Commissioner's power under section 263 must be exercised objectively. It highlighted that the Commissioner cannot act on the basis of subsequent legal developments but must consider the legal landscape at the time of assessment. The Court underscored the importance of maintaining consistency and legal certainty in tax assessments.In conclusion, the judgment focused on the necessity for the Commissioner to provide valid reasons for revising assessment orders under section 263, emphasizing the objective and justifiable nature of such decisions based on existing legal interpretations and factual circumstances.