2025 (5) TMI 714 - HC - Income Tax

Legal Challenge Dismissed: Valuation Officer's Report Absence Not Automatically Invalidating Income Tax Assessment Under Section 263

The SC examined whether the absence of a District Valuation Officer's report in an income tax assessment order constitutes a substantial question of law ... Validity of revision u/s 263 - 'Substantial Question of Law' - assessment order passed without valuation report of the DVO is erroneous and prejudicial to the interest of Revenue - whether Tribunal was correct in law in setting aside the order u/s 263 passed by PCIT by holding that the same is not within the purview of section 263 of the act without considering the fact that the assessment order without valuation report of the DVO is erroneous and prejudicial to the interest of Revenue'? HELD THAT:- We are of the considered opinion that the question framed is neither a question of law, nor a mixed question of law & facts, more particularly when it related to non-furnishing of valuation report of a particular property allegedly because the Assessee did not co- operate. Ordinarily, when the owner or occupier of the property does not co-operate in the process of valuation, the exercise should be undertaken by adopting best judgment valuation principle. This reasoning animates the impugned order of the Tribunal. The appeal being unmeritorious is liable to be rejected and accordingly it is, costs having been made easy. 1. ISSUES PRESENTED and CONSIDEREDThe core legal question considered by the Court was whether the Tribunal was correct in law in setting aside the order passed under section 263 of the Income Tax Act by the Principal Commissioner of Income Tax (PCIT), on the ground that the said order was not within the purview of section 263, despite the assessment order being rendered without a valuation report from the District Valuation Officer (DVO), which the Revenue contended rendered the assessment erroneous and prejudicial to its interests. The substantial question of law raised was whether the absence of the DVO's valuation report in the assessment order automatically rendered the order erroneous and subject to revision under section 263.2. ISSUE-WISE DETAILED ANALYSISIssue: Whether the Tribunal correctly held that the order under section 263 was not sustainable merely because the assessment order lacked the DVO's valuation report, and whether this constitutes a substantial question of law.Relevant Legal Framework and Precedents: The Court examined the appellate jurisdiction under section 260A of the Income Tax Act, which permits appeal to the High Court only if a substantial question of law is involved. The Court referred extensively to the principles governing what constitutes a 'substantial question of law' as elucidated in prior judgments and authoritative texts. It noted that the phrase 'substantial question of law' is not defined in the Act or in the Code of Civil Procedure (CPC), but judicial pronouncements have clarified that such a question must be real, essential, and have a material bearing on the rights of the parties, being debatable and not settled conclusively by precedent.The Court cited the Kerala High Court's observations on the archaic nature of the previous regime and the insertion of sections 260A and 260B to provide for appeals on substantial questions of law. It also referenced the Apex Court's ruling in Santosh Hazari vs. Purushottam, which emphasized that a substantial question of law is one that is debatable and affects the parties' rights materially. The Court further relied on the treatise by Kanga & Palkhivala which enumerates illustrative criteria for such questions, including whether legal principles have been misapplied or evidence misread.Court's Interpretation and Reasoning: The Court observed that the question framed by the Revenue did not qualify as a substantial question of law. It was neither a pure question of law nor a mixed question of law and fact. The issue primarily revolved around the factual circumstance of the Assessee's non-cooperation in furnishing the valuation report from the DVO. The Tribunal's approach, which upheld the use of best judgment valuation principles in the absence of cooperation from the Assessee, was found to be a reasonable exercise of discretion and fact-based determination rather than an error of law.The Court reasoned that the absence of the DVO's valuation report due to non-cooperation by the Assessee does not ipso facto render the assessment order erroneous or prejudicial to the Revenue's interest. The Tribunal's decision to set aside the revision under section 263 was thus justified. The Court emphasized that the Revenue's contention was essentially a factual dispute about the valuation process and the Assessee's conduct, which does not constitute a substantial question of law.Key Evidence and Findings: The critical factual finding was that the Assessee did not cooperate in providing the valuation report, which led the assessing authority to rely on best judgment valuation. The Tribunal accepted this approach as reasonable and lawful. The Revenue failed to demonstrate any legal error or misapplication of principles that would warrant interference under section 263.Application of Law to Facts: Applying the legal standards for substantial questions of law to the facts, the Court found that the Revenue's appeal did not raise any debatable or unsettled legal question. The issue was essentially a factual one concerning procedural compliance and the exercise of discretion in valuation. The Tribunal's order was therefore not liable to be set aside on the ground urged by the Revenue.Treatment of Competing Arguments: The Revenue argued that the absence of the DVO's valuation report rendered the assessment order erroneous and prejudicial, justifying revision under section 263. The Assessee contended that this was a question of fact and that the Tribunal's order was correct. The Court sided with the Assessee, holding that the Revenue's argument did not raise a substantial question of law and that the Tribunal's factual and discretionary findings were unimpeachable in law.Conclusions: The Court concluded that the question framed by the Revenue was not a substantial question of law and that the Tribunal was correct in setting aside the revision order under section 263. Consequently, the appeal was dismissed as unmeritorious.3. SIGNIFICANT HOLDINGS'Appeal lies only if the case involves a substantial question of law, which the memorandum of appeal, ideally speaking, has to precisely state. However, if the High Court is satisfied that a substantial question of law is otherwise involved, it may itself formulate such question and admit the appeal.''The substantial question of law on which an appeal shall be heard need not necessarily be a question of law of general importance. To be 'substantial', a question of law must be debatable and it must have a material bearing on the decision of the case in the sense that if answered either way insofar as the rights of the parties are concerned.''Ordinarily, when the owner or occupier of the property does not co-operate in the process of valuation, the exercise should be undertaken by adopting best judgment valuation principle.''The question framed is neither a question of law, nor a mixed question of law & facts, more particularly when it related to non-furnishing of valuation report of a particular property allegedly because the Assessee did not co-operate.''The appeal being unmeritorious is liable to be rejected and accordingly it is.'