TaxTMI 
TaxTMI 
2026 (8) TMI 1042
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....olding that decision of Assessing Officer cannot be treated as erroneous and prejudicial to the interest of revenue even though the AO has not made enquiry which should not have been made as envisaged by the decision of the Apex Court in the case of CIT-I, Mumbai v. Amitabh Bachchan in Civil Appeal No. 5009 of 2016? (ii) Whether on the facts and in the circumstances of the case and in law, the Hon'ble ITAT is justified in allowing the claim of the Assessee in respect of genuineness of unsecured loans and trade payables even though the assessment order passed by the Assessing Officer is prejudicial to the interest of Revenue in terms of Explanation 2(a) to Section 263(1) of the Act? (iii) Whether on the facts and in the circumstances of the case and in law, the Hon'ble ITAT erred in observing that Ld. PCTI was not empowered and entitled to revise assessment order under Section 263 of the Act r/w Explanation 2 even though there was loss to the Revenue and the assessment order was prejudicial to the interest of Revenue and ignoring the decision of Hon'ble Apex Court in case of CIT v. M/s. Paville Projects Pvt. Ltd.? (iv) Whether on the facts and in the circu....
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....019 and the assessee was asked to explain as to why the entire trade payable of Rs.5.01 crores should not be added. But the assessee in reply to such show cause notice submitted list of parties from whom the trade payables and details were called for and the Assessing Officer without considering the genuineness or creditworthiness of the trade payable for issuing notice under Section 133(6) of the Act accepted the details submitted by the assessee, which according to Pr. CIT was incomplete. The Pr. CIT, was therefore, of the opinion that the Assessment Order was passed without proper verification or inquiry on the issue which should have been made during the assessment which rendered the Assessment Order erroneous insofar as prejudicial to the interest of the Revenue within the meaning of Section 263 of the Act. 3.3. The Tribunal after considering the contentions raised on behalf of the assessee and on perusal of the Assessment Orders passed under Section 143(3) of the Act as well as the Revisional Order passed by the Pr. CIT under Section 263 of the Act and the settled legal position as per the decisions of this Court and the Hon'ble Apex Court in case of Principal Commissioner....
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.... We further find that the Hon'ble High Court in case of Pr. CIT v. Shreeji Prints (Pvt.) Ltd. (supra), while referring the contents of decision of Tribunal, noted that language of audit objection and show cause notice under Section 263 of the Act is same, meaning thereby that show cause notice under Section 263 of the Act by the ld. PR. CIT is without going through the assessment record and without exercising his own application of mind when the assessee has filed complete details of income tax return, balance sheet and P & L account." 3.4. The Tribunal after referring to the case laws, settled legal position as held by this Court as well as by the Hon'ble Apex Court in the following decisions has observed as under:- "14. We also find that Hon'ble Jurisdictional High Court in Aryan Arcade Ltd. v. Pr. CIT (2019) 412 ITR 277 (Gujarat) held that merely because Commissioner held a different belief that would not permit him to take the order in revision, it further held that when Assessing Officer made full enquiry, he made up his mind, the notice of revision is not valid. By following the aforesaid decisions of Superior Courts, the combination of this bench also took simila....
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....h should have been made by the Assessing Officer. It was, therefore, submitted that in the facts of the case when the assessee has failed to submit the requisite details called for by the Assessing Officer and the Assessing Officer has failed to conduct independent inquiry and ignored further investigation, the Pr. CIT was justified in invoking Explanation-2 to Section 263 of the Act to assume the jurisdiction under Section 263 of the Act and, therefore, the Tribunal was not justified in setting aside the order of the Pr. CIT in the facts of the case. 5. Having heard the learned Senior Standing Counsel Mr. Karan Sanghani appearing for the appellant and having perused the Assessment Order passed under Section 143(3) of the Act as well as the order under Section 263 of the Act passed by the Pr. CIT and the order of the Tribunal, the reasoning of the Tribunal which is reproduced herein-above clearly shows that the Assessing Officer had called for the relevant details by issuing the show cause notice and had duly considered the material placed on record, including the paper book. On perusal of the show cause notice the Assessing Officer had called upon the details to make addition o....
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.... this Act available at the time of examination by the Principal Commissioner or Commissioner; (c) where any order referred to in this sub-section and passed by the Assessing Officer had been the subject matter of any appeal filed on or before or after the 1st day of June, 1988, the powers of the Principal Commissioner or] Commissioner under this sub-section shall extend and shall be deemed always to have extended to such matters as had not been considered and decided in such appeal. Explanation 2.-For the purposes of this section, it is hereby declared that an order passed by the Assessing Officer shall be deemed to be erroneous in so far as it is prejudicial to the interests of the revenue, if, in the opinion of the Principal Commissioner or Commissioner,- (a) the order is passed without making inquiries or verification which should have been made; (b) the order is passed allowing any relief without inquiring into the claim; (c) the order has not been made in accordance with any order, direction or instruction issued by the Board under section 119; or (d) the order has not been passed in accordance with any decision which is pr....
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....firmation or inquiry has resulted into any loss to the Revenue which is prejudicial to the interest of the Revenue, it cannot be said that the Pr. CIT was right in invoking Section 263 of the Act. 7.2. Therefore, as already held by the decision of the Hon'ble Apex Court in case of Malabar Industries Co. Ltd. (supra) as well as decision of this Court in case of Shreeji Prints (Pvt.) Ltd. (supra), there is twin conditions with regard to the assessment order being erroneous and prejudicial to the interest of the Revenue which is the basis for assuming jurisdiction under Section 263 of the Act and Explanation-2 only provides for deeming fiction when these two conditions are fulfilled and when the Assessing Officer has not made sufficient inquiry then it is is deemed to be erroneous and prejudicial to the interest of the Revenue. 8. In the facts of the case when the Assessing Officer has made the inquiry and has arrived at a satisfaction, the Pr. CIT cannot impose his own opinion to assume the jurisdiction on assumption that by not furnishing the confirmation and not making further inquiry by the Assessing Officer, would result into addition under Section 68 of the Act. 9. In t....
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....t and directing a fresh assessment." 6. A bare reading of this provision makes it clear that the pre-requisite to exercise of jurisdiction by the Commissioner suo motu under it, is that the order of the Income-tax Officer is erroneous insofar as it is prejudicial to the interests of the revenue. The Commissioner has to be satisfied of twin conditions, namely, (i) the order of the Assessing Officer sought to be revised is erroneous; and (ii) it is prejudicial to the interests of the revenue. If one of them is absent-if the order of the Income-tax Officer is erroneous but is not prejudicial to the revenue or if it is not erroneous but is prejudicial to the revenue - recourse cannot be had to Sec. 263(1) of the Act. 7. There can be no doubt that the provision cannot be invoked to correct each and every type of mistake or error committed by the Assessing Officer; it is only when an order is erroneous that the section will be attracted. An incorrect assumption of facts or an incorrect application of law will satisfy the requirement of the order being erroneous. In the same category fall orders passed without applying the principles of natural justice or without applica....
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....s Court that where a sum not earned by a person is assessed as income in his hands on his so offering, the order passed by the Assessing Officer accepting the same as such will be erroneous and prejudicial to the interests of the revenue. Rampyari Devi Saraogi V/s. Commissioner of Income-tax, and in Smt. Tara Devi Aggarwal V/s. Commissioner of Income-tax, West Bengal. 10. In the instant case, the Commissioner noted that the Income-tax Officer passed the order of nil assessment without application of mind. Indeed, the High Court recorded the finding that the Income-tax Officer failed to apply his mind to the case in all perspective and the order passed by him was erroneous. It appears that the resolution passed by the board of the appellant-company was not placed before the Assessing Officer. Thus, there was no material to support the claim of the appellant that the said amount represented compensation for loss of agricultural income. He accepted the entry in the statement of the account filed by the appellant in the absence of any supporting material and without making any inquiry. On these facts the conclusion that the order of the Income-tax Officer was erroneous is irre....
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....ct to assessee's on-money receipts. The assessee carried the issue before the Tribunal. The Tribunal, by the impugned judgment, reversed the order of Commissioner. In such judgment, the Tribunal observed that in the order of assessment, the Assessing Officer had raised multiple queries calling upon the assessee's response. The Tribunal was of the opinion that the Assessing Officer had carried out detailed inquiries. The Commissioner was incorrect in holding that no inquiries were carried out. The revisional powers, therefore, could not have been exercised. 3. We have heard learned counsel for the Revenue and perused the documents on record. In particular, the Tribunal has in the impugned judgment referred to the detailed correspondence between Assessing Officer and the assessee during the course of assessment proceedings to come to a conclusion that the Assessing Officer had carried out detailed inquiries which includes assessee's on-money transactions. It was on account of these findings that the Tribunal was prompted to reverse the order of revision. No question of law arises. Tax Appeal is dismissed." (d) In case of Commissioner of Income Tax v. Nirma ....
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....hed. In the aforesaid circumstances, the CIT could not have exercised jurisdiction u/s. 263 of the Act as per settled legal position. 26. The view expressed by this Court in the case of CIT V/s. Shashi Theatre Pvt. Ltd. (supra) therefore is in consonance with not only the requirement of law but concludes the issue in so far as the present case is concerned. Just as it is not possible to decide grant of investment allowance in relation to one or the other item without considering the eligibility thereof, similarly deduction u/s. 80-I of the Act cannot be considered without deciding whether a particular portion of profits and gains has been derived from an industrial undertaking which fulfills the requisite conditions stipulated by the section. 27. In the aforesaid set of facts and circumstances of the case and the view that the Court has adopted, it is not necessary to enter into any discussion as regards merits of the controversy which has been brought before this Court by the other questions at the instance of the assessee and the question at the instance of the revenue. The Reference is answered accordingly by holding that the Tribunal committed an error in upho....
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.... 2016 dated 21.06.2016, this Court has observed as under :- "3. It can thus, be seen that issue pertains to validity of the order passed by the Commissioner in exercise of revisional jurisdiction under section 263 of the Income Tax Act against the order passed by the Assessing Officer in reassessment. The Commissioner who was of the opinion that inquiries were not made in respect of 11 share and premium applicants, total investment of which came to Rs.56 lacs. He therefore restored the matter back to the Assessing Officer for carrying out necessary inquiries with respect to identity and creditworthiness of these 11 share applicants and then to decide about genuineness of the share application transactions. The Tribunal in impugned judgment upon perusal of the record, particularly of the assessment proceedings held that the Assessing Officer had in fact, made inquiries with these 11 applicants also. The Tribunal held that even the Commissioner did not dispute this fact. The Tribunal was therefore of the opinion that this was not a case where it can be said that the Assessing Officer failed to carry out any inquiry at all. The Tribunal also noted that the Assessing Officer h....
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.... (1) of section, it is clear that the power of suo motu revision can be exercised by the Commissioner only if, on examination of the records of any proceedings under this Act, he considers that any order passed therein by the Income-tax Officer is "erroneous in so far as it is prejudicial to the interests of the Revenue". It is not an arbitrary or unchartered power. It can be exercised only on fulfilment of the requirements laid down in sub-section (1). The consideration of the Commissioner as to whether an order is erroneous in so far as it is prejudicial to the interests of the Revenue, must be based on materials on the record of the proceedings called for by him. If there are no materials on record on the basis of which it can be said that the Commissioner acting in a reasonable manner could have come to such a conclusion, the very initiation of proceedings by him will be illegal and without jurisdiction. The Commissioner cannot initiate proceedings with a view to starting fishing and roving enquiries in matters or orders which are already concluded. Such action will be against the well-accepted policy of law that there must be a point of finality in all legal proceedings, that ....
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....t of the record of the case. Evidently, the claim was allowed by the Income-tax Officer on being satisfied with the explanation of the assessee. Such decision of the Income-tax Officer cannot be held to be "erroneous" simply because in his order he did not make an elaborate discussion in that regard ... xxx" 13. When we examine the matter in the light of the aforesaid principle, we find that the AO had called for explanation on this very item, from the assessee and the assessee had furnished his explanation vide letter dated 26.09.2002. This fact is even taken note of by the Commissioner himself in Para 3 of his order dated 03.11.2004. This order also reproduces the reply of the respondent in Para 3 of the order in the following manner : "The tools and dies have a very short life and can produce upto maximum 1 lakh Permissible shorts and have to be replaced thereafter to retain the accuracy. Most of the parts manufactured are for the automobile industries which have to work on complete accuracy at high speed for a longer period. Since it is an ongoing procedure, a company had produced 10,75,000 sets whose selling rates is inclusive of the reimbursement of the dies....
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....ome tax authorities. Interestingly, even for future assessment years, the same very accounting practice is accepted. 17. It is in this context the question that assumes importance is as to whether powers could be exercised under Section 263 of the Act when two views are possible and following observations of the Tribunal, in this backdrop, become relevant : "38. Still further, the Hon'ble Supreme Court in Malabar Industrial Co. Ltd. (supra) has held that when two views are possible and the AO has taken one of the possible view, then the order cannot be held to be prejudicial to the interest of the Revenue. Since the CIT could not come to a definite finding that the expenditure in question was a capital expenditure in the proceedings under Section 263, in our opinion, the order of the AO could not be held to be erroneous." (h) In case of Commissioner of Income Tax v. Vikas Polymers reported in [2012] 341 ITR 537 (Delhi), the Hon'ble High Court of Delhi has observed as under :- "9. Before we undertake the exercise of answering the reference, it is deemed expedient to reiterate the governing principles laid down by Courts with regard to the exer....
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....de import and is not confined to the loss of tax see Dawjee Dadabhoy & Co. (supra), CIT V. T. Narayana Pai (1975) 98 ITR 422 (Kar), CIT V. Gabriel India Ltd. (supra) and CIT V. Smt. Minalben S. Parikh (1995) 215 ITR 81 (Guj). 12. At the same time, the words "prejudicial to the interest of the revenue", as observed in Dawjee Dadabhoy and Co. V. S.P. Jain (1957) 311 ITR 872 (Calcutta), can only mean that "the orders of assessment challenged are such as are not in accordance with law, in consequence whereof the lawful revenue due to the State has not been realized or cannot be realized." Thus, the Commissioner's exercise of revisional jurisdiction under the provisions of Section 263 cannot be based on whims or caprice. It is trite law that it is a quasi judicial power hedged in with limitation and not an unbridled and unchartered arbitrary power. The exercise of the power is limited to cases where the Commissioner on examining the records comes to the conclusion that the earlier finding of the Income Tax Officer was erroneous and prejudicial to the interest of the revenue and that fresh determination of the case is warranted. There must be material to justify the Commissi....
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.... Tax Officer has exercised the quasi-judicial power vested in him in accordance with law and arrived at conclusion and such a conclusion cannot be termed to be erroneous simply because the Commissioner does not feel satisfied with the conclusion. x x x x There must be some prima facie material on record to show that tax which was lawfully exigible has not been imposed or that by the application of the relevant statute on an incorrect or incomplete interpretation a lesser tax than what was just has been imposed. x x x x We may now examine the facts of the present case in the light of the powers of the Commissioner set out above. The Income Tax Officer in this case had made enquiries in regard to the nature of the expenditure incurred by the assessee. The assessee had given detailed explanation in that regard by a letter in writing. All these are part of the record of the case. Evidently, the claim was allowed by the Income Tax Officer on being satisfied with the explanation of the assessee. Such decision of the Income Tax Officer cannot be held to be "erroneous" simply because in his order he did not make an elaborate discussion in that regard........
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.... for not examining the details of the credits appearing in various names. What those details required to be examined were have not been set out. There is thus absolutely no reason in support of the conclusion of the Commissioner that the assessment order was erroneous and prejudicial to the interests of the Revenue. The power of the Commissioner under Section 263 is quasi-judicial in character. He must give reasons in support of his conclusion that the assessment order is erroneous in so far as it is prejudicial to the interests of the Revenue. If he does not give reasons, the order would be vitiated. This was the view taken by this Court in the case of J.P. Srivastava & Sons Ltd. V. Commissioner of Income Tax (1978) 111 ITR 326 (All) and Commissioner of Income Tax V. Sunder Lal (1974) 96 ITR 310 (All). In the instant case, since the Commissioner has not applied his mind to the relevant material on record and has not given reasons for his conclusions that the assessment order was prejudicial to the interest of the Revenue, the Tribunal was justified in reversing that order. 17. Similar view was expressed by the Punjab & Haryana High Court in CIT V. R.K. Metal Work....
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....ner is satisfied, after hearing the assessee, that the orders are not erroneous and prejudicial to the interest of the revenue, he may choose not to exercise his power of revision. This is for the reason that if a query is raised during the course of scrutiny by the assessing Officer, which was answered to the satisfaction of the assessing Officer, but neither the query nor the answer were reflected in the assessment order, this would not by itself lead to the conclusion that the order of the assessing Officer called for interference and revision. In the instant case, for example, the Commissioner has observed in the order passed by him that the assessee has not filed certain documents on the record at the time of assessment. Assuming it to be so, in our opinion, this does not justify the conclusion arrived at by the Commissioner that the assessing Officer had shirked his responsibility of examining and investigating the case. More so, in view of the fact that the assessee explained that the capital investment made by the partners, which had been called into question by the Commissioner, was duly reflected in the respective assessments of the partners who were Income Tax assessees ....
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.... erroneous can set aside the assessment in exercise of power under section 263 of the Act. It may be expedient at this stage to set out section 263 of the Act. Section 263, so far as relevant, runs as follows : "263. Revision of orders prejudicial to Revenue. - (1) The Commissioner may call for and examine the record of any proceeding under this Act, and if he considers that any order passed therein by the Income Tax Officer is erroneous in so far as it is prejudicial to the interests of the Revenue, he may, after giving the assessee an opportunity of being heard and after making or causing to be made such inquiry as he deems necessary, pass such order thereon as the circumstances of the case justify, including an order enhancing or modifying the assessment, or cancelling the assessment and directing a fresh assessment. (2) No order shall be made under sub-section (1) - (a) to revise an order of reassessment made under section 147, or (b) after the expiry of two years from the date of the order sought to be revised. . . . 9. From a reading of sub-section (1) of section 263, it is clear that the power of suo motu revision can be exercised by the C....
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....ue. It has, therefore, to be considered firstly as to when an order can be said to be erroneous. We find that the expressions "erroneous", "erroneous assessment" and "erroneous judgment" have been defined in Black's Law Dictionary. According to the definition, "erroneous" means "involving error; deviating from the law". "Erroneous assessment" refers to an assessment that deviates from the law and is, therefore, invalid, and is a defect that is jurisdictional in its nature, and does not refer to the judgment of the Assessing Officer in fixing the amount of valuation of the property. Similarly, "erroneous judgment" means "one rendered according to course and practice of court, but contrary to law, upon mistaken view of law; or upon erroneous application of legal principles". 12. From the aforesaid definitions it is clear that an order cannot be termed as erroneous unless it is not in accordance with law. If an Income Tax Officer acting in accordance with law makes a certain assessment, the same cannot be branded as erroneous by the Commissioner simply because, according to him, the order should have been written more elaborately This section does not visualise a case of ....
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....pplied by the Gujarat High Court in Addl. CIT v. Mukur Corporation [1978] 111 ITR 312 (Guj). We are of the opinion that the aforesaid interpretation given by the Calcutta High Court to the expression "prejudicial to the interests of the Revenue" is the correct interpretation. 14. We, therefore, hold that in order to exercise power under sub-section (1) of section 263 of the Act there must be material before the Commissioner to consider that the order passed by the Income Tax Officer was erroneous in so far as it is prejudicial to the interests of the Revenue. We have already held what is erroneous. It must be an order which is not in accordance with the law or which has been passed by the Income Tax Officer without making any enquiry in undue haste. We have also held as to what is prejudicial to the interests of the Revenue. An order can be said to be prejudicial to the interests of the Revenue if it is not in accordance with the law in consequence whereof the lawful revenue due to the State has not been realised or cannot be realised. There must be material available on the record called for by the Commissioner to satisfy him prima facie that the aforesaid two requisites ....