Itta/36/2004 Of Commissioner Of Income Tax Ii v. Shri Varanasi Kanta Rao

*THE HON'BLE SRI JUSTICE DILIP B. BHOSALE AND THE HON'BLE SRI JUSTICE A.RAMALINGESWARA RAO I.T.T.A.No.36 of 2004 % 31.03.2015 Between:Commissioner of Income Tax-II,Visakhapatnam.… PetitionerANDShri Varanasi Khanta Rao,Prop.Sri Sai Srinivasa Modern Rice Mill,Avalangi Village, Srikakulam Mandal,Srikakulam District.…RespondentCounsel for petitioner: Senior Counsel Sri S.R.Ashok Counsel for the Respondents : Sri Challa Gunaranjan > Head Note: ? CITATIONS: 1. (1968) 67 ITR 84 2. (1973) 88 ITR 323 3. (2000) 2 SCC 718 THE HON'BLE SRI JUSTICE DILIP B. BHOSALE AND THE HON'BLE SRI JUSTICE A.RAMALINGESWARA RAO I.T.T.A.No.36 of 2004 JUDGMENT:(Per Hon’ble Sri Justice A.Ramalingeswara Rao) This appeal is filed by the Revenue against the order of the Income TaxAppellate Tribunal, Visakhapatnam, in I.T.A.No.375/V/2002, dated 20.11.2002,allowing the appeal of the assessee for the year 1999-2000. The following substantial questions of law were framed for ourconsideration: “(a) Whether the Appellate Tribunal is justified in holding that therevisional proceedings are vitiated on the ground of lack ofjurisdiction?revisional proceedings are vitiated on the ground of lack ofjurisdiction? (b) Whether the observations of the Appellate Tribunal with regard to jurisdictional constraints u/s.263 are not based on statutorylanguage employed in Sec.263 of I.T.Act? (c) Whether the Appellate Tribunal is justified in holding thatcancellation of assessment by the Commissioner andordering fresh enquiry is beyond the jurisdiction of theCommissioner U/s.263?cancellation of assessment by the Commissioner andordering fresh enquiry is beyond the jurisdiction of theCommissioner U/s.263? (d) Whether the Appellate Tribunal is justified in entering intomerits of the case and recording findings on the factual matrixin the absence of placement of any material either beforeassessing authority or revisional authority much less findingswere recorded by them?”merits of the case and recording findings on the factual matrixin the absence of placement of any material either beforeassessing authority or revisional authority much less findingswere recorded by them?” Though the above questions of law were framed, all the questionscentered round the power and jurisdiction of the revisional authority underSection 263 of the Income Tax Act (for short, the Act), and hence in the factsand circumstances of the case, we reframe the substantial question of law asfollows for our consideration: “Whether on the facts and in the circumstances of the case, theIncome Tax Appellate Tribunal, Visakhapatnam, is justified inholding that the Commissioner of Income Tax did not exercise hisjurisdiction under Section 263 of the Income Tax Act properly?” The assessee is a Proprietor of Sri Sai Srinivasa Modern Rice Mill,Srikakulam, and he completed the construction of rice mill by March 1999. Hefiled return of income for the assessment year 1999-2000 declaring the incomeof Rs.4,60,960/-. It was processed under Section 143(1) of the Act. Theassessee was connected to Sri Venkata Santhamani Modern Rice, GroundnutOil Mill, in respect of which a survey under Section 133A of the Act wasconducted and the case of the assessee was also taken up for scrutiny by theAssessing Officer. The Assessing Officer passed an order on 15.03.2000 asfollows: “The assessee has filed return of income for the Assessmentyear 1999-2000 on 31.12.1999 by declaring income of Rs.4,60,960/-and the same has been processed U/s.143(1). This case isconnected case to Sri Venkata Santhamani Modern Rice G.N.OilMill where in Survey under Section 133A was conducted. Hence it has been taken up for scrutiny and notices U/s.143(2) have beenissued. In response there to the assessee and his AuthorisedRepresentative appeared and discussed about the case. As theassessee has filed return of income by admitting income and paidthe taxes as agreed at the time of survey, the assessment iscompleted by accepting the returned income. “The assessee has filed return of income for the Assessmentyear 1999-2000 on 31.12.1999 by declaring income of Rs.4,60,960/-and the same has been processed U/s.143(1). This case isconnected case to Sri Venkata Santhamani Modern Rice G.N.OilMill where in Survey under Section 133A was conducted. Hence it has been taken up for scrutiny and notices U/s.143(2) have beenissued. In response there to the assessee and his AuthorisedRepresentative appeared and discussed about the case. As theassessee has filed return of income by admitting income and paidthe taxes as agreed at the time of survey, the assessment iscompleted by accepting the returned income. Rs.Income Returned : 4,60,960Add: Agrl. Income : 38,200_________Total : 4,99,160_________Income Tax thereon : 1,23,748Less: Rebate on Agrl.Income 6,640_________1,17,108Less: Rebate U/s.88 7,457_________1,09,651Add: Int. U/s.234B & C 19,349_________1,29,000Less: Prepaid Taxed 1,29,000_________Tax payable NIL”------------ The Commissioner of Income Tax – 2, Visakhapatnam, called for theassessment record of the assessee and on the basis of the verification of thematerial available in the assessment records he found that the order ofassessment was erroneous in so far as it was prejudicial to the interests ofrevenue on the following grounds: i) There was a short accounting of yield of finished rice to the extent of18% of total paddy consumed which amounted to 5653.95 quintals of finishedrice, and it resulted in short charge of tax of about Rs.19,04,535/-; ii) As per the tax audit report, the valuation of closing stock was notmade at the cost price of the paddy purchased during the financial year 1998-1999; iii) There was a discrepancy in the purchase cost of 2[nd] gunnies ascompared to the 1[st] gunnies and also the sale price of 2[nd] gunnies ascompared to the valuation adopted in respect of the closing stock of 2[nd]gunnies; iv) There was apparent discrepancy between the raw material cost ofeach unit and the sale price of finished rice amounting to Rs.19/- per unit offinished rice sold; v ) The correctness of the credit liabilities of 102 parties with their fulladdresses and the year wise breakup of the past years was not verified by theAssessing Officer; vi) The deduction of interest liability towards other concerns was notproperly examined, and vii) The rebate under Section 88 of the Act should not have been allowedfor NSC deposit of Rs.11,000/-. A show cause notice was issued to the assessee requiring him to submitclarification or explanation to the above issues and also to show cause why theassessment made under Section 143(3) of the Act dated 15.03.2000 should notbe set aside. The assessee appeared through his representative and submitteda written explanation to the show cause notice. After considering theexplanation, the Commissioner considered it desirable to restore the entireassessment order for making fresh assessment de novo and in the concludingparagraph of his order he observed as follows: “In the totality of the facts and circumstances of the case, theassessment order passed by the Assessing Officer u/s.143(3) on15.03.2000 is hereby set aside and the A.O. is directed to initiatefresh assessment proceedings and carry out necessaryenquiries/cross verification in respect of the various points stated in “In the totality of the facts and circumstances of the case, theassessment order passed by the Assessing Officer u/s.143(3) on15.03.2000 is hereby set aside and the A.O. is directed to initiatefresh assessment proceedings and carry out necessaryenquiries/cross verification in respect of the various points stated in the show-cause notice served u/s.263 of the I.T.Act, 1961 andprovide reasonable opportunity to the assessee to produce itsregular books of accounts/bills and vouchers/documents which hemay choose to rely upon for substantiating his own claim. During thefresh assessment proceedings, the A.O should call for the minimumsupport of price fixed by State Govt., towards purchase cost ofdifferent variety of paddy for the F.Y.98-99 and also the sale price ofrice fixed in respect of levy rice sold to FCI for the F.Y.98-99 andexamine whether the purchase cost of paddy was properly shown inthe accounts of assessee and the sale price of the rice was properlyaccounted for. Wherever, the purchase cost of paddy is found to beshown at higher amounts compared to the minimum support pricefixed by the State Govt. for the F.Y.98-99, necessary crossverification may be carried out before allowing the assessee’s claim.The complete details of sundry creditors amounting toRs.33,60,999/- as on 31.03.99 should be cross verified from thecreditors concerned including subsequent date of payment of suchcredit liabilities to each creditor concerned after 31.3.99. Thereaftera fresh assessment order may be passed in accordance with therelevant provisions of law.” While coming to the said conclusion he relied on the decisions of the SupremeCourt in Rampyari Devi Saraogi v. Commissioner of Income Tax andSmt.Tara Devi Aggarwal v. Commissioner of Income Tax. The assessee went in appeal before the Tribunal, wherein reliance of theCommissioner on the above decisions was disputed. The Tribunal consideredthe above issues and replies furnished by the assessee and came to theconclusion that the above points raised by the Commissioner of Income Tax inno way affect the income of assessee and render the assessment proceedingerroneous and prejudicial to the interests of the revenue. The Tribunal furtherheld that after an agreed assessment is completed on the basis of discussionand deliberations made with the assessee and his authorized representative bythe Assessing Officer, the Commissioner of Income Tax is not supposed toraise the issue again and step into the shoes of the Assessing Officer like anappellate authority. After holding so, the Tribunal concluded as follows: “…After all his powers as per the provisions of Section 263are supervisory in nature and not like that of an appellate authority. Itwill not be out of place to mention here that the legislature whilecompiling the statute has assigned only to the first appellateauthority the powers of an AO. By virtue of that power only the firstappellate authority is supposed to step into the shoes of an AO and even can enhance the assessment. Even the Tribunal has not beenassigned with that power of enhancement. Therefore, in all fitness ofthings and in all fairness the legislature’s intention has to beproperly understood and the supervisory power of the CIT shouldnot be misused simply because the order passed by the AO was acryptic one as has been in the impugned case. Hence in ourconsidered view when the issue raised by the CIT in the showcause notice in pursuance to invoking of Section 263 in no way arefatal to the interest of the Revenue when the assessee has alreadydisclosed income at the time of survey u/s.133(A) amounting toRs.3,60,000/- and has accepted the same on agreed basis after duediscussions and deliberations along with his authorizedrepresentative before the AO at the time of assessment proceedingswhich means sticking to his disclosure at the time of survey, in allfairness there does not remain any scope for the CIT to invokeSection 263 and assume his revisional jurisdiction. Further we do not find any infirmity in the order of the AO inthe impugned case as per the two limbs contemplated u/s.263 (i.e.,erroneous and prejudicial to the interest of the Revenue); hence inour considered opinion in the present facts and circumstances of thecase assumption of jurisdiction u/s.263 by the CIT does not stand ona sound footing. We therefore, set aside the order of the CIT andrestore the order of the AO.” Against the said finding recorded by the Tribunal, the present appeal isfiled by the Revenue. It is contended by the learned Counsel for the Revenue that theassessment order is cryptic and the points raised by the Commissioner ofIncome Tax are the errors, which are prejudicial to the interests of the revenue.Learned Counsel for the assessee, on the other hand, submitted that since theAssessing Officer discussed about the case with the assessee and filed thereturn of income admitting the income, paid taxes as agreed at the time ofsurvey and the assessment was completed by accepting the return of income,the Commissioner cannot issue the order for de novo enquiry in exercise of hispowers under Section 263 of the Act. “Revision of orders prejudicial to revenue. 263.(1) ThePrincipal Commissioner orCommissioner may call forand examine the recordof any proceeding under this Act, and if heconsiders that any order passed therein by theAssessing Officer iserroneousin so far asit is prejudicial to the interests of the revenue,he may, after giving the assessee an opportunity of being heard andafter making or causing to be made such inquiry as he deemsnecessary, pass such order thereon as the circumstances of thecase justify, including an order enhancing or modifying theassessment, or cancelling the assessmentand directing a freshassessment. … (2) No order shall be made under sub-section (1) after theexpiry of two years from the end of the financial year in which theorder sought to be revised was passed. (3) Notwithstanding anything contained in sub-section (2), anorder in revision under this section may be passed at any time in thecase of an order which has been passed in consequence of, or togive effect to, any finding or direction contained in an order of theAppellate Tribunal,National Tax Tribunal, the High Court or theSupreme Court…” On a reading of the above provision it is clear that the only preconditionfor revising the order of Assessing Officer is that the order of the AssessingOfficer should be erroneous in so far as it is prejudicial to the interests of therevenue. The Commissioner pointed out the errors in the order of theAssessing Officer and a perusal of the errors would clearly disclose theprejudicial interest of the revenue. The vesting of such power in the hands ofthe Commissioner under Section 263 of the Act is to see that the AssessingOfficer does not commit any error affecting the interests of the revenue. We will consider the cases relied on by the learned Commissioner ofIncome Tax while passing the order impugned before the Tribunal. The firstcase is Rampyari Devi Saraogi (supra) decided by the Supreme Court. In thesaid case the appellant, who was an assessee, was sent a notice by theCommissioner of Income Tax, West Bengal, under Section 33B of the IncomeTax Act, 1922, proposing to pass an order under Section 33B of the said Actand, accordingly, giving an opportunity to her. The Tax Consultant, on behalf ofthe assessee, wrote a letter to the Commissioner stating that the show cause We will consider the cases relied on by the learned Commissioner ofIncome Tax while passing the order impugned before the Tribunal. The firstcase is Rampyari Devi Saraogi (supra) decided by the Supreme Court. In thesaid case the appellant, who was an assessee, was sent a notice by theCommissioner of Income Tax, West Bengal, under Section 33B of the IncomeTax Act, 1922, proposing to pass an order under Section 33B of the said Actand, accordingly, giving an opportunity to her. The Tax Consultant, on behalf ofthe assessee, wrote a letter to the Commissioner stating that the show cause notice was bad in law, illegal, void and without jurisdiction. However, theassessee appeared before the Commissioner, and the Commissioner passedan order on the same day cancelling the assessments made in favour of theassessee and directing the Income Tax Officer to do fresh assessmentsaccording to law after making proper enquires and investigation with regard tothe jurisdiction, carrying on of the business, possession of initial capital, giftsreceived and the sources of the moneys invested in the name of the assessee.The same was challenged before the High Court of Calcutta under Article 226of the Constitution of India, and the Division Bench of the High Court dismissedthe Writ Petition. While upholding the order of the Division Bench of the HighCourt, the Supreme Court, speaking through the three Judge Bench, held asfollows: “It is not necessary to further detail the reasons given by theCommissioner because on the face of the record the orders wereprejudicial to the interest of the revenue, and even if the facts whichthe Commissioner introduced regarding the enquiries made by himhad been indicated to the assessee, the result would have been thesame. The assessee, in our view, has not in any way suffered from thefailure of the Commissioner to indicate the results of the enquiries,mentioned above. Moreover, the assessee will have full opportunity ofshowing to the Income Tax officer whether he had jurisdiction or notand whether the income assessed in the assessment orders whichwere originally passed was correct or not.” The said decision was followed by another three Judge Bench ofSupreme Court in Smt.Tara Devi Aggarwal (supra). On a perusal of the above two judgments, we have no doubt that theCommissioner of Income Tax followed the ratio laid down in the abovedecisions and exercised his powers under Section 263 of the Act. I n Malabar Industrial Co.Ltd. v. Commissioner of Income Tax thescope of the revisional power of the Commissioner was examined. It was heldthat the Commissioner has to be satisfied of twin conditions, namely, i) theorder of the Assessing Officer sought to be revised is erroneous; and ii) it isprejudicial to the interests of the revenue. If one of them is absent, it was also held that recourse cannot be had to Section 263(1) of the Act. It was also heldthat the provision cannot be invoked to correct each and every type of mistakeor error committed by the Assessing Officer. An incorrect assumption of factsor an incorrect application of law will satisfy the requirement of the order beingerroneous. It was also held that the order passed without applying theprinciples of natural justice or without application of mind fall under the saidcategory. The phrase “prejudicial to the interests of the revenue” was explainedas follows: “8. The phrase “prejudicial to the interests of the Revenue” isnot an expression of art and is not defined in the Act. Understood inits ordinary meaning it is of wide import and is not conferred to loss of tax. The High Court ofCalcutta in Dawjee Dadabhoy & Co. v. S.P. Jain & Anr.[(1957) 31ITR 872 (Cal)], the High Court of Karnataka in Commissioner ofIncome-tax, Mysore v. T. Narayana Pai[(1975) 98 ITR 422 (Kant)],the High Court of Bombay in Commissioner of Income-tax v.Gabriel India Ltd.[(1993) 203 ITR 108 (Bom)]and the High Court ofGujarat in Commissioner of Income-tax v. Smt. Minalben S.[(1995) 215 ITR 81 (Guj)] treated loss of tax as prejudicial to theinterests of the revenue. “8. The phrase “prejudicial to the interests of the Revenue” isnot an expression of art and is not defined in the Act. Understood inits ordinary meaning it is of wide import and is not conferred to loss of tax. The High Court ofCalcutta in Dawjee Dadabhoy & Co. v. S.P. Jain & Anr.[(1957) 31ITR 872 (Cal)], the High Court of Karnataka in Commissioner ofIncome-tax, Mysore v. T. Narayana Pai[(1975) 98 ITR 422 (Kant)],the High Court of Bombay in Commissioner of Income-tax v.Gabriel India Ltd.[(1993) 203 ITR 108 (Bom)]and the High Court ofGujarat in Commissioner of Income-tax v. Smt. Minalben S.[(1995) 215 ITR 81 (Guj)] treated loss of tax as prejudicial to theinterests of the revenue. 9. Mr. Abaraham relied on the judgment of the Division Bench of theHigh Court of Madras in Venkatakrishna Rice Company v.Commissioner of Income-tax[(1987) 163 ITR 129 (Mad)]interpreting "prejudicial to the interests of the revenue". The HighCourt held: "In this context, (it must) be regarded as involvinga conception of acts or orders which are subversive ofthe administration of revenue. There must be somegrievous error in the order passed by the Income-taxOfficer, which might set a bad trend or pattern for similarassessments, which on a broad reckoning, theCommissioner might think to be prejudicial to theinterests of Revenue Administration". In our view this interpretation is too narrow to merit acceptance. Thescheme of the Act is to levy and collect tax in accordance with theprovisions of the Act and this task is entrusted to the Revenue. If dueto an erroneous order of the Income-tax Officer, the Revenue islosing tax lawfully payable by a person, it will certainly beprejudicial to the interests of the Revenue. 10. The phrase “prejudicial to the interests of the Revenue” has tobe read in conjunction with an erroneous order passed by theAssessing Officer. Every loss of revenue as a consequence of anorder of Assessing Officer cannot be treated as prejudicial to theinterests of the Revenue, for example, when an Income-tax Officeradopted one of the courses permissible in law and it has resulted inloss of revenue; or where two views are possible and the Income-tax Officer has taken one view with which the Commissioner doesnot agree, it cannot be treated as an erroneous order prejudicial tothe interests of the Revenue unless the view taken by the Income-tax Officer is unsustainable in law. It has been held by this Court thatwhere a sum not earned by a person is assessed as income in hishands on his so offering, the order passed by the Assessing Officeraccepting the same as such will be erroneous and prejudicial to theinterests of the Revenue. ( S e e Rampyari Devi Saraogi v.Commissioner of Income tax[(1968) 67 ITR 84 (SC)] and in Smt.Tara Devi Aggarwal v. Commissioner of Income-tax, WestBengal. [(1973) 88 ITR 323 : (1973) 3 SCC 482 : 1973 SCC (Tax)318]” In the instant case, a perusal of the order of the Assessing Officer wouldshow that the return of income filed by the assessee was accepted and the taxwas finalized. From the order of the Assessing Officer, one cannot deducewhether the errors pointed out by the Commissioner of Income Tax wereconsidered by the Assessing Officer or not. The Commissioner of Income Tax,not only pointed out the errors, but also had shown the effect of the same onthe revenue. It is not known how the Tribunal has come to the conclusion thatthe errors have no effect on the revenue. The Tribunal ought not to have takeninto consideration the explanation submitted by the assessee before theCommissioner for coming to the conclusion that the errors pointed out by theCommissioner have no effect on the revenue. Ultimately, it is for the AssessingOfficer, at the time of de novo enquiry, to consider whether the explanationoffered by the assessee to the points raised by the Commissioner is proper ornot. When once the Commissioner has got power to point out the errors whichhad the effect on the revenue, the Tribunal cannot sit as an appellate authorityon the order of the Commissioner passed under Section 263 of the Act. If thepower exists in the Commissioner and is exercised by him after satisfyinghimself on the facts of the case, it is not for the Tribunal to re-appreciate thesaid satisfaction of the Commissioner. It is only when the Commissioner doesnot exercise the power properly in satisfying the twin test contemplated under Section 263 of the Act, the order of the Commissioner can be held to beperverse, but not by re-appreciating the order of the Commissioner. A primafacie perusal of the order of the Commissioner shows that the Commissionerwas satisfied that there were errors which had effect on the interests of therevenue and it needed a further probe by the Assessing Officer. In the facts and circumstances of the case, we are satisfied that theorder passed by the Commissioner is proper and validly exercised as per thepowers conferred on him under Section 263 of the Act and we, accordingly, setaside the order of the Tribunal. Hence, we hold the substantial question of lawin favour of the Revenue and against the assessee. The appeal is, accordingly, allowed. The miscellaneous petitions, if any,stand disposed of. There shall be no order as to costs. ______________________ (DILIP B. BHOSALE, J) ________________________________ (A.RAMALINGESWARA RAO, J) 31.03.2015 vs