CIT LUDHIANA V. RAKESH JAIN PROP. M/S SHEKHAR CHAND JAIN AND CO.

ITA/285/2009

AI Insights

The case involves an appeal by the Commissioner of Income Tax-I, Ludhiana against Shri Rakesh Jain concerning the assessment year 2005-06. The primary legal issue was whether the Income Tax Appellate Tribunal was justified in allowing the assessee's appeal by ignoring the provisions of Section 263 of the Income Tax Act, 1961. The Assessing Officer had initially made an addition of `98,500 to the assessee's income for inadmissible and unvouched expenses. The Commissioner later found the assessment to be erroneous and prejudicial to the revenue, leading to a de novo assessment order. The Tribunal reversed the Commissioner's decision, prompting the revenue's appeal to the High Court.

• Counselvise Citation: [2013] 140 COUNSELVISE.COM (IT) 741359 (HC-CHANDIGARH)
• Appeal Type: Others
• Pronouncement Date: 31-07-2013
• Assessment Year: misc
• Other Referred Cases: Commissioner of Income Tax v. Deepak Kumar Garg, Malabar Industrial Co. Limited v. CIT, CIT v. Vikas Polymers
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Revenue
• Court: HIGH COURT
• Department Lawyers: RAJIV SHARMA; S K MUKHI
• Assessee Lawyers: RAJESH KATOCH
• Keywords: Erroneous order; Income Tax; Prejudicial to revenue; Revisional Jurisdiction
• Section: 143(3); 263; 260A

Judgement Text

"ITA NO.285 of 2009 (O&M) 1 IN THE HIGH COURT OF PUNJAB & HARYANA AT CHANDIGARH ITA No. 285 of 2009 (O&M) Date of Decision: 31.7.2013 Commissioner of Income Tax-I, Ludhiana ....Appellant. Versus Shri Rakesh Jain ...Respondent CORAM:- HON'BLE MR. JUSTICE AJAY KUMAR MITTAL. HON'BLE MR. JUSTICE JASPAL SINGH PRESENT: Mr. Rajesh Katoch, Advocate for the appellant. Mr. Rajiv Sharma, Advocate for Mr. S.K. Mukhi, Advocate for the respondent. AJAY KUMAR MITTAL, J. 1. This appeal has been filed by the revenue under Section 260A of the Income Tax Act, 1961 (in short “the Act”) against the order dated 4.11.2008 passed by the Income Tax Appellate Tribunal, Chandigarh Bench, Chandigarh (hereinafter referred to as “the Tribunal”) in ITA No. 807/CHANDI/2008 relating to the assessment year 2005-06, claiming the following substantial question of law:- “Whether on the facts and in law and circumstances of the Singh Gurbachan 2013.09.03 10:26 I attest to the accuracy and integrity of this document High Court Chandigarh ITA NO.285 of 2009 (O&M) 2 case the Hon'ble Income Tax Appellate Tribunal was justified in allowing the appeal of the assessee by ignoring the provision of Section 263 of the I.T. Act, 1961?” 2. Put succinctly, the facts necessary for adjudication of the present appeal as narrated therein are that the assessee is an individual and proprietor of M/s Shekhar Chand Jain and Company and derives income from contract work of civil construction and filed its return of income on 31.10.2005 for the assessment year 2005-06 declaring an income of ` 1,71,580/-. The assessment was completed vide order dated 13.12.2007 (Annexure A-1) under Section 143(3) of the Act at an income of ` 2,70,080/- by making an addition of ` 98,500/- on account of inadmissible and unvouched expenses debited to the profit and loss account for personal use. Being aggrieved, the assessee filed an appeal before the Commissioner of Income Tax-I, Ludhiana (for brevity, the CIT”). The CIT vide order dated 31.7.2008 (Annexure A-II) passed under Section 263 of the Act held the order of the Assessing Officer to be erroneous and prejudicial to the interest of the revenue. Accordingly, the assessment made by the Assessing Officer was cancelled and he was directed to frame the same de novo after calling the necessary documentary evidence, verification thereof and due opportunity of being heard to the assessee. Being dissatisfied, the assessee approached the Tribunal against the order passed by the CIT by way of an appeal who vide order dated 4.11.2008 (Annexure A-III) allowed the appeal holding that the assessment has been framed under Section 143(3) after examination of various papers and due application of mind and the CIT was not Singh Gurbachan 2013.09.03 10:26 I attest to the accuracy and integrity of this document High Court Chandigarh ITA NO.285 of 2009 (O&M) 3 justified in invoking his jurisdiction under Section 263 of the Act. Hence, the present appeal by the revenue. 3. Learned counsel for the appellant submitted that the Assessing Officer while framing the assessment under Section 143(3) of the Act on 13.12.2007 for the assessment year 2005-06 had in a slip-shod manner made assessment only by making an addition of ` 98,500/- on account of inadmissible and unvouched expenses debited to profit and loss account for personal use. According to the learned counsel, the CIT while passing the revisional order under Section 263 of the Act after noticing and examining the assessment record had elaborately discussed the assessment order and held it to be erroneous and pre-judicial to the interest of the revenue. He relied upon the following findings of the CIT:- “8.2.2. On query it has been affirmed by the Income Tax Officer III (I), Ludhiana vide his office letter No. ITO/W- III(1)/Ldh./nil dated 24.03.2008 that there was no other cover in respect of the assessee. In view of these facts it is clearly made out that at assessment stage AO has failed to apply his mind and compute total income in accordance with the provisions of the Income Tax Act, 1961 since detail of contracts/work done has not been filed before him, details of expenses and their genuineness has not been adjudged by the AO, source of various credits in the capital account and bank accounts have not been examined by the AO.” 4. It was urged that the Tribunal without considering the specific points as discussed by the CIT had reversed the order holding it to be passed on probabilities, surmises and conjectures. It Singh Gurbachan 2013.09.03 10:26 I attest to the accuracy and integrity of this document High Court Chandigarh ITA NO.285 of 2009 (O&M) 4 was contended that substantial question of law arises and the appeal deserves to be allowed. Reliance was placed upon the judgment of Madhya Pradesh High Court in Commissioner of Income Tax v. Deepak Kumar Garg, (2008) 299 ITR 435 (MP). 5. On the other hand, learned counsel for the assessee besides supporting the order passed by the Tribunal, submitted that the Assessing Officer while passing the assessment order on 13.12.2007 had examined the books of account in detail and had framed the assessment under Section 143(3) of the Act thereafter. It was argued that there was no error in the order of the Assessing Officer and it could not be termed to be erroneous or prejudicial to the interest of the revenue and, therefore, the jurisdiction invoked under Section 263 of the Act by the CIT was improper. 6. After hearing learned counsel for the parties, we find merit in the submissions made by the learned counsel for the appellant. 7. To adjudicate the question involved herein, the statutory provision of Section 263 of the Act requires to be examined. The relevant portion thereof reads thus:- “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 Assessing Officer is erroneous insofar 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 Singh Gurbachan 2013.09.03 10:26 I attest to the accuracy and integrity of this document High Court Chandigarh ITA NO.285 of 2009 (O&M) 5 circumstances of the case justify, including an order enhancing or modifying the assessment, or cancelling the assessment and directing a fresh assessment. Explanation.....” 8. Section 263 of the Act has been subject matter of interpretation in various decisions. The Hon'ble Apex Court in Malabar Industrial Co. Limited v. CIT, (2000) 243 ITR 83 has laid down the following guiding principles for exercise of jurisdiction under Section 263 of the Act by the CIT:- “A bare reading of this provision makes it clear that the prerequisite to exercise of jurisdiction by the Commissioner suo moto 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 Section 263(1) of the Act. 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 application of mind. The phrase prejudicial to the interests of the revenue is not an expression of art and is not defined in Singh Gurbachan 2013.09.03 10:26 I attest to the accuracy and integrity of this document High Court Chandigarh ITA NO.285 of 2009 (O&M) 6 the Act. Understood in its ordinary meaning it is of wide import and is not confined to loss of tax. The High Court of Calcutta in Dawjee Dadabhoy & Co. Vs. S.P. Jain and Another [31 ITR 872], the High Court of Karnataka in Commissioner of Income- tax, Mysore Vs. T. Narayana Pai [98 ITR 422], the High Court of Bombay in Commissioner of Income-tax Vs. Gabriel India Ltd. [203 ITR 108] and the High Court of Gujarat in Commissioner of Income-tax Vs. Smt. Minalben S. Parikh [215 ITR 81] treated loss of tax as prejudicial to the interests of the revenue. xx xx xx xx xx xx The phrase prejudicial to the interests of the revenue has to be read in conjunction with an erroneous order passed by the Assessing Officer. Every loss of revenue as a consequence of an order of Assessing Officer cannot be treated as prejudicial to the interests of the revenue, for example, when an Income-tax Officer adopted one of the courses permissible in law and it has resulted in loss of revenue; or where two views are possible and the Income-tax Officer has taken one view with which the Commissioner does not agree, it cannot be treated as an erroneous order prejudicial to the interests of the revenue unless the view taken by the Income-tax Officer is unsustainable in law. It has been held by this 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 Vs. Commissioner of Income-tax [67 ITR 84] and in Smt. Tara Devi Aggarwal Vs. Commissioner of Income-tax, West Bengal [88 ITR 323].” Singh Gurbachan 2013.09.03 10:26 I attest to the accuracy and integrity of this document High Court Chandigarh ITA NO.285 of 2009 (O&M) 7 9. Delhi High Court in CIT v. Vikas Polymers, (2012) 341 ITR 537 examining the scope of Section 263 of the Act and analysing the circumstances under which revisional power can be exercised by the CIT, observed as under:- “12. At the same time, the words “prejudicial to the interest of the revenue”, as observed in Dawjee Dadabhoy and Co. vs. 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 Commissioner’s finding that the order of the assessment was erroneous insofar as it was prejudicial to the interest of the revenue. 13. It is also trite that there is a fine though subtle distinction between “lack of inquiry” and “inadequate inquiry”. It is only in cases of “lack of inquiry” that the Commissioner is empowered to exercise his revisional powers by calling for and examining the records of any proceedings under the Act and passing orders thereon. x x x x” Singh Gurbachan 2013.09.03 10:26 I attest to the accuracy and integrity of this document High Court Chandigarh ITA NO.285 of 2009 (O&M) 8 10. Under Section 263 of the Act, the Commissioner is empowered to exercise jurisdiction where he is satisfied that the order of the Assessing Officer is erroneous in so far as it is prejudicial to the interests of the revenue. The object of the aforesaid provision is to correct an order passed by the Assessing Officer which is erroneous and prejudicial to the interests of the revenue as the department has no remedy of appeal against the assessment order. Whether a revisional order fulfils the requirements of Section 263 of the Act, depends upon facts of each case. 11. The CIT in his order dated 31.7.2008 passed under Section 263 of the Act had specifically noticed in detail the assessment record and had thereafter concluded that the Assessing Officer had not applied his mind and computed total income in accordance with the provisions of the Act. It was also recorded by him that the detail of the contracts/work done was not filed before the Assessing Officer and the details of expenses and their genuineness was not examined by the Assessing Officer. The contractor assessee was having gross receipts of ` 5,36,26,408/- and had declared taxable income of `1,71,580/-, thus giving net profit of 0.263% only. The show cause notice issued to the assessee described that the Assessing Officer had not examined the details of abnormally low profit of 0.263% at the time of making the assessment. The relevant portion of show cause notice dated 8.5.2008 reads thus:- “On perusal of record, it is noticed that assessment order passed under section 143(3) on 13.12.2007 by the Income Tax Officer-III(1), Ludhiana is erroneous and Singh Gurbachan 2013.09.03 10:26 I attest to the accuracy and integrity of this document High Court Chandigarh ITA NO.285 of 2009 (O&M) 9 prejudicial to the interest of revenue as detailed as under:- i) Perusal to capital account shows addition of Rs.6,00,000/-. In this regard no source of such deposits has been called for by the AO. ii) Perusal to savings bank account of the assessee shows various cash deposits totalling to Rs.30,92,000/-. No source of such funds has been called for by the AO. Iii) On gross receipts of Rs.5.36 crores assessee has declared profit of Rs.43.73 lacs and further claimed depreciation of Rs.42.78 lacs as per chart of computation of income. Effectively, assessee has returned net profit of 0.263%. Even in earlier years the results are far better. The AO has completed the assessment without comparing the final results with earlier years, as the results of the earlier year are much better. The reasons of abnormally low profit at 0.263% have not been looked into. iv) Perusal to Profit and Loss Account show a debit of Rs.2,66,603/- on account of 'hutment and water pump'. From the head of account, it appears that these expenses are on account of some additions to fixed assets. AO has not called for any details in this regard to decide whether the same is a revenue or capital expenses or not. v) Assessee has debited an amount of Rs.23,30,000/- on account of sub contract works. No reasonableness of such expenses has been investigated by the AO. 2. This is a case of a contractor having gross receipts of Rs.5.36 crores. No detailed questionnaire has been issued. Only few Singh Gurbachan 2013.09.03 10:26 I attest to the accuracy and integrity of this document High Court Chandigarh ITA NO.285 of 2009 (O&M) 10 questions have been asked vide order sheet entry dated 10.12.2007. On filing of reply on 13.12.2007, AO has finalized the assessment. As per his reply the assessee has filed various details i.e. copies of sundry creditors, debtors etc. but no such details are placed on record.” The discrepancies in the capital accounts were also not scrutinized. The CIT has elaborately discussed the manner in which the Assessing Officer had passed the assessment order in a slip-shod manner without holding proper enquiry. It was under these circumstances that the CIT exercised revisional jurisdiction under Section 263 of the Act. 12. The Madhya Pradesh High Court in Deepak Kumar Garg's case (supra) examining the scope of Section 263 of the Act under similar circumstances had observed as under:- “After hearing rival submissions and considering material available on record, we are of the view that the Tribunal's order is unsustainable. At the outset, it is clarified that we have no quarrel with the principles laid down in the cases relied upon by the learned senior counsel for the assessee. After going through them, we can safely say that no thumb rule of universal application is evolved or laid down for the exercise of revisional power under s. 263 of the Act. It depends on facts of each case but CIT must be satisfied of existence of the twin conditions, viz. that the order of the AO is erroneous and that it is prejudicial to the interest of Revenue. We are also conscious of the fact that s. 263 cannot be resorted to, to correct each and every type of mistake or error, unless aforesaid two Singh Gurbachan 2013.09.03 10:26 I attest to the accuracy and integrity of this document High Court Chandigarh ITA NO.285 of 2009 (O&M) 11 elements exist in the order of AO. In the case in hand, after hearing Authorized Representative, the CIT has recorded a clear finding that the order of AO was erroneous as well as prejudicial to the interest of Revenue. From the order of the AO, it is clear that for want of time, AO had done only a semblance of enquiry and that too, in very slip-shod manner, as is clear from the post script in the order of AO. AO accepted the version of the assessee without proper enquiry as a result substantial amount of taxable income was not brought to tax. In such case assessment order would be erroneous and prejudicial to the interest of the Revenue because law enjoins upon the AO to make assessment order bringing all taxable income to tax. The enquiry held in a perfunctory manner could not be said to be a proper enquiry before passing the assessment order. This cannot be ground to shut out the jurisdiction of the CIT that an adequate enquiry was conducted by the AO. We may clarify that order of the CIT is in two parts. Part one consists of reasons for issuing the show cause notice, and later part deals with findings recorded by the CIT after affording opportunity of hearing to the assessee. As stated above, CIT has recorded a categorical finding that order of AO for want of adequate enquiry, was erroneous and prejudicial to the interest of the Revenue and after setting aside the assessment order, remanded the matter to the AO for fresh assessment on merits. The CIT also directed AO to observe rules of natural justice and to provide opportunity of hearing to assessee before making fresh assessment order on merit. This adequately safeguards the interest of the assessee and would cause no prejudice. It seems that Tribunal was carried away by the first part of the order of CIT as a Singh Gurbachan 2013.09.03 10:26 I attest to the accuracy and integrity of this document High Court Chandigarh ITA NO.285 of 2009 (O&M) 12 result the later part of the order escaped from the notice of the Tribunal and the Tribunal branded the order of the CIT as based upon probabilities, surmises and conjectures.” 13. From the above, it clearly emerges that the Assessing Officer had failed to apply his mind to the case in all perspective and the order passed by him was erroneous. He had accepted the returned income by making an addition of ` 98,500/- in the absence of verification of the accounts, examining supporting material and without making any enquiry. The present is a case of lack of enquiry made by the Assessing Officer as has been recorded by the CIT in detail in his order passed under Section 263 of the Act. The irresistible conclusion on these facts would be that the assessment order passed by the Income Tax Officer was erroneous. According to the scheme of the Act, the revenue is entrusted with the levy and collection of tax in accordance with law. If due to an erroneous order of the Assessing Officer, the revenue is deprived of tax lawfully payable by an assessee, it would certainly be prejudicial to the interests of the revenue. The CIT had rightly invoked revisional power under Section 263 of the Act. The Tribunal while setting aside the revisional order passed by CIT has dealt with the scope of Section 263 of the Act in general without examining the details which had been examined by the CIT. Learned counsel for the respondent was unable to displace the discussion made by the CIT in the order passed under Section 263 of the Act. The Tribunal was, thus, in error in negating the order of CIT passed under Section 263 of the Act. Singh Gurbachan 2013.09.03 10:26 I attest to the accuracy and integrity of this document High Court Chandigarh ITA NO.285 of 2009 (O&M) 13 14. In view of the above, the substantial question of law is answered in favour of the revenue and against the assessee. The appeal stands allowed. (AJAY KUMAR MITTAL) JUDGE July 31, 2013 (JASPAL SINGH) gbs JUDGE Singh Gurbachan 2013.09.03 10:26 I attest to the accuracy and integrity of this document High Court Chandigarh "