M/s Karamjit Electrical Manufacturing Company Private Limited V. Commissioner of Income Tax, Jalandhar and Commissioner of Income Tax, Jalandhar-II, Jalandhar

ITA/136/2001

AI Insights

The case involves multiple appeals related to the income tax assessments of M/s Karamjit Electrical Manufacturing Company Private Limited for the assessment year 1992-93. The primary legal contention was whether the Commissioner of Income Tax (Appeals) was justified in ordering a re-assessment under Section 263 of the Income Tax Act, 1961, based on the grounds that the original assessment was erroneous and prejudicial to the interests of the revenue. The appeals by the revenue challenged the initial assessments, while the appeal by the assessee contested the re-assessment order. The court examined the legal definitions of 'erroneous' and 'prejudicial' within the context of Section 263, and considered precedents to determine the validity of the re-assessment order.

• Counselvise Citation: [2013] 140 COUNSELVISE.COM (IT) 810465 (HC-CHANDIGARH)
• Appeal Type: Others
• Pronouncement Date: 31-08-2013
• Assessment Year: misc
• Other Referred Cases: Malabar Industrial Company Limited versus C.I.T., 243 ITR 83, Commissioner of Income Tax versus Kanda Rice Mills, 178 I.T.R. 446
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Partly Allowed
• Court: HIGH COURT
• Department Lawyers: VIVEK SETHI
• Assessee Lawyers: ALOK MITTAL
• Keywords: Assessment Order; Erroneous and Prejudicial; Income Tax; Re-assessment; Valuation report
• Section: 143(3); 142(1); 143(2); 263

Judgement Text

"Income Tax Appeal No.136 of 2001 1 IN THE HIGH COURT OF PUNJAB AND HARYANA AT CHANDIGARH. Income Tax Appeal No.136 of 2001 Date of Decision: 31st August, 2013 M/s Karamjit Electrical Manufacturing Company Private Limited ..Appellant versus Commissioner of Income Tax, Jalandhar and another ..Respondents Income Tax Appeal No.149 of 2002 The Commissioner of Income Tax, Jalandhar ..Appellant versus M/s Karamjit Electricals Manufacturing Company (P) Limited Kartarpur ..Respondent Income Tax Appeal No.150 of 2002 The Commissioner of Income Tax, Jalandhar-II, Jalandhar ..Appellant versus M/s Karamjit Electricals Manufacturing Company (P) Limited Kartarpur. ..Respondent Income Tax Appeal No.165 of 2002 The Commissioner of Income Tax, Jalandhar-II, Jalandhar versus M/s Karamjit Electricals Manufacturing Company (P) Limited Kartarpur ..Respondent Varinder Kumar 2013.11.08 15:34 I attest to the accuracy and integrity of this document High Court Chandigarh Income Tax Appeal No.136 of 2001 2 and Income Tax Appeal No.29 of 2004 The Commissioner of Income-tax, Jalandhar-II, Jalandhar ..Appellant versus M/s Karamjit Electricals Manufacturing Company (P) Limited Kartarpur ..Respondent CORAM: HON' BLE MR. JUSTICE RAJIVE BHALLA HON'BLE MR. JUSTICE DR. BHARAT BHUSHAN PARSOON Present: Mr. Alok Mittal, Advocate, for the appellant. (in ITA No.136 of 2001 and for respondent in ITA Nos.149,150,165 of 2002 and 29 of 2004) Mr.Vivek Sethi, Advocate, for appellants ( in ITA Nos.149,150,165 of 2002 and 29 of 2004 and for respondent in ITA No.136 of 2001) RAJIVE BHALLA, J. By way of this order, we shall dispose of Income Tax Appeal nos. 136 of 2001, 149, 150, 165 of 2002 and 29 of 2004 together as they involve adjudication of the same substantial questions of law. Income Tax Appeal No.136 of 2001 has been filed by the assessee to challenge an order passed by the Commissioner of Income Tax under Section 263 of the Income Tax Act, 1961 (hereinafter referred to as the “Act”), whereas the other appeals have been filed by the revenue. However, for the sake of convenience, Varinder Kumar 2013.11.08 15:34 I attest to the accuracy and integrity of this document High Court Chandigarh Income Tax Appeal No.136 of 2001 3 facts are being taken from Income Tax Appeal No. 136 of 2001. Counsel for the appellant submits that jurisdiction assumed by the Commissioner of Income Tax (Appeals), under Section 263 of the Act. 1961, while ordering re-assessment, is illegal and void as an order under Section 263 of the Act can only be passed if the assessment order is erroneous and prejudicial to the interest of the revenue. A perusal of the order passed by the Assessing Officer reveals that it is neither erroneous nor prejudicial to the interest of the revenue. The Assessing Officer called for a report from a valuation officer and after examining the matter in detail, passed the assessment order. In the absence of any finding that the valuation report was wrongly accepted by the Assessing Officer, the impugned order is illegal. It is further argued that the words “erroneous” and “prejudicial”, used in Section 263 of the Act, require the Commissioner of Income Tax (Appeals), to refer to relevant facts that would indicate that the assessment order is not only erroneous but also prejudicial to the interests of the revenue. A perusal of the impugned orders reveals that such a finding has not been recorded, whether by the Commissioner of Income Tax (Appeals), Jalandhar, or by the Tribunal. Counsel for the assessee relies upon judgments of the Hon'ble Supreme Court of India in Malabar Industrial Company Limited versus C.I.T., 243 ITR 83 and a Division Bench of this Court in “Commissioner of Income Tax versus Kanda Rice Mills, 178 I.T.R. 446 in support of his arguments. Counsel for the assessee further submits that as the Tribunal has held that direction issued by the Commissioner, to the Assessing Varinder Kumar 2013.11.08 15:34 I attest to the accuracy and integrity of this document High Court Chandigarh Income Tax Appeal No.136 of 2001 4 Officer, to add Rs.4,10,640/- has been held to be illegal, the entire order, passed by the Commissioner, should have been set aside. It is further submitted that the Tribunal has erred in affirming the order passed by the Commissioner on a ground that was never raised before the Commissioner. The assessee was never confronted with the fact that the Assessing Officer had not conducted any enquiry into the cost of construction, thereby rendering the order passed by the Tribunal, null and void. Counsel for the appellant states that the following substantial questions of law arise for adjudication:- “ (a) Whether in the facts and circumstances of the case, order Annexures P-5 and P-7 are legally sustainable? (b) Whether in the facts and circumstances of the case, the order of the Appellate Tribunal in directing the Assessing Officer to make fresh assessment is legally sustainable in as much as once the very ground for assumption of jurisdiction by the CIT had been found to be legally untenable? (c) Whether in the facts and circumstances of the case, the order of the ITAT is legally sustainable, the same being violative of principles of natural justice in as much as the order of the CIT had been sought to be sustained on a ground never raised in the Show Cause Notice (Annexure P-3) nor which the assessee had ever been confronted with by the Appellate Tribunal? (d) Whether in the facts and circumstances of the case, Varinder Kumar 2013.11.08 15:34 I attest to the accuracy and integrity of this document High Court Chandigarh Income Tax Appeal No.136 of 2001 5 the order of the ITAT is legally sustainable in as much as the mandate laid down in the case of CIT Vs. Kandal Rice Mills reported in 178 ITR 446 not being met? (e) Whether in the facts and circumstances of the case, the order of the Appellate Tribunal is legally sustainable in view of the mandate laid down in the case Malabar Industrial Company Limited Versus CIT reported in 243 ITR 83?” Counsel for the appellant states that as the assessment order has been set aside and is subject matter of appeals filed by the revenue, the appeal should be allowed and appeals filed by the revenue should be dismissed. Counsel for the revenue submits that the impugned orders are legal and valid and do not suffer from any error of jurisdiction, much less, a wrongful assumption of jurisdiction. The so called questions of law framed by the appellant are neither questions of law nor substantial. The Commissioner has recorded clear and cogent reasons while holding that the order passed by the Assessing Officer is erroneous and prejudicial to the interest of the revenue. The order passed by the Assessing Officer has rightly been affirmed by the Tribunal. It is further submitted that appeals filed by the revenue, though infructuous in view of order passed under Section 263 of the 1961 Act, may be allowed. Before we record our opinion, it would be appropriate to narrate the facts in brief. The assessee filed returns of income for assessment Varinder Kumar 2013.11.08 15:34 I attest to the accuracy and integrity of this document High Court Chandigarh Income Tax Appeal No.136 of 2001 6 years 1992-93 on 21.12.1992, declaring income as `Nil'. The case of the assessee was selected for scrutiny and notices were issued under sections 143(2) and 142 (1) of the Act. After the assessee filed a reply, the Assessing Officer sought a valuation report with respect to the Factory Shed constructed, from 1987-88 to 1991-92. The Assessing Officer passed an order, under Section 143 (3) of the Act, accepting the assessee's returns of income as `Nil'. The Commissioner of Income Tax, Jalandhar, issued a notice to the assessee, under Section 263 of the Act in the following terms:- “ On examination of the Income-tax assessment record relating to the assessment year 1992-93 , it is noted that the assessment order dated 10.2.1995 passed under section 143(3) is erroneous in so far as it is prejudicial to the interests of revenue within the meaning of section 263 of the Income Tax Act, 1961, since the Assessing Officer failed to bring to tax the difference of Rs.4,10,640/- between the cost of construction determined by the Valuation Cell and that shown by you for the relevant year in respect of the construction of factory building. For the relevant year the valuation cell determined the cost of construction at Rs.6,76,900/- as against Rs.2,56,260/- shown by you.” The assessee, filed a reply, dated 21.3.1996, questioning the assumption of jurisdiction by the Commissioner. Vide Varinder Kumar 2013.11.08 15:34 I attest to the accuracy and integrity of this document High Court Chandigarh Income Tax Appeal No.136 of 2001 7 order dated 6.2.1997, the Commissioner directed the Assessing Officer, to hold a denovo assessment for Assessment Year 1992-93, after subjecting to tax unaccounted investment for Rs.4,10,640/-, in accordance with law. The assessee filed an appeal before the Income Tax Appellate Tribunal, Amritsar (for short the “Tribunal”). The appeal was dismissed on 29.9.2000 by affirming the order but by deleting the direction relating to Rs.4,10,640/-. We have heard counsel for the appellant and perused the impugned orders. The first question framed is in nature of a relief clause and shall be answered while considering the relief, if any, to be granted to the appellant. We would deal with questions no. (d) and (e) before we deal with other questions. The questions refer to precedents pertaining to the mode of manner of exercise of jurisdiction, under Section 263 of the Act and are pressed into service to contend that impugned orders have been passed by disregarding these binding precedents and in violation of Section 263 of the Act, the contention being that as the order passed by the Assessing Officer was not “erroneous” and “prejudicial” to the interests of the revenue, the Commissioner had no jurisdiction to order reassessment. A pre-requisite for exercise of power under Section 263 of the Act is a finding that the assessment order both erroneous and prejudicial, to the interest of the revenue. If the order is either erroneous or prejudicial, the Commissioner shall be prohibited from exercising jurisdiction. Section 263 of the Act may only be pressed Varinder Kumar 2013.11.08 15:34 I attest to the accuracy and integrity of this document High Court Chandigarh Income Tax Appeal No.136 of 2001 8 into service if an error or mistake in the assessment order is erroneous “and” prejudicial to the interest of the revenue. A reference in this regard may be made to the judgment in Malabar Industrial Company Limited versus C.I.T., 243 ITR 83 (supra). A relevant extract reads as follows:- “ .......The phrase “prejudicial” to the interests of the Revenue” is not an expression of art and is not defined in the Act. Understood in its ordinary meaning it is of wide import and is not confined to loss of tax. The scheme of the Act is to levy and collect tax in accordance with the provisions of the Act and this task is entrusted to the Revenue. If due to an erroneous order of the Income-tax Officer, the Revenue is losing tax lawfully payable by a person, it will certainly be prejudicial to the interests of the Revenue. 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 the 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 Varinder Kumar 2013.11.08 15:34 I attest to the accuracy and integrity of this document High Court Chandigarh Income Tax Appeal No.136 of 2001 9 Officer is unsustainable in law.” Thus a precondition for exercise of power under Section 263 of the Act, is that the assessment order must be both erroneous “and “ prejudicial to the interest of the revenue. A perusal of the impugned order passed by the Commissioner of Income Tax (Appeals), Jalandhar, reveals that he has adhered to the limits of his jurisdiction. To support our conclusion, it would be appropriate to reproduce a relevant extract from order dated 6.2.1997 passed by the Commissioner of Income Tax (Appeals), Jalandhar, which reads as follows:- “ 2. On examination of the assessment “record” relating to the asstt. Year 1992-93, it was noted that the assessee company had constructed cold storage building with an investment of Rs.7,40,792/- during the accounting years relevant to the assessment year 1988-89 to 1994-95. The said building was referred to the Valuation Cell of the Income-tax Department for the purpose of determining its cost of construction. For the previous year relevant to asstt. Year 1992-93 the valuation cell of the Income Tax Department determined its investment in construction at Rs.6,76,900/- as against Rs.2,66,260/- shown by the assessee. Since the unexplained investment of Rs.4,10,640/- being the difference between the cost of construction of the cold storage building shown by the assessee and the one determined by the Valuation Cell was not brought to tax by the Assessing Officer, Varinder Kumar 2013.11.08 15:34 I attest to the accuracy and integrity of this document High Court Chandigarh Income Tax Appeal No.136 of 2001 10 assessment framed u/s 143(3) on 10.2.1995 was considered to be erroneous in so far as it was prejudicial to the interests of Revenue. Accordingly, a show cause notice dated 16.3.1996 was issued to the assessee company. In response to the said notice the assessee company furnished a written reply dated 21.3.1996. It is submitted therein that it is not correct to say that the order u/s 143(3) dated 10.2.1995 passed by the AO is erroneous and prejudicial to the interest of Revenue since the issue had been thoroughly examined by the A.O. and it was only after he was satisfied with the explanation of the assessee that he did not make any addition. Besides, there was no provision under the Income-tax Act, 1961 which made it mandatory on the part of the AO to make the addition on the basis of the estimate of cost of construction by the Valuation Cell. The assessee has also argued that the report of the Valuation Cell was ab initio void as the Valuation Cell was not asked to make the valuation for earlier years in respect of which no proceedings were pending before the A.O. It is further submitted that if the issue has been thoroughly discussed and examined by the A.O. then his decision on the matter cannot be held to be erroneous simply because another authority came to a different conclusion. In the present case it is only a matter of estimate of cost of construction which may vary from person to person.” Varinder Kumar 2013.11.08 15:34 I attest to the accuracy and integrity of this document High Court Chandigarh Income Tax Appeal No.136 of 2001 11 (3) XX XX XX (4) From the foregoing facts, it is felt that the assessment framed by the AO u/s 143(3) on 10.2.1995 without bringing to tax the unaccounted investment of Rs.4,10,640/- in the construction of the cold storage building during the account year relevant to the assessment year 1992-93 is undoubtedly erroneous in so far as it is prejudicial to the interest of the Revenue......” A perusal of the extract reveals that the Commissioner of Income Tax, Jalandhar, was conscious of the nature of his jurisdiction and only after due consideration all relevant facts did he proceed to hold that the assessment order is both erroneous and prejudicial to the interests of the revenue. The order, in our considered opinion, cannot be faulted for a wrongful assumption of jurisdiction. The second question of law raises a plea that as assumption of jurisdiction by the Commissioner of Income Tax (Appeals), Jalandhar, has been held to be illegal by the Income Tax Appellate Tribunal, the order should have been set aside, in its entirety. A perusal of the order passed by the Tribunal does not indicate any finding that assumption of jurisdiction by the Commissioner is illegal. In fact, the Tribunal has emphatically affirmed the assumption of jurisdiction by the Commissioner. The question apparently refers to that part of the Tribunal's order where the Tribunal has set aside a direction issued by the Commissioner, Jalandhar, requiring the Assessing Officer to add Rs.4,10,640/-. The Varinder Kumar 2013.11.08 15:34 I attest to the accuracy and integrity of this document High Court Chandigarh Income Tax Appeal No.136 of 2001 12 setting aside of the direction issued by Commissioner does not, in any manner, impinge upon the correctness of the jurisdiction exercised by the Commissioner of Income Tax or the finding that the assessment order was erroneous and prejudicial to the interest of the revenue. The direction was rightly set aside as the Commissioner had no jurisdiction to direct the Assessing Officer to make a fresh assessment in a particular manner, by adding a particular amount. The second question is, therefore, answered by holding that order passed by the Tribunal, reversing the direction issued by the Commissioner of Income Tax (Appeals), Jalandhar, can not be construed as an adverse comment on the exercise of jurisdiction by the Commissioner of Income Tax, under Section 263 of the Act. The third question of law, in our considered opinion, has to be answered against the assessee. The plea that the Tribunal was not competent to uphold the order passed by the Commissioner of Income Tax (Appeals), Jalandhar, on a fact that was not part of the show cause notice nor was the appellant confronted with this fact, relates to the finding that the Assessing Officer did not make any inquiry regarding costs of construction. The facts considered by the Income Tax Appellate Tribunal are integral of the show cause notice as well as the order passed by the Commissioner of Income Tax (Appeals) and, therefore, cannot be said to be raised or considered for the first time or without notice to the assessee. With respect to Income Tax Appeal Nos. 149, 150, 165 of 2002 and 29 of 2004 filed by the revenue, suffice it to state, that as the order passed by the Commissioner of Income Tax under Section Varinder Kumar 2013.11.08 15:34 I attest to the accuracy and integrity of this document High Court Chandigarh Income Tax Appeal No.136 of 2001 13 263 of the Act directing re-assessment, the appeals filed by the revenue have, in essence, been rendered infructuous. It appears that order passed by the Commissioner of Income Tax under Section 263 of the Act, was not brought to the notice of the Income Tax Appellate Tribunal. In view of what has been stated hereinabove, the appeal filed by the assessee is dismissed, whereas appeals filed by the revenue have been rendered infructuous and are disposed of accordingly. ( RAJIVE BHALLA ) JUDGE 31st August, 2013 ( DR. BHARAT BHUSHAN PARSOON ) VK JUDGE Varinder Kumar 2013.11.08 15:34 I attest to the accuracy and integrity of this document High Court Chandigarh "