2006 (9) TMI 157 - HC - Income Tax

Condition Precedent - Whether, the Tribunal was right in law in annulling the order passed by the CIT u/s 263 ? - HELD THAT - A reference to the provisions of section 263 of the Act shows that jurisdiction thereunder can be exercised if the CIT finds that the order of the Assessing Officer was erroneous and prejudicial to the interests of the Revenue. Mere audit objection and because a different view could be taken, are not enough to say that the order of the Assessing Officer was erroneous or prejudicial to the interests of the Revenue. The jurisdiction could be exercised if the CIT was satisfied that the basis for exercise of jurisdiction existed. No rigid rule could be laid down about the situation when the jurisdiction can be exercised. Whether satisfaction of the CIT for exercising jurisdiction was called for or not, has to be decided having regard to a given fact situation. In the present case, the Tribunal has held that the assessee had disclosed that out of the sale consideration, a sum was to be received for the sale of permit. If that is so, there was no error in the view taken by the Assessing Officer and no case was made out for invoking jurisdiction u/s 263 of the Act. Thus, the question referred is answered against the Revenue and in favour of the assessee - Reference is disposed of accordingly.

Summary

Issues:
Jurisdiction under section 263 of the Income-tax Act, 1961 - Correctness of the order passed by the Commissioner of Income-tax - Assessment year 1975-76.

Analysis:
The case involved a question of law referred to the High Court by the Income-tax Appellate Tribunal regarding the correctness of an order passed by the Commissioner of Income-tax under section 263 of the Income-tax Act, 1961. The Tribunal noted that the assessee had sold machinery and a permit for 1,200 spindles, disclosing the sale in its return. The Commissioner initiated proceedings based on an audit note and proposal under section 263, challenging the assessment. The Tribunal held that the Commissioner erred in assuming jurisdiction under section 263 and annulled the order, citing detailed discussions in its order.

The Revenue argued that the Commissioner's jurisdiction under section 263 was justified as the consideration for the machinery sold was higher than stated in the agreement. The assessee contended that the permit for 1,200 spindles was sold, as reflected in the return. The assessee further argued that the order of the Assessing Officer was not erroneous or prejudicial to the Revenue, citing legal precedents to support their position.

The High Court emphasized that the Commissioner's jurisdiction under section 263 could only be exercised if the Assessing Officer's order was found to be both erroneous and prejudicial to the Revenue's interests. Mere audit objections were insufficient grounds for invoking section 263. The Court highlighted that the Commissioner must be satisfied that a basis for intervention existed. In this case, the Tribunal's finding that the sale consideration included an amount for the permit supported the Assessing Officer's view, negating the need for invoking section 263.

Ultimately, the High Court ruled in favor of the assessee, stating that no error existed in the Assessing Officer's decision, and therefore, section 263 jurisdiction was not warranted. The Court disposed of the reference accordingly, settling the matter in favor of the assessee.