2014 (2) TMI 1242 - HC - Income Tax

Validity of revision order u/s 263 - as per CIT(A) addition ought to have been towards undisclosed income of AOP instead of being taxed under the head income from business - Held that - In the present case, it is more than apparent that the learned Commissioner has proceeded to invoke his jurisdiction under s. 263 of the Act only on his own opinion as to how the amount of the income concerned ought to have been treated. We may observe that so far this amount of ₹ 38,17,000 is concerned, it was not the case that the assessee had not disclosed the same at all. It is different matter that the same was treated by the AO to be part of income of business after consideration of the record and with the finding that the same was to be treated as profit from the business of sale of agricultural land. In the given set of facts and circumstances of the case, particularly when the said income has been duly added to the income of the assessee, neither the order of the AO on this ground could have been considered as erroneous nor it could have been treated as operating prejudicial to the interest of Revenue. Thus when we find that the order passed by the Tribunal is in consonance with the law applicable and cannot be said to be legally unjustified, the formulated question in this case is required to be answered in the affirmative i.e., against the Revenue and in favour of the assessee.

Summary

Issues:
1. Validity of setting aside the order passed by the Commissioner of Income Tax-II under section 263 of the Income Tax Act.
2. Treatment of income by the Assessing Officer as business income instead of undisclosed income of an Association of Persons (AOP).

Issue 1: Validity of setting aside the order under section 263:
The High Court examined the appeal by the Revenue against the order passed by the Income Tax Appellate Tribunal, which set aside the order of the Commissioner of Income Tax-II under section 263 of the Income Tax Act. The substantial question of law was whether the Tribunal was legally justified in considering the Commissioner's order invalid and without jurisdiction. The Court analyzed the Tribunal's finding that passing a revisional order under section 263 while the matter was pending in appeal was unjustified. The Court held that the Commissioner's approach was erroneous and without jurisdiction as the Assessing Officer had opted for a legally permissible option in treating the income, which did not make the order erroneous or prejudicial to the revenue's interest.

Issue 2: Treatment of income as business income:
The case involved an Association of Persons (AOP) engaged in the business of purchasing and selling agricultural land. The Assessing Officer had assessed the AOP's income for a particular year and treated a specific amount as business income instead of undisclosed income of the AOP. The Commissioner set aside this treatment under section 263, deeming it prejudicial to the revenue. However, the High Court found that the Assessing Officer had considered both options available and chose a legally permissible course of action. The Court emphasized that the Commissioner cannot substitute his own option under section 263 and held that the Assessing Officer's decision was legally justifiable. The Court concluded that the treatment of the income as business income was valid, and the order was not erroneous or prejudicial to the revenue's interest.

In summary, the High Court upheld the Tribunal's decision, finding no merit in the Revenue's appeal. The Court emphasized the importance of following legally permissible options in assessing income and held that the Commissioner's invocation of jurisdiction under section 263 was unsustainable in this case. The Court also clarified that the order under section 263 being set aside rendered it non-existent from the beginning, reviving the appeal by the assessee for further consideration.