2010 (5) TMI 643 - HC - Income Tax

Revision u/s 263 - AO dropped the penalty proposed to be imposed u/s 271(1)(c) - Assessee contended that Commissioner has no jurisdiction to initiate a proceeding under section 263 of the Act as the Assessing Officer had only dropped the penalty proceeding whereas section 263 of the Act covers in its ambit only those orders which pertain to the orders of assessment which are erroneous and prejudicial to the interests of the Revenue. - held that - 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 dropping of the penalty proceeding, as is manifest from the impugned order, is definitely erroneous and prejudicial to the interests of the Revenue. The Commissioner of Income-tax has passed a detailed order holding, inter-alia, that loss of revenue has been caused as it is an erroneous order. Against assessee.

Issues Involved:
1. Jurisdiction of the Commissioner under Section 263 of the Income-tax Act, 1961.
2. Applicability of Section 263 to penalty proceedings under Section 271(1)(c) of the Income-tax Act.
3. Whether the conditions precedent to Section 263 are satisfied to justify the action.

Detailed Analysis:

1. Jurisdiction of the Commissioner under Section 263 of the Income-tax Act, 1961:
The primary issue was whether the Commissioner of Income-tax (CIT) had the jurisdiction under Section 263 to revise the order of the Assessing Officer (AO) that dropped the penalty proceedings initiated under Section 271(1)(c). The court noted that Section 263 allows the Commissioner to call for and examine the record of any proceeding under the Act and to revise any order passed therein if it is erroneous and prejudicial to the interests of the Revenue. The court referenced several precedents, including CIT v. Braj Bhushan Cold Storage and Addl. CIT v. Indian Pharmaceuticals, to establish that the term "assessment" in Section 263 has a wide connotation and includes penalty proceedings.

2. Applicability of Section 263 to Penalty Proceedings under Section 271(1)(c):
The court examined whether the language of Section 263 could be applied to penalty proceedings. It referred to multiple judgments, including CIT v. Narpat Singh Malkhan Singh and CIT v. Sara Enterprises, which supported the view that penalty proceedings are part of the assessment process and thus fall within the ambit of Section 263. The court concluded that the term "any proceeding" under Section 263 includes penalty proceedings, and the Commissioner has the jurisdiction to revise an order dropping penalty proceedings if it is erroneous and prejudicial to the interests of the Revenue.

3. Whether the Conditions Precedent to Section 263 are Satisfied:
The court assessed whether the conditions for invoking Section 263 were met, i.e., whether the order was erroneous and prejudicial to the interests of the Revenue. The court cited Malabar Industrial Co. Ltd. v. CIT, which clarified that an order can be considered erroneous if it deviates from the law, and prejudicial to the interests of the Revenue if it results in a loss of tax lawfully payable. The court found that the AO's order dropping the penalty proceedings was erroneous because it failed to consider relevant facts and legal provisions, thereby causing a loss of revenue. The court held that the cumulative test of error and prejudice was satisfied, justifying the Commissioner's action under Section 263.

Conclusion:
The court dismissed the writ petition, holding that the Commissioner of Income-tax had the jurisdiction under Section 263 to revise the order of the Assessing Officer that dropped the penalty proceedings under Section 271(1)(c). The court found that the conditions precedent to Section 263 were satisfied, as the AO's order was both erroneous and prejudicial to the interests of the Revenue.

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