2015 (4) TMI 902 - AT - Income Tax

Validity of Revision of assessment order - Both conditions i.e. Erroneous & prejudicial to the interest of revenue need to be fulfilled for order of revision - Dis-allowance of various expenses - Held that - It is a settled law that for invoking the provisions of section 263 the CIT must satisfy both the conditions that the order passed by the Assessing Officer is erroneous and also that it is prejudicial to the interest of the revenue. If one of the conditions is absent, the order passed by the CIT by invoking the provisions of section 263 will not be legal. The term erroneous has not been defined under the Income-tax Act but it is well settled that each and every type of mistake or error committed by the Assessing Officer cannot be said to be an error. An order can be said to be erroneous if there is an incorrect assumption of fact or incorrect application of law in the order passed by the Assessing Officer. If the Assessing Officer after making the enquiries and examining the records, taken one of the possible views, it cannot be said that the order passed by the Assessing Officer is erroneous. Jurisdiction u/s 263 has been exercised on the basis that all expenses charged to the profit and loss account is attributable to the investment in shares. Once the assessing officer has examined the nature of all the expenses and given the finding that the expenses relates to the business. It cannot be said that the order passed by the assessing officer is erroneous. It is not a case of lack of inquiry and also not a case where the assessing officer has taken a view which is unsustainable in law. Even we noted in the order passed u/s 263, the CIT has not given specific finding that the order passed is erroneous but stated that the order passed is prima facie found to be erroneous.Even we may mention that where there are two views possible as to the interpretation of any transaction and the Assessing Officer has taken one of the view favourable to the assessee, the order cannot be said to be erroneous unless the view taken by the Assessing Officer is unsustainable in law.Same view has been taken by Hon'ble Supreme Court in case of Malabar Industrial Co. Ltd. 2000 (2) TMI 10 - SUPREME Court . Section 263 does not empower the CIT to thrust upon his view on the Assessing Officer. Revision u/s 263 is possible only if both the conditions i.e. the order passed by the Assessing Officer is erroneous and it is prejudicial to the interest of the Revenue, are satisfied. When the Assessing Officer has taken one of the possible views, the order passed by the Assessing Officer cannot be regarded to be erroneous. Thus, in our opinion, under the facts and circumstances of this case, the CIT has not correctly exercised his jurisdiction and had acted beyond the power as laid down u/s 263 of the Act. - Decided in favour of assessee.

Summary

Issues Involved:
1. Jurisdiction of the Commissioner of Income Tax (CIT) under section 263 of the Income Tax Act, 1961.
2. Legitimacy of expenses claimed by the assessee as business expenses.
3. Whether the expenses should be allowed if there is no business activity but only investment activity.

Issue-wise Detailed Analysis:

1. Jurisdiction of the Commissioner of Income Tax (CIT) under section 263 of the Income Tax Act, 1961:

The appellant challenged the CIT's jurisdiction under section 263, arguing that the assessment order under section 143(3) was neither erroneous nor prejudicial to the interest of the revenue. The CIT invoked section 263, contending that the assessment order was erroneous and prejudicial to the revenue as the AO did not disallow expenses attributable to exempt income from investments. The tribunal examined section 263, noting four main features: the CIT's power to call for and examine records, consider orders as erroneous and prejudicial, give the assessee an opportunity to be heard, and make necessary inquiries. It was emphasized that both conditions-erroneous and prejudicial-must be satisfied for section 263 to apply. The tribunal found that the AO had conducted inquiries and taken a possible view, making the assessment order neither erroneous nor prejudicial to the revenue.

2. Legitimacy of expenses claimed by the assessee as business expenses:

The assessee claimed expenses as business expenses, which the AO allowed after detailed inquiries. The CIT directed the AO to re-examine whether the expenses were allowable, suggesting they were attributable to investment income, which is exempt under section 10. The tribunal noted that the AO had examined the expenses, found them related to the business, and allowed them. It was not a case of lack of inquiry or an unsustainable view. The tribunal highlighted that if the AO has taken one of the possible views after due inquiry, the order cannot be deemed erroneous. The tribunal referenced the Supreme Court's decision in Malabar Industrial Co. Ltd. vs. CIT, affirming that the AO's view was sustainable in law.

3. Whether the expenses should be allowed if there is no business activity but only investment activity:

The CIT argued that since there was no business activity, the expenses should not be allowed as business expenses. The tribunal found that the AO had treated the expenses as related to the business, not attributable to investment income. The tribunal emphasized that the AO had conducted inquiries and allowed the expenses under the head 'income from business.' It was noted that the CIT's order did not provide a specific finding that the AO's order was erroneous but only stated it was "prima facie" erroneous. The tribunal concluded that the CIT had overstepped his jurisdiction under section 263, as the AO had taken a possible view after due inquiry.

Conclusion:

The tribunal quashed the CIT's order under section 263, finding that the AO's order was not erroneous or prejudicial to the revenue. The tribunal emphasized that section 263 does not empower the CIT to impose his view on the AO when the AO has taken a possible view after due inquiry. The appeal of the assessee was allowed, and the tribunal annulled the CIT's order. The order was pronounced in the open court on 11.02.2015.