1976 (5) TMI 111 - HC - Income Tax

Summary

Issues Involved:

1. Nature and character of service and maintenance charges.
2. Jurisdiction of Commissioner under Section 263 during the pendency of an appeal.
3. Conditions for the exercise of power under Section 263.
4. Validity of the notice under Section 263.
5. Effect of the Tribunal's decision on subsequent assessments.
6. Application of principles of res judicata in income tax proceedings.
7. Compliance with principles of natural justice.

Issue-wise Detailed Analysis:

1. Nature and Character of Service and Maintenance Charges:

The primary issue in the assessments for the years 1965-66 and 1966-67 was whether the service and maintenance charges received by the petitioner from its tenants should be treated as "income from business" or "income from house property." The Income-tax Officer initially included these charges in the rental income. However, the Appellate Assistant Commissioner, following the Supreme Court's decision in *Karnani Properties Ltd. v. Commissioner of Income-tax*, held that these charges should be assessed under the head "income from business" due to the continuous and organized nature of the services provided by the petitioner. The Tribunal upheld this view, emphasizing the elaborate services rendered by the petitioner, which were analogous to those in the *Karnani Properties* case.

2. Jurisdiction of Commissioner under Section 263 During the Pendency of an Appeal:

The petitioner challenged the notice issued under Section 263 on the ground that the Commissioner of Income-tax was not competent to issue such a notice while an appeal was pending before the Appellate Assistant Commissioner. The petitioner argued that the Appellate Assistant Commissioner had the jurisdiction to rectify any error that might have caused prejudice to the revenue. The court, however, held that Section 263 of the Income-tax Act, 1961, does not limit the Commissioner's power to situations where no appeal is pending. The court referred to the Supreme Court's decision in *Commissioner of Income-tax v. Amritlal Bhogilal & Co.*, which clarified that the revisional power under Section 263 can be exercised even if an appeal is pending.

3. Conditions for the Exercise of Power under Section 263:

The court emphasized that the exercise of power under Section 263 is dependent on the Commissioner considering the order of the Income-tax Officer to be erroneous and prejudicial to the interests of the revenue. This consideration must be based on objective conditions. The court noted that the Commissioner must have material before him to come to such a conclusion and must provide the assessee with reasonable opportunity to be heard.

4. Validity of the Notice under Section 263:

The petitioner contended that the Commissioner had no material to consider the order in question as erroneous or prejudicial to the interests of the revenue. The court held that the notice under Section 263 must be based on relevant material facts, which must be communicated to the assessee. In this case, the Commissioner issued the notice based on the fact that the revenue had not accepted the Tribunal's decision for the previous years and that a reference application was pending before the High Court. The court found that this was not sufficient to establish that the Income-tax Officer's order was erroneous and prejudicial to the interests of the revenue.

5. Effect of the Tribunal's Decision on Subsequent Assessments:

The court noted that the Income-tax Officer had followed the Tribunal's decision for the previous years in assessing the service and maintenance charges under the head "income from business." The Commissioner did not point out any error in the Tribunal's decision or provide any factual basis for not following it. The court emphasized that subordinate authorities are bound to follow the decisions of higher appellate authorities to maintain judicial discipline.

6. Application of Principles of Res Judicata in Income Tax Proceedings:

The court discussed the principle that while res judicata does not strictly apply to income tax proceedings, there should be finality and certainty in litigation. An earlier decision on the same question should not be reopened if it was not arbitrary or perverse and was arrived at after due inquiry. The court cited the decision in *H. A. Shah & Co. v. Commissioner of Income-tax and Excess Profits Tax* to support this view.

7. Compliance with Principles of Natural Justice:

The court emphasized that the principles of natural justice require that the assessee be given reasonable opportunity to be heard and that the basic materials upon which the Commissioner proposes to act must be communicated to the assessee. In this case, the court found that the Commissioner had not provided sufficient material to justify the notice under Section 263.

Conclusion:

The court held that the conditions for the exercise of power under Section 263 were not fulfilled in this case. The notice issued under Section 263 was therefore without authority and was quashed. The court also set aside the Commissioner's order dated 20th March 1975, which dismissed the petitioner's application under Section 264 on the ground that the assessment order had been set aside. The Commissioner was directed to reconsider the application under Section 264 for the relevant assessment years. The rule was made absolute, and the respondents were restrained from giving effect to the notice under Section 263.