1976 (5) TMI 10 - HC - Income Tax

Summary

Issues Involved:
1. Classification of income from service and maintenance charges.
2. Jurisdiction of the Commissioner under section 263 of the Income-tax Act during the pendency of an appeal.
3. Validity of the notice under section 263.
4. Material basis for the Commissioner's decision.
5. Compliance with the principles of natural justice.

Detailed Analysis:

1. Classification of Income from Service and Maintenance Charges:
The primary issue was whether the income received by the assessee from maintenance and service charges should be treated as "income from business" or "income from house property." The Income-tax Officer initially included these charges in the rental income, but the Appellate Assistant Commissioner and subsequently the Income-tax Appellate Tribunal ruled that these charges should be taxed under the head "business" following the Supreme Court decision in Karnani Properties Ltd. v. Commissioner of Income-tax [1971] 82 ITR 547 (SC). The Tribunal observed that the services rendered by the assessee were analogous to those in the Karnani Properties case and constituted organized business activities.

2. Jurisdiction of the Commissioner under Section 263 During Pendency of an Appeal:
The petitioner contended that the Commissioner of Income-tax was not competent to issue any notice under section 263 of the Income-tax Act, 1961, during the pendency of an appeal before the Appellate Assistant Commissioner. The argument was based on the principle that revisional powers should not be available where there is an appellate jurisdiction. However, the court held that section 263 does not limit the Commissioner's powers to such exceptional situations only and that the Commissioner can exercise revisional powers even when an appeal is pending, provided the conditions of section 263 are met.

3. Validity of the Notice Under Section 263:
The petitioner challenged the notice issued under section 263 on the grounds that the Commissioner had no material basis to consider the order erroneous and prejudicial to the interests of the revenue. The court examined whether the Commissioner had fulfilled the conditions precedent for issuing the notice. It was noted that the Commissioner must consider the order passed by the Income-tax Officer to be erroneous in so far as it is prejudicial to the interests of the revenue. The court found that the Commissioner had not provided sufficient material to justify his decision to issue the notice.

4. Material Basis for the Commissioner's Decision:
The court emphasized that the exercise of power under section 263 is dependent upon the Commissioner considering the order of the Income-tax Officer to be erroneous and prejudicial to the interests of the revenue. The Commissioner must base this consideration on objective conditions and relevant material facts. In this case, the Commissioner proceeded on the basis that the revenue had not accepted the Tribunal's decision and that the issue was still pending before the High Court. The court found that the Commissioner had not indicated any factual materials to support that the Tribunal's decision was incorrect or that the Income-tax Officer's order was erroneous.

5. Compliance with the Principles of Natural Justice:
The court highlighted that the principles of natural justice require that the person affected by the Commissioner's decision should be given reasonable opportunity to be heard and should be informed of the basic materials upon which the Commissioner proposes to act. The court found that the Commissioner had not provided the petitioner with sufficient information or opportunity to contest the grounds for the proposed revision under section 263.

Conclusion:
The court held that the proposed exercise of power under section 263 was illegal and without jurisdiction. The notice issued under section 263 and any subsequent orders based on it were quashed and set aside. The Commissioner was restrained from giving effect to the notice, and the application under section 264 for the relevant assessment years was directed to be reconsidered. The rule was made absolute to the extent indicated, with no order as to costs.