2004 (6) TMI 258 - AT - Income Tax

Expenditure Incurred - rental income - Challenged the order passed by CIT u/s 263 - HELD THAT - The view taken by the Commissioner does not stand legal scrutiny. As rightly contended by the learned representative of the assessee, section 14A was introduced by Finance Act, 2001 with retrospective effect from 1-4-1962. It will have far reaching consequences. The settled cases of almost half a century will unsettle by this retrospective operation. The Board realised the consequences, and issued Circular No. 11 of 2001. The Circular of the Board is binding on all the Income-tax Authorities. Section 263 empowers the Commissioner to call for the records and examine of any person and on examining if he forms an opinion that the order passed by the Assessing Officer is erroneous insofar as it is prejudicial to the interest of revenue, he may after giving the assessee an opportunity of being heard and after making or causing to be made such enquiry as he deems necessary, pass such orders thereon as the circumstances of the case justify, enhancing or modifying the assessment or cancelling the assessment and directing a fresh assessment. From the above it is very clear that first of all the order passed by the Assessing Officer should be erroneous and also it should be prejudicial to the interest of revenue. If the order is not erroneous, even if it is prejudicial to the interest of revenue, the Commissioner has no revisionary power. If the Assessing Officer has no jurisdiction to pass an order, it is not an order at all. It is null and void. In the instant case it is very clear that on the basis of the policy decision taken by the Board, the Assessing Officer's power is taken away to reopen the assessment u/s 147. If the Assessing Officer has no power, the Commissioner also has no power. The proviso takes away the power of the Assessing Officer either to reassess u/s 147 or to pass an order enhancing or reducing the refund already made or otherwise increasing the liability of the assessee under section 154, for any assessment year beginning on or before 1st day of April, 2001. This is, as simple as, that. The Assessing Officer has no power to reopen or to change or to increase or decrease the liability of the assessee on the basis of section 14A, in view of introduction of the proviso to section 14A inserted by the Finance Act, 2002 w.e.f. 11-5-2001. If the Assessing Officer has no power, the Commissioner has also no power. A valid assessment order is a must, for CIT's revisionary power is directed against a valid but erroneous and prejudicial order of the Assessing Officer. In the instant case since the Assessing Officer himself has no power to pass such an order, the order passed u/s 263 stands in vacuum. Since no valid order of the Assessing Officer exist, the order passed u/s 263 is bad in law. In the result, the appeal by the assessee is allowed.

Summary

Issues involved: Appeal against order u/s 263 of the Income-tax Act, 1961 for assessment year 2000-01.

Summary:
1. The assessee contended that the proviso to section 14A restricts the power of revision by the Commissioner, as the Assessing Officer cannot enhance the assessment order. The Commissioner directed enhancement of assessment due to improper deductions claimed by the assessee.
2. The Commissioner found errors in the assessment related to deductions claimed for interest paid, service charges, and rental income. The Commissioner issued a notice u/s 263 to redo the assessment for incomes that had escaped assessment.
3. The assessee argued that the retrospective introduction of section 14A prohibits reopening of settled assessments, thus the Commissioner's order was not erroneous. The lease agreement supported the treatment of service charges as income from other sources.
4. The Tribunal found in favor of the assessee, stating that the Commissioner's order did not stand legal scrutiny. The retrospective effect of section 14A and Circular No. 11 of 2001 limited the power to reopen settled assessments.
5. The Tribunal emphasized that for the Commissioner to invoke section 263, the Assessing Officer's order must be both erroneous and prejudicial to revenue. As the Assessing Officer had no power to reassess under section 147 u/s 14A, the Commissioner's order was deemed invalid.

Conclusion: The appeal by the assessee was allowed.