Revision by the Commissioner under section 263 of Income-tax Act, may not be valid if it is on proposal of some other authority.

[C.A. DEV KUMAR KOTHARI]

  Relevant links and references:

Section 263 of Income-tax Act, 1961- relating to Revision of orders prejudicial to revenue and

section 129 of Income-tax Act,1961- relating to Change of incumbent of an office.

Hindustan Lever Ltd. Versus Commissioner of Income-tax- 2011 -TMI - 203135 - CALCUTTA HIGH COURT.

“Thanks for unnecessary litigation by revenue about manner of allowability of green leaf cess paid by tea companies”, http://www.taxmanagementindia.com/visitor/detail_article.asp?ArticleID=1062.

The provision:

In this write up we are concerned with power of CIT to pass revision order under section 263 when revision proceedings are initiated based on proposal of  the Assessing Officer (AO)  or another authority having some powers of supervision over AO or authority having concurrent power with the AO etc. The mater is discussed with reference to a recent judgment of Calcutta High Court.

The provision  of section 263 with necessary highlights (for analysis) are reproduced below:  

Revision of orders prejudicial to revenue.

263. (1) The Commissioner may call for and examine the record of any proceeding under this Act, and if he considers that any order passed therein by the ¹[Assessing] Officer is erroneous in so far as it is prejudicial to the interests of the revenue, he may, after giving the assessee an opportunity of being heard and after making or causing to be made such inquiry as he deems necessary, pass such order thereon as the circumstances of the case justify, including an order enhancing or modifying the assessment, or cancelling the assessment and directing a fresh assessment.

²[Explanation.—For the removal of doubts, it is hereby declared that, for the purposes of this sub-section,—

(a) an order passed ³[on or before or after the 1st day of June, 1988] by the Assessing Officer shall include—

(i) an order of assessment made by the Assistant Commissioner ⁴[or Deputy Commissioner] or the Income-tax Officer on the basis of the directions issued by the ⁵[Joint] Commissioner under section 144A;

(ii) an order made by the ⁶[Joint] Commissioner in exercise of the powers or in the performance of the functions of an Assessing Officer conferred on, or assigned to, him under the orders or directions issued by the Board or by the Chief Commissioner or Director General or Commissioner authorised by the Board in this behalf under section 120;

(b) "record" ⁷[shall include and shall be deemed always to have included] all records relating to any proceeding under this Act available at the time of examination by the Commissioner;

(c) where any order referred to in this sub-section and passed by the Assessing Officer had been the subject matter of any appeal ⁸[filed on or before or after the 1st day of June, 1988], the powers of the Commissioner under this sub-section shall extend ⁹[and shall be deemed always to have extended] to such matters as had not been considered and decided in such appeal.]

¹⁰[(2) No order shall be made under sub-section (1) after the expiry of two years from the end of the financial year in which the order sought to be revised was passed.]

(3) Notwithstanding anything contained in sub-section (2), an order in revision under this section may be passed at any time in the case of an order which has been passed in consequence of, or to give effect to, any finding or direction contained in an order of the Appellate Tribunal, ¹¹[National Tax Tribunal,] the High Court or the Supreme Court.

Explanation.—In computing the period of limitation for the purposes of sub-section (2), the time taken in giving an opportunity to the assessee to be reheard under the proviso to section 129 and any period during which any proceeding under this section is stayed by an order or injunction of any court shall be excluded.

--------------- ------------------------------Notes :---------------------------------------------------

All effective amendments are very old last being with effect from 01.10.1998 therefore, the footnotes relating to them are not given. 

11. Inserted by the National Tax Tribunal Act, 2005, with effect from a date yet to be notified.

 Readers may refer to footnotes if old matters are under consideration.

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 We find reference of S.129 in section 263, therefore, that section with highlights (for analysis) is also reproduced below:

Change of incumbent of an office.

129. Whenever in respect of any proceeding under this Act an income-tax authority ceases to exercise jurisdiction and is succeeded by another who has and exercises jurisdiction, the income-tax authority so succeeding may continue the proceeding from the stage at which the proceeding was left by his predecessor :

Provided that the assessee concerned may demand that before the proceeding is so continued the previous proceeding or any part thereof  be reopened or that before any order of assessment is passed against him, he be reheard.

Necessary actions required to be performed or taken by the Commissioner himself:

It is true that a Commissioner is assisted by many other Officers, and for his administrative functions he has take help and assistance of assistants. These includes officers like DCIT / ITO Head Quarter, Inspectors, Tax Assistants, auditors etc. The reports of audit party are also relevant in discharge fo functions of Commissioner. Thus the Commissioner can be assisted by his team and also the Assessing Officer about any matter concerning erroneous orders having been passed. The Commissioner can without doubt take feedback and information from other officers.    

However, some actions are necessarily to be taken by the Commissioner. On reading of the provisions we find that for exercising the authority of revision under section 263 the Commissioner need to take some actions himself. These are discussed below.

From provision	comments
The Commissioner may call for and examine the record of any proceeding under this Act	The word used is ‘may’, it signifies that it is not necessary that CIT should call for record of each and every proceedings. He may call for records of selected matters – this is his discretion. However, when he takes a decision of initiating proceedings under section 263, he must call for and examine records himself (though with assistance of other officers).
and if he considers that any order passed therein by the 1[Assessing] Officer is erroneous in so far as it is prejudicial to the interests of the revenue	Words used are ‘if he considers’ this means that CIT himself should consider. Thus CIT must record his reasoning for his considered view that the order is erroneous in so far as it is prejudicial to the interests of the revenue.
he may,
after giving the assessee an opportunity of being heard	He himself has to give opportunity of hearing to the assessee. The hearing aspect cannot be delegated.
and after making or causing to be made such inquiry as he deems necessary,	He can make or cause to be made further enquiry. Here he can take assistance of others in causing enquiry.
pass such order thereon as the circumstances of the case justify,	He himself has to pass order. Taking assistance of others can only be considered as incidental of working.
From section 129: Change of incumbent of an office.   xxx  an income-tax authority ceases to exercise jurisdiction and is succeeded by another who has and exercises jurisdiction, the income-tax authority so succeeding may continue the proceeding from the stage at which the proceeding was left by his predecessor : Provided that the assessee concerned may demand that before the proceeding is so continued the previous proceeding or any part thereof  be reopened or that before any order of assessment is passed against him, he be reheard.	There can be change of CIT due to change in jurisdiction or change in incumbent in office of CIT. In case authority or  incumbent is changed, the new authority or officer, as the case may be  can proceed from the stage where his predecessor ( or authority)  left the proceedings. Thus, if the case was heard, the new CIT can proceed to pass order. However, if the assessee has made request for rehearing then new officer has to compulsorily hear the assessee. Even otherwise, it is advisable for the new officer to provide further opportunity of hearing to the assessee. This is necessary because over the intervening period, there can be change in legal position and the new officer has to understand the matter. Besides to comply with principal of natural justice also it is necessary that assessee should be given fresh opportunity of hearing by the new authority or new officer in charge.

 

Proposal from Assessing Officers or other officers:

Assessment records are checked and audited by concerned authorities and auditors. Many times auditors point out certain mistakes in orders the mistakes can be about facts, law or calculations etc. The observations and notes of auditors, popularly called ‘audit objections’  are considered by the AO and other officers. A reply is to be given on audit objections. In case audit objection is accepted, then authorities have to take remedial measures. Remedial measures can be initiation of proceedings by way of rectification if the mistake is apparent from records, reassessment proceedings if the case falls under category of escaped income etc. or revision by CIT under section 263. The AO can also take steps by writing to the CIT(A) to take steps for enhancement of assessment, however, this is possible only when  appeal of assessee is pending before the CIT(A) against the order. It is usual that in cases where a revision is desirable, the AO or his senior supervising authorities  or authorities having concurrent authority (like JCIT/ DCIT or Addl. CIT of the Range) can send a report or proposal for revision to the concerned Commissioner.

In practice we also find that many times, while making enquiry in any subsequent or other year for the same assessee or in case of any other assessee the AO form a different opinion on particular matter. A claim which was allowed earlier is now viewed as not allowable. In such cases also the AO makes proposal for revision.

In cases of proposal for revision from other authorities also it is necessary for the Commissioner to take various steps and actions which are required to be taken by him. Merely based on an audit objection or proposal of other authorities for revision he cannot initiate revision proceedings. He must call for records, examine them and then form at least a prima facie opinion himself that there are errors in proceedings and error has resulted in order being erroneous and prejudicial to the interest of revenue. He cannot assume that these functions have been performed by his assistants or juniors or other officers of the department. This is because a statutory function is to be performed and duties are required to be discharged in a manner intended and specified in any provision.

Thus, in view of author when an audit objection or proposal for revision is received, the CIT must take various actions like call for records of proceedings, examine the records, make his own assessment about facts and law and then find whether it is a case of erroneous order which has caused prejudice to the revenue? Whether it is a case fit for initiating revision proceeding?

In such cases also CIT must also take an objective and rational view based on theory of result orientation. It should not be viewed simply from the angle of meeting targets of certain number of revision cases. Therefore, CIT must not make revision order in each and every case where a proposal has been forwarded or an audit objection is raised etc. He must make a proper assessment of situation and facts.

The decision on these issues should be independently made by the CIT. He can refuse proposal for revision if he finds that there is no merit on audit objection or the proposal to proceed for revision etc.

However, many times we find that whenever there is an audit objection alleging large revenue involvement, and when other proceedings by way of rectification or reassessment is not possible and a revision proceeding is feasible, the CIT initiate revision proceedings. This is not proper course adopted by CIT. As a result we find that a large number of revision proceedings u/s 263 fails many times on technical grounds and / or on merit.   

Recent case before High Court- a case of unnecessary revision:

We find a recent judgment  Dated - 04 February 2011 of honorable Calcutta High Court in the case of  Hindustan Lever Ltd. Versus Commissioner of Income-tax  reported as 2011 -TMI – 203135. This judgment clearly shows as to how unnecessary litigation is preferred by the revenue on a very much settled matter and that too a matter on which there should not be any dispute. In this regard readers may refer to another article by the author titled unnecessary litigation…

Facts of case and decision:

The assessee had to prefer an appeal under section 260A of the Income-tax Act, 1961.

The appeal is directed against an order dated 16-7-2002, passed by the Income-tax Appellate Tribunal, ‘E’ Bench, Calcutta in ITA No. 660 (Cal.) of 2000.

The appeal relates to the assessment year 1995-96.

The  Tribunal dismissed the appeal preferred by the appellant against an order dated 29-3-2000, passed by CIT, under section 263 of the Income-tax Act, 1961.

A Division Bench of the Calcutta High Court by order dated 18-8-2003 formulated the following questions of law in this appeal for hearing :

"(a)  Whether, in computing the composite income derived from sale of tea grown and manufactured by the assessee Cess payable under the Assam Agricultural Income-tax Act on green tea leaves is allowable as a business expenditure in computing the composite income under Rule 8 of the Income-tax Rules, 1962?

 (b) Whether, the condition precedent for the exercise of the power under section 263 of the Income-tax Act has been satisfied in the facts and circumstances of the case?"

 The facts relating to the proceedings relating to the dispute in appeal are as follows:

(a)    The Assessing Officer while making assessment for the assessment year 1995-96 under section 143(3) of the Act allowed Cess paid on green leaf to the Government as business expenditure.

(b)    Subsequently, a proposal under section 263 of the Act had been sent by the concerned Assessing Officer to the Commissioner of Income-tax on the ground that while completing the assessment of the abovementioned year, the Assessing Officer had allowed Cess on green leaf paid to the Government by the assessing-company as business expenditure by disregarding the fact that the Gauhati High Court, in the case of Jorehaut Group Ltd. v. Agrl. ITO [1997] 226 ITR 622 held that the Cess should be deductible from agricultural income-tax proceeding. 

(c)    As per AO the aforesaid allowance of Cess in the income-tax proceeding had made the assessment order erroneous and prejudicial to the interest of revenue.

(d) On receipt of such proposal, a show-cause notice was issued to the assessee and the assessee filed written submission before the CIT.

(e) The CIT, by order dated 29th March, 2002, directed the Assessing Officer to add back the whole of the ‘Cess’ on green leaf which was allowed as deduction by the Assessing Officer in the assessment.

(f)       The assessee preferred an appeal before ITAT which was dismissed by affirming the order of the Commissioner of Income-tax invoking his power under section 263 of the Act.

Arguments on behalf of assessee:

 Dr. Pal, the learned senior Advocate appearing on behalf of the appellant, has contended before court on the following lines:

(a) that there was no justification of initiating the proceeding under section 263 of the Act as the condition laid down for invocation of such provision was not reflected in the order under section 263 of the Act.

(b) that the order of the Gauhati High Court, relied upon by the Assessing Officer for giving proposal of reference, was not even followed by subsequent decisions of the said High Court and as such, there was no valid ground exercising the power under section 263 of the Act.

(c) If the order of the Assessing Officer was a possible view, there was no justification of reopening the assessment under section 263 of the Act

(d) In computing the composite income derived from sale of tea grown and manufactured by the assessee, the Cess payable under Assam Agricultural Income-tax Act on green tea leaf is allowable as business expenditure in computing the composite income under rule 8 of the Income-tax Rules, 1962. Dr. Pal, therefore, prays for setting aside the order passed under section 263 of the Act.

Arguments of counsel for revenue:

(a)   Mr. Shome, the learned senior counsel appeared  on behalf of the revenue, he  opposed the aforesaid contention of Dr. Pal

(b)   He contended that there is no justification of interfering with the order passed in the proceeding under section 263 of the Act,

(c)   The order u/s 263 has been even affirmed by the Appellate Tribunal.

(d)   Therefore, he prayed for dismissal of the appeal.

High Courts observations and ruling:

                On merit:

 The  question, whether the amount of Cess paid by an assessee under the Assam Agricultural Income-tax Act on green tea leaf is allowable as a "business expenditure" in computing the composite income under rule 8 of the Income-tax Rules, 1962, has already been decided by a Division Bench of this Court in the case of CIT v. A.F.T. Industries Ltd. [2004] 270 ITR 167 and it has been held that the amount of Cess so payable is deductible.

     (per author the decision is dated 30.07.2004 and in that case no one had appeared on behalf of assessee) 

    On proceedings court observed  and held as follows:

                We, therefore, find that there was no justification of invoking section 263 of the Income-tax Act for reopening of the assessment on the basis of a proposal given by the Assessing Officer himself after passing of the order of the assessment on the basis of the precedent of Gauhati High Court which has not been approved by a Division Bench of our High Court.

We, therefore, set aside the order passed by the Commissioner of Income-tax under section 263 of the Act which has been affirmed by the Tribunal below and direct the Assessing Officer to act accordingly.

           The appeal is, thus, allowed.

In the facts and circumstances, there will be, however, no order as to costs.

Observations of the author:

From the above judgment we can notice that a revision proceeding based merely on the proposal of the AO is not properly initiated proceeding for revision.

In this case when the learned CIT issued the notice he should have examined the facts. If properly examined, the CIT could gather that as IT Rules  as a first step entire composite income is considered as business income and therefore, green leaf cess as a cost of raw material was allowable while computing composite income, after computation of composite income only, an allocation is made whereby 40% is considered as income chargeable to tax under the Income-tax Act,1961. 

With due respect it appears that there is a mistake in observation of the Court also    wherein court has held that “….on the basis of the precedent of Gauhati High Court which has not been approved by a Division Bench of our High Court.” 

The judgment of the Gauhati High Court was in respect to provisions of the Assam Agricultural Income Tax Act and not the Income-tax Act. Therefore, there is no question of approving or disapproving that decision. That decision was distinguished in case of AFT Ltd. 

A case of unnecessary litigation:

Readers may refer to the article “Thanks for unnecessary litigation by revenue about manner of allowability of green leaf cess paid by tea companies”, http://www.taxmanagementindia.com/visitor/detail_article.asp?ArticleID=1062.

In that article detailed discussion has been made about computation of tea income and allowability of green leaf cess against composite income. In that case it was observed that   decision of  ITAT, 'D' Bench, Kolkata, has in the case of Bishnauth Tea Co. Ltd V JCIT (2002) 77 TTJ (Cal) 45  (dated 28.06.2002)  has held that the green leaf cess is allowable as expenditure while computing composite income under Rule 8. The Tribunal has interalia considered Rule 8, provisions of Income Tax Act, provisions of Assam Agricultural income Tax Act, judgment of Guahati High Court in case of Jorhat Group (supra.), and also the decisions of the Supreme Court on the aspects of the provisions under the Indian Constitutions vis a vis Income Tax Act and Agricultural Income Tax Act of few states reported as Tata Tea Ltd V State of West Bengal (1988 -TMI - 5257 - SUPREME Court), Assam Company Ltd V State of Assam (2001 -TMI - 40294 - SUPREME Court ) etc.

The decision of ITAT in case of Hindliver (dt.16.07.02), was rendered after the decision in case of Bishnauth, however, it appears that the earlier  decision was not followed. ( It may be that at the time of hearing that decision was not available to counsels and members hearing the case were also  not aware of the same). We find that in the case of Bishnauth Tea the order u/s 263 was set aside by the ITAT. Therein decision was that the CIT has not himself come to a conclusion that the assessment order is erroneous in so far prejudicial to the interest of revenue. Besides on merits also the Tribunal found that green tea leaf cess is allowable while computing composite income. Therefore, this decision of ITAT should have been followed by ITAT while deciding the case of Hindliver.