REVISION UNDER INCOME TAX - SOME ISSUES

[Mr. M. GOVINDARAJAN]

Introduction

The Revenue does not have any right to appeal against the order of the Assessing Officer.   It is in these circumstances the power of revision has been conferred on the Commissioner under Section 263 of the Income Tax Act, 1961 (‘Act’ for short) to correct erroneous orders which are also prejudicial to the interests of the revenue.  It was held in ‘Commissioner of Income Tax V. Goetze (India) Limited’ – 2013 (12) TMI 607 - DELHI HIGH COURT that when the Assessing Officer takes a view but the view is not correct and is erroneous, according to the findings recorded by the Commissioner that the order passed by Assessing Officer was prejudicial to the interests of the Revenue, then the order of Commissioner cannot be  set aside on the ground that the views were possible or probable.   However it would be incorrect to state as a broad proposition than an order of Assessing Officer cannot be erroneous, if the Assessing Officer, provided, has taken one of two possible views.   In such cases the order of Assessing Officer is erroneous, provided, the Commissioner holds and is able to demonstrate that the view taken by the Assessing Officer was not plausible, being legally unsustainable and incorrect.   But the finding must be recorded.   This would satisfy the statutory requirement that the order passed and made the subject matter of revision was erroneous subject to the second condition that the order under review should also be prejudicial to the interests of the Revenue.

Order

Explanation to Section 263(1) declares that an order passed by the Assessing Officer (on or after 01.06.1988) for the purposes of this section shall include-

• an order of assessment made by the Assistant Commissioner or Deputy Commissioner or the Income-tax Officer on the basis of the directions issued by the Joint Commissioner under section 144A;
• an order made by the 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 authorized by the Board in this behalf under section 120.

Limitation

Section 263(2) provides that no order shall be made after the expiry of two years from the end of the financial year in which the order sought to be revised was passed.  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, the High Court or the Supreme Court.  In computing the period of limitation for this purpose, 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.

Erroneous order

The position and function of the Income Tax Officer is very different from that of a civil court.  The statements made in a pleading provided by the minimum amount of evidence may be accepted by a civil court in the absence of any rebuttal.   The civil court is neutral.   It simply gives decision on the basis of the pleading and evidence which comes before it.  The Income Tax Officer is not only an adjudicator but also an investigator.   He cannot remain passive in the face of a return which is apparently in order but calls for further inquiry.   It is his duty to ascertain the truth of the facts stated in the return when the circumstances of the case are such as to provoke an inquiry.   The meaning to be given to the word ‘erroneous’ in Section 263 emerges out of this context.   It is because it is stated in the return when circumstances would make such an inquiry prudent that the word ‘erroneous’ in Section 263 includes the failure to make such an inquiry.   The order becomes erroneous because such an inquiry has not been made and not because there is anything wrong with the order if all the fact stated therein are assumed to be correct.

The Assessing Officer in the assessment order is not required to give detailed reasons in respect of each and every item of deduction etc.,   There is a distinction between the ‘lack of inquiry’ and ‘inadequate inquiry’.   If there was any inquiry even inadequate that would not by itself give occasion to the Commissioner to pass orders under Section 263 of the Act merely because he has a different opinion in the matter.   It is only in case of ‘lack of inquiry’ that such a course of action would be open.

In ‘Smt. Tara Devi Aggarwal V. Commissioner of Income Tax’ – 1972 (11) TMI 2 - SUPREME Court it was held that where the Assessing Officer accepted a particular contention or issue without inquiry whatsoever, the order was erroneous and prejudicial to the interests of Revenue.

In ‘Lala Harbhagwan Das and Memorial and Dr. Prem Hospital P. Limited V. Commissioner of Income Tax’ – 2014 (1) TMI 1129 - ITAT DELHI the bona fide belief of the assessee in claiming depreciation at 40% was upheld by the Tribunal in the assessment year 2005-06.   The finding that the assessee’s belief was a bona fide belief was a final finding of fact by a co-ordinate bench and had to be followed.   In the relevant year the facts were stronger as the assessee followed the preceding year’s practice which by itself constitutes a bona fide belief.   The order of Assessing Officer dropping penalty proceedings under Section 271 (1) (c) of the Act, could not be held to be erroneous and prejudicial to the interests of the Revenue merely because it was a cryptic order.   Therefore the order under Section 263 of the Act was to be quashed.

In ‘Commissioner of Income Tax V. Abad Construction Private Limited’ – 2014 (3) TMI 761 - KERALA HIGH COURT  the assessing authority who was passing orders factually was not satisfied with the material available, and therefore, attempted to collect material but failed.   It was within the competency of the Assessing Officer to reject the claim of deduction but he allowed the deduction giving a concession after exposing doubt that the material attempted to be collected was not collected, and therefore, he proceeded to pass the orders on the available materials.  The Commissioner under his revisional jurisdiction held that Assessing Officer has failed to make inquiry as regards the allowability of the claim of the assessee and hence the assessment orders of the Assessing Officer in allowing the deduction without making proper and detailed inquiry were erroneous and prejudicial to the interests of the Revenue.  The Tribunal quashed the order of Commissioner.  The High Court held that the Commissioner was justified in invoking proceedings under Section 263.

Prejudicial to the interests of the Revenue

The second condition precedent to invoke the power of revision under Section 263 is that the order of the Assessing Officer is prejudicial to the interests of the service.  Whether the order is prejudicial or not is to be decided on facts of each and every case.  In ‘Hemanth Kumar Bothra V. Commissioner of Income Tax and another’ –  2014 (2) TMI 519 - MADRAS HIGH COURT the assessee did not challenge the jurisdiction of Commissioner in issuing the notice under Section 263 of the Act.  They only contended that the word ‘erroneous’ was absent in the notice.   The Commissioner in the notice indicated that in the case of the assessee for the assessment year 2009 – 10 showed that the immovable property sale proceeds of ₹ 2.30 crores were treated as long term capital gains instead of short term capital gains, which had result into an order which is prejudicial to the interests of the Revenue.   The High Court held that the expression resulted into an order which is prejudicial to the interests of the Revenue’.

In ‘Commissioner of Income Tax V. Goetze (India) Limited’ – 2013 (12) TMI 607 - DELHI HIGH COURT  the income declared by the assessee for the assessment year 2000-01 under Section 115JA was accepted but some additions were made to the income computed under the normal provisions and it was enhanced to ₹ 2.45 crores.   The Commissioner, thereafter, revised the order under Section 263 on the ground that income computed under Section 115JA by the Assessing Officer was erroneous and prejudicial to the interests of the Revenue on two accounts-

• the Assessing Officer had wrongly allowed deduction of ₹ 1.53 crores claimed in the revised return and excluded this figure from the  book profits; and
• expenditure of ₹ 183.63 lakhs incurred for earning of exempt dividend income under Section 14A of the Act was not disallowed though the assessee had earned dividend income of ₹ 157.85 lakhs which was exempt under Section 10(33) of the Act.

The Tribunal set aside the order of Commissioner.   The High Court, on appeal, held that the assessee had credited the same amount to depreciation account and also the Profit and Loss Account in the year in question.   On being asked why both the heads were credited, the assessee could not give any explanation or answer.   It could not also explain why the revaluation or reduction of ₹ 1.53 crores was made to the revaluation reserve.  The Commissioner in his order specifically recorded that enhanced depreciation on re-valued reserve was claimed in the earlier assessment years.   The proviso to clause (i) of the Explanation to Section 115JA was not applicable as a reserve was not created during the period 1.4.1997 and 31.3.2001 but was created earlier on 30.06.1986.  The assessee admitted that the Assessing Officer had not applied Section 14B and no deduction under the section was made.   The High Court held that the order of revision was valid.

In ‘K.V. Balagangadharan V. Deputy Commissioner of Income Tax’ – 2014 (1) TMI 236 - ITAT COCHIN for the gains arising on sale or immovable properties, the cost relatable to the portion of land sold by the assessee was to be deducted, whether the gains arising on sale of immovable properties were assessed as business income or as short term capital gains.  The closing stock was credited to the Profit and Loss Account only for the purpose of making the ‘cost relatable to sales’ under the revenue cost matching principle.   Hence the closing stock value would not increase the profit from business.  Since no prejudice was caused to the Revenue by assessing the gains arising on sale of immovable properties.   Therefore the initiation of revision proceedings on this issue was not justified.

Power of Commissioner

The power of suo motu can be exercised by the Commissioner only, if on confirmation of the records of any proceedings, under this Act, he considers that any order passed therein by the Income Tax Officer is ‘erroneous’ in so far as it is prejudicial to the interests of Revenue.   It is not an arbitrary or unchartered power, it can be exercised only on fulfillment of the requirements laid down in Section 263(1).   The Commissioner cannot initiate proceedings with a view to starting fishing and roving inquiries in matters which are already concluded.   Such action will be against the well accepted policy of law that there must be a point of finality in all legal proceedings, that stale issues should not be reactivated beyond a particular stage and that lapse of time must induce repose in and set at rest judicial controversies in other spheres of human activity as held in by the High Court ‘Commissioner of Income Tax V. Gabriel India Limited’ – 1993 (4) TMI 55 - BOMBAY High Court

In ‘Commissioner of Central Excise V. Chambal Fertilizers and Chemicals Limited’ – 2014 (2) TMI 20 - RAJASTHAN HIGH COURT it was held that every loss to the Revenue cannot be treated as prejudicial to the interests of the Revenue.   If the Assessing Officer has adopted one of the courses permissible under the law or where two issues are possible has taken one view with which the Commissioner does not agree, it cannot be treated as order erroneous and prejudicial interests of the Revenue.   The Assessing Officer exercises quasi judicial power vested in him and if he exercises such powers in accordance with law and arrives at a just conclusion.   Such conclusion cannot be termed to be erroneous only because the Commissioner does not feel satisfied with the conclusion.

Whether Commissioner to make further inquiry?

In ‘Income Tax Officer V. DG Housing Projects Limited’ – 2012 (3) TMI 227 - DELHI HIGH COURT  it was held that it is not necessary for the Commissioner to make further inquiry before canceling the assessment order of the Income Tax Officer.   The Commissioner can regard the order as erroneous on the ground that in the circumstances of the case the Income Tax Officer shall have made further inquiries before accepting the statements made by the assessee in his return.                      

In ‘Commissioner of Income Tax V. Shree Manjunathesware Packing Products and Camphor works’ – 1997 (12) TMI 4 - SUPREME Court it was held that nothing bars/prohibits the Commissioner of Income tax from collecting and relying upon new/additional material/evidence and state that the order of Assessing Officer is erroneous.

Whether Commissioner can remand the matter?                      

In ‘Parashuram Pottery Works Co. Limited V. Income Tax Officer’ 1976 (11) TMI 1 - SUPREME Court it was held that the Commissioner of Income Tax cannot remand the matter to the Assessing Officer to decide whether the findings recorded and erroneous.  Where there is inadequate inquiry but not lack of inquiry the Commissioner must give and record a finding that order/inquiry is erroneous.   The said finding must be clear, unambiguous and not debatable.

In ‘Appollo Tyres Limited V. Deputy Commissioner of Income Tax’ – 2013 (10) TMI 1233 - KERALA HIGH COURT according to the revisional authority, several issues raised in the order passed under Section 263 of the Act were not explained properly.   Therefore the matter came to be remanded for fresh consideration by the Assessing Officer on the ground that the order passed by the Assessing Officer was erroneous and prejudicial to the interests of the Revenue.   The Tribunal confirmed the order of revision.  The High Court upheld the order of the Tribunal.

In ‘K.V. Balagangadharan V. Deputy Commissioner of Income Tax’ – 2014 (1) TMI 236 - ITAT COCHIN for the assessment year 2008-09 the amount of deficiency assessed by the Assessing Officer was ₹ 12,48,040/- whereas the Commissioner had worked out the deficiency at ₹ 20,85,111/-  Thus there was difference between the two figures which needed to be reconciled.  For the assessment year 2007-08 the Commissioner had worked out the peak fund deficiency of ₹ 37,92,295/- whereas the Assessing Officer had made addition to the extent of about ₹ 20 lakhs.   The Commissioner had considered the cash outflow in excess of that considered by the Assessing Officer.  The excess provision of the cash outflow required examination by the Assessing Officer.  Therefore the direction issued by the Commissioner was to be confirmed.  The Assessing Officer was directed to examine the issue in both years independently without being influenced by the observation or workings made by the Commissioner.

When Revisional power is not justified?                      

In ‘R. Srinivasan V. Assistant Commissioner of Income Tax’ – 2012 (12) TMI 903 - MADRAS HIGH COURT it was held that as far as the revisional remedy available to the Revenue is concerned, an order to be raised by the Commissioner must be one which is made by the authority below the rank of Commissioner and wherever the order is passed with the approval of the Commissioner and there is a direct appeal remedy to the Tribunal the Act does not contemplate an exercise of revisional jurisdiction under Section 263 to revise the order passed by the officer of the same rank.

In ‘R.V. Chakrapani V. Assistant Commissioner of Income Tax’ – 2013 (10) TMI 1078 - ITAT HYDERABAD the Tribunal found that there is no dispute regarding the payment of TDS amount into the Central Government account before the due date of filing the return of income of the assessee.  Being so, exercising the power under Section 263 of the Act by the Commissioner of Income Tax on this issue is not justified.

In ‘Commissioner of Income Tax V. New Delhi Television Limited’ – 2013 (10) TMI 428 - DELHI HIGH COURT the High Court held that the jurisdictional pre conditions stipulated in Section 263 of the Act were not satisfied.  The Assessing Officer did not conclude investigation and accepted the claim under Section 80HHF on being satisfied that the condition stipulated in that Section were satisfied.   The High Court held that it was not a case of ‘no investigation’.   It was also not a case where per se further investigation was required.  The Commissioner, in his order, had been tentative and hesitant and did not decide whether the claim under Section 80HHF had been rightly allowed by the Assessing Officer.  He had noted the stand of the assessee before him and before the Assessing Officer but refrained from forming any opinion as to whether the acceptance of the claim by the Assessing Officer was erroneous or not.   The order of revision was not valid.

Revision of other orders

Section 264 deals with the revision of orders other than in Section 263.

• In the case of any order other than an order to which section 263 applies passed by an authority subordinate to him, the Commissioner may, either of his own motion or on an application by the assessee for revision, call for the record of any proceeding under this Act in which any such order has been passed and may make such inquiry or cause such inquiry to be made and, subject to the provisions of this Act, may pass such order thereon, not being an order prejudicial to the assessee, as he thinks fit;
• The Commissioner shall not of his own motion revise any order under this section if the order has been made more than one year previously;
• In the case of an application for revision under this section by the assessee, the application must be made within one year from the date on which the order in question was communicated to him or the date on which he otherwise came to know of it, whichever is earlier;
• that the Commissioner may, if he is satisfied that the assessee was prevented by sufficient cause from making the application within that period, admit an application made after the expiry of that period;
• The Commissioner shall not revise any order under this section in the following cases-

• where an appeal against the order lies to the Deputy Commissioner (Appeals) or to the Commissioner (Appeals)] or to the Appellate Tribunal but has not been made and the time within which such appeal may be made has not expired, or, in the case of an appeal to the Commissioner (Appeals) or to the Appellate Tribunal, the assessee has not waived his right of appeal; or
• where the order is pending on an appeal before the Deputy Commissioner (Appeals); or
• where the order has been made the subject of an appeal to the Commissioner (Appeals) or to the Appellate Tribunal;

• Every application by an assessee for revision under this section shall be accompanied by a fee of five hundred rupees.
• On every application by an assessee for revision under this sub-section, made on or after the 1st day of October, 1998, an order shall be passed within one year from the end of the financial year in which such application is made by the assessee for revision.  n computing the period of limitation for the purposes of this sub-section, the time taken in giving an opportunity to the assessee to be re-heard 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;
• an order in revision may be passed at any time in consequence of or to give effect to any finding or direction contained in an order of the Appellate Tribunal,  the High Court or the Supreme Court.

Conclusion

The two conditions prescribed in Section 263 are to be fulfilled by the Commissioner before invoking his revisionary power.  The justification of the same may vary from case to case and is depending upon the facts and circumstances of the case.   The block assessment was also subject to revisional proceedings under Section 263 of the Act.  The main purpose of this power is to protect the interests of the Revenue.