REVISION BY PRINCIPAL COMMISSIONER/COMMISSIONER OF INCOME TAX

[Mr. M. GOVINDARAJAN]

Part E of Chapter XX of Income Tax Act, 1961 (‘Act’ for short) gives revisionary powers to the Principal Commissioner or Commissioner of Income Tax.  The Revisionary powers given to Principal Commissioner or Commissioner are of two types-

• Under Section 263 – Orders prejudicial to the revenue; and
• Under Section 264 – Orders other than Section 263.

Orders prejudicial to the Revenue

Section 263 (1) provides that the Principal Commissioner or Commissioner may call for and examine the record of any proceeding under this Act.  If he considers that any order passed therein by the Assessing Officer is erroneous in so far as it is prejudicial to the interests of the revenue, he may pass such order thereon as the circumstances of the case justify.  Before passing such order after-

• giving the assessee an opportunity of being heard
• making or causing to be made such inquiry as he deems necessary.

Such order may include an order-

• enhancing or modifying the assessment; or
• cancelling the assessment and directing a fresh assessment.

Such power shall extended and shall be deemed to have extended to the Principal Commissioner or Commissioner on any order passed by the Assessing  Officer which has been the subject matter of appeal to such matters as had not been considered and decided in such appeal.

The explanation to this section gives the list of orders as erroneous.  The explanation provides that an order passed by the Assessing Officer shall be deemed to be erroneous in so far as it is prejudicial to the interests of the revenue, if, in the opinion of the Principal Commissioner or Commissioner,-

• the order is passed without making inquiries or verification which should have been made;
• the order is passed allowing any relief without inquiring into the claim;
• the order has not been made in accordance with any order, direction or instruction issued by the Board under section 119; or
•  the order has not been passed in accordance with any decision which is prejudicial to the assessee, rendered by the jurisdictional High Court or Supreme Court in the case of the assessee or any other person.

Section 263(2) provides that 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.  Section 263 (3) provides that 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.  The explanation to this section provides that 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.

Orders other than Section 263

Section 264 (1) of the Act provides that in the case any order other than any order   to which Section 263 applies passed by subordinate to him, the Principal Commissioner or 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 Deputy Commissioner (Appeals) shall be deemed to be an authority subordinate to the Principal Commissioner or Commissioner.

Limitation

Section 264(3) provides that 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.   The Principal Commissioner or 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.

Section 264 (2) provides that the Principal Commissioner or Commissioner shall not of his own motion revise any order under this section if the order has been made more than one year previously.

Fees

Section 264 (5) provides that every application by an assessee for revision under this section shall be accompanied by a fee of ₹ 500/-.

Orders which cannot be revised

 Section 264 (4) provides that the Principal Commissioner or Commissioner shall not revise any order under this section in the following cases-

• where an appeal against the order lies to theDeputy 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 appealto 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 theDeputy Commissioner (Appeals); or
• where the order has been made the subject of an appealto the Commissioner (Appeals) or to the Appellate Tribunal.

Disposal of Revision petition

Section 264(6) provides that on every application by an assessee for revision 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.  In 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.

Section 264(7) provides that notwithstanding anything contained in sub-section (6), an order in revision under sub-section (6) 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.

An order by the Principal Commissioner or Commissioner declining to interfere shall, for the purposes of this section, be deemed not to be an order prejudicial to the assessee.

Case laws

Some case laws are discussed in relation to Section 263 and 264 of the Act.

Lack of inquiry

If the Principal Commissioner is of the opinion that the order is passed by the Assessing Officer without making any inquiry in respect of the matter, then he can invoke the jurisdiction for him under Section 263.  Lack of inquiry is also considered to be prejudicial to the interest of the revenue.

  In ‘Rajmandir Estates Private Limited V. Principal Commissioner of Income Tax’ – 2016 (5) TMI 801 - CALCUTTA HIGH COURT the High Court held that lack of enquiry, where enquiry is necessary, can be treated as prejudicial to the interest of the Revenue so as to justify revisional jurisdiction.   It was for non inquiry, the validity of action under Section 263 was held justified in a case of non verification of share capital contribution when there was evidence to suggest that the transaction could not be genuine.

  In ‘Indian Farmers Fertilizers Co-operative Ltd., V. Principal Commissioner of Income Tax’ – 2016 (11) TMI 1360 - ITAT DELHI the appellant is a co-operative society, engaging in the business of manufacture and import of fertilizers.  The appellant, along with another Indian Co-operative society entered into a joint venture with an Oman Oil company and formed a fertilizer company registered in Oman under the Omani laws.  The appellant held 25% share in the Oman Company.  The appellant established a branch office in Oman to oversee its investment in the Oman Company and to facilitate rendering of personnel placement and technical services to the Oman Company.  This branch was registered as a foreign company branch under the Omani laws, having a permanent establishment in Oman in terms of Article 5 of Double Taxation Avoidance Agreement.    The appellant filed a return for the year 2010-11 declaring an income of ₹ 723.16 crores.  Subsequently a revised return was filed declaring an income of ₹ 577.15 crores.  The difference is that the dividend income received by the appellant’s branch in Omani from the Oman Company to the tune of ₹ 144.11 crores was excluded on the ground that the same is to be assessee only in Oman and not in India.  The Assessing Officer allowed tax credit of a sum of ₹ 41.52 crores on the dividend income.  The Principal Commissioner, by his revisionary powers, held that the Assessing Officer did not make any verification or enquiries as regards the legal value of letters issued by the Secretary General and also did not make any enquiry as regards the designed for economic development.  There was lack of enquiry and non application of mind.   Hence he remanded the matter to the Assessing Officer under Section 263of the Act.

  On appeal, the Tribunal held that the order passed by the Principal Commissioner was bad in law because-

• detailed inquiries were made by the Assessing Officer at the time of the original assessment proceedings with regard to tax credit on deemed dividend which would have been payable in Oman but for the exemption granted the assessee had filed detailed replies in response to the query which were duly considering by the Assessing Officer before allowing tax credit;
• such credit was allowed by the Department for the early years; the Principal Commissioner could notsubstitute his view by assumingjurisdiction under Section 263;
• detailed inquiries were made by the Assessing Officer with regard to the capitalization of interest to fixed assets as well as capital work in progress;
• even the assessee had sufficient interest free funds to meet the capital expenditure and therefore no disallowance under Section 36(1)(iii) was called for;
• the assessee had already discharged its onus of proving non diversion of funds borrowed for working capital towards capital work-in-progress and fixed assets by submitting a certificate of an independent statutory auditor and proved availability of its own funds and internal accruals which was not rebutted by the Principal Commissioner.

The Tribunal set aside the order of Principal Commissioner.

  In ‘Vikrant Mehra V. Income Tax Officer’ – 2016 (6) TMI 783 - ITAT AMRITSAR the Assessing Officer completed the assessments of the assessee for the Assessment Years 2007 – 08 and 2008 – 09 accepting the submissions of the assessee that the bank deposits reflected the turnover from retain business.  The Commissioner was of the opinion that additions should have been made under Section 69.  He passed an order of revision under Section 263.  The Tribunal held that from the queries of the Assessing officer and the replies filed by the assessee from time to time it was clear that the Assessing Officer had made sufficient enquiries in this respect and only after being satisfied about the claim of the assessee under Section 44AG and after going through the case law he completed the assessment.  These were not the cases where no enquiry had been made.  There is a difference between lack of enquiry and no inquiry.  The Assessing Officer had passed the orders after due application of mind and not the cases fit for action under Section 263.

  In ‘Mahawar Iron Stores Private Limited V. Deputy Commissioner of Income Tax’ – 2016 (4) TMI 557 - ITAT DELHI the Tribunal held that no enquiry has been made by the Assessing Officer as to the purpose and basic payment of brokerage, its connection with the business and whether the payment was commensurate with the benefit derived by the company.  A complete list of the agents along with addresses was available on record but no attempt was made to verify even one of the persons.  The Commissioner had rightly set aside the order of assessment under Section 263 as erroneous as well as prejudicial to the interests of the Revenue.

No mistake on the part of assessee

  Even though the Assessing Officer has not made any query but the assessee’s account is correct and in accordance with law revisionary jurisdiction cannot be invoked by the Principal Commissioner of Income Tax as held in ‘Commissioner of Income Tax V. Binani Cements Limited’ – 2016 (3) TMI 327 - CALCUTTA HIGH COURT the assessee incurred loss of ₹ 9.20 crores for the  Assessment year 2006 – 07 on transfer of its investment division to a company D.  The loss was debited to Profit and Loss Account.  The assessment was under Section 115JB of the Act.  The Assessing officer did not question the fact of debiting loss arising out of the transfer, to the Profit and Loss Account.  The Commissioner, by an order under Section 263 of the Act, held that the loss could not have been debited to the Profit & Loss Account but was required to be added each for computation of profit under Section 115JB of the Act.  The Tribunal quashed the order of review by the Commissioner.  The High Court held that clauses 21 and 25 of Accounting Standard 13 provided for recognition of the profit or loss arising out of investment in the P&L Account.  The disclosure made by the assessee in the financial statement was in accordance with the requirement of clause 25 and also clause (2b) of Part II of Schedule VI to Companies Act, 1956.  The same should not be construed as inaccuracy in the accounts.  There is no mistake on the part of the assessee.  The Commissioner wrongly exercised his jurisdiction under Section 263 of the Act.  The High Court dismissed the appeal filed by the Department.

Revision on amalgamated company

  In an amalgamation process one company may be merged with another company.  The assets and liabilities of the transferee company (amalgamated company) to the transfer company (amalgamating company).   In such nature of amalgamation the amalgamated company ceases to be existed as per the Companies Act.  No action can be taken against the said company.  Revisionary power cannot be executed on such amalgamated companies.

  In ‘Milestone Trade links Private Limited V. Income Tax Officer’ – 2016 (4) TMI 501 - ITAT AHMEDABAD the High Court approved the merger of Hinduja Exports Private Limited (‘HEPL’ for short) with the assessee company with effect from 01.04.2011.  The Commissioner issued notice under Section 263 on 24.12.2014 in the name of the amalgamated company.  The assessee contended that the fact of amalgamation was brought to the notice of Assessing Officer by 23.07.2013.  The Tribunal in the appeal filed by the appellant held that there was no provision in the Act to communicate the factum of amalgamation to the Commissioner.  Even if the assessee gave consent for taking up the proceedings under Section 263 against it, that would not give jurisdiction of the Commissioner.  The High Court held that before taking up any action under Section 263, the Commissioner had to pursue records and the records would include the communication made by the assessee to the Assessing officer intimating about the fact of amalgamation.  The proceedings initiated under Section 263 against HEPL after its amalgamation with the assessee were void ab initio.        

Revision on the proposal of the Assessing Officer

  Section 263 provides that only the Principal Commissioner or Commissioner is to invoke the revisionary jurisdiction.  He cannot act on the proposal of the Assessing Officer as held in  ‘V.R. Venkatachallam V. Assistant Commissioner of Income Tax’ – 2016 (5) TMI 958 - ITAT CHENNAI the Tribunal held that the Commissioner, before exercising jurisdiction under Section 263, he must call for the records of the proceedings under the Act.  After examining the records if he comes to a conclusion that the order passed by the Assessing Officer is erroneous in so far as it is prejudicial to the interests of the Revenue, he can issue notice and revise the assessment under Section 263.  There should be an independent application of mind by the Commissioner himself.   He cannot act solely upon the proposal sent by the Assessing Officer so as to rectify any omission on the part of the Assessing Officer since the Assessing Officer has the remedy to rectify the omission under the provisions of the Act.

Justification for revision

  The Principal Commissioner or Commissioner while invoking revisionary jurisdiction he is to satisfy himself that it is a fit case for invoking jurisdiction of revisionary power or he is to justify for his action of invoking the revisionary jurisdiction.

  In ‘Tidel Park Limited V. Assistant Commissioner of Income Tax’ – 2016 (6) TMI 246 - ITAT CHENNAI the appeal is with regard to invoking the jurisdiction under Section 263 so as to hold the sinking fund deposit received by the assessee from the parties as revenue receipt.  The Assessing officer made no deductions to these receipts in his assessment order.   Hence Commissioner of Income Tax invoked the provisions of Section 263 so as to give direction to the Assessing Officer to consider this receipt as revenue receipt and re-frame the assessment.   The Tribunal held that the transaction of sinking fund was in the nature of charging fees from the owners for providing various types of services in the form of maintenance of various routine services and the maintenance of the building, all within the ambit of trading activities and nothing to do with the consideration received by the assessee, if any.  The Commissioner was justified in revising the orders.

Tribunal’s order binding on Principal Commissioner

  The order of higher authority is binding on the lower authorities.  The order of Tribunal is binding on Adjudicating Authority , Commissioner (Appeals) and even Commissioner who exercises revisionary jurisdiction.

  In  ‘Lakshmi Energy & Foods Limited V. Commissioner of Income tax’ – 2016 (6) TMI 785 - ITAT CHANDIGARH  the appellant was engaged in the business of rice milling and handling, storage and transportation of food grains.   On examination of the records of Assessment Year 2010 – 11, the Commissioner found that the Assessing Officer did not appreciate evidence on record, failed to examine and arrive at the correct and logical and the legal conclusion and in this process allowed a deduction under Section 80-IB (11A) of the Act.  The Tribunal held that once the particular issued had been decided in favor of the assessee by the Tribunal, even in the earlier assessment years the Commissioner could not infer the same view having been taken by the Assessing Officer in the subsequent year, was erroneous.  This was totally against the Principles of Judicial Discipline and binding precedent.  The view taken by the Tribunal was binding on the Assessing Officer, as well as Commissioner (Appeals) and even on the Commissioner assuming jurisdiction under Section 263.

Revision on the basis of audit objections

  In ‘Satraj Singh V. Principal Commissioner of Income Tax’ – 2016 (6) TMI 793 - ITAT AMRITSAR  the appellant was a contractor and his books of account was audited under Section 44AB of the Act.  The case of the assessee was selected for scrutiny.  During the assessment proceedings the addition was made for ₹ 1 lakh.  The Commissioner set aside the order under Section 263 of the proceedings with the direction to decide the issue afresh on the merits in accordance with the law.  The Tribunal held that the Assessing Officer examined the issue of disallowance of expenses made in cash on three occasions and found no violation of Section 40A(3).  The appellant gave reply showing that to manage his business at various places the advances were made to various supervisors engaged in various locations and these supervisors used to submit the details of material purchased by them and for making payments to labor and each payment was less than ₹ 20,000/- and therefore there is no violation.  The order passed by the Assessing Officer was not erroneous order or prejudicial to the interests of the Revenue.  The order of revised was not valid.  The revision on basis of audit objection is impermissible.

Revision on the application of assessee

  The Delhi High Court (HC) in a case has held that the revision powers conferred under section 264 of the Income-tax Act, 1961 (the Act), on the Commissioner of Income-tax (CIT) were very wide and could give relief to the taxpayer in a case where the taxpayer detected mistakes due to which he was over-assessed. Further, it held that when a substantive law confers a benefit on the taxpayer under a statute, it could not be taken away by the adjudicatory authority on mere technicalities. Furthermore, it held that the Tax Officer (TO) should not take advantage of any error or mistake that a taxpayer committed

In ‘Bhuppatlal J. Shah V. Income Tax Officer’ – 2012 (7) TMI 592 - BOMBAY HIGH COURT, the assessee was non-executive director of company. He resigned from the Board on 29th April 1994. On 27 the September, 2006 the assessee was issued notice to recover the tax due of the company for the assessment years 1986-87 to 1993-94 under section 179 of the Income-tax Act, 1961. The assessee informed to the assessing Officer that the Company is a partnership form having 80% share hence the assessing Officer must proceed against the firm for recovery due s of the Company. The Assessing Officer rejected the application of assessee. Assessee moved petition under section 264 which was rejected by the Commissioner without giving an opportunity of hearing. On writ petition the Court set aside the order of Commissioner and Assessing Officer and directed the Assessing Officer to pass an order after following principle of natural justice and including granting a personal hearing.

  In ‘Sanchit Software & Solutions Private Limited V. Income Tax Officer’ – 2012 (9) TMI 803 - BOMBAY HIGH COURT the  assessee filed the return of income wherein he has shown dividend and long term capital gains as taxable and forgot to claim the exemption .On receipt of intimation the assessee filed the revised the return claiming the exemption. The Assessing Officer has not taken the cognizance of revised return as the same was filed beyond time limit specified under section 139(5).The Assessee filed the revision application under section 264 against the intimation under section 143(1).The Commissioner rejected the application under section 264. The Assessee also filed rectification application before the Assessing Officer under section 154, which was pending. The Honorable Court quashed the order passed under section 264 and directed the Assessing Officer to dispose the application keeping in mind the object of circular dated 11-4-2005.The Court also observed that in any civilized system, the assessee is bound to pay the tax which he is liable under the law to the Government .The Government on the other hand is obliged to collect only that amount of tax which is legally payable by an assessee .The entire object of administration of tax is to secure the revenue for the development of the Country and not to charge assessee more than that which is due and payable by the assesse.

  In ‘Janata Co-Operative Bank Limited V. Commissioner of Income Tax’ – 2013 (2) TMI 476 - Bombay High Court an order was passed under section 264 by the Commissioner against the order of Assessing Officer under section 143 (3).Where in an amount of ₹ 6.80 lakhs was allowed and balance amount of ₹ 31.25 lakhs was disallowed. The assessee moved an application 154 before the Commissioner. The Commissioner declined to entertain the application placing reliance on section 154(IA). On writ the court held that the application was not made before the Assessing Officer who passed the order which was the subject-matter of revision, but, the application was made before the revisional authority himself for rectification. Such an application was maintainable and was not barred by section 154(IA). Accordingly the writ petition was allowed.

Conclusion

This article discusses some case laws on some issues on exercising revisionary jurisdiction.  The inference that can be made from the above discussion is that before invoking revisionary jurisdiction, the Principal Commissioner or Commissioner has to satisfy himself that it is a fit case for revision and he has to examine all records available in the assessment proceedings and to satisfy himself that the order is erroneous and prejudicial to the interest of the Revenue.  Further he is to record the reasons that the order passed by the Assessing Officer is erroneous in so far as it is prejudicial to the interests of the Revenue.