Issues Involved: 1. Whether the Tribunal was justified in setting aside the order passed by the Commissioner of Income-tax u/s 263 of the Income-tax Act, 1961.
Summary:
1. Tribunal's Justification in Setting Aside the Commissioner's Order u/s 263: The case pertains to the assessment year 1973-74, where the assessee-company claimed a deduction of Rs. 99,326 as "plant re-lay-out expenses." The Income-tax Officer (ITO) allowed this deduction after the assessee explained that the expenditure was incurred for merging two existing plants to enhance production efficiency. The Commissioner of Income-tax (CIT) later issued a notice u/s 263, stating that the ITO's order was erroneous and prejudicial to the Revenue, suggesting the expenditure was capital in nature based on the Supreme Court's principles in Sitalpur Sugar Works Ltd. v. CIT [1963] 49 ITR 160.
The assessee contended that the expenditure was a business expense and not capital in nature, and that the ITO had already examined and accepted their explanation. The CIT, however, did not accept this and directed the ITO to reassess the matter, citing non-application of mind by the ITO.
The Tribunal, upon appeal, concluded that the CIT's action was not in conformity with section 263 requirements. The Tribunal emphasized that the CIT must find the ITO's order erroneous before setting it aside, which the CIT failed to do. The Tribunal held that the CIT's order was not tenable in law.
2. Examination of the Commissioner's Powers u/s 263: The High Court examined the powers of the CIT u/s 263, which allows revision of orders prejudicial to the Revenue only if the order is erroneous and prejudicial to the Revenue's interests. The Court noted that the CIT's power is supervisory and not arbitrary, requiring material evidence to justify the revision. The Court referenced several precedents, including Parashuram Pottery Works Co. Ltd. v. ITO [1977] 106 ITR 1 (SC), emphasizing that the CIT cannot initiate proceedings for mere fishing and roving enquiries.
The Court held that an order is erroneous if it deviates from the law, and the CIT must have prima facie material to show that the ITO's order was erroneous and prejudicial to the Revenue. The Court found that the ITO had made necessary enquiries and accepted the assessee's explanation, and the CIT did not conclusively find the expenditure to be capital in nature.
3. Conclusion: The High Court affirmed the Tribunal's decision, stating that the CIT did not have the authority to set aside the ITO's order without a conclusive finding of error. The Court answered the referred question in the affirmative, in favor of the assessee and against the Revenue, with no order as to costs.
9911796707
