2017 (5) TMI 1110 - HC - Income Tax

Scope of revision u/s 263 - erroneous order, prejudicial to the interest of Revenue - Held that - Coming to the phrase prejudicial to the interest of Revenue , Court said in Malabar Industrial Co. Ltd. (2000 (2) TMI 10 - SUPREME Court) that it is not an expression of art and not defined in Act, 1961. When considered with its ordinary meaning, it is of wide import and not confined to mere loss of tax. Court was of the view that scheme of Act was to levy and collect tax in accordance to the provisions of Act and this task is entrusted to Revenue. If, due to erroneous order of Income Tax Officer, Revenue is loosing tax, lawfully payable by a person, it will certainly be prejudicial to the interest of Revenue. However, every loss of revenue, as a consequence of an order of Assessing Officer, cannot be treated as prejudicial to the interest of Revenue. For example, when Income Tax Officer adopted one of the course permissible in law and it resulted in loss of revenue, or where two views are possible and Income Tax Officer has taken one view with which Commissioner does not agree, it cannot be treated erroneous order, prejudicial to the interest of Revenue, unless view taken by Income Tax Officer is unsustainable in law. Aforesaid view taken in Malabar Industrial Company Ltd. (Supra) has been followed in CIT Vs. Max India Ltd. 2007 (11) TMI 12 - Supreme Court of India , where also Court has reiterated that expression erroneous should be read in conjunction with phrase prejudicial to the interest of Revenue. ITAT was not justified in quashing the order u/s 263 and confirming the order u/s 143(3) of the Income Tax Officer, 3(2), Lucknow. - Decided against assessee.

Issues:
1. Interpretation of Section 263 of the Income Tax Act, 1961 regarding the powers of the Commissioner.
2. Determining the conditions under which an order of the Assessing Officer can be considered erroneous and prejudicial to the interest of Revenue.
3. Assessing the correctness of the Tribunal's decision in setting aside the order of the Commissioner under Section 263 of the Income Tax Act, 1961.

Issue 1: Interpretation of Section 263 of the Income Tax Act, 1961
The High Court analyzed the provisions of Section 263 of the Income Tax Act, 1961, emphasizing that for the Commissioner to exercise jurisdiction under this section, the order of the Assessing Officer must be both erroneous and prejudicial to the interest of Revenue. Referring to the case of Malabar Industrial Company Ltd. Vs. CIT, the Court highlighted that the Commissioner must be satisfied that the order is erroneous and detrimental to revenue. It was clarified that the power of revision under Section 263 cannot be invoked for every mistake but only when the order is erroneous and prejudicial to revenue. The Court also noted that orders passed without applying principles of natural justice or without proper application of law would be considered erroneous.

Issue 2: Determining the conditions for an order to be considered erroneous and prejudicial
The Court delved into the interpretation of what constitutes an order being 'prejudicial to the interest of Revenue.' It was explained that this term, although not explicitly defined in the Act, has a wide import beyond mere loss of tax. The Court emphasized that if the Revenue is losing tax lawfully payable due to an erroneous order of the Assessing Officer, it would be prejudicial. However, not every loss of revenue resulting from an order can be deemed prejudicial. The Court provided examples where the Assessing Officer's decision, even if resulting in a loss of revenue, might not be considered prejudicial unless it is unsustainable in law. The judgment referenced the need for the Assessing Officer to apply the correct facts and law to avoid being considered erroneous and prejudicial to the interest of Revenue.

Issue 3: Assessing the Tribunal's decision and setting aside the Commissioner's order
The High Court scrutinized the Tribunal's decision to set aside the order of the Commissioner under Section 263. It was observed that the Tribunal had erred in misdirecting itself and failing to appreciate the scope of Section 263. The Court highlighted that the Tribunal's decision to allow the appeal by setting aside the Commissioner's order was incorrect. The Court concluded that the Tribunal had not properly considered the requirements of Section 263 and, therefore, set aside the Tribunal's decision. The judgment ultimately favored the appellant, allowing the appeal and confirming the order passed by the Commissioner under Section 263 of the Income Tax Act, 1961.

In summary, the High Court's judgment provided a detailed analysis of the interpretation of Section 263 of the Income Tax Act, 1961, the conditions for an order to be considered erroneous and prejudicial, and the assessment of the Tribunal's decision in setting aside the Commissioner's order. The Court emphasized the importance of ensuring that Assessing Officers apply the correct facts and law to avoid erroneous and prejudicial orders. Ultimately, the judgment favored the appellant by confirming the Commissioner's order under Section 263.

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