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TMI Blog2006 (10) TMI 187X X X X Extracts X X X X X X X X Extracts X X X X ..... vations of the learned CIT in last para at p. 2 of her impugned order regarding the insurance claim are factually incorrect and legally untenable. She is wrong in presuming that the right to receive insurance claim was not in dispute. She has not brought any evidence on the record to show that an amount of Rs. 1,48,06,977 though credited in the P L a/c had actually accrued due to the appellant. This amount neither represented a receipt in the hand of the appellant nor it constituted taxable income of the year under appeal. (d) The following observations of the learned CIT in para 7 are incorrect: "As regards, the underassessment of value of property at Delhi, the assessee has itself agreed that a mistake had crept into the assessment order in not taxing the notional interest on security deposit." Nowhere the assessee had agreed as observed by the learned CIT. (e) Provisions of s. 263 of the IT Act, 1961 in terms had no application to the facts of this case. (f) Various observations made by the learned CIT in the impugned order are either incorrect or are legally untenable. 2. That the impugned order under s. 263, dt. 30th March, 2005 as passed by the learned CIT being u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed CIT had no jurisdiction to invoke s. 263 because the reassessment order as passed under s. 143(3)/147 dt. 28th March, 2003 was after proper application of mind. The learned CIT overlooked to appreciate that in the computation of income filed with the return, copy at p. 24 admittedly, the assessee had deleted the amount of Rs. 1,48,46,997 credited to P L a/c vide Sch. 14 under the head 'Other income' copy at p. 40 with the following specific narration: "Less: Item credited to P L a/c. Insurance claim not taxable during the year as the matter is sub judice and the claim has not been settled (kindly see note No. 7 of the notes on account.) The same will become taxable in the year in which it is settled." 4. Learned Authorised Representative has drawn our attention to para 7 of Sch. 21 forming part of audited balance sheet filed along with the return of income which reads as under: "In Note No. 6 forming part of the accounts of the year ended 31st March, 1998, it was mentioned that the insurance claim of Rs. 4,22,94,263 relating to losses lodged with insurance company have not been accounted for and also losses against claim amounting to Rs. 63,40,155 had not been accounted ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... m of accounting, even in respect of the receipts on account of settlement of insurance claim, it has to follow the same system. As per Shri Satbir Singh moreover, in the present case, what is in dispute is the quantum of the claim and not the entire claim. It is well settled that where the right to receive payments is not in dispute, the amount is taxed in the year of accrual of the same. Clearly, by not bringing to tax the insurance claim as per CIT (Departmental Representative), the AO erred in law, which rendered his order erroneous as well as prejudicial to interest of Revenue. 9. Shri Satbir Singh has drawn our attention to the order of the AO wherein he has discussed regarding annual letting value of the property at Delhi and Bombay in great detail but in the final conclusion the computation of annual letting value in respect of Delhi property was left, thereby making the order erroneous. Since the order was erroneous for not computing the annual letting value of Delhi property, as per Mr. Satbir Singh, the order of the AO has become prejudicial to the interest of the Revenue insofar as the AO has not finally worked out the annual letting value of Delhi property even after ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al to the interests of the Revenue. The CIT has to be satisfied of twin conditions, namely, (i) the order of the AO sought to be revised is erroneous; and (ii) by virtue of the order being erroneous, prejudice has been caused to the interests of the Revenue. If one of them is absent-if the order of the ITO is erroneous but is not prejudicial to the Revenue or if it is not erroneous but is prejudicial to the Revenue-recourse cannot be had to s. 263(1). There can be no doubt to the well-settled legal proposition that the provision cannot be invoked to correct each and every type of mistake or error committed by the AO. An incorrect assumption of facts or an incorrect application of law will satisfy the requirement of the order being erroneous. In the same category fall orders passed without applying the principles of natural justice or without application of mind. The phrase 'prejudicial to the interests of the Revenue' is not an expression of art and is not defined in the Act. Understood in its ordinary meaning it is of wide import and is not confined to loss of tax. The scheme of the Act is to levy and collect tax in accordance with the provisions of the Act and this task is entrus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... purpose of filing return, the assessee company again reduced the taxable income exactly by the same amount of Rs. 1,48,69,997 on the plea of the matter being sub judice. As the assessee was consistently following mercantile system of accounting and which was also mandatory for it as per the provisions of the IT Act, 1961, the CIT found that by reducing the income on account of insurance claim in the computation of income, the assessee has reduced its income even after accounting the same as per mercantile system of accounting, and which has escaped the attention of the AO and rendered the assessment order erroneous and prejudice has been caused to the Revenue to this extent. It was submitted by the learned Authorised Representative at bar that dispute is still going on in the Court of law and the matter is sub judice before the National Consumer Court and nothing was received till date. Since nothing was received, as per learned Authorised Representative, mere accounting entry does not create any right in the hands of the assessee to receive any income which neither accrued nor arose during the year nor in the subsequent years. Income is liable to be taxed under the IT Act on the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y regarding claim lodged with it. In CIT vs. Ferozepur Finance (P) Ltd. (1980) 18 CTR (P H) 227 : (1980) 124 ITR 619 (P H), held as under: "Income-tax is levied on income whether the accounts are maintained on mercantile system or on cash basis. If income does not result at all, there cannot be levy of tax even if an entry of hypothetical income is made in the books of account, where the income does not result at all as there is neither accrual nor receipt of income, no tax can be levied. Even in mercantile system of accountancy an assessee could forgo the whole or part of a debt, which was irrecoverable, and the same could not be added to the income of the assessee." (a) Hon'ble Supreme Court in the case of Godhra Electricity Co. Ltd. vs. CIT (1997) 139 CTR (SC) 564 : (1997) 225 ITR 746 (SC), held that "Income-tax is a levy on income. No doubt, the IT Act takes into account two points of time at which the liability to tax is attracted, viz., the accrual of the income or its receipt; but the substance of the matter is the income. If the income does not result at all, there cannot be a tax, even though in book keeping, an entry is made about a hypothetical income, which does not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the Act has elaborately dealt with the issue of low rent being charged from the sister-concern in respect of property situated at a prime location of Bombay and Delhi and also interest-free security deposit of Rs. 3,00,00,000 taken from the sister-concern. The AO has also discussed the size of the property let out at Lawrence Road, New Delhi having area of 3800 sq. ft. and stated that annual letting value is to be arrived at as per the provisions of s. 23 of the Act according to which the sum for which property may reasonably be expected to be let out from year to year is to be determined. However, while making the final computation of income at p. 4 of his assessment order, the determination of annual letting value of Mumbai property was got done but there was no computation of annual value of Delhi property and thus entirely escaped computation of total income which rendered the order of the AO erroneous and prejudicial to the interest of Revenue with regard to computation of annual letting value of Delhi property. We, are therefore, inclined to agree with the contention of learned CIT (Departmental Representative) Shri Satbir Singh that CIT has correctly invoked the provision ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e in respect of both Bombay and Delhi properties, therefore, assessment order merged with appellate order, do not carry any weight insofar as there was no grievance of assessee before the CIT(A) regarding determination of incorrect annual value of Delhi property. As the AO had not computed the annual letting value of Delhi property, there does not arise any reason for assessee to allege the same before CIT(A), nor CIT(A) has decided the issue in favour of assessee or against the assessee regarding determination of annual letting value of Delhi property. Even by exercising the coterminous powers vested in CIT(A), to do the thing which AO failed to do, undisputedly in the instant case the CIT(A) had not enhanced the assessment, so as to close the doors of CIT under s. 263. Under these circumstances, the theory of merger will not apply, so as to restrain the powers vested under s. 263. With respect to the specific direction given by the CIT for taking 12.5 per cent interest, on the interest-free security deposit given to the assessee, we are inclined to agree with the learned Authorised Representative that the issue is covered by the order of the Tribunal, therefore, this specific dir ..... X X X X Extracts X X X X X X X X Extracts X X X X
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