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TMI Blog2010 (9) TMI 352X X X X Extracts X X X X X X X X Extracts X X X X ..... IKRI, J. 1. These two references are in respect of two assessment years, i.e., 1983-84 and 1984-85 and pertain to the same assessee. Even the question referred to this Court by the Tribunal on the direction issued by this Court vide order dated 13.8.1990 is common and reads as under:- "Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in law in cancelling the order passed by the CIT under sec. 263 of I.T. Act, 1961 and in holding that the assessment made by the Income-tax Officer was in accordance with law and not erroneous so as to be prejudicial to the interest of revenue?" 2. As is clear from the reading of the question itself, assessment orders passed by the AO in respect of these two years were cancelled and set aside by the Commissioner in exercise of his powers under Section 263 of the Income-Tax Act, 1961 (hereinafter referred to as the "Act"). However, the Tribunal has upset and quashed those orders in appeal. The factual background in which the assessment orders were made which were revised by the CIT under Section 263 of the Act is mentioned in the statement of case and is recapitulated below. 3. The assessee company w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ere seized. According to the Commissioner while making the assessment for assessment year 1984-85 the assessing officer did not make any use of the seized material to check up whether the working results as shown to the department were in accordance with the information available in the seized papers. The Commissioner also noted that the assessing officer had not looked into the compliance of provisions of Chapter XXII, Section B relating to deduction of tax at source. 6. It was on this basis the Commissioner, therefore, initiated action under section 263 in respect of the assessment orders for assessment years 1983-84 and 1984-85 and ultimately after hearing the assessee set aside the assessment vide order dated 11.3.1987 directing the Income-tax Officer to re-frame the assessments and proceed afresh from the stage of the filing of the Income-tax returns. 7. Aggrieved by this order of the Commissioner, the assessee filed appeals in the Income-Tax Appellate Tribunal (hereinafter referred to as the Tribunal‟). The Tribunal cancelled the order passed by the Commissioner holding that the AO had made proper enquiries for the years under consideration and the assessments were ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Revenue. For example, when an Income-tax Officer adopted one of the courses permissible in law and it has resulted in loss of Revenue; or where two views are possible and the Income-tax Officer has taken one view with which the Commissioner does not agree, it cannot be treated as an erroneous order prejudicial to the interests of the Revenue, unless the view taken by the Income-tax Officer is unsustainable in law. It has been held by this court that where as sum not earned by a person is assessed as income in his hands on his so offering, the order passed by the Assessing Officer accepting the same as such will be erroneous and prejudicial to the interests of the Revenue. Rampyari Devi Saraogi v. CIT [1968] 67 ITR 84 (SC) and in Smt. Tara Devi Aggarwal v. CIT [1973] 88 ITR 323 (SC). In the instant case, the Commissioner noted that the Income-tax Officer passed the order of nil assessment without application of mind. Indeed, the High Court recorded the finding that the Income-tax Officer failed to apply his mind to the case in all perspective and the order passed by him was erroneous. If appears that the resolution passed by the board of the appellate-company was not placed befor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re was any discrepancy or falsity in evidences furnished by the assessee, the order of the AO cannot be set aside for making deep inquiry only on the presumption and assumption that something new may come out. For making a valid order under Section 263 it is essential that the Commissioner has to record an express finding to the effect that order passed by the AO is erroneous which has caused loss to the Revenue. Furthermore, where acting in accordance with law the AO frames certain assessment order, same cannot be branded as erroneous simply because according to the Commissioner, the order should be written more elaborately. All these principles are highlighted in the judgments noted hereinafter." 9. We now proceed to answer the question keeping in view the aforesaid principles. As is clear from the facts of the case, the assessee company had been receiving contributions from certain wholesale dealers. These dealers/wholesale purchasers were having dealership of cigarettes manufactured by Godfrey Phillips India Ltd. Instead of spending themselves on advertisement and promotion of various brands of cigarettes individually, they decided to pool their resources together and engag ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s or without calling anybody the ITO has accepted the returns and treated the expenditure as having actually been incurred. The assessment made in this regard is in the nature of an assessment made u/s 143(1) and the Karnataka High Court has gone even to the extent of saying that even in an assessment made u/s 143(1) a) can be revised by the Commissioner u/s 263 of the I.T. Act, 1961. 12. xxxxx 13. xxxxx 14. xxxxx 15. If this logic is extended in the assessee's case before me, it would be noticed that there is nothing to indicate or support that expenditure to the extent of nearly Rs. 1.93 crores in this year, 1983-84 and Rs.3.47 crores in the year 1984-85 (which in two years as per agreement, should work out to 90% of the total receipts barring that which is to be carried forward for the assessment year 1984-85) has actually been incurred for the purposes for which it has been shown in the break up filed before the ITO. It was the assessing officer‟s duty to make a checking in this regard, and his failure to do so, prima facie, shows that he has accepted the claims without proper scrutiny or enquiry." 11. After referring to various case law and extensively quoting ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... total contribution of Rs.2.87 crores, after adjustment of service charges, a sum of Rs.94.61 lakhs was worked out as the short fall in terms of clause 10 of the Agreement mentioned herein and the said fall has been taken over to the balance sheet as liability to be expended during the following year." 26. The above observations in the ITO's order clearly bring out the position that he has, in a mechanical and parrot like manner, repeated what the assessee has stated before him without making enquiries or investigations regarding the assessee's claim and without expressing any opinion of his own and this one fact alone is sufficient to prove that the order passed by the ITO for this year is erroneous and prejudicial to the interest of revenue as it has not been passed after due enquiries, investigation scrutiny of the problem under consideration. 27. Even the peculiar nature of agreement entered into with the whole sale purchasers, of cigarettes, by the coy, did not arouse the ITC's curiosity to impel him to go into greater details for knowing the co. act state of affairs regarding the arrangements made. The earlier discussion would indicate that the persons who provided the fu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e case of Gee Vee Enterprises (Supra) has said that an Income-tax Officer cannot remain passive in the fact of the return, which is apparently in order but calls for further enquiries. The ITO has failed in regard to various enquiries required to be made, if I may use a strong word, "miserably‟ .." 12. Observations in respect of assessment year 1984-85 are almost similar in nature. In addition, one other aspect which is highlighted during this year is that on 20th January, 1986 search was conducted by the Income-tax Department at the premises of the assessee where a number of documents and papers were found. However, the AO had not made any use of the seized matter consisting of books of accounts and various documents to check up whether the working results as shown to the department were in accordance with the information available in the seized papers. 13. In this scenario when the matter reached the Tribunal, the Tribunal posed the question as to whether it could be said that the assessment orders made in the case of the assessee were erroneous so as to be prejudicial to the interest of the Revenue. The Tribunal examined and discussed the orders passed by the Assessing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . Matter was also discussed with the chartered accountants of the assessee who had explained the nature of agreements entered into between the assessee and various dealers and in this letter implications of the stipulations contained in clauses 9 and 10 of the agreement are dealt with extensively. The assessee had also filed details of expenses incurred on behalf of clients towards advertisement, promotional and other related services for a sum of ₹ 1.92 crores. In addition to this, details of repairing and maintenance expenses were also enclosed. Further details and information as required by the Assessing Officer relating to incentive bonus, fixed assets purchased, miscellaneous expenditure incurred, conference expenses, details of unsecured loans and details of expenses incurred on behalf of the clients were filed. The Tribunal observed that from this it was apparent that not only the Assessing Officers asked for the required details, but those details were supplied as well, and thereafter there was discussion on these details filed by the assessee, with the representative of the assessee. Apart from the aforesaid details relating to supply of information and discussion th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ps India Ltd. 90% of the amount was required to be spent by the assessee company and balance 10% was to be retained by it on account of service charges. He further records that certain wholesale dealers gave contributions to the assessee for carrying out additional advertisement in their issues areas of operation on similar terms because no separate agreements were existing for additional advertisement. The ITO found that total contribution on account of normal sale on cigarettes made by M/s. Godfrey Phillips India Ltd. and the additional advertisement on the basis during the year amounting to Rupees 34,08,099/-. According to the ITO, on the basis of agreement, the assessee company's share of service charges should come to Rs.34,08,099/- against total service charges declared by the assessee at Rs.33,92,847/-. The ITO was of the opinion after examination of this account in complete detail that there was understatement of service charges, in fact, amounted to 9.09% on the basis of arrangement made as mentioned supra but the ITO did not accept this argument as seend and correct because the assessee was not declaring service charges on the total amount of contribution received during ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d by the department under Section 132 of the Act. 18. Likewise, the view of the Commissioner regarding agreements entered into between the wholesale dealers and the assessee was based on the surmise that the ITO did not look into them and did not call for the names of the parties. Records reveal that the assessee‟s books of accounts, including the general ledgers were seized and complete details of parties, their addresses and the amounts received were recorded in this general ledger on the basis of which the ITO had made further enquiries. Even the observation of the Commissioner that the agreements were not looked into was contrary as at one stage the Commissioner had himself stated in the impugned order, that these agreements were produced before the ITOs and nature of these agreements was discussed in the assessment orders. 19. We, thus, agree with the conclusion of the Tribunal that the Commissioner had not pointed out any flaw in the assessments made by the Assessing Officer, but was only expecting that the ITO should have gone deeper into the matter. When it has come on record that the ITOs had made reasonably detailed enquiries, collected relevant material and dis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... owing manner: "xxx From a reading of sub-section (1) of section, it is clear that the power of suo motu revision can be exercised by the Commissioner only if, on examination 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 the Revenue". It is not an arbitrary or unchartered power. It can be exercised only on fulfilment of the requirements laid down in sub-section (1). The consideration of the Commissioner as to whether an order is erroneous in so far as it is prejudicial to the interests of the Revenue, must be based on materials on the record of the proceedings called for by him. If there are no materials on record on the basis of which it can be said that the Commissioner acting in a reasonable manner could have come to such a conclusion, the very initiation of proceedings by him will be illegal and without jurisdiction. The Commissioner cannot initiate proceedings with a view to starting fishing and roving enquiries in matters or orders which are already concluded. Such action will be against the well-accepted policy of law that there must be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nation in that regard by a letter in writing. All these are part of the record of the case. Evidently, the claim was allowed by the Income-tax Officer on being satisfied with the explanation of the assessee. Such decision of the Income-tax Officer cannot be held to be "erroneous" simply because in his order he did not make an elaborate discussion in that regard xxx" 13. When we examine the matter in the light of the aforesaid principle, we find that the AO had called for explanation on this very item, from the assessee and the assessee had furnished his explanation vide letter dated 26.09.2002. This fact is even taken note of by the Commissioner himself in Para 3 of his order dated 03.11.2004. This order also reproduces the reply of the respondent in Para 3 of the order in the following manner: "The tools and dies have a very short life and can produce upto maximum 1 lakh permissible shorts and have to be replaced thereafter to retain the accuracy. Most of the parts manufactured are for the automobile industries which have to work on complete accuracy at high speed for a longer period. Since it is an ongoing procedure, a company had produced 10,75,000 sets whose selling rates ..... 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