The order of the Bench was delivered by
P. K. Bansal (Vice-President)- This appeal filed by the assessee is against the order of the Principal Commissioner of Income-tax-2, Lucknow dated May 16, 2016 passed under section 263(1) of the Income-tax Act, 1961 by taking the following grounds of appeal :
(1) The learned Principal Commissioner of Income-tax has erred in law and on facts in passing the order which is illegal, improper, and against the principles of natural justice.
(2) The learned Principal Commissioner of Income-tax has erred in law and on facts in passing the order without giving adequate opportunity of being heard and without considering the submission made before him.
(3) The learned Principal Commissioner of Income-tax has erred in law and on facts in initiating the proceedings under section 263 of the Income-tax Act, 1961.
(4) The learned Principal Commissioner of Income-tax has erred in law and on facts in holding that the assessment order passed by the learned Assessing Officer is erroneous and prejudicial to the interests of the Revenue.
(5) The learned Principal Commissioner of Income-tax has erred in law and on facts in cancelling the assessment order passed by the learned Assessing Officer.
Without prejudice to the aforesaid grounds
(6) The learned Principal Commissioner of Income-tax has erred in law and on facts in cancelling the assessment order and directing the Assessing Officer to conduct necessary enquiries instead of conducting the enquiries himself.
(7) The order appeal against is contrary to law and facts.
(8) The appellant craves leave to add, amend, alter or withdraw any ground of appeal or raise any new ground of appeal during the pendency of appeal.
2. The only issue involved as per the grounds of appeal is that the order passed by the Assessing Officer was not erroneous and prejudicial to the interest of the Revenue, as the Assessing Officer has passed the assessment order after considering all the details and documents and it is not a case of lack of enquiry.
3. The facts of the case in brief are that the principal Commissioner of Income-tax-2, Lucknow after examining of the record of the assessment, which was completed under section 143(3) of the Act at a total income of Rs. 3,29,324 was of the opinion that the Assessing Officer has neither verified nor has applied his mind to the relevant provisions of the Income- tax Act while completing the assessment in this regard. He therefore, issued a show-cause notice dated February 16, 2016 which reads as under :
"2. The case records of the assessee for the assessment year 2013- 14 has been called for and examined by the undersigned. The asses see was engaged in providing consultancy and contract business of cable TV and deals in channel placement business of cable TV companies. After examination of the case records, the undersigned consider that the assessment for the assessment year of 2013-14 which is completed under section 143(3) of the Income-tax Act, 1961, on June 19, 2015 at a total income of Rs. 3,29,324 is erroneous in so fact as it is prejudicial to the interests of the Revenue on the following issues :
(i) The assessee has shown a total turnover of Rs. 1,79,85,012 whereas as per 26AS details the total receipts are at Rs. 1,87,85,136. Thus, there is a difference of Rs. 8,32,727 which are not disclosed. Since the deductors has credited the assessee's account by Rs. 1,87,85,136 during the financial year 2012-13 relevant to the assessment year 2013-14 and the assessee has been maintaining its account on the mercantile system of accountancy, therefore it was required to show the entire receipt in the books of account and this difference of Rs. 8,32,727 should have been shown as payment receivable, which was not done by the assessee. This resulted short computation of income by Rs. 8,32,727. The proper enquiry on this issue has not been made by the Assessing Officer.
(ii) The assessee has claimed consultancy charges at Rs. 15,00,000 in the profit and loss account. The perusal of record shows that the assessee has paid consultancy charges of Rs. 10,00,000 to Ms. Anjali Arora and Rs. 5,00,000 to Shri Sidharth Srivastava. During the course of assessment proceedings, the Assessing Officer has not properly examined/enquired into the details for establishing the creditworthi ness and genuineness of the transaction.
3. Thus during the course of assessment proceedings, the Assessing Officer has not examined/enquired into the details of the facts of the cases properly."
4. The Principal Commissioner of Income-tax-2, Lucknow was not satisfied with the reply of the assessee. He, therefore, cancelled the assessment and directed the Assessing Officer to frame a fresh assessment order as per law after making necessary enquiry and examination of the issues involved and after affording fair and reasonable opportunity of being heard to the assessee, by observing as under :
"I have considered the reply of the assessee. The contention of the assessee is not acceptable. The perusal of the assessment records reveals that the Assessing Officer has not made enquiry and verification on this issues which should have been made to establish the genuineness and creditworthiness of the payment of consultancy charges. It is clear that the Assessing Officer has not conducted necessary enquiry and verification before completing the assessment. The order is, therefore, both erroneous as well as prejudicial to the interest of the Revenue on this issue.
5. In view of Explanation 2 inserted below section 263 of the Income-tax Act, it is therefore, well-settled that the Assessing Officer has not made proper enquiry and verification in respect of the issues/points discussed at length in paragraphs 3 and 4 above which should have been made.
6. In view of the preceding discussion, the assessment order dated June 19, 2015 for the assessment year 2013-14 passed by the Assessing Officer under section 143(3) of the Income-tax Act is held to be erroneous in so far as it is prejudicial to the interests of the Revenue on the issues of (i) short computation of income by Rs. 8,32,727 i.e., difference in gross receipt as per the books and as appearing in the 26AS details of the assessee, and (ii) issue of payment of consultancy charges of Rs. 10,00,000 to Ms. Anjali Arora and Rs. 5,00,000 to Shri Sidharth Srivastava."
5. The learned authorised representative of the assessee vehemently contended that the Assessing Officer has duly verified and applied his mind to both the issues, therefore, the order of the Assessing Officer is not erroneous and prejudicial to the interest of the Revenue. He has drawn our attention towards pages 42 and 43 of the paper book i.e., questionnaire dated December 9, 2014 issued under section 142(1) of the Act, in which query regarding the details and nature of business activities undertaken by the company as well as asking the break-up of the gross receipts of Rs. 1,59,77,580 and the sources of receipt of amount (receipt on which TDS has not been deducted separately and receipts on which TDS deducted) was asked for. In this regard, our attention was drawn to the reply submitted by the assessee vide its letter dated January 9, 2015 and subsequently the Assessing Officer also made enquiry on the same issue vide order sheet entry dated April 20, 2015. The same was also replied by the assessee vide its letter dated May 14, 2015, the copy of which was also submitted before us, in which the assessee has mentioned the fact that the income as per Form No. 26AS is 1,87,85,136 and TDS as per Form No.26AS is Rs. 18,78,513 while the assessee has taken the income at Rs. 1,79,85,012 and TDS taken and claimed as per the books of account is Rs. 17,87,982 and the difference arises due to the facts which were mentioned by the assessee party-wise for Den Enjoy Cable Networks Pvt. Ltd. It was stated that the assessee has shown an income of Rs. 12,53,938 against the income shown in Form No. 26AS at Rs. 11,84,970. In respect of Big Magic Ltd., it was mentioned that difference of Rs. 5,71,163 has arisen as the assessee has billed and booked the income in April, 2013 i.e., in the financial year 2013-14 relevant to the assessment year 2014-15 and the assessee has not taken any advantage of the TDS of Rs. 57,117 during the impugned assessment year. In respect of receipt from Reliance Television Pvt. Ltd., the assessee has taken a sum of Rs. 3,30,532 in its books of account since the assessee has billed and booked the said income in April 2013, which corresponds to the assessment year 2014-15. The assessee has even not taken any advantage of the TDS amounting to Rs. 33,051. The assessee has even submitted copy of the accounts of these parties and relevant evidence to prove these facts. Even affidavit of the director was also submitted. The books of account were duly produced as has been asked for as is apparent from the order-sheet entry he made on February 16, 2015, March 14, 2015 and May 8, 2015.
6. Similarly in respect of consultancy charges of Rs. 15 lakhs, it was submitted that Rs. 10 lakhs have been paid to Anjali Arora after taking TDS of Rs. 1 lakh. Rs. 5 lakhs have been paid to Sidharth Srivastava after deducting TDS of Rs. 5 lakhs. The Assessing Officer has asked this explanation which was explained by the assessee in their letter on the date of hearing on December 29, 2014. The Assessing Officer further made enquiry in this regard by asking details of consultancy charges. The assessee has given those details also vide assessee's letter dated December 16, 2015. Payment to Anjali Arora was made through account payee cheque after deducting TDS. Copy of the consultancy agreement dated April 5, 2014 between Anjali Arora and the assessee-company was submitted before the Assessing Officer vide letter dated February 16, 2015. In furtherance to reply dated February 16, 2015, it was submitted that Anjali Arora has been working as a Country Manager-India for pacific traders, an MNC with effect from April 1, 2011. Copy of her employment letter including the terms of her employment and pacific traders were also filed. For this, our attention was also drawn towards paper book, in which all the details filed in respect of Anjali Arora are given.
7. Similarly, in respect of the payment of consultancy charges paid to Sidharth Srivastava amounting to Rs. 5 lakhs, it was submitted that consultancy agreement dated April 5, 2014 was filed before the Assessing Officer vide reply dated February 16, 2015. In furtherance to letter dated February 16, 2015, it was also stated that Sidharth Srivasatava had been working as Consultant for MCN International (India) Pvt. Ltd. an MNC from April 1, 2011. Copy of this agreement was filed before the Assessing Officer, from which it was evident that he had good experience in business development, sales and marketing. For this, our attention as draw towards paper book pages 101 to 123. Thus it was contended that it is a case where queries were raised during the course of scrutiny by the Assessing Officer which was answered by the assessee to the satisfaction of the Assessing Officer, but neither the query nor the answer was reflected in the assessment order. That would not itself mean that the order of the Assessing Officer called for inference and revision under section 263 of the Act. In this regard, reliance was placed on the decision of the hon'ble Delhi High Court in the case of CIT v. Vikas Polymers [2012] 341 ITR 537 (Delhi) ; [2010] 194 Taxman 57 (Delhi). The headnote of which reads as under :
"Section 263 of the Income-tax Act, 1961-Revision-Of orders prejudicial to interests of Revenue-Assessment year 1982-83- Whether for exercising power under section 263, it is a pre-requisite that Commissioner must give reasons to justify exercise of suo motu revisional powers by him to reopen a concluded assessment and exercise of power being quasi-judicial in nature, reasons must be such as to show that enhancement or modification of assessment or cancellation of assessment or directions issued for a fresh assessment were called for, and must irresistibly lead to conclusion that order of Assessing Officer was not only erroneous but was also prejudicial to interests of Revenue-Held, yes-Whether before exercising revisional powers, assessee must be called, his explanation sought for and examined by Commissioner, and thereafter, if Commissioner still feels that order is erroneous and prejudicial to interests of Revenue, Commissioner may pass revisional orders-Held, yes-Whether if a query was raised during course of scrutiny by Assessing Officer, which was answered to satisfaction of Assessing Officer, but neither query nor answer was reflected in assessment order, that would not, by itself, lead to conclusion that order of Assessing Officer called for interference and revision-Held, yes."
8. It was further submitted that it is not a case of lack of enquiry in respect of both the issues. It may be a case where enquiry may be inadequate but not a case of lack of enquiry. In this regard, reliance was placed on the decision of the hon'ble jurisdictional High Court in the case of Principal CIT v. Ashok Kumar Makhija (I. T. A. No. 169 of 2015 dated August 11, 2015) in which the hon'ble High Court has held as under :
"Having heard the learned counsel for the appellant, we are of the opinion that section 263 of the Act, cannot be exercised by the authority in the instant case. We are of the opinion that once an inquiry has been made and the reply of the assessee has been considered, the same matter cannot be re-agitated on the ground that some further inquiry was necessary. In our view, section 263 can be exercised where there was a lack of inquiry by the Assessing Officer and not on the ground of inadequate inquiry."
9. Reliance was also placed on the decision of the hon'ble Delhi High Court in the case of CIT v. Sunbeam Auto Ltd. [2011] 332 ITR 167 (Delhi) ; 189 Taxman 436 (Delhi) as well as that of the hon'ble Rajasthan High Court in the caseof CIT v. Jain Construction Co. [2013] 215 Taxman 127 (Raj) for the proposition of law that if the Assessing Officer has made inadequate enquiry that would not by itself give occasion to the Principal Commissioner of Income-tax-2, Lucknow to pass order under section 263 of the Act merely because he had a different opinion in the matter, it is only a case of lack of enquiry which does not empower the Principal Commissioner of Income-tax-2, Lucknow to take action under section 263 of the Act.
10. Reliance was also placed on the orders of the Income-tax Appellate Tribunal Lucknow Bench in the case of Omega Infra Developers P. Ltd. v. Principal CIT (I. T. A. No. 63/Lkw/2016 for assessment year 2012-13, dated July 27, 2016) and in the case of NRVS Enterprises Pvt. Ltd. v. Principal CIT (I. T. A. No. 616/Lkw/2015 for the assessment year 2011-12 dated September 19, 2016).
11. In respect of Explanation 2 to section 263 of the Act, reliance was placed on the decision of the Income-tax Appellate Tribunal Jabalpur Bench in the case of Jashn Beneficiary Trust, v. Asst. CIT [2017] 57 ITR (Trib) 29 (Jablpur) (I. T. A. No. 100/Jab/2016 dated March 15, 2017 ) in which the Tribunal under paragraph 11 took a view that for the applicability of clause (a) of Explanation, it is necessary that the Principal Commissioner must mention in the order what inquiries or verification the Principal Commissioner must mention in the order what inquiries or verification the Principal Commissioner desires to have been carried out by the Assessing Officer. Referring to the order passed under section 263 of the Act, it was submitted that the Principal Commissioner did not point out which enquiry the Assessing Officer should carry out. Therefore, it was contended that the order passed by the Principal Commissioner of Income-tax-2, Lucknow is not valid and must be cancelled.
12. The learned Departmental representative on the other hand, relied on Explanation 2(a) of section 263 of the Act, which defines the word "erroneous" and on that basis contended that after amendment, it is the prerogative of the Principal Commissioner of Income-tax-2, Lucknow in case he find that the enquiries have not been carried out by the Assessing Officer to his satisfaction to take the order to be erroneous and prejudicial to the interests of the Revenue.
13. We have heard the rival submissions and carefully considered the same along with the order of the tax authorities below before deciding the order passed by the Commissioner under section 263 is valid or not, it is necessary to discuss the provisions of section 263 which are stipulated as under :
"263.(1) The 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, be may, after giving the assessee an opportunity of being heard and after making or causing to be made such inquiry as he deems necessary, pass such order thereon as the circumstances of the case justify, including an order enhancing or modifying the assessment, or cancelling the assessment and directing a fresh assessment.
Explanation 1.-For the removal of doubts, it is hereby declared that, for the purposes of this sub-section,-
(a) an order passed on or before or after the 1st day of June, 1988 by the Assessing Officer shall include-
(i) an order of assessment made by the Assistant Commissioner or Deputy Director or the Income-tax Officer on the basis of the directions issued by the Joint Commissioner under section 144A ;
(ii) an order made by the Joint Commissioner in exercise of the power or in the performance of the functions of an Assessing Officer conferred on, or assigned to, him under the orders or directions issued by the Board or by the Chief Commissioner or Director General or Commissioner authorised by the Board in this behalf under section 120 ;
(b) 'record' shall include and shall be deemed always to have included all records relating to any proceeding under this Act available at the time of examination by the Commissioner ;
(c) where any order referred to in this sub-section and passed by the Assessing Officer had been the subject matter of any appeal filed on or before or after the 1st day of June, 1988, the powers of the Commissioner under this sub-section shall extend and shall be deemed always to have extended to such matters as had not been considered and decided in such appeal.
Explanation 2.-For the purposes, of this section, it is hereby declared 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-
(a) the order is passed without making inquiries or verification which should have been made ;
(b) the order is passed allowing any relief without inquiring into the claim ;
(c) the order has not been made in accordance with any order, direction or instruction issued by the Board under section 119 ; or
(d) 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.
(2) 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.
(3) Notwithstanding anything contained in sub-section (2), 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 Appel late Tribunal, the High Court or the Supreme Court.
Explanation.-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."
14. From the perusal of the aforesaid section, it is apparent that there are found main features of the power of revision to be exercised under section 263 by the Commissioner of Income-tax. Firstly, the Commissioner may call for and examine the records of any proceedings under the Act and for this purpose he need not to show any reason or record any reason to believe as is required under section 147 or 148(2). It is part of his administrative power to call for the record and examine them relating to any assessee which falls under his jurisdiction. Secondly, he may consider any order passed by the Assessing Officer as erroneous as well as prejudicial to the interests of the Revenue. This is exercised by calling for an examining the record available at this stage. There is no question of the assessee to appear and make submission at this stage. Thirdly, if after calling for an examining the records the Commissioner considers that the order of the Assessing Officer is erroneous in so far as it prejudicial to the interests of the Revenue, he is bound to give an opportunity to the assessee of being heard and after making or causing to be made such enquiry as he deem fit, pass such order thereon as the circumstances of the case may justify including an order enhancing or modifying the assessment or cancelling assessment and directing a fresh assessment. This empowers the Commissioner to cause or make such enquiries as he deems necessary. Fourthly, the Commissioner under section 263 can enhance or modify the assessment as a result of enquiry conducted and hearing of the assessee.
15. For invoking the provisions of section 263, both the conditions that the order passed by the Assessing Officer is erroneous and also that it is prejudicial to the interests of the Revenue must be satisfied. If one of them is absent, the provisions of section 263 cannot be invoked. The term erroneous" has not been defined under the Income-tax Act but it is well-settled that each and every type of mistake or error committed by the Assessing Officer cannot be said to be an error. The expressions "erroneous", "erroneous assessment" and "erroneous judgment" have been defined in Black's Law Dictionary, Sixth Edition, page 542. According to the definition "erroneous" means "involving error, deviating from the law". "Erroneous assessment" refers to an assessment that deviates from the law and is therefore invalid, and is defect that is jurisdictional in its nature, and does not refer to the judgment of the Assessing Officer in fixing the amount of valuation of the property. Similarly, "erroneous judgment" means "one rendered according to course and practice of court but contrary to law, upon mistaken view of law, or upon erroneous application of legal principles". Thus, an order can be said to be erroneous if there is incorrect assumption of facts or incorrect application of law by the Assessing Officer. If the Assessing Officer after making the enquiries and examining the records taken one of the possible view, it cannot be said that the order passed by the Assessing Officer was erroneous until and unless the view taken by the Assessing Officer is unsustainable in law. If the Assessing Officer has not carried out any enquiry, it can be said that the order passed is erroneous as due process of legal principles have not been followed. From the show cause-notice of the Commissioner, it is apparent that the Commissioner has treated the order to be erroneous as well as prejudicial to the interests of the Revenue as in his view the Assessing Officer has not examined the total receipts and claim of consultancy. The learned authorised representative relied in this regard on certain decisions, also and submitted that inadequacy of enquiry according to the whims and caprice of Commissioner does not give jurisdiction to the Commissioner to invoke section 263 and set aside the assessment. Now, the question before us is whether the Assessing Officer has examined each and every issue relating to the question which has been raised by the Commissioner in the show-cause notice and after examining the same he has taken a conscious decision not to make the addition to the extent, he found it to be justified or he did not make the addition as he is satisfied with the disclosure made by the assessee in the returns filed by him. Whether the income in respect of which the Assessing Officer has not made any addition is duly supported by the disclosure made by the assessee in the return filed.
16. The two issues in respect of which the Principal Commissioner of Income-tax-2, Lucknow has exercised jurisdiction under section 263 of the Act consist of one relating to the difference in the total receipts. According the Principal Commissioner of Income-tax-2, Lucknow, the assessee has shown the total turnover at Rs. 1,79,85,012 whereas as per Form No. 26AS the total receipts were at Rs. 1,87,85,136. The Principal Commissioner of Income-tax-2, Lucknow was of the opinion that for the difference of Rs. 8,32,727 the Assessing Officer has not made proper enquiry. We noted that the Assessing Officer issued notice under section 142(1) of the Act, in which he has enquired from the assessee about the gross receipts and the source of receipt of the amount and also the amount on which TDS has been deducted and on which TDS has not been deducted vide his query letter dated December 9, 2014. The assessee in this regard submitted detailed reply explaining the gross receipts and even specifically clarified vide letter dated May 14, 2015 explaining why there is a difference in the amount shown in Form No. 26AS at Rs. 1,87,85,136 and in the books at Rs. 1,79,85,012. The reply of the assessee in this regard is appearing at pages 55 to 58 of the paper book.
17. So far the payment of consultancy charges are concerned, the Assessing Officer specifically made query not only by way of notice but also during the course of hearing. The assessee vide its letter dated December 29, 2014 explained how the consultancy charges have been paid and to whom these were paid. Even copy of the agreements with Anjali Arora and Siddhart Srivastava for the payment of Rs. 10 lakhs and Rs. 5 lakhs respectively were also filed vide letter dated February 16, 2015. Not only this, the assessee has also filed explanation why consultancy charges have been paid, vide its letter dated May 14, 2015. The Assessing Officer, after being satisfied, completed the assessment without making any addition or disallowance in respect of queries made by him.
18. No doubt clause (a) of the Explanation 2 to section 263 deems the order to be erroneous and prejudicial to the interests of the Revenue in case order is passed without making enquiries or verification which should have been made in the opinion of the Principal Commissioner or Commissioner. In our opinion, for the applicability of clause (a) of the Explanation, it is necessary that the Principal Commissioner must mention in the order what inquiries or verification the Principal Commissioner desires to have been carried out by the Assessing Officer. The Principal Commissioner in this case even though stated that the Assessing Officer failed to examine during the course of the assessment proceedings the set off loss against the short- term capital gain on sale of shares but did not point out what type of inquiry or verification should have been carried out in this regard by the Assessing Officer. How non-examination of this aspect has resulted in under assessment. The order passed by the Assessing Officer, in our opinion, shall be deemed to be erroneous in so far as it prejudicial to the interests of the Revenue if the Principal Commissioner would have specifically pointed out which of the inquires or verification should have been carried out by the Assessing Officer in this regard and the Assessing Officer failed to carry out those inquiries and verification as desired by the Principal Commissioner. Since the Principal Commissioner has not suggested the basis of the inquiry or verification to be carried out by the Assessing Officer, the order passed by the Assessing Officer cannot be deemed to be erroneous in so far as it is prejudicial to the interests of the Revenue.
19. Similar view has been taken by the Jabalpur Bench of the Tribunal in the case of Jashn Beneficiary Trust v. Asst. CIT [2017] 57 ITR (Trib) 29 (Jabalpur) in ITA No. 100/JAB/2016 vide its order dated March 15, 2017, on which the learned authorised representative of the assessee has vehemently relied. Not only this, similar view has been taken by the Bombay Bench of the Tribunal in the case of Narayan Tatu Rane v. ITO in ITA No. 2690/Mum/20l6 vide order dated May 6, 2016 in which also under paragraph 20 of its order, the Tribunal has taken the same view on the interpretation of clause (a) of Explanation 2 to section 263 of the Act.
20. A perusal of the order passed by the Commissioner of Income-tax indicated that the assessment order passed by the Assessing Officer was cancelled on the ground that the Assessing Officer has not made proper enquiry and verification in respect of the issue as discussed above. This, in our considered opinion, cannot be sufficient ground for cancelling the assessment. While making the assessment order, it is the satisfaction of the Assessing Officer who made the enquiry and it should be the touchstone of assessment order passed by him. No cogent material or evidence was brought to our knowledge by the learned Departmental representative which may prove that the view taken by the Assessing Officer in the case of the assessee was unsustainable in law. Therefore, we are of the view that the order passed by the Commissioner of Income-tax is illegal and without jurisdiction. If the order passed by the Commissioner of Income-tax is sustained then this will permit the illegality to continue and the subsequent action is carried out on the illegal order is also illegal per se.
21. We find this case of the assessee is duly covered by the decision of the hon'ble Supreme Court in the case of Malabar Industrial Co. Ltd. v. CIT [2000] 243 ITR 83 (SC) wherein their Lordships has held as under :
"The pre-requisite to the exercise of jurisdiction by the Commissioner under section 263 is that the order of the Assessing Officer is erroneous in so far as it is prejudicial to the interests of the Revenue. The Commissioner has to be satisfied of the twin conditions, namely, (i) the order of the Assessing Officer sought to be revised is erroneous :
and (ii) is prejudicial to the interests of the Revenue. If one of them is absent-if the order of the Assessing Officer is erroneous but is not prejudicial to the Revenue-recourse cannot be had to section 263(1). There can be no doubt that the provision cannot be invoked to correct each and every type of mistake or error committed by the Assessing Officer, it is only when an order is erroneous that the section will be attracted. 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' has to be read in conjunction with an erroneous order passed by the Assessing Officer. Every loss of revenue as a consequence of the order of the Assessing Officer cannot be treated as prejudicial to the interests of the Revenue. For example, if the Assessing Officer has adopted one of the courses permissible in law and it has resulted in loss of revenue, or where two views are possible and the Assessing 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 Assessing Officer is unsustainable in law. Where a 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 without application of mind as such will be erroneous and prejudicial to the interests of the Revenue.
22. In the case of CIT v. R. K. Construction Co. [2009] 313 ITR 65 (Guj) the hon'ble Gujarat High Court as confirmed by the Supreme Court, confirming the order of the Income-tax Appellate Tribunal for which the undersigned was the author, has held as under :
"The details of sub-contractors examined by the Assessing Officer as per the directions of the Commissioner of Income-tax in revision proceedings, inter alia, include the name of these sub-contractors, their permanent account numbers, their permanent addresses, amount given to them, name of work entrusted to them, nature of such work and statements recorded by the Assessing Officer, etc. These details reveal that during the course of examination under section 131, no question was put to many of these sub-contractors as to the variation in their signatures. Similarly, no question was put to them for the reasons of discounting with the shroff. It is the stand of the assessee right from the beginning that all these sub-contractors were mainly working for the assessee and they did not have any office set up and since they were working for the assessee, they have used the assessee's address for correspondence, especially with the Government for timely communication. These persons are eligible under section 44AD to file their returns under presumptive scheme of taxation. All these persons were produced before the Assessing Officer in revision proceedings and no question was put to them though their statement on oath was recorded. All these persons have confirmed in revision proceedings that the money was not returned by them to any person and have used for their personal benefit. The payments were made to these persons by banking challans and tax was deducted at source in accordance with law. The assessee has also given complete details with respect to labour expenses called for in assessment proceedings. These details were duly verified by the Assessing Officer with the books and records. No adverse observation was made by the Assessing Officer and, hence, no addition was made in the regular assessment. The Assessing Officer has also randomly selected two labourers and examined them and their statements were recorded under section 131 of the Act. Since all necessary details were furnished to the Assessing Officer, there was no reason for the Commissioner of Income-tax to invoke the revisional jurisdiction under section 263 of the Act. The Commissioner has not stopped merely by issuance of notice under section 263. Once compliance is made, he went on issuing notice after notice and certain adverse inferences were drawn by him from the details collected by him during the revisional proceedings. Those details were thoroughly checked and examined by the Tribunal and arrived at a factual finding that there was no illegality committed by the assessee in entrusting the work to sub-contractors nor was there any illegality in making all due payments to them. The Tribunal has also given a specific finding to the effect that there was no evidence on record that these contractors were related to the assessee or were associates or sister concern of the assessee. The Tribunal has also given a finding that the Revenue has not discharged the onus that the payment to the sub- contractors were not genuine. Thus, the Tribunal has come to the conclusion that no disallowances can be made merely on the basis of suspicion, howsoever strong may it be, and the suspicion cannot take the place of actuality. The Assessing Officer has taken a particular view on the basis of evidence produced before him. On the basis of the said material and materials which were collected by the Commissioner of Income-tax in revisional proceedings, the Commissioner has taken a different view. However, in the revisional proceedings under section 263, it is not open for the Commissioner to take such a different view. No substantial question of law arise out of the order of the Tribunal and hence, the appeal filed by the Revenue deserves to be dismissed.-CIT v. Arvind Jewellers [2003] 259 ITR 502 (Guj) ; [2002] 177 CTR (Guj) 546 and Malabar Industrial Co. Ltd. v. CIT [2000] 243 ITR 83 (SC) ; [2000] 159 CTR (SC) 1 relied on)".
23. In our opinion, the impugned case is duly covered by this decision also.
24. The hon'ble Supreme Court in the case of CIT v. Max India Ltd. [2007] 295 ITR 282 (SC) has held as under (headnote) :
"The phrase 'prejudicial to the interests of the Revenue' in section263 of the Income-tax Act, 1961, has to be read in conjunction with the expression 'erroneous' order passed by the Assessing Officer. Every loss of revenue as a consequence of an order of the Assessing Officer cannot be treated as prejudicial to the interests of the Revenue. For example, when the Assessing Officer adopts one of two courses permissible in law and it has resulted in loss of revenue, or where two views are possible and the Assessing Officer has taken one view with which the Commissioner does not agree, it cannot be treated as an erroneous order prejudicial to the Revenue, unless the view taken by the Assessing Officer is unsustainable in law."
25. We have also gone through the decision of CIT v. Vodafone Essar South Ltd. [2013] 1 ITR-OL 526 (Delhi) ; [2013] 212 Taxman 184 (Delhi) on which the learned authorised representative vehemently relied. In this decision, we noted that the hon'ble High Court relied on the earlier decision of the High Court in the case of CIT v. Sunbeam Auto Ltd. [2011] 332 ITR 167 (Delhi) in which it was held that if there is some inquiry by the Assessing Officer in the original proceedings, even if inadequate, that cannot clothe the Commissioner with jurisdiction under section 263 merely because he can form another opinion. At the most the case of the assessee can be regarded to be the lack of inquiry in accordance with Commissioner of Income-tax if he has different opinion how to proceed with the assessment of the assessee.
26. Similar view has been taken by the hon'ble Delhi High Court in the case of CIT v. Software Consultants [2012] 341 ITR 240 (Delhi) in which it has been held as under (headnote) :
"The assessee-company did not file its return of income for the assessment year 1993-94. During the course of assessment proceedings for the assessment year 1997-98, it was noticed that the Central Bureau of Investigation had conducted search in the premises in which fixed deposit receipts worth Rs. 20 lakhs relating to assessment year 1993-94 were found in the possession of P, a director of the company. However, P claimed that the fixed deposits though in her name, actually belonged to the assessee. This stand was accepted by the Commissioner (Appeals) in the appeal filed by P. Thereafter, the Assessing Officer in the case of the assessee issued notice under section 148 of the Income-tax Act, 1961. In response to this notice, the assessee filed a return showing loss of Rs. 1,02,756. By assessment order the Assessing Officer accepted that the assessee had established and proved the source and its capacity to invest Rs. 20 lakhs and accordingly no addition was made on this account. In this assessment order the Assessing Officer had also noted that during the year share application money was increased by Rs. 47 lakhs. In order to verify the genuineness of share application money summonses under section 131 of the Act were issued to persons on random basis and their statements were recorded for confirming these investments made by them in the assessee-company. The Commissioner under section 263 of the Act directed the Assessing Officer to conduct further enquiries in respect of the share application money of Rs. 47 lakhs. He also held that the Assessing Officer had erred in determining the loss after issue of notice under section 148 of the Act. He mentioned lacunas and defects in the statements of the seven share applicants and the manner in which they were recorded. Accordingly, he held that the Assessing Officer had failed to make necessary verification and enquiries, which were required. The Tribunal quashed the order under section 263 of the Act passed by the Commissioner. On appeal :
Held, dismissing the appeal, that the Tribunal had held that the order of the Assessing Officer could not be regarded as erroneous even if the Assessing Officer had failed to carry out necessary verification and required enquiries in respect of the share application money, as no addition had been made on account of the reasons for reopening, which were recorded before issue of notice under section 148 of the Act. It had held that the Assessing Officer could not have made an addition on account of the share application money as no addition had been made on account of fixed deposits of Rs. 20 lakhs. The Tribunal had noticed and recorded that in the reasons for reopening it was mentioned that the assessee had made investment in the form of fixed deposits of Rs. 20 lakhs but in the assessment order passed under section 147/143(3) of the Act it had been held that the assessee had been able to show and establish the genuineness and capacity of the share applicants to make the investment. The Assessing Officer did not make any addition for the reasons recorded at the time of issue of notice under section 148 of the Act. This position was not disputed or disturbed by the Commissioner in his order under section 263 of the Act. The assessment order was not erroneous. Thus, the Commissioner could not have exercised jurisdiction under section 263 of the Act."
27. In the case of CIT v. Sunbeam Auto Ltd. [2011] 332 ITR 167 (Delhi) the High Court has held that inadequacy of enquiry will not give the jurisdiction to Commissioner under section 263. In this hon'ble High Court has held as under (headnote) :
"The Assessing Officer in the assessment order is not required to give a detailed reason in respect of each and every item of deduction, etc. Whether there was application of mind before allowing the expenditure in question has to be seen. If there was any inquiry, even inadequate that would not by itself give occasion to the Commissioner to pass orders under section 263 of the Income-tax Act, 1961, merely because he has a different opinion in the matter. It is only in cases of lack of inquiry that such a course of action would be open.
An order cannot be termed erroneous unless it is not in accordance with law. If an Income-tax Officer acting in accordance with law makes a certain assessment, it cannot be branded as erroneous by the Commissioner simply because, according to him, the order should have been written more elaborately. Section 263 does not visualise a case of substitution of the judgment of the Commissioner for that of the Income-tax Officer who passed the order unless the decision is held to be erroneous. Where the Income-tax Officer has exercised the quasi-judicial power vested in him in accordance with law and arrived at a conclusion such a conclusion cannot be found to be erroneous simply because the Commissioner does not feel satisfied with the conclusion. There must be some prima facie material on record to show that tax which was lawfully exigible has not been imposed or that by the application of the relevant statute on an incorrect or incomplete interpretation a lesser tax than what was just has been imposed.
The assessee was a manufacturer of car parts. Its return for the assessment year 2001-02 was taken up for scrutiny and assessment was completed. In revisional proceedings, the solitary objection of the Commissioner was that the expenditure on tools and dies aggregating to Rs. 10,56,69,367 was allowed as revenue expenditure without a detailed investigation. After considering all the materials furnished by the assessee the Commissioner took the view that the accounting practice followed by the assessee to debit the entire cost of tools and dies in the year of installation was not correct and he remitted the case to the Assessing Officer for re-examination. The Tribunal allowed the claim of the assessee. On appeal :
Held, dismissing the appeal, (i) that the Assessing Officer allowed the claim on being satisfied with the explanation of the assessee. Such decision of the Assessing Officer could not be held to be erroneous simply because in his order he did not make an elaborate discussion in that regard. The Assessing Officer had called for explanation on the very item from the assessee and the assessee had furnished its explanation. This fact was conceded by the Commissioner himself in his order. This showed that the Assessing Officer had undertaken the exercise of examining as to whether the expenditure incurred by the assessee in the replacement of dies and tools was to be treated as revenue expenditure or not. Therefore, it could not be said that it was a case of lack of inquiry. The accounting practice followed for a number of years had the approval of the Income-tax authorities. Even for future assessment years, the very same accounting practice was accepted.
(ii) That the dies were components of the machines. They needed constant replacement, as their life was not more than a year. The assessee also explained that since the parts were manufactured for the automobile industry, which had to work on complete accuracy at high speed for a longer period, replacement of the parts at short intervals becomes imperative to retain the accuracy. With the replacement of tools and dies no new asset comes into existence nor was their benefit of enduring nature. They did not even enhance the life of the existing machine of which the tools and dies were only parts. Therefore, the view taken by the Assessing Officer was one of the possible views and the assessment order passed by him could not be held to be prejudicial to the interests of the Revenue. The opinion of the Assessing Officer in treating the expenditure as revenue expenditure was plausible and thus there was no material before the Commissioner to vary that opinion and ask for fresh inquiry."
28. In view of various decisions as discussed by us in the preceding paragraphs and finding given by us, we are of the view that the Commissioner of Income-tax was not correct in law in exercising the jurisdiction under section 263, and cancelling the assessment and accordingly we quash the order passed under section 263 of the Act.
29. In the result, the appeal of the assessee stands allowed.
The order pronounced in the open court on April 12, 2017.