T. S. Kapoor (Accountant Member)
1. This is an appeal filed by the assessee against the order of the learned Commissioner of Income-tax, Bathinda, dated February 23, 2015, for the assessment year 2010-11.
2. The following grounds of appeal has been taken by the assessee.
"(i) That the order of the Commissioner of Income-tax passed under section 263 of the Income-tax Act, 1961, dated February 23, 2015, is against the facts of the case and untenable in law.
(ii) That the learned Commissioner of Income-tax did not appreciate that the order passed under section 263 of the Income-tax Act, 1961, is bad in law and is liable to be cancelled.
(iii) That the learned Commissioner of Income-tax failed to appreciate that the order passed by the Assessing Officer is neither erroneous nor prejudicial to the interests of the Revenue. As such the order passed under section 263 of the Income-tax Act, 1961, is bad in law and the same is liable to be cancelled.
(iv) That the learned Commissioner of Income-tax did not appreciate that the books of account were duly produced before the Assessing Officer and were duly examined by the Assessing Officer thoroughly and after satisfying himself the Assessing Officer accepted the return income, thus the Assessing Officer has fully applied his mind and has passed the assessment after order having regard to the material on the record. As such the order of the learned Commissioner of Income-tax is bad in law and the same is liable to be cancelled.
(v) That the order under section 263 of the learned Commissioner of Income-tax is bad in law because the audit objection cannot be made the basis for revision of an assessment. The Assessing Officer while completing the assessment has accepted the books of account after due examination. Thus, the order of the Assessing Officer is neither erroneous nor prejudicial to the interests of the Revenue and as such the order passed by the Commissioner of Income-tax under section 263 of the Income-tax Act, 1961, is illegal, invalid and void ab-initio and the same liable to be cancelled."
3. The brief facts as noted in the assessment order are that the assessee is a contractor and his books of account are audited under section 44AB of the Income-tax Act, 1961. The case of the assessee was selected for scrutiny. During the assessment proceedings, after examination of books of account and after verification of other details the addition was made to the tune of Rs. 1 lakh. The learned Commissioner of Income-tax issued notice under section 263 and passed order under section 263 and set aside the order of the Assessing Officer with the directions to the Assessing Officer to decide the issue afresh on the merits in accordance with law.
4. Aggrieved the assessee is in appeal before us.
5. At the outset, the learned authorised representative submitted that the basis on which proceedings by the Commissioner were initiated under section 263 for the so-called violation of the provisions of section 40A(3) was not correct as in fact the assessee had not made payments in violation of the provisions of section 40A(3) and this angle was already examined by the Assessing Officer before passing the assessment order. The learned authorised representative in this respect invited our attention to a copy of questionnaire issued by the Assessing Officer placed at the paper book pages 12 to 14 and our specific attention was invited to question No. 19 placed at the paper book page 13. Inviting our attention to the reply to this notice, the learned authorised representative took us to the paper book pages 15 to 17 and our specific attention was invited to the reply to question No. 19 placed at the paper book page 17. The learned authorised representative further invited our attention to a copy of the audit report placed at the paper book pages 2 to 11 and submitted that the auditor in his report has not pointed out any violation in the provisions of section 40A(3) and in this respect our specific attention was invited to the paper book page 5. The learned authorised representative, therefore, submitted that the necessary examination was already done by the Assessing Officer and, therefore, the action under section 263 was not warranted. Further, inviting our attention to the show-cause notice dated October 17, 2013, placed at the paper book page 22, the learned authorised representative submitted that after passing of the order the Assessing Officer again required the assessee to explain the so-called cash payments and a detailed reply was filed which is placed at the paper book pages 24 to 27. The learned authorised representative submitted that in this reply the assessee had elaborately explained that no payment in cash in excess of Rs. 20,000 was made and, therefore, there was no violation of the said section. The learned authorised representative further submitted that on the same issue the Assessing Officer had reopened the case under section 148 and in this respect our attention was invited to the paper book pages 28-29 where a copy of the reasons recorded was placed. The learned authorised representative submitted that a reply to the reasons recorded was filed a copy which was placed at the paper book pages 30 to 38, wherein the assessee again explained that there was no violation of the provisions of section40A(3). The learned authorised representative submitted that on receipt of such reply from the assessee, the assessment proceedings under section 147 were dropped by the Assessing Officer and in this respect invited our attention to the paper book page 39 where a copy of such order dropping the proceedings under section 147 was placed. The learned authorised representative submitted that after dropping the proceedings under section 147 by the same Income-tax Officer, L. D. Bansal, the proposal for initiation of action under section 263 was made on the same date by the same Assessing Officer. The learned authorised representative submitted that the issue of violation of the provisions of section 40A(3) was examined three times that is (i) during the assessment proceedings, (ii) after assessment proceedings, and (iii) during initiation of reassessment proceedings. The learned authorised representative submitted that it was not open to the Commissioner to initiate proceedings under section 263, once the issue was examined by the Assessing Officer and this is a case where the issue was examined three times. Reliance in this respect was placed on the following case law.
(i) Roshan Lal Vegetable Products Pvt. Ltd. v. ITO [2011] 9 ITR (Trib) 431 (Amritsar) ; [2012] 51 SOT 1 (Amritsar) (URO) ;
(ii) CIT v. Gabriel India Ltd. [1993] 203 ITR 108 (Bom) ; and
(iii) Malabar Industrial Co. Ltd. v. CIT [2000] 243 ITR 83 (SC).
Besides the above case law the learned authorised representative further placed his reliance on a number of caselaw.
6. Without prejudice the learned authorised representative submitted that reassessment proceedings in this casewere initiated on the basis of the audit objection and which were later on dropped, however, on the same date of dropping the reassessment proceedings proposal for initiation action under section 263 was initiated on the basis of the same audit objection which was not warranted by law as held by the Punjab and Haryana High Court in the caseof CIT v. Sohana Woollen Mills [2008] 296 ITR 238 (P&H) and in this respect filed a copy of the case law reported at 296 ITR 238. The learned authorised representative submitted that detailed submissions were filed with the Commissioner of Income-tax along with the relevant case law but the learned Commissioner of Income-tax ignored all the submissions and the judgments and finalised the assessment under section 263. In view of the facts and circumstances the learned authorised representative submitted that the order passed by the leaned Commissioner of Income-tax under section 263 be quashed.
7. The learned Departmental representative, on the other hand, submitted that the assessment order passed by the Assessing Officer does not talk about the examination of this aspect and, therefore, the action under section 263 was rightly taken by the Commissioner. He submitted that the Department had dropped the proceedings under section 147 to strengthen its case for action under section 263.
8. The learned authorised representative, in his rejoinder submitted that during reassessment proceedings under section 147 the Department had accepted that it was a change of opinion, therefore, had admitted that this issue was already examined by the Assessing Officer. Therefore, the order passed by the Commissioner needs to be quashed.
9. We have heard the rival parties and have gone through the material placed on record. We find that the Assessing Officer during the course of assessment proceedings specifically asked about the violation of the provisions of section 40A(3), vide questionnaire No. 19 placed at the paper book page 13 and in reply the assessee specifically replied that there was no violation of the provisions of section 40A(3), the relevant portion of his reply is placed at the paper book page 17. Furthermore, we note that the tax audit report has not pointed out any payment in violation of the provisions of section 40A(3). We further find that a detailed reply was filed even after completion of assessment in view of the notice by the same Assessing Officer. Furthermore, we find on the same issue of violation of provisions of section 40A(3), the reassessment proceedings were initiated against which again the assessee filed detailed objections and reply which was placed at the paper book pages 30 to 38 and after going through the reply filed by the assessee the proceedings under section 147 were dropped. From the above facts, we find that the examination of violation of the provisions of section 40A(3) has been examined by the Assessing Officer on three occasions and he had not found any violation of such provisions. The reply filed by the assessee clearly shows that to manage his business at various places the advances were made to various supervisors engaged working in various locations and these supervisors used to submit the details of material purchased by them and for making payments to labour and each payment was less than Rs. 20,000 and, therefore, in fact, there was no violation of the provisions of section 40A(3). The Bombay High Court in the case of CIT v. Gabriel India Ltd. [1993] 203 ITR 108 (Bom), has elaborately dealt with the powers under section 263 and which, vide paragraphs 14 to 17 has held as under (page 116) :
"We, therefore, hold that in order to exercise power under sub- section (1) of section 263 of the Act there must be material before the Commissioner to consider that the order passed by the Income-tax Officer was erroneous in so far as it is prejudicial to the interests of the Revenue. We have already held what is erroneous. It must be an order which is not in accordance with the law or which has been passed by the Income-tax Officer without making any enquiry in undue haste. We have also held as to what is prejudicial to the interests of the Revenue. An order can be said to be prejudicial to the interests of the Revenue if it is not in accordance with the law in consequence whereof the lawful revenue due to the State has not been realised or cannot be realised. There must be material available on record called for by the Commissioner to satisfy him, prima facie, that the aforesaid two requisites are present. If not, he has no authority to initiate proceedings for revision. Exercise of power of suo motu revision under such circumstances will amount to arbitrary exercise of power. It is well-settled that when exercise of statutory power is dependent upon the existence of certain objective facts, the authority before exercising such power must have materials on records to satisfy it in that regard. If the action of the authority is challenged before the court it would be open to the courts to examine whether the relevant objective factors were available from the records called for and examined by such authority. Our aforesaid conclusion gets full support from a decision of Sabyasachi Mukharji J., as his Lordship then was, in Russell Properties Pvt. Ltd. v. A. Chowdhury, Addl. CIT [1977] 109 ITR 229 (Cal). In our opinion, any other view in the matter will amount to giving unbridled and arbitrary power to the revising authority to initiate proceedings for revision in every case and start re-examination and fresh enquiries in matters which have already been concluded under the law. As already stated it is a quasi-judicial power hedged in with limitation and has to be exercised subject to the same and within its scope and ambit. So far as calling for the records and examining the same is concerned, undoubtedly it is an administrative act, but on examination, 'to consider' or, in other words, to form an opinion that the particular order is erroneous in so far as it is prejudicial to the interests of the Revenue, is a quasi-judicial act because on this consideration or opinion the whole machinery of re-examination and reconsideration of an order of assessment, which has already been concluded and the controversy which has been set at rest, is set again in motion. It is an important decision and the same cannot be based on the whims or caprice of the revising authority.
There must be materials available from records called for by the Commissioner.
We may now examine the facts of the present case in the light of the powers of the Commissioner set out above. The Income-tax Officer in this case had made enquiries in regard to the nature of the expenditure incurred by the assessee. The assessee had given detailed explanation 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. Moreover, in the instant case, the Commissioner himself, even after initiating proceedings for revision and hearing the assessee, could not say that the allowance of the claim of the assessee was erroneous and that the expenditure was not revenue expenditure but an expenditure of capital nature. He simply asked the Income-tax Officer to re-examine the matter. That, in our opinion, is not permissible. Further, inquiry and/or fresh determination can be directed by the Commissioner only after coming to the conclusion that the earlier finding of the Income-tax Officer was erroneous and prejudicial to the interests of the Revenue. Without doing so, he does not get the power to set aside the assessment. In the instant case, the Commissioner did so and it is for that reason that the Tribunal did not approve his action and set aside his order. We do not find any infirmity in the above conclusion of the Tribunal.
In the light of the foregoing discussion, we answer the question referred to us in the affirmative, that is, in favour of the assessee and against the Revenue.
Under the facts and in the circumstances of the case, we make no order as to costs."
Similarly, the decision of the honourable Supreme Court in the case of Malabar Industrial Co. Ltd. v. CIT [2000] 243 ITR 83 (SC) has held as under (page 87) :
"A bare reading of the provisions of section 263 makes it clear that the pre-requisite to exercise of jurisdiction by the Commissioner of Income-tax suo motu under it, is that the order of the Income-tax Officer is erroneous in so far as it is prejudicial to the interests of the Revenue. The Commissioner of Income-tax has to be satisfied of twin conditions, namely, (i) the order of the Assessing Officer sought to be revised is erroneous ; and (ii) it is prejudicial to the interests of the Revenue. If one of them is absent-if the order of the Income-tax Officer is erroneous but is non-prejudicial to the Revenue or if it is not erroneous but is prejudicial to the Revenue-recourse cannot be had to section 263(1) of the Act.
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' 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 entrusted to the Revenue. If due to an erroneous order of the Income-tax Officer, the Revenue is losing tax lawfully payable by a person, it will certainly be prejudicial to the interests of the Revenue.
The phrase 'prejudicial to the interests of the Revenue' has to read in conjunction with an 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 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 of Income-tax 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."
In the case before us, we find that the Assessing Officer has already applied his mind and has taken a concise decision of not making addition for violation of the provisions as there were no violation at all and, therefore, the order passed by the Assessing Officer was not erroneous and was not prejudicial to the interests of the Revenue.
10. Furthermore, we find that the proceedings under section 263 were initiated on the basis of the audit objections as is noted by the learned Commissioner in his order. The honourable Punjab and Haryana High Court in the caseof CIT v. Sohana Woollen Mills [2008] 296 ITR 238 (P&H) has held as under :
"Revision-Erroneous and prejudicial order-Assessing Officer taking possible view-Mere audit objections and merely because a different view can be taken are not enough to hold that the order of the Assessing Officer is erroneous or prejudicial to the interests of the Revenue-Assessing Officer accepted the case of the assessee that out of sale consideration of the machinery sold by it, sum of Rs. 1 lakh was received for the sale of permit in respect of 1,200 spindles. There was no error in the view taken by the Assessing Officer-Commissioner of Income-tax not justified in invoking jurisdiction under section 263 on the strength of an audit note."
11. In view of the above facts and circumstances and in view of the above judicial precedents, the appeal filed by the assessee is allowed.