Commissioner of Income Tax vs Arvind Jewellers

K.A. Puj, J.

At the instance of the revenue, the following questions of law are referred to for the opinion of this court for the assessment year 1981-82 :

"1. Whether, on the facts and in the circumstances of the case, the Income Tax Appellate Tribunal was right in law in setting aside the order made by the Commissioner of Income Tax u/s 263 of the Income Tax Act, 1961 ?

Whether, the conclusion reached by the Appellate Tribunal in setting aside the order made by the Commissioner u/s 263 of the Income Tax Act, 1961 is even otherwise sustainable in law ?"

The assessee is a partnership firm and had filed its return of income disclosing net loss of Rs. 2,777 in business of purchase and sale of ornaments and jewellery. The Income Tax Officer issued notices under sections 143(2) and 142(1) of the Income Tax Act, 1961 (hereinafter referred to as the Act) along with the requirement letter. After considering the material produced by the assessee and the explanation offered, the Income Tax Officer has framed the assessment determining the total Income at Rs. 32,900. The Commissioner has found the said order of the Income Tax Officer as erroneous and prejudicial to the interest of the revenue and, therefore, issued notice u/s 263 of the Act. The Commissioner was of the view that there was search at the business premises of the assessee-firm and the residential premises of the assessee-firm and residential premises of the partners on 28-11-1992. During the course of search, unaccounted cash amounting to Rs. 1,80,000 was seized. Similarly, silver ornaments and jewellery valued at Rs. 7,02,728 were seized. While finalizing the assessment for the assessment year 1981-82, the Income Tax Officer has added Rs. 15,000 as the assessee''s income from undisclosed sources represented by the credits in the accounts of seven parties as mentioned in the order u/s 263. After narrating in detail the facts of the case as well as the explanation offered by the assessee in reply to the notice issued u/s 263, the Commissioner has come to the conclusion that the assessment order passed by the Income Tax Officer u/s 143(3) for the assessment year in question determining the total income at Rs. 32,900 is erroneous and prejudicial to the interest of the revenue, insofar as the Income Tax Officer has not carried out any investigation either while adding certain amounts in the total income or while accepting the explanations on the various points as discussed in the said order. The Commissioner has, therefore, set aside the order passed by the Income Tax Officer u/s 143(3) with a direction to pass a fresh order in accordance with law after carrying out necessary investigations with regard to various explanations offered by the assessee.

Being aggrieved by the said order, the assessee preferred an appeal before the Tribunal and objected to the order so passed by the Commissioner. The Tribunal has considered the rival submissions of the parties in a great length and also referred to and relied on the authorities cited by the respective parties. The Tribunal has observed in para 7 of its order that from the material already brought on record, it is difficult to hold that the Income Tax Officer has not properly investigated and enquired into the case in depth. The Tribunal has found from the notice issued by the Income Tax Officer u/s 142(1) that the Income Tax Officer had raised all possible enquiries in view of a search conducted u/s 132 of the Act. The Tribunal has further observed that the Income Tax Officer was fully aware of the gravity of the situation and the interest of the revenue. After obtaining necessary information from the assessee, the Income Tax Officer has framed the assessment wherein he had not accepted the explanation given by the assessee in its entirety and had in fact made certain additions. The Tribunal has further taken the fact into account that as against total loss of Rs. 2,777 shown by the assessee, the Income Tax Officer had framed the assessment on a total income of Rs. 34,350. In this view of the matter, the Tribunal was of the view that the Commissioner was not justified in initiating the proceedings u/s 263. It was further observed by the Tribunal that merely on the ground that on the material already brought on record, better assessment could have been framed than that framed by the Income Tax Officer, the action u/s 263 cannot be taken. After considering all the issues, the Tribunal has set aside the order of the Commissioner and it is that order which is under challenge before us in this reference.

Heard Mrs. Mona Bhatt. the learned counsel appearing for the applicant-revenue and Mr. R.K. Patel, the learned advocate appearing for the respondent-assessee. The revenue''s case was, as canvassed by Mrs. Bhatt, that since the material which was available with the Income Tax Officer was not considered while finalizing the assessment, the order passed on that basis is erroneous and prejudicial to the interest of the revenue. According to the revenue, before passing the order, full enquiry and investigation ought to have been made by the Income Tax Officer and since this was not done, it has caused loss to the revenue and in this view of the matter, the order so passed we erroneous and prejudicial to the interest of the revenue and the Commissioner was justified while taking action u/s 263. In support of her contention, she had relied on the decision of the Supreme Court in the case of Commissioner of Income Tax, Bangalore Vs. Shree Manjunatheaware Packing Products and Camphor Works, .

Mr. R.K. Patel, the learned advocate appearing for the respondent assessee has drawn our attention to the decision of the Supreme Court in the case of Malabar Industrial Co. Ltd. v. CIT (2000) 14 DTC 146 (SC) : (2000) 243 ITR 831 wherein the Supreme Court has observed as under:

"A bare reading of section 263 of the Income Tax Act, 1961, makes it clear that the prerequisite for the exercise of the jurisdiction by the Commission suo motu under it, is that the order of the Income Tax Officer is erroneous insofar as it is prejudicial to the interests of the revenue. The Commissioner 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 not prejudicial to the revenue or if it is not erroneous but is prejudicial to the revenue-recourse cannot by bad to section 263(1) of the Act. 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 be 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 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." (p. 83)

From the above-observations made by the Supreme Court, it is clear that the provisions of section 263 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 section will be attracted and incorrect assumption of facts or an incorrect application of law will satisfy the requirement of the order being erroneous. The Supreme Court has also made it clear that the phrase ''prejudicial to the interests of the revenue has to be read in conjunction with an erroneous order passed by the assessing officer and that 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. It was further emphatically stated that when an Income Tax Officer adopts 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.

Coming to the facts of the present case, it is the finding of fact given by the Tribunal that the assessee has produced relevant material and offered explanation in pursuance of the notices issued u/s 142(1) as well as section 143(2) and after considering those materials and explanation the Income Tax Officer has come to a definite conclusion. The Commissioner did not agree with the conclusion reached by the Income Tax Officer. Section 263 does not empower him to take action on these facts to arrive at the conclusion that the order passed by the Income Tax Officer is erroneous and prejudicial to the interest of the revenue. Since the material was there on record and the said material was considered by the Income Tax Officer and a particular view was taken, the mere fact that different view can be taken, should not be the basis for an action u/s 263 and it cannot be held to be justified.

In view of this and following the principles laid down by the Supreme Court in Malabar Industrial Co. Ltd.s case (supra), we are of the view that having regard to the facts and circumstances of the case, the Tribunal was justified in setting aside the order passed by the Commissioner u/s 263. We, therefore, answer both the questions in the affirmative, i.e., in favour of the assessee and against the revenue.

The reference is, accordingly, disposed of with no order as to costs.