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Judgment
N.V. Balasubramanian, J.—In pursuance of the directions of this court in T. C. P. No. 330 of 1984 dated February 28, 1985, the
Appellate Tribunal has stated a case and referred the following questions of law for the assessment year 1977-78 for our consideration :
Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in cancelling the order of the Commissioner of
Income Tax passed u/s 263 in the assessee''s case for the assessment year 1977-78 ?
Whether the Appellate Tribunal''s view that the order of the Income Tax Officer got merged with the appellate order of the Commissioner of
Income Tax (Appeals) and, therefore, the Commissioner had no jurisdiction to invoke the provisions of Section 263 is sustainable in law especially
when the point considered by the Commissioner of Income Tax (Appeals) was not the subject-matter of appeal at all ?
Whether, on the facts and in the circumstances of the case, the assessee was entitled to weighted deduction u/s 35B in respect of the
expenditure of Rs. 37,26,317 detailed in the statement of the case ?
The assessee for the assessment year 1977-78 filed a return of income admitting the income of Rs. 1,63,72,720. The Income Tax Officer called
for the particulars u/s 143(2) of the Act and the details submitted by the assessee were examined by the Income Tax Officer. The Income Tax
Officer found that there was a variation between the income returned and the income proposed to be assessed which exceeded the figure of Rs.
1,00,000 and, therefore, he forwarded the draft assessment order u/s 144B of the Income Tax Act, 1961 (hereinafter to be referred to as ""the
Act""), to the Inspecting Assistant Commissioner calling upon the assessee to file its objection to the proposed order. The assessee did not furnish
any reply and the Income Tax Officer presumed that the assessee had no objection to offer and completed the assessment u/s 143(3) read with
Section 144B of the Act. In the assessment made the Income Tax Officer, inter alia, granted a relief of a sum of Rs. 18,63,159 u/s 35B of the Act
and after granting the deduction completed the assessment.
The assessee preferred an appeal to the Commissioner of Income Tax (Appeals) and it is relevant to mention here that the relief granted by the
Income Tax Officer u/s 35B of the Act was not the subject-matter of the appeal before the Commissioner of Income Tax (Appeals), and it is not
necessary to refer to the appellate order passed by the Commissioner of Income Tax (Appeals) except to notice, for the purpose of this judgment
that the relief granted u/s 35B of the Act was not the subject-matter of appeal before the first appellate authority.
After the disposal of the appeal by the Commissioner of Income Tax (Appeals), the Commissioner of Income Tax, who is having administrative
control over the Income Tax Officer, perused the order of the Income Tax Officer in exercise of his powers conferred upon him u/s 263 of the
Act. He was prima facie of the view that the Income Tax Officer has allowed weighted deduction u/s 35B of the Act in respect of the following
expenses incurred by the assessee :
(Rs.)
(i) Commission and brokerage paid outside India to bro-kers, charterers and charterer''s 36,53,088
brokers through whom contracts were finalised
(ii) Expenditure on membership subscription to associa-tion and subscription to various 20,732
magazines and purchase of booklets for obtaining information regarding markets outside
India.
(iii) Postage, telegrams, telephone expenses, etc., incurred by the brokers in London. 52,497
37,26,317
He was of the view that the aforesaid expenses did not qualify for weighted deduction u/s 35B of the Act, and issued a show-cause notice to the
assessee calling upon him to file objection as to why the assessment should not be modified. The assessee filed its detailed objections. The
Commissioner went through the records, written submissions filed on behalf of the assessee and came to the conclusion that the payment of
commission and brokerage did not fall under any specific sub-clause of Section 35B(1)(b) of the Act. He also stated that the assessment has been
completed by the Income Tax Officer in a perfunctory manner without verifying the nature of the expenses and their eligibility for weighted
deduction. He was of the view that weighted deduction claimed by the assessee has been accepted by the Income Tax Officer without verifying as
to the sub-clause of Section 35B(1)(b) of the Act under which the claim would be admissible. He was, therefore, of the view that the matter should
be restored to the Income Tax Officer for reconsideration and he held that the assessment order passed by the Income Tax Officer was erroneous
and prejudicial to the interests of the Revenue and set aside the assessment order with a direction to the Income Tax Officer to pass a fresh
assessment order in accordance with law after giving an opportunity to the assessee.
The assessee filed an appeal to the Income Tax Appellate Tribunal against the order passed by the Commissioner of Income Tax u/s 263 of the
Act. The Appellate Tribunal held that the Commissioner of Income Tax did not have any jurisdiction to pass the order u/s 263 of the Act on the
ground that the order of assessment was the subject-matter of appeal before the Commissioner of Income Tax (Appeals) and the order was also
passed by the Commissioner of Income Tax (Appeals) resulting in the merger of the order of assessment with the appellate order. The Appellate
Tribunal also held that the Income Tax Officer had allowed the weighted deduction after examining the details of the expenditure and the question
of examining the claim for the weighted deduction under Explanation 2 to Section 35B of the Act did not arise on the facts of the case. The view of
the Appellate Tribunal was that the Income Tax Officer had applied his mind to the eligibility of the claim made by the assessee for weighted
deduction and he has not mechanically allowed the claim. According to the Tribunal, the finality of an order of assessment should not be lightly
disturbed, and the view of the Commissioner of Income Tax that the Income Tax Officer had mechanically or perfunctorily made the assessment
without proper examination was incorrect. The Tribunal also came to the conclusion that the Commissioner did not come to any belief that the
allowance of deduction u/s 35B of the Act was erroneous as he has merely set aside the order to be redone by the Assessing Officer afresh
according to law. In this view of the matter, the Appellate Tribunal allowed the appeal preferred by the assessee.
The Appellate Tribunal, on the basis of the directions of this court, has stated a case and referred the questions of law set out supra.
Learned counsel for the Revenue submitted that the Tribunal was wrong in holding that there was a merger of the assessment with the appellate
order passed by the Commissioner of Income Tax (Appeals). He further submitted that the Income Tax Officer was wrong in granting a relief u/s
35B of the Act without properly verifying the nature of the expenditure and without holding under which clause the expenditure in question would
fall. He also submitted that the Commissioner considered the matter and was of the prima facie view that the items claimed by the assessee would
not fall under any one of the sub-clauses of Section 35B(1)(b) of the Act. According to him, the view of the Appellate Tribunal that the Income
Tax Officer has applied his mind before granting deduction is also not correct as the order of the Income Tax Officer does not indicate that he has
applied his mind for the deduction in question as the expenditure incurred did not come under any specific provisions of Section 35B of the Act.
Mr. Janarthana Raja, learned counsel for the assessee, on the other hand, submitted that the order of the Income Tax Officer clearly shows that
the Assessing Officer called for the details and examined the same and the grant of deduction was not against any provision of Law. According"" to
learned counsel for the assessee, the Commissioner of Income Tax had not applied his mind properly and in the absence of any finding that the
order was erroneous and prejudicial to the interests of the Revenue, the Commissioner had no jurisdiction to revise the order of assessment.
Learned counsel for the assessee submitted that the finding of the Appellate Tribunal that the Income Tax Officer had examined the matter in an
elaborate manner is a finding of fact and, therefore, this court should not interfere with the finding of fact. According to learned counsel for the
assessee, the payments were made to foreign brokers through whom information was obtained in respect of cargo availabilities and freight rates
and on the basis of the information furnished, the freight contracts were finalised and the expenditure was incurred for obtaining market information.
We have carefully considered the submissions of learned counsel. The order of the Commissioner of Income Tax discloses that he has gone
through the records of assessment and on the basis of the assessment records, he recorded a finding that the assessment was completed by the
Income Tax Officer in a perfunctory manner without verifying the nature of the expenditure and the eligibility of the claim for weighted deduction u/s
35B of the Act. The Appellate Tribunal has recorded a finding that the Income Tax Officer called for certain clarifications with regard to certain
items of expenses for which the payments were made to the parties in India and only after examining the same, the Income Tax Officer allowed the
deduction. It is not clear from the order of the Appellate Tribunal whether the Appellate Tribunal perused the records of assessment as was done
by the Commissioner in exercise of his power of revision. A careful reading of the order of the Appellate Tribunal indicates that it has only gone
through the order of the assessment passed by the Income Tax Officer. The Tribunal has not indicated the basis for its conclusion that the expenses
claimed by the assessee were examined by the Income Tax Officer in detail, when the Commissioner, after the perusal of records of assessment,
arrived at a finding that the claim of the assessee was allowed in a perfunctory manner or in a mechanical manner. The Tribunal, no doubt, referred
to the claim of deduction of the assessee u/s 35B(l}(b)(ii) and (iv) of the Act. The Tribunal overlooked the fact that the objection of the
Commissioner was that the Income Tax Officer had not examined the question of allowability of the claim for weighted deduction under which sub-
clause of Section 35B(1)(b) of the Act the claim would fall. We are of the view that even assuming that the Income Tax Officer had called for the
particulars, which were also furnished by the assessee, if the Income Tax Officer without probing into the matter further had allowed the claim of
the assessee for weighted deduction and if the Commissioner on the basis of materials forms an opinion that the grant of allowance made by the
Officer was erroneous and not warranted by law, the jurisdiction of the Commissioner u/s 263 of the Act is not ousted. The Commissioner may
not have recorded his final conclusion, but, the question for exercising the power of revision by the Commissioner is whether the order of the
Assessing Officer can be regarded as erroneous and prejudicial to the interests of the Revenue. It may be erroneous in law or in fact. It may be
erroneous in the sense that the Income Tax Officer had passed the order without properly conducting the inquiry in completion of the assessment
and the order may also be erroneous when the expenditure allowed was against the provisions of law. Therefore, the view expressed by the
Appellate Tribunal that the Income Tax Officer had allowed the claim after examining the records is inconsistent with the positive finding of the
Commissioner of Income Tax who recorded the finding on perusal of the entire assessment records. When the Appellate Tribunal, on appeal,
differs from the finding of fact of the Commissioner, it should have recorded its finding indicating the material on which it came to such a conclusion.
Learned counsel for the assessee produced before us a copy of the reply sent by the assessee to the show-cause notice issued by the
Commissioner of Income Tax u/s 263 of the Act and according to the statement filed along with the show-cause notice which was apparently filed
before the Income Tax Officer at the time of completion of assessment, the commission and brokerage on freight demurrage amounting to Rs.
36,53,088 represented the payments made to the brokers, charterers and charterers'' brokers through whom the contracts were finalised and in
the reply to the show-cause notice, the assessee has stated that the expenditure was incurred for obtaining information regarding markets outside
India as regards cargo availabilities and freight rates and the payments were made to foreign brokers through whom the information was obtained.
The Commissioner in his order referred to the allowance made by the Income Tax Officer of Rs. 36,53,088 being the expenditure incurred by way
of commission and brokerage paid outside India to brokers, charterers and charterers'' brokers through whom the contracts were finalised, A
reading of the order of the Commissioner shows that the Income Tax Officer allowed the weighted deduction on the commission paid to the
brokers, charterers and charterers'' brokers through whom the contracts were finalised, though the assessee in its reply stated that the payments
were made to foreign brokers through whom information was obtained in respect of cargo availabilities and freight rates. The conflicting stand in
the claim made before the Assessing Officer as well as before the Commissioner would warrant a view that the expenses were allowed by the
Income Tax Officer without properly verifying the claim. Further, the Commissioner passed the order of revision on two points ; one, the
expenditure in question did not appear to fall under any one of the specific sub-clauses of Section 35B(1)(b) of the Act and further, the assessment
was completed by the Income Tax Officer in a perfunctory manner. The Tribunal, in our view, was not correct in holding that the Commissioner
has not properly examined the case and it is also not correct in its view that the Commissioner had not come to any conclusion on the basis of
records that the allowance u/s 35B of the Act was erroneous, but merely set aside the order as not in accordance with law. This view of the
Appellate Tribunal is also not correct as the Commissioner in exercise of his power of revision can pass such orders as the circumstances of the
case would justify including an order enhancing or modifying the assessment or cancelling the assessment or directing a fresh assessment.
The Supreme Court in CIT v. Shree Manjunathesware Packing Products and Camphor Works [1998] 231 ITR 53, held that the revisional
powers conferred on the Commissioner of Income Tax u/s 263 of the Act are of wide amplitude enabling the Commissioner to call for and
examine the records under any proceeding of the Act and empowering the Commissioner to make or cause to make such enquiry as he deems
necessary in order to find out whether any order passed by the Assessing Officer was erroneous and prejudicial to the interests of the Revenue.
Therefore, when the powers conferred upon the Commissioner of Income Tax are of wide amplitude enabling the Commissioner to pass any
order, it is not necessary for the Commissioner to record his final conclusion regarding the allowability of the claim of the assessee u/s 35B of the
Act on the merits of the case. In our opinion, it would be sufficient if he comes to the conclusion on materials that the order of the Income Tax
Officer was erroneous and prejudicial to the interests of the Revenue and if such a conclusion is arrived at on materials on record, it is not
necessary for him to record his final conclusion on the merits of the case and it is open to the Commissioner to record his prima facie opinion in that
matter and set aside the order of assessment and direct the Income Tax Officer to pass a fresh assessment order in accordance with law. The
order of the Appellate Tribunal that the Commissioner should record his final conclusion on the question, if accepted, would take away the powers
conferred upon the Commissioner u/s 263 of the Act to pass such order as the circumstances of the case would justify.
This court in Indian Textiles Vs. Commissioner of Income Tax, has taken a view that where the Income Tax Officer had given relief without
any proper verification then, such an order would be prejudicial to the interests of the Revenue and can be the subject-matter of revision. In K.A.
Ramaswamy Chettiar and Another Vs. Commissioner of Income Tax, , another Bench of this court held that when the Income Tax Officer is
expected to make an enquiry of a particular item of income and if he does not make any enquiry as expected, that would be a ground for the
Commissioner of Income Tax to interfere u/s 263 of the Act with the order passed by the Income Tax Officer as the order passed by the Income
Tax Officer can be construed to be an order which is erroneous and prejudicial to the interests of the Revenue.
Furthermore, it was a claim for weighted deduction made by the assessee and when the Income Tax Officer allowed the claim for weighted
deduction, he should have at least in a brief manner indicated whether the assessee was eligible to claim weighted deduction, under which
subsection of Section 35B of the Act the expenses claimed by the assessee would fall and whether the statutory conditions for allowing the
weighted deduction were fulfilled. Even if the order is wholly silent, the records should indicate that the Income Tax Officer has satisfied himself
that the statutory conditions were fulfilled. It is well settled that there cannot be a blanket allowance of weighted deduction.
The statement filed by the assessee before the Income Tax Officer shows that the expenditure was incurred by way of brokerage and
commission paid, and the Commissioner was, therefore, justified in coming to the prima facie conclusion that the assessee was not entitled to claim
weighted deduction under any one of the sub-clauses of Clause (b) of Section 35B(1) of the Act. The Commissioner has recorded a prima facie
finding that the expenses incurred do not appear to come under any specific sub-clause of Section 35B(1)(b) of the Act and the absence of his
final conclusion in the matter by the Commissioner would not in any way debar him from exercising his revisional jurisdiction nor would it render
the jurisdiction properly exercised by the Commissioner non est in law. Though the Appellate Tribunal referred to the claim of the asses-see that
the expenses would fall under Sub-clauses (ii) and (iv) of Section 35B(1)(b) of the Act, it has not recorded any finding that the view of the
Commissioner that they do not come under any sub-clauses of Section 35B(1)(b) of the Act was in any way erroneous. The Tribunal referred to
the order in the case of Indian Hotel Limited, and it is not clear how the decision in Indian Hotel Limited is relevant in considering the question
whether the expenses claimed would fall under any of the sub-clauses of Section 35B(1)(b) of the Act.
The Gujarat High Court in Commissioner of Income Tax Vs. M.M. Khambhatwala, , held that the Commissioner would be entitled to exercise
his power of revision if he is of the view that the order of the Income Tax Officer is erroneous and prejudicial to the interests of the Revenue and it
is open to the Commissioner to exercise the power even in a case where the issue is debatable. Therefore, the view of the Appellate Tribunal that
the Commissioner should have finally determined the matter regarding the deduction u/s 35B of the Act is not warranted on the plain terms of
Section 263 of the Act.
Learned counsel for the Revenue invited our attention to a decision of the Karnataka High Court in Chief Commissioner of Income Tax Vs.
Mysore Sales International Ltd., , wherein the Karnataka High Court held that the maintenance of the agency should be for the promotion of sale
and the commission paid for procuring a particular? sale would not qualify for weighted deduction. In Srivilas Cashew Co. Vs. Commissioner of
Income Tax, , the Kerala High Court has taken a view that the assessee would be entitled to weighted deduction on the commission paid to a local
agent u/s 35B of the Act. The decisions of the Karnataka and Kerala High Courts, in our opinion, turn on the merits of the case and it is not
necessary to express any view on the merits of the case.
Learned counsel for the assessee strongly placed reliance on a decision of the Bombay High Court in Commissioner of Income Tax Vs.
Gabriel India Ltd., , wherein the Bombay High Court was considering an order of the Commissioner of Income Tax cancelling the order of the
Income Tax Officer. In that case, the Commissioner found that the order of the Income Tax Officer did not contain any discussion with regard to
the allowability of the claim for deduction, which indicated the non-application of mind and, therefore, according to the Commissioner, the claim of
the assessee required further examination as to whether the expenditure in question was revenue or capital in nature. The Commissioner, therefore,
cancelled the assessment order with a direction to the Income Tax Officer to make a fresh assessment on the line indicated by him. The Bombay
High Court in the above case accepted the tests laid down by the Calcutta High Court in DAWJEE DADABHOY and CO. Vs. S. P. JAIN AND
ANOTHER., , wherein it was held that the words, ""prejudicial to the interests of the Revenue"" in Section 263 of the Act should be construed to
mean that the order of assessment challenged is such that it is not in accordance with law in consequence whereof the lawful revenue due to the
State has not been realised or cannot be realised. The Bombay High Court held that there must be materials available on record for the
Commissioner to satisfy himself, though prima facie, that the order of the Income Tax Officer was not in accordance with law in consequence
whereof the lawful revenue due to the State has not been realised or cannot be realised. The Bombay High Court held that merely because the
Income Tax Officer had not made an elaborate discussion about the allowance of the claim of the assessee would not render the order of the
Income Tax Officer erroneous and prejudicial to the interests of the Revenue. It is significant to notice, in the case before the Bombay High Court,
the Commissioner after invoking the revisional jurisdiction, has not recorded his prima facie view that the claim of the assessee was erroneous and
that the expenditure was not revenue in nature, but was capital in nature, but, merely directed the Income Tax Officer to re-examine the matter.
However, in the instant case, the Commissioner, on examination of records, prima facie came to the conclusion that payments of commission and
brokerage did not appear to come under any of the sub-clauses of Section 35B(1)(b) of the Act and he also came to the conclusion that the
Income Tax Officer had, in a perfunctory and mechanical manner, allowed the claim of the assessee and that the order was erroneous and
prejudicial to the interest of the Revenue as the Income Tax Officer allowed the claim without verifying under what sub-clause of Section 35B(1)
(b) of the Act, the claim would fall. Therefore, when the Commissioner prima facie came to the conclusion that the order passed by the Income
Tax Officer was not in accordance with law and the assessment records disclose that the Income Tax Officer had not undertaken the enquiry
which was expected of him before allowing the claim of the assessee for weighted deduction, we hold that the Tribunal was not justified in holding
that the Commissioner lacked the jurisdiction to exercise his power of revision.
Learned counsel for the assessee strongly placed reliance on a decision of this court in Venkatakrishna Rice Company Vs. Commissioner of
Income Tax, , wherein this court held as under (page 137) :
In our judgment, the expression ''prejudicial to the interests of the Revenue'' is not to be construed in a petty-fogging manner, but must be given a
dignified construction. It may be noticed that the use of the expression ''Revenue'', in our opinion, is significant. It denotes some kind of abstraction
or symbol in the same sense in which the expression ''crown'' is used to distinguish it from any person enthroned. The interests of the Revenue are
not to be equated to rupees and paise, merely, There is a biblical saying that we do not live by bread alone. Varying this saying, it may be said that
the Revenue does not live by tax alone. In this sense, therefore, the interests of the Revenue are not tied up merely with realising as much revenue
as possible, willy nilly, merely looking to the productivity aspect of taxation. The jurisdiction of the Commissioner u/s 263 is undoubtedly a
supervisory jurisdiction. It is intended for interference in special cases to counteract orders which are erroneous as well as prejudicial to the
interests of the, Revenue. In this context, therefore, the expression ''prejudicial to the interests of the Revenue'' must be regarded as involving a
conception of acts or orders which are subversive of the administration of revenue. There must be some grievous error in the order passed by the
Income Tax Officer, which might set a bad trend or pattern for similar assessments, which on a broad reckoning, the Commissioner might think to
be prejudicial to the interests of the Revenue administration. There might be cases where the Commissioner might wish to interfere with an order of
the Income Tax Officer in order to safeguard the fair name and reputation of the Income Tax Department without any thought of going into the
particular aspects of the assessment. Assessments which are mala fide, politically and communally motivated may be, however, set aside as being
prejudicial to the interests of the Revenue. It is unnecessary, for us to illustrate the point any further. All that we wish to observe is that the scope of
the interference under this section is not to set aside merely unfavourable orders and bring to tax some more money to the treasury. Nor is the
section meant to get at sheer escapement of revenue which, as is well known, is taken care of by provisions elsewhere in the Act such, for
instance, as Section 147 of the Act. The prejudice must be prejudice to the Revenue administration.
The above decision is distinguishable on the facts of the case as the Commissioner in the instant case has come to a prima facie view that the
order was not in accordance with law and, as such, it is prejudicial to the interests of the Revenue. Therefore, in our opinion, the Tribunal was not
correct in holding that the Commissioner lacked the jurisdiction and the Tribunal was also not correct in holding that the Commissioner was not
justified in exercising his powers of revision. Accordingly, we answer the first question of law in the negative, in favour of the Revenue and against
the assessee.
In so far as the second question of law is concerned, it relates to the question of merger. In our view, the order of the Income Tax Officer
which was the subject-matter of revision before the Commissioner u/s 263 of the Act did not merge with the order of the first appellate authority as
the subject-matter of appeal before the first appellate authority was different. Therefore, on the basis of the decisions of the Supreme Court in the
case of COMMISSIONER OF Income Tax Vs. SHRI ARBUDA MILLS LTD., and CIT v. Shree Manjunathesware Packing Products and
Camphor Works [1998] 231 ITR 53, the Tribunal was not correct in holding that there was a merger of the order of the Income Tax Officer with
the order of the Commissioner of Income Tax (Appeals) precluding the Commissioner from exercising his revisional powers. Our answer to the
second question of law also is in the negative and in favour of the Revenue.
In so far as the third question is concerned, it relates to the claim of the assessee on the merits of the case. We have seen that the
Commissioner in exercising his power of revision has not finally decided the question of allowability of deduction on the merits of the case. The
Tribunal also has not considered the question on the merits of the case. Therefore, it would not be proper or appropriate at this juncture to render
our answer to the third question of law. Since we are upholding the order of the Commissioner of Income Tax on the question of jurisdiction, we
are not answering the third question of law referred to us and we deem fit that it will be proper for the Tribunal to consider the question on the
merits. It is made clear that it will be open to the Tribunal to consider the claim or remit the matter to the Income Tax Officer to consider the
question on the merits of the claim. Hence, we are not answering the third question of law.
Accordingly, the questions referred to us are answered in the following manner :
1st question : It is answered in the negative and in favour of the Revenue.
2nd question : It is answered in the negative and in favour of the Revenue.
3rd question : The question is not answered.
The Revenue will be entitled to the costs of the reference of a sum of Rs. 1,500.