Principal Commissioner of Income Tax vs M/s. India Finance Limited

The subject matter of challenge is a judgement and order dated 11th December, 2014 passed by the Income Tax Appellate Tribunal "C" Bench, Kolkata in ITA No.252/Kol/2012 pertaining to the assessment year 2007-08 by which the learned Tribunal has set aside an order passed under Section 263 of the Income Tax Act. The aggrieved revenue has come up in appeal. The following substantial question of law has been raised:

"Whether on the facts and in the circumstances of the case the Tribunal was justified in law in setting aside the order of the Commissioner of Income Tax passed under section 263 of the Act completely ignoring the facts that the Assessing Officer, in original assessment order dated May 11, 2009 passed under section 143(3) of the Act, erroneously allowed the loss of Rs.3,17,02,725/- from purchase and sale of cotton knitted fabric without making any enquiry whatsoever, though the assessee was not in the said business of purchase and sale of cotton knitted fabric in earlier year, which is prejudicial to the interest of Revenue and its purported findings in this behalf are arbitrary, unreasonable and perverse?"

The assessee filed the return showing a total income of Rs.5,44,480/-. The assessee had shown loss of a sum of Rs.3,17,02,725/- allegedly incurred in purchase and sale of cotton knitted fabric. The aforesaid loss was set off from the other income of the assessee amounting to a sum of Rs.3,33,71,912/-. The assessment was completed under Section 143(3) by a cryptic order, which reads as follows:

"Return was filed on 17-10-2007 showing Total Income of Rs.5,44,480/-. In response to notice u/s 143(2) & 142(1) Shri Ashoke Kr. Goenka, A/R of the assessee appeared from time to time and explained the return. Papers in support of the return were filed. The case was heard and discussed. Assessed under section 143(3) on the total income of Rs.5,44,480/- as per computation filed. Allow credit for prepaid taxes. Issue copy of the order and D.N. to the assessee."

CIT was of the opinion that the aforesaid assessment order was erroneous and prejudicial to the revenue. He, therefore, set aside the aforesaid assessment order and directed the Assessing Officer to complete the assessment in accordance with law after affording opportunity of hearing to the assessee. It is this order, which has been set aside by the learned Tribunal. The following facts have not been disputed before us:

(a) The assessee was not in the business of sale and purchase of cotton yarn;

(b) There was no opening or closing stock of cotton yarn;

(c) Purchase and sale were all amongst the connected concerns which had the same address. This fact surfaced before the learned Tribunal.

(d) No details of purchases /sales are on the record; and

(e) Such details were not also called for.

These facts have neither been disputed before us by the learned Counsel appearing for the assessee nor were these facts contested before the learned Tribunal. There is a finding recorded by the CIT that "the assessment was also made hurriedly as is apparent from the records". This finding of the CIT has not been commented upon or reversed by the learned Tribunal. The learned Tribunal proceeded to set aside the order passed by the CIT for the following reasons:

(a) "All that is being said is that the assessee "very likely" has tried to reduce its income by booking fictitious loss and that non-verification appeared to be "highly suspicious". CIT''s powers under section 263 admittedly cannot be invoked on mere presumptions and surmises nor on suspicion."

(b) "By throwing allegation on the assessment proceedings on suspicion and presumptions, the assessment order is held to be erroneous and prejudicial to the interest of revenue."

(c) "No enquiry has been done by the ld. CIT. This is not permissible. This view of ours also finds support to the decision of the Hon''ble Jurisdictional High Court in the case of CIT v. J. L. Morrison, reported in 366 ITR 593 (Cal.)."

(d) "Just because the Assessing Officer does not make a complete recording of what was happened in the assessment proceedings per se does not make the assessment order erroneous and prejudicial to the interest of revenue."

The learned Tribunal has evidently failed to make a distinction between an inference and a presumption. Even in the case of a trial when the question arises as to whether a fact has been proved or not, the question has to be answered on the basis as to whether the evidence adduced probabilises the claim or contention of the plaintiff or the defendant, as the case may be. The learned Tribunal failed to notice the facts, which were not in dispute and have not also been disputed before us, which we have quoted above. It was only reasonable to infer that an attempt might have been made to reduce the income by booking fictitious loss. The CIT could not have recorded any definite finding in respect of a matter which he intended to refer to the Assessing Officer for further investigation. After recording a final opinion that the loss was in fact fictitious there would be no point in remanding the matter to the Assessing Officer. There can be no doubt that merely on the basis of presumption or surmise or suspicion, an order under Section 263 cannot be passed. The learned Tribunal failed to appreciate that in this case the inference drawn by the CIT was not based either on presumptions or surmises or suspicion.

The learned Tribunal was also wrong in proceeding on the basis that the judgement in the case of CIT v. J.L. Morrison, reported in 366 ITR 593 (Cal) supported its views. The point, which arose for consideration in that case, was whether the receipt was a capital receipt or a revenue receipt in the admitted facts and circumstances of that case. There was no dispute in that case with regard to the facts nor was there anything to be investigated or looked into. The question essentially was a question of law unlike the case before us, where an opportunity to the assessee is required to be given in fairness so that he can establish, if he wants to, that the loss was, in fact, incurred by him. If he did not incur the loss, he does not have a right to have the imaginary loss, set off against the total income.

It is true that the assessee has no hand nor has any say with regard to the notings to be made by the Assessing Officer in his order sheet. But that does not mean that an assertion that everything was looked into by the Assessing Officer has to be accepted even though such assertion is either opposed to the admitted facts and circumstances the case or when the assessee fails to prove, by adducing circumstantial evidence, his assertion.

For the aforesaid reasons, we are of the opinion that the learned Tribunal has not applied its mind to all the relevant materials and has not considered the same and therefore the conclusion drawn is perverse. Reference may in this regard be made to the judgement in the case of Collector of Customs v. Biswanath Mukherjee, reported in 1974 CLJ 251, wherein the following views were taken:

"It is, however, equally well settled that even in a writ petition under Article 226, the Court is entitled to interfere with the finding of the Tribunal on any question of fact which the Tribunal is competent to decide, if the Court is satisfied that the finding of the Tribunal is perverse and the finding of the Tribunal is considered to be perverse, if �

(a) The Tribunal has come to the finding on no evidence;

(b) The Tribunal has based the finding on materials not admissible and has excluded relevant materials.

(c) The Tribunal has not applied its mind to all the relevant materials and has not considered the same in coming to the conclusion.

(d) The Tribunal has come to the conclusion by considering material which is irrelevant or by considering material which is partly relevant and partly irrelevant.

(e) The Tribunal has disabled itself in reaching a fair decision by some considerations extraneous to the evidence and the merits of the case.

(f) The Tribunal has based its finding upon conjectures, surmises and suspicion.

(g) The Tribunal has based the finding upon a view of the facts which could not reasonably be entertained or the facts found were such that no person acting judicially and properly instructed as to the relevant law could have found.

(h) If the Tribunal in conducting the enquiry has acted in flagrant disregard of the rules of procedure or has violated the principles of natural justice, where no particular procedure is prescribed.

In any of the above cases and in any other case where the Court, in the particular facts of the case, considers the finding of the Tribunal to be perverse and where the Court is of the opinion that justice of the case so requires, the Court is entitled to interfere and set aside the finding of the Tribunal on any question of fact. In such cases, the Court holds that there is an error of law on any of the above grounds."

For the aforesaid reason, the appeal and the question is answered in the negative.

Parties shall, however, bear their own costs.