[S.263 IT Act] Revisionary Power Can Be Invoked When Order Meets Twin Conditions Of Being Erroneous, Prejudicial To Interest Of Revenue: Delhi HC

The provision confers power of revision upon the Principal Commissioner or Commissioner, as the case may be.

It stipulates that the Commissioner may call for and examine the records if he considers that any order passed by the AO is erroneous in so far as it is prejudicial to the interests of the revenue and he may, after giving the assessee an opportunity of being heard and after making inquiry, pass appropriate orders- including an order enhancing or modifying the assessment, or canceling the assessment and directing a fresh assessment.

A division bench of Justices Vibhu Bakhru and Swarana Kanta Sharma observed,

“Twin conditions have to be met for assuming jurisdiction under Section 263 of the Act, and the PCIT has to form an opinion that the order passed by the AO is “erroneous” and “prejudicial to the interests of the Revenue.”

If the AO had applied his mind and had arrived at a plausible view, the same would not be amenable to a revision under Section 263 of the Act, the Court clarified.

“However, if the AO has not applied his mind and had come to an erroneous conclusion without making any enquiries, the CIT may be well within his jurisdiction to pass an order under Section 263 if he finds that the assessment order is erroneous and prejudicial to the interest of the revenue,” it added.

The observation was made while hearing Revenue's appeal against ITAT order which set aside Principal Commissioner's (PCIT) order under Section 263 whereby the AO's order determining assessee's land as “agricultural” and exempt from capital gain was found to be erroneous.

The PCIT had invoked its powers upon finding that the AO had accepted the assessee's claim regarding nature of land without making any independent inquiry or verifying the records.

The ITAT however set aside the PCIT order stating that there was no finding recorded by the PCIT, after the receipt of the replies from the assessee, that the assessment order was erroneous and prejudicial to the interest of the Revenue.

Before the High Court, the Revenue contended that ITAT did not consider Explanation 2(a) to Section 263 of the Act, which provides that jurisdiction can be exercised by the PCIT in case the AO has passed the order without making inquiries or verification.

It argued that the AO did not conduct inquiries with regard to the claims of the assessee, and did not obtain information from concerned authorities for verification of distance of the land in question from the municipal limits, which is essential for determining whether it is agricultural in nature.

Significant to note that Explanation 2 was added to the provision in the year 2015 and the case at hand pertained to AY 2013-14.

The assessee, affected by PCIT order, contended that the authority did not specifically hold that the order passed by the AO was erroneous and prejudicial to the interests of the Revenue. It was contended that unless such twin findings are recorded by the PCIT, after the receipt of response from the assessee, a valid order under Section 263 of the Act could not be passed.

On examining the merits of the case, the High Court found that no inquiry, in fact, was conducted by the AO before passing the assessment order.

It observed,

“while invoking the provisions of Section 263 of the Act against the order passed by the AO under Section 143(3) of the Act, the PCIT emphasized that the AO did not scrutinize the critical documents, particularly those concerned with the claim of the assessee with respect to the land being agricultural in nature and its sale being exempt from capital gains tax.”

Court then cited Commissioner of Income Tax v. Sunbeam Auto Ltd.: (2011) to highlight the distinction between “lack of inquiry” and “inadequate enquiry” conducted by the AO.

It was held therein by a coordinate bench of the High Court held that 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 Act, 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.

The High Court also relied on Tara Devi Aggarwal v. Commissioner of Income-Tax, West Bengal, Calcutta: (1973) where the Supreme Court upheld the finding of the CIT that the assessments made by the ITO were made in haste “without making any enquiry or investigation” into the antecedents of the assessee.

The High Court found the present case not to be one where the enquiries conducted by the AO were inadequate. Rather, it held this is a case of lack of enquiry as the AO had not conducted any enquiry to verify whether the land in question was beyond the prescribed municipal limits.

“It is apparent that no enquiry to the said effect was conducted by the AO and there is no material before the AO, other than the self serving statement of the assessee, to corroborate the same. Therefore, the present case would be one where the absence of any effective inquiry and a total non-application of mind by the AO is evident, and thus, the order passed by the AO would clearly fall within the meaning of an “erroneous order”. The order is also, undisputedly, prejudicial to the interests of the Revenue inasmuch as it results in loss of the Revenue in the form of tax,” Court held, emphasizing on the twin conditions.

Court also noted that though the case pertained to AY prior to insertion of Explanation 2, however, the provision even prior to the said amendment stipulated the mandatory requirement of the order being “erroneous” as well as “prejudicial to the interests of the Revenue”.

Thus the Court held that the invocation of provision by PCIT was justified.

It pointed out that the scope of these words was explained by the Supreme Court in Malabar Industrial Co. Ltd v. CIT (2000), much prior to the 2015 amendment. It was held therein that an order passed by an assessing officer can be deemed erroneous if it is based on incorrect assumption of facts or an incorrect application of law, and also if it is passed without applying the principles of natural justice or without application of mind.

Similarly, in Gee Vee Enterprise v. Additional Commissioner of Income Tax: (1975) the High Court had held that the Commissioner can regard the order as erroneous on the ground that in the circumstances of the case the officer should have made further inquiries before accepting the statements made by the assessee in the return.

“We are thus of the view that the PCIT had exercised the jurisdiction under Section 263 of the Act correctly and legally,” the High Court held and allowed the appeal.

Appearance: SSC Aseem Chawla with Advocate Pratishtha Chaudhary for Revenue; Advocate Rashmi Chopra for Respondent

Case title: Pr. Commissioner Of Income Tax Delhi -11 v. Sangeeta Jain

Case no.: ITA 1092/2018

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