* HON'BLE SRI JUSTICE DILIP B. BHOSALE AND HON'BLE SRI JUSTICE A.RAMALINGESWARA RAO I.T.T.A.No.36 of 2004 % 31.03.2015 Between: Commissioner of Income Tax-II, Visakhapatnam. Petitioner AND Shri Varanasi Khanta Rao, Prop.Sri Sai Srinivasa Modern Rice Mill, Avalangi Village, Srikakulam Mandal, Srikakulam District. Respondent Counsel for petitioner: Senior Counsel Sri S.R.Ashok Counsel for Respondents : Sri Challa Gunaranjan < Gist: > Head Note: ? CITATIONS: 1. (1968) 67 ITR 84 2. (1973) 88 ITR 323 3. (2000) 2 SCC 718 HON'BLE SRI JUSTICE DILIP B. BHOSALE AND HON'BLE SRI JUSTICE A.RAMALINGESWARA RAO I.T.T.A.No.36 of 2004 JUDGMENT: (Per Hon ble Sri Justice A.Ramalingeswara Rao) This appeal is filed by Revenue against order of Income Tax Appellate Tribunal, Visakhapatnam, in I.T.A.No.375/V/2002, dated 20.11.2002, allowing appeal of assessee for year 1999-2000. following substantial questions of law were framed for our consideration: (a) Whether Appellate Tribunal is justified in holding that revisional proceedings are vitiated on ground of lack of jurisdiction? (b) Whether observations of Appellate Tribunal with regard to jurisdictional constraints u/s.263 are not based on statutory language employed in Sec.263 of I.T.Act? (c) Whether Appellate Tribunal is justified in holding that cancellation of assessment by Commissioner and ordering fresh enquiry is beyond jurisdiction of Commissioner U/s.263? (d) Whether Appellate Tribunal is justified in entering into merits of case and recording findings on factual matrix in absence of placement of any material either before assessing authority or revisional authority much less findings were recorded by them? Though above questions of law were framed, all questions centered round power and jurisdiction of revisional authority under Section 263 of Income Tax Act (for short, Act), and hence in facts and circumstances of case, we reframe substantial question of law as follows for our consideration: Whether on facts and in circumstances of case, Income Tax Appellate Tribunal, Visakhapatnam, is justified in holding that Commissioner of Income Tax did not exercise his jurisdiction under Section 263 of Income Tax Act properly? assessee is Proprietor of Sri Sai Srinivasa Modern Rice Mill, Srikakulam, and he completed construction of rice mill by March 1999. He filed return of income for assessment year 1999-2000 declaring income of Rs.4,60,960/-. It was processed under Section 143(1) of Act. assessee was connected to Sri Venkata Santhamani Modern Rice, Groundnut Oil Mill, in respect of which survey under Section 133A of Act was conducted and case of assessee was also taken up for scrutiny by Assessing Officer. Assessing Officer passed order on 15.03.2000 as follows: assessee has filed return of income for Assessment year 1999-2000 on 31.12.1999 by declaring income of Rs.4,60,960/- and same has been processed U/s.143(1). This case is connected case to Sri Venkata Santhamani Modern Rice G.N.Oil Mill where in Survey under Section 133A was conducted. Hence it has been taken up for scrutiny and notices U/s.143(2) have been issued. In response there to assessee and his Authorised Representative appeared and discussed about case. As assessee has filed return of income by admitting income and paid taxes as agreed at time of survey, assessment is completed by accepting returned income. Rs. Income Returned : 4,60,960 Add: Agrl. Income : 38,200 _________ Total : 4,99,160 _________ Income Tax thereon : 1,23,748 Less: Rebate on Agrl.Income 6,640 _________ 1,17,108 Less: Rebate U/s.88 7,457 _________ 1,09,651 Add: Int. U/s.234B & C 19,349 _________ 1,29,000 Less: Prepaid Taxed 1,29,000 _________ Tax payable NIL ------------ Commissioner of Income Tax 2, Visakhapatnam, called for assessment record of assessee and on basis of verification of material available in assessment records he found that order of assessment was erroneous in so far as it was prejudicial to interests of revenue on following grounds: i) There was short accounting of yield of finished rice to extent of 18% of total paddy consumed which amounted to 5653.95 quintals of finished rice, and it resulted in short charge of tax of about Rs.19,04,535/-; i i ) As per tax audit report, valuation of closing stock was not made at cost price of paddy purchased during financial year 1998- 1999; iii) There was discrepancy in purchase cost of 2nd gunnies as compared to 1st gunnies and also sale price of 2nd gunnies as compared to valuation adopted in respect of closing stock of 2nd gunnies; i v ) There was apparent discrepancy between raw material cost of each unit and sale price of finished rice amounting to Rs.19/- per unit of finished rice sold; v ) correctness of credit liabilities of 102 parties with their full addresses and year wise breakup of past years was not verified by Assessing Officer; v i ) deduction of interest liability towards other concerns was not properly examined, and vii) rebate under Section 88 of Act should not have been allowed for NSC deposit of Rs.11,000/-. show cause notice was issued to assessee requiring him to submit clarification or explanation to above issues and also to show cause why assessment made under Section 143(3) of Act dated 15.03.2000 should not be set aside. assessee appeared through his representative and submitted written explanation to show cause notice. After considering explanation, Commissioner considered it desirable to restore entire assessment order for making fresh assessment de novo and in concluding paragraph of his order he observed as follows: In totality of facts and circumstances of case, assessment order passed by Assessing Officer u/s.143(3) on 15.03.2000 is hereby set aside and A.O. is directed to initiate fresh assessment proceedings and carry out necessary enquiries/cross verification in respect of various points stated in show-cause notice served u/s.263 of I.T.Act, 1961 and provide reasonable opportunity to assessee to produce its regular books of accounts/bills and vouchers/documents which he may choose to rely upon for substantiating his own claim. During fresh assessment proceedings, A.O should call for minimum support of price fixed by State Govt., towards purchase cost of different variety of paddy for F.Y.98-99 and also sale price of rice fixed in respect of levy rice sold to FCI for F.Y.98-99 and examine whether purchase cost of paddy was properly shown in accounts of assessee and sale price of rice was properly accounted for. Wherever, purchase cost of paddy is found to be shown at higher amounts compared to minimum support price fixed by State Govt. for F.Y.98-99, necessary cross verification may be carried out before allowing assessee s claim. complete details of sundry creditors amounting to Rs.33,60,999/- as on 31.03.99 should be cross verified from creditors concerned including subsequent date of payment of such credit liabilities to each creditor concerned after 31.3.99. Thereafter fresh assessment order may be passed in accordance with relevant provisions of law. While coming to said conclusion he relied on decisions of Supreme Court in Rampyari Devi Saraogi v. Commissioner of Income Tax and Smt.Tara Devi Aggarwal v. Commissioner of Income Tax. assessee went in appeal before Tribunal, wherein reliance of Commissioner on above decisions was disputed. Tribunal considered above issues and replies furnished by assessee and came to conclusion that above points raised by Commissioner of Income Tax in no way affect income of assessee and render assessment proceeding erroneous and prejudicial to interests of revenue. Tribunal further held that after agreed assessment is completed on basis of discussion and deliberations made with assessee and his authorized representative by Assessing Officer, Commissioner of Income Tax is not supposed to raise issue again and step into shoes of Assessing Officer like appellate authority. After holding so, Tribunal concluded as follows: After all his powers as per provisions of Section 263 are supervisory in nature and not like that of appellate authority. It will not be out of place to mention here that legislature while compiling statute has assigned only to first appellate authority powers of AO. By virtue of that power only first appellate authority is supposed to step into shoes of AO and even can enhance assessment. Even Tribunal has not been assigned with that power of enhancement. Therefore, in all fitness of things and in all fairness legislature s intention has to be properly understood and supervisory power of CIT should not be misused simply because order passed by AO was cryptic one as has been in impugned case. Hence in our considered view when issue raised by CIT in show cause notice in pursuance to invoking of Section 263 in no way are fatal to interest of Revenue when assessee has already disclosed income at time of survey u/s.133(A) amounting to Rs.3,60,000/- and has accepted same on agreed basis after due discussions and deliberations along with his authorized representative before AO at time of assessment proceedings which means sticking to his disclosure at time of survey, in all fairness there does not remain any scope for CIT to invoke Section 263 and assume his revisional jurisdiction. Further we do not find any infirmity in order of AO in impugned case as per two limbs contemplated u/s.263 (i.e., erroneous and prejudicial to interest of Revenue); hence in our considered opinion in present facts and circumstances of case assumption of jurisdiction u/s.263 by CIT does not stand on sound footing. We therefore, set aside order of CIT and restore order of AO. Against said finding recorded by Tribunal, present appeal is filed by Revenue. It is contended by learned Counsel for Revenue that assessment order is cryptic and points raised by Commissioner of Income Tax are errors, which are prejudicial to interests of revenue. Learned Counsel for assessee, on other hand, submitted that since Assessing Officer discussed about case with assessee and filed return of income admitting income, paid taxes as agreed at time of survey and assessment was completed by accepting return of income, Commissioner cannot issue order for de novo enquiry in exercise of his powers under Section 263 of Act. Section 263 of Act reads as follows: Revision of orders prejudicial to revenue. 263. (1) Principal Commissioner or Commissioner may call for and examine record of any proceeding under this Act, and if he considers that any order passed therein by Assessing Officer is erroneous in so far as it is prejudicial to interests of revenue, he may, after giving assessee opportunity of being heard and after making or causing to be made such inquiry as he deems necessary, pass such order thereon as circumstances of case justify, including order enhancing or modifying assessment, or cancelling assessment and directing fresh assessment. (2) No order shall be made under sub-section (1) after expiry of two years from end of financial year in which order sought to be revised was passed. (3) Notwithstanding anything contained in sub-section (2), order in revision under this section may be passed at any time in case of order which has been passed in consequence of, or to give effect to, any finding or direction contained in order of Appellate Tribunal, National Tax Tribunal, High Court or Supreme Court On reading of above provision it is clear that only precondition for revising order of Assessing Officer is that order of Assessing Officer should be erroneous in so far as it is prejudicial to interests of revenue. Commissioner pointed out errors in order of Assessing Officer and perusal of errors would clearly disclose prejudicial interest of revenue. vesting of such power in hands of Commissioner under Section 263 of Act is to see that Assessing Officer does not commit any error affecting interests of revenue. We will consider cases relied on by learned Commissioner of Income Tax while passing order impugned before Tribunal. first case is Rampyari Devi Saraogi (supra) decided by Supreme Court. In said case appellant, who was assessee, was sent notice by Commissioner of Income Tax, West Bengal, under Section 33B of Income Tax Act, 1922, proposing to pass order under Section 33B of said Act and, accordingly, giving opportunity to her. Tax Consultant, on behalf of assessee, wrote letter to Commissioner stating that show cause notice was bad in law, illegal, void and without jurisdiction. However, assessee appeared before Commissioner, and Commissioner passed order on same day cancelling assessments made in favour of assessee and directing Income Tax Officer to do fresh assessments according to law after making proper enquires and investigation with regard to jurisdiction, carrying on of business, possession of initial capital, gifts received and sources of moneys invested in name of assessee. same was challenged before High Court of Calcutta under Article 226 of Constitution of India, and Division Bench of High Court dismissed Writ Petition. While upholding order of Division Bench of High Court, Supreme Court, speaking through three Judge Bench, held as follows: It is not necessary to further detail reasons given by Commissioner because on face of record orders were prejudicial to interest of revenue, and even if facts which Commissioner introduced regarding enquiries made by him had been indicated to assessee, result would have been same. assessee, in our view, has not in any way suffered from failure of Commissioner to indicate results of enquiries, mentioned above. Moreover, assessee will have full opportunity of showing to Income Tax officer whether he had jurisdiction or not and whether income assessed in assessment orders which were originally passed was correct or not. said decision was followed by another three Judge Bench of Supreme Court in Smt.Tara Devi Aggarwal (supra). On perusal of above two judgments, we have no doubt that Commissioner of Income Tax followed ratio laid down in above decisions and exercised his powers under Section 263 of Act. I n Malabar Industrial Co.Ltd. v. Commissioner of Income Tax scope of revisional power of Commissioner was examined. It was held that Commissioner has to be satisfied of twin conditions, namely, i) order of Assessing Officer sought to be revised is erroneous; and ii) it is prejudicial to interests of revenue. If one of them is absent, it was also held that recourse cannot be had to Section 263(1) of Act. It was also held that provision cannot be invoked to correct each and every type of mistake or error committed by Assessing Officer. incorrect assumption of facts or incorrect application of law will satisfy requirement of order being erroneous. It was also held that order passed without applying principles of natural justice or without application of mind fall under said category. phrase prejudicial to interests of revenue was explained as follows: 8. phrase prejudicial to interests of Revenue is not expression of art and is not defined in Act. Understood in its ordinary meaning it is of wide import and is not conferred to loss of tax. High Court of Calcutta in Dawjee Dadabhoy & Co. v. S.P. Jain & Anr. [(1957) 31 ITR 872 (Cal)], High Court of Karnataka in Commissioner of Income-tax, Mysore v. T. Narayana Pai [(1975) 98 ITR 422 (Kant)], High Court of Bombay in Commissioner of Income-tax v. Gabriel India Ltd. [(1993) 203 ITR 108 (Bom)] and High Court of Gujarat in Commissioner of Income-tax v. Smt. Minalben S. [(1995) 215 ITR 81 (Guj)] treated loss of tax as prejudicial to interests of revenue. 9. Mr. Abaraham relied on judgment of Division Bench of High Court of Madras in Venkatakrishna Rice Company v. Commissioner of Income-tax [(1987) 163 ITR 129 (Mad)] interpreting "prejudicial to interests of revenue". High Court held: "In this context, (it must) be regarded as involving conception of acts or orders which are subversive of administration of revenue. There must be some grievous error in order passed by Income-tax Officer, which might set bad trend or pattern for similar assessments, which on broad reckoning, Commissioner might think to be prejudicial to interests of Revenue Administration". In our view this interpretation is too narrow to merit acceptance. scheme of Act is to levy and collect tax in accordance with provisions of Act and this task is entrusted to Revenue. If due to erroneous order of Income-tax Officer, Revenue is losing tax lawfully payable by person, it will certainly be prejudicial to interests of Revenue. 10. phrase prejudicial to interests of Revenue has to be read in conjunction with erroneous order passed by Assessing Officer. Every loss of revenue as consequence of order of Assessing Officer cannot be treated as prejudicial to interests of Revenue, for example, when Income-tax Officer adopted one of courses permissible in law and it has resulted in loss of revenue; or where two views are possible and Income- tax Officer has taken one view with which Commissioner does not agree, it cannot be treated as erroneous order prejudicial to interests of Revenue unless view taken by Income- tax Officer is unsustainable in law. It has been held by this Court that where sum not earned by person is assessed as income in his hands on his so offering, order passed by Assessing Officer accepting same as such will be erroneous and prejudicial to interests of Revenue. ( S e e Rampyari Devi Saraogi v. Commissioner of Income tax [(1968) 67 ITR 84 (SC)] and in Smt. Tara Devi Aggarwal v. Commissioner of Income-tax, West Bengal. [(1973) 88 ITR 323 : (1973) 3 SCC 482 : 1973 SCC (Tax) 318] In instant case, perusal of order of Assessing Officer would show that return of income filed by assessee was accepted and tax was finalized. From order of Assessing Officer, one cannot deduce whether errors pointed out by Commissioner of Income Tax were considered by Assessing Officer or not. Commissioner of Income Tax, not only pointed out errors, but also had shown effect of same on revenue. It is not known how Tribunal has come to conclusion that errors have no effect on revenue. Tribunal ought not to have taken into consideration explanation submitted by assessee before Commissioner for coming to conclusion that errors pointed out by Commissioner have no effect on revenue. Ultimately, it is for Assessing Officer, at time of de novo enquiry, to consider whether explanation offered by assessee to points raised by Commissioner is proper or not. When once Commissioner has got power to point out errors which had effect on revenue, Tribunal cannot sit as appellate authority on order of Commissioner passed under Section 263 of Act. If power exists in Commissioner and is exercised by him after satisfying himself on facts of case, it is not for Tribunal to re-appreciate said satisfaction of Commissioner. It is only when Commissioner does not exercise power properly in satisfying twin test contemplated under Section 263 of Act, order of Commissioner can be held to be perverse, but not by re-appreciating order of Commissioner. prima facie perusal of order of Commissioner shows that Commissioner was satisfied that there were errors which had effect on interests of revenue and it needed further probe by Assessing Officer. In facts and circumstances of case, we are satisfied that order passed by Commissioner is proper and validly exercised as per powers conferred on him under Section 263 of Act and we, accordingly, set aside order of Tribunal. Hence, we hold substantial question of law in favour of Revenue and against assessee. appeal is, accordingly, allowed. miscellaneous petitions, if any, stand disposed of. There shall be no order as to costs. ______________________ (DILIP B. BHOSALE, J) ________________________________ (A.RAMALINGESWARA RAO, J) 31.03.2015 vs Commissioner of Income-tax-II, Visakhapatnam v. Shri Varanasi Khanta Rao