Smita Rohit Gupta Vs PCIT-1 (Bombay High Court)
Summary: The Bombay High Court quashed an order passed by the Principal Commissioner of Income Tax under Section 264 of the Income-tax Act, 1961 and remanded the matter for fresh consideration on merits. The Court held that the revisional powers under Section 264 are wide and that the Commissioner was required to examine whether the income in question was actually taxable, particularly after the petitioner had subsequently complied with the payment requirements under the Income Declaration Scheme, 2016 (IDS).
The petitioner, an individual, had filed a declaration under the IDS. Under the Scheme, the tax, surcharge and penalty were payable in three instalments. She paid the first instalment but defaulted on the remaining two. Consequently, under Clause 3 of Section 187 of the Finance Act, 2016, her declaration was deemed never to have been made under the IDS. Section 197(b) consequently made the undisclosed income chargeable to tax under the Income-tax Act in the previous year in which the declaration was made. The petitioner therefore filed a revised return of income.
Subsequently, the Finance (No. 2) Act, 2019 inserted a proviso to Section 187(1) of the Finance Act, 2016. The proviso empowered the Central Government to specify persons who could make payment of the outstanding tax, surcharge and penalty, together with interest, within a notified period. Pursuant to this provision, Notification No. 103 of 2019 dated 13 December 2019 permitted persons who had not earlier paid the tax under the Scheme to make the payment by 31 January 2020, along with applicable interest. The petitioner was covered by the Notification.
The petitioner thereafter applied on 13 January 2020 to revive her declaration and sought withdrawal of the earlier order passed under Section 187(3). She was permitted to pay the balance amount with interest. On 18 January 2020, she paid Rs.37,71,800/-. Respondent No.1 subsequently issued Form No.4 on 22 January 2020, recording that the declaration made on 30 September 2016 had been accepted and that the petitioner had paid the entire tax due under the Scheme. The facts relating to payment and acceptance of the declaration were not disputed in the subsequent proceedings.
The consequence of the revived and accepted declaration was significant. Section 188 of the IDS Finance Act, 2016 provides that undisclosed income declared in accordance with Section 183 is not to be included in the declarant’s total income for any assessment year under the Income-tax Act where the prescribed tax, surcharge and penalty are paid within the statutory framework. Since the petitioner had ultimately paid the tax, surcharge and penalty along with interest, the undisclosed income of Rs.85,96,886/- could not, according to the Court, be included in her taxable income.
By the time the petitioner sought to correct her return, however, the period for filing a revised return had expired. She therefore approached the Principal Commissioner under Section 264 of the Income-tax Act. The Commissioner condoned the delay in filing the revision application but rejected the claim on merits. The Commissioner reasoned that the revised return had been voluntarily filed on 2 November 2017, processed under Section 143(1) on 19 September 2018, and that there was consequently no error in the processing order warranting exercise of Section 264.
Before the High Court, the Revenue relied upon the Supreme Court decision in ACIT v. Rajesh Jhaveri Stock Brokers (P) Ltd., contending that processing under Section 143(1) did not constitute an assessment order and therefore the Commissioner was justified in refusing to entertain the Section 264 application. The Bombay High Court rejected the applicability of that decision to the present facts. It noted that Rajesh Jhaveri concerned the operation of Section 147 and the question whether a change of opinion could arise where an order under Section 143(1)(a) had been made. The issue before the Court in the present case was instead the scope of the Commissioner’s revisional jurisdiction under Section 264.
The Court relied upon Hindustan Diamond Company Pvt. Ltd. v. CIT, where the Bombay High Court had held that Section 264 confers wide jurisdiction on the Commissioner. The power is intended to address situations where an aggrieved assessee cannot obtain relief from the appellate authority and has no other effective remedy under the Act. The Court had further held that exercise of Section 264 is not restricted by the Assessing Officer’s power to make adjustments under Section 143(1), and that relief may be granted under Section 264 even where the Assessing Officer could not have made the corresponding adjustment under Section 143(1).
The Court also referred to Vijay Gupta v. CIT, Delhi-III, in which the Delhi High Court held that the expression “any order” in Section 264 gives the provision a broad scope. The power is not confined merely to errors committed by subordinate authorities; it can also extend to errors committed by assessees themselves, including circumstances in which a legitimate claim was omitted from the original return and subsequently raised for the first time in a Section 264 application.
Applying these principles, the Bombay High Court held that the Commissioner was bound to consider whether the petitioner’s income was taxable and, if so, to what extent. Since the petitioner had ultimately paid the tax, surcharge and penalty with interest under the mechanism made available pursuant to the 2019 amendment and Notification, Section 188 operated so that the declared undisclosed income could not be included in her taxable income. The Commissioner therefore ought to have exercised the power under Section 264 and decided the matter on merits.
The High Court accordingly quashed and set aside the impugned order dated 26 March 2021 and remanded the matter to Respondent No.1 for decision on merits. The Commissioner was directed to give the petitioner a personal hearing, with at least five working days’ notice, and to pass a reasoned order dealing with all her submissions. The matter was directed to be disposed of within eight weeks.
Cases Discussed
- ACIT v. Rajesh Jhaveri Stock Brokers (P) Ltd. — considered by the Revenue but held inapplicable because the Supreme Court decision concerned Section 147 and the effect of processing under Section 143(1), whereas the present case concerned the scope of revision under Section 264.
- Hindustan Diamond Company Pvt. Ltd. v. CIT — relied upon for the principle that Section 264 confers wide revisional jurisdiction and that relief can be granted even where the Assessing Officer could not make an adjustment under Section 143(1).
- Vijay Gupta v. CIT, Delhi-III — relied upon for the principle that Section 264 can extend to errors committed by an assessee and to legitimate claims not made in the original return but subsequently raised in revision.
FULL TEXT OF THE JUDGMENT/ORDER OF BOMBAY HIGH COURT
1. Petitioner is an individual who had filed a declaration under the Income Declaration Scheme, 2016 (“IDS”). Under the Scheme the entire payment of tax was to be made in three instalments: 25% taxes, surcharge and penalty in first instalment; for an amount not less than 50% of such tax, surcharge and penalty as reduced by the amount paid in the second instalment; and for the whole amount to be paid as reduced by the amounts earlier paid in the third instalment. Admittedly, Petitioner made payment of the first instalment but defaulted the remaining two instalments. In view of the default, as provided under Clause 3 of Section 187 of the IDS and as provided under Section 197(b) of the Finance Act, 2016 the undisclosed income shall be chargeable to tax under the Income-tax Act, 1961 (” Act”) in the previous year in which the declaration was made.
In view thereof, Petitioner filed revised return of income.
2. Subsequently vide Finance (No.2) Act, 2019, a proviso was inserted in Section 187(1) of the Finance Act, 2016 which provided that where the amount of tax, surcharge and penalty, has not been paid within the due date notified under this sub-section, the Central Government may, by Notification in the Official Gazette, specify class of persons, who may, make the payment of such amounts on or before such date as may be notified by the Central Government, along with the interest on such amount @ 1% for every month or part of a month comprised in the period commencing on the date immediately following the due date and ending on the date of such payment. Using the said power, the Central Government issued Notification bearing number 103 of 2019 dated 13th December 2019 wherein the Central Government allowed every person who did not pay tax earlier under the Scheme, to pay the tax upto 31st January 2020 along with the interest. Petitioner was covered by the said Notification. Petitioner made use of the opportunity to revive the declaration under the Scheme. Accordingly, Petitioner made an application vide letter dated 13th January 2020 showing her intention to pay balance instalments along with interest under the Scheme and requested withdrawal of the order dated 24th May 2018 that been passed under Section 187(3) of the IDS. Petitioner was permitted to pay balance amount along with interest under the Scheme. Petitioner, on 18th January 2020, paid a sum of Rs.37,71,800/-. On payment of the amount, Respondent No.1 also issued Form No.4 on 22nd January 2020. Form No.4, copy whereof is at Exhibit ‘O’ to the Petition, also mentions that declaration made on 30th September 2016 has been accepted and that Petitioner has paid entire tax due under the Scheme. In the impugned order dated 20th March 2021, these facts are not disputed. In fact they have been accepted as reflecting the true facts.
3. As a result of the said acceptance of the declaration of Petitioner under the IDS, amount of undisclosed income of Rs.85,96,886/- could not have been taxed under the Act as per Section 188 of the IDS Finance Act, 2016. The time limit, however, to file revised return had expired. Left with no option, Petitioner, therefore, moved an application under Section 264 of the Act before Respondent No.1. Respondent No.1 provided an opportunity to Petitioner to explain her case and also asked Assessing Officer to submit a report after ascertaining correctness of the contentions of Petitioner. The Assessing Officer submitted detailed report dated 8th March 2021 wherein the Assessing Officer submitted that assessee should file revision petition within one year from the date of the order sought to be revised but the application has not been made in time. At the same time, the Assessing Officer also submitted that considering the circumstances of the case, delay may be condoned. Impugned order does not reflect anything contrary to what Petitioner submitted regarding the payment under the IDS.
4. Respondent No.1 condoned the delay but refused to grant relief to Petitioner on the merits of the case. Paragraph 5 of the impugned order dated 26th March 2021 reads as under: “
5. Coming to merit of the case, as the assessee has filed his revised return of income voluntarily on 2.11.2017 by disclosing the return income at Rs.9419001, which has been processed under Section 143(1) of the Act on 19.9.2018. Since revised return was processed on the basis of details filed by the assessee and therefore there is no error in order of processing passed on 19.9.2018. Thus, the application does not come under preview of 264 of the Act.”
5. Mr. Manwani relying upon judgment of the Hon’ble Apex Court in ACIT v Rajesh Jhaveri Stock Brokers (P) Ltd. 1 submitted that since Petitioner had filed returns under Section 139 and that was processed under Section 143(1) of the Act, that processing order will not be an order and, therefore, Respondent No.1 was justified in not entertaining application under Section 264 of the Act.
6. In our view, judgment of the Hon’ble Apex Court in Rajesh Jhaveri (Supra) will not be applicable to the facts and circumstances of the case because that was a case where the Court was considering the provisions of Section 147 for re-opening the assessment. The Court was considering whether the question of change of opinion would arise when an order under Section 143(1)(a) of the Act had been passed.
7. The provisions of Section 264 and the power available to the Commissioner to exercise under Section 264 of the Act came up for consideration before the Division Bench of this Court in Hindustan Diamond Company Pvt. Ltd. v. CIT 2. The Division Bench was pleased to observe that exercise of power under Section 264 was not subject to the power of the Assessing Officer to make adjustment under Section 143(1) of the Act. The Court held that power of the Commissioner under Section 264 is rather wide and even the errors committed could be rectified. Paragraph 6 of the Hindustan Diamond Company Pvt. Ltd. (Supra) reads as under: “
6. Having heard the Counsel on both sides, we are of the opinion that the Commissioner was not justified in rejecting the revision application of the assessee. As rightly contended by Mr. Inamdar, Section 264 confers wide jurisdiction on the Commissioner. Proceedings under Section 264 are intended to meet the situation faced by an aggrieved assessee who is unable to approach the appellate authority for relief and has no other alternate remedy available under the Act. In the light of the decision of the Apex Court in the case of Bharat Earth Movers (supra), the provision for Leave Encashment being a current liability the assessee is entitled for deduction of that amount. The Assessing Officer had accepted the return, ignoring the request of the assessee for deduction of the above amount. Therefore, the relief which was not granted by the Assessing Officer could be granted by the Commissioner under Section 264. Before allowing such deduction if any further enquiry was required to be done, the Commissioner could have either himself enquired or directed the Assessing Officer to do the needful. However, the Commissioner has declined to exercise power under Section 264 because of amendment to Section 143(1) by Finance Act, 1999. Powers of the Assessing Officer to make prima facie adjustments under Section 143(1), done away with by Finance Act, 1999 (with effect from 1st June, 1999) does not in any way effect the right of the Commissioner under Section 265 of the Act to grant relief to the assessee if available to the assessee as per the decision of the Apex Court. Exercise of powers under Section 264 is not subject to the power of the Assessing Officer to make adjustments under Section 143(1) of the Income-tax Act. Therefore, relief can be granted to the assessee under Section 264 even if the power of adjustment under Section 143(1) is taken away from the Assessing Officer. ”
(emphasis supplied)
8. Section 264 of the Act also came up for consideration before the Hon’ble Delhi High Court in Vijay Gupta v CIT Delhi-III 3 where paragraph 35 reads as under: “
35. From the various judicial pronouncements, it is settled that the powers conferred under Section 264 of the Act are very wide. The Commissioner is bound to apply his mind to the question whether the petitioner was taxable on that income. Since Section 264 uses the expression “any order”, it would imply that the section does not limit the power to correct errors committed by the subordinate authorities but could even be exercised where errors are committed by assessees. It would even cover situations where the assessee because of an error has not put forth a legitimate claim at the time of filing the return and the error is subsequently discovered and is raised for the first time in an application under Section 264. ”
(emphasis supplied)
9. In the circumstances, it is well settled that powers conferred under Section 264 of the Act are very wide. Commissioner is bound to apply his mind to the question whether Petitioner’s income was taxable and to what extent. Admittedly, amount payable under the IDS has been paid. Section 188 of the IDS provides that the amount of undisclosed income declared in accordance with 183 shall not be included in total income of the declarant for any assessment year for the Income-tax Act, if the declarant makes the payment of tax and surcharge referred to in Section 184 and the penalty referred to in Section 185, by the date specified under Sub-section 1 of Section 187. Petitioner having paid the tax and surcharge and the penalty with interest, amount of undisclosed income cannot be included in the income of the declarant/petitioner. Therefore, in our view, Commissioner should have exercised his power under Section 264 of the Act and decide the matter on merits.
10. We hereby quash and set aside the impugned order dated 26th March, 2021 and remand the matter to Respondent No.1 to decide the matter on merits.
Before passing any order, Respondent No.1 shall give personal hearing to Petitioner notice whereof shall be communicated at least five working days in advance. Order passed should be reasoned order dealing with all the submissions of Petitioner.
Application shall be disposed within eight weeks.
Notes:
1 161 taxmann 316 (SC)
2 (2003) 175 Taxation 91 (Bom)
3 [2016] 68 taxmann.com 131 (Delhi)
