ITO cannot initiate proceedings under Section 263

CIT Vs Shri Jheendu Ram (Allahabad High Court)

In the instant case, the Tribunal has found that it is only the satisfaction of the Principal Commissioner/Commissioner of Income Tax himself that too after applying his mind and after examining the record of any proceeding. It is required to record his satisfaction the proceedings under Section 263 can validly be initiated. But in the instant case in the order of the Commissioner of Income Tax, it is noticed that nowhere the Commissioner of Income Tax has recorded his satisfaction, rather the satisfaction was of the Income Tax Officer (Technical) who is not competent to revise the order under Section 263 of the Act. Admittedly, the show cause notice has been issued by the ITO (Technical) which also establishes that without examining the assessment order passed by the assessing officer, the show cause notice has been issued. Furthermore, nothing was brought on record to substantiate that the order passed by the assessing officer is erroneous or prejudicial to the interest of revenue.

In view of the aforesaid and considering the facts and circumstances of the case, we find that in the instant case neither the Commissioner of Income Tax has applied his mind nor he has brought on record that the assessment order was erroneous or prejudicial to the interest of revenue.

Admittedly, the original order has been passed under Section 143(3) of the Act was an order passed by the assessing authority who is not below in rank of the Income Tax Officer (Technical), who has initiated the proceedings under Section 263 in the instant case. An order cannot be revised by the equally situated or equally ranked authority or by any authority who is not authorized under the law. In the instant case the authorized authority is none else but the Commissioner of Income Tax or Principal Commissioner of Income Tax.

Full Text of the High Court Judgment / Order is as follows:-

1. This is an Income Tax Appeal filed by the Commissioner of Income Tax­I, Kanpur under Section 260A of the Income Tax Act, 1961 (hereinafter referred as ‘The Act’).

2. We have heard Sri Manu Ghildiyal, learned counsel for the Department. No one is present on behalf of the assessee.

3. The present appeal has been filed against the order and judgment dated 18.11.2009 passed by the Income Tax Appellate Tribunal in ITA No. 522/Lucknow/2009 for the assessment year 2006­-07 by which the ITAT has set aside the order under Section 263 of the Act passed by the CIT­1, Kanpur.

4. While deciding the appeal of the ITAT has held that the order of the CIT­I, Kanpur was void ab initio, and therefore, deserves to be set aside.

5. The brief facts of the case are that the assessee is engaged in transport business on own account and also on commission basis. The present assessment year involved in the present appeal is assessment year 2006-­07. For the assessment year 2006-­07 the assessment was completed under Section 143(3) of the Act on a total income of Rs. 2,28,910/­.

6. The accounts of the assessee has been audited and during the course of audit, the auditor has inserted a note which is quoted herein below:

“ In Financial Year 2004-­05 Firm has shown its total receipt from party but in current year 2005­-06 it has shown its income as commission received Rs. 4,18,707.70 on total payment received Rs.1,60,56,923/­. As explained by the assessee that Firm earn only commission on truck playing on behalf of other party.”

7. In view of the aforesaid, auditor’s note the proceedings under Section 263 of the Act has been initiated. It is found that the order aforesaid was erroneous in so far as it was prejudicial to the interest of revenue.

8. The glaring feature of the present case are that though a notice under Section 263 of the Act has been issued on 05.06.2009 but instead of issuance of a notice by the Commissioner of Income Tax, it has been admittedly issued by the Income Tax Officer (Technical), Kanpur. The reply has been submitted to the notice and thereafter an order has been passed under Section 263 of the Act by the Commissioner of Income Tax-I, Kanpur dated 13.07.2009. The Commissioner of Income Tax ­I, Kanpur has held that in the present case the order passed by the assessing officer is erroneous and prejudicial to the interest of revenue, therefore, the same is liable to be set aside. The matter has been restored to the assessing authority by the CIT with following directions vide order dated 13.07.2009:­

“Considering the above mentioned facts, circumstances and settled legal position, I hold that the assessment order passed by the Income Tax Officer­3(2), Kanpur on 15.09.2008 in the present case is erroneous and prejudicial to the interests of the Revenue. The assessment order passed by the Income Tax Officer­3(2), Kanpur on 15.09.2008 is set aside. The case is restored to the Assessing Officer with the directions to make a fresh assessment in accordance with the law after making necessary inquiries on all the points mentioned herein above after allowing the assessee an opportunity of being heard.”

9. Aggrieved by the order passed under Section 263, appeal has been preferred by the assessee before the ITAT which has been decided by the ITAT vide impugned order dated 18.11.2009. Before the ITAT the assessee has challenged the order passed under Section 263 and has submitted that the said order is without jurisdiction, therefore, the same be set aside.

10. In reply to the submission and pleading of the assessee, the departmental representative appeared before the ITAT and has submitted that admittedly the Income Tax Officer (Technical) has initiated the proceedings under Section 263 but the same was initiated on behalf of the Commissioner of Income Tax, therefore, the show cause notice issued by the Income Tax Officer (Technical) was on behalf of the Commissioner of Income Tax and satisfaction recorded in the order sheet dated 05.06.2009 by the Income Tax Officer (Technical) is also be read as the satisfaction of the CIT.

11. Section 263 of the Act provides the revision of orders prejudicial to the revenue. Sub­section 1 of Section 263 is necessary to be looked into for the purpose of determination of the power vested with the authority concerned to revise the order prejudicial to the revenue. For the ready reference the provision of Section 263(1) of the Act is quoted herein below;

“263(1) The [Principal Commissioner or] Commissioner may call for and examine the record of any proceeding under this Act, and if he considers that any order passed therein by the [Assessing] Officer is erroneous in so far as it is prejudicial to the interests of the revenue, he may, after giving the assessee an opportunity of being heard and after making or causing to be made such inquiry as he deems necessary, pass such order thereon as the circumstances of the case justify, including an order enhancing or modifying the assessment, or cancelling the assessment and directing a fresh assessment”

12. This provision clearly indicates that the power vested to revise an order prejudicial to the revenue is solely and extensively vested with the Principal Commissioner or Commissioner of Income Tax who may call for and examine the record of any proceeding under the provision of Income Tax Act and while doing so if the Principal Commissioner or the Commissioner found that the order passed by the assessing officer is erroneous, in so far as it is prejudicial to the interest of revenue he may, after giving the assessee an opportunity…… made such inquiry….., pass such order thereon as the circumstance of the case justify….

13. In the instant case, the Tribunal has found that it is only the satisfaction of the Principal Commissioner/Commissioner of Income Tax himself that too after applying his mind and after examining the record of any proceeding. It is required to record his satisfaction the proceedings under Section 263 can validly be initiated. But in the instant case in the order of the Commissioner of Income Tax, it is noticed that nowhere the Commissioner of Income Tax has recorded his satisfaction, rather the satisfaction was of the Income Tax Officer (Technical) who is not competent to revise the order under Section 263 of the Act. Admittedly, the show cause notice has been issued by the ITO(Technical) which also establishes that without examining the assessment order passed by the assessing officer, the show cause notice has been issued. Furthermore, nothing was brought on record to substantiate that the order passed by the assessing officer is erroneous or prejudicial to the interest of revenue.

14. In view of the aforesaid and considering the facts and circumstances of the case, we find that in the instant case neither the Commissioner of Income Tax has applied his mind nor he has brought on record that the assessment order was erroneous or prejudicial to the interest of revenue.

15. Admittedly, the original order has been passed under Section 143(3) of the Act was an order passed by the assessing authority who is not below in rank of the Income Tax Officer (Technical), who has initiated the proceedings under Section 263 in the instant case. An order cannot be revised by the equally situated or equally ranked authority or by any authority who is not authorized under the law. In the instant case the authorized authority is none else but the Commissioner of Income Tax or Principal Commissioner of Income Tax.

16. In view of the aforesaid facts, we have no option but to dismiss the appeal filed by the department, therefore, the order impugned passed by the Income Tax Appellate Tribunal is affirmed.

17. The appeal is dismissed.

Order Date :­10.10.2017