Passing assessment order without examining non-allowable expenses makes assessment order erroneous

Brief of the case:

• The Hon’ble Kerala High Court in the case of M/s Asianet Satellite Communications Ltd. held that passing assessment order without examining expenses by Assessing Officer which ought not to allowed is a clear case of an assessment order erroneous in so far as prejudicial to the interests of revenue.
• Therefore, the initiation of revisionary proceedings u/s 263 by Commissioner is justified in law.

Facts of the case:

• The original assessment u/s 143(3) was completed accepting the returned loss of Rs. 2,68,03,915/-. Subsequently, in exercise of power conferred by sec 263 the Commissioner initiated revisionary proceedings and ordered for setting aside the assessment and making fresh assessment.
• The fresh assessment was completed assessing the income as NIL. Appeal was filed by assessee against the fresh order before tribunal which was dismissed by it on the ground that the revision made by Commissioner was justified as the order of AO was erroneous insofar as prejudicial to the interests of revenue.
• Aggrieved by the order of tribunal assessee in appeal before the High Court.

­Contention of Assessee:

• Learned counsel for the assessee contended that the in order to invoke the revisionary powers u/s 263 twin conditions necessary to be satisfied viz the order of the Assessing Officer being erroneous and prejudicial to the interests of the Revenue.
• But these requirements have not been satisfied in the present case as there was no error committed by AO in framing assessment , the expenses which the commissioner is claiming to disallow had been duly considered by AO.
• Thus, the mere fact that another treatment is possible does not make the assessment order erroneous.
  

Contention of Revenue:

• The revenue contended that the two expenditures in question were not all examined by AO , therefore, the order passed by AO was without application of mind so far as those expenditures are concerned.
• Due to such non-application of mind , the assessment order is erroneous and excess allowance of loss to assessee make it prejudicial as well to the interests of revenue.
• Therefore, the twin conditions as laid down in Sec 263 got satisfied thereby justifying the revisionary proceedings initiated by Commissioner.              

Held by Hon’ble High Court:

• The point of dispute is that whether the order of the Commissioner of Income Tax under section 263 of the Act satisfies the precondition that the assessment order was erroneous and prejudicial to the interests of revenue.
• In Malabar Industrial Co. Ltd. Apex Court examined the provisions of Sec 263 and held that the Commissioner of Income Tax before passing an order of revision has to be satisfied of twin conditions: (i) the order of the Assessing Officer sought to be revised is erroneous; and (ii) it is prejudicial to the interests of the Revenue.
• In the present case, the Commissioner on examining the records of assessment came to know that some expenses which should not have been allowed have been allowed by AO by overlooking the same. The aggregate amount of such expenses allowed came to Rs. 796.65 lacs.
• Thus, the order was passed by AO without application of mind and without conducting any enquiry and also without even calling for or verifying the records.
• Clearly this is an error which is prejudicial to the interest of revenue in as much as high quantum of loss require to be carried forward.
• Therefore, the Commissioner was justified to exercise the revision power conferred upon him by Sec 263.
• In result , the appeal of assessee was dismissed.