Objective
Author, in this article, analyses the nuances of exercising revisionary power of CIT / PCIT u/s 263 when the assessee has preferred an appeal before CIT(A) and the matter is pending for adjudication.
Text reproduced from judgement/Act is in small font and in Italics.
Structure-:
This article is based on a judicial pronouncement and is divided into following parts.
| Part – I – case in brief | PART – II – case in detail | PART – III – Analysis of Author |
| Citation of the case | Facts of the case | Position of CIT/PCIT v CIT(A) |
| Entering the subject | Legislative Background | Whether there exists similar situation |
| Question posed | Contention of Revenue | Potential Repercussions on both Parties |
| Answer | Judgements relied upon by Revenue | Final Observations |
| Author’s opinion | Contention of Assessee | Conclusion |
| Judgements relied upon by Assessee | ||
| Pronouncement of ITAT |
PART – I Case in brief
Citation of the case
| Forum -: Income Tax Appellate Tribunal | Bench-: Jaipur, B Bench |
| Name-: JR Industriesv. PCIT, A.Y. -: 2011-12 | Judgement date- :November 23, 2021 |
| Corum-: Sandeep Gosain, Judicial MemberAnd Vikram Singh Yadav, Accountant Member | Citation-: [2021] 132 taxmann.com 302 (Jaipur – Trib.), IT APPEAL NOS. 26 TO 28 (JP.) OF 2021 |
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| Facts | Question |
| AO passed an order of re-assessment u/s 147 which was challenged by the assessee before CIT(A). While the matter was pending before CIT(A), PCIT revised order of AO u/s 263. | Whether PCIT was correct in revising an assessment order u/s 263 against which appeal before CIT(A) is pending? |
| Answer by tribunal | Author’s opinion |
| Yes | This decision may need re-consideration. |
PART – II – case in detail
Facts of the case
The brief facts of the case are that the assessee is engaged in business of trading of groundnut and mustard seeds and oil. Assessee’s case was reopened for the A.Y. 2011-12. In response to notice u/s 148 assessee filed its return of income on 27.04.2018 declaring total income of Rs.57,190/-. Re-assessment proceedings were completed at a total income of Rs.3,52,190 vide order dated 27.12.2018 leading to addition of Rs.2,95,000/-.
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Thereafter, the case of the assessee was taken up for revisionary proceedings u/s 263 of the Act by Ld. PCIT. During the pendency of the appeal before the ld. PCIT, the ld. PCIT noticed that the assessment in the present case was re-opened on the basis of information received from Investigation Wing, Jaipur about the transaction of Rs.11,80,000/- as bogus sales made through accommodation entries. The ld. PCIT was of the view that the A.O. erred in appreciating only 25% of the bogus sales i.e. Rs. 2,95,000/- to tax without any basis whereas according to the ld. PCIT, the whole amount of the bogus sales need to be examined considering the nature of the transactions being of accommodation entry taken. The ld. PCIT was also of the view that the A.O. has not given any reason or basis of his decision of bringing only Rs. 2,95,000/- to tax as against bogus sales of Rs. 11.80 lacs. Therefore, the ld. PCIT reached to the conclusion that since the order passed by the A.O. was without any verification/enquiry, therefore, the said order was erroneous and prejudicial to the interests of the revenue, thus, initiated proceedings U/s 263 of the Act by issuing notice dated 10/02/2020.
After providing opportunity of hearing to the assessee, order dated 04/03/2021 was passed thereby holding the order passed by the A.O. as ‘erroneous and prejudicial’ to the interests of the revenue and thus directed the A.O. to decide the matter afresh in the light of the observations set out by the ld. PCIT. Against the order passed by the ld. PCIT, the assessee has preferred the present appeal before us on the grounds mentioned above.
Legislative Background
a) Explanation 1(c) to Section 263(1) of the Act, reads as below:
“where any order referred to in this sub-section and passed by the Assessing Officer had been the subject matter of any appeal “filed on or before or after the 1st day of June, 1988”], the powers of the [Principal Commissioner or] Commissioner under this sub-section shall extend ***[and shall be deemed always to have extended] to such matters as had not been considered and decided in such appeal.”
Contention of revenue
On the other hand, the ld. CIT-DR has relied on the order passed by the ld. Pr.CIT and also relied upon the notes on Clauses Finance Bill, 1988, which is at page No. 1-2 of the department’s paper book, memorandum of Finance Bill, 1988, which is page No. 3 of the department’s paper book, Section 31 of the Income Tax Act, 1922 which is at page No. 4-5 of the department’s paper book, Section 31A of the Income Tax Act, 1922, which is at page No. 6 of the department’s paper book and the ld. CIT-DR has also relied on the decision of the Coordinate bench of this Tribunal in ITA No. 255/JP/2020 dated 25/03/2021. The ld. CIT-DR has further relied on the following judicial pronouncements:
Judgements relied upon by the Revenue
(i) CIT Vs Shri Arbuda Mills Ltd. (1998) 98 Taxman 457 (SC)
(ii) CIT Vs Ratilal Bacharilal & Sons (2006) 153 Taxman 86 (Bom)
(iii) CIT Vs South India Shipping Corporation Ltd. (2000) 111 Taxman 58 (Mad).
(iv) CIT Vs Carborandum Universal Ltd. (1999) 240 ITR 99 (Mad.)
(v) CIT Vs Shree Durga Agencies Ltd. (1999) 239 484 (Calcutta)
(vi) Aditi Technologies (P) Ltd. Vs ITO, Ward 4(1), Banglore (2014) 47 taxmann.com 166 (Bang-Trib)
(vii) CIT, Patiala Vs Ganesh Steel Industries (2009) 184 Taxman 220 (P&H).
(viii) CIT Vs Indo Persian Rugs (2007) 160 Taxman 127 (Allahabad)
(ix) CIT Vs Soble & Miglani (2005) 145 Taxman 353 (All.)
Contention of assesse
It was further argued by the ld. AR that once the appeal is filed by the assessee against the order of A.O. then in that eventuality, he surrenders himself to the jurisdiction of ld. CIT(A). Thus, this surrender is unconditional and the assessee in that eventuality, has no right to withdraw the appeal or to take U-turn. It was further submitted by the ld AR that power of enhancement to CIT(A) are akin to powers of revision to PCIT conferred u/s 263 of the Act.
Judgements relied upon by the Assessee
(1) CIT vs. Rai Bahadur Hardutroy Motilal Chamaria (1967) 66 ITR 0443
(2) CIT vs. McMillan & Co. (1958) 33 ITR 0182.
(3) ITAT Delhi Bench ‘F’ in the case of ACIT vs. Pawan Kumar Singhal (2019) 183 DTR 0161 (Del.)(Trib.)
Pronouncement of the ITAT
b) Para 11 on page 11 reads as follows;
11. We have heard the rival contentions of both the parties and have perused the material placed on record. We have also deliberated upon the decisions cited in the orders passed by the authorities below as well as cited before us and we have also gone through the orders passed by the revenue authorities. From the facts of all these cases, we noticed that the main contention of the ld. AR that if an appeal against the assessment order passed by the AO is filed by the assesssee and is pending before CIT(A), then the PCIT has no jurisdiction u/s 263 of the Act as the C1T(A) can enhance income u/s 251 of the Act. In this context, it would be appropriate to reproduce clause (c) of Explanation 1 of section 263 of the Act, as amended from time to time, as under:
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c) Later, the ITAT has reproduced Notes on Clauses and Memorandum to Finance Bill 1988 relating to the amendments in section 263 of the Act by the Finance Act, 1988 through which the said Explanation was introduced
d) Later on the ITAT has discussed the doctrine of merger of order.
Thus, we are of the view that where an issue in the assessment order has neither been agitated before the Commissioner (Appeals) nor considered by him, in such a scenario that portion of the assessment order will not merge with the order of the Commissioner (Appeals) and therefore, the Commissioner will have the jurisdiction under Section 263 to revise the assessment order with respect to that particular issue.
To make it clear, let us assume that in a particular case, the AO had made addition on account of three issues A, B and C, against which the assessee filed appeal to CIT(A) on two issues i.e. B and C and the CIT(A) has also passed an appellate order. Thus, in view of the Explanation as reproduced above, the PCIT cannot assume jurisdiction in respect of issue B and C u/s 263 of the Act, however, the PCIT can assume jurisdiction in respect of issue A which has not been agitated before CIT(A) as the assessment order merge’s with the order of CIT(A) in respect of issue B and C only but not in respect of the issue.
If the contention of the ld. AR is accepted then during the pendency of the PCIT has no jurisdiction to cancel the assessment order even in respect of issue A also as the CIT(A) can enhance the income u/s 251 of the Act on issue A but after passing of the appellate order by the CIT(A), now the PCIT can assume jurisdiction u/s 263 of the Act as the Ld. CIT(A) has not considered and decided such issue A in the appellate order.
This cannot be the intention of the legislature as time limit is there for passing order u/s 263 of the Act, whereas there is no such limit for the CIT(A) for adjudicating an appeal and this interpretation makes the provisions of section 263 of the Act practically redundant during the pendency of appeal before CIT(A).
e) Most importantly, later ITAT observes as follows for doctrine of merger
13. In another circumstances, if an appeal, against the assessment order passed by the AO, has been filed with the CIT(A) but has not been decided and is pending before CIT(A), then the Doctrine of Merger will even otherwise not apply as there is no order of CIT(A) with which the assessment order could merge and thus, the PCIT will surely have jurisdiction u/s 263 of the Act in respect of all the issues whether contested before CIT(A) or not. Although, it was argued by ld. AR that once an appeal is filed by the assessee against the order of AO, then he surrenders himself to the jurisdiction of CIT(A). Thus, this surrender is unconditional and the assessee has no right to withdraw the appeal or to take a U-turn. The power of enhancement to CIT(A) are akin to powers of revision to PCIT conferred u/s 263 of the Act. In this regard, ld. AR has placed reliance on the following judicial pronouncements in support of these contentions:
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f) The ITAT has also observed that, there is a definite time limit for passing order u/s 263 of the Act vis-à-vis there is no time limit for passing an order u/s 251 by CIT(A).
g) Later, the ITAT has adjudicated the matter on merits i.e., whether the caveats of section 263 have been complied with or not. The author will not go into the same as this is not the topic of the article.
PART – III – Analysis of Author
h) The reason for analysis is the concept of “sub judice” as contemplated in section 10 of the Code of Civil Procedure, 1908.
i) Section 10 of Civil Procedure Code defines ‘Stay of suit’ as follows:
“No Court to proceed with trail of any suit in which the matter in issue, is also directly and substantially in issue. In previously instituted suit between the same parties, or between parties under whom they or any of them claim, litigating under the same title, where such suit is pending in same or any other Court, in India, Having jurisdiction to grant relief claimed. Explanation: The pendency of a suit in a Foreign Court doesn’t preclude the Courts in India from, trying a suit founded on same cause of action.”
j) In view of above, various characteristics of section 10 can be summarised as follows;
i. Scope: Section 10 deals with the concept of Res Sub Judice.
ii. Objective: The object of Section 10 is to prevent Courts of concurrent jurisdiction from simultaneously, trying two parallel cases, in respect of same matter in issue. The two fold objects are:
a. Avoid wasting Court Resources.
b. Avoid Conflicting decisions.
iii. Conditions or essentials
a) The matter in issue in both the cases are to be substantially the same
b) Previously instituted suit must be pending in the same or any other court competent to grant:
c) Relief claimed in the suit.
d) Relief claimed in subsequent the suit.
e) Suits to the parties are to be the same or between parties under whom they or any of them claim, litigating under the same title.
f) Any decree passed in violation of Section 10 is null and void.
Illustration: Papita, an agent of Babita at Delhi agreed to sell Babita’s goods in Chennai. Papita, the agent files suit for balance of accounts in Chennai. Babita sues the agent Papita for accounts and his negligence in Delhi; while case is pending in Chennai. In this case, Delhi Court is precluded from conducting trail and Papita can petition Chennai Court to direct stay of proceedings against Delhi Court.
Though specific provisions of any Act can override the provisions of CPC-1908, the principle of sub-judice is still relevant.
k) To analyse the situation, it is classified into following:
- Position of CIT/PCIT v CIT(A)
- Whether there exists similar situation
- Potential Repercussions on revenue / assessee
Position of CIT/PCIT v CIT(A)
1) Firstly, let’s understand the Powers of CIT(A). the section has been reproduced herein below. In place of the words “Commissioner (Appeals)” words “CIT(A)” has been used.
| CIT / PCIT | CIT(A) |
| Powers of the CIT(A)
251. (1) In disposing of an appeal, the CIT(A) shall have the following powers— (a) in an appeal against an order of assessment, he may confirm, reduce, enhance or annul the assessment; (aa) in an appeal against the order of assessment in respect of which the proceeding before the Settlement Commission abates under section 245HA, he may, after taking into consideration all the material and other information produced by the assessee before, or the results of the inquiry held or evidence recorded by, the Settlement Commission, in the course of the proceeding before it and such other material as may be brought on his record, confirm, reduce, enhance or annul the assessment; (b) in an appeal against an order imposing a penalty, he may confirm or cancel such order or vary it so as either to enhance or to reduce the penalty; (c) in any other case, he may pass such orders in the appeal as he thinks fit. (2) The CIT(A) shall not enhance an assessment or a penalty or reduce the amount of refund unless the appellant has had a reasonable opportunity of showing cause against such enhancement or reduction. Explanation.—In disposing of an appeal, the CIT(A) may consider and decide any matter arising out of the proceedings in which the order appealed against was passed, notwithstanding that such matter was not raised before the CIT(A) by the appellant. |
Revision of orders prejudicial to revenue.
263. (1) The PCIT/CIT may call for and examine the record of any proceeding under this Act, and if he considers that any order passed therein by the AO 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. Explanation 1—For the removal of doubts, it is hereby declared that, for the purposes of this sub-section,— (a) an order passed on or before or after the 1st day of June, 1988 by the AO shall include— (i) List of orders…….. (ii) List of orders…….. (b) record” shall include and shall be deemed always to have included all records relating to any proceeding under this Act available at the time of examination by the PCIT/CIT; (c) where any order referred to in this sub-section and passed by the AO had been the subject matter of any appeal filed on or before or after the 1st day of June, 1988, the powers of the PCIT/CIT under this sub-section shall extend and shall be deemed always to have extended to such matters as had not been considered and decided in such appeal. Explanation 2.—For the purposes of this section, it is hereby declared that an order passed by the Assessing Officer shall be deemed to be erroneous in so far as it is prejudicial to the interests of the revenue, if, in the opinion of the PCIT/CIT/PCCIT,— (a) the order is passed without making inquiries or verification which should have been made; (b) the order is passed allowing any relief without inquiring into the claim; (c) the order has not been made in accordance with any order, direction or instruction issued by the Board under section 119; or (d) the order has not been passed in accordance with any decision which is prejudicial to the assessee, rendered by the jurisdictional High Court or Supreme Court in the case of the assessee or any other person. (2) No order shall be made under sub-section (1) after the expiry of two years from the end of the financial year in which the order sought to be revised was passed. (3) Notwithstanding anything contained in sub-section (2), an order in revision under this section may be passed at any time in the case of an order which has been passed in consequence of, or to give effect to, any finding or direction contained in an order of the Appellate Tribunal, National Tax Tribunal,] the High Court or the Supreme Court. Explanation.—In computing the period of limitation for the purposes of sub-section (2), the time taken in giving an opportunity to the assessee to be reheard under the proviso to section 129 and any period during which any proceeding under this section is stayed by an order or injunction of any court shall be excluded. |
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| Particulars | CIT | CIT(A) |
| Whether the scope restricted to the issues where AO has applied his mind? | Y | Y |
| Whether a separate stand can be taken merely for change in opinion as compared to the one taken by the AO? | N | Y |
| Whether there is a time limit for exercising the power ? | Y | N |
| Whether criteria ofissue being “erroneous in so far as it is prejudicial to the interests of the revenue” is required to be passed? | Y | N |
| Whether, as per ground reality, CIT(A) are adjudicating issues other than those appealed against in the way CIT is exercising sec 263 | Y | N |
| Whether Circulars / instructions of CBDT are binding | Y | N |
| Whether the assessee has inherent right of withdrawal of the application / appeal | N.A. | # |
# – If CIT(A) is satisfied that it is a fit case for withdrawal, CIT(A) may allow the withdrawal
Whether there exists similar situation
m) Consider section 221. In case, an assessee, has filed appeal before CIT(A), it does surrender itself before CIT(A). But regarding the procedure for obtaining stay of demand arising from order of AO, there is a specifically makes a mention of the AO and the PCIT.
(i) Firstly, the Assessee must approach AO, if un-satisfied,
(ii) Secondly, the assessee must approach PCIT, if un-satisfied,
(iii) Thirdly, the assessee can reach CIT(A)
n) The author hastens to add that, there are judgements which has held that this chronology is not mandatory but directory and may not be followed in some cases.
o) Though it may be a procedural one and not a substantial question, it is a case the issue of overlapping jurisdiction has been properly addressed by the legislation.
Potential Repercussions on revenue / assessee
p) Consider the position of any issue being favourable to revenue / assessee.
| Favourable to assessee / Against the Revenue | Against the assessee / Favourable to Revenue |
| There is a definite time limit for passing order u/s 263 of the Act vis-à-vis there is no time limit for passing an order u/s 251 by CIT(A).It implies that, if CIT/PCIT does not exercises revisionary power u/s 263 within the time-frame and if CIT(A) fails to adjudicate the matters which are part of assessment proceedings, the loss is permanent for the revenue. | In view of the explanation to section 251(2) of the Act, the powers, and duties of the CIT(A) are coterminous(#) to AO.
Thus CIT(A) is under obligation to adjudicate upon all such matters to which the AO has applied his mind |
| Even a CIT/PCIT can invoke section 263 only if order passed by an AO “is erroneous in so far as it is prejudicial to the interests of the revenue”. | Consider a Scenario herein below. It will put assessee is much awkward a position and there will be an anarchy. |
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| Favourable to Assessee | Favourable to Revenue |
| i. The assessee will be deprived of “Limited Finality” qua year qua issue.
ii. Such multiple assumption of jurisdiction will create anarchy. |
iii. If CIT/PCIT does not exercises revisionary power u/s 263 within the timeframe and if CIT(A) fails to adjudicate the matters which are part of assessment proceedings, the loss is permanent.
iv. PCIT/CIT exercises the supervisory jurisdiction which is with checks and balances protecting the rights of the assessee as well. |
#-Coterminous, in simple terms means having the same or coincident boundaries
Scenario
| Total travel expenditure is Rs. 1,00,000/-
Among various additions, 1) AO dis-allows 40% i.e. Rs.40,000/- 2) PCIT /CIT revises it u/s 263 and dis-allows additional 30% i.e. Rs.30,000/-. 3) CIT(A) adjudicates the matter and dis-allows additional 40% i.e. Rs. 40,000/ In both cases i.e. 2 and 3, the Assessee approaches ITAT |
Thus, the effective dis-allowance towards travel expenditure is Rs. 1,10,000/- against expenditure of Rs. 1,00,000/- which itself is absurd.
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Final Observations
q) Let’s summarise the individual point considered hereinabove:
Whether there exists similar situation
r) There already exists similar situation u/s 221 of the Act where there is potential clash of PCIT/CIT and CIT(A) exists which has been properly dealt with by the legislation.
Position of CIT/PCIT v CIT(A)
s) There is a significant difference between the position and powers of CIT/PCIT vis-à-vis CIT(A)
Potential Repercussions on revenue / assessee
t) It will create an anarchy in the adjudication process.
u) Sufficient checks and balances are available, and it will be difficult to conclude that legislation has intention that PCIT/CIT will adjudicate an issue which is already being seized off by CIT(A).
Conclusion
v) Lastly, the issue of “doctrine of merger” was discussed by the ITAT. But this has nothing to do with the issue under consideration. Our system depends on hierarchical system of adjudication and at a time, only one authority is seized of a particular matter.
w) In view of above, the author is of an opinion that, the PCIT / CIT can not assume jurisdiction u/s 263 when an appeal is pending before CIT(A) under legislative framework.
x) For the convenience of readers, the same is re-produced herein-below. It basically states that, in case of order u/s 263, the order of AO gets merged with the order u/s 263. In case of order of CIT(A), the order of AO gets merged with the order of CIT(A).
To make it clear, let us assume that in a particular case, the AO had made addition on account of three issues A, B and C, against which the assessee filed appeal to CIT(A) on two issues i.e. B and C and the CIT(A) has also passed an appellate order. Thus, in view of the Explanation as reproduced above, the PCIT cannot assume jurisdiction in respect of issue 13 and C u/s 263 of the Act, however, the PCIT can assume jurisdiction in respect of issue A which has not been agitated before CIT(A) as the assessment order merge’s with the order of CIT(A) in respect of issue B and C only but not in respect of the issue. If the contention of the ld. AR is accepted then during the pendency of the PCIT has no jurisdiction to cancel the assessment order even in respect of issue A also as the CIT(A) can enhance the income u/s 251 of the Act on issue A but after passing of the appellate order by the CIT(A), now the PCIT can assume jurisdiction u/s 263 of the Act as the Ld. CIT(A) has not considered and decided such issue A in the appellate order. This cannot be the intention of the legislature as time limit is there for passing order u/s 263 of the Act, whereas there is no such limit for the CIT(A) for adjudicating an appeal and this interpretation makes the provisions of section 263 of the Act practically redundant during the pendency of appeal before CIT(A).
13. In another circumstances, if an appeal, against the assessment order passed by the AO, has been filed with the CIT(A) but has not been decided and is pending before CIT(A), then the Doctrine of Merger will even otherwise not apply as there is no order of CIT(A) with which the assessment order could merge and thus, the PCIT will surely have jurisdiction u/s 263 of the Act in respect of all the issues whether contested before CIT(A) or not. Although, it was argued by ld. AR that once an appeal is filed by the assessee against the order of AO, then he surrenders himself to the jurisdiction of CIT(A). Thus, this surrender is unconditional and the assessee has no right to withdraw the appeal or to take a U-turn. The power of enhancement to CIT(A) are akin to powers of revision to PCIT conferred u/s 263 of the Act. In this regard, ld. AR has placed reliance on the following judicial pronouncements in support of these contentions:
Author Bio
AS FAR AS POWER IS CONCERNED ALL THE CITS WILL JUMP IN THE FRAY AND WILL MAKE BEST OF THE ATTEMPTS TO HAVE LION’SHARE. BUT WHERE THE RESPONSIBILITY COMES NO CIT IS AVAILABLE AND IT BECOME A GAME OF PASSING THE BUCK.