If AO fails to give reasons for accepting assessee’s contentions, invocation of powers u/s 263 cannot be faulted with – ITAT

CHANDIGARH, AUG 17, 2007 : THE revisionary powers of Commissioner u/s 263 are to be exercised when the order of A.O. is erroneous and prejudicial to the interests of revenue. Whether, any kind of error comes within the scope of Sec.263 or there are some determinative factors, and what is the scope of power to be exercised by Commissioner under the said section are some of the issues which came up before the Tribunal for consideration in this case.

Brief Facts :

The assessee, in the instant case, was engaged in the business of manufacturing of PCB Drills and PCB Raster Bits and mostly exported its manufacture. The appeal related to AY-2000-01 and 2001-02 but the facts in both the years were similar and thus the Tribunal decided the issue pertaining to AY 2000-01 which was to apply mutatis mutandis to the other year in appeal. For the AY-2000-01, assessee returned its income claiming a deduction u/s 80HHC and 80G which was allowed by the A.O. after making a detailed inquiry and assessment framed accordingly. However CIT found the order of A.O. erroneous end prejudicial to the interest of the revenue u/s 263 of the Act and accordingly sets aside the assessment order with a direction to reframe assessment as per law. CIT pointed out an error in the calculation of deduction u/s 80HHC and an error in calculation of income u/s 115JA primarily as it was pointed out that assessee earned an amount of Rs 36,45,148 on account of inspection and regrinding charges from domestic customers which couldn’t be taken into consideration for calculation of deduction u/s 80HHC as it was not export and similarly deduction u/s115JA was also excessively taken as deduction u/s 115JA is with reference to deduction computed under clause (a),(b) and (c) of Sec 80HHC(3) and it does not refer to the amount referred to in proviso of Sec 80HHC(3).

It is against this order of CIT that the assessee came in appeal to the Tribunal. It was contended on behalf of the assessee that CIT had invoked the provisions of Sec.263 without jurisdiction as A.O.’s order was one of the possible views and it was a case of difference of opinion with regard to deductions and if A.O. has taken a possible view, then CIT can’t substitute his own view u/s 263 as it does not amount to error being prejudicial to the interest of revenue. It was pointed out that all the issues raised by CIT had been enquired into by the A.O. also through a questionairre in original assessment proceedings and after due deliberation, the order was passed which was a possible view which can’t be revised u/s263.

On the other hand, it was argued on behalf of the revenue that the order of A.O. was completely erroneous as, though A.O. had enquired into the issues pertaining to deduction u/s 80HHC, 115JB, 80G etc. which have been raised by CIT, but the explainations of assessee with respect to same were accepted as it is by A.O. without application of mind which amounted to erroneous decision. The ld. DR substantiated his contentions by pointing out at explaination (baa) of Sec.80HHC which provides for reduction of 90% of job charges from profits of business for computation of deduction u/s 80HHC and since assessee earned an amount of Rs.36,45,148 from job work, the same was required to be reduced from the profits of business for computation of deduction. It was pointed out that though A.O. made the relevant enquiry he didn’t apply his mind to the said provision which clearly rendered his decision erroneous.

Having heard the rival submissions, the Tribunal got down to adjudicating the matter and noted that A.O. did look into and raised the issue of deduction u/s 80HHC and computation of income u/s 115JA through a questionaire which was replied to by the assessee and after considering the reply A.O. passed the order. But what was to be looked into was whether the order of A.O. was erroneous and prejudicial to the interest of revenue calling for revision by the CIT u/s 263. Tribunal pointed out that there were two essential ingredients to be satisfied before Sec.263 could be invoked by the CIT which were that the order of A.O. should be firstly erroneous and secondly it should be prejudicial to the interest of revenue. Tribunal referred to S.C. decision in the case of Malabar Industrial Co. Ltd. v. CIT, 243 ITR 83 wherein it was laid down that unless both the ingredients are satisfied Sec.263 cannot be invoked. But not every kind of error or loss of revenue came within its ambit. Apex court in the above mentioned decision referred to circumstances which amounted to erroneous decision which are

(i) An incorrect assumption of facts or an incorrect application of law will satisfy the requirement of the order being erroneous.

(ii) The order passed without applying the principles of natural justice or without application of mind will also satisfy the requirement of the order being erroneous.

As for loss of revenue, it was laid down by the apex court that where there is more then one view possible on a particular issue and A.O. takes one of the probable views which leads to loss of revenue with which the Comm. doesn’t agree, it will not amount to an error prejudicial to the interest of revenue calling for invocation of Sec.263.

Coming to the facts of the case in hand keeping in mind the principles with regard to invocation of Sec.263, the Tribunal observed that though A.O. had made necessary enquiries with respect to issues raised by CIT and received a reply from the assessee,there was no finding given by A.O. with regard to them in the order.

It was pointed out that all quasi judicial authorities are supposed to pass speaking orders to reduce arbitrariness, to ensure observance of rule of law and also because these orders are appealable and in absence of speaking and reasoned orders it would become difficult for appellate authorities to decide the issues raised. It was observed that in the instant case far from giving a speaking order, A.O. had given no reasons for accepting the claim of assessee which rendered the order erroneous. Specially in light of the fact that there were decisions of Chandigarh Bench of the Tribunal, which also happened to be jurisdictional bench, in matter of calculation of deduction u/s80HHC which were in favour of Revenue and these were to be accepted by the A.O. but instead he gave a contrary decision that too without giving any reasons for accepting the claim of assessee rendering the decision erroneous and prejudicial to the interest of revenue. With regard to deduction u/s115JA also the Tribunal held that A.O. had erred in accepting the claim of assessee without giving any reasons for the accepatance and had failed to distinguish between 115J and 115JA, therefore on account of this also the order of A.O. was erroneous and prejudicial to the interest of revenue.

On the basis of above observations and principles with respect to Sec.263, Tribunal held that the order of CIT invoking provisions of Sec.263 was perfectly legal and there was no infirmity in the same and thus upheld the order. As facts of AY-2001-02 were similar to those of AY-2000-01, the decision was made applicable mutatis mutandis to AY 2001-02.

Thus, on the basis of the above discussion it is to be noted that Sec.263 is the revisionary power of Commissioner which is to be invoked where the order of A.O. is erroneous and prejudicial to the interest of revenue but all errors and loss of revenue don’t allow for invocation of Sec.263 but in circumstances as discussed above. In case there are two views on an issue and A.O. takes one of the views leading to loss of revenue, it will not lead to an erroneous decision calling for invocation of Sec.263. The circumstances as laid out in the Malabar case is an important pointer and basis for action u/s 263.

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