IN THE ITAT HYDERABAD BENCH ‘A’
Additional Commissioner of Income-tax
IT APPEAL NO. 741 (HYD.) OF 2012
[ASSESSMENT YEAR 2007-08]
OCTOBER 19, 2012
Chandra Poojari, Accountant Member
This appeal by the assessee is directed against the order of the CIT-III, Hyderabad dated 27.3.2012 passed u/s. 263 of Income-tax Act, 1961 for assessment year 2007-08.
2. The assessee raised the ground that the CIT erred in assuming jurisdiction u/s. 263 of the Act thereby directing the Assessing Officer to disallow payment of Rs. 4,18,80,995 incurred towards commission out of commercial expediency on account of a trade practice.
3. Brief facts of the issue are that in this case the assessment was completed determining total income at Rs. 6,10,74,327 u/s. 143(3) of the Act wherein the Assessing Officer accepted declared income by the assessee. The CIT on examining the record found that the assessee incurred expenditure of Rs. 4,18,80,995 as commission paid to the following parties:
|Name of the party|| |
Commission paid (Rs.)
|R.K. Marketing Service|| |
|Vijay Mining Pvt. Ltd.|| |
|Lakshmi Mines & Minerals|| |
|B. Bhagyalakshmi|| |
|K. Annapurna|| |
4. The assessee only furnished confirmation letters from the parties concerned. However, not furnished any details regarding the services rendered by these parties. According to the CIT, the Assessing Officer accepted these payments as incurred towards carrying on the business of the assessee and he has not enquired into the genuineness of the commission payment with reference to the services rendered by these parties. Being so, the CIT was of the opinion that the order of the Assessing Officer is erroneous and prejudicial to the interest of revenue and accordingly after giving adequate opportunity of hearing to the assessee, he directed the Assessing Officer to disallow the payments. Thereby the income of the assessee was determined at Rs. 10,29,55,322. Against this the assessee is in appeal before us.
5. The learned AR submitted that the present Appeal is filed against the order under Section 263 of Income Tax Act, 1961, dated 27.03.2012 passed by the Commissioner of Income-tax-Ill, Hyderabad. The Commissioner of Income-tax vide the impugned order, revised the assessment order passed under Section 143(3) of Income Tax Act, 1961 for disallowance of commission payment of Rs. 4,18,80,995. Aggrieved by this revision, the present appeal is preferred before this Tribunal. The assessee is a partnership firm engaged in the business of trading in iron ore. During the course of business operations, the assessee had incurred expenditure in the form of commission paid to various parties for services rendered during the course of sale of iron ore. This commission was paid for the services rendered in procuring the business as well as for promoting sales. It is a normal trade practice in this line of business to pay this kind of commission.
6. The AR submitted that the books of account and vouchers were produced during the course of assessment proceedings. All the commission payments were made through account payee cheques and tax was duly deducted at source from commission payments. The Assessing Officer verified these details and he was satisfied with regard to various expenses including commission paid to various parties for the purpose of business. The Assessing Officer completed the assessment after due application of mind and completed the assessment without any additions. However, the CIT vide show-cause-notice dated 23.02.2011 sought to revise the assessment order on the ground that the learned Assessing Officer had not carried out further enquiries with regard to the commission payments. The Assessee had opposed the revision on the ground that the very same issue was examined and considered by the Assessing Officer during the course of assessment proceedings vide the questionnaires dated 22.06.2009, 12.10.2009 and 16.10.2009. After considering the explanation furnished by the Assessee in response to the said questionnaires, the learned Assessing Officer, on being satisfied with such explanation, chose not to make any addition in respect of the same and thus completed the assessment. Therefore, the assessment order cannot be termed as “erroneous” and therefore, jurisdiction under Section 263 of Income Tax Act, 1961, cannot be exercised. However, the CIT not having been satisfied with the explanation furnished in response to the show cause notice, had passed an order under Section 263 on 27.03.2012 disallowing the commission payment of Rs. 4,18,80,995.
7. The AR submitted that the impugned order passed by the learned Commissioner of Income Tax is against the basic tenets of provisions of Section 263 of Income Tax Act, 1961 on the following aspects of law governing the facts of the case:-
(a) The assessment order passed cannot be termed as “erroneous” inasmuch as the Assessing Officer has passed the order after application of his mind on the very same issue, after considering all the information, explanation filed. The Commissioner of Income Tax cannot substitute his own views on the issue in exercise of the jurisdiction under Section 263 of Income Tax Act, 1961. Reliance in this regard is placed on the following decisions :
1. CIT v. Smt. D. Valliammal  230 ITR 695 (Mad);
2. CIT v. Ratlam Coal Ash Co.  171 ITR 141;
3. Ashoke Kumar Parasramka v. Asstt. CIT  65 ITD 1 (Cal);
4. CIT v. Mehrotra Brothers  270 ITR 157 (MP);
5. CIT v. Parameshwar Bohra  267 ITR 698;
6. Paul Mathews & Sons v. CIT  263 ITR 101;
7. CIT v. Arvind Jewellers  259 ITR 502;
8. CIT v. Hastings Properties  253 ITR 124;
9. CIT v. J.P. Goal (HUF)  247 ITR 555;
10. CIT v. Amalgamations Ltd.  238 ITR 963 (Mad.);
11. CIT v. Macneill Magore Ltd.  232 ITR 945
(b) Simply because the Commissioner of Income Tax felt that the assessment order is prejudicial to the interests of Revenue by itself would not be enough to vest the Commissioner with the power of suo moto revision because the first requirement of Section, namely, the order is “erroneous” is lacking. Reliance is placed on t he following decisions:
1. CIT v. Gabriel India Ltd.  203 ITR 108;
2. Board of Control for Cricket in India v. DIT (Exemptions)  96 ITD 263 (Mum);
3. J.K. Industries Ltd. v. Asstt. CIT  283 ITR (AT) 101 (Kol.);
4. CIT v. G.R. Thangamaligai  259 ITR 129 (Mad.);
5. CWT v. Girdhari Lal  258 ITR 331/123 Taxman 973 (Raj); and
(c) The impugned order under Section 263 of Income Tax Act, 1961 is not maintainable for the reason that the show cause notice was issued for alleged failure of further enquiry into the matter, even in the body of the impugned order it goes to show that the assessment order was proposed to be revised for further enquiry into the matter. The case laws relied by the learned Commissioner are only for the proposition that in case no enquiry was made by the Assessing Officer, revision was justified. In spite of this, the learned Commissioner finally settled the controversial issue vide operative portion of the impugned order and disallowed the commission payment of Rs. 4,18,80,995. Thus, the impugned order had travelled beyond the scope and ambit of show cause notice and therefore, the order under Sec. 263 of Income Tax Act, 1961 is null and void and is liable to be quashed.
(d) Even assuming that the enquiries made by the Assessing Officer are inadequate, the jurisdiction under Sec. 263 of Income Tax Act, 1961 cannot be assumed as it was only in the cases of lack of enquiries that the jurisdiction under Sec. 263 of Income Tax Act, 1961 can be assumed. Reliance in this regard is placed on the following decisions:
1. CIT v. Anil Kumar Sharma  335 ITR 83;
2. CIT v. Sunbeam Auto Ltd.  332 ITR 167;
3. CIT v. Gabriel India Ltd.  203 ITR 108
8. The AR submitted that in Gabriel India Ltd., case (supra), law on this aspect was discussed in the following manner (page 113) :
“From reading of sub-section (1) of section 263, it is clear that the power of suo moto revision can be exercised by the Commissioner only if, on examination of the records of any proceedings under this Act, he considers that any order passed therein by the Income-tax Officer is ‘erroneous in so far as it is prejudicial to the interests of the Revenue’. It is not an arbitrary or unchartered power; it can be exercised only on fulfilment of the requirements laid down by sub-sect ion (1). The consideration of the Commissioner, as to whether an order is erroneous in so far as it is prejudicial to the interests of the Revenue, must be based on materials on the record of the proceedings called for by him. If there are no materials on record on the basis of which it ca n be said that the Commissioner acting in a reasonable manner could have come to such a conclusion, the very initiation of proceedings by him will be illegal and without jurisdiction. The Commissioner cannot initiate proceedings with a view to starting fishing and roving enquiries in matters or orders which are already concluded. Such action will be against the well- accepted policy of law that there must be a point of finality in all legal proceedings, that stale issues should not be reactivated beyond a particular stage and that lapse of time must induce repose in and set at rest judicial and quasi-judicial controversies as it must in ether spheres of human activity. (See Parashuram Pottery Works Co. Ltd. v. ITO [1977) 106 ITR 1 (SC) at page 10) ….”
From the aforesaid definitions it is clear that an order cannot be termed as erroneous unless it is not in accordance with law. If an Income-tax officer acting in accordance with law makes a certain assessment, the same cannot be branded as ‘erroneous by the Commissioner simply because, according to him, the order should have been written more elaborately. This section does not visualise a case of substitution of the judgment of the Commissioner for that of the Income-tax Officer, who passed the order unless the decision is held to be erroneous. Cases may be visualised where the Income-tax Officer while making an assessment examines the accounts, makes enquiries, applies his mind to the facts and circumstances of the case and determines the income either by accepting the accounts or by making some estimate himself. The Commissioner, on perusal of the records, may be of the opinion that the estimate made by the officer concerned was on the lower side and left to the Commissioner he would have estimated the income at a figure higher than the one determined by the Income-tax Officer. That would not vest the Commissioner with power to re-examine the accounts and determine the income himself at a higher figure. It is because the Income-tax Officer has exercised the quasi-judicial power vested in him in accordance with law and arrived at a conclusion and such a conclusion cannot be formed to be erroneous simply because the Commissioner does not feel satisfied with the conclusion There must be some prima facie material on record to show that tax which was lawfully exigible has not been imposed or that by the application of the relevant statute on an incorrect or incomplete interpretation a lesser tax than what was just has been imposed.
We may now examine the facts of the present case in the light of the powers of the Commissioner set out above. The Income-tax Officer in this case had made enquiries in regard to the nature of the expenditure incurred by the assessee. The assessee had given detailed explanation in that regard by a letter in writing. All these are part of the record of the case. Evidently, the claim was allowed by the Income-tax Officer on being satisfied with the explanation of the assessee, Such decision of the Income- tax Officer cannot be held to be ‘erroneous’ simply because in his order he did not make an elaborate discussion in that regard.”
9. The learned AR submitted that in the instant case, the learned Assessing Officer called for explanation on the very same issue vide questionnaires dated 22.06.2009, 12.10.2009 and 16.10.2009 from the Assessee and the Assessee had furnished his explanation vide letters dated 26.10.2009 and on various other dates. This clearly shows that the Assessing Officer has undertaken the exercise of examining as to whether commission expenditure was incurred by the Assessee or not. On being satisfied with the explanation furnished by the Assessee, he accepted the same. The learned Commissioner of Income Tax in the show cause notice dated 23.02.2011 accepted this position in the following words:
“In support of this expenditure you have merely furnished confirmation letters from the parties without giving any justification supportive evidence regarding the services rendered which has been accepted by the Assessing Officer. Assessing Officer has not gathered any evidence to suggest that services were rendered by these agents commensurate to the commission paid. Assessing Officer has not carried out any further enquiries in this regard.”
10. The AR submitted that thus, even the learned Commissioner of Income Tax conceded the position that Assessing Officer made enquiries. The only grievance of the learned Commissioner of Income Tax was that the Assessing Officer should have made further enquiries rather than accepting the explanation. Therefore, it cannot be said that it is a case of “lack of enquiry.” The learned Commissioner of Income Tax had placed reliance on various judicial decisions which are not germane in the present case inasmuch as those decisions are applicable to the case where there was no enquiry at all by the Assessing Officer.
11. The AR further submitted that the impugned order is also liable to be set aside for the simple reason that the learned Commissioner of Income Tax had not furnished the material in the show cause notice based on which he jumped over to the conclusion impetuously, without proper application of mind, that the assessment order is erroneous and prejudicial to the interests of revenue. It was only in the impugned order, a mention was made as to the material, viz. subsequent assessment proceedings, based on which he had come to such conclusion. It is well settled principle of law that the principle of res judicata does not apply to the Income Tax proceedings; more so, in respect of question of fact. Each assessment year is a separate unit of assessment. The issues in the present year may be the same as they might have been in the subsequent year; but, still it is expected of the Assessing Officer to verify the facts on those issues and then he may follow his order for the subsequent year. The Hon’ble Orissa High Court in the case of CIT v. Orissa State Financial Corpn.  203 ITR 747 held that no revision was possible based on the earlier order of the Tribunal.
12. No new material has been brought on record to suggest that the assessment order was erroneous and prejudicial to the interests of revenue. Therefore, the jurisdiction under Section 263 of Income Tax Act, 1961 cannot be assumed. Reliance in this regard is placed on the decision of Hon’ble Income-tax Appellate Tribunal – Chennai Bench in the case of IClCI Bank Ltd. v. Jt. CIT  309 ITR (AT) 235 (Chennai).
13. The AR submitted that that the learned Assessing Officer after duly considering the explanation and information filed in response to the questionnaire on the issue, on being satisfied with such explanation chose not to make any further enquiry. Endless enquiry is not possible and it is for the learned Assessing Officer to decide when to end the enquiry. The learned CIT cannot transgress the jurisdiction under Section 263 of I.T. Act, 1961 by mentioning that no proper enquiry was made. Reliance in this regard is placed on the decision of Hon’ble Agra Bench of ITAT in the case of Rishi Kumar Gupta v. CIT  90 TTJ 645.
14. The learned AR submitted that, without prejudice to the above, on the merits of the issue, the Assessee respectfully submits that payment of commission was made wholly and exclusively for the purpose of business. There were no extraneous considerations involved nor was it the case of Revenue that unreasonable, amounts were paid to the related parties. Therefore, there were no grounds of whatsoever nature to disallow the commission payments. Reliance in this regard is placed on the Hon’ble Supreme Court judgment in the case of Swadeshi Cotton Mills Co. Ltd. v. CIT  63 ITR 57 (SC).
15. The AR submitted that the reasons given for disallowance of commission payments for the subsequent assessment year, i.e., 2008-09, cannot be adopted for disallowance of the same in the present year without verifying the facts on those issues independently the assessment of each year is independent and the principles of res judicata are not applicable. Reliance in this regard is placed on the decision of the Income-tax Appellate Tribunal – Chennai Bench in the case of ICICI Bank Ltd. (supra). In fact, there was no material on record suggesting that in respect of commission payments any addition is neither entailed nor was there any new material brought on record justifying disallowance of commission payments. Thus, the learned Commissioner of Income-tax is not justified usurp jurisdiction under the provisions of Section 263 of Income Tax Act, 1961. In the light of the aforesaid reasons, facts, circumstances and legal position, it is prayed that this Hon’ble Tribunal may be pleased to pass such appropriate order or orders as may be deemed fit and proper in the interests of justice, quashing the impugned order passed under Section 263 of Income Tax Act, 1961.
16. The learned DR submitted that the Assessing Officer allowed payment of commission as business expenditure without carrying out necessary enquiry regarding genuineness of payment and service rendered. The assessee only filed confirmation letters from these parties and on that basis the Assessing Officer allowed payment of commission. He submitted as follows:
(a) The Assessing Officer merely accepted the confirmatory letters (from the alleged commission agents) filed by the assessee firm without conducting any independent enquiry/investigation.
(b) The Assessing Officer had not called for the copies of agreements entered into by the assessee firm with the alleged commission agents.
(c) The Assessing Officer had not called for correspondence made by the assessee firm with the commission agents.
(d) The Assessing Officer had not called for the partywise list of customers introduced by the alleged commission agents.
(e) The Assessing Officer had not called for specific tonnage details of sales effected through each of the commission agent.
(f) The Assessing Officer had not called for documentary evidence in support of services rendered by the alleged commission agents.
(g) The Assessing Officer had not called for the basis of calculation of commission in respect of each of the alleged commission agent.
(h) The Assessing Officer had not satisfied himself with the expertise of the above agents in providing similar services to parties other than the assessee firm.
17. The DR further submitted that for A.Y. 2008-09 on enquiry it was found that this expenditure is not genuine and on this basis the CIT took up the case for revision for this assessment year. According to the DR the record means all the information and evidence available before the CIT after conclusion of assessment by the Assessing Officer. For this purpose, he relied on the judgement of Supreme Court in the case of CIT v. Manjunatheswar Packing Products & Camphor Works  231 ITR 53/96 Taxman 1 wherein it was held that “record” for the purpose of “revision”, means the information/evidence available with the Commissioner of Income-tax as on the date of issue of show-cause-notice u/s. 263 of the Act. Nothing prohibits the Commissioner from collecting and relying upon new/additional material/evidence to show and state that the order is erroneous and prejudicial to the interest of revenue. He submitted that like all enquiry conducted by the Assessing Officer to come to correct conclusion could be the very reason to invoke the provisions of section 263 of the Act. He submitted that in this case there is total non application of mind by the Assessing Officer and thereby incorrect assessment of facts. He relied on the following judgments:
(a) CIT v. Daga Entrade (P.) Ltd.  327 ITR 467 (Gau.);
(b) Consolidated Photo & Finvest Ltd. v. Asstt. CIT  281 ITR 394/151 Taxman 41 (Delhi),
(c) Ashok Leyland v. CIT  260 ITR 599/ 125 Taxman 965 (Mad.);
(d) CIT v. Jawahar Bhattacharjee  341 ITR 434/209 Taxman 174 (Gau.);
(e) CIT v. McMillan & Co.  33 ITR 182 (SC)
(f) Rampyari Devi Saroogi v. CIT  67 ITR 84 (SC)
(g) Malabar Industrial Co. Ltd. v. CIT  243 ITR 83/109 Taxman 66 (SC)
(h) CIT v. Pushpa Devi  173 ITR 445/40 Taxman 375 (Patna)
(i) Addl. CIT v. Mukur Corpn.  111 ITR 312 (Guj.)
(j) Smt. Lajja Wati Singhal v. CIT  226 ITR 527/95 Taxman 157 (All.)
(k) Jai Bharat Tanners v. CIT  264 ITR 673/128 Taxman 880 (Mad.)
(l) Thalibai F. Jain v. ITO  101 ITR 1 (Kar.)
18. He also relied on the order of the Tribunal in the case of Spectra Shares [IT Appeal No. 748/Hyd/2011 order dated 5.8.2011].
19. We have carefully considered the rival submissions in the light of material placed before us and also gone through all the judgements cited by the parties before us. First we take up the legal issue with reference to the jurisdiction of invoking the provisions of section 263 of the Act by the learned CIT. The scheme of the IT Act is to levy and collect tax in accordance with the provisions of the Act and this task is entrusted to the Revenue. If due to erroneous order of the assessing officer, the Revenue is losing tax lawfully payable by a person, it will certainly be prejudicial to the interest of the revenue. As held in the case of Malabar Industries Co. Ltd., (supra), the Commissioner can exercise revision jurisdictional u/s 263 if he is satisfied that the order of the assessing officer sought to be revised is (i)erroneous; and also (ii) prejudicial to the interests of the revenue. The word ‘erroneous’ has not been defined in the Income Tax Act. It has been however defined at page 562 in Black’s Law Dictionary (seventh Edition) thus’;
‘erroneous, adj. Involving error, deviating from the law’.
The word ‘error’ has been defined at the same page in the same dictionary thus:
‘error No. 1 : A psychological state that does not conform to Objective reality; a brief that what is false is true or that what is true is false’.
At page 649/650 in P. Ramanatha Aiyer’s Law Lexicon Reprint 2002, the word ‘error’ has been defined to mean-
‘Error: A mistaken judgement or deviation from the truth in matters of fact, and from the law in matters of judgement ‘error’ is a fault in judgement, or in the process or proceeding to judgement or in the execution upon the same, in a Court of Record; which in the Civil Law is called a Nullityie” (termes de la ley).
Something incorrectly done through ignorance or inadvertence S.99 CPC and S.215 Cr.PC.
‘Error, Fault, Error respects the act; fault respect the agent, an error may lay in the judgement, or in the conduct, but a fault lies in the will or intention.”
20. At page 650 of the aforesaid Law Lexicon, the scope of Error, Mistake, Blunder, and Hallucination has been explained thus:
“An error is any deviation from the standard or course of right, truth, justice or accuracy, which is not intentional. A mistake is an error committed under a misapprehension of misconception of the nature of a case. An error may be from the absence of knowledge, a mistake is from insufficient or false observation. Blunder is a practical error of a peculiarly gross or awkward kind, committed through glaring ignorance, heedlessness, or awkwardness. An error may be overlooked or atoned for, a mistake may be rectified, but the shame or ridicule which is occasioned by a blunder, who can counteract. Strictly speaking, Hallucination is an illusion of the perception, a phantasm of the imagination. The one comes of disordered vision, the other of discarded imagination. It is extended in medical science to matters of sensation, whether there is no corresponding cause to produce it. In its ordinary use it denotes an unaccountable error in judgement or fact, especially in one remarkable otherwise for accurate information and right decision. It is exceptional error or mistake in those otherwise not likely to be deceived.”
21. In order to ascertain whether an order sought to be revised under Section 263 is erroneous, it should be seen whether it suffers from any of the aforesaid forms of error. In our view, an order sought to be revised under Section 263 would be erroneous and fall in the aforesaid category of “errors” if it is, inter alia, based on an incorrect assumption of facts or an incorrect application of law or non-application of mind to something which was obvious and required application of mind or based on no or insufficient materials so as to affect the merits of the case and thereby cause prejudice to the interest of the revenue.
22. Section 263 of the Income-tax Act seeks to remove the prejudice caused to the revenue by the erroneous order passed by the Assessing Officer. It empowers the Commissioner to initiate suo moto proceedings either where the Assessing Officer takes a wrong decision without considering the materials available on record or he takes a decision without making an enquiry into the matters, where such inquiry was prima facie warranted. The Commissioner will be well within his powers to regard an order as erroneous on the ground that in the circumstances of the case, the Assessing Officer should have made further inquiries before accepting the claim made by the assessee in his return. The reason is obvious. Unlike the Civil Court which is neutral in giving a decision on the basis of evidence produced before it, the role of an Assessing Officer under the Income-tax Act is not only that of an adjudicator but also of an investigator. He cannot remain passive in the face of a return, which is apparently in order but calls for further enquiry. He must discharge both the roles effectively. In other words, he must carry out investigation where the facts of the case so require and also decide the matter judiciously on the basis of materials collected by him as also those produced by the assessee before him. The scheme of assessment has undergone radical changes in recent years. It deserves to be noted that the present assessment was made under Section 143(3) of the Income-tax Act. In other words, the Assessing Officer was statutorily required to make the assessment under Section 143(3) after scrutiny and not in a summary manner as contemplated by Sub-section (1) of Section 143. Bulk of the returns filed by the assessees across the country is accepted by the Department under Section 143(1) without any scrutiny. Only a few cases are picked up for scrutiny. The Assessing Officer is therefore, required to act fairly while accepting or rejecting the claim of the assessee in cases of scrutiny assessments. He should be fair not only to the assessee but also to the Public Exchequer. The Assessing Officer has got to protect, on one hand, the interest of the assessee in the sense that he is not subjected to any amount of tax in excess of what is legitimately due from him, and on the other hand, he has a duty to protect the interests of the revenue and to see that no one dodged the revenue and escaped without paying the legitimate tax. The Assessing Officer is not expected to put blinkers on his eyes and mechanically accept what the assessee claims before him. It is his duty to ascertain the truth of the facts stated and the genuineness of the claims made in the return when the circumstances of the case are such as to provoke inquiry. Arbitrariness in either accepting or rejecting the claim has no place. The order passed by the Assessing Officer becomes erroneous because an enquiry has not been made or genuineness of the claim has not been examined where the inquiries ought to have been made and the genuineness of the claim ought to have been examined and not because there is anything wrong with his order if all the facts stated or claim made therein are assumed to be correct. The Commissioner may consider an order of the Assessing Officer to be erroneous not only when it contains some apparent error of reasoning or of law or of fact on the face of it but also when it is a stereo-typed order which simply accepts what the assessee has stated in his return and fails to make enquiries or examine the genuineness of the claim which are called for in the circumstances of the case. In taking the aforesaid view, we are supported by the decisions of the Hon’ble Supreme Court in Rampyari Devi Saraogi (supra), Smt. Tara Devi Aggarwal v. CIT  88 ITR 323 (SC), and Malabar Industrial Co. Ltd’s (supra).
23. In Malabar Industrial Co. Ltd. case (supra) the Hon’ble Court has held as under:
“There can be no doubt that the provision cannot be invoked to correct each and every type of mistake or error committed by the Assessing Officer, it is only when an order is erroneous that the section will be attracted. An incorrect assumption of facts or an incorrect application of law will satisfy the requirement of the order being erroneous. In the same category fall the orders passed without applying the principles of natural justice or without application of mind.
In our humble view, arbitrariness in decision-making would always need correction regardless of whether it causes prejudice to an assessee or to the State Exchequer. The Legislature has taken ample care to provide for the mechanism to have such prejudice removed. While an assessee can have it corrected through revisional jurisdiction of the Commissioner under Section 264 or through appeals and other means of judicial review, the prejudice caused to the State Exchequer can also be corrected by invoking revisional jurisdiction of the Commissioner under Section 263. Arbitrariness in decision-making causing prejudice to either party cannot therefore be allowed to stand and stare at the legal system. It is difficult to countenance such arbitrariness in the actions of the Assessing Officer. It is the duty of the Assessing Officer to adequately protect the interest of both the parties, namely, the assessee as well as the State. If he fails to discharge his duties fairly, his arbitrary actions culminating in erroneous orders can always be corrected either at the instance of the assessee, if the assessee is prejudiced or at the instance of the Commissioner, if the revenue is prejudiced. While making an assessment, the ITO has a varied role to play. He is the investigator, prosecutor as well as adjudicator. As an adjudicator he is an arbitrator between the revenue and the taxpayer and he has to be fair to both. His duty to act fairly requires that when he enquires into a substantial matter like the present one, he must record a finding on the relevant issue giving, howsoever briefly, his reasons therefor. In S.N. Mukherjee v. Union of India AIR 1990 SC 1984, it has been observed by the Hon’ble Supreme Court as follows:
“Reasons, when recorded by an administrative authority in an order passed by it while exercising quasi-judicial functions, would no doubt facilitate the exercise of its jurisdiction by the appellate or supervisory authority. But the other considerations, referred to above, which have also weighed with this Court in holding that an administrative authority must record reasons for its decision are of no less significance. These considerations show that the recording of reasons by an administrative authority serves a salutary purpose, namely, it excludes chances or arbitrariness and ensures a degree of fairness in the process of decision-making. The said purpose would apply equally to all decisions and its application cannot be confined to decisions which are subject to appeal, revision or judicial review. In our opinion, therefore, the requirement that reasons be recorded should govern the decisions of an administrative authority exercising quasi-judicial functions irrespective of the fact may, however, be added that it is not required that the reasons should be as elaborate as in the decision of a court of law. The extent and nature of the reasons would depend on particular facts and circumstances. What is necessary is that the reasons are clear and explicit so as to indicate that the authority has given due consideration to the points in controversy. The need for recording of reasons is greater in a case where the order is passed at the original stage. The appellate or revisional authority, if it affirms such an order, need not give separate reasons if the appellate or revisional authority agrees with the reasons contained in the order under challenge.”
24. Similar view was earlier taken by the Hon’ble Supreme Court in Siemens Engg. & Mfg. Co. of India Ltd. v. Union of India AIR 1976 SC 1785. It is settled law that while making assessment on assessee, the ITO acts in a quasi-judicial capacity. An assessment order is amenable to appeal by the assessee and to revision by the Commissioner under Sections 263 and 264. Therefore, a reasoned order on a substantial issue is legally necessary. The judgments on which reliance was placed by the learned Counsel for the assessee also points to the same direction. They have held that orders, which are subversive of the administration of revenue, must be regarded as erroneous and prejudicial to the interests of the revenue. If the Assessing Officers are allowed to make assessments in an arbitrary manner, as has been done in the case before us, the administration of revenue is bound to suffer. If without discussing the nature of the transaction and materials on record, the Assessing Officer had made certain addition to the income of the assessee, the same would have been considered erroneous by any appellate authority as being violative of the principles of natural justice which require that the authority must indicate the reasons for an adverse order. We find no reason why the same view should not be taken when an order is against the interests of the revenue. As a matter of fact such orders are prejudicial to the interests of both the parties, because even the assessee is deprived of the benefit of a positive finding in his favour, though he may have sufficiently established his case.
25. In view of the foregoing, it can safely be said that an order passed by the Assessing Officer becomes erroneous and prejudicial to the interests of the Revenue under Section 263 in the following cases:
(i) The order sought to be revised contains error of reasoning or of law or of fact on the face of it.
(ii) The order sought to be revised proceeds on incorrect assumption of facts or incorrect application of law. In the same category fall orders passed without applying the principles of natural justice or without application of mind.
(iii) The order passed by the Assessing Officer is a stereotype order which simply accepts what the assessee has stated in his return or where he fails to make the requisite enquiries or examine the genuineness of the claim which is called for in the circumstances of the case.
26. We shall now turn to the facts of the case to see whether the case before us is covered by the aforesaid principles. Perusal of the assessment order passed by the Assessing Officer does not show any application of mind on his part. He simply accepted the income declared by the assessee. This is a case where the Assessing Officer mechanically accepted what the assessee wanted him to accept without any application of mind or enquiry. The evidence available on record is not enough to hold that the return of the assessee was objectively examined or considered by the Assessing Officer. It is because of such non-consideration of the issues on the part of the Assessing Officer that the return filed by the assessee stood automatically accepted without any proper scrutiny. The assessment order placed before us is clearly erroneous as it was passed without proper examination or enquiry or verification or objective consideration of the claim made by the assessee. The Assessing Officer has completely omitted to examine the issues in question from consideration and made the assessment in an arbitrary manner. His order is a completely non-speaking order. In our view, it was a fit case for the learned Commissioner to exercise his revisional jurisdiction under section 263 which he rightly exercised by cancelling the assessment order and directing the Assessing Officer to pass a fresh order considering the issues raised by the CIT. In our view, the assessee should have no grievance in the action of learned Commissioner in exercising the jurisdiction u/s. 263 of the IT Act.
27. It was however contended by the learned Counsel that the Assessing Officer had taken a possible view in accepting the return of the assessee with reference to expenditure and hence, the Commissioner was not justified in assuming the revisional jurisdiction under Section 263. We have given our thoughtful consideration to the aforesaid submissions. As already stated earlier, an order becomes erroneous because inquiries, which ought to have been made on the facts of the case, were not made and not because there is anything wrong with the order if all the facts stated or the claims made in the return are assumed to be correct. Thus, it is mere failure on the part of the Assessing Officer to make the necessary inquiries or to examine the claim made by the assessee in accordance with law, which renders the resultant order erroneous and prejudicial to the interest of the revenue. Nothing more is required to be established in such a case. One would not know as to what would have happened if the Assessing Officer had made the requisite inquiries or examined the claim of the assessee in accordance with law. He could have accepted the assessee’s claim. Equally, he could have also rejected the assessee’s claim depending upon the results of his enquiry or examination into the claim of the assessee. Thus, the formation of any view by the Assessing Officer would necessarily depend upon the results of his inquiry and conscious, and not passive, examination into the claim of the assessee. If the Assessing Officer passes an order mechanically without making the requisite inquiries or examining the claim of the assessee in accordance with law, such an order will clearly be erroneous in law as it would not be based on objective consideration of the relevant materials. It is therefore, the mere failure on the part of the Assessing Officer in not making the inquiries or not examining the claim of the assessee in accordance with law that per se renders the resultant order erroneous and prejudicial to the interest of the revenue. Nothing else is required to be established in such a case to show that the order sought to be revised is erroneous and prejudicial to the interests of the revenue.
28. We are unable to accept the submission of the learned Counsel for two other reasons also. First reason is that the view so taken by the Assessing Officer without making the requisite inquiries or examining the claim of the assessee will per se be an erroneous view and hence will be amenable to revisional jurisdiction under Section 263. Second reason is that it is not taking of any view that will take the matter under the scope of Section 263. The view taken by the Assessing Officer should not be a mere view in vacuum but a judicial view. It is well established that the Assessing Officer being a quasi-judicial authority cannot take a view, either against or in favour of the assessee / revenue, without making proper inquiries and without proper examination of the claim made by the assessee in the light of the applicable law. As already stated earlier, we are not able to appreciate on what material was placed before the Assessing Officer at the assessment stage to take such a view. The assessee has also not been able to lead enough evidence to show to us that any inquiry was made by the Assessing Officer in this regard. Therefore mere allegation that the Assessing Officer has taken a view in the matter will not put the matter beyond the purview of Section 263 unless the view so taken by the Assessing Officer is a judicial view consciously based upon proper inquiries and appreciation of all the relevant factual and legal aspects of the case. The judicial view taken by the Assessing Officer may perhaps place the matter outside the purview of Section 263 unless it is shown that the view so taken by the Assessing Officer contains some apparent error of reasoning or of law or of fact on the face of it.
29. The learned Counsel has strongly relied upon the following observations made in the case of Malabar Industrial Co. Ltd. (supra) and submitted that the learned Commissioner was not justified in substituting his view for that of the Assessing Officer:
“… Every loss of revenue as a consequence of an order of the Assessing Officer cannot be treated as prejudicial to the interests of the revenue. For example, when an Income-tax Officer adopted one of the courses permissible in law and it has resulted in loss of revenue; or where two views are possible and the Income-tax Officer has taken one view with which the Commissioner does not agree, it cannot be treated as an erroneous order prejudicial to the interests of the revenue, unless the view taken by the Income-tax Officer is unsustainable in law.”
30. We have carefully gone through the aforesaid observations. “Adopting” one of the courses permissible in law necessarily requires the Assessing Officer to consciously analyse and evaluate the facts in the light of relevant law and bring them on record. It is only then that he can be said to have “adopted” or chosen one of the courses permissible in law. The Assessing Officer cannot be presumed or attributed to have “adopted” or chosen a course permissible in law when his order does not speak in that behalf. Similarly, “taking” one view where two or more views are possible also necessarily imports the requirement of analysing the facts in the light of applicable law. Therefore, proper examination of facts in the light of relevant law is a necessary concomitant in order to say that the Assessing Officer has adopted a permissible course of law or taken a view where two or more views are possible. It is only after such proper examination and evaluation has been done by the Assessing Officer that he can come to a conclusion as to what are the permissible courses available in law or what are the possible views on the issue before him. In case he comes to the conclusion that more than one view is possible then he has necessarily to choose a view, which is most appropriate on the facts of the case. In order to apply the aforesaid observations to a given case, it must therefore first be shown that the Assessing Officer has “adopted” a permissible course of law or, where two views are possible, the Assessing Officer has “taken” one such possible view in the order sought to be revised under Section 263. This requires the Assessing Officer to take a conscious decision; else he would neither be able to “adopt” a course permissible in law nor “take” a view where two or more views are possible. In other words, it is the Assessing Officer who has to adopt a permissible course of law or take a view where two or more views are possible. It is difficult to comprehend as to how the Assessing Officer can be attributed to have “adopted” a permissible course of law or “taken” a view where two or more views are possible when the order passed by him does not speak in that behalf. We cannot assume, in order to provide legitimacy to the assessment order, that the Assessing Officer has adopted a permissible course of law or taken a possible view where his order does not say so. The submissions made by the learned Counsel, if accepted, would require us to form, substitute and read our view in the order of the Assessing Officer when the Assessing Officer himself has not taken a view. It could have been a different position if the Assessing Officer had “adopted” or “taken” a view after analysing the facts and deciding the matter in the light of the applicable law. However, in the case before us, the Assessing Officer has not at all examined as to whether only one view was possible or two or more views were possible and hence, the question of his adopting or choosing one view in preference to the other does not arise. The aforesaid observations of the Hon’ble Supreme Court do not, in our view, help the assessee; and rather they are against the assessee.
31. In the case of Padmasundara Rao v. State of Tamil Nadu  255 ITR 147, the Hon’ble Supreme Court has held that
“… There is always peril in treating the words of a speech or judgment as though they are words in a legislative enactment, and it is to be remembered that judicial utterances are made in the setting of the facts of a particular case, said Lord Morrin in Harrington v. British Railways Board  2 WLR 537 (HL). Circumstantial flexibility, one additional or different fact may make a world of difference between conclusions in two cases….” Therefore, the observations of the Hon’ble Supreme Court in Malabar Industrial Co. Ltd’s case (supra) on which reliance has been placed by the learned Counsel cannot be read in isolation. The judgment deserves to be read in its entirety to cull out the law laid down by the Hon’ble Supreme Court. If so read, it is quite evident that the orders passed on an incorrect assumption of facts or incorrect application of law or without applying the principles of natural justice or without application of mind will satisfy the requirement of the order being erroneous and prejudicial to the interest of the revenue. If the order sought to be revised under Section 263 suffers from any of the aforesaid vices, it cannot be said that the Assessing Officer has “adopted”, in such an order, a course permissible in law or “taken” a view where two or more views are possible.”
32. It was next contended by the learned Authorised Representative that the Assessing Officer had considered all the relevant aspects of the case carefully while passing the order. According to him, the mere fact that the assessment order passed by the Assessing Officer was short would neither mean failure on his part in not examining the matter carefully nor would render his order erroneous so long as the view taken by him was a possible view. In our view, the aforesaid submission of the assessee must fail for the reasons already explained in the foregoing paras of this order as the order, which is sought to be revised under Section 263 reflects no proper application of mind by the Assessing Officer and thus be amenable to revision under Section 263. In this case before us, the assessment order passed by the Assessing Officer lacks judicial strength to stand. It is not a case where the order is short but is not supported by judicial strength. It is in this view of the matter that we feel that the learned Commissioner has correctly exercised his revisional jurisdiction under Section 263.
33. In our opinion, the Assessing Officer has been entrusted the role of an investigator, prosecutor as well as adjudicator under the scheme of the Income-tax Act. If he commits an error while discharging the aforesaid roles and consequently passes an erroneous order causing prejudice either to the assessee or to the State Exchequer or to both, the order so passed by him is liable to be corrected. As mentioned earlier, the assessee can have the prejudice caused to him corrected by filing an appeal; as also by filing a revision application under Section 264. But the State Exchequer has no right of appeal against the orders of the Assessing Officer. Section 263 has therefore been enacted to empower the Commissioner to correct an erroneous order-passed by the Assessing Officer which he considers to be prejudicial to the interest of the revenue. The Commissioner has also been empowered to invoke his revisional jurisdiction under Section 264 at the instance of the assessee also. The line of difference between Sections 263 and 264 is that while the former can be invoked to remove the prejudice caused to the State the later can be invoked to remove the prejudice caused to the assessee. The provisions of Section 263 would lose significance if they were to be interpreted in a manner that prevented the Commissioner from revising the erroneous order passed by the Assessing Officer, which was prejudicial to the interest of the revenue. In fact, such a course would be counter productive as it would have the effect of promoting arbitrariness in the decisions of the Assessing Officers and thus destroy the very fabric of sound tax discipline. If erroneous orders, which are prejudicial to the interest of the revenue, are allowed to stand, the consequences would be disastrous in that the honest tax payers would be required to pay more than others to compensate for the loss caused by such erroneous orders. For this reason also, we are of the view that the orders passed on an incorrect assumption of facts or incorrect application of law or without applying the principles of natural justice or without application of mind or without making requisite inquiries will satisfy the requirement of the order being erroneous and prejudicial to the interest of the revenue within the meaning of Section 263.
34. Further coming to the facts of the present case, there is no enquiry in respect of commission payment made to the following parties to the tune of Rs. 4,18,80,995 as below:
|Name of the party|| |
Commission paid (Rs.)
|R.K. Marketing Service|| |
|Vijay Mining Pvt. Ltd.|| |
|Lakshmi Mines & Minerals|| |
|B. Bhagyalakshmi|| |
|K. Annapurna|| |
35. The CIT was of the opinion that there is no proper enquiry by the Assessing Officer. The Assessing Officer accepted the claim of payment of commission by placing reliance only on confirmation letters filed by the assessee firm without conducting further enquiry with regard to genuineness of the commission payments. The Assessing Officer not gathered any information regarding the genuineness of payments and evidence to suggest the nature of services rendered by these parties. It is incumbent on the part of the Assessing Officer to come to independent conclusion that the payments commensurate with the nature of services rendered by the parties. The Assessing Officer absolutely closed his eyes for extraneous reasons and accepted the commission payments just on the basis of confirmation letters. Confirmation letters themselves cannot prove the genuineness of the payments and nature of services rendered. Being so, it has to be examined thoroughly. At this point, we make it clear that the CIT though said in his order that there is no proper enquiry by the Assessing Officer, he, instead of directing the Assessing Officer to carry on further enquiry from the point where he has stopped, disallowed the entire commission payments. This is not proper. The CIT is required to cause enquiry himself regarding the genuineness of payments of commission or got it done from the Assessing Officer. In the present case, he failed on both the counts. Being so, in our opinion, it is appropriate to remit the entire issue back to the file of the Assessing Officer to carry further enquiry. Accordingly, we modify the order of the CIT to that extent and remit the entire issue to the file of the Assessing Officer to carry further enquiry as the case warrants regarding genuineness of the commission payments to the above parties. The Assessing Officer is directed to examine the entire issue and if he finds the assessee has incurred any commission payments wholly and exclusively for the purpose of business commensurate with the services rendered by the respective parties, the same is to be allowed to that extent.
36. In the result, appeal of the assessee is partly allowed for statistical purposes.