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Proceedings u/s 263(1) could only be invoked after satisfaction of its Ingredients

In the present case the Hon’ble Tribunal held that for invoking section 263 both the conditions that the order of AO is erroneous as well prejudicial to the interest of Revenue should be satisfied

Brief of the Case

In the present case the Hon’ble Tribunal held that for invoking section 263 both the conditions that the order of AO is erroneous as well prejudicial to the interest of Revenue should be satisfied

Facts of the Case

In this case CIT has issued show cause notice u/s 263 on the basis that AO has dropped the penalty proceedings initiated u/s 271(1)(c) on the ground that it is a voluntary surrender by assessee and ultimately CIT set aside the order of AO and directed him to pass a speaking penalty order.

Contentions of the Revenue

The Ld. DR vehemently relied on the order of CIT but was not able to adduce evidence before the Hon’ble Tribunal that the action taken by the AO to drop the proceeding u/s 271(1)(c) of the Act was illegal.

Contentions of the Assessee

The Assessee already gave the explanation that the sum of ₹ 14,11,817/- is not the income liable to taxation. Also, he offered the said amount to buy peace and to avoid multiplicity of litigation. According, to him it is not a fit case for levy of penalty and there is no lack of enquiry on the part of AO and also the application of mind was made by AO and then penalty proceedings were dropped.

Held by CIT

The ld. CIT quashed the order of AO and raised the section 263 of the Act.

Held by ITAT

The Hon’ble Tribunal relied on the decision of Malabar Industrial Co. Ltd. vs. CIT 243 ITR 83 (SC), in which it was held that the pre-requisite to the exercise of jurisdiction by the Commissioner under section 263 is that the order of the AO is erroneous insofar as it is prejudicial to the interests of the revenue where two conditions have to be satisfied that the order of the assessing officer sought to be revised is erroneous and is prejudicial to the interests of the revenue. If one of them is absent then section 263(1) cannot be invoked. An incorrect assumption of facts or an incorrect application of law will satisfy the requirement of the order being erroneous. In the same category, there are orders passed without applying the principles of natural justice or without application of mind. Also, where two views are possible and the assessing 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 assessing officer is unsustainable in law.

Accordingly, the Hon’ble Tribunal applied the above observations in the present case and held in the favour of Assessee that the proceedings u/s 263 can’t be initiated.

Categories: Income Tax
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