Revision u/s 263 without recording a finding regarding escapement of income is unsustainable

Prabhakar Jha Vs PCIT (ITAT Kolkata)

ITAT Kolkata held that invocation of revisionary power u/s 263 of the Income Tax Act without pointing out the error committed by AO and without recording a finding regarding escapement of income is unsustainable in law.

Facts- The assessee at the relevant time was running a Petrol Pump in the name and style of ‘Kuldeep Service Station’. It was engaged in purchase and sale of petroleum products. He has filed its return of income electronically on 12.03.2018 declaring total income of Rs.6,86,240/-. The case of the assessee was selected for scrutiny assessment on the issue of cash deposit during demonetisation. AO has passed an assessment order on 24.12.2019 u/s. 143(3) of the Act. AO has determined the total taxable income at Rs.8,09,810/- as against the returned income. He made certain disallowances out of salary to staff, miscellaneous expenses, travelling expenses etc.

The Commissioner took cognizance u/s. 263 of the Act and observed that a perusal of the assessment record would reveal that the assessee received contractual income of Rs.15,84,602/- from Indian Oil Corporation Limited. This contractual receipt was not disclosed in the Profit & Loss Account and AO did not raise any query in this regard, therefore, the order of the AO is erroneous as well as prejudicial to the interest of revenue.

Conclusion- In the present case, the ld. Commissioner harboured a belief that there is a contractual receipt of Rs.15,00,000/- and the ld. Assessing Officer did not make any inquiry about this contractual receipt. The moment assessee has explained the transaction, then it was for the ld. Commissioner to pinpoint, as to how this explanation is to be rejected and where error has been committed by the ld. Assessing Officer. But no such step has been taken by the ld. Commissioner. It is the ld. CIT who has to come to the conclusion that assessment order is erroneous before setting aside the order. In the present case, he has to examine and recorded a finding as to how this contractual receipt goad escapement of income for which assessment order is to be termed as erroneous. We find no such efforts have been made. Therefore the impugned order is not sustainable and it is quashed.

FULL TEXT OF THE ORDER OF ITAT KOLKATA

The assessee is in appeal before the Tribunal against the order of ld. Principal Commissioner of Income Tax, Patna-1 dated 12.03.2022 passed under section 263 of the Income Tax Act in Assessment Year 2017-18.

2. The assessee has taken five grounds of appeal, but in brief his grievances revolve around a single issue, namely ld. CIT has erred in taking cognizance under section 263 and thereby setting aside the assessment order.

3. Brief facts of the case are that the assessee at the relevant time was running a Petrol Pump in the name and style of ‘Kuldeep Service Station’. It was engaged in purchase and sale of petroleum products. He has filed its return of income electronically on 12.03.2018 declaring total income of Rs.6,86,240/-. The case of the assessee was selected for scrutiny assessment on the issue of cash deposit during demonetisation. A notice under section 143(2) was issued and served upon the assessee. After hearing the assessee, the ld. Assessing Officer has passed an assessment order on 24.12.2019 under section 143(3) of the Income Tax Act. The ld. Assessing Officer has determined the total taxable income at Rs.8,09,810/- as against the returned income. He made certain disallowances out of salary to staff, miscellaneous expenses, travelling expenses etc. The ld. Commissioner took cognizance under section 263 of the Income Tax Act and observed that a perusal of the assessment record would reveal that the assessee received contractual income of Rs.15,84,602/- from Indian Oil Corporation Limited. This contractual receipt was not disclosed in the Profit & Loss Account and ld. Assessing Officer did not raise any query in this regard, therefore, the order of the ld. Assessing Officer is erroneous as well as prejudicial to the interest of revenue. In response to the show-cause notice, it was contended by the assessee that all the books of account were produced before the ld. Assessing Officer, who has duly investigated them.

4. As far as the item mentioned in the show-cause notice by the ld. Commissioner is concerned, he submitted that a tanker was put into service for transporting the petroleum products from Indian Oil Station upto the Petrol Pump and the outcome of such activity is as under:-

Diesel and Driver expenses:

Thus according to the assessee, there was no other commission income from Indian Oil on plying of the oil tankers. This aspect has been examined by the ld. Assessing Officer.

5. The ld. Principal Commissioner without going into the details submitted by the assessee simply treated the assessment order as erroneous and set aside for re­- examination.

6. The ld. Counsel for the assessee reiterated his submission as was raised before the ld. Commissioner, whereas the ld. CIT(DR), on the other hand, relied upon the order of ld. Pr. Commissioner.

7. We have duly considered the rival contentions and gone through the record carefully. Before we embark upon an enquiry on the facts and issues agitated before us to find out whether the action u/s 263 of the Act, deserves to be taken against the assessee or not, it is pertinent to take note of this section. It reads as under:-

“263(1) The Commissioner may call for and examine the record of any proceeding under this Act, and if he considers that any order passed therein by the Assessing Officer is erroneous in so far as it is prejudicial to the interest 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.- 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 Assessing Officer shall include-

(i) an order of assessment made by the Assistant Commissioner or Deputy Commissioner or the Income Tax Officer on the basis of the directions issued by the Joint Commissioner under section 144A;

(ii) an order made by the Joint Commissioner in exercise of the powers or in the performance of the functions of an Assessing Officer conferred on, or assigned to, him under the orders or directions issued by the Board or by the Chief Commissioner or Director General or Commissioner authorized by the Board in this behalf under section 120;

(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 Commissioner;

(c) 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 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.

(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.”

8. A bare perusal of the sub section-1 would reveal that powers of revision granted by section 263 to the learned Commissioner have four compartments. In the first place, the learned Commissioner may call for and examine the records of any proceedings under this Act. For calling of the record and examination, the learned Commissioner was not required to show any reason. It is a part of his administrative control to call for the records and examine them. The second feature would come when he will judge an order passed by an Assessing Officer on culmination of any proceedings or during the pendency of those proceedings. On an analysis of the record and of the order passed by the Assessing Officer, he formed an opinion that such an order is erroneous in so far as it is prejudicial to the interests of the Revenue. By this stage the learned Commissioner was not required the assistance of the assessee. Thereafter the third stage would come. The learned Commissioner would issue a show-cause notice pointing out the reasons for the formation of his belief that action u/s 263 is required on a particular order of the Assessing Officer. At this stage the opportunity to the assessee would be given. The learned Commissioner has to conduct an inquiry as he may deem fit. After hearing the assessee, he will pass the order. This is the 4th compartment of this section. The learned Commissioner may annul the order of the Assessing Officer. He may enhance the assessed income by modifying the order. He may set aside the order and direct the Assessing Officer to pass a fresh order. At this stage, before considering the multi-fold contentions of the ld. Representatives, we deem it pertinent to take note of the fundamental tests propounded in various judgments relevant for judging the action of the CIT taken u/s 263. The ITAT in the case of Mrs. Khatiza S. Oomerbhoy Vs. ITO, Mumbai, 101 TTJ 1095, analyzed in detail various authoritative pronouncements including the decision of Hon’ble Supreme Court in the case of Malabar Industries 243 ITR 83 and has propounded the following broader principle to judge the action of CIT taken under section 263.

(i) The CIT must record satisfaction that the order of the AO is erroneous and prejudicial to the interest of the Revenue. Both the conditions must be fulfilled.

(ii) Sec. 263 cannot be invoked to correct each and every type of mistake or error committed by the AO and it was only when an order is erroneous that the section will be attracted.

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

(iv) If the order is passed without application of mind, such order will fall under the category of erroneous order.

(v) Every loss of revenue cannot be treated as prejudicial to the interests of the Revenue and if the AO has adopted one of the courses permissible under law or where two views are possible and the AO has taken one view with which the CIT does not agree. If cannot be treated as an erroneous order, unless the view taken by the AO is unsustainable under law.

(vi) If while making the assessment, the AO examines the accounts, makes enquiries, applies his mind to the facts and circumstances of the case and determine the income, the CIT, while exercising his power under s 263 is not permitted to substitute his estimate of income in place of the income estimated by the AO.

(vii) The AO exercises quasi-judicial power vested in him and if he exercises such power in accordance with law and arrive at a conclusion, such conclusion cannot be termed to be erroneous simply because the CIT does not fee stratified with the conclusion.

(viii) The CIT, before exercising his jurisdiction under s. 263 must have material on record to arrive at a satisfaction.

(ix) If the AO has made enquiries during the course of assessment proceedings on the relevant issues and the assessee has given detailed explanation by a letter in writing and the AO allows the claim on being satisfied with the explanation of the assessee, the decision of the AO cannot be held to be erroneous simply because in his order he does not make an elaborate discussion in that regard.

9. In the light of above, we have gone through the record carefully. During the course of hearing, our attention was drawn towards the judgment of the Hon’ble Delhi High Court in the case of ITO –vs.- D.G. Housing Projects (343 ITR 329). In this judgment, Hon’ble Delhi High Court has propounded that ld. Commissioner cannot remit the matter to the ld. Assessing Officer to decide whether the findings recorded are erroneous. In the present case, the ld. Commissioner harboured a belief that there is a contractual receipt of Rs.15,00,000/- and the ld. Assessing Officer did not make any inquiry about this contractual receipt. The moment assessee has explained the transaction, then it was for the ld. Commissioner to pinpoint, as to how this explanation is to be rejected and where error has been committed by the ld. Assessing Officer. But no such step has been taken by the ld. Commissioner. It is the ld. CIT who has to come to the conclusion that assessment order is erroneous before setting aside the order. In the present case, he has to examine and recorded a finding as to how this contractual receipt goad escapement of income for which assessment order is to be termed as erroneous. We find no such efforts have been made. Therefore the impugned order is not sustainable and it is quashed.

10. In the result, the appeal of the assessee is allowed.

Order pronounced in the open Court on 12.10.2023.