Cases where revision order under Section 263 of the Income Tax Act, 1961 was upheld

In the following instances, the revision under Section 263 was held to be valid :

Commissioner can assume jurisdiction under section 263 during pendency of appeal before Commissioner (Appeals); in view of Explanation (c) to section 263(1), Commissioner can assume jurisdiction under section 263 in respect of issues which have not been considered and decided by Commissioner (Appeals)

The power of PCIT under section 263 extends to such matters which had not been considered and decided in such appeal. The use of the word “considered and decided” in Explanation 1(c) to section 263 leaves no room for doubt that if some issue is decided by CIT(A) in an appeal against the assessment order passed by the Assessing Officer. Then, that issue cannot be subject matter of proceedings under section 263 of the Act. 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 Assessing Officer 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 1(c), the PCIT cannot assume jurisdiction in respect of issue B and C under section 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 A. 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 under section 251 of the Act on issue A but after passing of the appellate order by the CIT(A), now the PCIT can assume jurisdiction under section 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 under section 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). In another circumstances, if an appeal, against the assessment order passed by the Assessing Officer, 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 under section 263 of the Act in respect of all the issues whether contested before CIT(A) or not. – [JR Industries v. PCIT (2022) 192 ITD 414 : (2021) 132 taxmann.com 302 (ITAT Jaipur)]

Revision under section 263 justified if Assessing Officer allowed business loss of huge amount merely based on vague premise that assessee might have to incur certain expenses relevant to keep company in operation

Assessee filed its return of income declaring loss of Rs. 1.78 crores against business income of Rs. 2.31 lakhs. Assessing Officer noted that there was no nexus between this interest income of Rs. 2.31 lakhs and so-called business activities of assessee. On this basis, he added an amount offered as business income by assessee as income from other sources. However, he accepted that assessee had incurred abovesaid business loss and allowed same. Commissioner invoked revisional jurisdiction under section 263 on ground that since assessee had not carried out any business during year, assessee was incorrectly allowed business losses claimed by it. It was noted that record had very clearly suggested that there was no business undertaken by assessee during year though it had claimed business expenses to tune of Rs. 1.78 crores. It was also found that assessee had not charged any fees whatsoever for technical or management services rendered by it during year. Therefore, without a thorough inquiry and merely based on vague premise that assessee might have to incur certain expenses which might be relevant to keep company in operation, Assessing Officer was not at all justified in allowing business loss to extent of Rs. 1.78 crores. On facts, impugned order passed by Assessing Officer allowing expenditure was not a plausible view and same was prejudicial to interest of revenue; thus, impugned invocation of revision under section 263 was justified. [In favour of revenue] (Related Assessment year : 2009-10) - [PCIT, Panaji v. Zuari Maroc Phosphates Ltd. (2021) 432 ITR 316 : 279 Taxman 333 : 126 taxmann.com 170 (Bom.)]

Assessment was completed without proper inquiries, Commissioner was competent to invoke revisional jurisdiction and direct Assessing Officer for fresh assessment

Subsequent, to passing of final assessment order, Commissioner issued revision notice based on reports of Serious Fraud Investigation Office (SFIO) and Justice Shah Commission after noting that there was under-invoicing which was not considered while issuing assessment order.  After hearing assessee's objections, revisional order was passed setting aside assessment order and Assessing Officer was directed to pass fresh assessment order - On appeal, Tribunal held that since only direction was issued for passing fresh assessment, issues raised by assessee could always be gone into by Assessing Officer after granting full opportunity to assessee. Since assessment was completed without proper inquiries, it was competent for Commissioner to invoke revisional jurisdiction and direct fresh assessment. [In favour of revenue] (Related Assessment year : 2008-09) - [Vedanta Ltd. v. CIT (2021) 279 Taxman 358 : 124 taxmann.com 435 (Bom.)]

Assessing Officer sought information from assessee regarding its claim of deduction under section 10B, however, without considering such information produced by assessee and without application of mind to same, he allowed such claim for deduction, it was a case of inadequate inquiries and, therefore, exercise of revision jurisdiction by Commissioner under section 263 was justified

Export oriented undertakings (Revision) - Word ‘erroneous’ in section 263 also includes failure to make an inquiry by Assessing Officer. Assessee filed its revised return of income claiming deduction under section 10B. Assessing Officer asked assessee to submit information regarding its claim for deduction and, thereafter, passed an assessment order allowing same. Commissioner invoked revision jurisdiction under section 263 on ground that Assessing Officer had not done any required enquiry before allowing such claim of deduction made by assessee. Assessee contended that Assessing Officer asked information regarding its claim under section 10B and after assessee submitted same, he allowed such claim of deduction. Thus, there was proper enquiry made by Assessing Officer and impugned revision under section 263 was unjustified. It was noted that assessment order indicated that Assessing Officer had not even considered, much less, applied his mind to such information provided by assessee before allowing deduction under section 10B. Merely seeking information by Assessing Officer from assessee with regard to its claim for deduction itself could never be regarded as sufficient and Assessing Officer had to consider such information so furnished and after applying mind, arrive at a decision on issue. It was a case of inadequate inquiries and, therefore, exercise of revision jurisdiction by Commissioner under section 263 was justified. [In favour of revenue] (Related Assessment years : 2006-07 and 2007-08) – [Sesa Starlite Ltd. v. CIT, Panaji, Goa (2021) 277 Taxman 443 : 123 taxmann.com 217 (Bom.)]

Assessment had been made by Assessing Officer, without verification of claim of written off bad debts as deduction, it was erroneous and prejudicial to interest of revenue, hence, Commissioner was correct in assuming revisionary jurisdiction and passing order under section 263

While exercising revisionary jurisdiction and passing order under section 263, whenever it is found by Commissioner that Assessing Officer has not conducted necessary verification and has passed assessment order accepting documents furnished by assessee without analyzing or examining them, assessment order is bound to be erroneous and prejudicial to interest of revenue. Where assessee filed its return of income claiming bad debts written off as deduction, however, Assessing Officer had not called for any specific details regarding bad debts and he had also not called for or verified list of bad debts, thus, assessment having been made without verification of claim of written off bad debts as deduction was erroneous and prejudicial to interest of revenue. Therefore, Commissioner was correct in assuming revisionary jurisdiction and passing order under section 263. [In favour of revenue] (Related Assessment year : 2014-15 – [Jalgaon People's Co-op Bank Ltd. v. PCIT, Nashik (2021) 188 ITD 608 : 127 taxmann.com 243 (ITAT Pune)]

Not issuing draft assessment order is a jurisdictional defect which cannot be cured by CIT under section 263

Compliance to section 144C is mandatory in all such cases, where TPO proposes variation in income or loss returned, which is prejudicial to interests of assessee and only after complying with conditions laid down in section 144C, Assessing Officer is empowered to pass assessment order under section 143(3) read with section 144C by completing assessment on such enhanced income or variation in loss returned by assessee – [(2021) 131 taxmann.com 309 (ITAT Kolkata)]

CIT can exercise Section 263 jurisdiction to correct an error prejudicial to interest of Revenue in the order of Assessing Officer, even if it was approved by the Joint Commissioner

Pr. CIT had called for assessment records in the case of assessee and noted that there was an information of seizure of cash amounting to Rs. 2 Crores by the Police and, therefore, a search & seizure action under section 132 & 132A was carried out in the case of the assessee. Pr. CIT further noted that assessee had claimed during the assessment proceedings that this cash of Rs. 2 Crores belonged to his deceased father, Late Sh. Satish Mehta and that the source of this cash was agricultural income of his father which had been duly declared in the father’s return of income for Assessment Year 2017-18. Pr. CIT also noted that it was the assessee’s submissions before Assessing Officer that assessee had received 2 Crores in cash after the demise of his father and it was the same cash which had been deposited in assessee’s bank accounts and had been seized by the Department. The Ld. Pr. CIT, in paragraph -8 of the impugned order has raised 10 points which have not been examined by the Assessing Officer before reaching the conclusion that impugned amount of Rs. 2 Cores belonged to the father of the assessee as his agricultural income. The issues pointed out by the Ld. Pr. CIT in para 8 of the impugned order are being reproduced herein under for a ready reference:-

 

(i)          The assessing officer has failed to call report from the state authorities to ascertain the genuineness of the agricultural activities undertaken during the year under consideration or prior/subsequent to it on the said land.

 

(ii)         Nor details of persons from whom such income was received has not been called for by the Assessing Officer neither any verification or enquiry has been made in this regard.

 

(iii)       Similarly, the details of expenses incurred on so called agricultural activities and evidences of incurring such expenses have not been gathered.

 

(iv)       Details of the Mandi or Market where such produce was sold not gathered

 

(v)         The stamp paper on which the lease deed has been stated to be recorded was purchased in Delhi during September 2012, where as the deed on it was recorded on 10.09.2015. This Lease Deed was neither registered nor notarized by any notary.

 

(vi)       It has been stated on the Lease Deed that it was recorded at Mundra, Gujrat but both the witnesses as well as the Lessee were resident of Delhi. However, no evidences were found on record to suggest how they know or met with the Lessor. How the deal was finalized whether any broker was involved. No enquiry or investigation has been done to ascertain these facts. Similarly, no enquiry has been made from the witnesses either to ascertain these facts.

 

(vii)     No evidence found on record to show that the Lessor of the land was indeed the owner of the land for which the stated Lease Deed has been recorded.

 

(viii)    Hence, it is apparently clear that the claim of seized cash generated through agricultural activities was accepted by the assessing officer without desirable examination & inquiries as elaborated above and without proper scrutiny which is totally in contravention to the relevant provisions of the Income Tax Act, 1961.

 

(ix)       No enquiry or investigation made to ascertain what happened to any crop under process at the time of demise of the father of the assessee and how its claim has been settled.

 

(x)         Similarly, no evidences were gathered about transfer of any money or the rentals paid by the Lessee to the Lessor in lieu of the Lease Deed.

It was held that the power of the Commissioner under Section 263 was in the nature of supervisory jurisdiction. This power was granted to correct an error, which was prejudicial to the interest of the Revenue in the order of Assessing Officer, even if it is approved by the Joint Commissioner, who was also falling below the rank of the Pr. Commissioner. Therefore, on provisions of Section 263 gave un-fettered right to the Commissioner of Income Tax to revise any order passed by Assessing Officer. Whatever was to be excluded by the law had already been provided under that Section and the only exception were the issues ‘decided and considered’ in the appellate orders. [In favour of revenue] (Related Assessment Year : 2017-18) – [Kapil Mehta v. PCIT - Date of Judgement : 11.10.2021 (ITAT Delhi)]

Word ‘erroneous’ in section 263 includes failure to make such an inquiry

The Commissioner can regard the order as erroneous on the ground that in the circumstances of the case the Income-tax Officer should have made further inquiries before accepting the statements made by the assessee in his return. The reason is obvious. The position and function of the Income Tax Officer is very different from that of a civil court. The statements made in a pleading proved by the minimum amount of evidence may be accepted by a civil court in the absence of any rebuttal. The civil court is neutral. It simply gives decision on the basis of the pleading and evidence which comes before it. The Income-tax Officer is not only an adjudicator but also an investigator. He cannot remain passive in the face of a return which is apparently in order but calls for further inquiry. It is his duty to ascertain the truth of the facts stated in the return when the circumstances of the case are such as to provoke an inquiry. The meaning to be given to the word “erroneous” in section 263 emerges out of this context. It is because it is incumbent on the. Income-tax Officer to further investigate the facts stated in’ the return when circumstances would make such an inquiry prudent that the word “erroneous” in section 263 includes the failure to make such an inquiry. The order becomes erroneous because such an inquiry has not been made and not because there is anything wrong with the order if all the facts stated therein are assumed to be correct. (Related Assessment Year : 2011-12) - [JNS Instruments Ltd. v. PCIT - Date of Judgement : 11.10.2021 (ITAT Delhi)]

Upholds revisionary order under section 263, finds omission by Assessing Officer to consider stamp value of property sold

Surat ITAT holds assessment order passed without considering stamp duty value of Rs. 6.2 Cr on immovable property sold, ‘erroneous’; Assessee(holding 30% of the property) sold immovable property  along with a third party for Rs. 1 Cr., but the property was value at 6.2 Cr. by the SRO; PCIT initiated proceedings under section 263 on two grounds: (i) that there is differential of amount of Rs.5.2 Cr. to be considered under section 50C and (ii) no property was shown in the balance sheet, thereby requiring disallowance of deduction u/s 54F; ITAT Remarks that “Income Tax Officer is not only an adjudicator but also an investigator… it is his duty to ascertain the truth of facts stated in return when the circumstances of the case are such as to provoke an inquiry”, cites Hon’ble Delhi High Court ruling in Gee Vee Enterprises in this regard; Observes that transaction of sale of the immovable property and capital gain remains unexplained from assessee side and further on examining the assessment order there is no whisper to examine the transaction of sale of the immovable property and capital gain, by the assessing officer; Notes that there is omission on the part of the Assessing Officer to consider such stamp duty valuation of the property at Rs.6.2 Cr. and thereby non-application of provision of section 50C has rendered the assessment order so passed by the Assessing Officer erroneous; On claim of deduction under section 54F, holds that it is not a disputed fact that old property sold and new property purchased have not been reflected in the balance sheet of the Assessee and even if, the properties were not to be shown in balance sheet, still the amount received as sale consideration of old property should have been reflected in the balance sheet, remarks that Assessing Officer while completing the assessment has also not looked into and examined these factual aspects. [In favour of Revenue] – [Mehulbhai Durlabhjibhai Vithalani v. ACIT Date of Judgement : 21.04.2021 (ITAT Surat)]

Commissioner invoked revision under section 263 on ground that assessee sold immovable properties consisting of land, building and tea factory but he failed to apportion sale consideration towards sale of closing stock, since, admittedly, stock was lying with assessee on date of sale of these fixed assets, impliedly stock was sold to same party and purchaser had also confirmed same, impugned revision and subsequent addition bringing to tax value of closing stock transferred to purchaser was justified

Assessee individual was engaged in business of medical profession and manufacturing tea. During year, assessee sold immovable properties consisting of land, building and tea factory for consideration of certain amount. Assessee filed his return of income which was processed under section 143(3). Subsequently, Principal Commissioner invoked revision under section 263 on ground that Assessing Officer had failed to enquire issue of sale of closing stock. Assessee contended that no sale consideration was apportioned towards closing stock and assets were sold on slump sale basis as going concern basis - Same was rejected and an order was passed under section 143(3), read with section 263, bringing to tax value of closing stock. It was noted that assessee had ceased to carry on business and, admittedly, stock was lying with assessee on date of sale of these fixed assets. Therefore, impliedly stock was sold to same party and, further, purchaser had also confirmed same. Contention of assessee that asset was sold on slump sale as going concern could not be accepted in view of fact that liability were not taken over and capital gains under slump sale as prescribed under section 50B were not offered to tax. Further, contention of assessee that stock was sold as part of immovable asset had no credence, inasmuch as, no documentary evidence to this effect was produced. Further, even assuming that no specific consideration was assigned to sale of closing stock, provisions of section 50C were attracted on sale of fixed assets - Thus, addition was required to be confirmed even under provisions of section 50C, in light of fact that sale consideration received exactly matched with guideline value prescribed for stamp duty purpose in respect of fixed assets. On facts, impugned addition made by Principal Commissioner was justified. Further, since only contention made by assessee was that this was sold as part of sale of assets, which was not supported by any evidence, it was clear case of concealment and, accordingly, penalty under section 271(1)(c) was to be levied. [In favour of revenue] (Related Assessment year : 2013-14) – [Muthukumaran Rangarajan v. ITO, Cuddalore (2020) 185 ITD 365 : 120 taxmann.com 89 : 77 ITR(T) 421(ITAT Chennai)]

Assessing Officer while completing assessment under section 144, completely overlooked provisions of section 184(5) and allowed deduction on account of interest/remuneration paid to partners, it certainly made assessment order erroneous and prejudicial to interests of revenue and, thus, impugned revisional order passed by Commissioner was to be upheld

For relevant year, Assessing Officer completed assessment under section 144 wherein he allowed deduction towards interest and remuneration paid to partners - Commissioner opined that when Assessing Officer completed assessment under section 144, he was required to disallow interest and remuneration paid to partners as per section 184(5). He thus passed a revisional order setting aside assessment. Once assessment is completed under section 144, provision of section 184(5) gets triggered automatically and it will override all other provisions of Act. Since, in instant case, while completing assessment Assessing Officer completely overlooked provisions of section 184(5) and allowed deduction on account of interest/remuneration paid to partners, it certainly made assessment order erroneous and prejudicial to interests of revenue. Therefore, impugned revisional order was to be confirmed. [In favour of revenue] (Related Assessment year : 2010-11) – [Saroj Print Arts v. PCIT (2020) 181 ITD 502 : 113 taxmann.com 264 (ITAT Mumbai)]

There is no bar for Principal Commissioner to invoke section 263 in order to examine final assessment order passed by Assessing Officer pursuant to DRP decision

No-doubt DRP panel consists of three Commissioners and Principal Commissioner examining or sitting over decision of the DRP may not be appropriate. At the same time, one cannot lose sight off, of a statutory provision like section263 unless and until section263 prohibits to examine the final assessment order, pursuant to the DRP decision. One cannot go beyond the statutory provision and so also 'read' or 'add' words by the Courts while interpreting a statutory provision. Time and again, Supreme Court and other Courts have held that in a matter of interpretation of statutory provisions, Court cannot 'add any words or sentence'. Even if there is any ambiguity, at the best Court can read down or struck down such statutory provision. In the present case, reading of section263, it is crystal clear that there is no bar for the Principal Commissioner to invoke section263 in order to examine the final assessment order passed by the Assessing Officer pursuant to the DRP decision. [In favour of revenue] (Related Assessment year : 2009-10) - [Devas Multimedia (P) Ltd. v. PCIT (2019) 419 ITR 391 : 111 taxmann.com 494 (2020) 268 Taxman 150 (Karn.)]

Lack of application of mind to return and documents filed by assessee and failure to conduct enquiry- Revision is held to be valid

Records were filed before Assessing Officer. A detailed questionnaire was also issued by Assessing Officer a reply was filed by assessee, but Assessing Officer did neither apply his mind nor did he conduct an enquiry into matter although he recorded in note-sheet that reply filed by assessee was not satisfactory and did not explain all facts. Tribunal recorded a finding that Assessing Officer had simply accepted claim of assessee without examining records. Lack of enquiry by Assessing Officer led to rendering his order erroneous and prejudicial to interest of revenue. Commissioner was justified in passing an order invoking power under section 263 and remitting matter back to Assessing Officer for conducting a proper assessment. [In favour of revenue] (Related Assessment Year : 2010-11) – [Nagal Garment Industries (P) Ltd. v. CIT (2019) 415 ITR 134 (MP)]

Assessing Officer did not apply mind to correctness of books of account produced before her except to note that books of account were produced and test checked, impugned revisional order passed under section 263 was to be upheld

Assessee was engaged in business of manufacturing/trading of yarn and fiber waste etc. A survey under section 133A was conducted at business premises of assessee and during said survey, a sum of Rs. 2.15 crores was surrendered as an additional income. Subsequently, assessee filed return declaring taxable income of Rs. 1.35 crores. Assessing Officer completed assessment under section 143(3) by making a small addition of Rs. 15,000 only. Commissioner opined that Assessing Officer was required to have carefully dealt with case especially where assessee had surrendered Rs. 2.15 crores during survey but in return filed subsequently, taxable income of only Rs. 1.35 crores was declared. He thus passed a revisional order setting aside assessment. In view of fact that Assessing Officer did not apply mind to correctness of books of account produced before her except to note that books of account were produced and test checked, impugned revisional order passed under section 263 was to be upheld. [In favour of revenue] (Related Assessment year : 2008-09) – [PCIT, Ludhiana v. Venus Woollen Mills, Ludhiana (2019) 412 ITR 188 : 105 taxmann.com 287 (P&H)]

Agricultural land claimed to have been purchased by the assessee which is prohibited under Land Reforms Act of State of Rajasthan, not eligible for deduction under Section 54B – Assessing Officer did not consider the crucial basis before allowing deduction – Revision rightly invoked by PCIT

It was that when the transfer of agricultural land itself is prohibited under State laws, the alleged agreement would not bring the case in the category of transfer of ownership without any formal deed of title. Hence, the crucial aspect and the very basis of allowability of deduction under Section 54B was not considered by the Assessing Officer and consequently the revision made by PCIT is valid. (Related Assessment year : 2011-12) – [Ram Charan Meena v. PCIT (2019) 201 TTJ 1004 : 182 DTR 268 : 73 ITR 568 (ITAT Jaipur)]

Method of accounting – Forward contracts – In terms of AS - 11, both gains or loss on account of exchange rate fluctuations on reporting date are to be accounted for while computing income chargeable to tax – Re­vision is held to be valid

Assessee-company was engaged in providing information technology services. While computing taxable income, assessee did not include unrealised mark to market gain on open forward contracts in foreign exchange. Assessing Officer accepted income declared by assessee. Commissioner, however, took a view that assessee should have offered for taxation income from mark to market gain or loss on open forward contracts in foreign exchange on balance sheet date in year in which same had accrued. He passed a revisional order setting aside assessment. On appeal the Tribunal held that in terms of AS-11, both gains or loss on account of exchange rate fluctuations on reporting date are to be accounted for while computing income chargeable to tax. Accordingly, the revision order is upheld. (Related Assessment year : 2011-12) – [Tata Consultancy Services Ltd. v. CIT (2019) 199 TTJ 716 : 178 ITD 51 (ITAT Mumbai)]

Ex-servicemen Corporation - Registered under Companies Act as any other company - Not entitled to exemption – Revision is held to be valid - On merit also it was held that assessee corporation was not entitled to exemption under section 10(26BBB)

The assessee claimed to be engaged in of doing welfare of ex-servicemen by providing them and their family members with employment. It furnished return of income claiming exemption under section 10(26BBB). Assessing Officer allowed the claim. Commissioner passed a revisional order holding that since assessee was not ‘established by a Central, State or Provincial Act’, it stood disqualified at the threshold itself for exemption under section 10(26BBB) of the Act. Dismissing the appeal of the assessee, the Tribunal held that, since the assessee filed to satisfy the conditions of section 10(26BBB) and Assessing Officer did not examine this issue at all, therefore, the Commissioner was justified in setting aside the assessment order and to enhance the income of assessee by holding that assessee is not entitled for exemption under the provisions of section 10(26BBB). Assessee corporation was merely registered under Companies Act as any other company hence not entitled to exemption as corporation. (Related Assessment year : 2010-11) – [Uttarakhand Purv Sainik Kalyan Nigam Ltd. v. ACIT (2019) 199 TTJ 649 : 177 DTR 433 : 175 ITD 107 (ITAT Delhi)]

Purchase of a land prior to date of transfer of agricultural land - Revision is held to be justified

It was held that purchase of a land prior to date of transfer of his agricultural land Commissioner was justified in disallowing exemption under Section 54B of the Act. Revision is held to be justified.

We find that the controversy is plain and simple and is not capable of any debate having regard to express statutory language. The Assessing Officer has not given any reason as to how purchase of land prior to transfer of capital asset is eligible for claim of deduction under section 54B(1) of the Act. Thus, as a corollary, the Assessing Officer has accepted the claim of deduction by oversight and without any application of mind in this regard. No evidence has been adduced before us to show that the issue was present to the mind of the Assessing Officer. A wrong acceptance of claim of deduction would not be given inference towards application of mind. Secondly, the eligibility of deduction under section 54B of the Act in respect of land acquired prior to transfer of capital asset is clearl y opposed to the plain provision of the Act and thus apparently not sustainable having regard to express the provision of the statute. The legislature in its own wisdom has used the expression before the transfer of long-term asset  as well as after the transfer of capital asset at appropriate places viz. Section 54 of the Act. The intention of the legislature is thus quite clear. Therefore, claim of deduction accepted by the Assessing Officer despite unequivocal language of the Act, in our view, is erroneous as contemplated under section 263 of the Act. Such error on the part of the Assessing Officer has caused definite prejudice to the interest of the Revenue. The action of the PCIT is thus within the realm of powers vested under section 263 of the Act. The PCIT has distinguished the case laws cited which is found to be in order. We do not see irregularity in the assumption of jurisdiction by the PCIT under section 263 of the Act. We therefore decline to interfere. Revision is held to be justified. (Related Assessment years :2012-13) - [Paras Chinubhai Jani v. PCIT (2019) 177 ITD 591 (ITAT Ahmedabad)]

Revision proceedings under section 263 were justified as Assessing Officer accepted assessee’s claim of considering sale consideration as per agreement, instead of jantri value on which stamp duty was collected as sale consideration under section 50C for computation of capital gains, which was clearly unsustainable

Commissioner initiated revision proceedings in case of assessee on ground that land was jointly sold by assessee with 4 co-owners and while calculating assessee's share of taxable capital gain, instead of jantri value on which stamp duty was collected, declared sale consideration was taken and, therefore, certain income remained untaxed which resulted in under-assessment of income under head capital gains - Assessee explained that Assessing Officer had specifically looked into matter of application of section 50C, and duly verified records and evidences. However, it was observed that Assessing Officer, did seek an explanation from assessee in ‘general terms’ for adoption of sale consideration as against stamp duty valuation, but, there was neither any specific reference to facts of case nor application of section 50C - Whether thus, view adopted by Assessing Officer being clearly unsustainable in law, even if matter was examined by Assessing Officer and it was conscious call of Assessing Officer to accept plea of assessee; such a situation would not take matter outside ambit of section 263. Therefore, revision proceedings under section 263 were justified and there was no infirmity in order of Commissioner directing re-examination of claims on merits. [In favour of revenue] (Related Assessment year : 2012-13) - [Babulal S. Solanki v. ITO (2019) 176 ITD 642 : 104 taxmann.com 155 (ITAT Ahmedabad)]

Assessing Officer is not expected to mechanically accept what assessee has claimed before him and it is his duty to ascertain truth of facts stated and genuineness of claims made in return and order passed by Assessing Officer becomes erroneous when an enquiry has not been made before accepting genuineness of claim which resulted in loss of revenue

Section 263 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 matter, where such inquiry was prima facie warranted. The Commissioner is well within his powers to treat an order as erroneous on the ground that the Assessing Officer should have made further inquiries before accepting the wrong claims made by the assessee. The Assessing Officer cannot remain passive in the face of a claim, which calls for further enquiry to know the genuineness of it. 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 Assessing Officer is 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. The Assessing Officer is therefore, required to act fairly while accepting or rejecting the claim of the assessee in cases of scrutiny assessments.

The Assessing Officer should 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. The order passed by the Assessing Officer becomes erroneous when an enquiry has not been made before accepting the genuineness of the claim which resulted in loss of revenue.

In the present case, the Assessing Officer had not made the disallowance under section 40(a)(iib). Without enquiring, the Assessing Officer accepted the assessee's claim. The failure on the part of the Assessing Officer to make necessary enquiry rendered the assessment order erroneous which also resulted in loss to the revenue. The Commissioner had observed in his order that the electricity duty under section. 3(1) of the KSED Act falls under the purview of section 40(a)(iib) and it is to be disallowed under section 40(a)(iib). Hence, the order of the Commissioner cannot be held as erroneous. The Commissioner's approach was correct. Therefore, the Commissioner exercised his power conferred under section. 263 in setting aside the assessment. The Assessing Officer has not considered the issue relating to the application of section 40(a)(iib) and he had accepted the claim without applying his mind, and, thus, the order of the Assessing Officer was erroneous in so far as it is prejudicial to the interests of the revenue, as it involves huge amount of tax. [In favour of revenue] (Related Assessment year : 2014-15) – [Kerala State Electricity Board Ltd. v. DCIT, Trivandrum (2019) 111 taxmann.com 353 (ITAT Cochin)]

Assessee offering 15% of gross profit in the course of assessment proceedings with a view to buy peace and unending litiga­tion which was accepted by the Assessing Officer without making any inquiry – Commissioner revising the order on the ground that as there was no discussion in the order of Assessing Officer and the Assessing Officer limiting addition under Section 69C only on basis of GP ratio is held to be not justified - Tribunal affirming the revision order - High Court affirmed the order of the Tribunal

Bogus purchases - Hotel business - information from sales tax authorities - Hawala Traders – On the basis of information, received from Sales Tax Department in relation to certain parties who were engaged in providing bogus purchase bills and that assessee was also one of beneficiaries of hawala bills given by such parties. Assessing Officer asked assessee to show cause why this entire amount/bogus purchases should not be assessed as non-genuine purchases. With a view to buy peace and to avoid unending litigation, assessee offered that gross profit rate of said purchases might be assessed as income. Accordingly, Assessing Officer held 15 per cent of said purchases to be assessed as income of assessee. Commissioner invoked section 263 on ground that since assessee had not disputed that parties from whom purchases were made were those whose names appeared on website of Sales Tax Department as accommodation entry providers, entire purchases was to be treated as non-genuine. It was observed that the assessee was not able to produce any material purchased by it nor it could ensure presence of supplier from whom it purchased goods. Further, Assessing Officer did not make any inquiry with regard to purchase expenses claimed by assessee. Accordingly, the revision order was passed directing the Assessing Officer to decide afresh by giving an opportunity of hearing. On appeal by the assessee, dismissing the appeal the Court held that Revision is held to be justified as there was no discussion in the order of Assessing Officer and the Assessing Officer limiting addition under Section 69C only on basis of GP ratio. Accordingly, the order of Tribunal is affirmed. [In favour of revenue] (Related Assessment year : 2010-11) – [Shoreline Hotel (P) Ltd. v. CIT (2018) 305 CTR 491 : 259 Taxman 49 : 171 DTR 245 (Bom.)]

Hindu Undivided Family (HUF) - Gift by the mother of the Karta of the HUF, to the HUF is liable to be taxed as the mother cannot be considered as member of HUF – Revision was held to be justified – Assessee was directed to produce valuation report as per rule 11UA

Dismissing the appeal of the assessee the Tribunal held that; Proviso to section 56(2)(vii) provides definition of “relatives” in case of individual and HUF separately. It provides that above clause for taxability shall not apply to any sum of money or property received from any “relative”. The “relatives” have been mentioned separately with respect to an individual, and with respect to a Hindu undivided family. Therefore, in case of Hindu undivided family, if the gift is not received from member of such HUF then such sum is chargeable to tax. The “relatives” mentioned with respect to an individual cannot be considered when the recipient of the property is an HUF. Further, it substitutes the earlier definition of the “relative” when there was no reference about what constitutes “relatives” with respect to the HUF. It only talks about “relatives” with respect to an individual. Therefore, earlier the issue was that if the gift is received by an HUF from its members, probably it was taxable. To remove that lacuna and to give benefit to the HUF, the above amendment was made. The amendment also speaks through “notes on clauses” that now the definition of “relative” shall also include any sum or property received by a Hindu undivided family from its members apart from the persons referred to in the explanation with respect to an individual. It does not provide that if gift is made to an HUF by any of the  “relatives” of those individuals comprising the HUF, who is not the member of the HUF, then such gift is not chargeable to tax. If such a view were accepted, then gift to HUF would never be chargeable to tax if it were received from the “relatives” of the members of such HUF. We are afraid that is not the language as well as the intention of the legislature. Even otherwise, when the language of the law is clear, support of the “notes on clauses” to the amendment does not help the assessee. Revision was held to be justified, however the assessee was directed to produce valuation report as per rule 11UA. (Related Assessment year : 2013-14) – [Subodh Gupta (HUF) v. PCIT(2018) 193 TTJ 442 : 169 ITD 60 : 166 DTR 153 (ITAT Delhi)]

Assessee’s claim for deduction under section 35(1) could not be allowed where it did not maintain separate books of account in respect of its research and development activity and the direction given by the CIT was modified allowing the Assessing Officer to examine the claim

Assessee company was engaged in business of manufacturing and trading of electronic process control equipment. Assessee filed its return claiming deduction under section 35(1). Assessing Officer completed assessment under section 143(3) accepting assessee’s claim. Commissioner noted that assessee's claim of deduction was wrongly allowed as it had not maintained separate books of account for its research and development activity. He thus passed a revisional order setting aside assessment. Since assessee itself accepted before Commissioner that it had not maintained separate books of account in respect of R&D facility even though it was required to maintain same as per provisions of Act, impugned revisional order did not require any interference. [In favour of revenue] (Related Assessment year : 2009-10) - [Nivo Controls (P) Ltd. v. CIT (2018) 169 ITD 139 : 90 taxmann.com 271 (ITAT Mumbai)]

Assessee company incurred expenditure on education of its director at abroad, in absence of commitment/bond executed by said Director to serve assessee company post his education so that assessee could reap benefits of his education for com business, expenditure was not allowable as business expenditure

Assessee-company incurred certain expenditure on education of its director, namely, AK, who had undergone a course at USA from University of Pennsylvania and claimed deduction of same as business expenditure. It was noted that just two days post AK’s induction as Director of assessee-company, resolution was passed by Board of Directors of company approving his education expenses. No appointment letter issued by assessee in favour of said AK was filed. No commitment/bond was executed by AK to serve assessee company post his education so that assessee company could recoup its expenses on his education and reap benefits of his education for company’s business post completion of his education. On perusal of the audited financial statements, it could not be found that any remuneration was paid to AK during year under consideration. No agreements was entered into by assessee company with AK regarding his term of appointment. Even content of course being studied by AK and its correlation with assessee's business was not brought on record by assessee. In the instant case, the material placed by the assessee before the Assessing Officer was not sufficient to come to the conclusion that the expenses incurred by the assessee on education of newly inducted Director were for the business purposes allowable under section 37(1). On facts, education expenses incurred by assessee definitely required greater scrutiny by Assessing Officer before allowing same as business expenses, thus, Pr. Commissioner had rightly invoked provision of section263 by setting aside assessment order passed by Assessing Officer under section 143(3) and directing him to pass de novo assessment order after verification. [In favour of revenue] (Related Assessment year : 2012-13) – [Hunumesh Realtors (P) Ltd. v. PCIT (2018) 168 ITD 87 : (2017) 88 taxmann.com 185 (ITAT Mumbai)]

Non-consideration of larger claim for Rs. 298.93 crores as depreciation and consideration of only a part of it being Rs. 6.45 crore by Assessing Officer, who did not go into issue with respect to whole amount, was an error, that could be corrected under section 263

With respect to exercise of power under section263 is concerned, the issue stands concluded, in the light of the amendment with effect from 1989, by insertion of Explanation (c) to section 263(1). The non-consideration of the larger claim for Rs. 298.93 crores as depreciation and the consideration of only a part of it (Rs. 644,81,091) by the Assessing Officer, who did not go into the issue with respect to the whole amount, was an error, that could be corrected under section 263. CIT v. Aruba Mills (1998) 231 ITR 50 (SC) is decisive, in that the provision of section 263(1) Explanation (c) was introduced to cater to precisely this kind of mischief. [In favour of revenue] (Related Assessment year : 2010-11) - [BSES Rajdhani Power Ltd. v. PCIT (2017) 399 ITR 228 : 88 taxmann.com 25 (Del.)]

Law laid down in Subhlakshmi Vanijya (P) Ltd v. CIT 155 ITD 171 (Kol), Rajmandir Estates (P) Ltd. 86 ITR 162 (Cal) etc. that the CIT is entitled to revise the assessment order under section 263 on the ground that the Assessing Officer did not make any proper inquiry while accepting the explanation of the assessee insofar as receipt of shareapplication money is concerned cannot be interfered with

(i) Bogus share capital: Mere fact that payment was received by cheque or that the applicants were companies borne on the file of the Registrar of Companies does not prove that the transaction was genuine. Even under the unamended section 68, the onus is on the assessee to prove the creditworthiness of the subscribers. Argument that the amendment to section 68 is not retrospective is not required to be considered.

(ii) Even if the Assessing Officer has conducted an inquiry into the taxability of share capital receipts u/s 68, the CIT is entitled to revise under section 263 if the Assessing Officer has not applied his mind to important aspects. Law in Lovely Exports 299 ITR 268, Sophia Finance 205 ITR 98 etc does not apply as they are prior to the Money Laundering Act, 2002. Questions whether receipt towards share capital is taxable pre section 56(2)(viib) & whether proviso to section 68 is retrospective are left open in Daniel Merchants (P) Ltd. v. ITO, the Calcutta High Court dismissed the appeal of the assessee on the following basis:

“The assessee seeks to raise certain points of law in this appeal which were subject matters before this Court in four appeals already decided and in all the four appeals it was found that the questions raised were not substantial questions of law. These decisions are Rajmandir Estates (P) Ltd. v. PCIT, Kolkata-III reported in (2016) 386 ITR 162 (Kol.), Pragati Finance Management Private Limited v. CIT-II in ITAT No.178 of 2016 which was decided on 7th March, 2017, Success Tours and Travels (P) Ltd. v. ITO (2017) 247 Taxman 109 : 80 taxmann.com 262 (Cal.) which was decided on 23rd March, 2017 and AIM Fincon (P) Ltd. v. CIT, (2019) 412 ITR 539 (Cal.) which is decided today itself. The instant appeal and stay application shall accordingly stand dismissed.” .

On appeal by the assesse to the Supreme Court HELD dismissing the SLP:

“In all these cases, we find that the Commissioner of Income Tax had passed an order under Section 263 of the Income Tax Act, 1961 with the observations that the Assessing Officer did not make any proper inquiry while making the assessment and accepting the explanation of the assessee(s) insofar as receipt of share application money is concerned. On that basis the Commissioner of Income Tax had, after setting aside the order of the Assessing Officer, simply directed the Assessing Officer to carry thorough and detailed inquiry. It is this order which is upheld by the High Court. We see no reason to interfere with the order of the High Court.” – [Daniel Merchants (P) Ltd. Private Limited v. ITO - Date of Judgement : 29.11.2017 (SC)]

Revision in was Failure to make necessary enquiries, order of revision was held to be valid

The Court held that, the Commissioner had also noted that the assessee trust had claimed various expenses as debited in its income and expenditure which needed to be examined/verified to ascertain genuineness before it could have been accepted that its claim was applied towards its objects. Merely because it had been granted exemption under section 12AA of the Act, it could not be said that therefore, nothing was required to be done during the assessment proceeding except to accept the return of the charitable institution. Hence it was not a fit case for setting aside the order of revision. The Court also observed that the Assessing Officer while making assessment was to keep in mind the fact that both the order refusing renewal of approval under section 80G and the show-cause notice for cancellation of registration had been quashed by the court and accordingly decide the matter in accordance with law. – [Imarat Shariah Educational and Welfare Trust v. CIT (2017) 392 ITR 301 : 245 Taxman 101 (Patna), Shri Mahavir Sthan Nyas Samiti v. UOI (2017) 392 ITR 301 : 245 Taxman 101 (Patna)]

Assessing Officer failed to consider the absence of any busi­ness activity for the purpose of treating an expenditure allowable for de­duction, the order of Assessing Officer was erroneous and prejudicial to Revenue and therefore, revision under section 263 by the CIT was sustainable

Dismissing the appeal of the assessee, the Court upheld the initiation of proceedings under section 263 of the Act, noting that the original order passed under section 143(3) of the Act, accepting the return filed by the assessee wherein the assessee had claimed business losses to be carried forward, was erroneous as it was not in accordance with law and prejudicial to the interest of the revenue. It noted that the Assessing Officer had not taken into account the fact that the assessee had not commenced any business activities of development of SEZ/Real estate during the year and and merely obtained loan from holding company which was utilized for investing in shares of subsidiary company, interest paid on loan could not be treated as expenditure incurred for purpose of business. Therefore, the expenditure claimed by the assessee, which was ultimately carried forward could not be treated as business loss. [In favour of revenue] (Related Assessment year : 2009-10) – Zuari Management Services Ltd. v. CIT (2017) 292 CTR 327 : 146 DTR 177 : 88 taxmann.com 625 : (2016) 97 CCH 164 (Bom.)]

Assessee with a small amount of authorised share capital, raised huge sum on account of premium, exercise of revisionary powers by Commissioner opining that this could be a case of money laundering was justified

Cash credit (Share application money) - During relevant year, assessee-company had increased its share capital by issuing 7.93 lakhs shares of Rs.10 each at a premium of Rs.390. Assessing Officer completed assessment without holding requisite investigation except for calling for records - Commissioner passed order under section 263 and opined that this could be a case of money laundering which went undetected due to lack of requisite enquiry into increase of share capital including premium received by assessee and non-application of mind. High Court by impugned order held that since assessee with an authorised share capital of Rs.1.36 crores raised nearly a sum of Rs. 32 crores on account of premium and chose not to go in for increase of authorised share capital merely to avoid payment of statutory fees was an important pointer necessitating investigation and thus, Commissioner was justified in treating assessment order erroneous and prejudicial to interest of revenue. Special leave petition filed against impugned order was to be dismissed. [In favour of revenue] (Related Assessment year : 2009-10) – [Rajmandir Estates (P) Ltd. v. PCIT (2017) 245 Taxman 127 : 77 taxmann.com 285 (SC)] 

Provisions of section 50C are deeming provisions and mandatory, failure of Assessing Officer to apply provisions of section 50C would render assessment order erroneous and prejudicial to interest of revenue

The provisions of section 50C are deeming provisions and mandatory in nature. The application of such provisions is made by operation of law. Exception to these provisions can be made only in accordance with law, as provided in section 50C only. The Assessing Officer did not raise any query with regard to application of section 50C, the Assessing Officer committed a mistake and, thus, it rendered the order of the Assessing Officer as erroneous. Since non-application of section 50C would also amount to under assessment of income and tax payable thereon, it was prejudicial to the interests of the revenue. Further, the provisions of section 263 are widely worded and clearly lay down that the power of the Commissioner to revise an assessment order shall continue to extend in all those matters which have not been considered and decided in any appeal. Where the matter pertaining to application of section 50C had neither been considered nor decided in appeal by the Commissioner (Appeals), the Commissioner had requisite power under the law to consider and examine the application of section 50C for revision under section 263, since the ‘doctrine of merger’ would not apply upon such matter. [In favour of revenue] (Related Assessment year : 2004-05) - [Vithal Nagar Co. Operative Housing Society Ltd. and Ors. v. CIT (2017) 185 TTJ 780 : 88 taxmann.com 890 : (2016) 52 ITR(T) 21(ITAT Mumbai)]

Assessee explained source of cash deposit in its savings account as received from closure of previous loans given by him but same was not substantiated with any record or evidence, Principal Commissioner was justified in making revision of assessment order under section 263

As explained in Gee Vee Enterprises v. Addl. CIT (1975) 99 ITR 375 (Delhi), an Income Tax Officer, in contradistinction to a civil court, which is neutral, is not only an adjudicator but also an investigator. He cannot, therefore, remain passive in the face of a return which is apparently in order but calls for further enquiry. It is his duty to ascertain the truth of the facts stated in the return when the circumstances of the case are such as provoke an enquiry. It is because it is incumbent on him to further investigate the facts stated in the return when the circumstances would make such an enquiry prudent that the word 'erroneous' in section263 includes a failure on his part to make such an enquiry. The order is erroneous because such an enquiry has not been made and not because there is anything wrong with the order if all the facts stated therein are assumed to be correct. In the present case, the assessment is not consistent even with what is stated in the return itself. No bills and vouchers, stated to be accompanying non-existing books of account, were admittedly produced. It is also incomprehensible that the assessee is, as stated, not maintaining any books of account (in respect of the money lending business) and, in any case, that there was a complete absence of any record in respect of the advances made and recovered, as well as qua the interest/commission earned in the process, and returned only on the basis of ‘memory’.

The cash deposits in the bank account's need to be satisfactorily explained, else these are liable to be added as unexplained income under sections 69/69A. There is no explanation as to the source of the deposit/s. Merely stating that the same is a return of the loans given earlier, without in any manner substantiating the same, i.e., the loans given earlier and/or their return, would be of little consequence, both in law and in fact in-as-much as the law mandates the same to be satisfactorily explained, so that the same would require being reasonably established as a fact. There is nothing to indicate a running money lending business. Further, it needs to be borne in mind that the law deems the same as unexplained income for the year in which the asset (deposit) is found (made), i.e., the current year. It is only for the current year that, by virtue of the information in the possession of the revenue of the cash deposits in the assessee's bank account's, leads to the inference of the assessee being the owner of the said sum/s, as the law deems (section 110 of the Indian Evidence Act) and, accordingly, is deemed as the assessee's income for the relevant year, where the assessee has not satisfactorily explained as to its nature and source. Sections 68, 69, etc. are only rules of evidence incorporating the principles of common law jurisprudence. There was further nothing adduced at any stage to show that the deposits, value of which remains unspecified, formed part of the disclosed assets or income for an earlier year, so that the disclosed capital becomes the explanation for the source of the deposits during the current year. In both cases, as shall be readily seen, there is no finding by the Assessing Officer - who merely records what the assessee's states per its communications, as to whether it is indeed so, i.e., the cash deposits represent a receipt, along with interest, of the loans given earlier. Further, even going by the assessee's explanation, which could no doubt be true, or have a element of truth, so that the assessee's capital as invested in the said business, is rotated, the capital invested in the said business is liable to be estimated and brought to tax, i.e., apart from the income by way of interest/commission from the financing business. What is this capital? What is the amount of debtors (receivable) as at the year-end, or the balance's in the bank account's at the beginning as well as end of the year. All this is conspicuous by its absence. Again, as stated by the Principal Commissioner, there is nothing to show that the disclosure of interest/commission income is true and correct. An average lending period of 7 to 10 days, as stated, would imply an annual turnover ratio in the range of 36 to 52, and provide a basis for the estimation of both the capital invested as well as the interest income.

As source of cash deposit made in savings bank account, assessee claimed that said amount was received on closure of loans earlier given by him. However, there was complete absence of any record in respect of advances made by assessee and amount recovered as well as interest/commission earned in this process. In fact, there was nothing to indicate that assessee had a running money lending business. Further, assessee’s return for relevant year was not based on any books of account and same was only on basis of memory only. In view of these facts, Principal Commissioner was justified in setting aside assessment made by Assessing Officer accepting assessee’s explanation. [In favour of revenue/Matter remanded] (Related Assessment year : 2011-2012) - [Avathan Marimuthu v. ACIT, Trichy (2017) 166 ITD 141 : 84 taxmann.com 104 (ITAT Chennai)]

Assessing Officer allowed claim of deduction under section 80HHC without examining said claim with reference to unabsorbed depreciation and investment allowance as referred to in sections 32 and 32A respectively, Commissioner was justified in invoking revision under section 263

Assessee-company claimed deduction under section 80HHC in respect of export of goods and merchandise. It was noted that Assessing Officer had allowed claim of deduction under section 80HHC without examining it with reference to unabsorbed depreciation and investment allowance as referred to in sections 32 and 32A. Mere taking of a view by the Assessing Officer without having subjected the claim to examination would not make it a view of the Assessing Officer. A view has necessarily to be preceded by examination of the claim and opting to choose one of the possible results. In the absence of view being taken, merely because the issue itself was debatable, would not absolve the Assessing Officer of applying his mind to the claim made by the assessee and allowing the claim only on satisfaction after verification/enquiry on his part. A view in the absence of examination is no view but only a chance result. Therefore, the Assessing Officer cannot abdicate his responsibility of examining the claim for deduction before allowing it. Absence of examination of the claim made by the assessee while passing an assessment order and allowing the claim made, would render the order of the Assessing Officer erroneous and coupled with the fact that in this case it is admitting prejudicial to the interest of the revenue, exercise of the revisional jurisdiction under section 263 by the Commissioner proper and valid. [In favour of revenue] (Related Assessment year : 1990-91 – [CIT, Nagpur v. Ballarpur Industries Ltd. (2017) 85 taxmann.com 10 (Bom.)]

Assessing Officer accepted claim made by assessee towards depreciation on intangible assets without proper examination or enquiry or verification or objective consideration of such claim, exercise of jurisdiction by Commissioner under section 263(1) was justified

The assessee claimed depreciation on intangible assets. The Assessing Officer accepted the assessee's claim of depreciation on intangible assets and made relevant additions. The Commissioner observed that the Assessing Officer had completely failed to apply his mind and conduct inquiry into this issue at hand. Perusal of the assessment order passed by the Assessing Officer does not show any application of mind on his part. He has made addition only with regard to depreciation on intangible assets. 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 accepted on by making addition towards depreciation on intangible assets. The assessment order in instant case 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. It was a fit case for the Commissioner to exercise his revisional jurisdiction under section263 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 Commissioner on the impugned order. The assessee should have no grievance in the action of Commissioner in exercising the jurisdiction under section 263.

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. 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, 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. Accordingly, there is no infirmity in order of the Commissioner. [In favour of revenue] (Related Assessment year : 2003-04) – [Sify Software Ltd. v. ACIT (2017) 80 taxmann.com 273 (ITAT Chennai)]

Assessing Officer failed to examine applicability of notification dealing with sale of share of Indian company to non-resident by assessee, in assessment proceedings and allowed claim of assessee u/s 54F, revision under section 263 was justified

Sale of shares to non-resident and investment in residential property - Assessee derived income from investment in shares and mutual fund. Claim of assessee regarding consideration received on sale of shares of Indian company to non-resident was accepted by Assessing Officer. Similarly, claim under section 54F had been accepted. However, Assessing Officer neither enquired nor applied his mind to relevant notification on sale of shares by resident to non-resident prescribed by RBI in this regard. Further, no enquiry as to whether claimed amount of exemption under section 54F was properly deposited in capital gains scheme or not, or whether condition laid down in section 54F was complied with or not, was made by Assessing Officer.

The order passed by the Assessing Officer in this case is very cryptic. The Assessing Officer being a quasi judicial authority cannot take a view, either against or in favour of assessee/revenue, without making proper enquiry and without proper examination of the claim made by the assessee in the light of facts on record. The Commissioner has been empowered to initiate the suo motu proceedings under section 263 either when the Assessing Officer takes a wrong decision without considering the material available on record or he takes a decision without making an enquiry into matter where such enquiry was prima facie warranted. Arbitrariness in decision making would always need correction regardless of whether it causes prejudices to the assessee or the revenue. The scheme of the Income Tax 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. 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. 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. On facts, Commissioner was justified in revising order passed by Assessing Officer. [In favour of revenue] (Related Assessment year :  2011-12) - [Ravi Kannan v. ACIT (2017) 163 ITD 640 : 79 taxmann.com 157 : 55 ITR 38 (SN) (ITAT Chennai)]

Where out of investment written off by assessee, it recovered certain amount during relevant year and offered same as income but claimed entire amount written off as deduction which was allowed by Assessing Officer in impugned order, an excess deduction was allowed to assessee which was an error and clearly fell within scope of section 263

During the assessment year 2006-07, the assessee had written off the investment of Rs. 1 crore and claimed it as a revenue expenditure. The Assessing Officer disallowed it as a capital expenditure and that order had attained finality. Out of that Rs. 1 crore, the assessee recovered Rs. 60 lakhs during assessment year 2007-08 and Rs. 40 lakhs during assessment year 2008-09. Although, the assessee recovered Rs. 60 lakhs only in the assessment year 2007-08, and credited it in its profit and loss account but claimed a deduction of Rs. 1 crore in the computation memo of its revised return, and same was ultimately accepted by the Assessing Officer in the impugned assessment order. Held that the assessee had recovered Rs. 60 lakhs only in the assessment year 2007-08 and offered it as an income in that assessment year. However, it claimed a deduction of Rs. 1 crore which was accepted by the Assessing Officer in the impugned assessment order. Thus, an excess deduction of Rs. 40 lakhs was allowed to the assessee in the assessment year 2007-08, which was an error and it clearly fell within the scope of section 263. [In favour of revenue] (Related Assessment year 2007-8) – [ILC Industries Ltd. v. PCIT (2017) 88 taxmann.com 848 : 53 ITR(T) 342 (ITATBangalore)]

Capital or revenue - Depreciation - Revision was held to be valid

Expenditure on modifying and improving leased property allowed as revenue expenditure. Revision was held to be justified. Assessee can claim depreciation on value spent on such improvement or changes in structure. (Related Assessment year : 2011-12) – [MSA Motors v. ACIT (2017) 54 ITR 8 (ITAT Hyderabad)]

Assessing Officer allowed loss allegedly incurred by assessee in purchase and sale of cotton knitted fabric which was not its business, by a cryptic order and facts inter alia revealed that such transactions were amongst connected concerns, no details of purchase/sales were on record; and such details were not also called for it was reasonable to infer that assessee had made attempt to reduce income by booking fictitious loss and, therefore commissioner was justified in invoking powers under section 263

The assessee had shown a loss allegedly incurred in purchase and sale of cotton knitted fabric which was not its business. Said loss was set off from the other income of the assessee. The assessment was completed under section 143(3) by a cryptic order. The Commissioner, by invoking provision of section263, held that assessment order was erroneous and prejudicial to the revenue and, therefore, directed the Assessing Officer to complete the assessment in accordance with law after affording an opportunity of hearing to the assessee. The Tribunal set aside order of the Commissioner holding that inference drawn by the Commissioner was based on presumptions or surmises. On appeal:

Held that facts revealed that the assessee was not in the business of sale and purchase of cotton yarn; there was no opening or closing stock of cotton yarn; purchases and sales were all amongst the connected concerns which had the same address; no details of purchases/sales were on the record; and such details were not also called for. On facts, it was only reasonable to infer that an attempt might have been made to reduce the income by booking fictitious loss. There can be no doubt that merely on the basis of presumption or surmise or suspicion, an order under section263 cannot be passed. The Tribunal failed to appreciate that in this case the inference drawn by the Commissioner was not based either on presumptions or surmises or suspicion. Therefore, the Tribunal was not justified in setting aside the order of the Commissioner. [In favour of revenue] (Related Assessment year : 2007-08) – [PCIT v. India Finance Ltd. (2016) 389 ITR 242 : (2017) 81 taxmann.com 135 (Cal.)]

Statements recorded at time of search of premises of assessee’s son can form basis of any action under section 263 against assessee

Upon scrutiny of the record of assessment, the Commissioner noted that the Income-tax Officer had not taken into consideration the explanation of son of the assessee and further that he had not considered the various statements of the persons which were recorded at the time of the search. He, therefore, exercising his powers under section 263, set aside the order of assessment and directed the ITO to make fresh assessment. On appeal, the Tribunal set aside revision order holding that the Commissioner could intervene only on the basis of the record of the assessment proceedings of the assessee, and that the statements recorded at the time of search of the premises of the son of the assessee could not form the basis of any action under section 263. On appeal to the High Court, Justice M.S. Shah, following the decision of the Supreme Court in the case of CIT v. Shree Manjunathesware Packing Products & Camphor Works (1988) 231 ITR 53, held that exercise of power by the Commissioner under section 263(1) was obviously in respect of the assessee's case but for the purpose of exercising that power, the examination by the Commissioner was not required to be confined to the record of that assessee's case as such record could be any record relating to any proceeding under the Act. Since the Tribunal had set aside the order of the Commissioner only on this ground, in his opinion, the matter would have to be remanded before the Tribunal for consideration on merits. On the other hand, Justice, D.A. Mehta held that the term 'record' used in section263 would not include the statement of the son of the assessee since there was nothing on the record to show that these statements had come on record of the assessee. In his opinion, words 'any proceedings under the Act' would not extend to a proceeding not relating to the assessee who was subjected to action under section 263. He, therefore, upheld decision of the Tribunal. On reference to Third Judge:

Section 154 is in the nature of power of rectification of mistake. Sub-section (1) thereof clothes the Income-tax authority with a view to rectify any mistake apparent from the record, the power to amend any order passed under the Act, amend any intimation or deemed intimation under section 143(1) or amend any intimation under sub-section (1) of section 200A. The term 'record', therefore, has to be seen in the context of the nature of the statutory provision and the power it aims to cloth the Assessing Officer. As noted, the power is for rectification of any mistake apparent from the record. Such powers are not in the nature of review or revision and can be exercised only for correction of a mistake which is apparent from the record. In this context, therefore, the term 'record' has to be understood as record of the case before the Assessing Officer. Obviously, reference to the mistake apparent from the record cannot have relation to some other record extraneous to the assessment proceedings. This provision, therefore, has an entirely different context where the term 'record' has been used and it does not include any Explanation as was inserted in section 263(1) with a historical background noted by the Supreme Court in the case of Shree Manjunathesware Packing Products Camphor & Works (supra). Significantly, the explanation was added for all purposes to have been included from the beginning. The decisions relied upon in the context of the term 'record' used in section 154, therefore, would render no further help on the controversy on the hand. Under the circumstances, the view of M.S. Shah, J is to be concurred with. The Appellate Tribunal was not right in coming to the conclusion that the basis of intervention by the commissioner should be part of the records in the assessment proceedings of the assessee and the statements in the search operations regarding the son of the assessee could not be considered as forming part of assessment of the assessee. [In favour of revenue] – [CIT v. Vallabhdas Vithaldas (2015) 232 Taxman 57 : 56 taxmann.com 300 (Guj.)]

Assessees were partners of a firm - Apart from assessment of partnership firm, they were also assessed to tax in their individual capacity on returns filed by them - In their assessment for relevant assessment year, Assessing Officer gave deduction of interest paid on borrowal for investment in firm - On 29.12.1999, Commissioner, in exercise of powers under section 263, set aside order of Assessing Officer holding that after insertion of section 14A, interest payable on amount invested in a partnership firm could not be allowed as deduction - Assessee challenged order of Commissioner contending that in view of proviso to section 14A no order could be passed enhancing assessment or reducing refund already made - Since proviso to section 14A came to be inserted by Finance Act, 2002 with retrospective effect from 11.05.2001 and, as such, on date of order of Commissioner passed under section 263, said proviso was not in existence, it would not be applicable to instant case - Therefore, order passed by Commissioner was valid and within his powers under section 263

The assessees were partners of a firm. Apart from the assessment of partnership firm, they were also assessed to tax in their individual capacity on the returns filed by them. The Assessing Officer passed orders of assessment by allowing the assessees’ claim to set off the interest against other taxable income. On 29.12.1999, the Commissioner, in exercise of powers under section 263, set aside assessment orders and directed the Assessing Officer to disallow the interest paid on borrowed capital invested in the partnership firm by applying the provisions of section 14A and also directed the assessing authority to ascertain the actual amount of borrowed funds invested by the assessees in the partnership firm. The Tribunal dismissed the assessees' appeal holding that if there was a direct nexus between the borrowal of amount and investment in the firm and if the assessees were receiving only the share of profit which could be exempted under section 10(2A), such interest paid on the amount borrowed was not allowable as deduction. On further appeal, the High Court observed that the Tribunal had to consider the effect of proviso to section 14A while considering the case of the assessees and remitted the matter back to the Tribunal. Pursuant to the order of the High Court, the Tribunal made fresh orders and reaffirmed its earlier findings holding that proviso to section 14A was inserted with retrospective effect from 11.05.2001 and, therefore, the said proviso would not apply to the facts of the assessees. On appeal, the assessees contended that the language of the proviso to section 14A was very clear and unambiguous, and no order could be passed enhancing assessment or reducing the refund already made by applying section 14A.

Held : In the instant case, order under section 263 was dated 29.12.1999. Though section 14A came to be inserted by the Finance Act, 2001 with effect from 01.04.1962, yet proviso thereto came to be inserted by the Finance Act, 2002 with retrospective effect from 11.05.2001. Therefore, as on the date of the order of the Commissioner under section 263, proviso to section 14A was not even in existence. Therefore, the Tribunal was justified in saying that the proviso to section 14A would not apply to the facts of the assessees' case. 

As a matter of fact, the assessees submitted before the Tribunal that the interest paid was legitimate business expenses against the income, which, even though not taxed in the hands of the assessees, had nevertheless been taxed in the hands of the firm wherein the assessees were partners. Unless there was material to establish the amount being utilized for investment in the firm, there could not be computation regarding the allowability of the interest paid. The fact finding authorities had opined that such material was not available in the paper books submitted before the Tribunal at the time of hearing. Therefore, the Tribunal was justified in saying that the assessees themselves were not clear about the amount, which could be allocated to the interest paid on the capital by virtue of the partnership deed entered into between the partners and the firm. Section 14A deals with the expenditure incurred in relation to income not includible in the total income. However, the proviso has come into existence only with effect from 11.05.2001 but section 14A was brought in by the Finance Act, 2001 with retrospective effect from 01.04.1962. In that view of the matter, the Commissioner, while exercising powers under section 263, was justified in saying the expenditure attributable to taxable income was allowable and what was attributable to non-taxable income could not be allowed as deduction. The Commissioner was right in directing the Assessing Officer to compute the interest, which could not be allowed as against the exempted income, being a share in the profit on the capital investment by the individual partners. Even after remand by the High Court, the assessees were not able to bring on record the facts clarifying the position. Therefore, the Tribunal was justified in saying that the facts had to be clarified before the Assessing Officer while proceeding with the matter as directed by the Commissioner. The Tribunal had appreciated the case on hand in accordance with the provisions of section 14A, including the proviso to section 14A. Accordingly, the Tribunal was justified, in law, in holding that the order passed by the Commissioner was valid and within the powers under section 263. (Related Assessment year : 1995-96) - [Mahesh G. Shetty v. CIT, Bangalore (2012) 344 ITR 18 : (2011) 10 taxmann.com 49 : (2011) 238 CTR 440 : 198 Taxman 224 (Karn.)]

Word ‘record’ used in section 263(1) would mean records as it stands at time of examination by Commissioner but not as it stands at time of order passed by Assessing Officer - Even prior to 1989 amendment material which had already come on record though subsequently to making of assessment could be taken into consideration by Commissioner - Commissioner, in instance, was justified in invoking section 263 on basis of valuation report submitted by DVO subsequent to assessment order

During the assessment year 1977-78, the assessee-firm constructed a cinema theatre and showed cost of construction at Rs. 20,28,498. The Assessing Officer referred the matter to DVO who could not submit his report by 31.03.1980, i.e., before expiry of time-limit to complete assessment. The assessment order was passed accepting the valuation mentioned by the assessee. Thereafter on 16.12.1980, the DVO submitted the report wherein the cost of construction was shown at Rs. 34,58,600. The Commissioner, therefore, issued notice under section 263(1) to the assessee. The assessee submitted before the Commissioner that the valuation report was not available on the record of the Assessing Officer at the time of passing the assessment and, thus, it could not be a valid basis for initiating an action under section 263. The Commissioner, however, rejected it on the ground that the 'record' would include all records available at the time of examination by him. On appeal, the Tribunal accepted the view of the assessee and that was upheld by the High Court. On appeal to the Supreme Court:

It could not be said that the correct and settled legal position, with respect to the meaning of the word 'record' till 01.06.1988, was that it meant the record which was available to the Assessing Officer at the time of passing of the assessment order. Further, such a narrow interpretation of the word 'record' was not justified, in view of the object of the provision and the nature and scope of the power conferred upon the Commissioner. The revisional power conferred on the Commissioner under section 263 is of wide amplitude. It enables the Commissioner to call for and examine the record of any proceeding under the Act. It empowers the Commissioner to make or cause to be made such enquiry as he deems necessary in order to find out if any order passed by the Assessing Officer is erroneous insofar as it is prejudicial to the interests of the revenue. After examining the record and after making or causing to be made an enquiry if he considers the order to be erroneous then he can pass the order thereon as the circumstances of the case justify. Obviously, as a result of the enquiry he may come in possession of new material and he would be entitled to take that new material into account. If the material, which was not available to the Assessing Officer when he made the assessment could, thus, be taken into consideration by the Commissioner after holding an enquiry, there is no reason why the material which had already come on record though subsequently to the making of the assessment cannot be taken into consideration by him. Moreover, in view of the clear words used in clause (b) of the Explanation to section 263(1), it has to be held that while calling for and examining the record of any proceeding under section 263(1) it is and it was open to the Commissioner not only to consider the record of that proceeding but also the record relating to that proceeding available to him at the time of examination. Therefore, in the instant case, it was open to the Commissioner to take into consideration all the records available at the time of examination by him and, thus, to consider the valuation report submitted by the DVO subsequent to the passing of the assessment order and so, the order passed by him was legal. (Related Assessment year : 1977-78) - [CIT v. Shree Manjunathesware Packing Products & Camphor Works (1998) 231 ITR 53 : 96 Taxman 1 : (1997) 143 CTR 406 (SC)]

Capital gains - Stock-in-trade converted into investment – Indexation-Revision was held to be valid

Dismissing the appeal the Court held that; The assessee-company was engaged in the business of trading in cement, paper, AC sheets, pipes, etc. Till  March 31, 1993, certain shares were held as stock-in-trade and were converted into investment by a resolution dated 31.03.1993. In the previous year relevant to the assessment year 1994-95, the assessee sold these shares and claimed that the shares were investment during the assessment year 1994-95 and the profits arising from the sale were capital gains, on which indexing benefit was allowable. The Assessing Officer allowed the indexation benefit not from the date of conversion but from the date of purchase, which resulted in long-term capital loss. The Commissioner set aside the order acting under section 263, which was confirmed by the Tribunal was held to be valid. (Related Assessment year : 1994-95) – [Cambay Investment Corporation Ltd. v. DCIT (2016) 388 ITR 366 : 242 Taxman 13 (Guj.)]

Additional ground - addition not challenged in original assessment can­not be challenged in appeal against order pursuant to revision order un­der section 263

The assessee claimed deduction of Rs.9,65,903 towards prior period expenses for the assessment year 2006-07. Since the expenses did not relate to the assessment year 2006-07, the claim was disallowed by the Assessing Officer while passing the original assessment order under section 143(3) of the Income-tax Act, 1961. This assessment year was a subject matter of revision under section 263 and the Assessing Officer was directed to consider the allowability of depreciation on the improvement made towards leasehold properties. Consequent to the revision order passed under section 263, the Assessing Officer completed the assessment under section 143(3) read with section 263. On appeal challenging the disallowance of prior period expenses, the Tribunal held that the addition did not emanate from the order passed under section 143(3) read with section 263. Since the assessee failed to challenge the addition in the original assessment, it could not challenge the addition in appeal against the order of revision, as this was not the subject matter of the order passed under section 263. (Related Assessment year : 2006-07) – [Accel Frontline Ltd. v. DCIT (2016) 46 ITR 138 (ITAT Chennai)]

Failing to record reasons in assessment order for conclusion reached by Assessing Officer on issues arising for consideration–Revision directing for fresh assessment was proper

The assessee claimed depreciation on goodwill and operational expenses. The Principal Commissioner invoked the provisions of section 263 of the Act on the ground that the Assessing Officer had not discussed and verified the claim of the assessee. On appeal, the assessee contended that the Assessing Officer had raised specific enquiries during the course of assessment proceedings and accepted its claim and it was not necessary to discuss about the enquiries made by the Assessing Officer in the assessment order. Held that the Assessing Officer had not discussed the issues that arose for consideration in the assessment order. The proceedings before the Assessing Officer being judicial proceedings, he was expected to record his own reasons for the conclusion reached. Whether it was an administrative order or judicial order, the reasons for the conclusion or decision taken had to be recorded in the order itself. There was no infirmity in the order of the Principal Commissioner. The Assessing Officer was directed to conduct an independent enquiry and pass a speaking order recording his own reasons without being influenced by any of the observations made by the Principal Commissioner. (Related Assessment year : 2010-11) – [Medall Health Care (P) Ltd.v. CIT (2016) 46 ITR 36 (ITAT Chennai)]

Commissioner discovering errors and passing order of revision after hearing assessee - Order valid

Allowing the appeal the Court held that; a prima facie perusal of the order of the Commissioner showed that he was satisfied that there were errors which had effect on the interests of the Revenue and needed a further probe by the Assessing Officer. The order passed by the Commissioner was proper and he had validly exercised the powers conferred on him under section 263. The order of the Tribunal setting it aside was not valid. (Related Assessment year : 1999-2000) – [CIT v. Varanasi Khanta Rao, Prop. Sri Sai Srinivasa Modern Rice Mill (2015) 377 ITR 602 : 234 Taxman 454 (T & AP)]

Gift from aunt - Revision was held to be not valid - Gifts from strangers - Revision was held to be valid

Mere identification of donor and showing movement of gift amount through banking channels was held not sufficient to prove genuineness of gift. The burden on recipient is not only to establish identity of person making gift but also his capacity to make a gift and that it had actually been received as a gift. Since the recipient failed to do so, revision was held to be valid. However, since one of the donors was the real aunt of the assessee the amount of Rs. 1 lakh gifted by her was to be excluded from the purview of fresh assessment proceedings. (Related Assessment year : 2000-01) – [CIT v. Rippen Ahuja (2014) 365 ITR 150 (P&H)]

Housing project - Deduction was allowed without application of mind by Assessing Officer – Revision was held to be valid

Assessing Officer even though taking a view that there existed possibility of violation of approved building plan, allowed assessee’s claim for deduction under section 80-IB(10) as assessment was getting time barred, it being a case of non-application of mind, Commissioner was justified in setting aside assessment in exercise of revisional power (Related Assessment years : 2005-06, 2006-07). – [CIT v. Abad Constructions (P) Ltd (2014) 363 ITR 372 : 225 Taxman 151 (Mag.) : 103 DTR 439 (Ker)]

Revision of orders prejudicial to revenue - Co-operative Societies - Lack of enquiry - Revision was held to be valid

Once a claim is made under section 80P of the Act, the Assessing Officer is necessarily required to apply his mind and conduct proper enquiry and verification at the time of assessment. Lack of this exercise on the part of Assessing Officer leads to an erroneous order, which is prejudicial to the interests of the Revenue. (Related Assessment year : 2009-10) – [Perinthalmanna Service Co-op Bank Ltd. v. ITO (2014) 363 ITR 268 (Ker.)]

Revision of orders prejudicial to revenue - Revision was held to be justi­fied

The Assessee maintained book of accounts of construction activities carried out abroad for which payment was received in foreign currency. Assessing Officer opined that entire difference with Indian rupees credited to profit and loss account relate to fixed assets/long-term liabilities, and thus exchange variation reserve account (EVR) was not liable to be taxed. The CIT passed a revision order under section 263 with an observation that there is no mention of any reasons as to why entire EVR should relate to fixed assets. Assessing Officer’s silence on the issue is without meaning. On appeal, the Tribunal observed that CIT calculated the variation pertaining to three categories, i.e. income and expenditure, current assets and current liabilities and fixed assets – head office account/depreciation reserve, so it was for the assessee to explain. Hence the Tribunal dismissed Assessee’s appeal. The High Court confirmed the remand to the lower authorities and declined to answer the questions of law in the said appeals. (Related Assessment years : 1988-89 to 1990-91)– [U. P. State Bridge Corpn. Ltd. v. CIT (2014) 220 Taxman 13 (Mag.) (All.)]

Reasonableness of the income offered has not been properly examined by the Assessing Officer while making assessment - Revision of order was upheld by the Tribunal - No substantial question of law

A survey was conducted under section 133A of the Act in the business premises of the Assessee Books of accounts and documents were impounded. The assessee proposed a particular estimation of income. It was proposed to estimate the income of the assessee at an average rate of 2% of the income earned by the assessee’s firm as per the assessee’s proposal. However, the income  assessed by the Assessing Officer in order under section 143 r.w. section 147 of the Act, was less than 2%. This in view of the CIT was prima facie erroneous and prejudicial to the interest of the revenue. Order of revision was upheld by Tribunal. On appeal the Court held that the CIT found that the issue relating to reasonableness of income offered has not been properly examined by the Assessing Officer while making assessment. It was also noted that the rate of 2% was mentioned in a vague manner in the assessment order without proper working. This finding was also verified by the Tribunal. The court therefore held that no question of law arose from the order of the tribunal. (Related Assessment year : 2004-05) – [Popular Mini Finance v. CIT (2014) 97 DTR 407(Ker.)]

Creation of shell companies and subscribing for shares at high premium constitutes tax evasion by money laundering. It is a case of clear human ingenuinity with the clear and contumacious intention to defraud the revenue - Revision was held to be valid

The first question comes to our mind is as to why this hurry in completing the reassessment proceedings especially when substantial time is still available and detailed inquiry is expected. Normally, once reopening is done by issuance of notice under section 148, the full time as available under the Act is used by the Assessing Officer but conspicuously in all such cases the assessments are closed fast. These are special cases where within such a short period of issuance of notice under section 148, assessment stands concluded without any investigation or verification or inquiry worth its name. One is left wondering as to whether it is on purpose and design or whether it was in the normal course as this feature is special only to such companies where large share capital has been introduced. It is relevant because the creation of the shell companies and introduction of the share capital is not the only issue that comes up. This is but the tip of the iceberg. A perusal of the Balance sheet and Profit & Loss account in the case of the assessee shows that the share application monies received by the assessee along with the premium are represented in the Balance sheet in the form of current assets being the unquoted equity shares in other such companies. That is the share application money received by the assessee is used for making further investments in other such similar shell companies from whom cash is taken and rerouted through cheques. These shell companies which are acquired by the interested third parties purchase these companies at a fractional amount of the value of the shares. These are cases of clear human ingenuinity with the clear and contumacious intention to defraud the revenue. It is not the handiwork of one person alone. One person has created the shell, another has funded the shell with an intention to launder unaccounted funds and after having acquired the shell has used it for converting its funds also. There is no information as to who are the latest beneficiaries of such shell companies and for what purpose the companies are being used. This is just the reason why the provision of section 56(viib) has been introduced. Receipt of share application money with huge share premium warranted detailed enquiry by the Assessing Officer and not a perfunctory enquiry. (Related Assessment year : 2008-09) – [Bisakha Sales (P) Ltd. v. CIT – Date of Judgement : 19.09.2014 (ITAT Kolkata)]

Assessing Officer merely accepted claim of assessee without making any enquiry or applying his mind - Revision by the Commissioner justified

The assessee had made payments to small labourers and machine repairers for which it did not have any valid vouchers. During the assessment proceedings it was stated before the Assessing Officer that the payments were made under emergent conditions and that the expenses were actually incurred. The Assessing Officer disallowed a sum of Rs. 2 lakhs, which disallowance was accepted by the assessee. The CIT exercised revisionary powers under section 263 and directed the Assessing Officer to modify the assessment order since according to the CIT the 4 aspects mentioned in his notice were not considered by the Assessing Officer. Tribunal set-aside the order of the CIT. On appeal by the department, the High Court observed that there was no application of mind on the part of the Assessing Officer and that the 4 points mentioned by the CIT have not been considered by the Assessing Officer. Accordingly, the High Court allowing the appeal held that the CIT was justified in directing the Assessing Officer to redo the matter afresh. (Related Assessment years : 2006-07)– [CIT v. Alloy Steels (2013) 359 ITR 355 : 217 Taxman 262 : 36 taxmann.com 514 (Karn.)]

No application of mind by the Assessing Officer at the time of assess­ment – An order without application of mind is definitely prejudicial to the interest of revenue

The assessee claimed provision made for standard assets also as a provision for bad and doubtful debts under section 36(1)(viia). Assessing Officer allowed the deduction under section 36(1)(viia). CIT initiated proceedings under section 263 of the Act. As per CIT, the provision for standard assets could not be considered as provision for bad and doubtful debts which could be allowed under section 36(1)(viia) of the Act. Before the Tribunal the assessee submitted that Assessing Officer has taken a lawful view and therefore, CIT could not substitute his view with that of Assessing Officer. The Tribunal upheld the revisional order passed by the CIT and observed that there was no enquiry made during the course of assessment proceeding. Therefore, the order which was silent on the claim made by assessee, and allowing such claim, without any discussion will definitely render it erroneous and prejudicial to the interest of revenue. Tribunal dismissing the appeal followed the decision of Apex Court in case of Malabar Industrial Co. Ltd. v. CIT (2000) 243 ITR 83 (SC) (Related Assessment year : 2007-08) – [Bharat Overseas Bank Ltd. v. CIT (2013) 152 TTJ 546 : 82 DTR 373 (ITAT Chennai)]

Failure by Assessing Officer to make enquiry in respect of payments li­able to tax deduction at source, revision is held to be justified

The assessee is a telecommunications service provider. The Assessing Officer, inter alia, made two disallowances under section 40(a)(ia) of the Income-tax Act, 1961 on the ground of failure by the assessee to deduct tax at source on the payments: free airtime to distributors in the nature of commission expenses liable to deduction of tax at source under section 194H of the Act, and roaming charges paid to other operators in the nature of fees for technical services liable for deduction of tax at source under section 194J of the Act. On the basis that the nature of business of the assessee was the same for the assessment year 2007-08 also and that the assessee had not deducted tax at source on the free airtime allowed to distributors under section 194H of the Act or on the roaming and interconnection charges under section 194J of the Act, the Commissioner issued notice of revision under section 263 to the assessee, set aside the assessment for that year and directed the Assessing Officer to examine the case afresh in respect of these two issues and after giving proper opportunity to the assessee and pass a speaking order. On appeal : Held, dismissing the appeal, (i) that the issue of disallowance of free airtime to distributors under section 40(a)(ia) of the Act had not been examined by the Assessing Officer in the course of assessment proceedings for the assessment year 2007-08. No reference thereto was there in the assessment order. The Assessing Officer had not issued any query in this regard or obtained necessary details. Hence, it could not be said that the Assessing Officer had applied one of the two views possible. (ii) That on the issue of roaming charges paid the fact that certain tax deductible at source had not been so deducted was clearly prejudicial to the Revenue. That something was available in the balance-sheet, profit and loss account or books of accounts could not lead to the conclusion that the Assessing Officer had applied his mind. There was no discussion by the Assessing Officer on these subjects, nor had the Assessing Officer made any enquiry on these subjects. The Assessing Officer had mechanically accepted what the assessee wanted him to accept without any application of mind or enquiry. Similarly, no evidence had been placed that the claim made by the assessee was objectively examined or considered by the Assessing Officer either on record or in the assessment order. The Assessing Officer had completely omitted the issue in question from consideration and made the assessment in an arbitrary manner. Hence, it was a fit case for the Commissioner to exercise his revisional jurisdiction under section 263. Appeal of assessee was dismissed. (Related Assessment year : 2007-08) – [Bharti Hexacom Ltd. v. CIT (2013) 21 ITR 648 (ITAT Delhi)]

Not application of mind to relevant material or an incorrect assumption of facts or an incorrect application of law will satisfy the requirement of order being erroneous, hence, revision held to be valid

The assessee bought shares on 21.04.2000 for Rs. 19,536 and sold them on 02.05.2001 for Rs. 6,36,640. A gain of more than 30 times was made in one  year. The Assessing Officer accepted the LTCG and allowed section 54F relief. The CIT passed an order under section 263 in which he held the order to be ‘erroneous and prejudicial to the interest of the revenue’ on the ground that the Assessing Officer had not made any enquiry to determine the genuineness of the transaction though the circumstances warranted the same. On appeal of the assessee, the Tribunal relied on B & A Plantation & Industries & Anr. v. CIT (2007) 290 ITR 395 (Gau.) and held that as the order of the Assessing Officer was not without jurisdiction, it could not be held to be ‘erroneous’ for purposes of section 263. On appeal by the department, the issue was referred by the Full Bench as to the supposed conflict between various judgements of the Court on the subject: Jurisdiction under Section 263 can be exercised whenever it is found that the order of assessment was erroneous and prejudicial to the interest of the Revenue. Not holding such inquiry as is normal and not applying mind to relevant material would make the assessment ‘erroneous’ warranting exercise of revisional jurisdiction. An incorrect assumption of facts or an incorrect application of law will satisfy the requirement of the order being ‘erroneous’. Non-application of mind and omission to follow natural justice is in same category. CIT v. Daga Entrade (P) Ltd. (2010) 327 ITR 467 (Gau.) lays down the correct law and is not in conflict with Rajendra Singh v. Superintendent of taxes & Ors. (1990) 1979 STC 10 (Gau.). (Related Assessment year : 2002-03).– [CIT v. Jawahar Bhattacharjee (2012) 341 ITR 434 : 247 CTR 473 : 209 Taxman 174 :67 DTR 217 (Gau)(FB)]

Reasoned order - Double taxation relief – India-Canada - As the computa­tion was not clearly indicated in the assessment order the revision was held to be valid

Assessee while filing the return of income, claimed relief under DTAA relief in respect of Canada and Thailand. Assessing Officer has allowed the claim under section 143(3). The Commissioner passed the order under section 263, and directed the Assessing Officer to examine the enactment of both the countries and to ascertain the exact relief that the assessee can claim under Article 23(2) with Canada and Article 23(3) of the DTAA of Thailand. Tribunal set aside the order of Commissioner and restored the order of the Assessing Officer. On further appeal to High Court by the revenue the court held that as the Assessing Officer has not clearly indicated the computation with the relevant Articles of DTAA and the basis, can be construed as an order both erroneous and prejudicial to the interest of revenue hence the revision order was justified. (Related Assessment years : 1995-96 & 1996-97). – [CIT v. Infosys Technologies Ltd. (No 2) (2012) 341 ITR 293 : 247 CTR 410 : 205 Taxman 98 : 67 DTR 33 (Karn.)]

Computation deduction under section 80HHF - Adjustment of brought forward losses - Legal position to be seen when exercising therevision jurisdiction and not when the Assessing Officer passed the order- Revision held to be valid

Assessing Officer allowed the deduction under section 80HHF, before setting off the losses of brought forward from earlier years. Commissioner passed the order under section 263 revising the order. On appeal, the Tribunal held that for the purpose of examining the validity of revision proceedings, what one needs to examine is the legal position prevailing as on the time when revision powers are exercised by the Commissioner and not when the Assessing Officer passed the order at the point of time. Accordingly, revision order held to be valid. (Related Assessment year : 2003-04) – [Star India Ltd. v. Addl. CIT (2012) 143 TTJ 307 : 65 DTR 169 : 49 SOT 422 (ITAT Mumbai)]

Income-escaping assessment order passed under section143(3), r.w.s. 147, is an assessment order passed by Assessing Officer and therefore, any issue, which Commissioner thinks that Assessing Officer has not considered in the said assessment, can be brought to life by Commissioner in exercise of his powers under section 263. – [Spencer & Co. Ltd. v. ACIT (2012) 137 ITD 141 (ITAT Chennai)(TM)]

Depreciation - Additional depreciation - Generation of electricity - Manu­facture - Revision is not justified - On reduction of sales on estimate basis revision held to be justified

Process of generation of electricity is akinto manufacture or production of an article or thing and assessee engaged in activity of generation of electricity would be entitled to additional depreciation under section 32(1)(iia). Hence, revision is not justified. As regards other issue which Commissioner observed that Assessing Officer had allowed assessee to provisionally revise its sales downwards on estimate basis that too without issuing any corresponding credit note to customers which in opinion of Commissioner was erroneous and prejudicial to interest of revenue. He, therefore, set aside assessment order and remitted that issue to file of Assessing Officer for fresh examination. On reduction of sales, Commissioner had rightly taken cognizance under section 263 and had rightly remitted that issue to Assessing Officer for fresh adjudication. If on verification of record, Commissioner forms an opinion that an issue available in computation of income required verification and investigation at end of Assessing Officer before its acceptance or rejection and such inquiry was not conducted, then assessment order on such issue can be set aside under section 263. (Related Assessment year : 2005-06) – [NTPC Ltd. v. DCIT (2012) 54 SOT 177 (URO)(ITAT Delhi)]

Revision of orders prejudicial to revenue – Exempted income - Proviso to section 14A - Law prevailing on the date of order under section 263

Assessees were partners of a firm - Apart from assessment of partnership firm, they were also assessed to tax in their individual capacity on returns filed by them. In their assessment for relevant assessment year, Assessing Officer gave deduction of interest paid on borrowal for investment in firm. On 29.12.1999, Commissioner, in exercise of powers under section 263, set aside order of Assessing Officer holding that after insertion of section 14A, interest payable on amount invested in a partnership firm could not be allowed as deduction. Assessee challenged order of Commissioner contending that in view of proviso to section 14A no order could be passed enhancing assessment or reducing refund already made. Since proviso to section 14A came to be inserted by Finance Act, 2002 with retrospective effect from 11.05.2001 and, as such, on date of order of Commissioner passed under section 263, said proviso was not in existence, it would not be applicable to instant case. Therefore, order passed by Commissioner was valid and within his powers under section 263. [In favour of revenue] (Related Assessment year : 1995-96). – [Mahesh G. Shetty & Ors. v. CIT (2011) 238 CTR 440 : 198 Taxman 22 : 51 DTR 104 (Karn.)]

NOTE: SLP rejected – SLP (Civil) (Nos 14660-14663 of 2011 date 05.07.2011 (2012) 204 Taxman 189 (Mag.)

Revision of orders prejudicial to revenue – Business income – Capital gains – Income from purchase and sale of shares

Assessing Officer accepted the income declared by the assessee under the head ‘long-term capital gains’ without any application of mind or enquiry though the assessee was investment company, the assessment was erroneous and revision order under section 263 was justified. (Related Assessment year :2006-07) – [Spectra Shares & Scrips (P) Ltd. v. DCIT (2011) 62 DTR 411 (ITAT Hyderabad)]

Under the Kar Vivad Samadhaan Scheme, finality is assigned only to the matters which are subject matter of declaration by the assessee in relation to the disputed income and, therefore, the jurisdiction of the Commissioner under section 263 is not ousted vis-à-vis the matters which are totally unconnected with the disputed income for which assessee opted for the Scheme – [Bhilwara Spinners Ltd. v. CIT (2006) 102 TTJ 838 (ITAT Jodhpur)]

Revision of orders prejudicial to revenue – Trading activity – Exclusion from benefit

Where while allowing deduction under section 80-IA Assessing Officer did not exclude profit earned by assessee from trading activity, fact that there was total non-application of mind on part of the Assessing Officer to said important issue rendered his order erroneous and prejudicial to interest of revenue and, therefore, Commissioner had rightly invoked his jurisdiction under section 263. (Related Assessment year : 1995-96) – [Recon Oil Industries Ltd. v. Jt. CIT (2005) 2 SOT 732 (ITAT Mumbai)]

Revision of orders prejudicial to revenue – Valuation of stock – Cession of business

Where though facts showed that there was complete cessation of business of assessee-firm on division of assets/liabilities among partners, yet Assessing Officer accepted valuation of stock at cost price rather than market price, his order was rightly held as erroneous and prejudicial to interest of revenue by Commissioner. (Related Assessment year : 1992-93) – [Naveen Harware & Electrical Stores v. CIT (2004) 266 ITR 308 : 188 CTR 19 : 140 Taxman 325 (Gau.)]

Commissioner can exercise jurisdiction under section 263 in respect of assessment under section 143(1) as applicable after 01.04.1989

Indeed after the amendment of 1989, there has been a perceptible shift in the procedure regarding assessment. The procedure for assessment has been simplified so as to dispense with a regular assessment order to be passed by the Assessing Officer in every case. The acceptance or acknowledgement of the return filed by the assessee and intimation sent for the purpose of section 143(1) is an assessment. It is nevertheless ‘assessment’. Assessment has been defined in section 2(8) as ‘assessment includes reassessment’. Section 143, as a whole, is a provision regarding assessment. The modalities and procedure for assessment have been provided for in sub-section (1), which is different from the procedure under sub-section (2), read with sub-section (3), of the same provision. In both cases, it is a proceeding under the Act and the assessment accepted or made by the revenue, as the case may be. In the latter case, i.e., section 143(3), an order is passed; whereas in the former case, that is, section 143(1), it is an intimation or acknowledgement. Nevertheless, the intimation sent by the Assessing Officer, in law, will have to be understood as having the force of an order on self-assessment. Only this construction would be purposive construction. This construction is reinforced by the legal fiction provided in the amended provision, which postulates that ‘intimation’ shall be deemed to be notice of demand issued under section 156 and all the provisions of the Act shall apply accordingly. On a plain reading of section 156, notice of demand is served upon the assessee when any tax interest, penalty, fine or other sum is payable in consequence of any order passed under the Act. To put it differently, issuance of notice of demand [read intimation under section 143(1)], presupposes that it is in consequence of an order having been passed under the Act. In that sense ‘intimation’ under section 143(1) would partake of the colour of an order passed under the Act. Understood, thus, interference under section 263, by the Commissioner even against an intimation referable to section 143(1) is open. If the Legislature had intended to exclude the jurisdiction of the Commissioner in respect of proceeding under section 143(1), which is also an assessment and, therefore, in the nature of an order, it would have expressly made provision in that behalf, just as it has amended section 154 by the Finance Act, 1999, in respect of the provision for ‘rectification of mistake’ as a consequential amendment made to envelop the amended section 143(1). Further section 142 enables the Assessing Officer to make enquiry before assessment, after the return of income under section 139 is filed by the assessee. Section 142 precedes section 143 and is not restricted only to the assessment order to be passed within the meaning of section 143(3). In other words, on the filing of the return under section 139, if the Assessing Officer has reason to believe that an in-appropriate claim has been made by the assessee in the return, before sending the intimation under section 143(1) he can make such enquiry and if he is satisfied in that enquiry about the inappropriate claim of the assessee, he can proceed in terms of sub-section (2) and sub-section (3) of section 143. This appears to be the scheme regarding the procedure of assessment of the return filed by the assessee. Accordingly, in both situations, it is the decision of the Assessing Officer whether to send intimation or to proceed under section 143(2). That is surely a process of taking a decision in the matter. Sending the intimation being a decision of acceptance of self-assessment is, therefore, in the nature of an order passed by the Assessing Officer for the purpose of section 263. In the other situation, the action culminates with the order in writing under section 143(3) which is indubitably amenable to section 263. Therefore, the Tribunal was wrong in taking the view that the Commissioner could not have exercised jurisdiction under section 263 in respect of the assessment under section 143(1) as applicable after 01.04.1989. Therefore, the decision impugned in the appeal was set aside and the appeal was remitted to the Tribunal for being considered in accordance with law. (Related Assessment year : 1999-2000) – [CIT v. Anderson Marine & Sons (P) Ltd. (2004) 266 ITR 694 : 189 CTR 118 : 139 Taxman 16 (Bom.)]