Calcutta H.C : Issues as to whether order can sustain on legal parameters or not, can be tested by higher authority who have been bestowed with power of appeal and section 253 provides a remedy of appeal against an order passed under section 263 by Commissioner, alternative remedy of appeal against said order had to be resorted to by assessee

High Court Of Calcutta

Zigma Commodities (P.) Ltd. Vs. ITO, Ward- 5(3), Kolkata

Section : 263

Assessment Years : 2003-04 To 2009-10

Harish Tandon, J.

Writ Petition No. 281 Of 2014

May 8, 2014

ORDER

1. Assailing the show cause notice dated 3rd February, 2014 passed by the Commissioner of Income Tax under Section 263 of the Income Tax Act, 1961, the petitioner has filed the instant writ petition. The challenge to the said notice is basically founded on the ground that the Commissioner has not recorded his satisfaction relating to error in the order passed under Section 148 of the said Act affecting the interest of the revenue.

2. The undisputed facts are that the petitioner filed a return under Section 143 (1) of the said Act declaring a loss of Rs. 19,428/-. Subsequently a notice for reassessment under Section 148 of the said Act was issued on 7th April, 2011 on the premise that the petitioner being a Non-Industrial Company has written off preliminary expenses in access of Rs. 9,000/- and, therefore, is not eligible to wright off the expenses for increase in the authorized capital. By an assessment order dated 29th April, 2011, the Authority assessed the loss at Rs. 7,429/- after disallowing the access preliminary expenses of Rs. 9,000/- as well as a sum of Rs. 3,000/- under Section 14A of the said Act and computed the tax at rupees ‘Nil’. The Commissioner of Income Tax issued the purported show cause notice under Section 263 intending to revise the order of reassessment made under Section 147 and 148 of the said Act raising doubt over the subscription of shares on premium in absence of any business activities and non-conducting of proper inquiry regarding the identity and worthiness of the shareholders. The Authority thought that in absence of any proper inquiry, the order is erroneous and prejudicial to the interest of the revenue. Subsequently the petitioner disclosed before this Court that the Commissioner has passed the order under Section 263 of the said Act on 18th March, 2014 which was communicated after the filing of the instant writ petition. The challenge is further made to the said order dated 18th March, 2014 on the ground of violation of principle of natural justice. It is stated that despite the specific prayer having made for supply of the relied on documents, the Authorities have not provided such documents to the petitioner and such order is, therefore, liable to be quashed on the flagrant violation of the principle of natural justice.

3. The learned Advocate appearing for the petitioner submits that there is no recording of satisfaction by the Commissioner before issuing the show cause notice under Section 263 of the said Act for arriving at the conclusion that the order of reassessment is erroneous and prejudicial to the interest of the revenue. By relying upon a judgment of this Court rendered in case of CIT v. Karam Chand Thapar & Sons Ltd. [1990] 185 ITR 368/50 Taxman 190, the petitioner says that the word ‘considers’ postulate the careful examination, study and examination of the documents upon due application of mind. He further submits that the conditions laid down under Section 263 of the said Act is sine quo non to invocation of power and in absence of any of such conditions shall render the notice to be defective improper and liable to be quashed and set aside. He audaciously submits that the Commissioner should himself examine the records and the materials available, before arriving the conclusion that the order is erroneous as held in case of CIT v. Gabriel India Ltd. [1993] 203 ITR 108/71 Taxman 585 (Bom.). By relying upon a judgment of this Court in case of CIT v. G.M. Mittal Stainless Steel (P.) Ltd. [2003] 263 ITR 255/130 Taxman 67, the petitioner says that the Commissioner is statutorily bound to record reasons before coming to the conclusion that the order of the Assessing Officer is erroneous and prejudicial to the interest of the revenue. Lastly he submits that if the show cause notice suffers from incurable infirmity and lacks material particulars, the High Court in exercise of power of judicial review can it set aside as held in B.P. Agarwalla & Sons Ltd. v. CIT [1994] 208 ITR 863/[1993] 71 Taxman 361 (Cal).

4. The department, in turn, says that prior to the issuance of show cause notice under Section 263 of the Act, the records were placed before the Commissioner who after careful examination instructed the Deputy Commissioner of Income Tax to draft the said notice which after approval was issued upon the petitioner. He further submits that an opportunity of hearing was given to the petitioner before passing the order dated 18th March, 2014 and, therefore, the said order cannot be said to have been passed in violation of principle of natural justice. He lastly submits that the order passed under Section 263 of the said Act is appellable under Section 253 (1) (c) of the said Act before the Appellate Tribunal.

5. Before proceeding to deal with the points canvassed by the respective parties, it would be profitable to quote the relevant provisions as under:

“Sec.253. Appeals to the Appellate Tribunal.— (1) Any assessee aggrieved by any of the following orders may appeal to the Appellate Tribunal against such order—

(c) an order passed by a Commissioner under Section 12AA or under clause (vi) of sub-section (5) of section 80G or under section 263 or under section 271 or under section 272A or an order passed by him under section 154 amending his order under section 263 or an order passed by a Chief Commissioner or a Director General or a Director under section 272;

263. Revision of orders preducial to revenue.— (1) The Commissioner may call for and examine the record of any by the Assessing Officer is erroneous in so far as it is prejudicial to the interest of the revenue, he may, after giving the assessee an opportunity of being heard and after making or causing to be made such inquiry as he deems necessary, pass such order thereon as the circumstances of the case justify, including an order enhancing or modifying the assessment, or canceling the assessment and directing a fresh assessment.”

6. On meaningful reading of the aforesaid provisions, it is explicit that the Commissioner can exercise the jurisdiction under Section 263 of the said Act suo motu. The pre-requisite condition for exercise of such jurisdiction is that the order of the Income Tax Officer is erroneous and prejudicial to the interest of the revenue. The twin conditions enshrined under the aforesaid provisions is composite and non-segretable. Merely because, the order of the Assessing Officer appears to be erroneous, which is not prejudicial to the interest of the revenue or the order is otherwise valid but prejudicial to the interest of the revenue, does not invite the invocation of such power by the Commissioner.

7. There is a distinction between an order being erroneous and mistake or error committed by the Assessing Officer. An incorrect assumption of facts and/or improper application of law would justify and/or satisfy the requirement of the order being erroneous. The order cannot be branded as erroneous as the Commissioner is not satisfied with the conclusion arrived by the Assessing Officer. The order can be brought within the purview of erroneous order if it involves an error by deviating from law or upon erroneous application of legal principle as held by Bombay High Court in case of Gabriel India Ltd. case (supra) in these words:

‘We find that the expressions “erroneous”, “erroneous assessment” and “erroneous judgment” have been defined in Blacks Law Dictionary. According to the definition, “erroneous” means “involving error; deviating from the law”. “Erroneous assessment” refers to an assessment that deviates from the law and is, therefore, invalid, and is a defect that is jurisdictional in its nature, and does not refer to the judgment of the Assessing Officer in fixing the amount of valuation of the property. Similarly, “erroneous judgment” means “one rendered according to course and practice of court, but contrary to law, upon mistaken view of law; or upon erroneous application of legal principles”.

Form the aforesaid definitions it is clear that an order cannot be termed as erroneous unless it is not in accordance with law. If an Income-tax Officer acting in accordance with law makes a certain assessment, the same cannot be branded as erroneous by the Commissioner simply because, according to him, the order should have been written more elaborately. This section does not visualise a case of substitution of the judgment of the Commissioner for that of the Income-tax Officer, who passed the order unless the decision is held to be erroneous. Cases may be visualised where the Income-tax Officer while making an assessment examines the accounts, makes enquiries, applies his mind to the facts and circumstances of the case and determines the income either by accepting the accounts or by making some estimate himself.’

8. The assumption of incorrect facts or incorrect application of law may be brought within the purview of erroneous order which should be manifest from the materials available with the Commissioner. Branding the order to be erroneous by the Commissioner because he thought that another view is possible when the view taken by the Assessing Officer is otherwise valid, is clearly impermissible. The legislature have taken care of abuse of such power and used the conjunctive word that mere order being erroneous does not attract the invocation of suo motu power of revision by the Commissioner unless it acts prejudicial to the interest of the revenue. The expression ‘prejudicial to the interest of revenue’ is not an expression of art and is of wide import. The aforesaid phrase should be understood in the context that because of the erroneous order passed by the Income Tax Officer, the revenue is deprived of the tax payable by the assessee under the law. The scheme of the Act is to levy and collect the tax in accordance with the provisions contained under the Income Tax Act and the revenue has been entrusted with such task.

9. It admits no quarrel to the proposition that wrong assumption of fact or law makes the order erroneous but the violation of principle of natural justice and/or adherence to the provision shall also render the said order erroneous.

In the show cause notice, the Commissioner recorded that the proper inquiry was not conducted regarding the identity and worthiness of the shareholders who subscribed the shares at a high premium in a closely held Company having no business activities. The Commissioner further proceeded to record that a proper inquiry in this regard should have been conducted by the Assessing Officer.

10. In case of Karam Chand Thapar & Sons Ltd. (supra), the Court noticed the judgment of the Supreme Court delivered in case of Barium Chemical Ltd. v. A.J. Rana AIR 1972 SC 591 on an issue wherein the word ‘considers’ implies the authorities to deliberate upon the matter with careful thinking and due application of mind. If the circumstances indicated in the show cause notice manifest the examining of the documents and existence of the ingredients to brand the order to be erroneous and prejudicial to the interest of the authority, it shall constitute the sufficient compliance with the requirement of the statute.

11. The notice is the foundation of the invocation of jurisdiction under Section 263 of the Act and is the source of the power of the Commissioner to invoke its jurisdiction. The High Court can certainly interfere with the show cause notice under Article 226 of the Constitution, if the show cause notice is brought within the purview of any of the contingencies laid down in case of B. P. Agarwalla & Sons Ltd. (supra). The following passage can be aptly quoted in this regard:

“There could be no quarrel with the proposition that the court exercising jurisdiction under article 226 will interfere with the issuance of a notice under section 263 when there is an initial lack of jurisdiction. But in neither of the cases cited by the respondents did the courts hold that the ambit of the court’s power is limited to scrutinizing whether the jurisdiction was properly assumed or not by the Commissioner.

In the case of Indian Cardboard Industries v. Collector of Central Excise (1992) 58 ELT 508 (Cal), after considering the decision cited, I had held that the court in exercising the jurisdiction under article 226 of the Constitution will interfere with the show cause notice in the following circumstances:

(1) When the show cause notice ex facie or on the basis of admitted facts does not disclose the offence alleged to be committed.

(2) When the show cause notice is otherwise without jurisdiction.

(3) When the show cause notice suffers from an incurable infirmity.

(4) When the show cause notice is contrary to judicial decision or decision of the Tribunal.

(5) When there is no material justifying the issuance of the show cause notice.”

The same principles will apply to notices under section 263 of the Act.

In my view, in this case, the notice under section 263 suffers from an incurable infirmity and can be set aside by this Court under article 226.

12. The decision founded on the show cause notice would fall, in the event, the show cause notice is found to have been issued without disclosing the offence alleged to have been committed or otherwise without jurisdiction or suffers from incurable infirmity or lacks material particulars justifying the issuance thereof.

13. The Commissioner received the records prior to the issuance of the show cause notice and opined that the Assessing Officer failed to apply his mind objectively and failed to conduct an inquiry over the subscription of the shares to various subscribers at a high premium. Section 263 of the Act never envisages the separate recording of the satisfaction before issuance of the show cause notice but if it is clearly discernible from the facts narrated in the show cause notice that the order of the Assessing Officer appears to be erroneous and a prejudice is caused to the revenue, it would render the said show cause notice legal and valid.

The Commissioner has indicated the same sufficiently in the show cause notice and afforded the opportunity to the petitioner to file reply thereto which, in fact, have been done. Whether the order can sustain on legal parameters or not, can be tested by a Higher Authority who have been bestowed with the power of appeal. Section 253 of the Act provides a remedy of appeal against an order passed under Section 263 of the Act by the Commissioner and, therefore, such remedy is required to be resorted by the petitioner.

14. This Court, therefore, does not find any merit in the writ petition.

15. The writ petition is thus dismissed.

[Citation : 365 ITR 276]