Karnataka H.C : the Commissioner, before exercise of jurisdiction under sec.263 of the IT. Act should have recorded a finding that the claim under sec. 54A of the Act is erroneous and therefore prejudicial to the interest of the revenue before setting aside the assessment year and remitted the matter back for fresh consideration

High Court of Karnataka

CIT, Central Circle vs. D.G. Gopala Gowda

Section : 263, 48

N. Kumar And B. Manohar, JJ.

IT Appeal No. 1422 Of 2006

March 5, 2013

JUDGMENT

N. Kumar, J. – The revenue has preferred this appeal against the order passed by the Income Tax Appellate Tribunal (for short ‘the Tribunal’) which has set aside the order passed by the Commissioner under section 263 of the Income Tax Act (for short, hereinafter referred to as ‘the Act’) and remanded the matter back to the Assessing Authority for fresh consideration.

2. The assessee had purchased a site at Rupena Agrahara in the financial year 1995-96 for a consideration of Rs. 3,46,520/-. He started construction of the building in April 1999. He agreed to sell the said property under the agreement dated 9-9-2000 in unfinished condition. Under the terms of agreement, the assessee should complete the construction of the building before execution of sale deed with the help of the funds provided by the purchaser. On 22-11-2000 the assessee executed a sale deed in favour of the purchaser for a consideration of Rs. 1,38,00,000/-. The assessee received a sum of Rs.40,00,000/- at the time of agreement. The total cost of construction was Rs. 1,04,30,425/-. Thereafter, the assessee purchased another property at Koramangala. The Assessing Officer computed the income from the long term capital gains at Rs. 22,17,940/- for the sale of the property. However, the assessee was exempted from paying tax since the fund was utilized fully towards purchase of another property at Koramangala. The Commissioner of Income Tax issued notice under Section 263 of the Act stating that the Assessing Officer was not justified in treating the sale as long term capital gain and according to him, it should have been treated as short term capital gain. The assessee filed his reply to the show-cause notice. Thereafter, the Commissioner proceeded to pass the order setting aside the order of assessment on the ground that it is prejudicial to the interest of the revenue. Aggrieved by the said order, the assessee preferred an appeal to the Tribunal. The Tribunal went into the factual aspects and took note of the legal position as settled in various judgments of the courts and in fact, calculated both the short term and long term capital gain and then found that the assessee is not liable to pay any tax. Therefore, it recorded the finding that even if the order of the Assessing Authority is erroneous, it is not prejudicial to the interest of the revenue. Therefore, set aside the order of the revisional authority and granted relief to the assessee. Aggrieved by the said order, the revenue has preferred this appeal.

3. The appeal was admitted to consider the following substantial questions of law.

“Whether the Tribunal was right in holding that the Commissioner, before exercise of jurisdiction under sec.263 of the IT. Act should have recorded a finding that the claim under sec. 54A of the Act is erroneous and therefore prejudicial to the interest of the revenue before setting aside the assessment year and remitted the matter back for fresh consideration?”

4. Learned counsel appearing for the revenue assailing the impugned order contended that the Tribunal could not have computed the capital gain as it is the job to be done by the Assessing Authority and therefore, the Tribunal committed a serious error in interfering with the order of the revisional authority. He submitted that the revisional authority while exercising power of revision, could have passed a final order on merits, but it also has discretion and the power to remand the matter for fresh consideration to the Assessing Authority. That cannot be found fault with and therefore he submits that a case for interference is made out.

5. Per contra, the learned counsel for the assessee submitted supported the impugned order.

6. The power of revision conferred under section 263 of the Act on the Commissioner has to be exercised strictly in accordance with law. After reviewing the case law, this court had an occasion to set out the scope of the revisional power in the case of CIT v. Digital Global Soft Ltd. [2011] 203 Taxman 98/15 Taxmann.com 78 (Kar.), where it is held as under:

16. As is clear from the wording in section 263, the Commissioner gets the jurisdiction to revise any proceedings under this Act, if he considers that any order passed therein by the Assessing Officer is erroneous insofar as it is prejudicial to the interest of the Revenue. Therefore, it is clear that he cannot exercise the power of revision solely on the ground that the order passed is erroneous. He gets’ jurisdiction only if such erroneous order is prejudicial to the interest of the Revenue. Prejudicial to the Revenue means, lawful revenue due to the State has not been realized or cannot be realized. In other words, by the order of the Assessing Authority if the lawful revenue to the State has not been realized or cannot he realized, as the said order is prejudicial to the interest of the Revenue and also erroneous, he gets jurisdiction to interfere with the said order under section 263. Therefore, for attracting section 263, the condition precedent is (a) the order of Assessing officer sought to be revised is erroneous and (b) it is prejudicial to the interest of the Revenue. If one of them is absent, i.e., if the order of the Income tax officer is erroneous but is not prejudicial to the Revenue, recourse cannot be had to section 263(1) of the Act. The satisfaction of both the conditions stipulated in the section is sine qua non for the Commissioner to exercise his jurisdiction under section 263.

17. In this background, if we look into the facts of the case, as the provisions of section 155(14) was not in the statute book on the day the Assessing officer passed the order, coupled with the scope of his power under section 154, the order passed on 12.06.2001 cannot be strictly in accordance with law. It is erroneous. The amendment came into effect only from 01.06.2002. but on the day the Commissioner was exercising his power and passing the order on 31.07.2002, the said amendment was very much in the statute book. Therefore, on 31.07.2002, omen revisional jurisdiction was exercised, the Commissioner could not have held that the order passed by the Assessing Authority is erroneous, as on that day the amended law provided for such reference.

18. Even if it is erroneous, unless the said erroneous order is prejudicial to the interest of the Revenue, the Commissioner could not have exercised the said power. From the admitted material on record, the amount that is ordered to be refunded to the assessee is not the amount which is lawfully due to the Revenue at all it was an. amount which is Revenue legitimately should have refunded if only the claim had been in the return enclosing the certificates under section 203. the said amount should have been refunded to the assessee. Because he was handicapped by such certificates not being forwarded to him, consequently not able to make the claim, such a claim was not made. The moment he got possession of those certificates on 12.02.2001, within two years from the date of the end of the assessment year he has put forth the claim. The said amount was not a lawful amount to the Government. It was an amount which should have been refunded to the assessee.

Therefore, the condition precedent for exercising the revisional power under section 263 of the Act is that the order under revision should not only be erroneous, but such erroneous order should result in prejudice to the interest of the revenue. Mere error would not confer jurisdiction to exercise revisional power under section 263 of the Act.

7. We have gone through the order passed by the revisional authority. It is a very cryptic order. It neither points out an error nor prejudice which has caused to the revenue. After declaring that the order is prejudicial, it refers to the notice being issued to the assessee and the assessee filing reply to the said notice and then review authority feels that it is a matter to be readjudicated by the Assessing Authority and therefore, the matter was remanded for fresh consideration. This is not the way, the revisional authority should exercise their power under Section 263 of the Act. The order of revisional authority should indicate the error committed by the Assessing Authority and consequential prejudice caused to the revenue because of the erroneous order.

Unless these two conditions exist, the revisional authority does not get jurisdiction to pass any order under section 263 of the Act. Once these two conditions are set out in the order, then it is open to the revisional authority to consider the case on merits and pass final order or in its view, requires some adjudication or enquiry, the matter can be remanded to Assessing Authority. But such remand should be only after setting out the facts which show erroneous nature of the order and the consequential prejudice to the revenue which confer jurisdiction on the revisional authority.

8. Seen from that angle, in the impugned order though we could make out what is the error committed by the revisional authority, certainly there is no iota of evidence to show how it is prejudicial to the interest of the revenue. On the contrary, in the reply to the notice, the assessee had filed a statement. Even if the assessment is to be made separately for the land on long term basis and to the building on short term basis, the assessee is not liable to pay any tax for the building. The assessee has demonstrated that, in no event the order passed by the Assessing Officer is prejudicial to the interest of the revenue. That aspect has not been considered and there is no reference to that aspect in the entire order passed by the revisional authority and by a cryptic order,” the matter is remanded to the Assessing Authority. Though the Tribunal was not expected to go into the merits of the case, in order to demonstrate that the order passed by the Assessing Authority even if it is erroneous, is not prejudicial to the interest of the revenue, they have set out computation of capital gains and demonstrated that the order was not prejudicial. Therefore, the order passed by the revisional authority is illegal and rightly it has been set aside.

9. In the light of what we have stated above, the substantial question of law is answered in favour of the assessee and against the revenue.

10. In that view of the matter, we do not see any merit in this appeal. Accordingly, the appeal is dismissed.

[Citation : 354 ITR 501]

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