The Tax Publishers2012 TaxPub(DT) 0516 (Hyd-Trib) : (2011) 142 TTJ 0483 : (2011) 062 DTR 0411

INCOME TAX ACT, 1961

--Revision under section 263--Erroneous and prejudicial order Lack of proper enquiry--The assessee-company is carrying on business of dealing in shares and mutual fund units. Its ancillary business is running a function hall from which it declared gross receipts of Rs. 4,37,315 and net profit at Rs. 1,72,292. For the assessment year 2006-07, the assessee has filed return of income, declaring. Schedule I of the return of income, containing computation of income from business, showed the assessee's net profit from the P&L Account, against which, in item No. 10 of Schedule I, assessee claimed exempt income. Under section 10(38) for long-term capital gains income. The break-up of the amount of long-term capital gains noted above, is furnished in adjudsted statement of computation of total income enclosed to the return of income, which indicates long-term capital gains from sale of quoted shares and long-term capital gains from the sale of mutual fund units. Assessment thereafter was completed under section 143(3) determining the total icnome of the assessee vide order of assessment 16-12-2008. The CIT on perusal of the records of the assessee upto assessment year 2009-10, found that in the tax audit report for the assessment year 2004-05, it was mentioned by the auditors, M/s B Co. that the nature of the assessee's business was 'investment/trading in shares and securities'. The Tribunal also for that year in its order dt. 3-10-2008 in ITA No. 477/Hyd/2008, found that the assessee was engaged in the business of investments and trading in shares and securities. The CIT further noted from the statement of gain/loss on quoted shares filed by the assessee before the assessing officer on 29-8-2008 that the assessee had been buying and selling a large number of shares several times during the year. He noted that the total number of shares of 53 listed companies and units of 121 mutual funds were sold during the year and net sale consideration of Rs. 21,21,98,822 was received in respect of mutual fund units. The CIT further noticed that for the other assessment years also the assessee has been systematically doing huge volumes of purchase and sales on a regular basis, with a turnover of Rs. 50 crores, in about 100 listed companies and about 100 mutual funds. In addition to this, the assessee had also declared net short-term capital gains from sale of units of debt funds and gain from sale of unquoted shares. The CIT also noted from the 43rd Annual Report filed by the assessee before the assessing officer on 25th March, 2008 that the company reported that during the year 'the market was upbeat' and the company's investments in shares and mutual funds have yielded good results. The assessing officer, according to the CIT had not examined the issue in detail and erroneously accepted the claim of the assessee as long-term capital gains. The CIT therefore was of the opinion that though the assessee has been carrying on trading in shares and units extensively and regularly in huge volumes on high frequency, but offered the profit generated therefrom as capital gains and claimed exemption from tax. Accordingly, he issued a show-cause notice under section 263 dated 20th Jan., 2010, calling upon the assessee to show-cause as to why the activity of the assessee should not be treated as trading in units and shares and tax its profits as business income, since the assessment order dt. 16-12-2008 passed under section 143(3) accepting the claim of the assessee treating it as capital gains and short-term capital gains, according to the CIT, was erroneous and prejudicial to the interests of the revenue. After detailed consideration of the submissions of the assessee in response thereto. The CIT revised assessing officer's order under section 263. Held: Assessment order passed by the assessing officer was rightly held by the CIT as erroneous and prejudicial order.

An order passed by the assessing officer becomes erroneous and prejudicial to the interests of the Revenue under section 263 in the following cases : (i) The order sought to tie revised contains error of reasoning or of law or of fact on the face of it. (ii) The order sought to be revised proceeds on incorrect assumption of facts or incorrect application of law. In the same category fall orders passed without applying the principles of natural justice or without application of mind. (iii) The order passed by the assessing officer is a stereotype order which simply accepts what the assessee has stated in his return or where he fails to make the requisite enquiries or examine the genuineness of the claim which is called for in the circumstances of the case. [Para 34 Perusal of the assessment order passed by the assessing officer does not show any application of mind on his part. He simply accepted the income declared by the assessee under the head 'Long-term capital gains' as it is, though the assessee-company has been carrying on the business in shares. The assessing officer has not bothered to examine the nature of business carried on by the assessee though it was mentioned in the tax audit report that the assessee is engaged in the business of 'investment/trading of shares and securities'. It was also on record that the Tribunal for the assessment year 2004-05 vide order dated 3-10-2008 in ITA No. 477/Hyd/2008 has held that the assessee was engaged in the business of investments and trading on shares and securities. 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 claim made by 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 claim by the assessee stood automatically accepted without any scrutiny. The assessment order placed before us 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 the issue in question from consideration and made the assessment in an arbitrary manner. His order is a completely non-speaking order. In our view, it was a fit case for the learned CIT to exercise his revisional jurisdiction under section 263 which he rightly exercised by cancelling the assessment order and directing the assessing officer to pass a fresh order considering the income declared by the assessee under the head 'Long-term capital gains' amounting to Rs. 18,98,06,611 and 'short-term capital gains' at Rs. 20,70,510 together amounting to Rs. 19,18,77,121 as income under the head 'Business'. The assessee should have no grievance in the action of CIT. [Para 34] It was however contended by the counsel that the assessing officer had taken a possible view in accepting the return of the assessee with reference to head of income and hence, the CIT was not justified in assuming the revisional jurisdiction under section 263. This Tribunal has given thoughtful consideration to the aforesaid submissions. An order becomes erroneous because inquiries, which ought to have been made on the facts of the case, were not made and not because there is anything wrong with the order if all the facts stated or the claims made in the return are assumed to be correct. Thus, it is mere failure on the part of the assessing officer to make the necessary inquiries or to examine the claim made by the assessee in accordance with law, which renders the resultant order erroneous and prejudicial to the interest of the Revenue. Nothing more is required to be established in such a case. One would not know as to what would have happened if the assessing officer had made the requisite inquiries or examined the claim of the assessee in accordance with law. He could have accepted the assessee's claim. Equally, he could have also rejected the assessee's claim depending upon the results of his enquiry or examination into the claim of the assessee. Thus, the formation of any view by the assessing officer would necessarily depend upon the results of his inquiry and conscious, and not passive, examination into the claim of the assessee. If the assessing officer passes an order mechanically without making the requisite inquiries or examining the claim of the assessee in accordance with law, such an order will clearly be erroneous in law as it would not be based on objective consideration of the relevant materials. It is therefore, the mere failure on the part of the assessing officer in not making the inquiries or not examining the claim of the assessee in accordance with law that per se renders the resultant order erroneous and prejudicial to the interest of the Revenue. Nothing else is required to be established in such a case to show that the order sought to be revised is erroneous and prejudicial to the interests of the revenue. [Para 35] Tribunal is unable to accept the submission of the counsel for two other reasons also. First reason is that the view so taken by the assessing officer without making the requisite inquiries or examining the claim of the assessee will per se be an erroneous view and hence will be amenable to revisional jurisdiction under section 263. Second reason is that it is not taking of any view that will take the matter under the scope of section 263. The view taken by the assessing officer should not be a mere view in vacuum but a judicial view. It is well established that the assessing officer being a quasi-judicial authority cannot take a view, either against or in favour of the assessee/revenue, without making proper inquiries and without proper examination of the claim made by the assessee in the light of the applicable law. As already stated earlier, Tribunal is not able to appreciate on what material was placed before the assessing officer at the assessment stage to take such a view. The assessee has also not been able to lead enough evidence to show to us that any inquiry was made by the assessing officer in this regard. Therefore mere allegation that the assessing officer has taken a view in the matter will not put the matter beyond the purview of section 263 unless the view so taken by the assessing officer is a judicial view consciously based upon proper inquiries and appreciation of all the relevant factual and legal aspects of the case. The judicial view taken by the assessing officer may perhaps place the matter outside the purview of section 263 unless it is shown that the view so taken by the assessing officer contains some apparent error of reasoning or of law or of fact on the face of it. [Para 36] 'Adopting' one of the courses permissible in law necessarily requires the assessing officer to consciously analyse and evaluate the facts in the light of relevant law and bring them on record. It is only then that he can be said to have 'adopted' or chosen one of the courses permissible in law. The assessing officer cannot be presumed or attributed to have 'adopted' or chosen a course permissible in law when his order does not speak in that behalf. Similarly, 'taking' one view where two or more views are possible also necessarily imports the requirement of analysing the facts in the light of applicable law. Therefore, proper examination of facts in the light of relevant law is a necessary concomitant in order to say that the assessing officer has adopted a permissible course of law or taken a view where two or more views are possible. It is only after such proper examination and evaluation has been done by the assessing officer that he can come to a conclusion as to what are the permissible courses available in law or what are the possible views on the issue before him. In case he comes to the conclusion that more than one view is possible then he has necessarily to choose a view, which is most appropriate on the facts of the case. In order to apply the aforesaid observations to a given case, it must therefore first be shown that the assessing officer has 'adopted' a permissible course of law or, where two views are possible, the assessing officer has 'taken' one such possible view in the order sought to be revised under section 263. This requires the assessing officer to take a conscious decision; else he would neither be able to 'adopt' a course permissible in law nor 'take' a view where two or more views are possible. In other words, it is the assessing officer who has to adopt a permissible course of law or take a view where two or more views are possible. It is difficult to comprehend as to how the assessing officer. can be attributed to have 'adopted' a permissible course of law or 'taken' a view where two or more views are possible when the order passed by him does not speak in that behalf. We cannot assume, in order to provide legitimacy to the assessment order, that the assessing officer has adopted a permissible course of law or taken a possible view where his order does not say so. The submissions made by the learned counsel, if accepted, would require us to form, substitute and read our view in the order of the assessing officer when the assessing officer himself has not taken a view. It could have been a different position if the assessing officer had 'adopted' or 'taken' a view after analysing the facts and deciding the matter in the light of the applicable law. However, in the case before us, the assessing officer has not at all examined as to whether only one view was possible or two or more views were possible and hence, the question of his adopting or choosing one view in preference to the other does not arise. The aforesaid observations of the Hon'ble Supreme Court do not, help the assessee; and rather they are against the assessee. [Para 38] It was next contended by the Authorised Representative that the assessing officer had considered all the relevant aspects of the case carefully while passing the order. According to him, the mere fact that the assessment order passed by the assessing officer was short would neither mean failure on his part in not examining the matter carefully nor would render his order erroneous so long as the view taken by him was a possible view. In our view, the aforesaid submission of the assessee must fail for the reasons already explained in the foregoing paras of this order as the order, which is sought to be revised under section 263 reflects no proper application of mind by the assessing officer and thus be amenable to revision under section 263. In this case, the assessment order passed by the assessing officer lacks judicial strength to stand. It is not a case where the order is short but is not supported by judicial strength. It is in this view of the matter that the CIT has correctly exercised his revisional jurisdiction under section 263. [Para 40] 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. As mentioned earlier, 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 CIT to correct an erroneous order passed by the assessing officer which he considers to be prejudicial to the interest of the revenue. The CIT 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 latter 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 CIT 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 taxpayers 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. [Para 41]

SUBSCRIBE TaxPublishers.inSUBSCRIBE FOR FULL CONTENT

TaxPublishers.in

'Kedarnath', 7, Avadh Vihar, Near Nirali Dhani,

Chopasni Road

Jodhpur - 342 008 (Rajasthan) INDIA

Phones : 9785602619 (11 am - 5 pm)

E-Mail : mail@taxpublishers.in / mail.taxpublishers@gmail.com