Delhi High Court
Income Tax Officer vs Dg Housing Projects Ltd on 1 March, 2012
Author: Sanjiv Khanna
Bench: Sanjiv Khanna, R.V. Easwar
$~6
* IN THE HIGH COURT OF DELHI AT NEW DELHI
% Date of Decision : 1st March, 2012.
+ ITA 179/2011
INCOME TAX OFFICER ..... Appellant
Through Mr. Kamal Sawhney, sr. standing
counsel with Mr. Amit Shrivastava, Adv.
versus
DG HOUSING PROJECTS LTD ..... Respondent
Through Mr. Kapil Goel, Adv.
CORAM:
HON'BLE MR. JUSTICE SANJIV KHANNA
HON'BLE MR. JUSTICE R.V. EASWAR
SANJIV KHANNA,J: (ORAL)
The present appeal by the Revenue impugns order dated 31.2.2010
passed by the Income Tax Appellate Tribunal ("Tribunal", for short) in
the case of D G Housing Projects Ltd. and relates to assessment year
2004-05.
2. Having heard counsel for the parties, the following
substantial question of law is framed :
"Whether Income Tax Appellate Tribunal was right in setting
ITA 179/2011 Page 1 of 19
aside the order of the Commissioner of Income Tax under
Section 263 of the Income Tax Act, 1961?"
3. The assessee is a company and for the assessment year in question
had filed return on 31.10.2004 declaring taxable income of Rs.3,54,712/-.
4. During the year in question the assessee had sold an immoveable
property (unfortunately, the details of the said property are not mentioned
in the appeal and in the annexures i.e. the assessment order, order of the
Commissioner of Income Tax (CIT) and the Tribunal) and had claimed
long term capital loss of Rs.35.71 lacs after indexation. The said property
was purchased by the respondent-assessee in 1997 for Rs.69.63 lacs and
was sold in 2003 (the date is not given in any of the orders or in the
appeal) for Rs.70 lacs. The property was yielding monthly rent of Rs.2.05
lacs per month and was sold to the tenant in occupation.
5. The Assessing Officer examined the sale transaction and in the
assessment order had observed:-
"During the year under consideration the assessee company
has shown income from House Property and Income from
Business. The assessee company was engaged in the
business of sale & purchase, construction, lease or rent of
property. During the year the assessee has received rent for
three months only and thereafter the property was sold to
ITA 179/2011 Page 2 of 19
the tenant who was occupying the property. Profit on the
same has been declared by the assessee. The assessee was
given several opportunities but the company has not filed
details in respect of the various expenses claimed by it. As
such to cover any possible leakage, a lump sum addition of
Rs.7500/- is made."
Reading of the aforesaid paragraph of the assessment order shows
that the Assessing Officer had examined the said transaction and accepted
the computation of the respondent-assessee. Addition of Rs.7,500/- was
made to cover up possible leakages.
6. The CIT thereafter issued notice dated 24.2.2009 under Section 263
of the Income Tax Act, 1961 ("Act" for short) recording the following
reasons:
"From the computation of income filed with the return, it
appears that this profit on sale of property has neither been
assessed as capital gain nor as income from business. The
profit on the sale of property is reduced from the business
income of the assessee company in the computation of
income for separate consideration but it is not considered as
income by the assessee in the computation of income.
Therefore, the assessee company has not offered this profit
either as business income or as capital gains. In the absence
of any business, the expenses have also been incorrectly
allowed. Since the assessee company was deriving income
from property only, no separate deduction, except the
deduction u/s 24, was admissible in respect of the expenses
incurred by the assessee company for the maintenance of
ITA 179/2011 Page 3 of 19
property or otherwise. Accordingly, notice u/s 263dated
(sic) 24.2.2009 was issued the assessee."
The respondent-assessee furnished reply and attended hearings on
24th March, 2009 and 26th March, 2009.
7. On 30th March, 2009, the CIT had passed an order, inter alia,
holding:
"4. I have carefully considered the assessee's arguments
and examined the assessment record. The assessee's
submissions are not acceptable for the following reasons :
(i) There is an apparent understatement of the sale price
of the property sold. The property purchased for Rs.69.63
lacs in 1997, yielding a rent of Rs.2.05 lacs per month, is
being claimed to have been sold for only Rs.70 lacs in 2003.
It cannot be understood how such a high-yielding asset can
be disposed off at such a low value. It is clear that the
aspect of full value of consideration receivable has not been
properly examined by the Assessing Officer and the
assessment order is erroneous and prejudicial to the interest
of the revenue.
(ii) The assessee has argued that Schedule III of the
Wealth Tax Act is not applicable to the Income Tax Act and
has quoted Section 55A of the Income Tax Act to support its
case. However, reference need not be made to the
Valuation Officer when the value of the asset is
determinable as per the formula laid down in Schedule-III
of the Wealth Tax Act. Only when it cannot be determined
by this method does the Assessing Officer make a reference
to the Valuation Officer. In this case this formula is clearly
applicable and the valuation can be worked out as per the
method laid down in Schedule-III. Hence the assessee's
ITA 179/2011 Page 4 of 19
argument is not tenable.
5. In light of the above discussion, the assessment order
is held to be erroneous and prejudicial to the interests of
revenue. It is hence set aside to be made afresh by the
Assessing Officer according to law after giving opportunity
to the assessee of being heard."
(emphasis supplied)
8. The Tribunal has set aside the order observing that the CIT had not
held and come to the conclusion or given a finding that the actual receipt
of consideration was more than what was declared in the return. The CIT
had not recorded any finding that the sale consideration of the property
was higher. It has been held that the CIT could not have made any
addition under Section 50C as the stamp duty had not been enhanced by
the registering authority and the sale deed was registered. It was not the
case of the CIT that any extra stamp duty over and above the transaction
value was payable because of the circle rates. The order under Section
263 of the Act was set aside/cancelled. Accordingly, Revenue is in appeal.
9. Section 263 of the Act, reads as under:-
"263. Revision of orders prejudicial to revenue.--(1) The
Commissioner may call for and examine the record of any
proceeding under this Act, and if he considers that any order
passed therein by the Assessing Officer is erroneous in so
ITA 179/2011 Page 5 of 19
far as it is prejudicial to the interest of the revenue, he may,
after giving the assessee an opportunity of being heard and
after making or causing to be made such inquiry as he
deems necessary, pass such order thereon as the
circumstances of the case justify, including an order
enhancing or modifying the assessment, or cancelling the
assessment and directing a fresh assessment.
Explanation.--For the removal of doubts, it is hereby
declared that, for the purposes of this sub-section,--
(a) an order passed on or before or after the 1st day of June,
1988 by the Assessing Officer shall include--
(i) an order of assessment made by the Assistant
Commissioner or Deputy Commissioner or the Income Tax
Officer on the basis of the directions issued by the Joint
Commissioner under Section 144-A;
(ii) an order made by the Joint Commissioner in exercise of
the powers or in the performance of the functions of an
Assessing Officer conferred on, or assigned to, him under
the orders or directions issued by the Board or by the Chief
Commissioner or Director General or Commissioner
authorised by the Board in this behalf under Section 120;
(b) "record" shall include and shall be deemed always to
have included all records relating to any proceeding under
this Act available at the time of examination by the
Commissioner;
(c) where any order referred to in this sub-section and
passed by the Assessing Officer had been the subject-matter
of any appeal filed on or before or after the 1st day of June,
1988, the powers of the Commissioner under this sub-
section shall extend and shall be deemed always to have
extended to such matters as had not been considered and
decided in such appeal.
(2) No order shall be made under sub-section (1) after the
expiry of two years from the end of the financial year in
which the order sought to be revised was passed.
ITA 179/2011 Page 6 of 19
(3) Notwithstanding anything contained in sub-section (2),
an order in revision under this section may be passed at any
time in the case of an order which has been passed in
consequence of, or to give effect to, any finding or direction
contained in an order of the Appellate Tribunal, National
Tax Tribunal, the High Court or the Supreme Court.
Explanation.--In computing the period of limitation for the
purposes of sub-section (2), the time taken in giving an
opportunity to the assessee to be reheard under the proviso
to Section 129 and any period during which any proceeding
under this section is stayed by an order or injunction of any
court shall be excluded."
10. Revenue does not have any right to appeal to the first appellate
authority against an order passed by the Assessing Officer. Section 263
has been enacted to empower the CIT to exercise power of revision and
revise any order passed by the Assessing Officer, if two cumulative
conditions are satisfied. Firstly, the order sought to be revised should be
erroneous and secondly, it should be prejudicial to the interest of the
Revenue. The expression „prejudicial to the interest of the Revenue‟ is of
wide import and is not confined to merely loss of tax. The term
„erroneous‟ means a wrong/incorrect decision deviating from law.
This expression postulates an error which makes an order unsustainable in
law.
ITA 179/2011 Page 7 of 19
11. The Assessing Officer is both an investigator and an adjudicator.
If the Assessing Officer as an adjudicator decides a question or aspect and
makes a wrong assessment which is unsustainable in law, it can be
corrected by the Commissioner in exercise of revisionary power. As
an investigator, it is incumbent upon the Assessing Officer to investigate
the facts required to be examined and verified to compute the taxable
income. If the Assessing Officer fails to conduct the said investigation, he
commits an error and the word „erroneous‟ includes failure to make the
enquiry. In such cases, the order becomes erroneous because enquiry or
verification has not been made and not because a wrong order has been
passed on merits.
12. Delhi High Court in Gee Vee Enterprises vs. Additional
Commission of Income-Tax, Delhi-I & Ors.,(1975) 99 ITR 375, has
observed as under:-
"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
ITA 179/2011 Page 8 of 19
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."
13. In the said judgment, Delhi High Court had referred to earlier
decisions of the Supreme Court in Rampyari Devi Sarogi vs. CIT (1968)
67 ITR 84 (SC) and Tara Devi Aggarwal vs. CIT (1973) 88 ITR 323
(SC), wherein it has been held that where Assessing Officer has accepted
a particular contention/issue without any enquiry or evidence whatsoever,
the order is erroneous and prejudicial to the interest of the Revenue. After
reference to these two decisions, the Delhi High Court observed:-
"These two decisions show that it is not necessary for the
Commissioner to make further inquiries before cancelling
the assessment order of the Income-tax Officer. The
Commissioner can regard the order as erroneous on the
ITA 179/2011 Page 9 of 19
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."
14. The aforesaid observations have to be understood in the factual
background and matrix involved in the said two cases before the Supreme
Court. In the said cases, the Assessing Officer had not conducted any
enquiry or examined evidence whatsoever. There was total absence of
enquiry or verification. These cases have to be distinguished from other
cases (i) where there is enquiry but the findings are incorrect/erroneous;
and (ii) where there is failure to make proper or full verification or
enquiry.
15. In the case of Commissioner of Income Tax vs. Sunbeam Auto
Ltd. (2011) 332 ITR 167 (Del), Delhi High Court was considering the
aspect, when there is no proper or full verification, and it was held as
under:-
"We have considered the rival submissions of the counsel
on the other side and have gone through the records. The
first issue that arises for our consideration is about the
exercise of power by the Commissioner of Income-tax
under section 263 of the Income-tax Act. As noted above,
the submission of learned counsel for the Revenue was that
while passing the assessment order, the Assessing Officer
ITA 179/2011 Page 10 of 19
did not consider this aspect specifically whether the
expenditure in question was revenue or capital
expenditure. This argument predicates on the assessment
order, which apparently does not give any reasons while
allowing the entire expenditure as revenue expenditure.
However, that by itself would not be indicative of the fact
that the Assessing Officer had not applied his mind on the
issue. There are judgments galore laying down the
principle that the Assessing Officer in the assessment order
is not required to give detailed reason in respect of each
and every item of deduction, etc. Therefore, one has to see
from the record as to whether there was application of mind
before allowing the expenditure in question as revenue
expenditure. Learned counsel for the assessee is right in his
submission that one has to keep in mind the distinction
between " lack of inquiry" and " inadequate inquiry" . If
there was any inquiry, even inadequate that would not by
itself give occasion to the Commissioner to pass orders
under section 263 of the Act, merely because he has a
different opinion in the matter. It is only in cases of "lack
of inquiry" that such a course of action would be open. In
Gabriel India Ltd. [1993] 203 ITR 108 (Bom), law on this
aspect was discussed in the following manner (page 113):
" . . . From a rending of sub-section (1) of section 263,
it is clear that the power of suo motu revision can be
exercised by the Commissioner only if, on examination
of the records of any proceedings under this Act, he
considers that any order passed therein by the
Income-tax Officer is „erroneous in so far as it is
prejudicial to the interests of the Revenue‟ . It is not
an arbitrary or unchartered power, it can be exercised
only on fulfilment of the requirements laid down in
sub-section (1). The consideration of the
Commissioner as to whether an order is erroneous in
ITA 179/2011 Page 11 of 19
so far as it is prejudicial to the interests of the Revenue,
must be based on materials on the record of the
proceedings called for by him. If there are no materials
on record on the basis of which it can be said that the
Commissioner acting in a reasonable manner could
have come to such a conclusion, the very initiation of
proceedings by him will be illegal and without
jurisdiction. The Commissioner cannot initiate
proceedings with a view to starting fishing and roving
enquiries in matters or orders which are already
concluded. Such action will be against the well-
accepted policy of law that there must be a point of
finality in all legal proceedings, that stale issues
should not be reactivated beyond a particular stage
and that lapse of time must induce repose in and set at
rest judicial and quasi-judicial controversies as it must
in other spheres of human activity. (See Parashuram
Pottery Works Co. Ltd. v. ITO [1977] 106 ITR 1 (SC)
at page 10) . . . From 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. The Commissioner, on perusal of the
ITA 179/2011 Page 12 of 19
records, may be of the opinion that the estimate made
by the officer concerned was on the lower side and
left to the Commissioner he would have estimated the
income at a figure higher than the one determined by
the Income-tax Officer. That would not vest the
Commissioner with power to re-examine the accounts
and determine the income himself at a higher figure.
It is because the Income-tax Officer has exercised the
quasi-judicial power vested in him in accordance with
law and arrived at a conclusion and such a conclusion
cannot be formed to be erroneous simply because the
Commissioner does not feel satisfied with the
conclusion . . . There must be some prima facie
material on record to show that tax which was lawfully
exigible has not been imposed or that by the
application of the relevant statute on an incorrect or
incomplete interpretation a lesser tax than what was
just has been imposed . . . We may now examine the
facts of the present case in the light of the powers of
the Commissioner set out above. The Income-tax
Officer in this case had made enquiries in regard to the
nature of the expenditure incurred by the assessee.
The assessee had given detailed explanation in that
regard by a letter in writing. All these are part of the
record of the case. Evidently, the claim was allowed by
the Income-tax Officer on being satisfied with the
explanation of the assessee. Such decision of the
Income-tax Officer cannot be held to be „ erroneous‟
simply because in his order he did not make an
elaborate discussion in that regard.""
16. Thus, in cases of wrong opinion or finding on merits, the CIT has to
come to the conclusion and himself decide that the order is erroneous, by
ITA 179/2011 Page 13 of 19
conducting necessary enquiry, if required and necessary, before the order
under Section 263 is passed. In such cases, the order of the Assessing
Officer will be erroneous because the order passed is not sustainable in
law and the said finding must be recorded. CIT cannot remand the matter
to the Assessing Officer to decide whether the findings recorded are
erroneous. In cases where there is inadequate enquiry but not lack of
enquiry, again the CIT must give and record a finding that the
order/inquiry made is erroneous. This can happen if an enquiry and
verification is conducted by the CIT and he is able to establish and show
the error or mistake made by the Assessing Officer, making the order
unsustainable in Law. In some cases possibly though rarely, the CIT can
also show and establish that the facts on record or inferences drawn from
facts on record per se justified and mandated further enquiry or
investigation but the Assessing Officer had erroneously not undertaken
the same. However, the said finding must be clear, unambiguous and not
debatable. The matter cannot be remitted for a fresh decision to the
Assessing Officer to conduct further enquiries without a finding that the
order is erroneous. Finding that the order is erroneous is a condition or
ITA 179/2011 Page 14 of 19
requirement which must be satisfied for exercise of jurisdiction under
Section 263 of the Act. In such matters, to remand the matter/issue to the
Assessing Officer would imply and mean the CIT has not examined and
decided whether or not the order is erroneous but has directed the
Assessing Officer to decide the aspect/question.
17. This distinction must be kept in mind by the CIT while exercising
jurisdiction under Section 263 of the Act and in the absence of the finding
that the order is erroneous and prejudicial to the interest of Revenue,
exercise of jurisdiction under the said section is not sustainable. In most
cases of alleged "inadequate investigation", it will be difficult to hold that
the order of the Assessing Officer, who had conducted enquiries and had
acted as an investigator, is erroneous, without CIT conducting
verification/inquiry. The order of the Assessing Officer may be or may
not be wrong. CIT cannot direct reconsideration on this ground but only
when the order is erroneous. An order of remit cannot be passed by the
CIT to ask the Assessing Officer to decide whether the order was
erroneous. This is not permissible. An order is not erroneous, unless the
ITA 179/2011 Page 15 of 19
CIT hold and records reasons why it is erroneous. An order will not
become erroneous because on remit, the Assessing Officer may decide
that the order is erroneous. Therefore CIT must after recording reasons
hold that the order is erroneous. The jurisdictional precondition stipulated
is that the CIT must come to the conclusion that the order is erroneous and
is unsustainable in law. We may notice that the material which the CIT
can rely includes not only the record as it stands at the time when the
order in question was passed by the Assessing Officer but also the record
as it stands at the time of examination by the CIT [see CIT vs. Shree
Manjunathesware Packing Products, 231 ITR 53 (SC)]. Nothing
bars/prohibits the CIT from collecting and relying upon new/additional
material/evidence to show and state that the order of the Assessing Officer
is erroneous.
18. It is in this context that the Supreme Court in Malabar Industrial
Co. Ltd. vs. Commissioner of Income Tax, (2000) 243 ITR 83 (SC), had
observed that the phrase „prejudicial to the interest of Revenue‟ has to be
read in conjunction with an erroneous order passed by the Assessing
ITA 179/2011 Page 16 of 19
Officer. Every loss of Revenue as a consequence of an order of the
Assessing Officer cannot be treated as prejudicial to the interest of
Revenue. Thus, when the Assessing Officer had adopted one of the
courses permissible and available to him, and this has resulted in loss to
Revenue; or two views were possible and the Assessing Officer has taken
one view with which the CIT may not agree; the said orders cannot be
treated as an erroneous order prejudicial to the interest of Revenue unless
the view taken by the Assessing Officer is unsustainable in law. In such
matters, the CIT must give a finding that the view taken by the Assessing
Officer is unsustainable in law and, therefore, the order is erroneous. He
must also show that prejudice is caused to the interest of the Revenue.
19. In the present case, the findings recorded by the Tribunal are
correct as the CIT has not gone into and has not given any reason for
observing that the order passed by the Assessing Officer was erroneous.
The finding recorded by the CIT is that "order passed by the Assessing
Officer may be erroneous". The CIT had doubts about the valuation and
sale consideration received but the CIT should have examined the said
aspect himself and given a finding that the order passed by the Assessing
ITA 179/2011 Page 17 of 19
Officer was erroneous. He came to the conclusion and finding that the
Assessing Officer had examined the said aspect and accepted the
respondent‟s computation figures but he had reservations. The CIT in the
order has recorded that the consideration receivable was examined by the
Assessing Officer but was not properly examined and therefore the
assessment order is "erroneous". The said finding will be correct, if the
CIT had examined and verified the said transaction himself and given a
finding on merits. As held above, a distinction must be drawn in the cases
where the Assessing Officer does not conduct an enquiry; as lack of
enquiry by itself renders the order being erroneous and prejudicial to the
interest of the Revenue and cases where the Assessing Officer conducts
enquiry but finding recorded is erroneous and which is also prejudicial to
the interest of the Revenue. In latter cases, the CIT has to examine the
order of the Assessing Officer on merits or the decision taken by the
Assessing Officer on merits and then hold and form an opinion on merits
that the order passed by the Assessing Officer is erroneous and prejudicial
to the interest of the Revenue. In the second set of cases, CIT cannot
direct the Assessing Officer to conduct further enquiry to verify and find
ITA 179/2011 Page 18 of 19
out whether the order passed is erroneous or not.
20. The CIT is patently wrong in mentioning and stating that Schedule
III to the Wealth Tax Act, 1957 was not applicable but, the Assessing
Officer should have adopted the said formula/method. The aforesaid
reasoning cannot be accepted and does not show or establish that the
assessment order was erroneous.
21. In view of the aforesaid reasoning, the question of law is answered
in favour of respondent-assessee and against the Revenue and the appeal
is accordingly dismissed. No costs.
SANJIV KHANNA, J.
R.V.EASWAR, J. MARCH 01, 2012 vld ITA 179/2011 Page 19 of 19