Kerala High Court
Commissioner Of Income Tax vs H. H. Sir Rama Varma & Ors. on 4 February, 1993
Equivalent citations: (1993)111CTR(KER)157
JUDGMENT
K. P. BALANARAYANA MARAR, J. :
At the instance of the Revenue, the Tribunal, Cochin Bench has referred the following question of law for the decision of this Court :
"Whether, on the facts and in the circumstances of the case, and also on an interpretation of the revisional order, the assessee is entitled to claim deduction of the cost of improvement in respect of an asset (the capital gains arising on the sale had been considered in the original assessment) in the reassessment pursuant to the order of the Commissioner under s. 263 of the IT Act, 1961 ?"
2. Deceased first respondent, whose legal representatives are respondents 2 and 3 herein is an assessee to income-tax. The relevant assessment year is 1976-77. In the original assessment completed on 25th February, 1977 the ITO did not include the capital gains arising out of transfer of 2000 shares in M/s. Nirlon Synthetic Fibres & Chemical Ltd. to a firm called M/s. Laxmi Ram in which the assessee was a partner. The CIT acting under s. 263 of the IT Act held that the ITO erred in falling to bring to tax the capital gains arising out of this transaction. The order of the ITO was set aside with a direction to make a fresh assessment.
3. A revised return was filed by the assessee on 20th January, 1981 wherein he claimed deduction of an amount of Rs. 75,198 towards cost of improvements in respect of a sale of a property in Courtallam. This claim was not put forward at the time of the original assessment. The ITO rejected the claim on the ground that it was not put forward earlier and also on the further ground that the original assessment order was set aside in revision for the limited of computing the capital gains on the sale of shares to the partnership firm. Revised assessment was made on 21st March, 1981 wherein the value of the shares transferred was fixed at Rs. 544 per share by invoking the provisions of s. 52(2) of the IT Act and the capital gains arising out of that transaction was worked out at Rs. 9,02,810. On appeal, the CIT(A) held that the provisions of s. 52(2) could not be invoked and relief was granted to the extent of Rs. 5,88,000. It was further found that the assessee was entitled to claim the deduction towards cost of improvements in respect of the property at Courtallam. The CIT(A) set aside the assessment for recomputing the capital gains and for making the deduction claimed by the assessee. The matter was carried in second appeal to the Tribunal. The Tribunal held that the assessment having been set aside by the Commissioner on the earlier occasion the assessee was well within his rights to agitate a claim that was not made in the original assessment. It was observed that the original assessment has become non est on the passing of the order by the Commissioner under s. 263. The appeal by the Revenue was dismissed by the Tribunal upholding the order of the Commissioner. It is in these circumstances that the question aforementioned has been referred to this Court.
4. Heard counsel.
5. The main argument advanced by the learned counsel for the Revenue is that the Commissioner acting under s. 263 of the IT Act by his order dt. 22nd February, 1979 has only directed the Assessing Officer to make a fresh assessment after giving an opportunity to the assessee to place before the ITO whatever material he wishes to place in regard to the question relating to the taxation of capital gains indicated in that order. It is seen mentioned therein that the shares owned by the assessee have been transferred to the firm in lieu of his capital contribution and on the facts of the case there is a transfer of capital asset within in the meaning of s. 2(47). The contention is that the ITO should have made a reassessment in the light of the order of the Commissioner and deduction of Rs. 75,198 towards cost of improvements in respect of a sale of the property in Courtallam should not have been allowed. The claim made by the assessee was rejected by the ITO on the ground that the earlier assessment was set aside for the limited purpose of computing capital gains on the transfer of shares to the partnership firm. On appeal the CIT(A) - first appellate authority - found the deduction to be admissible for the reason that the claim now made is a deduction in computing the capital gains though not in respect of the assets considered by the CIT in revision. The deduction claimed relates to the expenditure incurred by the assessee for laying roads and other development activities in respect of some land at Courtallam. The Commissioner observed that the amount claimed is a portion of the total expenditure and is calculated in proportion to the area sold as compared to the total area of the land held by the appellant.
6. The Tribunal has considered the matter in detail and found that the assessee was well within his rights to claim deduction of that amount. On hearing counsel for the Revenue we see no error in the order of the Tribunal.
7. Sec. 263 of the IT Act enables the Commissioner to call for and examine the record of any proceeding under the Act. If he considers that an order passed 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 enquiry 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. Power is, therefore given to the Commissioner to suo motu revise the order of the assessing authority, if the order is erroneous and the order has resulted in prejudice to the interest of the Revenue. While revising the order the Commissioner may cancel the assessment and direct a fresh assessment. Sec. 264 also confers a power on the Commissioner to call for the records of any proceeding under this Act and pass such order thereon as he thinks fit, either of his own motion or on an application by the assessee for revision. But an order passed under that section should not be an order prejudicial to the assessee. On the other hand, an order passed under s. 263 can be one prejudicial to the assessee. The enhancement or modification of the assessment or cancellation of the same is contemplated under s. 263 only when the order of the assessing authority is prejudicial to the interest of the Revenue.
8. There has not been any appeal against the earlier order of assessment. The Commissioner in exercising the revisional powers under s. 263 can either enhance or modify or cancel the assessment and direct a fresh assessment to be made. In this case, the Commissioner by order dt. 22nd February, 1979 passed under s. 263 of the Act had set aside the earlier assessment and the ITO was directed to make a fresh assessment after giving an opportunity to the assessee to place before the ITO whatever material he wishes to place in regard to the question relating to the taxation of capital gains indicated in that order. Learned counsel for the Revenue would contend that the assessing authority has only to consider the aspects indicated in the order which did not relate to the expenses incurred in connection with the property at Courtallam. It is, therefore, contended that the deduction of that amount was not made in accordance with the direction of the Commissioner. It is his contention that the assessing authority was bound to confine the enquiry within the four corners of that order and was not competent to entertain other claims.
9. The question, therefore, to be considered is whether the assessing authority has power to entertain the claim when the entertain the claim when the entire assessment has been set aside or annulled and a direction has been given to make a fresh assessment. When the Commissioner has cancelled the order and has directed a fresh assessment to be made the entire assessment is before the officer. He is within his powers to consider all claims -even the one not taken up earlier. The entire matter is afresh before the assessing authority and all relevant aspects should be considered by him while making the assessment afresh. The position will be different if the assessing authority has been directed to make only an assessment following some directions issued by the Commissioner. That the assessee was given an opportunity to place before the ITO all materials regarding the question relating to taxation of capital gains indicated in the order does not by itself restrict the powers of the assessing authority while making a fresh assessment. The entire assessment had been cancelled and the direction was to make a fresh assessment. The CIT(A) was, therefore, right in observing that the assessee is legitimately entitled to claim the deduction. No error has, therefore, been committed by the Tribunal in upholding the order of the Commissioner (Appeals).
For the aforesaid reasons the question referred to us is answered in the affirmative, i.e., in favour of the assessee and against the Revenue.