COMMISSIONER OF INCOME TAX vs. ARVIND JEWELLERS

ITR/174/1989HC GujaratGJHC24012954198919 July 2002Author: HONOURABLE MR. JUSTICE MOHIT S. SHAH,HONOURABLE MR. JUSTICE K.A.PUJ6 pages
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What did the High Court hold?

The High Court held that the provisions of Section 263 cannot be invoked to correct every mistake or error by the Assessing Officer; it applies only when an order is erroneous and prejudicial to the revenue. An incorrect assumption of facts or incorrect application of law makes an order erroneous. The phrase "prejudicial to the interests of the Revenue" must be read with an erroneous order, and not every loss of revenue is prejudicial. If the ITO adopted a course permissible in law, or took one of two possible views, and this resulted in a loss of revenue, it is not necessarily prejudicial unless the ITO's view is unsustainable in law. The Tribunal's finding was that the assessee had produced material and offered explanations, which the ITO considered before reaching a conclusion. The CIT disagreed with this conclusion but did not demonstrate that the ITO's order was erroneous or prejudicial to the revenue in the manner contemplated by Section 263. The High Court, following the Supreme Court's principles, found the Tribunal justified in setting aside the CIT's order. Both questions were answered in the affirmative, in favour of the assessee.

What were the facts?

The assessee, Arvind Jewellers, a partnership firm, filed a return showing a net loss of Rs. 2,777/- for Assessment Year 1981-82. The Income-tax Officer (ITO) assessed the total income at Rs. 32,900/-. The Commissioner of Income-tax (CIT) initiated proceedings under Section 263, considering the ITO's order erroneous and prejudicial to revenue. This followed a search on 28.11.1992, which resulted in the seizure of unaccounted cash (Rs. 1,80,000/-) and jewellery (Rs. 7,02,728/-). The CIT noted that the ITO had only added Rs. 15,000/- from undisclosed sources and had not conducted sufficient investigation. The CIT set aside the ITO's order, directing a fresh assessment. The assessee appealed to the Income-tax Appellate Tribunal (ITAT).

What were the issues?

1. Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was right in law in setting aside the order made by the Commissioner of Income-tax under Section 263 of the I.T. Act, 1961? 2. Whether the conclusion reached by the appellate Tribunal in setting aside the order made by the Commissioner of Income-tax under Section 263 of the I.T. Act, 1961 is even otherwise sustainable in law? Assessee's contentions (as understood from the judgment): The ITAT found that the ITO had conducted sufficient inquiries and investigations, as evidenced by the notices issued under Section 142(1) and 143(2). The ITAT observed that the ITO was aware of the situation and had made additions to the income, increasing it from a loss to Rs. 34,350/-. The Tribunal held that the CIT was not justified in initiating Section 263 proceedings merely because a better assessment could have been framed, especially when the ITO had taken a view permissible in law. The assessee relied on the Supreme Court decision in Malabar Industrial Co. Ltd. (Supra). Revenue's contentions: The revenue argued that the ITO's order was erroneous and prejudicial to the interest of the revenue because the material available was not properly considered, and full enquiry and investigation were not conducted. The revenue contended that this omission caused a loss to the revenue, justifying the CIT's action under Section 263. The revenue relied on CIT vs. Manjunathesware Packing Products and Camphor Works, (1998) 231 ITR 53.

Which sections of the Income-tax Act were involved?

Section 263,Section 143(2),Section 142(1),Section 132

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IN THE HIGH COURT OF GUJARAT AT AHMEDABAD

INCOME TAX REFERENCE No 174 of 1989

For Approval and Signature:

Hon'ble MR.JUSTICE M.S.SHAH and Hon'ble MR.JUSTICE K.A.PUJ

============================================================ 1. Whether Reporters of Local Papers may be allowed : NO to see the judgements?

2.

To be referred to the Reporter or not? : NO 3. Whether Their Lordships wish to see the fair copy : NO of the judgement?

4.

Whether this case involves a substantial question : NO of law as to the interpretation of the Constitution of India, 1950 of any Order made thereunder?

5.

Whether it is to be circulated to the concerned : NO Magistrate/Magistrates,Judge/Judges,Tribuna

The order continues below.

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