COMMISSIONER OF INCOME TAX vs. HARISH KUMAR SHAH

t>?.&rl° HI6H COURT OFCHHATTISGARH AT BILASPUR DIVISION BENCH: HON'BLE SHRI DHIRENDRA MISHRA. & HON'BLE SHRI R.N. CHANbRAKAR. JJ TAX CASE qNCOME TAX APPEAL) N0. 46 OF 2008 Appellant Respondent Vs Commissioner of Income Tax, Bilaspur (C6) Harish Kumar Shah, Prop. M/s Shah Stone Suppliers Bilaspur (C6) u Present: Mr. Rajeev Shrivastava, Standing Counsel for the appellant None for the respondent. O R b ER ith (8Tn January, 2010) Per Dhirendra Mishra. J 01. This income tax appeal under Section 260-A of the Income Tax Act, 1961 (for brevity "the Act") has been admitted on the following substantial question of law: "Whether the concept of "change of opinion" is applicable to the provisions of Section 263 especially as the order of the Commissioner of Income Tax was not based on any change of opinion but on the errors highlighted in the order?" 02. Briefly stated, facts of the case are that the respondent-assessee filed his return of income on 28.11.2003 disclosing a total income of Rs.39.841/- and agricultural income of Rs.2,36.437/-. The Assessing Officer (in short "/\0"),after affording the assessee opportunities of hearing, completed assessment on a total income of Rs.4,96,350/- wjth agricultural income of Rs.55,000/-. The Commissioner, !"'1.«'-.'.' ;

:^, Income Tax (for brevity "CIT") on examination of records found that: (i) The investment in loader of Rs.3,93,762/- being difference between actual cost of the loader and the bank loan received was not considered, (ii) The AO failed to examine the source pf investments in different assets disclosed in Schedule D to the tune of Rs.4,07,592/- and Rs.61,761/- in Plant and Machinery, the source of investment of Rs.8,750/- towards computer, Rs.2,78,710/- towards Maruti Omni Car as well as depreciation claimed on car at Rs.55,742/-; (iii) The estimation of gross family expenses at Rs.65,000/- per annum is inadequate looking to the status of the assessee. With the aforesaid findings, the order of the AO was cancelled under Section 263 of the Act after affording opportunities of hearing to the assessee, and the AO was directed to frame fresh assessment. 03. However, the Tribunal by the impugned order allowed the appeal of the assessee by canceling the order passed by the CIT under Section 263(1) of the Act. 04. Shri Rajeev Shrivastava, learned counsel for the appellant-revenue, argues that it is settled law that prerequisite for exercise of jurisdiction by the CIT suo motu under Section 263 of the Act is that the order of the ITO is erroneous insofar as it is prejudicial to the interest of the revenue. An incorrect assumption of facts or an incorrect application of law will satisfy the requirement of the order being erroneous. In the instant case, the AO passed the order without application of mind. Scheme of the Act is to •fc

S''!^"^. ' ' , '^SSSQ^ ••^SVKS'^' levy and collect tax in accordance with the provisions of the Act. 05. Reliance is placed on the judgments in the matters of Malabar Industrial Co. Ltd. Vs. Commissioner of Income Ta^ and Commissioner of Income Tax Vs. Shree Manjuna Thesware Packing Products & Camphor Works^. 06. The respondent is unrepresented, though served. 07. We have heard learned counsel for the appellant and perused the material available on record. 08. Assessment for the assessment year 2003-04 was completed under Section 143(3) on a total income of Rs.5,51.350/-. On examination of the record, CIT found that the AO while making assessment failed to examine the aspects detailed in para-2 of its order, which resulted in underestimation. Accordingly, notice under Section 263(1) of the Act was issued to the assessee. After examining the submissions advanced on behalf of the assessee with reference to the record, it was held that; (i) There is no evidence on record regarding the source of investment in purchase of loader. The loader was purchased on 31s October, 2002 by paying an initial sum of Rs.2,00,550/- by draft . The details of the draft were not obtained by the AO. The details were not furnished even before the CIT. The explanation offered by the assessee in his written submission was considered and rejected with an observation that the assessee had failed to explain the source of initial deposit of Rs.2,00,550/- and the transactions ' (2000) 159 CTR (SC) 1 : (2000) 243 ITR 83 (SC): (2000) 109 TAXMAN 66 (SC) 2 (1997) 143 CTR (SC) 406 : (1998) 231 ITR 53 (SC) : (1998) 96 TAXMAN 1

Sa«te'^ •^^^•s^. l"s8|SiSi *!Ssfi' of Rs.2,00,550/- and Rs.53,071/-, being the first EMI, have escaped assessment. The order on this point is erroneous and also prejudicial to the interest of the revenue. (ii) The addition of Rs.4,69,353/- towards Plant and Machinery was sought to be explained before CIT by furnishing certain copies of account, which was neither requisitioned nor submitted by the assessee before the AO. These details require cross verification with respect to the books of account. The source of DD of Rs.60,000/- has not been explained. (iii) In respect of source of investment on Maruti Car, it was observed that the assessee has not been able to explain that the amount towards payment was made cash at the time of purchase whereas loan was raised for a sum of Rs.l,35.000/- on a later date. The AO failed to examine this aspect also. With these findings, the CIT held that the AO completed assessment in the case in utter haste without proper and thorough enquiry and investigation, the same was erroneous and prejudicial to the interest of the revenue and accordingly, cancelled the assessment with a direction to the AO to frame it afresh after proper examination of the issues detailed in the order after affording opportunity of hearing to the assessee. 09. The Tribunal allowing the appeal of the assessee against the order of the CITobserved in para-6 thus: "6. We have given our careful consideration to the rival submissions made before us and have perused the orders of tax authorities. We have also considered the paper book filed by the Id. Counsel for the assessee. From the record, we

find that the Id. CIT in this case has invoked the provisions of section 263 observing that the AO has not examined certain aspects while completing the assessment under section 143(3) and, therefore, such order of AO has become erroneous and prejudicial to the interest of revenue. However, a close perusal of the relevant documents and evidences, which have been placed before us in form of paper book, makes it clear that the assessee has placed all the documents and evidences in respect of these items before the AO and the AO after perusing the same has completed the assessment. Since the assessment under Section 143(3) was completed by the AO only after perusing the relevant details and evidences placed by the assessee, the action of Id. CIT in invoking the provision under section 263 is nothing but is based on mere change of opinion, which is not permissible under the law as held by the different Courts and Tribunals. We, therefore, are of the opinion that the order of Id. CIT in invoking the provision of section 263 is not correct and, therefore, cancel his order and accept the grounds raised by the assessee." 10. In Shree Manjuna Thesware Packing Products <S Camphor Work/', the question before the Hon'ble Supreme Court was whether the word 'record' used in Section 263(1) of the Act would not mean record as it stands at the time of examination by the CIT, but it means the record as it stands at the time the order in question was passed by the ITO? Answering the question in favour of the revenue, it has been held that it was open to the CIT to take into consideration all the records availabte at the time of examination by him, and thus, to consider the valuation report submitted by the Oepartmental Vatuation Cell subsequent to passing of assessment order, so the order passed by him was legal. The High Court was wrong in taking acontrary view. 11. In Malabar Industrial Co. Ltd. , interpreting Section 263 of the Act, the Hon'ble Supreme Court has held thus:

A bare reading of provisions of s. 263 makes it clear that the prerequisite to exercise of Jurisdiction by the CIT suo motu under it. is that the order of the ITO is erroneous insofar as it is prejudicial to the interests of the Revenue. The CIT has to be satisfied of twin conditions, namely, (i) the order of the AO sought to be revised is erroneous; and (ii) it is prejudicial to the interests of the Revenue. If one of them is absent - if the order of the ITO is erroneous but is not prejudicial to the Revenue or if it is not erroneous but is prejudicial to the Revenue - recourse cannot be had to s. 263(1). There can be no doubt that the provision cannot be invoked to correct each and every type of mistake or error committed by the AO; it is only when an order is erroneous that the section will be attracted. An incorrect assumption of facts or an incorrect application of law will satisfy the requirement of the order being erroneous. In the same category fall orders passed without applying the principles of natural Justice or without application of mind. The phrase 'prejudicial to the interests of the Revenue' is not an expression of art and is not defined in the Act. Understood in its ordinary meaning it is of wide import and is not confined t6 loss of tax. The scheme of the Act is to levy and collect tax in accordance with the provisions of the Act and this task is entrusted to the Revenue. If due to an erroneous order of the ITO, the Revenue is losing tax lawfully payable by a person, it will certainly be prejudicial to the interests of the Revenue. The phrase 'prejudicial to the interests of the Revenue' has to be read in conjunction with an erroneous order passed by the AO. Every loss of revenue as a consequence of an order of AO' cannot be treated as prejudicial to the interests of the Revenue, for example, when an ITO adopted one of the courses permissible in law and it has resulted in loss of revenue^ or where two views are possible and the ITO has taken one view with which the CIT does not agree, it cannot be treated as an erroneous order prejudicial to the interests of the Revenue unless the view taken by the ITO is unsustainable in law." f

;;'ii'"¥tei-.. ^' .-js-s^ "^ ^ '^'^w.v^ss'^. 8 ^ •-SSBSS-S 12. In the instant case, the CIT after elaborately referring to various aspects, which have been overlooked by the AO at the time of assessment, held that the AO has completed assessment in utter haste without proper and thorough enquiry and investigation and thus, the order passed by the AO is erroneous and prejudicial to the interest of the revenue. There is categorical finding that the AO has made incorrect assumption without application of mind while accepting the explanation of the assessee. However, learned Tribunal, without adverting to various aspects observed by the CIT, has allowed the appeal with an observation that the action of the CIT in invoking the provision under Section 263 is nothing but is based on mere change of opinion. The aforesaid finding has been arrived at without considering various factual aspects detailed in the order of the CIT and therefore, the same cannot be sustained. 13. In the result, the appeal is allowed. Impugned order of the Tribunal is setaside and the order passed by the CIT is restored. Sd/- Dhirendra Mishra Jadge ^IM. chandrakar Jud&e e ^l