CIT vs. GUPTA SPINNING MILLS PVT LTD

IN THE HIGH COURT OF DELHI AT NEW DELHI . . . . . ITA 410/2013 . . . . . CIT ..... Appellant . Through Mr. Kamal Sawhney, Sr. Standing Counsel. . . . versus . . . . . GUPTA SPINNING MILLS PVT LTD ..... Respondent . Through . . . CORAM: . HON'BLE MR. JUSTICE SANJIV KHANNA . HON'BLE MR. JUSTICE SANJEEV SACHDEVA . . . O R D E R . 13.09.2013 . . . We have heard the learned counsel for the Revenue in this appeal under Section 260A of the Income Tax Act, 1961 challenging the order passed by the Income Tax Appellate Tribunal (tribunal, for short) dated 29th February, 2012. Order under Section 263 of the Commissioner of Income Tax (Commissioner) dated 5th March, 2010 has been quashed. . 2. We are afraid that we have to uphold the order of the tribunal because of the order passed under Section 263 by the Commissioner, which is highly cryptic and self contradictory. In fact, it supports the case of the respondent that power under Section 263 could not have been invoked. . 3. The respondent-assessee had filed return for assessment year 2006- 07 declaring income of Rs.2,14,62,660/- on 23rd October, 2006. The said income was derived from investments in mutual funds, shares in the shape of dividend, capital gains, etc. The assessment order records that during the course of hearing, the respondent had produced books of account, which were checked. The Assessing Officer made an addition of Rs.27,110/- under Section 14A of the Act by making disallowance of expenditure. No other addition was made. . 4. The order under Section 263 in the first paragraph refers to profit on sale of shares, which was treated as short-term capital gain or long- term capital gain. Notice was issued why profit from sales of shares should not be treated as business profit. The said order records the submissions of the respondent in the following words:- . ?The case fixed for hearing on 03.05.2010 Sh. Vinod Gupta, AR of the assessee appeared and submitted that the profit resulted because of sale of past investment so the same was rightly shown as capital gains and not business income. It was further submitted that for looking at the nature of transaction its frequency etc it could not be construe as business income. In support of the above contention, certain judicial pronouncements were relied upon and it was further submitted that in the earlier year the assessee company had account he (sic) shares as investment in its account and, not as stock in trade. Secondly, the assessee had earned the divided got bonus shares on the investment held. It was argued that the same would prove that the associated income was related to sale of investment and was rightly shown as capital gains.? . . . 5. Thereafter, the reasoning given by the Commissioner reads as under:- . ?I have heard the authorized representative, gone thought (sic) the submission as also the facts of records. Prima facts the assessee submission has some strength and needs appropriate considerations as per law. At the same time it is also a matter of record that there is a lack of enquiry/investigation on the part of Assessing Officer. To that extent it can certainly be held that the order of the AO is both erroneous as well as prejudicial to the interest of the revenue. Therefore, the provision of section 263 of the Act is invoked and the order of the Assessing Officer is set aside to be redone afresh. The assessee shall be given reasonable opportunities of being heard.? . (emphasis supplied) . . . 6. On looking at the assessment order, one does get an impression that the respondent had no other business and had declared a huge amount of Rs.2,16,40,214/- as income from short-term capital gains. This factum has not been adverted or stated in the findings recorded by the Commissioner, though in the first paragraph, the Commissioner has mentioned that there was underassessment of Rs.662.06 lakhs and tax effect was Rs.260.13 lakhs. In the reasoning and the ratio, the Commissioner has made observation in favour of the respondent-assessee that ?prima facie the assessee?s submission has some strength and needs appropriate consideration as per law?. He further records that there was lack of enquiry and investigation by the Assessing Officer. In other words, investigation or inquiry was carried out by the Assessing Officer at the time of original assessment. The Commissioner has accepted that this is not a case of no inquiry or investigation but it could be a case of an erroneous decision. Power under Section 263A can be invoked when twin conditions are satisfied i.e. when order passed by the Assessing Officer is erroneous and prejudicial to the interest of the Revenue. Satisfaction of jurisdictional conditions by the Commissioner is imperative and obligatory to sustain an order under Section 263 of the Act. It has been repeatedly held that an erroneous order means one which is contrary to law or the maker misunderstood the law/ facts or when there is erroneous application of law to the facts. The facts incorrectly stated can also lead to erroneous order. However, the . Commissioner must reach the said conclusion and cannot set aside an order of the Assessing Officer for fresh consideration or revisit without recording that the order was erroneous. As the Assessing Officer is both an investigator and adjudicator, when he fails to conduct any inquiry on the subject matter, i.e. it is a case of no inquiry, order passed by the Assessing Officer is treated as erroneous. However, there is difference between no inquiry by the Assessing Officer and what Commissioner considers and regards is inadequate inquiry. This distinction has to be drawn in view of the decision of the Supreme Court in Malabar Industrial Co. Ltd. Vs. CIT, (2000) 243 ITR 83 (SC) wherein it has been observed that where two views are possible and the Assessing Officer takes one view or accepts the assessee?s stand, the order is not erroneous, unless the order is not sustainable in law. Thus in such cases, Commissioner is not powerless. After hearing the assessee, he can hold that the finding of the Assessing Officer is erroneous. In rare cases the inadequate inquiry per se can be treated as erroneous, but this must be indicated and stated by the Commissioner in clear and lucid term by pointing out the relevant facts. . 7. We have quoted the exact reasoning given by the Commissioner but do not think that the said observations meet the statutory requirements. The said lapse and failure of the Commissioner bars and prevents us from issuing notice in the appeal in view of the statutory provisions. The appeal therefore has to be dismissed. Ordered accordingly. . . . . . SANJIV KHANNA, J. . . . . . . . SANJEEV SACHDEVA, J. . . . SEPTEMBER 13, 2013 . NA/VKR . . . $ 01 .