M/S VOLVO INDIA PVT. LTD.,,HOSAKOTE vs. CIT, BANGALORE

Per Chandra Poojari, Accountant Member This appeal by the assessee is against the order of the PCIT, LTU, Bangalore dated 19.3.2015 u/s. 263 of the Income-tax Act, 1961 [the Act] for the assessment year 2008-09.

“1. In law, the Commissioner of Income-Tax ought to have appreciated that the impugned assessment order was not amenable to the divisional jurisdiction U/s. 263 and therefore, the impugned order passed by him U/s 263 is not sustainable.

ITA No.687/Bang/2015 Page 2 of 30

ITA No.687/Bang/2015 Page 3 of 30

30/09/2008 declaring a total income of Rs.311,55,75,940/-. After issuing notice u/s 143(2) of the Act the assessment was completed u/s 143(3) r.w.s.144C of the Act on 18/10/2012 on a total income of Rs.347,04,06,832/- after making several disallowances. Being aggrieved by the disallowance, an appeal was filed and pending disposal. As the matter stood thus, the ld.CIT (LTU) had issued notice u/s 263 dated 4/2/2015 calling upon the assessee-company to show cause as to why the assessment order cannot be revised, as the AO had failed to disallow a sum of Rs.2,36,07,661/- as no tax deduction was made. In response to show cause notice, assessee-company submitted vide letter dated 11/3/2015 that provision for expenses was made at the end of the accounting year without any reference to any vendor and in the beginning of the next accounting year, this provision was reversed and actual invoice was raised for the actual expenditure incurred. Only at the time of raising the actual invoice, TDS is effected and therefore, the TDS provisions are not applicable and the assessment cannot be termed as erroneous and prejudicial to the interests of revenue. The ld.CIT(LTU), after considering the explanation of the assessee-company observed that TDS on an amount of Rs.2,36,07,661/- was not made in any of the years but it is claimed as deduction in the year under consideration and therefore, held that the amount cannot be claimed as a deduction under the provisions of sec.40(a)(ia) of the Act. The ld.CIT(LTU) held that this claim of the assessee was not examined by the AO during the course of assessment proceedings. Therefore, he set aside the assessment order to examine this issue after affording an opportunity of hearing to the assessee-company.

ITA No.687/Bang/2015 Page 4 of 30

under the provisions of sec.263 of the Act. The only ground on which the ld.CIT(LTU) exercised the power of revision u/s 263 was that the claim of allowance of Rs.2,36,07,661/- under the provisions of sec. 40(a)(ia) was not examined by the AO during the course of assessment proceedings. Learned counsel for the assessee could not demonstrate before us that the issue was examined by the AO during the course of assessment proceedings. It is settled principle of law that non-enquiry by the AO on an issue confers jurisdiction on the CIT to revise the assessment. The Hon’ble jurisdictional High Court, in the case of CIT vs. Infosys Technologies Ltd.(341 ITR 293), following the judgment of the Hon‘ble Supreme Court in the case of Malabar Industrial Co. vs. CIT (243 ITR 83), held that where deduction was allowed by the AO without indicating the basis, that could be considered as an order both erroneous and prejudicial to interests of revenue vide paras.27 & 28 which read as under:-

“27. The assessing authority performs a quasi-judicial function and the reasons for his conclusions and findings should be forthcoming in the assessment order. Though it is urged on behalf of the assessee by its learned counsel that reasons should be spelt out only in a situation where the assessing authority passes an order against the assessee or adverse to the interests of the assessee and no need for the assessing authority to spell out reasons when the order is accepting the claim of the assessee and the learned counsel submit that this is the legal position on authority, we are afraid that to accept a submission of this nature would be to give a free hand to the assessing authority, just to pass orders without reasoning and to spell out reasons only in a situation where the finding is to be against the assessee or any claim put forth by the assessee is denied. 28. We are of the clear opinion that there cannot be any dichotomy of this nature as every conclusion and finding by the assessing authority should be supported by reasons, however brief it may be, and in a situation where it is only a question of

ITA No.687/Bang/2015 Page 5 of 30

computation in accordance with the relevant articles of a double taxation avoidance agreement and that should be clearly indicated in the order of the assessing authority, whether or not the assessee had given particulars or details of it. It is the duty of the assessing authority to do that and if the assessing authority had failed in that, more so in extending a tax relief to the assessee, the order definitely constitutes an order not merely erroneous but also prejudicial to the interests of the Revenue and, therefore, while the Commissioner was justified in exercising the jurisdiction under section 263 of the Act, the Tribunal was definitely not justified in interfering with this order of the Commissioner in its appellate jurisdiction.” When the ld.CIT remanded the matter to the AO to examine the issue afresh, it cannot be termed as beyond the jurisdiction of the CIT. Respectfully following the judgment of the Hon'ble jurisdictional High Court in the case of Infosys Technologies Ltd.(supra), we hold that the ld.CIT(LTU) was justified in assuming jurisdiction u/s 263 of the Act and directing for de novo assessment. 5. In the result, the appeal of the assessee-company is dismissed.” 5. Against this, the assessee went to High Court. The High Court remitted the matter to the file of the Tribunal with the following observations:-

“ 6. We have considered the submissions made by learned counsel for the parties and have perused the record. Before proceeding further, it is apposite to take note of the relevant extract of Section 263 of the Act, which 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 far as it is

ITA No.687/Bang/2015 Page 6 of 30

prejudicial to the interests 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.’ 7. Thus, from close scrutiny of Section 263 it is evident that twin conditions are required to be satisfied for exercise of revisional jurisdiction under Section 263 of the Act firstly, the order of the Assessing Officer is erroneous and secondly, that it is prejudicial to the interest of the revenue on account of error in the order of assessment. 8. The aforesaid provision was considered by the Supreme Court in 'MALABAR INDUSTRIAL COMPANY VS. CIT - 4 ITR 83 and it was held that the phrase 'prejudicial to "the interests of the revenue' has to be read in conjunction with an erroneous order passed by the Assessing Officer and every loss of revenue as a consequence of the order of the Assessing Officer cannot be treated as prejudicial to the interest of revenue. It was further held that where two views are possible and the Income Tax Officer has taken one view with which the Commissioner does not agree, the order passed by the Assessing Officer cannot be treated as erroneous order prejudicial to the interest of the revenue. The principles laid down in the aforesaid decision were reiterated by the Supreme Court in 'CIT VS. MAX INDIA LTD.,' 295 ITR 282 (SC) and recently in 'ULTRATECH CEMENT LTD. AND ORS. VS. STATE OF RA.JASTHAN AND ORS.', CIVIL APPEAL NO.2773/2020 DECIDED ON 17.07.2020. 9. In the_backdrop of the aforesaid well settled legal position, we may advert to the facts of the case. The relevant extract of the order passed by the Tribunal which reads as under: “The only issue that arises for our consideration in the present appeal is whether the ld.CIT(LTU) was justified in

ITA No.687/Bang/2015 Page 7 of 30

assuming jurisdiction under the provisions of sec.263 of the Act. The only ground on which the ld.CIT(LTU) exercised the power of revision u/s 263 was that the claim of allowance of Rs.2,36,07,661/- under the provisions of sec. 40(a)(ia) was not examined by the AO during the course of assessment proceedings.” 10. However, it is the claim of the assesee that the assessee has not claimed the benefit of the disallowance under Section 40(a)(ia) of the Act for the Assessment Year in question i.e., 2008-09 and the same was claimed in the previous Assessment Year i.e., 2008-09 and the same was claimed in the previous Assessment Year i.e., 2007-08. Therefore, in our opinion, the matter requires factual adjudication. The Tribunal has not adverted to the aforesaid aspect of the matter and has not considered the submission made by the assessee that the amount of Rs.2,35,07,661/- was not a real amount but only the provision that was directly reversed. 11. In view of the preceding analysis, the matter requires factual adjudication. We are inclined to remit the matter. Therefore, it is not necessary for us to answer the substantial questions of law framed in the appeal. 12. In the result, the impugned order dated 20.1.2016 is hereby quashed and the matter is remitted to the Tribunal for decision afresh in accordance with the observations made in this order. Needless to state that it shall be open for both the parties to raise all the contentions as are admissible in law.” 6. Hence this appeal came before the Bench for adjudication. The ld. AR submitted that at the end of every month the appellant created provisions for expenses for which the exact quantification was not possible to at the time of closing the books. Such provisions were made without reference to any vendor, as the identity of the vendors was not known, and corresponding liability was taken for the month. During the next month the actual expenses incurred, with appropriate TDS made, are booked and the

ITA No.687/Bang/2015 Page 8 of 30

corresponding provision made is reversed. For example, if a provision of Rs. 25,00,000 is made at the end of May and the actual expenses made against the provision is Rs.30,00,000 in June, then in June the actual expenses of Rs.30,00,000 are booked as expenses, appropriate TDS is made and the provision made in May of Rs.25,00,000 is reversed. This method is adopted as per the principle of prudence in providing for all possible liabilities at the earliest.

ITA No.687/Bang/2015 Page 9 of 30

A.Y. Add to Profit Tax Audit SI. Less to Profit from No from P&L A/c P&L A/c Amount Report Amount (Rs.) 40(a)(ia) (Rs.) (Provision disallowance (Provision of reversed in April) (Rs.) March) 1 2006-07 17,26,72,340 1,92,90,637 17,26,72,340

2 2007-08 10,12,02,076 17,26,72,340 10,12,01,946

2008-09 15,38,94,934 10,12,02,076 15,38,94,934 3

23,15,82,071 15,38,94,934 23,15,82,071 4 2009-10

5 2010-11 25,43,83,525 23,15,82,071 25,43,83,525

ITA No.687/Bang/2015 Page 10 of 30

ITA No.687/Bang/2015 Page 11 of 30

“On perusal of the assessment records for Asst. Year 2008-09, it is revealed that the following issue has not been considered as per the provisions of the income tax Act, during the course of assessment made U/s143(3) rws 144C thereby making the order passed U/s 143(3) rws 144C dated 18-10-2012 erroneous and prejudicial to the interest of the Revenue namely 1. The assessee company has claimed allowance U/s 40(a)(ia) of Rs.10,12,02,276 which includes an amount of Rs.2,36,07,661 for which no TDS was effected. Omission to disallow this amount of Rs.2,36,07,661 U/s 40(a)(ia) has resulted in an assessment which is erroneous and prejudicial to the interests of Revenue" To consider, the above issues, proceedings U/s 263 is initiated herewith." 15. The ld. AR submitted that it was therefore the contention of the CIT that the appellant had claimed expense of Rs.2,36,07,661 which was allowed in the assessment order; that on the expense claimed of Rs.2,36,07,661 no TDS was not effected and therefore such expense should have been disallowed U/s 40(a)(ia) of the I.T. Act. The notice of the CIT did not provide any evidence that an expense of Rs.2,36,07,661 was actually claimed as an expense or that on such an expense no TDS was done by the appellant.

ITA No.687/Bang/2015 Page 12 of 30

a. It is well established that the conditions to be satisfied for invoking the Jurisdiction U/s263 by the CIT are - the order should first be erroneous and the error in the order must be resulting in prejudice to the interests of the Revenue (Malabar Industrial Co. Ltd. vs. CIT[2000] 243 ITR 83(SC)). It is also well established that the burden of establishing that an assessment order is both erroneous and prejudicial to the interest of revenue is on the CIT. b. The CIT has assumed jurisdiction after going through the assessment record. The assessment record consists of the Return of income, Computation of Total Income, Tax Audit Report and the entire record of the assessment proceedings including the assessment order. c. As demonstrated from the Return, Computation of Total Income and tax Audit report for A.Ys 2006-07 to 2010-11- all available on record to the CIT at the time of assuming jurisdiction U/s263 — the amount of Rs.2,36,07,661 is not an amount which was actually paid and on which no TDS was made but a figure arising out of a correct and consistent accounting practice by the appellant. d. Assumption of jurisdiction by the CIT in spite of a clear record showing that the assessment order was not erroneous makes the assumption of jurisdiction U/s263 by the CIT legally invalid. e. The assertion of the CIT that the Assessing Officer has not examined the issue during the assessment proceedings is also factually incorrect as can be seen from the questionnaires issued by the Assessing Officer during the scrutiny proceedings. f. The issue was examined by the Assessing officer. It is only a correct and consistent accounting practice followed by the

ITA No.687/Bang/2015 Page 13 of 30

Appellant. There was no claim of expenditure of Rs.2,36,07,661 at all in the return of income. It would be perverse to say that the Assessment Order is erroneous because the Assessing Officer has not examined a claim and allowed it when there was no such claim at all in the return nor allowing of such a claim in the Assessment Order passed. g. The assumption of jurisdiction by the CIT U/s. 263 of the I.T. Act is, therefore, not according to the provisions of sec 263 and the subsequent order passed U/s 263 is legally void ab initio. h. Notwithstanding that the assumption of jurisdiction itself is legally untenable, the CIT did not provide any evidence for his assertion in the notice to the Appellant. In the absence of CIT giving any evidence for his assertion, the Appellant clearly explained the issue with an illustration regarding the accounting practice. i. Without prejudice to the submissions that there was no claim of expense itself, the Appellant also submitted that no TDS can be done on a provision made on estimate where the prospective recipient is not known and cited the decision of Hon’ble ITAT Mumbai in the case of Pfizer Ltd. Vs Income Tax Officer (TDS)(OSD) Annexure L) in support. j. In the case of M/s Toyota Kirloskar Motors (P) Ltd Vs Income Tax Officer (TDS) – LTU, in ITA 245 of 2018 dated 24/03/2021, the Hon'ble Karnataka High Court has held, on facts similar to the facts of the Appellant case, that no TDS was deductible on a provision even in the year of creation as below: “11. In the instant case the provisions were created during the course of the year reversal entry was also made in the same accounting year. The Assessing Officer erred in law in holding assessee should have deducted tax as per the rate 'cable along with interest. The authorities under the Act ought to have appreciated that in the absence of any income accruing to anyone under the Act, the liability to

ITA No.687/Bang/2015 Page 14 of 30

deduct TDS on the assessee could not have been fastened and consequently, the proceeding U/s 201 and 201(1A) could not have been initiated.." (Emphasis supplied) k. The CIT however made assumptions that provision cannot be made by the Appellant without engaging a vendor, without any basis whatsoever and contrary to the facts and submissions of the Appellant. l. The CIT erroneously assumed that the Appellant claimed Rs.10,12,02,076 in 2008-09 on payment basis as the same was voluntarily disallowed by it U/s 40(a)(ia) in A.Y. 2007-08 and the deduction disallowed in the year U/s40(a)(ia) is deductible in the year of payment on making the TDS. He also erroneously assumed --a: TDS on the amount Rs.2,36,07,661 was not made in any of the year but it is claimed as deduction in the AY 2008-09. m. As detailed (supra), Rs.2,36,07,661 was not claimed as deduction in A.Y. 2008-09 as an expense and so there was no case for any disallowance U/s 40(a)(ia) for the reason of non- deduction of TDS. Therefore, the order U/s 263 of the CIT directing the Assessing Officer to disallow an expense not claimed in the return is untenable. n. The finding of the CIT in the order U/s 263 that claim of Rs.2,36,07,661 needs to be brought to tax for non-deduction of TDS being factually and legally untenable makes it clear that the order of the Assessing Officer was certainly neither erroneous nor prejudicial to the interest of Revenue. 19. On the other hand, the ld. DR relied on the orders of the lower authorities.

We have heard both the parties and perused the material on record 20. regarding assumption of jurisdiction and also gone through all the judgements cited by the parties before us. First we take up the legal issue with reference to the jurisdiction of invoking the provisions of section 263 of

ITA No.687/Bang/2015 Page 15 of 30

the Act by the learned CIT. The scheme of the IT 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 erroneous order of the assessing officer, the Revenue is losing tax lawfully payable by a person, it will certainly be prejudicial to the interest of the revenue. As held in the case of Malabar Industries Co. Ltd., (supra), the Commissioner can exercise revision jurisdictional u/s 263 if he is satisfied that the order of the assessing officer sought to be revised is (i)erroneous; and also (ii) prejudicial to the interests of the revenue. The word 'erroneous' has not been defined in the Income Tax Act. It has been however defined at page 562 in Black's Law Dictionary (seventh Edition) thus';

'erroneous, adj. Involving error, deviating from the law'. The word 'error' has been defined at the same page in the same 21. dictionary thus:

'error No. 1 : A psychological state that does not conform to Objective reality; a brief that what is false is true or that what is true is false'. At page 649/650 in P. Ramanatha Aiyer's Law Lexicon Reprint 22. 2002, the word 'error' has been defined to mean-

'Error: A mistaken judgement or deviation from the truth in matters of fact, and from the law in matters of judgement 'error' is a fault in judgement, or in the process or proceeding to judgement or in the execution upon the same, in a Court of Record; which in the Civil Law is called a Nullityie" (termes de la ley). Something incorrectly done through ignorance or inadvertence S.99 23. CPC and S.215 Cr.PC. 'Error, Fault, Error respects the act; fault respect

ITA No.687/Bang/2015 Page 16 of 30

the agent, an error may lay in the judgement, or in the conduct, but a fault lies in the will or intention."

At page 650 of the aforesaid Law Lexicon, the scope of Error, 24. Mistake, Blunder, and Hallucination has been explained thus:

"An error is any deviation from the standard or course of right, truth, justice or accuracy, which is not intentional. A mistake is an error committed under a misapprehension of misconception of the nature of a case. An error may be from the absence of knowledge, a mistake is from insufficient or false observation. Blunder is a practical error of a peculiarly gross or awkward kind, committed through glaring ignorance, heedlessness, or awkwardness. An error may be overlooked or atoned for, a mistake may be rectified, but the shame or ridicule which is occasioned by a blunder, who can counteract. Strictly speaking, Hallucination is an illusion of the perception, a phantasm of the imagination. The one comes of disordered vision, the other of discarded imagination. It is extended in medical science to matters of sensation, whether there is no corresponding cause to produce it. In its ordinary use it denotes an unaccountable error in judgement or fact, especially in one remarkable otherwise for accurate information and right decision. It is exceptional error or mistake in those otherwise not likely to be deceived." In order to ascertain whether an order sought to be revised under 25. Section 263 is erroneous, it should be seen whether it suffers from any of the aforesaid forms of error. In our view, an order sought to be revised under Section 263 would be erroneous and fall in the aforesaid category of "errors" if it is, inter alia, based on an incorrect assumption of facts or an incorrect application of law or non-application of mind to something which was obvious and required application of mind or based on no or insufficient materials so as to affect the merits of the case and thereby cause prejudice to the interest of the revenue.

ITA No.687/Bang/2015 Page 17 of 30

Section 263 of the Act seeks to remove the prejudice caused to the 26. revenue by the erroneous order passed by the Assessing Officer. It empowers the Commissioner to initiate suo moto proceedings either where the Assessing Officer takes a wrong decision without considering the materials available on record or he takes a decision without making an enquiry into the matters, where such inquiry was prima facie warranted. The Commissioner will be well within his powers to regard an order as erroneous on the ground that in the circumstances of the case, the Assessing Officer should have made further inquiries before accepting the claim made by the assessee in his return. The reason is obvious. Unlike the Civil Court which is neutral in giving a decision on the basis of evidence produced before it, the role of an Assessing Officer under the Income-tax Act is not only that of an adjudicator but also of an investigator. He cannot remain passive in the face of a return, which is apparently in order but calls for further enquiry. He must discharge both the roles effectively. In other words, he must carry out investigation where the facts of the case so require and also decide the matter judiciously on the basis of materials collected by him as also those produced by the assessee before him. The scheme of assessment has undergone radical changes in recent years. It deserves to be noted that the present assessment was made under Section 143(3) of the Income-tax Act. In other words, the Assessing Officer was statutorily required to make the assessment under Section 143(3) after scrutiny and not in a summary manner as contemplated by Sub-section (1) of Section 143. Bulk of the returns filed by the assessees across the country is accepted by the Department under Section 143(1) without any scrutiny. Only a few cases are picked up for scrutiny. The Assessing Officer is therefore, required to act fairly while accepting or rejecting the claim of the assessee in cases of scrutiny assessments. He should be fair not only

ITA No.687/Bang/2015 Page 18 of 30

to the assessee but also to the Public Exchequer. The Assessing Officer has got to protect, on one hand, the interest of the assessee in the sense that he is not subjected to any amount of tax in excess of what is legitimately due from him, and on the other hand, he has a duty to protect the interests of the revenue and to see that no one dodged the revenue and escaped without paying the legitimate tax. The Assessing Officer is not expected to put blinkers on his eyes and mechanically accept what the assessee claims before him. It is his duty to ascertain the truth of the facts stated and the genuineness of the claims made in the return when the circumstances of the case are such as to provoke inquiry. Arbitrariness in either accepting or rejecting the claim has no place. The order passed by the Assessing Officer becomes erroneous because an enquiry has not been made or genuineness of the claim has not been examined where the inquiries ought to have been made and the genuineness of the claim ought to have been examined and not because there is anything wrong with his order if all the facts stated or claim made therein are assumed to be correct. The Commissioner may consider an order of the Assessing Officer to be erroneous not only when it contains some apparent error of reasoning or of law or of fact on the face of it but also when it is a stereo-typed order which simply accepts what the assessee has stated in his return and fails to make enquiries or examine the genuineness of the claim which are called for in the circumstances of the case. In taking the aforesaid view, we are supported by the decisions of the Hon'ble Supreme Court in Rampyari Devi Saraogi (supra), Smt. Tara Devi Aggarwal v. CIT [1973] 88 ITR 323 (SC), and Malabar Industrial Co. Ltd's (supra).

In Malabar Industrial Co. Ltd. case (supra) the Hon'ble Court has 27. held as under:

ITA No.687/Bang/2015 Page 19 of 30

"There can be no doubt that the provision cannot be invoked to correct each and every type of mistake or error committed by the Assessing Officer, 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 the orders passed without applying the principles of natural justice or without application of mind.” In our humble view, arbitrariness in decision-making would always 28. need correction regardless of whether it causes prejudice to an assessee or to the State Exchequer. The Legislature has taken ample care to provide for the mechanism to have such prejudice removed. While an assessee can have it corrected through revisional jurisdiction of the Commissioner under Section 264 or through appeals and other means of judicial review, the prejudice caused to the State Exchequer can also be corrected by invoking revisional jurisdiction of the Commissioner under Section 263. Arbitrariness in decision-making causing prejudice to either party cannot therefore be allowed to stand and stare at the legal system. It is difficult to countenance such arbitrariness in the actions of the Assessing Officer. It is the duty of the Assessing Officer to adequately protect the interest of both the parties, namely, the assessee as well as the State. If he fails to discharge his duties fairly, his arbitrary actions culminating in erroneous orders can always be corrected either at the instance of the assessee, if the assessee is prejudiced or at the instance of the Commissioner, if the revenue is prejudiced. While making an assessment, the ITO has a varied role to play. He is the investigator, prosecutor as well as adjudicator. As an adjudicator he is an arbitrator between the revenue and the taxpayer and he has to be fair to both. His duty to act fairly requires that when he enquires into a substantial matter like the present one, he must record a finding on the relevant issue giving, howsoever briefly, his reasons therefor.

ITA No.687/Bang/2015 Page 20 of 30

In S.N. Mukherjee v. Union of India AIR 1990 SC 1984, it has been observed by the Hon'ble Supreme Court as follows:

"Reasons, when recorded by an administrative authority in an order passed by it while exercising quasi-judicial functions, would no doubt facilitate the exercise of its jurisdiction by the appellate or supervisory authority. But the other considerations, referred to above, which have also weighed with this Court in holding that an administrative authority must record reasons for its decision are of no less significance. These considerations show that the recording of reasons by an administrative authority serves a salutary purpose, namely, it excludes chances or arbitrariness and ensures a degree of fairness in the process of decision-making. The said purpose would apply equally to all decisions and its application cannot be confined to decisions which are subject to appeal, revision or judicial review. In our opinion, therefore, the requirement that reasons be recorded should govern the decisions of an administrative authority exercising quasi-judicial functions irrespective of the fact may, however, be added that it is not required that the reasons should be as elaborate as in the decision of a court of law. The extent and nature of the reasons would depend on particular facts and circumstances. What is necessary is that the reasons are clear and explicit so as to indicate that the authority has given due consideration to the points in controversy. The need for recording of reasons is greater in a case where the order is passed at the original stage. The appellate or revisional authority, if it affirms such an order, need not give separate reasons if the appellate or revisional authority agrees with the reasons contained in the order under challenge." Similar view was earlier taken by the Hon'ble Supreme Court 29. in Siemens Engg. & Mfg. Co. of India Ltd. v. Union of India AIR 1976 SC 1785. It is settled law that while making assessment on assessee, the ITO acts in a quasi-judicial capacity. An assessment order is amenable to appeal by the assessee and to revision by the Commissioner under Sections 263 and 264. Therefore, a reasoned order on a substantial issue

ITA No.687/Bang/2015 Page 21 of 30

is legally necessary. The judgments on which reliance was placed by the learned Counsel for the assessee also points to the same direction. They have held that orders, which are subversive of the administration of revenue, must be regarded as erroneous and prejudicial to the interests of the revenue. If the Assessing Officers are allowed to make assessments in an arbitrary manner, as has been done in the case before us, the administration of revenue is bound to suffer. If without discussing the nature of the transaction and materials on record, the Assessing Officer had made certain addition to the income of the assessee, the same would have been considered erroneous by any appellate authority as being violative of the principles of natural justice which require that the authority must indicate the reasons for an adverse order. We find no reason why the same view should not be taken when an order is against the interests of the revenue. As a matter of fact such orders are prejudicial to the interests of both the parties, because even the assessee is deprived of the benefit of a positive finding in his favour, though he may have sufficiently established his case.

In view of the foregoing, it can safely be said that an order passed 30. by the Assessing Officer becomes erroneous and prejudicial to the interests of the Revenue under Section 263 in the following cases:

(i) The order sought to be revised contains error of reasoning or of law or of fact on the face of it. (ii) The order sought to be revised proceeds on incorrect assumption of facts or incorrect application of law. In the same category fall orders passed without applying the principles of natural justice or without application of mind. (iii) The order passed by the Assessing Officer is a stereotype order which simply accepts what the assessee has stated in

ITA No.687/Bang/2015 Page 22 of 30

his return or where he fails to make the requisite enquiries or examine the genuineness of the claim which is called for in the circumstances of the case. We shall now turn to the facts of the case to see whether the case 31. before us is covered by the aforesaid principles. Perusal of the assessment order passed by the Assessing Officer does not show any application of mind on his part. This is a case where the Assessing Officer mechanically accepted what the assessee wanted him to accept without any application of mind or enquiry. The evidence available on record is not enough to hold that the return of the assessee was objectively examined or considered by the Assessing Officer. It is because of such non-consideration of the impugned issues on the part of the Assessing Officer that the return filed by the assessee was accepted without any proper scrutiny. The assessment order placed before us is clearly erroneous as it was passed without proper examination or enquiry or verification or objective consideration of the claim made by the assessee. The Assessing Officer has completely omitted to examine the issue in question from consideration and made the assessment in an arbitrary manner. His order is a completely non-speaking order with regard to issue raised by the PCIT in his order. In our view, it was a fit case for the learned Commissioner to exercise his revisional jurisdiction under section 263 which he rightly exercised by setting aside the assessment order and directing the Assessing Officer to pass a fresh order considering the issues raised by the CIT. In our view, the assessee should have no grievance in the action of learned Commissioner in exercising the jurisdiction u/s. 263 of the IT Act.

It was however contended by the learned Counsel that the 32. Assessing Officer had taken a possible view in accepting the return of the assessee with reference to the impugned issue and hence, the PCIT was

ITA No.687/Bang/2015 Page 23 of 30

not justified in assuming the revisional jurisdiction under Section 263. We have given our thoughtful consideration to the aforesaid submissions. As already stated earlier, an order becomes erroneous because inquiries, which ought to have been made on the facts of the case, were not made and not because there is anything wrong with the order if all the facts stated or the claims made in the return are assumed to be correct. Thus, it is mere failure on the part of the Assessing Officer to make the necessary inquiries or to examine the claim made by the assessee in accordance with law, which renders the resultant order erroneous and prejudicial to the interest of the revenue. Nothing more is required to be established in such a case. One would not know as to what would have happened if the Assessing Officer had made the requisite inquiries or examined the claim of the assessee in accordance with law. He could have accepted the assessee's claim. Equally, he could have also rejected the assessee's claim depending upon the results of his enquiry or examination into the claim of the assessee. Thus, the formation of any view by the Assessing Officer would necessarily depend upon the results of his inquiry and conscious, and not passive, examination into the claim of the assessee. If the Assessing Officer passes an order mechanically without making the requisite inquiries or examining the claim of the assessee in accordance with law, such an order will clearly be erroneous in law as it would not be based on objective consideration of the relevant materials. It is therefore, the mere failure on the part of the Assessing Officer in not making the inquiries or not examining the claim of the assessee in accordance with law that per se renders the resultant order erroneous and prejudicial to the interest of the revenue. Nothing else is required to be established in such a case to show that the order sought to be revised is erroneous and prejudicial to the interests of the revenue.

ITA No.687/Bang/2015 Page 24 of 30

We are unable to accept the submission of the learned Counsel for 33. two other reasons also. First reason is that the view so taken by the Assessing Officer without making the requisite inquiries or examining the claim of the assessee will per se be an erroneous view and hence will be amenable to revisional jurisdiction under Section 263. Second reason is that it is not taking of any view that will take the matter under the scope of Section 263. The view taken by the Assessing Officer should not be a mere view in vacuum but a judicial view. It is well established that the Assessing Officer being a quasi-judicial authority cannot take a view, either against or in favour of the assessee / revenue, without making proper inquiries and without proper examination of the claim made by the assessee in the light of the applicable law. As already stated earlier, we are not able to appreciate on what material was placed before the Assessing Officer at the assessment stage to take such a view. The assessee has also not been able to lead enough evidence to show to us that any inquiry was made by the Assessing Officer in this regard. Therefore mere allegation that the Assessing Officer has taken a view in the matter will not put the matter beyond the purview of Section 263 unless the view so taken by the Assessing Officer is a judicial view consciously based upon proper inquiries and appreciation of all the relevant factual and legal aspects of the case. The judicial view taken by the Assessing Officer may perhaps place the matter outside the purview of Section 263 unless it is shown that the view so taken by the Assessing Officer contains some apparent error of reasoning or of law or of fact on the face of it.

The learned Counsel has strongly relied upon the following 34. observations made in the case of Malabar Industrial Co. Ltd. (supra) and submitted that the learned Commissioner was not justified in substituting his view for that of the Assessing Officer:

ITA No.687/Bang/2015 Page 25 of 30

"... Every loss of revenue as a consequence of an order of the Assessing Officer cannot be treated as prejudicial to the interests of the revenue. For example, when an Income-tax Officer adopted one of the courses permissible in law and it has resulted in loss of revenue; or where two views are possible and the Income-tax Officer has taken one view with which the Commissioner does not agree, it cannot be treated as an erroneous order prejudicial to the interests of the revenue, unless the view taken by the Income-tax Officer is unsustainable in law." We have carefully gone through the aforesaid observations. 35. "Adopting" one of the courses permissible in law necessarily requires the Assessing Officer to consciously analyse and evaluate the facts in the light of relevant law and bring them on record. It is only then that he can be said to have "adopted" or chosen one of the courses permissible in law. The Assessing Officer cannot be presumed or attributed to have "adopted" or chosen a course permissible in law when his order does not speak in that behalf. Similarly, "taking" one view where two or more views are possible also necessarily imports the requirement of analysing the facts in the light of applicable law. Therefore, proper examination of facts in the light of relevant law is a necessary concomitant in order to say that the Assessing Officer has adopted a permissible course of law or taken a view where two or more views are possible. It is only after such proper examination and evaluation has been done by the Assessing Officer that he can come to a conclusion as to what are the permissible courses available in law or what are the possible views on the issue before him. In case he comes to the conclusion that more than one view is possible then he has necessarily to choose a view, which is most appropriate on the facts of the case. In order to apply the aforesaid observations to a given case, it must therefore first be shown that the Assessing Officer has "adopted" a permissible course of

ITA No.687/Bang/2015 Page 26 of 30

law or, where two views are possible, the Assessing Officer has "taken" one such possible view in the order sought to be revised under Section 263. This requires the Assessing Officer to take a conscious decision; else he would neither be able to "adopt" a course permissible in law nor "take" a view where two or more views are possible. In other words, it is the Assessing Officer who has to adopt a permissible course of law or take a view where two or more views are possible. It is difficult to comprehend as to how the Assessing Officer can be attributed to have "adopted" a permissible course of law or "taken" a view where two or more views are possible when the order passed by him does not speak in that behalf. We cannot assume, in order to provide legitimacy to the assessment order, that the Assessing Officer has adopted a permissible course of law or taken a possible view where his order does not say so. The submissions made by the learned Counsel, if accepted, would require us to form, substitute and read our view in the order of the Assessing Officer when the Assessing Officer himself has not taken a view. It could have been a different position if the Assessing Officer had "adopted" or "taken" a view after analysing the facts and deciding the matter in the light of the applicable law. However, in the case before us, the Assessing Officer has not at all examined as to whether only one view was possible or two or more views were possible and hence, the question of his adopting or choosing one view in preference to the other does not arise. The aforesaid observations of the Hon'ble Supreme Court do not, in our view, help the assessee; and rather they are against the assessee.

In the case of Padmasundara Rao v. State of Tamil Nadu [2002] 255 36. ITR 147, the Hon'ble Supreme Court has held that:-

ITA No.687/Bang/2015 Page 27 of 30

"... There is always peril in treating the words of a speech or judgment as though they are words in a legislative enactment, and it is to be remembered that judicial utterances are made in the setting of the facts of a particular case, said Lord Morrin in Harrington v. British Railways Board [1972] 2 WLR 537 (HL). Circumstantial flexibility, one additional or different fact may make a world of difference between conclusions in two cases...." Therefore, the observations of the Hon'ble Supreme Court in Malabar Industrial Co. Ltd's case (supra) on which reliance has been placed by the learned Counsel cannot be read in isolation. The judgment deserves to be read in its entirety to cull out the law laid down by the Hon'ble Supreme Court. If so read, it is quite evident that the orders passed on an incorrect assumption of facts or incorrect application of law or without applying the principles of natural justice or without application of mind will satisfy the requirement of the order being erroneous and prejudicial to the interest of the revenue. If the order sought to be revised under Section 263 suffers from any of the aforesaid vices, it cannot be said that the Assessing Officer has "adopted", in such an order, a course permissible in law or "taken" a view where two or more views are possible." It was next contended by the learned Authorised Representative that 37. the Assessing Officer had considered all the relevant aspects of the case carefully while passing the order. According to him, the mere fact that the assessment order passed by the Assessing Officer was short would neither mean failure on his part in not examining the matter carefully nor would render his order erroneous so long as the view taken by him was a possible view. In our view, the aforesaid submission of the assessee must fail for the reasons already explained in the foregoing paras of this order as the order, which is sought to be revised under Section 263 reflects no proper application of mind by the Assessing Officer and thus be amenable to revision under Section 263. In this case before us, the assessment order passed by the Assessing Officer lacks judicial strength to stand. It is not a

ITA No.687/Bang/2015 Page 28 of 30

case where the order is short but is not supported by judicial strength. It is in this view of the matter that we feel that the learned Commissioner has correctly exercised his revisional jurisdiction under Section 263.

In our opinion, the Assessing Officer has been entrusted the role of 38. an investigator, prosecutor as well as adjudicator under the scheme of the Income-tax Act. If he commits an error while discharging the aforesaid roles and consequently passes an erroneous order causing prejudice either to the assessee or to the State Exchequer or to both, the order so passed by him is liable to be corrected. As mentioned earlier, the assessee can have the prejudice caused to him corrected by filing an appeal; as also by filing a revision application under Section 264. But the State Exchequer has no right of appeal against the orders of the Assessing Officer. Section 263 has therefore been enacted to empower the Commissioner to correct an erroneous order-passed by the Assessing Officer which he considers to be prejudicial to the interest of the revenue. The Commissioner has also been empowered to invoke his revisional jurisdiction under Section 264 at the instance of the assessee also. The line of difference between Sections 263 and 264 is that while the former can be invoked to remove the prejudice caused to the State the later can be invoked to remove the prejudice caused to the assessee. The provisions of Section 263 would lose significance if they were to be interpreted in a manner that prevented the Commissioner from revising the erroneous order passed by the Assessing Officer, which was prejudicial to the interest of the revenue. In fact, such a course would be counter-productive as it would have the effect of promoting arbitrariness in the decisions of the Assessing Officers and thus destroy the very fabric of sound tax discipline. If erroneous orders, which are prejudicial to the interest of the revenue, are allowed to stand, the consequences would be disastrous in that the honest tax payers would be

ITA No.687/Bang/2015 Page 29 of 30

required to pay more than others to compensate for the loss caused by such erroneous orders. For this reason also, we are of the view that the orders passed on an incorrect assumption of facts or incorrect application of law or without applying the principles of natural justice or without application of mind or without making requisite inquiries will satisfy the requirement of the order being erroneous and prejudicial to the interest of the revenue within the meaning of Section 263.

ITA No.687/Bang/2015 Page 30 of 30

business or profession in the computation of total income for the AY 2009- 09, the assessee shall deduct TDS on it, otherwise provisions of section 40(a)(ia) are clearly applicable and the assessee is not entitled to claim this amount as deduction even on actual payment of this expenditure in this assessment year under consideration. Accordingly, we remit this issue to the file of the ld. PCIT for de novo consideration and the assessee shall satisfy the PCIT with regard to non-claiming the above amount as expenditure and the PCIT will decide the issue within three (3) months from the date of receipt of this order.

Pronounced in the open court on this 27th day of December, 2021.

Sd/- Sd/- ( BEENA PILLAI ) ( CHANDRA POOJARI ) JUDICIAL MEMBER ACCOUNTANT MEMBER

Bangalore, Dated, the 27th December, 2021.

/Desai S Murthy /

Copy to: 1. Appellant 2. Respondent 3. CIT 4. CIT(A) 5. DR, ITAT, Bangalore. By order

Assistant Registrar ITAT, Bangalore.