SREEDHAR REDDY DUDDUKUNTA,HYDERABAD vs. DY. COMMISSIONER OF INCOME TAX, CENTRAL CIRCLE-1(3), HYDERABAD

Brief facts of the case relevant for the disposal of this appeal are that the assessee received salary from M/s. Saisudhir Infrastructure Ltd, Hyderabad and initially his salary was Rs.60,00,000 per annum. Assessee filed his return of income for the A.Y 2013-14 on 22.11.2013 declaring an income at Rs.63,10,400/-. But subsequently, according to the assessee, in view of the statutory requirements, approval of the Registrar of Companies was sought by filing Form No.25C, but such approval was granted permitting the assessee only to draw a salary of Rs.36,00,000/-per annum. In compliance with such statutory requirements, the assessee reduced the receipt of salary to Rs.36,00,000 and revised the return of income on 10.12.2014 at Rs.39,20,000/-. Learned Assessing Officer, after examining the material made available before him by the assessee accepted the return of income as filed by the assessee.

Learned PCIT, however, on a perusal of the record was of the opinion that inasmuch as the assessee did not file the return of income u/s 139(1) of the Act, but filed u/s 139(4) of the Act, the assessee is not entitled to revise the same u/s 139(5) of the Act. On this premise, the learned PCIT was of the opinion that the assessment order passed by accepting the income returned in the revised return of income was erroneous and also prejudicial to the interest of the Revenue. He accordingly set aside the assessment order to the file of the learned Assessing Officer with a direction to pass the assessment afresh on the basis of the original return filed, after affording an opportunity of being heard to the assessee.

Assessee is aggrieved by the action of the learned PCIT and preferred this appeal stating that the salary permitted by the Registrar of Companies alone has to be reckoned as salary of the assessee for the purpose of computation of income, inasmuch as such salary is in compliance with the statutory requirements, the assessment completed on such information is neither erroneous nor prejudicial to the interest of the Revenue. Apart from this, it is submitted on behalf of the assessee by the learned AR that it is the settled principle of law in the case of Malabar Industrial Co. Ltd. V/s CIT [243 ITR 83 10/02/2000] that in order to invoke jurisdiction by the learned Pr.CIT u/s 263 of the Act, the twin conditions of section 263, namely “erroneous order” in so far as “prejudice to the interest of the Revenue” must be satisfied. According to him, in this case, the learned Pr.CIT failed to take proceedings to their logical conclusion by determining the extent of prejudice to the interest of the Revenue after independent investigations of the record and that, however, the learned Pr.CIT equated the errors in the order to that of prejudice to the interest of the Revenue and therefore, the twin conditions laid down by the Hon'ble Apex Court in the case of Malabar Industrial Co. Ltd Vs. CIT (Supra) are not satisfied. Learned AR accordingly prayed to quash the proceedings u/s 263 of the Act.

Per contra, learned DR submitted that it is an admitted fact that the assessee did not file the return of income u/s 139(1) of the Act, but filed the same u/s 139(4) of the Act and therefore, in view of the decision of the Hon'ble Apex Court in the case of Kumar Jagdish Chandra Sinha vs. CIT (1996) 220 ITR 67 (S.C) no revised return can be filed under sub section (5) of section 139 in a case where the return is filed u/s 139(4) and that once this is so the revised returns filed by the assessee for the said A.Y were not valid in law and could not have been treated and acted upon as revised returns contemplated by sub-section (5) of section 139. He accordingly submitted that when the error is manifested in compliance of the order through such an error, the prejudice to the interest of the Revenue is perpetrated and therefore, there are no grounds to interfere with the order passed by the Pr.CIT u/s 263 of the I.T. Act.

We have gone through the record in the light of the submissions made on either side. Insofar as the first limb to section 263 empowered the learned Pr.CIT to invoke jurisdiction to revise the assessment order, namely “erroneous order”, it admits of no doubt that inasmuch as the assessee filed the return of income u/s 139(4) of the Act but that u/s 139(1) of the Act, in view of the decision of the Apex Court in the case of Kumar Jagdish Chandra Sinha (Supra), such an assessment order is erroneous. The first limb is, therefore, satisfied.

Now coming to the second limb, i.e. prejudicial to the interest of the Revenue, admittedly, the assessee stated the income at Rs.36,00,000 as against the originally stated income of Rs.60,00,000 only in compliance with the statutory requirements under the Companies Law and the learned Assessing Officer accepted the same. Learned CIT (A) does not state anywhere in the order that as against the statutorily approved salary of Rs.36,00,000/- the assessee should have received Rs.60,00,000/- or that the learned Assessing Officer considering the legally permissible income of Rs.36.00 lakhs was in any way illegal or irregular.

Further, learned Pr.CIT did not state as to how the prejudice is caused to the interest of the Revenue when the learned Assessing Officer considered the legally acceptable remuneration of the assessee under the Companies Act. What is the extent of prejudice is not stated by the Pr.CIT. Learned Pr.CIT equated the error in the assessment order to prejudice to the interest of Revenue. Position of law on this aspect is otherwise. In Malabar Industrial Co. Ltd (Supra), the Hon'ble Supreme Court clearly stated that every erroneous order need not result in prejudice to the interest of the Revenue and vice-versa. It is further stated that when two view are possible for the learned Assessing Officer to take, and the learned Assessing Officer takes one such view, though prejudice is caused to the Revenue, it would not empower the learned Pr.CIT to interfere with such an order in exercise of powers u/s 263 of the Act. So, also when the order is erroneous, but no real prejudice is caused to the Revenue, learned Pr.CIT cannot interfere in such an order. We are of the considered opinion that the second limb, namely prejudice to the interest of the Revenue is not established in this case.

In this matter, the twin conditions of 263 of the Act are not satisfied cumulatively, and, therefore, we are of the considered opinion that the learned Pr.CIT is not justified in setting aside the assessment order for denovo assessment. We accordingly do not fine any reason to sustain the impugned order and consequently we quash the same.

In the result, appeal of the assessee is allowed.