Where the Assessing Officer took a possible view, while passing an order of assessment, the Commissioner exceeded his jurisdiction in seeking recourse to his power under section 263.
HIGH COURT OF BOMBAY Grasim Industries Ltd. vs. CITITR No. 113 of 1990
RELEVANT EXTRACTS:
11. Section 263 of the Income Tax Act, 1961 empowers the Commissioner to call for and examine the record of any proceedings under the Act and, if he considers that any order passed therein, by the Assessing Officer is erroneous in so far as it is prejudicial to the interests of the Revenue, to pass an order upon hearing the assessee and after an enquiry as is necessary, enhancing or modifying the assessment or cancelling the assessment and directing a fresh assessment. The key words that are used by Section 263 are that the order must be considered by the Commissioner to be "erroneous in so far as it is prejudicial to the interests of the Revenue". This provision has been interpreted by the Supreme Court in several judgments to which it is now necessary to turn. In Malabar Industrial Co. Ltd. vs. CIT, 1 the Supreme Court held that the provision "cannot be invoked to correct each and every type of mistake or error committed by the Assessing Officer" and "it is only when an order is erroneous that the Section will be attracted" The Supreme Court held that an incorrect assumption of fact or an incorrect application of law, will satisfy the requirement of the order being erroneous. An order passed in violation of the principles of natural justice or without application of mind, would be an order falling in that category. The ex-pression "prejudicial to the interests of the Revenue", the Supreme Court held, it is of wide import and is not confined to a loss of tax. What is prejudicial to the interest of the Revenue is explained in the judgment of the Supreme Court:
"The phrase "prejudicial to the interests of the Revenue" has to be read in conjunction with an erroneous order passed by the Assessing Officer. 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 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."
The principle which has been laid down in Malabar Industrial Co. Ltd. (supra) has been followed and explained in a subsequent judgment of the Supreme Court in Commissioner of Income Tax vs Max India Ltd . 2 While interpreting the provisions of Section 80HHC(3), the Supreme Court noted that the statutory provision had been amended eleven times and different views existed on the day when the Commissioner passed his order under Section 263.
The Court observed that "the mechanics of the section have become so complicated over the years that two views were inherently possible." Consequently, the subsequent amendment to the statutory provision, even though it was retrospective, would not attract the provisions of Section 263 particularly when the provision of law, as it stood, on the date when the Commissioner passed the order under Section 263, would have to be taken into account.
12. In Commissioner of Income Tax vs. Gabriel India Ltd.,3 a Division Bench of this Court observed that Section 263 does not confer an arbitrary or uncharted power on the Commissioner. In considering as to whether an order is erroneous in so far as it is prejudicial to the interests of the Revenue, the Commissioner must be guided by the material on the record. The power of suo motu revision under Section 263(1), is in the nature of supervisory jurisdiction. Two circumstances must exist in order to enable the Commissioner to exercise the power, namely, (i) the order must be erroneous; and (ii) by virtue of the order being erroneous, prejudice must have been caused to the interests of the Revenue.
Section 263 does not empower the Commissioner to substitute his judgment for that of the Assessing Officer, unless the decision is held to be erroneous. Both the conditions for the exercise of the power must be fulfilled. The order, in other words, sought to be revised, must be erroneous and must be prejudicial to the interests of the Revenue.
13 .The question as to whether the Commissioner has acted within the fold of his jurisdiction under Section 263 or outside it, in the present case, must be decided with reference to the principles which have been laid down by the Supreme Court and by this Court. Section 41(1) provides that where an allowance or deduction has been made in the assessment for any year in respect of a loss, expenditure or trading liability incurred by the assessee and subsequently during any previous year, the assessee obtained whether in cash or in any other manner, any amount in respect of such loss or expenditure or some benefit in respect of such trading liability by way of remission or cessation thereof, the amount obtains or the value of the benefit accruing shall be deemed to be profits and gains of business or profession and would accordingly be chargeable to income as the income of that previous year. The State Legislature enacted the Kerala Forest Produce (Fixation of Selling Price) Act, 1978. Section 3(1) empowers the Government to fix the selling price of forest produce for the following financial year. Section 5 stipulated that after the publication of the notification under Section 3, no forest produce shall be sold by the Government at a price which is less than the notified selling price. On 9th March 1979, the Government of Kerala issued notifications in exercise of its power under the Act of 1978 for the period ending 31st March 1981 and also for the period commencing from 1st April 1981, being the previous year relevant to Assessment Year 1982 83. The assessee had been allowed a deduction of an amount of Rs.1.75 crores during the Assessment Years 1980 81, 1981 82 and 1982 83. The notifications that were issued by the State Government were challenged by the assessee before the Kerala High Court. By its judgment dated 15th April 1981, the High Court struck down the notifications in so far as they related to eucalyptus, on the ground that in fixing the prices for eucalyptus, the State Government had not followed the procedure prescribed by the Act. The Kerala High Court held that matters which were required to be considered had not been placed before the Committee which was statutorily to be constituted under the provisions of the Act and the Committee had failed to consider relevant material before making its recommendations, in regard to the price of eucalyptus. The judgment of the Kerala High Court, therefore, set aside the notifications on the ground that the mandate of the Act in fixing the price of forest produce had not been followed and that relevant consideration had not been borne in mind by the Committee. The liability of the assessee to pay arose by virtue of the provisions of Section 5 of the Act, under which, no forest produce could be sold by the Government at a price, which was less than the selling price; the selling price being de1` 1fined to mean that the price of forest produce fixed by the Government under Section 3. The judgment of the Kerala High Court did not prohibit the government from issuing a fresh notification. After the decision of the Kerala High Court, the Expert Committee constituted under the provisions of Section 4, convened for the purposes of deciding afresh, the selling price of eucalyptus upto 31st March 1982. The Committee held its meeting on 25th March 1982, which was six days before the end of the relevant period here, and recommended the fixation of the selling price of eucalyptus between Rs.328/ to Rs.384/ per metric ton between 1978 and 1981. The Special Secretary to the State Government in the Forest and Minor Irrigation Department recorded in a note dated 27th March 1982 that the Kerala Forest Produce (Fixation of Selling Price) Rules, 1978 had been amended on 28th May 1981. Some doubt was expressed as to whether these Rules could fasten a liability with retrospective effect in the absence of an amendment to the parent legislation. The State Government, in pursuance of the judgment of the Kerala High Court proceeded to issue fresh notifications on 31st March 1981, 29th April 1981 and 29th May 1981. By the notification dated 29th May 1981, the Government refixed the selling price in the year 1981 82 with effect from 1st June 1981. On 31st March 1982, selling prices were notified for the period from 1st April 1982. These notifications were once again challenged by the assessee in a Writ Petition before the Kerala High Court. The Petition was allowed by the Division Bench of the Kerala High Court on 28th May 1994 and the notifications were set aside with a declaration that the prices fixed of bamboo, reed and eucalyptus were not payable by the Petitioner. The judgment of the Kerala High Court did not conclude the proceedings. Special Leave Petitions were filed before the Supreme Court in which, while granting leave, interim orders were passed by the Supreme Court, directing the assessee to pay the price of forest produce at 60% of the rate fixed in the notification issued by the State Government under Section 3(e) of the Act, less the price already paid. The Bank Guarantees furnished by the assessee were allowed to be encashed to the aforesaid extent. The Supreme Court expressed the hope that the parties would be able to arrive at a settlement which may be "beneficial to all concerned, having regard to the checkered history of the litigation with its attendant uncertainties, and to avoid further long drawn out litigation." Eventually, a settlement was arrived at between the Government of Kerala and the assessee on 27th October 1988. By the settlement, a series of matters set out in the schedule, came to be settled and parties agreed that no payment will be due by either party to the other in respect of any of the matters mentioned in the schedule.
14. The narration of facts would thus show that the liability of the assessee in respect of the payment due for the supply of forest produce, under the Kerala Forest Produce (Fixation of Selling Price) Act, 1978, was not concluded by the judgment of the Kerala High Court dated 15th April 1981. The notifications fixing the price of eucalyptus were set aside by the Kerala High Court, on the ground that the Committee statutorily constituted under the Act, had not applied its mind to the relevant material. The liability of the assessee to pay at the price notified, arose under the Act, for the supplies of forest produce effected by the State Government to the assessee . The liability arose as a result of the supply of forest produce the quantification of liability was liable to be made by the instrument of the notifications issued in accordance with the provisions of the Act. The view that there was no remission or cessation of the liability during the previous year, relevant to Assessment Year 1982- 83, was a possible view having regard to the circumstances, which transpired after the judgment of the Kerala High Court.
These circumstances included the following:
(i) The recommendations made by the Expert Committee on 25th March 1982 for the refixation of prices of forest produce six days before the end of the financial year; (ii) The issuance of fresh notifications by the State Government; (iii) The challenge by the assessee to the fresh notifications; (iv) The judgment of the Kerala High Court dated 28th May 1984, setting aside the second set of notifications; (v) The filing of Special Leave Petitions before the Supreme Court challenging the judgment of the Kerala High Court in the second round; and (vi) The interim order passed by the Supreme Court requiring the assessee to pay at the rate of 60% of the prices/notifications and allowing encashment of Bank Guarantees for that purpose; and (vii) The eventual resolution of the dispute by a settlement of 27th October 1988.
15. In these circumstances, when the Assessing Officer took a possible view, while passing an order of assessment, the Commissioner exceeded his jurisdiction in seeking recourse to his power under Section 263. At the least, it must be held that the question as to whether the liability of the assessee had ceased in the previous year relevant to the Assessment Year 1982 83, was an issue on which a possible view was that there was no final or irrevocable remission or cessation of liability, within the meaning of Section 41(1) of the Act, during Assessment Year 1982 83. This view could not, by any stretch of logic, be regarded as being insustainable in law. The condition precedent to the exercise of jurisdiction under Section 263, is that the order sought to be revised must be erroneous in so far as it is prejudicial to the interests of the Revenue. Following the judgments of the Supreme Court in Malabar Industrial Co. and Max India Ltd. (supra), it is now a settled principle that where the Assessing Officer has adopted one of the courses permissible in law or where two views are possible and the Assessing 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 Assessing Officer is unsustainable in law. In the present case, two views were inherently possible and the assessee therefore, cannot be subjected to the exercise of the jurisdiction under Section 263. The Tribunal, with respect, has adopted a rather simplistic view of the matter, in coming to the conclusion that the liability had ceased to exist, consequent upon the judgment of the Kerala High Court, dated 15th Apri1981. This clearly overlooks the checkered history of the litigation. The fact that the litigation had a checkered history was noted in the interim order of the Supreme Court, which also referred to the "attendant uncertainties" and to the possibility of a "further long drawn out litigation".
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