2012 (3) TMI 227 - HC - Income Tax

Validity of revisionary powers exercised by Commissioner u/s 263 on ground that A.O. has not examined aspect of full value of consideration and that high-yielding asset could not be disposed off at such a low value assessee claimed long-term capital loss on sale of immovable property in year 2003 for 70 lacs purchased in year 1997 for 69.63 lacs - Held that - A.O. is both an investigator and an adjudicator. If the A.O. fails to conduct enquiry he commits an error and the word erroneous includes failure to make the enquiry. In cases where there is inadequate enquiry but not lack of enquiry again the CIT must give and record a finding that the order/inquiry made is erroneous. An order is not erroneous and prejudicial to the interest of Revenue unless the CIT hold and records reasons why it is erroneous. Therefore we upheld the order of Tribunal setting aside the order of CIT since CIT has not examined the said aspect himself and has not given any finding/reason for observing that the order passed by the A.O. was erroneous Decided against the Revenue.

Summary

The core legal question considered was whether the Income Tax Appellate Tribunal was correct in setting aside the order passed by the Commissioner of Income Tax (CIT) under Section 263 of the Income Tax Act, 1961, which had revised an assessment order on the ground that it was erroneous and prejudicial to the interests of the revenue.

The dispute arose from the assessment year 2004-05, where the assessee company declared a long-term capital loss on the sale of immovable property. The Assessing Officer (AO) accepted the sale consideration declared by the assessee and made only a nominal addition to cover possible leakages, thus completing the assessment. Subsequently, the CIT invoked revisionary powers under Section 263, alleging that the assessment order was erroneous and prejudicial to revenue because the sale consideration was understated and expenses were incorrectly allowed.

Issue-wise Detailed Analysis:

1. Scope and applicability of Section 263 of the Income Tax Act

The Court examined the legal framework of Section 263, which empowers the CIT to revise an assessment order if it is both erroneous and prejudicial to the interests of the revenue. The two cumulative conditions-error and prejudice-must be satisfied for the exercise of such jurisdiction. The term "erroneous" is interpreted as a decision that is legally unsustainable or a failure to conduct proper inquiry or verification. "Prejudicial to the interests of revenue" is a wide concept, not limited to mere loss of tax.

The Court relied on precedents, including earlier decisions of the Delhi High Court and the Supreme Court, which clarified that the AO is not just an adjudicator but also an investigator. The AO's failure to make necessary inquiries or verification renders the order erroneous and justifies revision under Section 263. However, if the AO has conducted inquiry, even if inadequate, the CIT cannot simply substitute his opinion unless the order is shown to be unsustainable in law.

2. Whether the CIT was justified in setting aside the AO's order on the ground that the sale consideration was understated

The CIT's order alleged that the sale consideration declared (Rs. 70 lakhs) was unrealistically low given that the property was purchased for Rs. 69.63 lakhs and yielded a monthly rent of Rs. 2.05 lakhs. The CIT held that the AO failed to properly examine the full value of consideration and that the assessment order was erroneous and prejudicial.

However, the Tribunal found that the CIT did not record any positive finding that the actual sale consideration was higher than declared. There was no evidence of enhanced stamp duty or any other material indicating undervaluation. The sale deed was registered at the declared value, and the CIT did not invoke Section 50C (which deals with deemed consideration based on stamp duty value) as the stamp duty was not enhanced.

The Court emphasized that mere suspicion or doubts about the valuation do not suffice to hold the AO's order erroneous. The CIT must independently examine the material and form a clear conclusion that the AO's acceptance of the sale consideration was legally unsustainable. In the absence of such a finding, the revision order cannot be sustained.

3. Applicability of Schedule III of the Wealth Tax Act for valuation and CIT's direction to AO

The CIT criticized the AO for not applying the valuation formula under Schedule III of the Wealth Tax Act to determine the sale consideration. The assessee argued that the Wealth Tax Act provisions are not applicable for income tax assessments, and the CIT's direction was not tenable.

The Court held that the CIT's reasoning was flawed. The Wealth Tax Act valuation formula is not automatically applicable to income tax proceedings. The CIT's assertion that the AO should have applied this formula did not establish that the AO's order was erroneous. The CIT cannot impose valuation methods not mandated under the Income Tax Act without proper legal basis. This ground did not justify revision under Section 263.

4. Distinction between lack of inquiry and inadequate inquiry by the AO

The Court analyzed the distinction between cases where the AO completely fails to make any inquiry (lack of inquiry) and cases where the inquiry is made but may be inadequate or the findings are disputed. Precedents establish that an order is erroneous under Section 263 if the AO fails to make any inquiry, but mere inadequacy or difference of opinion does not suffice.

The CIT's order indicated reservations about the AO's examination but did not demonstrate that the AO failed to conduct any inquiry. The AO had examined the transaction and accepted the assessee's figures subject to a nominal addition. The CIT's direction for fresh assessment without recording a clear finding that the AO's order was erroneous amounted to an impermissible remand.

The Court underscored that the CIT must itself form a clear, unambiguous opinion that the AO's order is erroneous and prejudicial before exercising revisionary powers. The CIT cannot delegate this determination back to the AO by ordering a fresh inquiry without such a finding.

5. Requirement of clear findings and finality in revision proceedings

The Court reiterated that the CIT's power under Section 263 is not arbitrary or unbounded. It must be exercised on materials on record and requires a reasoned conclusion that the order is erroneous and prejudicial. The CIT cannot initiate fishing or roving inquiries. The principle of finality in assessment proceedings demands that stale issues not be reopened without cogent justification.

In this case, the CIT's order lacked a definitive finding of error and prejudice. The CIT expressed doubts but did not conclusively establish that the AO's order was legally unsustainable. The Tribunal's decision to set aside the CIT's revision order was therefore upheld.

Significant Holdings:

"The expression 'erroneous' means a wrong/incorrect decision deviating from law. This expression postulates an error which makes an order unsustainable in law."

"The Income-tax Officer is not only an adjudicator but also an investigator. He cannot remain passive in the face of a return which is apparently in order but calls for further inquiry. It is his duty to ascertain the truth of the facts stated in the return when the circumstances of the case are such as to provoke an inquiry."

"If the Assessing Officer as an adjudicator decides a question or aspect and makes a wrong assessment which is unsustainable in law, it can be corrected by the Commissioner in exercise of revisionary power. As an investigator, it is incumbent upon the Assessing Officer to investigate the facts required to be examined and verified to compute the taxable income. If the Assessing Officer fails to conduct the said investigation, he commits an error and the word 'erroneous' includes failure to make the enquiry."

"If there was any inquiry, even inadequate, that would not by itself give occasion to the Commissioner to pass orders under section 263 of the Act, merely because he has a different opinion in the matter. It is only in cases of 'lack of inquiry' that such a course of action would be open."

"An order cannot be termed as erroneous unless it is not in accordance with law. If an Income-tax Officer acting in accordance with law makes a certain assessment, the same cannot be branded as erroneous by the Commissioner simply because, according to him, the order should have been written more elaborately."

"Every loss of Revenue as a consequence of an order of the Assessing Officer cannot be treated as prejudicial to the interest of Revenue. When the Assessing Officer had adopted one of the courses permissible and available to him, and this has resulted in loss to Revenue; or two views were possible and the Assessing Officer has taken one view with which the CIT may not agree; the said orders cannot be treated as an erroneous order prejudicial to the interest of Revenue unless the view taken by the Assessing Officer is unsustainable in law."

"The CIT must after recording reasons hold that the order is erroneous. An order will not become erroneous because on remit, the Assessing Officer may decide that the order is erroneous. Therefore CIT must, after recording reasons, hold that the order is erroneous."

The Court concluded that the CIT's order under Section 263 was unsustainable as it did not record any clear finding that the AO's order was erroneous and prejudicial to revenue. The CIT's doubts and reservations without independent examination and conclusive findings were insufficient. The Tribunal's decision setting aside the CIT's revision order was upheld, and the appeal by the Revenue was dismissed.