TMI Blog2016 (3) TMI 289X X X X Extracts X X X X X X X X Extracts X X X X ..... icial to the interest of the Revenue, are allowed to stand, the consequences would be disastrous in that the honest taxpayers would be 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 s. 263. Thus the order passed by Assessing Officer is prejudicial to the interest of the Revenue. Thus, the Ld. CIT is justified in exercising the jurisdiction provided to him u/s.263 of the Act. Accordingly, the legal issue raised by the regarding validity of exercising jurisdiction u/s.263 by CIT is rejected.- Decided against assessee Application of the principle of diversion of income by overriding title - expenditure claimed on transfer of property inherited from the father - cost incurred on acquisition by the successor - Held that:- The true test for the application of the r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at the assessee sold his house property at 38, Defence Officers Colony, HAR-Il Stage, Indira Nagar, Bangalore for a consideration of ₹ 8,80,00,000/- vide sale deed dated 10-11-2011. This property was originally purchased by assessee s father on 26-07-1979, and inherited by the assessee after the demise of his father on 11-06-2011 through a will. The assessee claimed ₹ 68,02,500/- as expenditure on transfer of the above property, the details of Which are as under:- Payment made to Sri Sai Spiritual Center Trust : Rs.10,00,000 Payment made to Help age India : Rs.25,00,000 CRY (Child Rights and You) : Rs.15,00,000 Sri Ramana Ashramam Thiruvannamalai : Rs.10,00,000 Payment made to Sri M.S. Narayanan : ₹ 50,000 Professional fees paid to Sri M.S.Narayanan : ₹ 3,20,000 Commission paid to N D Basavaraja : ₹ 4,00,000 Other expenses : ₹ 32,500 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ther, Ld. CIT observed that the copy of sale deed dated 10-11-2011 available on record shows that assessee had already obtained katha certificate of this property from Bruhat Bangalore Mahanagar Palike on 26-10-2011 itself which is before the date of sale i.e. assessee was absolute owner of the property and thus there is no diversion by overriding title Further, the said property was sold by assessee and not by the Executor to the will This contradicts the claim of assessee that he got only the balance amount after making the payment of ₹ 60,50,000/- as per will. Further, as per the will the Executor can sell the property only one year after demise of Shri A V Rajaram whereas sale was made within 5 months. A!l these factors go to prove that the sale was not made as per will and the assessee as sole owner, sold the impugned property for a consideration of ₹ 8,80,00,000/-. Moreover, the payments said to have been made as per Will can neither be considered as diversion by overriding title nor expenditure incurred wholly and exclusively in connection with the transfer in view of the binding decisions of jurisdictional High Court on identical situations in the following case ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ated 25.09.2014 is neither erroneous nor prejudicial to the interests of revenue to warrant the Commissioner s interference under section 263 of the Act. 3.2 Regarding invoking the provisions of the section 263 of the Act by the Ld. CIT, ld.A.R submitted that in the course of the scrutiny assessment proceedings the Income Tax Officer had issued questionnaire dated 12.05.2014 and heard the case on 29.05.2014; in response to the questionnaire and the enquiry during the hearing on 29.05.2014 the ld.A.R had submitted Legal Opinion (dated 30.11.2011); the Income Tax Officer had accepted the Opinion and referring in the assessment order to the claim of exclusion of payments of amounts to various charities as per Will dated 30.10.2008 of the assessee s father, professional fees, commission paid and other expenses adopted the net consideration offered by the assessee for purposes of computation of Long Term Capital Gains on sale of the immovable property at Bangalore bequeathed to the appellant by his father; in such circumstances the section 263 in respect of the issue regarding net sale consideration is contrary to the scheme of the Act and is wholly unjustified. The assessee is a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... from the truth in matters of fact, and from the law in matters of judgment 'error' is a fault in judgment, or in the process or proceeding to judgment 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 CPC and s. 215 Cr.PC. 'Error, fault, error respects the act; fault respect the agent, an error may lay in the judgment, or in the conduct, but a fault lies in the will or intention. 5. At p. 650 of the aforesaid Law Lexicon, the scope of error, 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 t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ose 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 s. 143(3) of the IT Act. In other words, the AO was statutorily required to make the assessment under s. 143(3) after scrutiny and not in a summary manner as contemplated by sub-s. (1) of s. 143. Bulk of the returns filed by the assessees across the country are accepted by the Department under s. 143(1) without any scrutiny. Only a few cases are picked up for scrutiny. The AO 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 to the assessee but also to the Public Exchequer. The AO 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 AO is not expected to put blinkers on his eyes and mechanically accept what the assessee cla ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ness 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 AO. It is the duty of the AO to adequately protect the interests 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 CIT, 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. In S.N. Mukherjee vs. 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 pa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 AO 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. 10. In view of the foregoing, it can safely be said that an order passed by the AO becomes erroneous and prejudicial to the interests of the Revenue under s. 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 categor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... show to us that any inquiry was made by the AO in this regard. Therefore mere allegation that the AO has taken a view in the matter will not put the matter beyond the purview of s. 263 unless the view so taken by the AO 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 AO may perhaps place the matter outside the purview of s. 263 unless it is shown that the view so taken by the AO contains some apparent error of reasoning or of law or of fact on the face of it. 13. The learned counsel has strongly relied upon the following observations made in the case of Malabar Industrial Co. Ltd. (supra) and submitted that the learned CIT was not justified in substituting his view for that of the AO : ... Every loss of revenue as a consequence of an order of the AO cannot be treated as prejudicial to the interests of the Revenue. For example, when an ITO adopted one of the courses permissible in law and it has resulted in loss of revenue; or where two views are possible and the ITO has taken one view with which the CIT does not agree, it cannot be treated as an erroneous or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , if accepted, would require us to form, substitute and read our view in the order of the AO when the AO himself has not taken a view. It could have been a different position if the AO 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 AO 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. 15. In the case of Padmasundara Rao vs. State of Tamil Nadu Ors. (2002) 176 CTR (SC) 104 : (2002) 255 ITR 147 (SC) the Hon'ble Supreme Court has held that : ... 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 vs. British Railways Board (1972) 2 WLR 537 (HL) circumstantial flexibilit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... an have the prejudice caused to him corrected by filing an appeal; as also by filing a revision application under s. 264. But the State Exchequer has no right of appeal against the orders of the AO. Sec. 263 has therefore been enacted to empower the CIT to correct an erroneous order passed by the AO which he considers to be prejudicial to the interest of the Revenue. The CIT has also been empowered to invoke his revisional jurisdiction under s. 264 at the instance of the assessee also. The line of difference between ss. 263 and 264 is that while the former can be invoked to remove the prejudice caused to the State the latter can be invoked to remove the prejudice caused to the assessee. The provisions of s. 263 would lose significance if they were to be interpreted in a manner that prevented the CIT from revising the erroneous order passed by the AO, 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 AOs 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 s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y and which continues unabated as long as the property is transferred under any of the modes specified u/s.49 of the Act. In the case of CIT Vs. Manjula J.Shah reported in 35 SOT 105, Special Bench of Mumbai Tribunal which was upheld by the Bombay High Court in the case of CIT Vs. Manjula J.Shah reported in 204 Taxmann 691(Bom.) wherein it was held that when the assessee sells his immovable property which is acquired under gift or will, while computing the capital gain the index cost of acquisition has to be computed with reference to the year in which previous owner first held the asset and not the year in which the assessee became the owner of the asset. There is, thus, no scope for further adding any 'cost of acquisition', if any, incurred by the assessee, to that by the previous owner. That is, the deeming as to the 'cost of acquisition' and 'holding period' is to be given full effect to, taking it to its logical conclusion. The cost incurred by the legatee/s, if any, as toward discharge of a mortgage created either by him or even by the previous owner would not qualify to be considered or included as a part of the cost of acquisition u/s. 48(ii). In t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of Smt. Rugmani Varma reported in 222 ITR 357(Mad.) (refer pgs. 369-370). It is, thus, only the cost, where so, as incurred by the previous owner, or that which would stand to have been incurred by him, that would qualify for deduction u/s. 48(ii). The law in the matter is well settled, and this also perhaps explains the complete non-reference to any of the decisions relied upon by the Revenue by the Id. AR either before the first appellate authority or even before us. 20. In our opinion, the expression in connection with such transfer , as appearing in section 48(i), is wider than the expression for the transfer , the said exposition mean that apart from that stated in section 48, could be allowed in the computation of capital gains chargeable u/s.45. It is the interpretation of the words full value of the consideration received or accruing as a result of the transfer of the capital asset as appearing in section 48. The same stands interpreted to exclude payments that are absolutely necessary, so as to arrive at the real and effective consideration. 21. In our opinion as seen from the clause No.7, the assessee s father, A.V Rajaram bequeathed the entire sale consideratio ..... X X X X Extracts X X X X X X X X Extracts X X X X
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