TMI Blog2017 (7) TMI 620X X X X Extracts X X X X X X X X Extracts X X X X ..... le view. In this scenario, the CIT could not exercise his powers under Section 263 of the Act. - Decided in favour of assessee. - Civil Appeal No. 815 of 2007, Civil Appeal No. 4923 of 2007 - - - Dated:- 21-3-2017 - A. K. Sikri And Ashok Bhushan, JJ. For the Appellant : Mr. Y. P. Adhyaru, Sr. Adv. Mrs. Anil Katiyar, Adv For the Respondent : Mr. Haresh Raichura, Adv JUDGMENT The respondent-assessee was a registered firm engaged in the business of sale of scrap of ship materials. The firm was constituted with two partners, i.e., mother and son. During the period under consideration, the firm was dissolved on 01.02.1993 on account of the death of one of the partners. At the time of dissolution, the firm had valued the closing stock at cost price. The respondent-assessee filed return of income showing total income of ₹ 16,41,760/- for assessment year 1993-1994. The relevant previous year is financial year 1992-1993. On this return, the assessment order was passed by the Assessing Officer on 24.02.1995 under section 143(3) of the Income Tax Act, 1961 (hereinafter referred to as 'Act') accepting the method of valuation adopted by the respondent-assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the High Court while upsetting the said order referred to the judgment of this Court in 'Sakthi Trading Co. v. Commissioner of Income Tax [(2001) 250 ITR 871]. A perusal of the judgment of the High Court would reveal that two substantial questions of law were considered by the High Court, which are as follows: i. Whether in the facts and circumstances of the case, the ITAT was right in law, in holding that the CIT has validly exercised revisional jurisdiction under section 263 of the Income Tax Act, 1961? ii. Whether, in the facts and circumstances of the case, the ITAT was right in law, in holding that closing stock was to be valued at market price on the ratio of the decision of the Supreme Court in ALA Firm v. CIT reported in 189 ITR 285 though the business was continued after the dissolution of the firm? Since, validity of exercise of powers under Section 263 of the Act is involved, we reproduce that provision hereunder: 263. Revision of orders prejudicial to revenue.- (1) The Principal Commissioner or 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... accordance with any order, direction or instruction issued by the Board under section 119; or (d) the order has not been passed in accordance with any decision which is prejudicial to the assessee, rendered by the jurisdictional High Court or Supreme Court in the case of the assessee or any other person. (2) No order shall be made under sub-section (1) after the expiry of two years from the end of the financial year in which the order sought to be revised was passed. (3) Notwithstanding anything contained in sub-section (2), an order in revision under this section may be passed at any time in the case of an order which has been passed in consequence of, or to give effect to, any finding or direction contained in an order of the Appellate Tribunal, National Tax Tribunal, the High Court or the Supreme Court. Explanation.-In computing the period of limitation for the purposes of sub-section (2), the time taken in giving an opportunity to the assessee to be reheard under the proviso to section 129 and any period during which any proceeding under this section is stayed by an order or injunction of any court shall be excluded. This provision has come for in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ords: A bare reading of this provision makes it clear that the prerequisite to the exercise of jurisdiction by the Commissioner suo moto under it, is that the order of the Income Tax Officer is erroneous in so far as it is prejudicial to the interests of the Revenue. The Commissioner has to be satisfied of twin conditions, namely, (i) the order of the Assessing Officer sought to be revised is erroneous: and (ii) it is prejudicial to the interests of the Revenue. If one of them is absent if the order the Income Tax Officer is erroneous but is not prejudicial to the Revenue to if it is not erroneous but is prejudicial to the Revenue-recourse cannot be had to section 263(1) of the Act. There can be no doubt that the provisions 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 acts or an incorrect application of law will satisfy the requirements of the order being erroneous. In the same category fall orders passed without applying the principles of natural justice or without application of mind. The phrase 'prej ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... udgment of the Madras High Court in ' Ramchari (G.R.) and Co. v. Commissioner of Income Tax [(1961) 41 ITR 142] and pointed out that in the said case, the High Court had held that privilege of valuing the opening and closing stocks in a consistency manner is available only to continuing business and that it cannot be adopted where the business comes to an end and the stock-in-trade has to be disposed of in order to determine the exact position of the business on the date of closure. The Madras High Court has also held that the partnership concern which dissolves its business in the course of the accounting year forms a close parallel to the case of a firm which goes into liquidation. In both the cases all the assets and stock-in-trade of business will have to be sold and their value realised for the purposes of ascertaining the true state of the profits to losses of the business. Following discussion of this Court in ALA Firm's case, in the aforesaid process, becomes relevant: Even in a continuing business, the valuation at market value is permissible only when it is less than cost; it is not quite certain whether the rules permit an assessee if he so desires to va ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Income Tax, West Bengal' [1953 (24) ITR 481] as follows: It is wrong to assume that the valuation of the closing stock at market rate has for its object, the bringing into charge any appreciation in the value of such stock. The true purpose of crediting the value of unsold stock is to balance the cost of those goods entered on the other side of the accounts at the time of their purchase, so that the cancelling out of the entries relating to the same stock from both sides of the account would leave only the transaction on which there have been actual sales in the course of the year showing the profit or loss actually realized on the year trading. As pointed out in paragraph 8 of the Report of the Committee Financial Risks attaching to the holding of the Trading Stocks 1919, as the entry for stock which appears in a trading account is merely intended to cancel the charge for the goods purchased which have not been sold, it should necessarily represent the cost of the goods. If it is more or less than the cost, then the effect is to state sold at the incorrect figure... From this rigid doctrine one exception is very generally recognized on prudential grounds and is now full ..... 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