S.Rajagopal, Coimbatore vs Assessee

अपीलाथ क ओर से / Appellant by : Shri. T. Banusekar, C.A., यथ क ओर से / Respondent by : Shri. G.T. Venkateswara Rao, CIT

सन ु वाई क तार ख/Date of hearing : 18.03.2015. घोषणा क तार ख /Date of Pronouncement : 27.03.2015.

आदे श / O R D E R

PER CHANDRA POOJARI, ACCOUNTANT MEMBER

This appeal by the assessee is directed against the order of

the Commissioner of Income Tax -I, dated 26.03.2014 passed u/s.263

of the Income Tax Act.

:- 2 -: I.T.A.No1647/Mds/2014.

2. The facts of the case are that the assessment in this case was

completed u/s.143(3) on 30.11.2011. Later on observing all the

assessment records, the Commissioner of Income Tax was of the

opinion that there was certain errors in the assessment order which

are prima facie prejudicial to the interest of the Revenue as such he

issued notice u/s. 263 dated 24.01.2014. According, to the

Commissioner of Income Tax, the assessee has taken loans from

banks and out of which made bank deposits to the tune of

D3,09,76,817/- and this was not utilized for the purpose of business

and only a sum of D2,47,98,393/- was used for the purpose of

business. The interest to the tune of D48,39,309/- was incurred by the

assessee on the total loan of D5,57,75,210/-. Since the assessee used

a part of loan for making deposits in bank, entire claim of interest of

D48,39,309/- cannot be allowed as business expenses. Accordingly, he

directed the Assessing Officer to disallow the portion of interest on the

borrowed capital which was not used for the purpose of business.

Against this, the assessee preferred this appeal before us.

3. We have heard both the parties and perused the material on

record. We have carefully considered the rival submissions in the light

of material placed before us and also gone through all the judgments

cited by the parties before us. First we take up the legal issue with :- 3 -: I.T.A.No1647/Mds/2014.

reference to the jurisdiction of invoking the provisions of section 263 of

the Act by the learned CIT. The scheme of the IT Act is to levy and

collect tax in accordance with the provisions of the Act and this task is

entrusted to the Revenue. If due to erroneous order of the assessing

officer, the Revenue is losing tax lawfully payable by a person, it will

certainly be prejudicial to the interest of the revenue. As held in the

case of Malabar Industries Co. Ltd., Vs. CIT (243 ITR 83 (SC), the

Commissioner can exercise revision jurisdictional u/s 263 if he is

satisfied that the order of the assessing officers sought to be revised is

(i)erroneous; and also (ii) prejudicial to the interests of the revenue.

The word 'erroneous' has not been defined in the Income Tax Act. It

has been however defined at page 562 in Black's Law Dictionary

(seventh Edition) thus; ' erroneous, adj. Involving error, deviating from

the law'. The word 'error' has been defined at the same page in the

same dictionary thus: 'error No. 1 : A psychological state that does not

conform to Objective reality; a brief that what is false is true or that

what is true is false'.

3.1 At page 649/650 in P. Ramanatha Aiyer's Law Lexicon

Reprint 2002, the word 'error' has been defined to mean-

Error: A mistaken judgement or deviation from the truth in matters of fact, and from the law in matters of :- 4 -: I.T.A.No1647/Mds/2014.

judgement 'error' is a fault in judgement, or in the process or proceeding to judgement 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 judgement, or in the conduct, but a fault lies in the will or intention."

3.2 At page 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 the shame or ridicule which is occasioned by a blunder, who can counteract. Strictly speaking, Hallucination is an illusion of the perception, a phantasm of the imagination. The one comes of disordered vision, the other of discarded imagination. It is extended in medical science to matters of sensation, whether there is no corresponding cause to produce it. In its ordinary use it denotes an unaccountable error in judgement or fact, especially in one remarkable otherwise for accurate information and right decision. It is exceptional error or mistake in those otherwise not likely to be deceived."

3.3 In order to ascertain whether an order sought to be revised

under Section 263 is erroneous, it should be seen whether it suffers

from any of the aforesaid forms of error. In our view, an order sought

to be revised under Section 263 would be erroneous and fall in the

aforesaid category of "errors" if it is, inter alia, based on an incorrect

assumption of facts or an incorrect application of law or non-

:- 5 -: I.T.A.No1647/Mds/2014.

application of mind to something which was obvious and required

application of mind or based on no or insufficient materials so as to

affect the merits of the case and thereby cause prejudice to the

interest of the revenue.

3.4 Section 263 of the Income-tax Act seeks to remove the

prejudice caused to the revenue by the erroneous order passed by the

Assessing Officer. It empowers the Commissioner to initiate suo moto

proceedings either where the Assessing Officer takes a wrong decision

without considering the materials available on record or he takes a

decision without making an enquiry into the matters, where such

inquiry was prima facie warrant ed. The Commissioner will be well

within his powers to regard an order as erroneous on the ground that

in the circumstances of the case, the Assessing Officer should have

made further inquiries before accepting the claim made by the

assessee in his return. The reason is obvious. Unlike the Civil Court

which is neutral in giving a decision on the basis of evidence produced

before it, the role of an Assessing Officer under the Income-tax Act is

not only that of an adjudicator but also of an investigator. He cannot

remain passive in the face of a return, which is apparently in order but

calls for further enquiry. He must discharge both the roles effectively.

In other words, he must carry out investigation where the facts of the :- 6 -: I.T.A.No1647/Mds/2014.

case so require and also decide the matter judiciously on the basis of

materials collected by him as also those 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 Section 143(3) of the Income-tax Act. In other words,

the Assessing Officer was statutorily required to make the assessment

under section 143(3) after scrutiny and not in a summary manner as

contemplated by Sub-section (1) of Section 143. Bulk of the returns

filed by the assessees across the country is accepted by the

Department under Section 143(1) without any scrutiny. Only a few

cases are picked up for scrutiny. The Assessing Officer 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 Assessing Officer

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 Assessing

Officer is not expected to put blinkers on his eyes and mechanically

accept what the assessee claims before him. It is his duty to ascertain :- 7 -: I.T.A.No1647/Mds/2014.

the truth of the facts stated and the genuineness of the claims made in

the return when the circumstances of the case are such as to provoke

inquiry. Arbitrariness in either accepting or rejecting the claim has no

place. The order passed by the Assessing Officer becomes erroneous

because an enquiry has not been made or genuineness of the claim

has not been examined where the inquiries ought to have bee n made

and the genuineness of the claim ought to have been examined and

not because there is anything wrong with his order if all the facts

stated or claim mad e therein are assumed to be correct. The

Commissioner may consider an order of the Assessing Officer to be

erroneous not only when it contains some apparent error of reasoning

or of law or of fact on the face of it but also when it is a stereo-typed

order which simply accepts what the assessee has stated in his return

and fail s to make enquiries or examine the genuineness of the claim

which are called for in the circumstances of the ca se. In taking the

aforesaid view, we are supported by the decisions of the Hon'ble

Supreme Court in Rampyari Devi Saraogi v. CIT (67 ITR 84) (SC),

Smt. Tara Devi Aggarwal v. CIT (88 ITR 323) (SC), and Malabar

Industrial Co. Ltd's case ( 243 ITR 83) (SC).

3.5 In Malabar Industrial Co. Ltd. case the Hon'ble Supreme Court

has held as under:

:- 8 -: I.T.A.No1647/Mds/2014.

"There can be no doubt that the provision 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 facts or an incorrect application of law will satisfy the requirement of the order being erroneous. In the same category fall the orders passed without applying the principles of natural justice or without application of mind. In our humble view, arbitrariness in decision- making would always need correction regardless of whether it causes prejudice to an assessee or to the State Exchequer. The Legislature has taken ample care to provide for the mechanism to have such prejudice removed. While an assessee can have it corrected through revisional jurisdiction of the Commissioner under Section 264 or through appeals and other means of judicial review, the prejudice caused to the State Exchequer can also be corrected by invoking revisional jurisdiction of the Commissioner under Section 263. Arbitrariness 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 Assessing Officer. It is the duty of the Assessing Officer to adequately protect the interest 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 Commissioner, 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 v. 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 passed by it while exercising quasi-judicial functions, would no doubt facilitate the exercise of its jurisdiction by the appellate or supervisory authority. But the other considerations, referred to above, which have also weighed with this Court in holding that an administrative authority must record reasons for its decision are of no less significance. These considerations show that the recording of reasons by an administrative authority serves a salutary purpose, namely, it excludes chances or arbitrariness and ensures a degree of fairness in the process of decision- making. The said purpose would apply equally to all decisions and its application cannot be confined to decisions which are subject to appeal, revision or judicial review. In our opinion, therefore, the requirement that reasons be recorded should govern the decisions of an administrative authority exercising quasi-judicial functions irrespective of the fact may, however, be added that it is not required that the reasons should be as elaborate :- 9 -: I.T.A.No1647/Mds/2014.

as in the decision of a court of law. The extent and nature of the reasons would depend on particular facts and circumstances. What is necessary is that the reasons are clear and explicit so as to indicate that the authority has given due consideration to the points in controversy. The need for recording of reasons is greater in a case where the order is passed at the original stage. The appellate or revisional authority, if it affirms such an order, need not give separate reasons if the appellate or revisional authority agrees with the reasons contained in the order under challenge."

3.6 Similar view was earlier taken by the Hon'ble Supreme Court

in Siemens Engg. & Mfg. Co. Ltd. v. Union of India AIR 1976 SC 1785.

It is settled law that while making assessment on assessee, the ITO

acts in a quasi- judicial capacity. An assessment order is amenable to

appeal by the assessee and to revision by the Commissioner under

Sections 263 and 264. Therefore, a reasoned order on a substantial

issue is legally necessary. It was held that orders, which are subversive

of the administration of revenue, must be regarded as erroneous and

prejudicial to the interests of the revenue. If the Assessing Officers are

allowed to make assessments in an arbitrary manner, the

administration of revenue is bound to suffer. If without discussing the

nature of the transaction and materials on record, the Assessing

Officer 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. As a matter of fact such orders are prejudicial to the interests of :- 10 -: I.T.A.No1647/Mds/2014.

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.

3.7 In view of the foregoing, it can safely be said that an order

passed by the Assessing Officer becomes erroneous and prejudicial to

the interests of the Revenue under Section 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 category fall orders passed without applying the principles of

natural justice or without application of mind. (iii) The order passed by

the Assessing Officer is a stereotype order which simply accepts what

the assessee has stated in his return or where he fails to make the

requisite enquiries or examine the genuineness of the claim which is

called for in the circumstances of the case.

4. In this present case, the Assessing Officer completed

assessment u/s.143(3) of the Income Tax Act on 30.11.2011 which

means that the Assessing Officer applied his mind and came to the

conclusion that the assessee had properly accounted interest :- 11 -: I.T.A.No1647/Mds/2014.

payments in his books of accounts. After he came to the conclusion

that the whole expenditure incurred by the assessee towards interest

payment of D48,39,309/-, he allowed the same as business

expenditure. For this conclusion reached by the Assessing Officer, the

Commissioner of Income Tax cannot find fault and he cannot impose

his view on the Assessing Officer. The Assessing Officer has taken one

possible view. The view taken by the Assessing Officer cannot be

considered as erroneous if the income from interest on 'fixed deposit'

is considered as income from other sources, than the interest incurred

by the assessee on borrowings used for making deposits is to be

allowed as expenditure. Further, if there is any loss under the head

"Income from other sources" it is to be set off against income from

any other head of Income as per provisions of section 71 of the Act.

Then also, there is no revenue loss to the department. From this point

of view, the order passed by the Assessing Officer cannot be prejudice

to the interests of Revenue. Being so, considering the facts and the

circumstances of the case, in our opinion, the Commissioner of Income

Tax is not justified in exercising his jurisdiction u/s. 263 of the Act and

the order of the Commissioner of Income Tax passed u/s. 263 is

quashed.

:- 12 -: I.T.A.No1647/Mds/2014.

5. In the result, the appeal filed by the assessee in ITA

No.1647/Mds/2014 is allowed.

Order pronounced on Friday, the 27th of March, 2015, at Chennai.

Sd/- Sd/- (च ला नागे !साद ) (चं पज ू ार ) (CHALLA NAGENDRA PRASAD) (CHANDRA POOJARI) या"यक सद य/ JUDICIAL MEMBER लेखा सद य/ ACCOUNTANT MEMBER

चे#नई/Chennai. $दनांक/Dated:27.03.2015.

KV

आदे श क त'ल(प अ)े(षत/Copy to: 1. अपीलाथ /Appellant 2. यथ / Respondent 3. आयकर आय+ ु त (अपील)/CIT(A) 4. आयकर आय+ ु त/CIT 5. (वभागीय त न.ध/DR

6. गाड फाईल/GF.