Shervani Industrial Syndicate … vs Deputy Commissioner Of Income Tax on 27 May, 2005

ORDER

1. The appeal has been directed by the assessee against the order under Section 263 of the Act, dt. 27th Feb., 2004, passed by the learned CIT, whereby he has cancelled the “regular assessment” order dt. 28th March, 2002 (as had been passed by the Asstt. CIT, Range-2, Allahabad), with the direction to the AO “to reframe the assessment order after proper scrutiny and investigation and also after giving the assessee a reasonable opportunity of being heard on all the issues”.

2. The appeal has been preferred on the following grounds :

1. Because the learned CIT has erred in law and on facts in holding that the AO has failed to make proper enquiry into the facts of the case and on that ground in further holding that the regular assessment order dt. 28th March, 2002, passed by the Asstt. CIT, Range-11,. Allahabad, is “erroneous insofar as it is prejudicial to the interest of Revenue” and in cancelling the assessment with the direction to the AO to reframe the assessment order.

2. Because the assessment order dt. 28th March, 2002, as had been passed by the Asstt. CIT, Range-II, Allahabad, accorded fully with the provisions of law (except to the extent the same has been contested in appeal before the learned first appellate authority) and the learned CIT could not have held the said order to be “erroneous and prejudicial to the interest of Revenue” within the meaning of Section 263 in cancelling the assessment as a whole on that ground.

3. Because all such inquiries as were called for on the facts and circumstance of the case, on all the issues as had been referred to in the notice under Section 263(1) and the regular assessment order dt. 28th March, 2002, could not have been faulted with on that reasoning and ground so as to vest with the learned CIT to assume his revisionary jurisdiction and to cancel the assessment as a whole for being reframed.

4. Because in any case, in response to the notice under Section 263, the appellant had made detailed submissions on each and every “ground” that had been taken up in the said notice and for the reason that the learned CIT has failed to carry his statutory obligation to deal and decide all such issues, the order under Section 263 stands wholly vitiated and the same deserves to be quashed.

5. Because the learned CIT has erred in holding that, in response to the notice under Section 263 :

(a) the appellant had touched upon legal aspect of the case without bringing all the relevant facts on record;

(b) on remaining issues ‘no light has been thrown’;

(c) the silence of the appellant proves that the decision taken to initiate action under Section 263 was justified.

6. Because the findings as aforesaid are wholly misconceived and even inconsistent with the material and information on record and assumption of jurisdiction under Section 263 on such misconception has rendered the impugned order dt. 27th Feb., 2004, as vitiated in law.

7. Because wholly without prejudice to the contentions raised in the foregoing grounds, the learned CIT should have, inter alia, held that :

(a) the second revised return filed on 30th Oct., 2001, was a valid return;

(b) income shown in the said return was liable to be treated as accepted by the AO as no notice under Section 143(2) had ever been issued in relation to the same;

(c) no direction for reframing the assessment could have been given owing to the reason that mandatory requirement of issuing notice under Section 143(2) could not have been fulfilled at this stage.

8. Because the setting aside of the assessment that had been made in pursuance of the return dt. 30th Oct., 2001, was an exercise in futility and such an order is liable to be declared as null and void.

9. Because the order appealed against is contrary to facts, law and principles of natural justice.

3. Briefly, the facts of the case are that the assessee is a public limited company. For the asst. yr. 1999-2000, it had filed a return on 30th Dec, 1999, under Section 139(1) of the Act, showing an income of Rs. 30.13 crores (rounded-up), after including therein long-term capital gain (including the long-term capital gain as had been worked out in relation to the receipt of Rs. 55 crores from M/s Wilkinson Sword (India) Limited in lieu of transfer of “intellectual property assets” as per the agreement dt. 25th Nov., 1998). The said return was revised on 30th Nov., 2000 (hereinafter referred to as second return), to make an additional claim for expenditure relating to this year, but paid in the succeeding year. Thereafter, a second revised return (hereinafter referred to as third return) was filed on 30th Oct., 2001. In the third return, the assessee excluded long-term capital gain arising out of the transaction with M/s Wilkinson Sword (India) Limited. In the letter dt. 29th Oct., 2001, accompanying the said return, it was claimed that “intellectual property assets” as had been transferred by the assessee, in the nature of ‘trademarks’, trade names, etc., as per the agreement dt. 25th Nov., 1988 itself (supra), which came within the ambit of taxation under the head ‘Capital gain’ w.e.f. 1st April, 2002, by virtue of insertion of the term ‘trademark’ or ‘brand name’ in Section 55(2)(a) of the Act. Therefore, the long-term capital gain in relation to the transfer of ‘trademark’ should be excluded from the overall computation of income, as stood included in the original return as well as in the first revised return (second return). As per the said letter, it was also contended that in any case computation of income (as shown in the original return as well as in the second return) was liable to be corrected by excluding the effect of assessee’s transaction with Wilkinson Sword (India) Ltd., so that the computation of taxable income may be brought in conformity with the provisions of law as existing at the relevant time. As the contents of the said letter have got a very vital bearing on the issues involved in this appeal, the same are reproduced hereunder:

Dated : 29th Oct., 2001

The Jt. CIT

Range-I

Allahabad

Sir,

Sub : Asst. yr. 1999-2000-Filing of revised return.

In the aforesaid matter we have to submit as under :

2. During the year under consideration we had sold ‘Intellectual property assets’ to M/s Wilkinson Sword (India) Limited in terms of agreement dt. 25th Nov., 1998; the ‘Intellectual property assets’ being defined in the said agreement itself as under :

2.1.1 Subject to the provisions of this agreement, on the closing date, the seller shall sell, transfer, convey, assign and deliver to the buyer and the buyer shall purchase, acquire and accept from the seller, free from encumbrances, all rights, title and interests of the seller in and to the following assets (herein individually and collectively the ‘Intellectual property assets’);

(a) all trademarks, trade names, house marks, devices and brand names owned by or applied for registration or registered in the name of the seller under the mark and name “GEEP” including all secondary and subsidiary marks thereof and used in the business together with the goodwill of the business connection with which the GEEP trademarks, trade names and brand names are used, short particulars whereof are given in Sch. A hereto (herein the ‘GEEP trademarks’);

(b) all literary and artistic works and other works and materials amounting to copyrights owned and/or used by the seller in the business and all benefits and advantages accruing therefrom, short particulars whereof are given in Sch. B hereto (herein the ‘GEEP copyrights’);

(c) all designs owned and/or used by the seller in, or in relation to, the business and all benefits and advantages accruing therefrom, short particulars of such designs are given in Sch. C hereto (herein the ‘GEEP designs’)’

3. In lieu of the said sale of ‘Intellectual property assets’ we had received sums aggregating Rs. 55 crores which had been shown under the head ‘Exceptional items’ in Sch. 15 forming part of the P&L a/c for the year ending on 31st March, 1999, which is already a part of the return filed under Section 139(1) on 30th Dec, 1999.

4. In the return so filed by us under Section 139(1) and so also in the first revised return filed on 30th Nov., 2000, i.e., within the period specified under Section 139(5), the said sum had been offered for taxation by way of long-term capital gain which worked out to Rs. 29,99,34,132 as per the working given in the schedule attached with the statement showing computation of income (filed alongwith the return on 30th Dec, 1999).

5. We have now been advised that the said consideration of Rs. 55 crores for transferring the trademarks, trade names, etc., as got associated with our business as had been carried on over a number of decades did not fall in the category of taxable gains; the basis of such an advice being the express provision which got inserted in Section 55(2)(a) by the Finance Act, 2001.

6. It is further submitted that the said amendment was brought in terms of Clause (32) of the Finance Bill, 2001, true import of which was explained in the memorandum of notes on clauses which reads as under :

‘Clause 32 seeks to amend Section 55 of the IT Act relating to meaning of the expressions ‘adjusted’, ‘cost of improvement’ and ‘cost of acquisition’.

Under the existing provision contained in Clause (a) of Sub -section (2), the cost of acquisition in relation to a capital asset, being goodwill of a business or a right to manufacture, produce or process any article or thing, tenancy rights, stage carriage permits or loom hours, shall be taken to be the purchase price in case the asset is purchased by the assessee from a previous owner and in any other case such cost shall be taken to be nil.

It is proposed to amend Clause (a) of Sub -section (2) to provide that the cost of acquisition in relation to a trademark or brand name associated with a business shall also be taken to be the purchase price in case the asset is purchased from a previous owner and nil in any other case.

This amendment will take effect from 1st April, 2002 and will, accordingly, apply in relation to the asst. yr. 2002-03 and subsequent years.’

7. As the omission to claim exemption of the said sum of Rs. 55 crores from taxation could be discovered after the position was clarified in terms of the notes on clauses as reproduced above, the assessee begs to submit herewith a revised return showing a business loss of Rs. 1,66,70,797 as has been worked out in the following manner :

Rs.

Business loss for the current year             1,98,56,976
 

Deduct :
 Short-term capital gain arising out of sale of
depreciable assets of marketing division and The
Mysore unit of the assessee-company (as per the
computation given in the annexure to the statement
of total income filed alongwith the return
on 30th Dec, 1999)                               31,86,179
                                                 ----------
Net loss to be carried forward for being set
off in the succeeding years as per the
provisions of law.                              1,66,70,797
                                               -------------
 

8. As a result of the revision of return in the aforesaid manner, as per the working given in the statement accompanying the revised return that is being filed herewith, the assessee-company has become entitled to a refund of Rs. 7,89,48,801, for which a refund voucher may kindly be issued at your earliest convenience.
 

9. In any case, the computation of income as has already been submitted by us in the return/revised return, has to be necessarily corrected so as to bring the same in conformity with the provisions of the Act, in view of the decision of the Hon'ble Supreme Court in the case of CIT v. Mahalaxmi Sugar Mills Co. Ltd , wherein the Hon'ble Court observed as under :

‘In the second place, there is a duty cast on the ITO to apply the relevant provisions of the Indian IT Act for the purpose of determining the true figure of the assessee’s taxable income and the consequential tax liability. Merely because the assessee fails to claim the benefit of a set off, it cannot relieve the ITO of his duty to apply Section 24 in an appropriate case. (P. 928)

10. In case any clarification and/or information is required to be submitted we request your good self to kindly specify the same so as to enable us to do the needful. (Emphasis, italicised in print, added)

Yours faithfully,

For Shervani Industrial Syndicate Limited

Sd/-

Tahir Hasan

Whole Time Director

4. During the course of “regular assessment” proceedings, the AO took due note of the second revised return as well as above referred letter dt. 29th Oct., 2001, whereby the claim for exemption for capital gain was made and even made further queries from the assessee. After that, he accepted the assessee’s claim, after recording the following findings in this respect :

6. Regarding taxability of sale consideration against sale of intellectual property asset the assessee-company vide its letter dt. 27th March, 2002, submitted that the same is not taxable in the year under assessment because of detailed reason mentioned in its letter dt. 29th Oct., 2001, which is on record. In support of its contention the assessee also filed photocopy of case law of CIT v. B.C. Srinivasa Shetty . On perusal of assessee’s said letter, agreement Section 55(2a) of the IT Act, 1961 and referred case law of Hon’ble Supreme Court, no taxability on this receipt is charged.

5. The AO completed the “regular assessment” accordingly vide order dt. 28th March, 2002.

6. The regular assessment order as aforesaid was found to be erroneous and prejudicial to the interests of the Revenue by the learned CIT, whereupon he issued a very detailed show-cause notice dt. 17th Oct., 2003. The grounds for assumption of jurisdiction under Section 263, as have been summarized by us with the consent of the parties, are as under :

(i) The second revised return (third return) wherein the claim for exclusion of capital gain was made for the first time, was illegal and non est in the eye of law, as it had been filed beyond the expiry of a period of one year from the end of the relevant assessment year;

(ii) The assessee’s claim for exemption from capital gain (as made for the first time in the third return) could not have been considered by the AO, much less allowed;

(iii) In any case, the AO had failed to make timely enquiries from Wilkinson Sword (India) Limited (later on merged with Gillette India Ltd.) about the nature of payment made by them to the assessee-company and the claim had been allowed without having full knowledge about the nature of “assets” which was subject-matter of transfer;

(iv) The disallowances under the head “commission” and sale promotion expenses were inadequate looking to the observations made by the AO about the quantum of expenses (claimed as deduction) and unverifiable nature thereof, as contained in the assessment order (supra);

(v) No enquiries were made by the AO from the debtors and creditors inspite of an observation in the audit report that the balances in such accounts were subject to confirmation by the respective parties.

7. As there was a change in the incumbency, the succeeding CIT issued another notice dt. 14th Jan., 2004. Before him a detailed submission dt. 22nd Jan., 2004, was made by the assessee on all the issues as aforesaid, including the validity of third return. In relation to the taxability of consideration received from Wilkinson Sword (India) Ltd., it was specifically submitted that the sum of Rs. 55 crores had been received by the assessee, on transfer of “Intellectual property asset” which represented “trademark” or “brand name” and at any stage, there was no ambiguity about the nature of “Asset” as the same stood defined in the agreement dt. 25th Nov., 1988 itself. As Section 55(2)(a) of the Act was amended w.e.f. 1st April, 2002, only so as to provide that ‘cost of acquisition’ in case of “trademark” and “brand name” associated with the business of the assessee, would be treated as Nil, for the purposes of computation of capital gain under Section 45 of the Act. Therefore, the sum in question could not have been subjected to taxation in the asst. yr. 1999-2000 in view of the principle laid down by the apex Court in the case of CIT v. B.C. Srinivasa Setty, (supra). No error of law had been committed by the AO by granting the said exemption in the assessment order dt. 28th March, 2002, so far as it contained exclusion of long-term capital gain in relation to this “property”. On other issues also, it was submitted that after due examination, the AO had taken a conscious view about the extent to which disallowances should be made and such an opinion could not have been substituted by the learned CIT under Section 263 of the Act , by his own opinion.

8. The learned CIT did not express any opinion of his own, on any of the issues, in the order dt. 27th Feb., 2004, even though the assessee had made detailed submissions on all the issues in response to notice under Section 263. He just reproduced the notice under Section 263 dt. 17th Oct., 2003 (supra) and the assessee’s submissions dt. 22nd Jan., 2004 and cancelled the assessment order dt. 28th March, 2002. Such order, as a whole, apart from the ‘reproductions’ as have been referred to above, is reproduced hereunder:

I have given a careful consideration to the matter. I find that Mr. Garg, advocate, has made submission only on one issue and the issue relates to the capital gains. Here, he has touched upon the legal aspect of the case without bringing all the relevant facts on record. So long as other issues are concerned, no light has been thrown at all. The silence of Mr. Garg oh other issues only proves that the decision taken to initiate action under Section 263 was justified. As the AO has failed to make proper inquiry into the facts of the case, only alternative left before me is to cancel the assessment order for fresh adjudication.

In view of the facts and circumstances of the case, as discussed above, I fully agree with my learned predecessor that the assessment order dt. 28th March, 2002, passed under Section 143(3) is erroneous insofar as it is prejudicial to the interest of the Revenue. I, therefore, cancel the assessment order and direct the AO to reframe the assessment order after proper scrutiny and investigation and also after having given the assessee reasonable opportunity of being heard on all the issues.

Aggrieved by the said order, the appeal has been filed by the assessee on a number of grounds as have been noted by us in para 2 above.

9. Shri S.K. Garg, the learned Counsel for the assessee, raised a preliminary objection to the very validity of assumption of jurisdiction by the learned CIT (in relation to the regular assessment order dt. 28th Feb., 2004). The learned CIT, who occupies supervisory jurisdiction under the IT Act, can interfere with an order passed by an “AO”, only if such an order (passed by the AO) is found to be both erroneous as well as prejudicial to the interests of the Revenue, as a result of enquiries made by him. In this respect, apart from referring to the provisions of law, the learned Counsel referred to the decision of Hon’ble Allahabad High Court in the case of CIT v. Late Sunder Lal Through Bankey Behati Lal and our attention was specifically drawn to the following passage :

It will be seen that the CIT can exercise his power under this section only in case he considers the order passed by the ITO to be ‘prejudicial to the interest of the Revenue’. The revisional power conferred on the CIT is undoubtedly a quasi-judicial power [See Dwarka Nath v. ITO and Anr.. ]. Although the case deals with the nature of the powers conferred on the CIT under Section 33A(2) of the Act, we see no difference in that power and the one exercised under Section 33B of the Act. This being so, he must give his own reasons for being satisfied that the order passed by the ITO is prejudicial to the interest of the Revenue. This conclusion is further strengthened by the use of the words ‘if he considers used in the sub-section which postulates a scrutiny by the CIT of all the relevant facts holding that the order is prejudicial to the interest of the Revenue.

As the stipulated enquires have not been made by the learned CIT and he did not even make any adverse comment on merits of the assessee’s Explanation/objection to the proposal under Section 263 of the Act as is contained in the detailed submissions dt. 22nd Jan., 2004 (copy appearing at pp. 10 to 18 of the paper book), his order is wholly vitiated. Without dealing with and displacing the assessee’s objection, the learned CIT interfered with the finality of assessment order dt. 28th March, 2002 and for this reason alone, the order passed by him under Section 263 of the Act suffers from an incurable infirmity.

10. Further, in terms of the abovereferred submissions dt. 22nd Jan., 2004, it was contended before the learned CIT himself that the assessment order dt. 28th March, 2002, was ‘no assessment order’ as the same had been passed by the AO without complying with the mandatory requirement of serving on the assessee a notice under Section 143(2) of the Act. Elaborating further, he submitted that after second revised return had been filed on 30th Oct., 2001, no notice under Section 143(2) was issued. Therefore, the assessment order dt. 28th March, 2002, itself was non est and for this reason, revisionary jurisdiction could not have been exercised. Reliance in this regard was placed on the decision of the Allahabad Bench of Tribunal in the case of Smt. Saraswati Devi in ITA No. 975/Alld/1996, copy appearing at pp. 29 to 35 of the paper book relevant portion being reproduced hereunder :

7.1 The question that now arises for consideration is whether the learned CIT could direct the AO to frame the assessment afresh under the provisions of the IT Act, 1961. It is here that the nature of infirmity in the notice issued by the AO under Section 143(2), in consequence of which the assessment was made, becomes relevant. No doubt, basically, the provisions of Section 143(2) are procedural in nature but from the language and the context of Section 143(2), it is clear that in the eventualities specified in the section, a notice is mandatory and not a mere formality. In the provisions of Section 143(2), as they stood before substitution by the Direct Tax Laws (Amendment) Act, 1989, w.e.f. 1st April, 1989, no time-limit was prescribed for issue of a notice. It was in the context of the pre-amendment provisions that, following the ratio of decisions of the Allahabad High Court in Sant Baba Mohan Singh v. CIT and J&K High Court in Rattan Lal Tiku v. CIT , the Rajasthan High Court in the decision in CIT v. Gyan Piakash Gupta (1987) 165 ITR 501 (Raj) relied upon by the learned Departmental Representative, had held that an assessment passed without issuing notice under Section 143(2) of the Act, was invalid but the invalidity was not of such nature that could not be cured. However, by the Direct Tax Laws (Amendments) Act, 1987, a proviso was introduced to section issuing notice under Section 143(2) of the Act, was invalid but the invalidity was not of such nature that could not be cured. However, by the Direct Tax Laws (Amendment) Act, 1987, a proviso was introduced to Section 143(2) which, after the amendment w.e.f. 1st Oct., 1991, provided that the said notice cannot be served on the assessee after the expiry of 12 months from the end of the month in which the return is furnished. The said proviso imposed a statutory fetter upon the AOs and controlled their jurisdiction. The effect of the proviso is that a notice under Section 143(2) if issued after the expiry of the period of limitation would be bad in law. In the present case, the right of the AO to issue notice under Section 143(2) had extinguished in law much before it was issued by him. Once a right has been extinguished under the law in force, it cannot be revived. Therefore, in completing the fresh assessment in pursuance of the direction of the learned CIT as per the impugned order, no notice under Section 143(2) could be legally issued by the AO The order of the learned CIT insofar as his direction to reframe the assessment on the present proceedings is concerned, therefore, needs to be quashed. We order accordingly.

11. Another plea of the learned Counsel was that the learned CIT in the notice issued under Section 263(1) has taken a view that the third return (second revised return) was not a valid return and, therefore, the assessee’s claim for exemption Inform capital gain in relation to a sum of Rs. 55 crores [as had been received from M/s Wilkinson Swords (India) Limited], as had been made for the first time in the third return (second revised return), could not have even been looked, into, much less allowed by the AO, while completing the assessment. Such a view was erroneous. The appellant had filed original “return” on 30th Dec, 1999, which was a “return” under Section 139(1) and as per the provisions contained in Section 139(5), such a return could have been revised “before the expiry of one year from the end of the relevant assessment year or before the completion of assessment, whichever is earlier”. In the present case, the regular assessment had been made on 28th Feb., 2002. Therefore, the return filed originally on 30th Dec, 1999, under Section 139(1) could have been revised by 31st March, 2001. In the meantime, the assessee had revised the original return on 30th Nov., 2000, i.e., prior to the expiry of a period of one year from the end of the relevant assessment year. The law is that once a valid revised return is filed, it has the effect of substituting the return filed originally under Section 139(1). The provisions of Section 139(5) as are effective from 1st April, 1989, do not curtail the right of an assessee to file a second revised return at any time, before completion of assessment, once it is found that the original return had been validly revised. The principle is well laid down by the decision of Hon’ble Allahabad High Court in the case of Niranjan Lal Ram Chandra v. CIT . Therefore, the time-limit available to the assessee to file another return (revising the return filed on 30th Nov., 2000), was available and the AO had validly taken cognizance of the said return, before completing the assessment on 28th Feb., 2002.

12. In any case, even if the third return was not to be treated as a valid return, statement showing the computation of income as appended thereto was liable to be treated as corrected computation of income. In fact, it was so pleaded specifically vide para 9 of the letter dt. 29th Oct., 2001 (copy available on pp. 19 to 21 of the paper book as has been reproduced also by us in para 3 above). Such a corrected computation of income, is distinguishable from a revised return and was liable to be taken into account by the AO before completing the assessment, as held by the Hon’ble Allahabad High Court in the case of Gopal Das Parshottam Das v. CIT (1941) 9 ITR 130 (All). In case an assessee, under ignorance of law, has offered a sum as a taxable income, he can seek correction of the same. The AO is duty-bound, not only to look into such claim but also to accept the same if the claim was in accordance with the provisions of law. In the present case, the subject-matter of ‘transfer’ was ‘trademark’ or ‘brand name’, which undisputedly did not have any ‘cost’. Transfer of such an asset could not have been subjected to taxation under the head ‘Long-term capital gain’, as per the principle laid down by the Hon’ble Supreme Court in the case of CIT v. B.C. Shnivasa Setty (supra). It was only w.e.f. 1st April, 2002, that the legislature incorporated amendment in. Section 55(2)(a) which has the effect of laying down that cost of acquisition of “trademark” ‘brand name’ at Nil, for the purposes of computation of capital gain and the transaction came within the purview of computational provisions of Section 45. This position has been amply clarified in the ‘memorandum of notes’ on clauses of the Finance Bill, 2001, also. So, from the asst. yr. 2002-03, the ‘transfer’ of ‘trademark’ or ‘brand name’ attracts taxability under the head ‘Capital gain’. Since the ‘transfer’ took place in the asst. yr. 1999-2000, the provisions relating to computation of ‘capital gain’ were not applicable and the assessee’s claim for exemption from capital gain was rightly allowed.

13. It was agreed that the AO even at his own was obliged to take note of correct position of law and collect taxes, by passing an order only in accordance with the provisions of law. Even if it is held that the third return filed on 30th Oct., 2001, was not a valid return, although not admitted by the assessee, the AO in due discharge of his duty, was liable to take into account the corrected computation of income and accept the same, if it was in accordance with the provisions of law. If the assessee’s contention that second revision return was a valid return is not to be accepted, then also, this should be taken to be the case where the AO had taken into account the corrected computation of income and since such a corrected computation accorded fully with the law prevalent in the asst. yr. 1999-2000; no error of law has been committed by the AO and the regular assessment order dt. 28th March, 2002 could not have been held to be erroneous in this respect.

14. It was further submitted by the learned Counsel that there was no failure to make necessary enquiries by the AO. After receipt of the second revised return accompanied by letter dt. 29th Oct., 2001, wherein nature of transaction in question as also applicability of relevant provisions of law had been fully explained, the AO made further enquiries and the assessee had duly responded to the same. It was only after such enquiries that the assessee’s claim of non-taxability was accepted. No doubt, the Asstt. CIT made direct enquiries from the parties concerned, rather belatedly, on 21st March, 2002, but the result of such enquiries too did not alter the situation even by a bit. The payers had duly confirmed that so far as the assessee was concerned, the payment of Rs. 55 crores had been made in pursuance of the agreement dt. 25th Nov., 1998 and for transfer of ‘intellectual property assets’ as had been defined in para 2.1.1 of the said agreement itself, relevant portions of which are contained in the assessee’s letter dt. 29th Oct., 2001, as have been reproduced by us in para 3 above. It is also a settled law that in case even on further enquiries, the taxability of a transaction is not affected, no interference is called for by the CIT under Section 263, on the ground that there was failure on the part of the AO to make due enquiries or enquiries were made belatedly. Reliance in this regard was placed on the decision of the Hon’ble Madras High Court in the case of CIT v. Shakti Chanties (as has been cited in the gist of case law), wherein it has been held that “Where the material relied upon by the CIT, which according to him, was omitted to be noticed by the ITO, would not have altered or varied the final conclusion arrived at by the ITO, the CIT would lack the jurisdiction to revise the order of assessment”.

15. As far as other issues are concerned, there too, there was no error at the end of the AO. He has duly examined the books of account and specifically the details under the heads “Advertisement” and “Commission”. After such an examination he had made disallowances under both the heads. In other words, he had resorted to the disallowance to such extent which in his view was reasonable, after due perusal of the records. The opinion so expressed by him, could not have been substituted by the learned CIT by his opinion in his revisionary jurisdiction under Section 263. As regards balances in the accounts of the parties, the learned CIT could not have held that some probe by the AO was necessary in anticipation of finding out any discrepancy. The observations made by the auditors in their audit report, to the effect that the balances in the accounts of parties remained unconfirmed, do not by themselves justify initiation of any enquiry. Therefore, the order cannot be said to be erroneous even on the ground that enquiries from the debtors and creditors had not been made. There is no such requirement of law, particularly when the accounts were subjected to statutory audit under the Companies Act as well as tax audit under Section 44AB of the Act and such books of account have been duly accepted by the AO for the purposes of assessment. Even in the impugned order, no finding was given by the learned CIT about lack of reliance or worthiness of the books of account of the appellant, which had, otherwise been very extensively examined by the AO. The learned CIT could not have assumed jurisdiction under Section 263, just to direct the AO to carry out verification and/or to make roving enquiries, without finding an error of law in the assessment order on specific issues. Reliance was again placed on the ‘gist of case laws’ (as appearing on pp. 57 to 63 of the paper book) and our attention was specifically drawn to the following case law :

(i) CIT v. Trustees of Anupam Charitable Trust (1987) 167 ITR 129 (Raj)–“The error envisaged by Section 263 is not one which depends on possibility or guesswork, but it should be actually an error either on facts or in law.”

(ii) CIT v. Steller Investment Ltd. –Commissioner set aside the assessment order on the alleged ground that the officer did not make enquiries with regard to the genuineness of the subscription of the share capital. CIT’s action was held not proper.

This judgment got confirmed from the Hon’ble Supreme Court in the case of CIT v. Steller Investment Ltd. (supra).

(iii) Kewal Ram Chauhan v. ITO (1997) 91 Taxman 167 (Chd)(Magi)–Assessment could not be cancelled on ground that desired enquiries had not been made by AO. This was not a sufficient ground for cancellation of assessments. It was mainly the satisfaction of the AO who made enquiries as evident from record and accepted the returned income.

On entirety of facts, orders passed by the CIT under Section 263 could not be held to be proper and valid. No valid conclusion had been arrived at by the CIT. Hence, the order of the CIT under Section 263 was quashed.

(IV) CIT v. Smt. D. Valliammal –“Held, that the CIT set aside the order passed by the ITO on the ground that verification of account was needed. This could not be a ground for invoking jurisdiction under Section 263. (p. 696)

16. The learned Counsel further submitted that the regular assessment order accorded fully with the provisions of law and the same, therefore, could not have been held to be erroneous, as held by the Hon’ble Bombay High Court in the case of CIT v. Gabhal India Ltd. . It is a settled law that an order has to be both erroneous as well as prejudicial to the interests of Revenue, so as to confer jurisdiction on the CIT to exercise revisionary powers under Section 263. In the present case none of the said conditions even exists, leave aside the question of co-existence thereof. He further submitted that the view taken by the Hon’ble Bombay High Court in the case of Gabrial India Ltd. (supra), to the aforesaid effect has since been upheld by the Hon’ble Supreme Court in the case of Malabar Industrial Co. Ltd. v. CIT (2000) 243 ITR 83 (SC).

17. Lastly, the learned Counsel submitted that the order passed by the learned CIT under Section 263 stands wholly vitiated. He had issued notice under Section 263 on some specific grounds only and the assessee had availed the opportunity and responded to the said notice by filing its objection. While passing the order under Section 263, he could not have given directions to reframe the assessment. The order so passed by the learned CIT was in excess of the jurisdiction that he had assumed by issuing notice under Section 263 on specific grounds. The order passed by him under Section 263, which has the effect of throwing wide open the assessment as a whole, is wholly untenable, as being beyond the provisions of law. Reliance was placed on the following case law :

(i) Jai Commercial Co. Ltd. v. Jt. CIT (2000) 66 TTJ (Del) 731
…29. There are not more meshes in a net than there are in the administration of human justice. Thus, justice should be administered with due caution and care. The power conferred on the CIT under Section 263 deals with corrective measure. If an error had crept in the order of assessment and that error is prejudicial to the interest of the Revenue, the CIT can assume jurisdiction under Section 263 of the Act. The CIT’s action under Section 263 must resemble that of a surgeon’s knife. He cannot open the assessment wide and direct the AO to consider everything de novo. Only errors, which had crept into the assessment need to be corrected. He must give a clear-cut finding as to the error. He must establish that the said error is prejudicial to the interest of Revenue. He should see that the justice is done. There cannot be anything of greater consequence than to keep the stream of justice clear and pure, that parties may proceed with safety both to themselves and their characters, (p. 739)

(ii) Ram Nath Export Ltd. v. Dy. CIT (1999) 104 Taxman (Del)(Mag) 87.

…The scope of interference under Section 263 is not to set aside merely unfavourable orders and bring to tax some more money to the treasury nor is the section meant to get sheer escapement of revenue which is taken care of by other provisions in the Act. The prejudice that is contemplated under Section 263 is prejudice to the income-tax administration as a whole. Section 263 is to be invoked not as a jurisdiction corrective or as a review of a subordinate order in exercise of the supervisory power, but it is to be invoked and employed only for the purpose of setting right distortions and prejudices to the Revenue which is a unique conception which has to be understood in the context of and in the interest of the Revenue administration. For making a valid order under Section 263(1), it is sine qua non, for the CIT to record an express finding to the effect that the order sought to be revised is erroneous as well as prejudicial to the interest of the Revenue.

Taking into consideration the totality of facts, the conditions precedent for assuming jurisdiction under Section 263 did not exist. Accordingly, the order passed under Section 263 was to be quashed, (p. 88)

18. On the other hand, the learned senior Departmental Representative strongly supported the order passed by the learned CIT, in exercise of his jurisdiction under Section 263 of the Act. He stated that the second revised return (third return) that had been filed on 30th Oct., 2001, was beyond the time-limit as prescribed in Section 139(5), which had expired in this case on 31st March, 2001. The accounts had been drawn as per the provisions of Companies Act, 1956 and the sum in question stood credited in the P&L a/c distinctly under the head ‘exceptional items’. On the basis of accounts so drawn (which were subjected to audit also), the assessee had filed consecutively two returns and in none of these two returns, he made any claim for exemption. It was only in the third return, which was an invalid return (filed beyond the time-limit prescribed in the Act) that the claim for exemption from ‘long-term capital gain’ in relation to a sum of Rs. 55 crores as had been received from Wilkinson Sword (India) Limited for transfer of “intellectual property rights”, was made. The claim was in a sharp contrast to the treatment given by the assessee in why the accounting entries should not be treated at their face value. Under these circumstances, the AO, could not have even entertained the said claim, much less allowed it. The AO acted contrary to the specific provision of law, as contained in Section 139(5) of the Act, which is evident from para 2 of the assessment order, wherein he has recorded the comparative details of all the three returns. Such a distortion has rendered the assessment as erroneous and in view of the fact that the ‘Revenue’ has been denied its legitimate share, the order is prejudicial also. The learned CIT has rightly corrected the said order, in his supervisory jurisdiction under Section 263 of the Act, by setting aside the same.

19. He further argued that there was a failure at the part of the AO to make timely enquiries from the parties concerned. Such enquiries into the nature of receipt of Rs. 55 crores in the hands of the assessee were necessary before granting exemption from long-term capital gain. Without making timely enquiries from the other party, the AO could not have granted exemption, as had been sought for by the assessee. Such a failure itself has rendered the assessment to be erroneous and prejudicial to the interests of Revenue,

20. As regards various disallowances (as have been made in the assessment), again there was a distinct failure at the part of the AO, to apply his mind to the of disallowances. After finding out unverifiability and inadmissibility of large number of expenses, he could not have felt contended just by making token disallowance only. In view of his own observations as are contained in the assessment order, the AO was obliged to make appropriate and specific disallowances, instead of making just taken disallowances.

21. Similarly, the observations made by the statutory auditor to the effect that parties’ accounts remained unconfirmed, called for enquiries from the parities concerned, atleast on sample basis. Undisputedly, there was a failure at his part to make such enquires. Such a failure has again rendered the assessment to be erroneous and prejudicial to the interest of Revenue. In support of this contention he has referred to the leading case of Gee Vee Enterprises v. Addl. CIT (1975) 99 ITR 374 (Del) and also to a host of other cases. We are not referring to all such case laws as we are in agreement with the learned senior Departmental Representative, on principle, that failure to make such enquiries as were called for in a particular case, renders the assessment order “erroneous as well as prejudicial to the interests of Revenue”. However, at the same time it has to be seen as to what kind of enquiries are required to be made in a particular case and finally whether, in reality, there was a failure at the part of the AO to make such enquiries.

22. It was finally pleaded by the learned senior Departmental Representative that, the learned CIT himself has not expressed any opinion on the merits of any of the issues and has left the matter wide open, for being decided by the AO, after giving a due and effective opportunity of being heard to the assessee, in the set aside proceedings. Such an order (passed by the CIT under Section 263) meets the requirement of equity and justice also and does not call for any interference by the Tribunal.

23. In rejoinder, the learned Counsel again submitted that before setting aside assessment, the learned CIT was obliged to consider the assessee’s objection and express his opinion as to why such objections are not acceptable. In case, the learned CIT has failed to do so, then the assessee has a right to contend in appeal before Tribunal that on the facts and information as were available on record and as had been highlighted in the submissions made during the course of proceedings under Section 263, there was no error in the assessment order and interference with the same by the learned CIT in exercise of his revisionary jurisdiction was wholly uncalled for. Reliance in this regard was placed on the decision of Hon’ble Punjab and Haryana High Court in the case of CIT v. Jagadhri Electric Supply and Industrial Co. , wherein their Lordships have observed and held as under :

The jurisdiction vested in the CIT under Section 263(1) of the Act is of a special nature or, in other words, the CIT has the exclusive jurisdiction under the Act to revise the order of the ITO if he considers that any order passed by him was erroneous insofar as it was prejudicial to the interest of Revenue. Before doing so, he is also required to give an opportunity of being heard to the assessee. If after hearing the assessee in pursuance of the notice issued by him under Section 263(1) of the Act, he is not satisfied, he may pass the necessary orders. Of course, the order thus passed will contain the grounds for holding the order of the ITO to be erroneous, as contemplated under Section 263(1) of the Act. Feeling aggrieved, therefore, the assessee may file an appeal against the same, as provided under Section 253(1)(c) of the Act. In the memorandum of appeal, the assessee is supposed to attach the order of the CIT and to challenge the grounds for decision given by him in his order. At the time of the hearing, if the assessee can satisfy the Tribunal that the grounds for decision given in the order by the CIT are wrong on facts or are not tenable in law, the Tribunal has no option but to accept the appeal and to set aside the order of the CIT. The Tribunal cannot uphold the order of the CIT on any other ground which, in its opinion, was available to the CIT as well. If the Tribunal is allowed to find out the grounds available to the CIT to pass an order under Section 263(1) of the Act, then it will amount to a sharing of the exclusive jurisdiction vested in the CIT, which is not warranted under the Act. It is all the more so, because the Revenue has not been given any right of appeal under the Act against an order of the CIT under Section 263(1) of the Act.

The legislature, in its wisdom has laid down some built in safeguards, against arbitrary exercise of powers under Section 263. In the present case, such safeguards have been violated inasmuch as the assessment order has been set aside, without even finding out any ground or material to hold the assessee’s submissions/objections, as have been put forth in the proceedings under Section 263, were not tenable. In such a situation, the learned CIT’s action deserves to be quashed.

24. We have carefully considered the rival submissions and perused the records. First of all we take up the assessee’s plea that the assessment order dt. 28th March, 2002, was no order at all and, therefore, revisionary jurisdiction in relation to the same could not have been exercised. The plea has been founded on the contention that the AO did not issue any notice under Section 143(2) after second revised return (third return in the row) had been filed by the assessee on 30th Oct., 2001. It is now a well-settled law that an AO, in order to assume jurisdiction to pass an order under Section 143(3), has to necessarily serve on the assessee a notice under Section 143(2). This is a mandatory requirement and omission to comply with such mandatory requirement of law within the stipulated period of time, is fatal to the very survival of the assessment order. However, such notice is required to be served only if there is a valid return on record. Therefore, answer to the assessee’s plea will depend on the answer to the question as to whether second revised return filed on 30th Oct., 2001, was a valid return. There is no dispute that the original return had been filed in time and under Section 139(1). Such a return can be revised, in case the assessee discovers any omission or incorrect statement in such return.

25. However, w.e.f. 1st April, 1989, the legislature has placed certain limitation on the assessee’s right to file revised return, by providing that such return can be filed only “before expiry of one year from the end of the relevant assessment year or before the completion of the assessment whichever is earlier.” In the present case, the assessment was made on 28th March, 2002. However, the period of one year (as calculated from the end of the relevant assessment year) had expired on 31st March, 2001. The revised return, therefore, in the instant case could be filed before 31st March, 2001. Therefore, we hold that the second revised return filed on 30th Oct., 2001, is not a valid return at all. The law did not require that in relation to such an invalid return also, notice under Section 143(2) should have been served on the assessee before completion of assessment under Section 143(3). The regular assessment order dt. 28th March, 2002, is, therefore, a valid assessment order and, in principle, the learned CIT could have exercised his revisionary powers under Section 263 in relation to the same.

26. However, such a revisionary powers as has been granted to the CIT, can be exercised only when the order (which is sought to be subjected to revision under Section 263) is both erroneous as well as prejudicial to the interests of Revenue. In case the order is not erroneous, it cannot be subjected to revision under Section 263, howsoever grave is the prejudice caused to the Revenue. Plethora of case law are available on this issue and the same is now settled by the apex Court also, vide its decision in the case of Malabar Industrial Co. Ltd. v. CIT (supra), wherein at p. 87 their Lordships have held that :

A bare reading of this provision makes it clear that the prerequisite to the excise of jurisdiction by the CIT suo motu under it, is that the order of the ITO is erroneous insofar as it is prejudicial to the interest of the Revenue. The CIT has to be satisfied of twin conditions, namely, (i) the order of the AO 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 of the ITO is erroneous but is not prejudicial to the Revenue or if it is not erroneous but is prejudicial to the Revenue–recourse cannot be had to Section 263(1) of the Act.

Therefore, in order to decide validity of assumption of jurisdiction by the learned CIT under Section 263, it has to be seen as to whether the assessment order dt. 28th March, 2002, is both erroneous and prejudicial to the interest of Revenue.

27. In the case of Gabriel India Ltd. v. CIT (supra), the two phraseologies have been defined as under :

(a) “Erroneous” : “…. We find that the expressions “erroneous”, “erroneous assessment” and “erroneous judgment” have been defined in Black’s Law Dictionary. According to the definition, “erroneous” means “invoking error; deviating from the law”; “erroneous assessment” refers to an assessment that deviates from the law and is, therefore, invalid and is a defect that is jurisdictional in its nature and does not refer to the judgment of the AO in fixing the amount of valuation of the property. Similarly, “erroneous judgment” means “one rendered according to course and practice of Court, but contrary to law, upon mistaken view of law, or upon erroneous application of legal principles.

From the aforesaid definitions it is clear that an order cannot be terms as erroneous unless it is not in accordance with law.

If an ITO acting in accordance with law makes a certain assessment, the same cannot be branded as erroneous by the CIT simply because, according to him, the order should have been written more elaborately. This section does not visualise a case of substitution of the judgment of the CIT for that of the ITO, who passed the order, unless the decision is held to be erroneous

(pp. 114 and 115)

“Prejudicial to the interest of Revenue” : “….As observed in Dawjee Dadabhoy & Co. v. S.P. Jain and Anr. (1957) 31 ITR 872 (Cal) at p. 881, “the words ‘prejudicial to the interests of the Revenue’ have not been defined, but it must mean that the orders of assessment challenged are such as are not in accordance with law, in consequence whereof the lawful revenue due to the State has not been realized or cannot be realized. It can mean nothing else” ? The aforesaid observations were also applied by the Gujarat High Court in Addl. CIT v. Mukur Corporation (1978) 111 ITR 312 (Guj). We are of the opinion that the aforesaid interpretation given by the Calcutta High Court to the expression ‘prejudicial to the interests of the Revenue’ is the correct interpretation.”

(p. 115)

With the said proposition of law, we proceed to examine multiple contentions, put forth by the parties before us.

28. First of all, we proceed to examine as to whether the assessment order dt. 28th March, 2002, is ‘erroneous’ as not being in accordance with the provisions of law, for, if it is not in accordance with the provisions of law, then only it can be treated to be erroneous.

29. The first and foremost issue which needs to be decided is as to whether the assessee could successfully claim exemption from capital gain in relation to its transaction with Wilkinson Swords (India) Ltd., even though the assessee had already offered the same for taxation in the earlier returns. Although the third return filed on 30th Oct., 2001, was not a valid return, the fact remains that the assessee had placed on record (along with said return itself) a letter dt. 29th Oct., 2001, as has been reproduced by us in para 3 of this order. In terms of the said letter, the assessee had duly informed the AO that the sum of Rs. 55 crores had been received from Wilkinson Sword (India) Limited for transfer of “intellectual property asset”, as per agreement dt. 25th Nov., 1998. In the said agreement itself, “Intellectual property asset” has been defined. Even at the cost of repetition, the said definition is reproduced hereunder :

2.1.1 Subject to the provisions of this agreement, on the closing date, the seller shall sell, transfer, convey, assign and deliver to the buyer and the buyer shall purchase, acquire and accept from the seller, free from encumbrances, all rights, title and interests of the seller in and to the following assets (herein individually and collectively the ‘intellectual property assets’);

(a) all trademarks, trade names, house marks, devices and brand names owned by or applied for registration or registered in the name of the seller under the mark and name ‘GEEP’ including all secondary and subsidiary marks thereof and used in the business together with the goodwill of the business connection with which the GEEP trademarks, trade names and brand names are used, short particulars whereof are given in Sch. A hereto (herein the ‘GEEP trademarks’) :

(b) all literary and artistic works and other works and materials amounting to copyrights owned and/or used by the seller in the business and all benefits and advantages accruing therefrom, short particulars whereof are given in Sch. B hereto (herein the ‘GEEP copyrights’);

(c) all designs owned and/or used by the Seller in, or in relation to, the business and all benefits and advantages accruing therefrom, short particulars of such designs are given in Sch. C hereto (herein the ‘GEEP designs’)

30. It was further shown in terms of the said letter itself that Section 55(2)(a) was sought to be amended by the Finance Bill, 2001, so as to provide that in relation to the “trademark” or “brand name associated with a business”, purchase price shall be taken at Nil in the hands of the owner/transferor if he himself has not purchased it earlier. There is no ambiguity about the applicability of the said provision w.e.f. the asst. yr. 2002-03 and for this contention relevant extract from the “Memorandum of notes on clauses of the Finance Bill, 2001,” as reported in (2001) 248 1TR (St) 126 was specifically brought to the notice of the AO. Relevant portion is produced hereunder :

Clause 32 seeks to amend Section 55 of the IT Act relating to meaning of the expressions ‘adjusted’, cost of improvement” and “cost of acquisition”.

Under the existing provision contained in Clause (a) of Sub -section (2), the cost of acquisition in relation to a capital asset, being goodwill of a business or a right. to manufacture, produce or process any article or thing, tenancy rights, stage carriage permits or loom hours, shall be taken to be the purchase price in case the asset is purchased by the assessee from a previous owner and in any other case such cost shall be taken to be nil.

It is proposed to amend Clause (a) of Sub -section (2) to provide that the cost of acquisition in relation to a trademark or brand name associated with a business shall also be taken to be the purchase price in case the asset is purchased from a previous owner and nil in any other case.

This amendment will take effect from 1st April, 2002 and will, accordingly, apply in relation to the asst. yr. 2002-03 and subsequent years.

It was further submitted before the AO that at the time of filing of return (original as well as first revised return) filed on 30th Dec, 1999 and 30th Nov., 2000, respectively, the assessee was not aware of the correct legal position and it was only by virtue of the clarifications in the form of “Memorandum of notes on clauses of the Finance Bill” that the assessee got apprised with the correct legal position and lodged its claim for exemption from capital gain, in relation to the said sum of Rs. 55 crores. It is not in dispute that in order to levy capital gain tax, four ingredients should co-exists, viz.,

(i) there should be a capital asset;

(ii) such capital asset should have the cost of acquisition;

(iii) the capital asset should be subjected to transfer as per the definition contained in Section 2(47) of the Act; and

(iv) there should be a sale consideration in lieu of such transfer;

and in case any of the four ingredients are found to be missing then the computational provision for levy of capital gain cannot be applied. This position of law has been settled by the apex Court in the case of CIT v. B.C. Srinivasa Setty (supra), wherein at p. 299, their Lordships have observed and held as under :

A transaction to which those provisions cannot be applied must be regarded as never intended by Section 45 to be the subject of the charge. This inference flows from the general arrangement of the provisions in the IT Act, where under each head of income the charging provision is accompanied by a set of provisions for computing the income subject to that charge. The character of the computation provisions in each case bears a relationship to the nature of the charge. Thus, the charging section and the computation provisions together constitute an integrated code. When there is a case to which the computation provisions cannot apply at all, it is evident that such a case was not intended to fall within the charging section. Otherwise, one would be driven to conclude that while a certain income seems to fall within the charging section, there is no scheme of computation for quantifying it. The legislative pattern discernible in the Act is against such a conclusion. It must be borne in mind that the legislative intent is presumed to run uniformly through the entire conspectus of provisions pertaining to each head of income.

In order to cover up the situation arising out of the said judgment, Clause (a) of Section 55 (2) was substituted w.e.f. 1st April, 1995, whereby the goodwill of business, tenancy right, stage carriage permits or loom hours were placed within the purview of the computational provisions, by providing that in case such capital assets do not have any cost of acquisition, the same shall be treated as Nil. Thereafter, the scope of this clause was extended from time to time, as may be seen from the following :

(a) Right to manufacture, produce or process any article or thing, was brought at par with other capital asset, namely, goodwill, tenancy right, stage carriage permits or loom hours, etc., but w.e.f. 1st April, 1998;

(b) Again, there was an addition of “trademark” or Brand name associated with a business”, effective from 1st April, 2002; and

(c) Finally, as the position stands today, “right to carry on any business” was inserted in the said clause w.e.f. 1st April, 2003.

From this it will be seen that none of the insertions is retrospective in nature.

31. In the present case, after the assessee had claimed through the letter dt. 29th Oct., 2001, that the correct computation of income should be adopted for the purpose of assessment, so as to exclude the receipt in question from the computation of capital gain, the AO proceeded to examine the said claim with reference to the agreement dt. 25th Nov., 1998. After the AO got apprised of the nature of transaction and the assessee’s claim in relation thereto, he could not have ignored the same and he carried a statutory obligation to examine the veracity of the said claim. He could not have taken advantage of the assessee’s ignorance at the earlier stages. Even the CBDT vide Circular No. 14 of 1955, dt. 11th April, 1955 instructed that :

Officers of the Department must not take advantage of ignorance of an assessee as to his rights. It is one of their duties to assist a taxpayer in every reasonable way, particularly in the matter of claiming and securing reliefs and in this regard the officers should take the initiative in guiding a taxpayer where proceedings or other particulars before them indicate that some refund or relief is due to him. This attitude would, in the long run, benefit the Department for it would inspire confidence in him that he may be sure of getting a square deal from the Department. Although, therefore, the responsibility for claiming refunds and reliefs rests with the assessee on whom it is imposed by law, officers should :

(a) draw their attention to any refunds or reliefs to which they appear to be clearly entitled but which they have omitted to claim for some reason or other;

(b) freely advise them when approached by them as to their rights and liabilities and as to the procedure to be adopted for claiming refunds and reliefs.

A show-cause notice was issued to the appellant and in response to such show-cause notice, the appellant again made detailed submissions and even referred to various case law. After considering all these materials and information, including the position of law, the AO granted exemption.

32. Subsequently, the Hon’ble Supreme Court in the case of CIT v. Mahalaxmi Sugar Mills Co. Ltd. , in its judgment dt. 15th July, 1986, laid down as under by reiterating its earlier stand :

In the second place, there is a duty cast on the ITO to apply the relevant provisions of the Indian IT Act for the purpose of determining the true figure of the assessee’s taxable income and the consequential tax liability. That the assessee fails to claim the benefit of a set off cannot relieve the ITO of his duty to apply Section 24 in an appropriate case.

33. It is also relevant to mention here that in a recent decision, the Hon’ble J&K High Court in the case of Smt. Sneh Lata Jain v. CIT (2004) 140 Taxman 156 (J&K), has held that no tax can be levied or recovered without an authority of law. Article 265 imposes an embargo on imposition of collection of tax if the same is without authority of law.

34. The facts of the said case are that the assessee had offered surplus arising on sale of land, for capital gain tax. After completion of his assessment on the basis of his own return, he invoked the revisionary jurisdiction of CIT by filing a petition under Section 264. In the said petition, it was claimed that the assessee was entitled for exemption from capital gain, by virtue of applicability of the provisions of Section 54F. The revisional authority, however, held that the return filed by the assessee having been accepted, the claim could not have been entertained at his (revisionary authority’s) stage. On a writ petition moved against the order of the revisionary authority, the Hon’ble Court passed the aforesaid order.

35. In an earlier decision, the Hon’ble Delhi High Court in the case of CIT v. Bharat General Reinsurance Co. Ltd. held that :

There is a duty cast on the ITO to apply the relevant provisions of the Indian IT Act for the purpose of determining the true figure of the assessee’s taxable income and the consequential tax liability. That the assessee fails to claim the benefit of a set off cannot relieve the ITO of his duty to apply Section 24 in an appropriate case.

The said decision, wherein year of taxability of dividend was different than the year in which the assessee has disclosed the income in his return, was approved by the Hon’ble Supreme Court in the case of Rampur Distillery Chemicals Co. Ltd v. CIT (1991) 187 ITR 561 (SC).

36. At this stage, it is also very pertinent to refer to the decision of the Hon’ble Supreme Court in the case of National Thermal Power Co. Ltd v. CIT . The facts of the case were that the assessee had received interest amounting to Rs. 22,84,994 on short-term deposits with bank. The said sum according to the return of the assessee was duly subjected to tax and inclusion of such income was not disputed (by the assessee) even in the first appeal (which the assessee had filed on a number of other grounds). Against the order of the first appellate authority, the second appeal was filed before the Tribunal and there too, the taxability of the said sum was not objected to in the original grounds of appeal. Subsequently, through additional ground it was contended that the said sum could not have been included in the income of the assessee. It pleaded that the authorities below themselves should have adjudicated the issue of taxability of the said sum (even if the assessee had offered the same for taxation) on the basis of facts and evidence on record. The Tribunal declined to entertain these grounds. The matter came up for consideration finally before the Hon’ble Supreme Court and it was held that “where the Tribunal is only required to consider the question of law arising from the facts which are on record in the assessment proceedings, we fail to see as to why such question should not be allowed to be raised when it is necessary to consider that question ‘in order to correctly assess the tax liability on the assessee’.” (Emphasis, italicised in print, added)

37. The true import of the said principles is that the assessee’s tax liability to tax should be worked out correctly, irrespective of the admission made by it in the return; the only restriction being that the relevant facts and other material should be on record, If such a plea is applicable and even enforceable at the appellate stage, we fail to understand as to why the AO himself cannot grant such relief as is admissible to him on the basis of facts, material and information on record, even if the assessee has not claimed the same. The assessee’s case here is on the better footing. While the assessment proceedings were in progress and much before the conclusion thereof, it had made a claim before the AO himself that the receipts in question were not exigible to tax and in support of its claim, all the relevant details/information’s were placed on record. Thus, on a consideration of totality of the facts and circumstances of the case, we hold that the AO owed a statutory duty to consider the assessee’s claim for exemption from capital gain, made before him, inspite of the fact that such claim had not been made in the earlier returns, which were valid and enforceable. In other words, we hold that even though the third return (second revised return) through which claim for exemption from capital gain had been made, was not a valid return, the consideration of such a claim was not ousted from the purview of the assessment proceedings.

38. Now, the connected question that comes up for consideration is as to whether the exemption granted by the AO accorded with the provisions of law. As has been noted by us earlier, the ‘transfer’ related to “trademark” or “brand name as associated” with the product of the assessee. Prior the asst. yr. 2002-03, transfer of such a capital asset could not have been subjected to the computation of capital gain tax; the reason being that such a “capital asset” did not have any value or cost of acquisition, to put it in income-tax terminology. The matter was squarely covered by the decision of the apex Court in the case of B.C. Srinivasa Setty (supra). Not doubt, the AO made belated enquiries from the payers, M/s Wilkinson Sword (India) Limited (which got merged by that time into Gillette India Limited) and the response from the person concerned came after the assessment had been completed. But, this has not made any difference to the assessee’s claim for exemption. The factual position with regard to nature of ‘receipt’ which was subject-matter of transfer remains the same as had been explained by the assessee in terms of its letter dt. 29th Oct., 2001 and in the subsequent Explanation given by it on 27th March, 2002. It is a settled law that in taxing statute, there is no equity about law and there is no scope for any intendment. This principle as had been laid down long back by the House of Lords, has recently been considered by the Hon’ble Allahabad High Court in the case of CIT v. Sahara India Savings and Investment Corporation Ltd. (2003) 264 ITR 646 (All), wherein their Lordships have observed and held as under:

Where the language of a provision is plain, Courts cannot ordinarily concern themselves with the policy behind the provision, or the intention of the legislature. As Lord Watson said in A. Salomon v. A. Salomon & Co. (1897) AC 22, 38 (HL), “intention of the legislature’ is a common but slippery phrase”. In ITO v. T.S. Devinatha Nadar and Ors. (1968) 68 ITR 252 (SC) : AIR 1968 SC 623, the Supreme Court of India observed that the rule that (p. 257) : “we must look to the general scope and purview of the statute and at the remedy sought to be applied and consider what was the former state of the law and what it was that the legislature contemplated” was made while construing a non-taxing statute. The said rule had only a limited application in interpreting a taxing statute. It follows from this decision that the mischief rule laid down in Heydon’s case (1584) 3 Co. Rep 7a has only a limited application to taxing statutes.

Hence, there is no question of looking into the legislative intent or spirit of the law in a taxing statute. We have only to see the actual words used. In other words, in a taxing statute we have to go by the letter of the law and not its spirit or intent.

If the said proposition of law is applied in this case, it will be seen that the “trademark” or “brand name associated with the business of the assessee” came within the purview of computation of capital gain w.e.f. 1st April, 2002. The year under assessment/appeal being 1999-2000, the transfer of said asset could not have been subjected to taxation. We, therefore, hold that the claim for exemption has rightly been allowed.

39. The learned CIT has also mentioned in his notice under Section 263(1) that the phraseology reading as “right to manufacture, produce or process any article or thing” was there in Clause (a) of Section 55(2) w.e.f. 1st April, 1998. Such a phraseology is not equivalent to “trademark or brand name association with business of the assessee” for which the appellant had received the sums in question. It is also not the case of the learned CIT that the receipts in question were in lieu of surrendering the right to manufacture, produce or process any article or thing, nor it is so borne out from the agreement dt. 25th Nov., 1998, or from the response to the belated queries made by the AO. Therefore, this ground is also not available to the learned CIT to interfere with the regular assessment order dt. 28th March, 2002.

40. The initiation of proceedings under Section 263 is also based on the ground that no enquiries were made by the AO from the debtors and creditors inspite of an observation in the audit report that the balances in such accounts were unconfirmed. No material whatsoever has been brought on record by the learned CIT which goes to show that there was any discrepancy in these accounts.

There is a force in the contention putforth by the learned Counsel that the order has been held to be erroneous in this respect merely on guesswork and in the expectation of finding out some discrepancy. The revisionary jurisdiction as has been conferred on the CIT under Section 263 cannot be exercised on the basis of such a possibility or guesswork. Apart from various case law as have been referred to by the learned Counsel in support of this contention, with which we concur, we also hold that the point at issue is squarely covered by the decision in the case of Gabriel India Ltd. (supra), relevant observation are on p. 114 of the Report in the said case, which is reproduced hereunder :

As observed in Dawjee Dadabhoy & Co. v. S.P. Jain (1957) 31ITR 872 (Cal) at p. 881, “the words ‘prejudicial to the interests of the Revenue’ have not been defined, but it must mean that the orders of assessment challenged are such as are not in accordance with law, in consequence whereof the lawful revenue dies to the State has not been realized or cannot be realized. It can mean nothing else” ? The aforesaid observations were also applied by the Gujarat High Court in Addl. CIT v. Mukur Corporation . We are of the opinion that the aforesaid interpretation given by the Calcutta High Court to the expression “prejudicial to the interests of the Revenue” is the correct interpretation.

41. The learned CIT has also set aside the assessment, inter alia, on the ground that proper disallowances under various heads of expenses have not been made. It is seen from the discussions appearing in the assessment order that the AO has examined each and every item very carefully and thereafter he made disallowances according to his own opinion and judgment. The learned CIT could not have thrust his own finding in this respect, even if such an opinion, if implemented, can fetch some more revenue. Unless and until some specific error of law is pointed out, as has not been done here, the learned CIT’s order under Section 263, will have to be held to be based on extraneous material/consideration. In his order, the learned CIT has also observed that there was no counter from the side of the assessee on this issue, although, the same had been specifically raised in the notice dt. 17th Oct., 2003, under Section 263. We find from the said submissions (which are reproduced also in the impugned order) that the assessee had specifically objected to the proposal under Section 263 in this respect. For the sake of reference only, para 11 of the said submissions is reproduced hereunder :

11. Lastly, it has been noted in the said notice under Section 263 that disallowance under the head ‘commission’/sale promotion expenses are inadequate and the some more disallowance should have been made. In this regard, it is stated that passing an assessment order is an exercise of the ‘faculty’ of the AO. If after examination of books of account and other records, he has reached some opinion, it cannot be substituted by an opinion of superior authority like CIT. This point is covered by the following principle as has been laid down by the Hon’ble Bombay High Court in the case of Gabriel India Ltd. (supra). Kind attention of your honour in invited to the following passage as appearing at p. 115 of the said Report :

‘Cases may be visualised where the ITO while making an assessment examines the accounts, makes enquiries, applies his mind to the facts and circumstances of the case and determines the income either by accepting the accounts or by making some estimate himself. The CIT, on perusal of the records, may be of the opinion that the estimate made by the officer concerned was on the lower side and left to the CIT he would have estimated the income at a figure higher than the one determined by the ITO. That would not vest the CIT with power to reexamine the accounts and determine the income himself at a higher figure. It is because the ITO has exercised the quasi-judicial power vested in him in accordance with law and arrived at a conclusion and such a conclusion cannot be termed to be erroneous and simply because the CIT does not feel satisfied with the conclusion. It may be said in such a case that in the opinion the CIT the order in question is prejudicial to the interests of the Revenue. But, that by itself will not be enough to vest the CIT with the power of suo motu revision because the first requirement, viz., that the order is erroneous, is absent.

42. There is also force in the contention putforth by the learned Counsel to the effect that, while interfering with the finality of assessment, the learned CIT carried out a statutory duty to deal with and decide the objections of the affected person. In the present case, we find that the assessee had duly participated in the proceedings under Section 263 and had even made ground-wise objections to the proposal mooted under Section 263. The assessee’s objections have not been displaced or subjected to “counter” in any manner, except that he has made a casual observation that the issue of disallowances/inadequate disallowances of various expenses had not been agitated by the assessee. The said observation is factually incorrect as is evident from para 11 of the submissions of the assessee as have been reproduced in para 41 above. Thus, the fact remains that the objection raised by the assessee, to the proposal under Section 263 remains unrebutted from the side of the learned CIT. In such a situation, objections are liable to be treated as ‘admitted facts’ in view of the following principles as laid down by the Hon’ble Allahabad High Court in the case of Ravi Iron Industries v. Director of Investigation and Ors. , wherein “their Lordships have observed and held as under :

Order 8, Rule 5 of the CPC, 1908, provides that every allegation of fact in the plaint if not denied specifically or by necessary implication or stated to be not admitted in the pleading of the defendant shall be taken to be admitted except against the person under disability. Although the provisions of the CPC are not applicable to writ petitions, the general principles stated in the CPC are applicable to writ proceedings.

On the basis of such admitted facts, the regular assessment order dt. 28th March, 2002, could not have been found to be faulted with in any manner, much less “erroneous and prejudicial to the interest of Revenue”. We, therefore, hold that the order under Section 263 dt. 27th Feb., 2004, is wholly unsustainable for this reasons also.

43. Before parting with the matter, we may also point out that the order under Section 263, which is subject-matter of appeal before us is also vitiated for the reason that the learned CIT exceeded the grounds on which the action was proposed to be taken. In the notice under Section 263 dt. 17th Oct., 2003, certain grounds were specified and the assessee’s objections were called for on such specific grounds only. The learned CIT could not have set aside the assessment as a whole with the direction to the AO to reframe the same. Similar view was taken by our learned Brothers in the case of Fertilizer Traders v. CIT dt. 15th Feb., 2002, (copy available in the assessee’s paper book at pp. 64 to 131), wherein our learned Brothers have held as under :

15.2 The orders of the CIT dt. 28th March, 2001, are, therefore, quashed on merits also liable to be quashed on the ground that he has set aside the orders of assessment for block period for making roving inquiries-a concept prohibited by various case law. Since it is clear from the directions contained in paras 8.1 and 8.2 of the orders under Section 263 of the Act that the AO has been directed to make roving inquiries by saying that ‘after making proper inquiries, scrutiny and examination on all the relevant issues…’, the orders of the revision have to be quashed and we do so.

Respectfully following the said decision, the order under Section 263 dt. 27th Feb., 2004, is quashed on this ground also.

44. In the result, the appeal directed by the assessee is allowed.