ORDER–Order in confirmity with Tribunal’s earlier order in assessee’s own case.
Ratio:
Where order sought to be revised was in confirmity with Tribunal’s earlier order in assessee’s own case, same could not be termed as erroneous though some prejudice was caused to revenue by such order.
Held:
The application of the lower rate of tax on the assessee-company on the footing that it is an industrial company, being in conformity with the order of the Tribunal for an earlier year, which, in turn, had applied the judgments of the two High Courts, cannot be stated to be erroenous, though some prejudice might have been caused to the revenue by way of loss of revenue. But, it is not only enough that some prejudice is caused to the revenue but it is further necessary that the order sought to be revised by the Commissioner should also be erroneous. The order sought to be revised in the present case, not being erroneous, is not amenable to the jurisdiction of the Commissioner under section 263.
Application:
Also to current assessment years.
Income Tax Act 1961 s.263
Revision under s. 263–JURISDICTION OF CIT–Order already set right by invoking s. 154.
Ratio:
Where assessing officer has already set right order passed earlier invoking section 154, Commissioner had no jurisdiction to invoke section 263 in respect of that very same order.
Held:
By the time the Commissioner issued his first notice on 25-11-1991, whatever prejudice had been caused to the revenue by assessing the assessee-company at a lower rate of tax had been set right by the assessing officer himself by invoking the provisions of section 154 on 16-7-1991. It, therefore, follows that the first notice itself is bad and the Commissioner ought to have dropped the proceedings as infructuous once he was informed of the assessing officer’s order under section 154.
Application:
Also to current assessment years.
Income Tax Act 1961 s.263
Revision under s. 263–MERGER WITH APPELLATE ORDER–In appeal only one out of two issues decided as contested.
Ratio:
Where in appellate order allowability of interest under section 214 was decided as contested and not rate of tax applicable in assessee’s case, doctrine of merger could not applied, as rate of tax and the interest under section 214 were two totally different issues.
Held:
The rate of tax is one thing; the interest under section 214 is entirely a different thing. By contesting the non-grant of the interest, the assessee cannot be said to have contested the rate of tax also, which is the subject-matter of the order under section 263. The rate of tax and the interest under section 214 are two totally independent issues. Therefore, the doctrine of merger is not applicable to the facts of the present case.
Case Law Analysis:
Hamilton & Co. (P) Ltd. v. CIT (1991) 187 ITR 568 (Cal) relied.
Application:
Also to current assessment years though provision of section 214 is now not operative.
Income Tax Act 1961 s.214
Income Tax Act 1961 s.263
Revision under s. 263–NOTICE–Non-reasoned second notice issued after issuing invalid but reasoned first notice.
Ratio:
In the circumstances of the case, order passed under section 263 was not valid as non-reasoned second notice, issued after issuing invalid first reasoned notice, was for separate and independent proceedings.
Held:
In second notice, the Commissioner has not brought out the jurisdictional facts. He has not pointed out as to what error has been committed by the assessing officer and how such error was prejudicial to the interests of the revenue. The said second notice is directed against an entirely different or independent proceedings taken by the assessing officer which resulted in passing an order under section 154. If the Commissioner wishes to revise order, he has to independently give reasons as to how he consider the same to be erroenous and prejudicial to the interests of the revenue. It is not possible to read into the second notice the contents of the first notice, as one cannot look into the first notice which is invalid. The proceedings, therefore, had no validity at all right from the inception. In other words, the proceedings were void ab initio.
Application:
Also to current assessment years.
Income Tax Act 1961 s.263
Revision under s. 263–OPPORTUNITY OF HEARING–Non-reasoned second notice simply enclosing order passed under s. 154, opportunity of hearing also not given.
Ratio:
Non-reasoned second notice issued under section 263, simply enclosing order under section 154 passed by the assessing officer, could not be termed a valid notice in view of non-affording effective opportunity of hearing, in the circumstances of the case.
Held:
The second notice is directed against an independent proceedings and it becomes the duty of the Commissioner to demonstrate the error and the prejudice caused to the revenue thereby. He has not done so. The mere fact that the order passed by the assessing officer under section 154 was enclosed with the second notice does not give jurisdiction to the Commission. It is no doubt true that before issuing the notice, in the Commissioner is not required to give an opportunity to the assessee of being heard, but once he has initiated proceedings, it is incumbent upon him to give an opportunity of being heard to the assessee. Such an opportunity would become a meaningless ritual if there is no indication or reason given in the notice. The second notice, enclsoing the order passed by the assessing officer under section 154, does not give any indication or reason as to how or why the said order is erroneous or prejudicial to the interests of the revenue. The assessee thus, had no means of knowing what it had to meet. No effective opportunity has been given to it.
Application:
Also to current assessment years.
Income Tax Act 1961 s.263
Income Tax Act 1961 s.154
Revision under s. 263–ORDER OF CIT–Non-recording of reasons by CIT.
Ratio:
On non-recording of reasons by the Commissioner order passed under section 263 was not valid.
Held:
The requirement of section 263 is that the Commissioner should not only record a finding that the order of the assessing officer was prejudicial to the interests of the revenue and was erroneous but he should also mention the material on the basis of which he has arrived at such conclusion. Non-recording of reasons by the Commissioner would vitiate the order passed by him under section 263.
Case Law Analysis:
CIT v. Sunder Lal (1974) 96 ITR 310 (All) relied.
Application:
Also to current assessment years.
Income Tax Act 1961 s.263
ORDER
Shri R.V. Easwar, Judicial Member
1. This appeal by the assessee is directed against the order passed by the CIT under section 263 of the Income-tax Act, 1961.
2. In the assessment made under section 143(3) on 30-3-1990, the ITO assessed the total income @ 55%, which was the rate applicable in the case of an industrial company as defined in the relevant Finance Act. On 16-7-1991, the assessment was amended under section 154 of the Act and in this order, after a some what elaborate discussion, the ITO held that the assessee cannot be treated as an industrial company. He, therefore, applied the rate of 60% on the footing that the assessee was only a trading company. On 25-11-1991, the CIT issued notice under section 263 on the ground that the correct rate of Income-tax applicable in the assessee’s case was 60 per cent, but in the assessment made on 30-3-1990, the ITO had erroneously charged tax @ 55 per cent. He was of the view that the income derived by the assessee from manufacturing or processing activities was less than 51 per cent of the assessee’s total income and, therefore, the assessee could not be treated as an industrial company under the relevant Finance Act. In response to the notice, the assessee’s representative appeared before the CIT on 16-12-1991 and pointed out that by order under section 154 dated 16-7-1991, the assessee was assessed @ 60 per cent. The CIT, however, observed that after passing the order under section 154 on 16-7-1991 the ITO has again passed another order under section 154 on 17-12-1991 rectifying his mistake in applying 60 per cent rate of tax and has, by the said order, reduced the rate of tax to 55 per cent., thereby restoring the status quo ante. He enclosed a copy of the order along with a notice dated 17-12-1991 issued to the assessee asking the assessee to show cause why proceedings under section 263 should not be taken. In response to the letter dated 17-12-1991, the assessee, vide letter dated 19-12-1991, sought for time. The same was, however, refused and the CIT proceeded to pass on order under section 263 on 20-12-1991. In this order he held as under :-
“4. It is noticed that the business of the assessee-company consisted of mainly of dealing in goods, merchandise manufactured/processed or produced by persons other than the assessee-company. It is therefore a trading company in which the public is not substantially interested. The correct rate of tax in this case for the assessment year 1986-87 should be 60 per cent instead of 50 per cent originally charged by the Assessing Officer and also subsequently charged by him in terms of his orders under section 154 of the IT Act dated 17-12-1991.
5. In terms of section 263 of the IT Act, I, therefore, direct the Assessing Officer to charge the tax rate @ 60 per cent instead of 55 per cent. He will issue demand notice and challan accordingly.”
3. It is the above order that is under challenge before us.
4. We have heard the rival contentions in extenso. The contention on behalf of the assessee firstly was that the CIT did not have jurisdiction to initiate proceedings under section 263. We are of the view that the contention is well-taken. As the facts narrated above would show, by the time the CIT issued his first notice on 25-11-1991, whatever prejudice had been caused to the revenue by assessing the assessee-company at a lower rate of tax had been set right by the ITO himself by invoking the provisions of section 154 on 16-7-1991. It, therefore, follows that the first notice itself is bad and the CIT ought to have dropped the proceedings as infructuous once he was informed of the ITO’s order under section 154. His second notice dated 17-12-1991 reveals an interesting fact. It appears that on being told of the order passed by the ITO under section 154, the ITO some how got knowledge of the same and passed an order on 17-12-1991 again under section 154 restoring the status quo ante, namely, assessment of the company @ 55 per cent. On the very same day, the CIT issued notice, which we may refer to as the second notice, to the assessee. In this notice, the CIT has not brought out the jurisdictional facts. He has not pointed out as to what error has been committed by the ITO and how such error was prejudicial to the interests of the revenue. It is well settled by now that the CIT can invoke the powers under section 263 only where the order is erroneous and the error has resulted in prejudice to the interests of the revenue. Neither of these two conditions has been fulfilled in the present case. We Cannot look into the notice dated 25-11-1991 any more, because each notice is founded on different jurisdictional facts and their validity has to be examined with reference to what has been brought out therein. There is therefore no way in which we can uphold the first notice. So far as the second notice is concerned, it is directed against an entirely different or independent proceedings taken by the ITO which resulted in passing an order under section 154 on 17-12-1991. If the CIT wishes to revise this order, he has to independently give reasons as to how he consider the same to be erroneous and prejudicial to the interests of the revenue. The CIT has to have jurisdiction both when the notice under section 263 is issued and when the order is ultimately passed. The second notice does not set out the reasons for issuing the same. We have no means of verifying as to why or how the CIT considers the second rectification order passed by the ITO to be erroneous and prejudicial to the interests of the revenue. It is not possible to read into the second notice the contents of the first notice because, as stated earlier, we cannot look into the first notice which is invalid. The proceedings initiated by the issue of the first notice had become infructuous once it had been established that the ITO had already set right the error by his first rectification order. In fact, logically speaking, the very issue of the notice was a futile exercise since at that point of time the error or prejudice had already been rectified by the ITO. The proceedings, therefore, had no validity at all right from the inception. In other words, the proceedings were void ab initio. The second notice will, therefore, have to be reckoned as an independent notice. The CIT appears to be under the misconception that the second notice is only a continuation of the first notice and this theory cannot be countenanced for the reasons stated earlier. The second notice is directed against an independent proceedings and, therefore, it becomes the duty of the CIT to demonstrate the error and the prejudice caused to the revenue thereby. He has not done so, as we can gather from the second notice. The mere fact that the order passed by the ITO under section 154 on 17-12-1991 was enclosed with the second notice does not give jurisdiction to the CIT. That order would in any case be served upon the assessee in due course.
5. Mr. Surana for the assessee referred us to the judgment of the Calcutta High Court in Jeewanlal (1929) Ltd. v. Addl. CIT [1977] 108 ITR 407. In this judgment it has been held by the Calcutta High Court that where an assessment order was rectified by the ITO under section 154, the order in existence was the order as rectified. Applying this view to the present case, as we are respectfully bound to, it must be held that the CIT can revise the assessment order only as it was rectified by the order passed by the ITO on 17-12-1991 and it was, therefor, incumbent upon the CIT to establish or demonstrate that the rectification order by which the ITO applied a lower rate of tax was erroneous and prejudicial to the interests of the revenue. He has not done so in the notice. The view that after the rectification it is only the assessment as rectified that is in existence, has also been accepted by the Kerala High Court in CAIT v. Mrs. Alakutty George [1993] 201 ITR 408 after referring to the Calcutta decision.
6. It was submitted on behalf of the revenue that the reasons for invoking the provisions of section 263 have been furnished in the order passed by the CIT under section 263 and, therefore, the proceedings could not be held to be invalid merely because the notice issued on 17-12-1991 did not do so. The answer to this submission is that the CIT should have assumed valid jurisdiction before issuing notice under section 263 and he must continue to have valid jurisdiction till the proceedings culminate in the passing of an order. At both points of time, the CIT must have valid jurisdiction to revise the assessment. The requirement of section 263 is that the CIT should not only record a finding that the order of the ITO was prejudicial to the interests of the revenue and was erroneous but he should also mention the material on the basis of which he has arrived at such conclusion. Non-recording of reasons by the CIT would vitiate the order passed by him under section 263. It has been so held by the Allahabad High Court in CIT v. Sunder Lal [1974] 96 ITR 310. The conclusion is strengthened by the use of the words “if he considers” in section 263, which postulates a scrutiny by the CIT of all the relevant facts for coming to the prime conclusion, before he initiates proceedings by the issue of notice, that the order passed by the Assessing Officer is erroneous and prejudicial to the interests of the revenue. It is no doubt true that before issuing the notice, in the CIT is not required to give an opportunity to the assessee of being heard, but once he has initiated proceedings, it is incumbent upon him to give an opportunity of being heard to the assessee. Such an opportunity would become a meaningless ritual if there is no indication or reason given in the notice. Applying this test to the present case, we find that the second notice, enclosing the order passed by the ITO under section 154 on 17-12-1991, does not give any indication or reason as to how or why the said order is erroneous or prejudicial to the interest of the revenue. The assessee thus had no means of knowing what it had to meet. No effective opportunity has been given to it.
7. The assessee’s appeal must be accepted for one more reason. In the assessment year 1981-82, a controversy arose as to whether the assessee should be treated as an industrial company within the meaning of the relevant Finance Act, so that it would be assessed at a lesser rate of tax compared to a trading company. The controversy reached the Tribunal and in ITA No. 1001/Cal/1984, it was held, following the judgment of the Kerala High Court in Cochin Co. v. CIT [1978] 114 ITR 822 and the judgment of the Andhra Pradesh High Court in Nava Bharat Enterprises (P.) Ltd. v. CIT [1983] 143 ITR 804/13 Taxman 52, that the assessee must be held to be an industrial company and should get the benefit of lower rates of tax. In the assessment made for the year under appeal on 30-3-1990 as well as by the order dated 17-12-1991 under section 154 of the Act, the ITO has assessed the assessee-company at the lower rate of tax applicable to an industrial company. Though he has not referred to the order of the Tribunal or the judgments cited above, the ultimate conclusion of his is that the assessee has to be treated as an industrial company. His order is thus in conformity with the view taken by the Tribunal in the assessee’s own case for the assessment year 1981-82. In Russell Properties (P.) Ltd. v. A. Chowdhury, Addl. CIT [1977] 109 ITR 229, the Calcutta High Court was dealing with the case where action had been taken under section 263 to set aside an order passed by the ITO following a decision of the Tribunal in the assessee’s own case. After holding that though as a general rule, the principle of res judicata was not applicable to the decisions of the income-tax authorities and an assessment for a particular year was final and conclusive between the parties only in relation to that year and a decision given in an assessment for an earlier year was not binding either on the assessee or the department in the subsequent year it was held that “this rule was subject to limitation that there should be finality and certainty in all litigations including litigations arising out of the Income-tax Act and an earlier decision on the same question should not be reopened if that decision was not arbitrary or perverse and if it had been arrived at after due enquiry and if no fresh facts were placed before the authority giving the later decision and if the earlier decisions were based on all materials and relevant consideration” (see page 243 of the Report). After so laying down the broad proposition, at page 245 of the Report, the High Court held as under :-
“The Income-tax Officer has merely followed the decision of the Tribunal. No error has been pointed out in the said decision of the Income-tax Officer. It has not been pointed out that there were materials for the Income-tax Officer not to follow the decision of the Tribunal. As a matter of fact whenever there is a decision of the higher appellate authority, the subordinate authorities are bound to follow the said decision if judicial discipline is to be maintained. Reliance may be placed in this connection on the observations of the Supreme Court in the case of East India Commercial Co. Ltd. v. Collector of Customs AIR 1962 SC 1893 at page 1905 of the report. In the aforesaid view of the matter I must hold that the conditions for exercise of the power under section 263 of the Act, namely, that there must be material for the Commissioner to consider that the order passed by the Income-tax Officer was erroneous insofar as it is prejudicial to the interests of the revenue were not fulfilled in the instant case. If that is the position, then the notice must be held to be without authority.”
The aforesaid decision was followed by the Allahabad High Court in K.N. Aggarwal v. CIT [1991] 189 ITR 769/56 Taxman 24. That was also a case arising under section 263 of the Act. At pages 772-773 of the Report it was held as under :-
“After giving our earnest consideration to the matter, we are of the view that it is difficult to sustain the exercise of reviewing power in such a situation for the simple reason that the order of the assessing authority cannot be said to be erroneous if he merely follows a decision of a higher authority or court on the same point in the case of the same assessee. Indeed, the orders of the Tribunal and the High Court are binding upon the Assessing Officer and since he acts in a quasi-judicial capacity, the discipline of such functioning demands that he should follow the decision of the Tribunal or the High Court, as the case may be. He cannot ignore it merely on the ground that the Tribunal’s order is the subject-matter of revision in the High Court or that the High Court’s decision is under appeal before the Supreme Court. Permitting him to take such a view would introduce judicial indiscipline, which is not called for even in such cases. It would lead to a chaotic situation. True it is that the dilemma of the revenue is also real and substantial in such cases, but such a situation cannot be provided for by judicial interpretation by courts, but only by an appropriate agency.”
The application of the lower rate of tax on the assessee company on the footing that it is an industrial company, being in conformity with the order of the Tribunal for an earlier year, which, in turn, had applied the judgments of the two High Courts, cannot be stated to be erroneous, though some prejudice might have been caused to the revenue by way of loss of revenue. But as has already been stated, it is not enough that some prejudice is caused to the revenue but it is not further necessary that the order sought to be revised by the CIT should also be erroneous. The order sought to be revised in the present case, not being erroneous, is not amenable to the jurisdiction of the CIT under section 263. Therefore, even on this ground, which is an independent ground, the appeal should succeed.
8. Mr. Surana has also sought to invoke the doctrine of merger in support of the appeal. He pointed out that against the assessment order there was an appeal to the CIT (Appeals) and one of the grounds was that the assessee should be given interest under section 214 of the Act on the refund of Rs. 1,42,366. The CIT (Appeals) vide paragraph 8 of his order, directed the Assessing Officer to grant interest as was due. Mr. Surana says that this direction was given with regard to the tax found refundable, which was worked out on the footing that the assessee was an industrial company, and since the direction of the CIT (Appeals) to grant interest impinges upon the amount refundable to the assessee, the controversy with regard to the proper rate of tax applicable to the assessee must be deemed to have merged with the appellate order and, therefore, the CIT was not right in law in seeking to initiate proceedings under section 263. We are unable to uphold the contention, which appears to us to be a little far-fetched. The legal position with regard to merger has been laid down by the jurisdictional High Court in Hamilton & Co. (P.) Ltd. v. CIT [1991] 187 ITR 568/57 Taxman 194 (Cal.). The rate of tax is one thing; the interest under section 214 is entirely different thing. By contesting the non-grant of the interest, the assessee cannot be said to have contested the rate of tax also, which is the subject-matter of the order under section 263. The test would be whether the direction of the CIT (Appeals) would be a affected in any way by the order under section 263. In our view, it would not. If the direction of the CIT is upheld and the tax is computed @ 60 per cent, the interest payable to the assessee under section 214 may get reduced. However, the direction of the CIT (Appeals) would not otherwise be nullified or frustrated. The rate of tax and the interest under section 214 are two totally independent issues. Applying the test laid down by the Calcutta High Court in the decision cited supra with regard to the doctrine of merger, we hold that the said doctrine is not applicable to the facts of the present case. This contention of the assessee fails.
9. On merits, the issue is covered by the order of the Tribunal in the assessee’s case for the assessment year 1981-82. It has been admitted on behalf of the assessee that if the provisions of the relevant Finance Act are applied in the manner in which the Income-tax authorities want to, the assessee’s income from manufacturing activities would be less than 51 per cent of its total income. But it is contended that the interpretation placed on the provisions of the relevant Finance Act by the Tribunal for the assessment year 1981-82 is in respectful conformity with the interpretation placed on the provisions by the Kerala High Court and Andhra Pradesh High Court in the decisions cited supra and, therefore, in the interest of judicial discipline and consistency, the said order should be followed. We have no reservation whatsoever in accepting the contention. It would be better to reproduce the relevant part of the Tribunal’s order for the assessment year 1981-82 wherein this issue has been decided in favour of the assessee, as under :-
“3. It is argued by learned Departmental Representative that since the assessee-company had no income from its business of manufacturing goods it could not be ‘industrial company’. For that purpose, he has placed reliance upon the Explanation to the Clause (c) of section 2(7) of the Finance Act, 1981 which is reproduced above.
4. We find no merit in such contention of learned Departmental Representatives. Such provision has already been interpreted by the Kerala High Court and Andhra Pradesh High Court in the case of Cochin Co. v. CIT [1978] 114 ITR 822 and Nava Bharat Enterprises (P.) Ltd. v. CIT [1983] 143 ITR 804. Following the said authorities, we hold that the CIT (Appeals) has rightly held the assessee-company as ‘industrial company’.”
It would be noticed that the contention before the Tribunal by the learned Departmental Representative was the same as has been raised by the CIT in the present proceedings. Since the controversy has already been decided by the Tribunal in favour of the assessee, and there being no change in the factual or legal position for the year under appeal, respectfully following the said order, we hold that the assessee has rightly been treated as an industrial company by the ITO. Thus, even on merits, the order of the CIT cannot be upheld.
10. The appeal is accepted and the order of the CIT is set aside.