JUDGMENT
Kurian Joseph, J.
1. In exercise of the power of revision under Section 263 of the IT Act, 1961 whether the CIT is justified in directing to reopen the computation of income which was not interfered with by the appellate authority in the appeal filed by the assessee on other grounds, is the question to be considered in this writ petition.
2. Short facts. The petitioner is the assessee, a partnership firm. The assessment year is 1992-93. Section 44AC in the matter of computation of income was available on the statute book at the relevant time (omitted w.e.f. 1st April, 1993). It was the usual practice at that time, both for the assessee and the Revenue, to take 40 per cent of the purchase price of alcoholic liquor for human consumption other than Indian made foreign liquor (IMFL) as the profit. The petitioner also adopted the same method and returned an income of Rs. 5,25,645 from arrack business (40 per cent of the purchase cost). After setting off the loss in the toddy business the net income was computed as Rs. 2,17,217. But the AO reduced the loss on toddy business from Rs. 3,08,428 to Rs. 1,54,215 and added a sum of Rs. 7,00,000 as credits and the assessment was completed on 7th Feb., 1995 (Ext. PI). The matter was pursued in appeal and the CIT(A) disposed of the appeal by setting aside the assessment and directing the assessing authority to issue summons to the partners concerned, examine them and permit the appellant (petitioner) firm to cross-examine the partners and then enter a finding regarding the genuineness or otherwise of the credits. That order is dt. 13th Dec, 1995 (Ext. P2). Pursuant to Ext. P2 the assessing authority passed Ext. P3 assessment order dt. 6th March, 1998. Income from sale of arrack was not touched and the addition made as per Ext. PI was sustained. The matter was pursued in appeal; the same was dismissed as per Ext. P4 order dt. 4th Aug., 1999. Ext. P5 appeal before the Tribunal filed against Ext. P4 is pending. While so, Ext. P6 notice was issued proposing to invoke Section 263 and revise Ext. P3 order of assessment dt. 6th March, 1998, in view of the decision of the Supreme Court in Union of India and Anr. v. A. Sanyasi Rao and Ors. . Petitioner took up several contentions, mainly regarding limitation and jurisdiction. The contentions were repelled and Ext. P10 order was passed by the CIT directing the assessing authority to recompute the income on the basis of the decision of the Supreme Court referred to abovecompute the income on the basis of the P & L a/c and not at 40 per cent as was done on a wrong interpretation of Section 44AC. The Supreme Court held that Section 44AC r/w Section 206C is only a machinery provision and not a charging section and that those provisions do not dispense with the regular assessment as provided under Sections 28 to 43C of the IT Act.
3. Sri P. Balakrishnan, learned Counsel appearing for the petitioner contends that the computation of income as per Section 44AC had attained finality as per Ext. PI order of assessment dt. 7th Feb., 1995 as confirmed in Ext. P2 appellate order dt. 13th Dec, 1995. Therefore, the same issue was not liable to be reopened in exercise of the powers under Section 263 of the Act. It is also barred by limitation since Ext. P10 order is passed only on 30th March, 2000 whereas the issue had otherwise become final in the assessment order dt. 7th Feb., 1995 as confirmed in the appellate order dt. 13th Dec, 1995. It is also contended that there is no error to be qualified as causing prejudice to the interests of the Revenue and hence the CIT lacks jurisdiction to pass an order under Section 263 of the Act.
4. Sri P.K. Ravindranatha Menon, learned senior Central Government counsel (Taxes) on the other hand, submits that since Ext. PI assessment order dt. 7th Feb., 1995 has been set aside by the appellate authority as per Ext. P2 order dt. 13th Dec, 1995 and fresh assessment order has been passed by the assessing authority as per Ext. P3 order dt. 6th March, 1998, the impugned order under Section 263 is within the prescribed period of two years. Since the assessing authority passed the fresh assessment order after Sanyasi Rao’s case (supra) by the Supreme Court, non-application of the settled principle of law with regard to computation of income is certainly erroneous and prejudicial to the interests of the Revenue and hence the impugned proceedings under Section 263 are well within the jurisdiction of the CIT.
5. In order to appreciate the rival contentions, it is necessary to refer to the scheme and purpose of Section 263 of the IT Act. The section reads as follows:
263. Revision of orders prejudicial to Revenue(1) The CIT may call for and examine the record of any proceeding under this Act, and if he considers that any order passed therein by the AO is erroneous insofar as it is prejudicial to the interests of the Revenue, he may, after giving the assessee an opportunity of being heard and after making or causing to be made such inquiry as he deems necessary, pass such order thereon as the circumstances of the case justify, including an order enhancing or modifying the assessment, or cancelling the assessment and directing a fresh assessment.
ExplanationFor the removal of doubts, it is hereby declared that, for the purposes of this sub-section.
(a) an order passed on or before or after the 1st day of June, 1988 by the AO shall include
(i) an order of assessment made by the Asstt. CIT or Dy. CIT or the ITO on the basis of the directions issued by the Jt. CIT under Section 144A;
(ii) an order made by the Jt. CIT in exercise of the powers or in the performance of the functions of an AO conferred on, or assigned to, him under the orders or directions issued by the Board or by the Chief CIT or Director General or CIT authorised by the Board in this behalf under Section 120.
(b) ‘record’ shall include and shall be deemed always to have included all records relating to any proceeding under this Act available at the time of examination by the CIT;
(c) where any order referred to in this sub-section and passed by the AO had been the subject-matter of any appeal filed on or before or after the 1st day of June, 1988, the powers of the CIT under this sub-section shall extend and shall be deemed always to have extended to such matters as had not been considered and decided in such appeal.
(2) No order shall be made under Sub-section (1) after the expiry of two years from the end of the financial year in which the order sought to be revised was passed.
(3) Notwithstanding anything contained in Sub-section (2), an order in revision under this section may be passed at any time in the case of an order which has been passed in consequence of, or to give effect to, any finding or direction contained in an order of the Appellate Tribunal, the High Court or the Supreme Court.
Explanation.In computing the period of limitation for the purposes of Sub-section (2), the time taken in giving an opportunity to the assessee to be reheard under the proviso to Section 129 and any period during which any proceeding under this section is stayed by an order or injunction of any Court shall be excluded.
Three conditions must be satisfied for the CIT to exercise the power:
(1) There must be an order by the assessing authority;
(2) It is erroneous;
(3) The error has caused prejudice to the interests of the Revenue.
It is fairly clear that power under Section 263 is in the nature of a supervisory jurisdiction. When the CIT considers that an order passed by the assessing authority requires to be revised on the latter two conditions, he has to call for and examine the records of the assessing authority and pass the required orders, be it for enhancement, modification, cancellation or fresh assessment. It is also clear from the expression ‘prejudicial to the interests of the Revenue’ that it is not mere loss to the Revenue that is contemplated under Section 263. It must be prejudicial to the Revenue administration. Of course, loss of tax is prejudicial to the interests of the Revenue. The non-application of mind by an AO and ignoring the settled principle of law in the matter of computation of income and the resultant assessment order is certainly erroneous and prejudicial to the Revenue both in terms of loss of tax and in terms of prejudice to the Revenue administration. In the instant case it is clear from Ext. P3 revised assessment order dt. 6th March, 1998 that the assessing authority has not followed the dictum laid down by the Supreme Court in Sanyasi Rao’s case (supra), while computing the income on the basis of the P & L a/c. He mechanically followed the computation of income as originally made in the assessment order dt. 7th Feb., 1995 at 40 per cent of the P & L a/c. The contention of Sri Balakrishnan is that such computation of income having not been interfered with by the appellate authority in the appellate order dt. 13th Dec, 1995 (Ext. P2) and the Revenue having not taken any steps in that regard at that time, the assessing authority is justified in passing Ext. P3 order dt. 6th March, 1998 maintaining the income as 40 per cent of the P & L a/c. The contention cannot be appreciated. On facts, it has to be seen that what has been done in Ext. P2 order of the appellate authority is to set aside the assessment order dt. 7th Feb., 1995. It has also to be seen that the appellate authority in the order dt. 13th Dec, 1995 sustained the income at 40 per cent since that appellate order was prior to Sanyasi Rao’s case (supra). After the decision in Sanyasi Rao’s case (supra) rendered by the Supreme Court on 13th Feb., 1996, the assessing authority has necessarily to apply the principle as settled by the Supreme Court in computing the income from arrack business. The assessment of income under Section 44AC in Ext. P3 order dt. 6th March, 1998 is hence certainly an error. There is both loss to the Revenue as well as prejudice to the Revenue administration.
6. On the question of limitation also, the contention of Sri Balakrishnan, learned Counsel for the petitioner, cannot be appreciated. The impugned Ext. P10 order is dt. 30th March, 2000. The limitation is two years from the end of the financial year in which the order sought to be revised was passed. The order sought to be revised was passed on 6th March, 1998. Therefore, Ext. P10 order dt. 30th March, 2000 is within the stipulated period of two years. What is revised is not Ext. PI order dt. 7th Feb., 1995. That order had already been set aside in Ext. P2 appellate order dt. 13th Dec, 1995. Neither is it the appellate order that is revised in the instant case. The order that is revised is the order of assessment (Ext. P3) dt. 6th March, 1998 passed pursuant to Ext. P2 appellate order. Thus-, the impugned Ext. P10 order passed is within the powers of the CIT under Section 263 of the Act and the same is not hit by limitation either.
Therefore, there is no merit in the writ petition. It is accordingly dismissed.