Commissioner of Income-Tax, Bangalore

Vs

Shree Manjunathesware Packing Products & Camphor Works

(G. T. Nanavati, M. Jagannadha Rao JJ)

02.12.1997

JUDGMENT

 

NANAVATI, J.

1.Leave granted.

2.Heard learned counsel on both the sides.

3.This appeal arises out of the judgment and order passed by the High Court of Karnataka on 6th June, 1995 in I.T.R.C.No.26/93.The question that was referred to the High Court was:

"Whether, on the facts and in the circumstances of the case, the Appellate Tribunal is right in law in holding that the word 'record' used in Sec.263 (1) of the Act would not mean the record as it stands at the time of examination by the Commissioner, but it means the record as it stands at the time the order in question was passed by the ITO?"

4.The respondent-firm, during the previous year relevant to the assessment year 1977-78, had constructed a cinema theatre and in the return filed y it had shown the cost of construction at Rs.20,28,498/- (Rs.23,78,242 less Rs.3,49,644 being electric portion).The Income-Tax Officer on 2nd February, 1980 wrote to the Departmental Valuation Officer to ascertain and report correct cost of construction of the theatre.The Valuation Officer expressed his inability to give hisvaluation report by 31st March, 1980 by which date the assessment was to be completed. The Income-Tax Officer, therefore, without waiting for his report, passed an order of assessment accepting the valuation mentioned by the assessee in its return. The Valuation Officer submitted his report on 16th December, 1980 He determined the cost of construction at assessee.Therefore, the Commissioner of Income-Tax issued a notice under Section 263 (1) of the Income-Tax Act to the assessee on the ground that investment not accounted for by the assessee firm should have been brought to tax and the Income-Tax Officer having not done so, his order was erroneous and prejudicial to the interest of the Revenue.Before the Commissioner, it was contended by the assessee that as the Valuation eport was not available to the Income-Tax Officer at the time of passing the assessment order and did not form part of the record of the proceeding, it could not be a valid basis for initiating an action under Section 263 of the Act and, therefore, the proceeding deserved to be dropped.The decision of the Calcutta High Court in Ganga Properties Vs.I.T.O.,[(1979) 118 ITR 447] was relied upon in support of that contention. The Commissioner rejected it on the ground that the term 'record' would include all records available at the time of examination by him, set aside the assessment made by the Income-Tax Officer and directed him to pass a fresh assessment order in light of the observations made by him.

5.The assessee preferred an appeal to the Income Tax Appellate Tribunal against that order.The Tribunal upheld the contention of the assessee relying upon the judgment of the Calcutta High Court in Ganga Properties case (supra), allowed the appeal and set aside the order passed by the Commissioner.

6.At the instance of the Revenue, the question stated above was referred to the High Court of Karnataka for its opinion.The High Court after referring to the decisions of the Calcutta High Court in Ganga Properties case and C.I.T. Vs.S.M.Oil Extraction Pvt.Ltd.[(1991) 190 ITR 404], held that though the record contemplated by Section 263 (1) does not mean only the order of assessment but it comprises all proceedings on which the assessment is based, yet if there was some record which was not available on the date of compilation of assessment that record would not form part of the order of the assessment authorities.It, therefore, answered the question in affirmative, i.e., in favour of the assessee and against the Revenue.The Revenue has, therefore, filed this appeal.

7.Mr.Shukla, learned counsel for the Revenue, submitted that in view of the amendments made in Section 263 (1) by the Finance Act of 1988 and the Finance Act of 1989, the term 'record' would mean all records relating to that proceeding available at the time of examination by the Commissioner.He further submitted that even though the Valuation Report submitted by the Departmental Valuation Officer was not available to the Income-Tax Officer when he had passed the assessment order, as it was called for by him before passing of the assessment order, it became a part of the record and, therefore, it was open to the Commissioner to consider the same while exercising his revisional power under that section.Strongly opposing these submissions, Ms.Indu Malhotra, learned counsel appearing for the assessee, submitted that as the Commissioner had passed the order on 3rd March, 1982, the amendments made in Section 263 (1), in 1988 and 1989, though with retrospective effect cannot have the effect of validating the order of the Commissioner which was illegal when passed.She submitted that when the order was passed by the Commissioner the correct position of law was that only hat record which was available to the Income-Tax Officer could be considered by the Commissioner for the purposes of exercising his power under Section 263 (1).She submitted that the legislature by adding the explanation and widening the definition of the term 'record' has now enabled the Commissioner to take into consideration all records relating to the proceeding.In her submission, the 1989 amendment had only limited retrospective effect.If an order passed by the Commissioner under Section 263, after 1st June, 1988 the material, which was not available to the Income-tax Officer, when he had passed the assessment order, then its validity had to be determined on the basis that not only all the record of that proceeding but the record relating to it was also available to the Commissioner.But an order passed before 1st June, 1988, if it was illegal for the reason that it had taken into consideration other material also, then the amendment of 1989 did not have the effect of making it legal.

8.Earlier Section 263 (1) did not contain any explanation. It enables the Commissioner to call for and examine the record of any proceeding under the Act and pass such order thereon as the circumstances of the case justify, including an order enhancing or modifying the assessment or cancelling the passed by the assessing officer is erroneous insofar as it is prejudicial to the interests of the Revenue. By the Taxation Laws (Amendment) Act, 1984, an explanation was added to Section 263 (1) for removal of certain doubts but it is not necessary to refer to that explanation as it related to the meaning of the expression" order passed by the assessing officer" and, therefore, not relevant for the purpose of this case.By the Finance Act, 1988, the said explanation as substituted w.e.fLegislature had to make that amendment is stated in the Memorandum explaining the provisions in the Finance Bill of 1988.We will refer to only that part which is relevant for us.It was observed by the Legislature that the provision as it stood then, had given rise to judicial controversy in respect of the following:

"48. x x x x x x

(a) On the interpretation of the term 'record': It has been held in some cases that the word 'record' in section 263 (1) could not mean the record  as it stood at the time of examination by the Commissioner but it meant the record as it stood at the time when the order was passed by the Assessing Officer. Such an interpretation is against the Legislative intent and defeats the very objective sought to be achieved by such provisions, since the purpose is to revise the order on the basis of the record as is available to the Commissioner at the time of examination.x x x x x xTo eliminate litigation and to clarify the legislative intent in respect of the provisions in the three Direct Tax Acts, it is proposect to clarify the legal position in this regard in the Explanation to the relevant sections. The proposed amendments are intended to make it clear that 'record' would include all records relating to any proceedings under the concerned direct tax laws available at the time of examination by the Commissioner."

The relevant part of the explanation after its substitution read as follows:

"Explanation.-For the removal of doubts, it is hereby declared that, for the purposes of this sub-section,

(a) ...................

(b)  "record" includes all records relating to any  proceeding under  this  Act available at the time of examination  by  the Commissioner,

(c).............".

9.  Thus, by this amendment, definition of the  term  "record" for   the  purpose  of  Section  263,  was  provided  by   the legislature.  But  a doubt regarding the meaning of  the  term 'record'  still persisted and, therefore, a further  amendment was  made  by the Legislature while enacting  Finance  Act  of 1989. The Memorandum explaining the provisions in the  Finance Bill,  1989  makes  that  clear.  Paragraph  28  of  the  said Memorandum reads as under:

28.  Under  the  existing provisions of section  263  of  the Income-tax Act and corresponding provisions of the  Wealth-tax Act  and the Gift-tax Act, the Commissioner of  Income-tax  is empowered to call for and examine the record of any proceeding and  if he considers that the orders passed by  the  Assessing Officer  is  erroneous in so far as it is prejudicial  to  the interests  of Revenue, he may pass such order thereon  as  the circumstances   of  the  case  justify,  including  an   order enhancing or modifying the assessment, or canceling the  same or directing a fresh assessment. By the Finance Act, 1988,  an Explanation  was substituted with effect from 1st June,  1988, to the relevant sections of the Income-tax Act, Wealth-tax Act and  Gift-tax  Act  to clarify that the  term  "record"  would include  all records relating to any proceeding  available  at the  time of examination by the Commissioner. Further, it  was matters except those which have been considered and decided in an  appeal.  The  above Explanation was  incorporated  in  the Finance Act,  1988, to clarify this legal  position  to  have always  been  in existence. Some Appellate  Authorities  have, however,   decided  that  the  Explanation  will  apply   only prospectively, i.e., only to those orders which are passed  by the  Commissioner  after 1.6.1988. Such an  interpretation  is against the legislative intent and it is, therefore,  proposed to  amend section 263 of the Income-tax Act, so as to  clarify that the provisions of the Explanation shall be deemed to have always been in existence. Amendments on the above lines have been proposed in section 25 of  the  Wealth-tax  Act and section 24 of  the  Gift-tax  Act also."

10.   After  that  amendment,  the  relevant  part   of   the Explanation reads as under:

"Explanation.  -  For  the removal of  doubts,  it  is  hereby declared that, for the purposes of this sub-section, -

(a) ....................

(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 Commissioner;"

11. After referring to the history of this provision, we will now  refer  to the decisions, which were relied  upon  by  the learned  counsel  in  support of the  rival  contentions  with respect  to the correct interpretation of the  word  "record". The  Calcutta  High Court in Ganga Properties  Vs.  Income-tax Officer  [(1979) 118 ITR 447], after observing that  provision of  Section 263(1) of the Act has to be understood on its  own language and in the context of the revisional jurisdiction  of the  Commissioner conferred by it and also the scheme  of  the Act, held as under :

"Whereas  s. 263(1) of the Act uses the words  "is  erroneous" and  not the words "has become subsequently erroneous".  Under this  section, the Commissioner may call for and examine  "the record"  of  the  "proceeding" in order  to  consider  in  his revisional jurisdiction as to whether the order in question by the  IT0  "is  erroneous". Therefore, he is to  call  for  the "record"  of  the "proceeding" which was before  the  IT0  and examine  it in order to consider whether on the basis  of  the material  which  were before the IT0 and formed part  of  that record  the  order  passed  by  the  IT0  is  "erroneous"  and prejudicial to the interests of the revenue. Therefore,  the materials which were not in existence  at  the time  the  assessment  was  made  but  afterwards  came   into existence cannot form part of the record of the proceeding  of " _
the  IT0 at the time he passes the order and  accordingly,  it cannot be taken into consideration by the Commissioner for the purposes of invoking his jurisdiction under this section,  for he  is  not  an appellate authority  under  this  section  and exercise  only revisional jurisdiction and hence he  can  only take into consideration the record as it stood before the  ITO and  the  materials  in  such  record  for  the  purposes   of ascertaining  whether the order in question was erroneous  and prejudicial to the interests of the revenue.

In other words, any material which comes into existence  later on cannot form part of the record of the ITO for the  purposes of  invoking the Commissioner's power under s. 263(1)  of  the Act. And it is only after the proceeding is lawfully initiated by the Commissioner on the basis of the record of the ITO that the Commissioner can take into account any material which  may come into existence later on in view of the expression  "after making  or  causing  to  be made  such  enquiry  as  he  deems necessary" used in the second limb of this section." The  Calcutta High Court interpreted the word  "record"  under Section  263(1) before it was amended by the Finance  Acts  of 1988  and 1989. Following that decision Kerala High  Court  in Commissioner  of Income-Tax Vs. M.A. Unneerikutty [(1992)  194 ITR  546], also took the same view. In that case attention  of the  Kerala  High Court was drawn to the  amendments  made  by Finance  Acts of 1988 and 1989. The High Court,  however,  did not  consider the effect of the said amendments as it  was  of the  view  that  were  was no occasion  for  the  Tribunal  to consider the scope of the amended Section because it came into force  only in 1988, much later than the order  disposing,  of the revision and, therefore no such question arose out of  the order  off  the  Tribunal. It was  submitted  by  the  learned counsel  for  the  respondent that  Section  263(1)  was  thus interpreted  by the Calcutta and Kerala High Courts before  it was  amended  in 1988 and 1989 and, therefore,  that  was  the correct  legal  position  till 1st  June,  1988.  The  learned counsel  also drew our attention to the decision of  Allahabad High Court in Commissioner of Wealth Tax Vs. Raj Narain Pratap Narain (HUF) [(1989) 177 ITR 34]. In that case, in the wealth-tax  proceedings for the assessment years 1978-79 and  1979-80 the Assessing Officer had determined the fair market value  of an immovable property at Rs.7,35,086/- as on the two valuation dates relevant for the years in dispute. After the  completion of  those  assessments,  the Commissioner  of  Wealth-tax,  on coming  to know that the property was sold by the assessee  on August 18, 1983 for a consideration of Rs.36 lakhs,  initiated proceeding  under  Section  25(2) of the  Wealth-Tax  Act  and subsequently  passed an order holding the impugned  assessment orders  erroneous  and  prejudicial to the  interests  of  the revenue.  On appeal by the assessee, the Income Tax  Appellate Tribunal  held that "the expression "record" in section  25(2) of  the  Act cannot mean the record as it stands at  the  time when  the action under that section is taken but it means  the record  as it stands when the assessment order was  passed  by the  assessing officer". In support of this view the  Tribunal had  relied  upon the decision of the Calcutta High  Court  in Ganga  Property's (supra). Against the order of  the  Tribunal the Commissioner of Wealth Tax had preferred two  applications under  Section  27(3)  of the Wealth-Tax  Act  but  they  were rejected  by the High Court. The view taken by  the  Allahabad High Court was that the question raised by the Department  was academic  because  the  Tribunal  had  not  passed  its  order entirely  on  the meaning of the expression "record"  and  the other  reasoning  on which the decision of  the  Tribunal  was based was a factual one and was equally fatal to the cause  of revenue. This decision is, therefore, of not any help at all.

12.  She further submitted that in a matter arising under  the Wealth-tax Act Gujarat High Court had also taken the same view and  the Department's special leave petitions Nos. 8511-13  of 1984  (Commissioner  of  Wealth-tax Vs.  Rajshree  S. Parekh) [(1991) 191 ITR Statute p.76] though were heard after the said two  amendments, this Court dismissed them summarily and  thus the  view taken by the Gujarat High Court was upheld. In  that case  the  Wealth-tax  Officer  had  assessed  the  assessee's property as per the approved valuer's report. The Commissioner in suo motu revision directed valuation in accordance with the departmental   valuer's  report.  The  Tribunal  allowed   the assessee's appeal against the order passed by the Commissioner and  also rejected the Departments reference application.  The High Court also rejected the reference application made by the Department. Aggrieved by the view taken by the High Court  the Department had filed the said special leave petitions in  this Court.  It is true that the said special leave petitions  were dismissed  summarily but that would not mean that  this  Court approved the view that was taken by the High Court. 13. In a later decision in Commissioner of Income-Tax Vs. S.M. Oil Extraction Pvt. Ltd. [(1991) 190 404], Calcutta High Court itself interpreted the word "record" differently. In that case the  assessment was completed on February 1, 1983. The  Income Tax  Officer before he completed the assessment  had  referred the matter of plant and machinery and electrical  installation to the Valuation Officer (P & M). His report was not  received by  the Income Tax Officer when the assessment was  completed. It  was  received by him after the assessment  proceeding  was completed.   The   Commissioner  of   Income-Tax   took   into consideration   the  said  Valuation  Report  and  found   the assessment order erroneous. In that context the question which had  arisen for consideration was whether the Commissioner  in exercise of jurisdiction under Section 263(1) of the Act could have relied upon the valuation report which had come into  the possession  of  the  Income-Tax  Officer  subsequent  to   the completion  of  the assessment. The Calcutta High  Court  held that "the record contemplated in section 263(1) does not  mean only the order of assessment but it comprises all  proceedings on  which  the  assessment  is  based.  The  Commissioner   is entitled,  for  the  purpose  of  exercising  his   revisional jurisdiction, to look into the whole evidence. The  expression "record"  as used in section 263 of the Act  is  comprehensive enough  to include the whole record of evidence on  which  the original assessment order was passed. The valuation proceeding is a part of the assessment proceeding. But once the valuation report  was  received  by the  Income  Tax  Officer,  although subsequent to the completion of the assessment, it forms  part of  the  assessment year in question". It  further  held  that "where  any  proceeding  is initiated in  the  course  of  the assessment  proceeding having a relevant and material  bearing on the assessment to be made and the result of such proceeding was  not  available  with the Income-Tax  Officer  before  the completion   of   the   assessment,  but   the   result   came subsequently, the revising authority is entitled to look  into such  material as it forms part of the assessment  records  of the particular assessment year"Calcutta High Court took this without referring to the definition of the word  "record" contained in the explanation to Section 263(1) of the Act.

14. It, therefore, cannot be said, as contended by the learned counsel for the respondent, that the correct and settled legal position,  with  respect to the meaning of the  word  "record" till  1st June, 1988, was that it meant the record  which  was available to the Income Tax Officer at the time of passing  of the  assessment  order. Further, we do not think that  such  a narrow  interpretation of the word "record" was justified,  in view  of the object of the provision and the nature and  scope of  the power conferred upon the Commissioner. The  revisional power  conferred on the Commissioner under Section 263  is  of wide  amplitude. It enables the Commissioner to call  for  and examine  the  record  of  any proceeding  under  the  Act.  It empowers  the Commissioner to marks or cause to be  made  such enquiry  as  he deems necessary in order to find  out  if  any it  is  prejudicial  to the interests of  the  revenue.  After examining the record and after making or causing to be made an enquiry if he considers the order to be erroneous then he  can pass  the  order  thereon as the  circumstances  of  the  case justify. Obviously, as a result of the enquiry he may come  in possession  of new material and he would be entitled  to  take that new material into account. If the material, which was not available   to  the  Income-Tax  Officer  when  he  made   the assessment  could  thus  be taken into  consideration  by  the Commissioner after holding an enquiry, there is no reason  why the   material  which  had  already  come  on  record   though subsequently  to the making of the assessment cannot be  taken into  consideration  by him. Moreover, in view  of  the  clear words used in clause (b) of the explanation to Section 263(1), it  has  to he held that while calling for and  examining  the record of any proceeding under Section 263(1) it is and it was open  to  be Commissioner not only to consider the  record  of that   proceeding  but  also  the  record  relating  to   that proceeding available to him at the time of examination.

15. The view that we are taking receives support from the two decisions  of  this Court, though the point  which  is  raised before  us was not specifically raised in those two cases.  In Tax Reference Case No.11 of 1983 (The Commissioner of  Income-Tax,  Gujarat-I Vs. Shri Arbuda Mills Ltd.) this  Court  after considering the effect of the amendment made in Section 263(1) of  the Act by the Finance Act, 1989 whereby clause c  of  the explanation  was also amended with retrospective  effect  from 1st  June,  1988,  held  that "the  consequence  of  the  said amendment  made with retrospective effect is that  the  powers under  Section 263 of the Commissioner shall extend and  shall be  deemed always to have extended to such matters as had  not been considered and decided in an appeal. Accordingly, even in respect  of  the  aforesaid three items,  the  powers  of  the Commissioner  under  Section  263 shall extend  and  shall  be deemed always to have extended to them because those items had not  been  considered and decided in the appeal filed  by  the assessee".  In  that  case the  assessment  was  completed  on 31.3.1978 and the Income Tax Officer while computing loss  and income of the assessee had accepted the claim of the  assessee in  respect  of those three items. Obviously, in  the  appeals filed by the assessee those items were not the  subject-matter of  the appeals as the decision in respect thereof was in  its favour.  In respect of those three items the Commissioner  had exercised  his power under Section 263 of the  Income-Tax  Act and,   therefore,   the   question  which   had   arisen   for consideration   was   "whether  on  the  facts  and   in   the circumstances  of the case, the order of assessment passed  by the  ITO  u/s 143(3) read with section 144B on  31.7.1978  had merged   with  that  of  the  Commissioner   (Appeals)   dated 15.12.1979  in respect of the three items in dispute so as  to exclude  the  jurisdiction of the Commissioner  of  Income-Tax under sec. 263"? Thus the amendment made in clause c was  held applicable to the orders passed before 1st June, 1988.

16.   In   South  India  Steel  Rolling  Mills.   Madras   Vs. Commissioner  of  Income Tax, Madras [1997 (9) SCC  728],  the Commissioner  in exercise of his power under Section  263  had withdrawn  the development rebate granted for the years  1962-
63, 1963-64, 1967-68 and 1968-69 on the ground that since  the partnership stood dissolved on 3.3.1968 on the death of one of the  two  partners,  before  the expiry  of  eight  years  the assessee  firm  was  not  entitled  to  the  benefit  of   the development rebate under Section 33(1)(a) of the Act. The said order  passed  by the Commissioner was challenged  before  the Tribunal but the assessee's appeal had failed. At its instance the following question was referred to the Madras High Court:

"Whether  on  the  facts and circumstances  of  the  case  the revision  of assessment under Section 263 by the  Commissioner for withdrawing the development rebate granted for  Assessment Years  1962-63,  1963-64, 1967-68 and 1968-69  is  proper  and justified."

The  High  Court  also decided against the  assessee.  In  the appeal  filed  by the assessee the order of  Commissioner  was challenged  inter  alia  on the ground that  the  power  under Section 263 could have been invoked on the basis of the record as it stood when be order was passed by the Income Tax Officer and  that  it was not open to the Commissioner  to  take  into account  dissolution  of the assessee firm, which  took  place after   passing   of  the  assessment   order   because   that circumstance was not disclosed by the record which was  before the  Income Tax Officer. Rejecting this contention this  Court held "As regards his taking into consideration an event  which had  occurred  subsequent to the passing of the order  by  the Income-Tax  Officer, it may be stated that in Explanation  (b) in  Section  263 there is an express provision wherein  it  is prescribed  that  "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 Commissioner". The death of one of the two partners  resulting in  the  dissolution of the assessee firm on account  of  such death  took  place prior to the passing of the  order  by  the Commissioner   and   it  could,  therefore,  be   taken   into consideration by him for the purpose of exercising his  powers under Section 263 of the Act." In that case also the amendment was held applicable to an order passed before 1st June, 1988.

17.  We, therefore, hold that it was open to the  Commissioner to  take into consideration all the records available  at  the time of examination by him and thus to consider the  Valuation Report  submitted by the Department valuation Cell  subsequent to  the  passing  of the assessment order and,  so  the  order passed by him was legal. The High Court was wrong in taking  a contrary view. We, therefore, allow this appeal, set aside the judgment  and  order passed by the High Court and  answer  the question  referred to the High Court in the negative  i.e.  in favour of the Revenue and against the assessee. In view of the facts  and circumstances of the case, there shall be no  order as to costs.