1. The appeal filed by the assessee is directed against the order passed by the learned Commissioner of Income-tax under Section 263 of the Income-tax Act, 1961 on the following grounds: 1. The order passed by the Ld. CIT under Section 263 of the Income-tax Act, is bad in law.
2. The Ld. CIT erred in holding that loss of Rs. 13,90,096 incurred by the appellant on sale of import entitlement license is not admissible deduction.
3. The Ld. CIT failed to appreciate that appellant had shown the value of import entitlement at Rs. 73,01,184 in the closing stock of assessment year 1996-97 and after selling part of it in assessment year 1997-98 and making a profit, the appellant had sold the balance in assessment year 1998-99 in which loss of Rs. 13,90,096 was incurred and therefore, the same had been correctly allowed by the Assessing Officer as deduction.
4. The Ld. Commissioner failed to appreciate that whereas in assessment year 1996-97, the appellant was allowed deduction under Section 80HHC, in assessment year 1998-99, business loss on sale of license has been allowed under Section 37(1) and therefore, there had not been allowance of double deduction.
2. The facts of the case, in brief, are that the assessee, a partnership firm, was engaged, during the previous year relevant to the assessment year under appeal, in the business exporting pens and ball pens. It filed its return of income declaring loss of Rs. 11,32,829 on 30.10.1998 for the assessment year under appeal. The assessment was completed on 29.12.2000 under Section 143(3) of the IT Act accepting the loss shown by the assessee. The entire order of assessment passed by the Assessing Officer reads, in verbatim, as under: The assessee-firm filed its return of income for assessment year 1998-99 on 30.10.1998 admitting a net loss of Rs. 11,32,828. This return of income was processed under Section 143(1)(a) without any prima facie adjustment on 31.3.1999. Subsequently, notice under Section 143(2) of the IT Act was issued and served on the assessee.
In response to notice under Section 143(2) of the IT Act, Mr. L.R. Bajaj, Advocate, attended from time to time, furnished the details called for and the case was discussed.
Assessed under Section 143(3) of the IT Act, the above loss is allowed to be carry forward. Credit for prepaid taxes and tax payable is determined as per ITNS 150 separately. Demand notice and challan is issued accordingly.
3. The learned Commissioner of Incom etax called for the records of the assessee and found that the assessee had shown, in the assessment year 1996-97, export turn over of Rs. 2.36 crores and total profit of Rs. 1.58 crores including import entitlements of Rs. 73.01 lakhs obtained by the assessee as a result of the exports made by it. The learned Commissioner noted that the entire profit including the value of import entitlements obtained by it was claimed by the assessee and allowed by the Assessing Officer as deduction under Section 80HHC while processing the return under Section 143(1) of the IT Act on 15.1.1997 for assessment year 1996-97. He further noted that the assessee had subsequently declared, in assessment year 1998-99, ie., the assessment year under appeal, loss of Rs. 13,90,096 on sale of the aforesaid import licences on which it had earlier (in assessment year 1996-97) claimed and obtained deduction under Section 80HHC with the result that it claimed a net loss of Rs. 11,32,829 in the return of income for the assessment year under appeal. The Ld. Commissioner was of the opinion that since the value of the aforesaid licences had already been considered while giving deduction under Section 80HHC for assessment year 1996-97, the claim of the assessee for further deduction by way of loss of Rs. 13,90,096 on sale of the said licences during the year under consideration was untenable. He was also of the view that there was failure on the part of the Assessing Officer in not examining the said claim of the assessee on merits and in accordance with law at the assessment stage with the result that the said claim of the assessee stood accepted without any objective consideration and evaluation of the issues involved by the Assessing Officer. He therefore formed the belief that the order mechanically passed by the Assessing Officer without application of mind was both erroneous and prejudicial to the interest of the revenue.
4. In view of the aforesaid, the Ld. Commissioner issued a show-cause notice under Section 263 asking the assessee to explain as to why the order passed by the Assessing Officer for the assessment year under appeal should not be set aside for being made afresh as per law after giving a reasonable opportunity of hearing to the assessee. The assessee submitted its reply to the show-cause notice which the learned Commissioner considered and, after consideration of the submissions made by the assessee, passed the impugned order setting aside the assessment made by the Assessing Officer with the direction to him to frame a fresh assessment as per law after giving a reasonable opportunity of hearing to the assessee. It is this order of the learned Commissioner, which is the subject-matter of appeal by the assessee before us.
5. In support of the appeal, the Ld. Authorized Representative for the assessee took us through the relevant notices issued and orders passed by the Departmental authorities. He submitted that the Assessing Officer had accepted the profit as shown in Profit & Loss Account for assessment year 1996-97 as eligible for deduction under Section 80HHC.He explained that the assessee had indeed suffered loss in the assessment year under appeal, i.e., assessment year 1998-99 as a result of sale of the entitlements and therefore, the assessee was entitled to claim the loss so suffered by it. He submitted that the Assessing Officer had considered all the relevant aspects of the case while passing the assessment order and it was only then that he decided to accept the loss in question as shown by the assessee. He argued that the claim of the assessee for deduction under Section 80HHC in assessment year 1996-97 and its claim for allowance of business loss on sale of import entitlements during the previous year relevant to the assessment year under consideration were altogether different from each other and that their admissibility depended upon the fulfilment of the statutory conditions laid down in that behalf. He submitted that the mere fact that the import licences had been taken into account while computing the deduction under Section 80HHC in an earlier year would not ipso facto disentitle the assessee from claiming loss suffered on their sale in a subsequent year. According to him, the assessee was entitled to both the claims in that it satisfied the requisite conditions prescribed for availing both of them. His alternative submission was that even if the issue was considered to be a debatable one, the learned Commissioner was not justified in assuming jurisdiction under Section 263 as the Assessing Officer had taken a plausible view while making the assessment. According to him, the Ld.
Commissioner was not at all right in law in substituting his own view for the view taken by the Assessing Officer in the matter. In support of his submissions, he relied upon the following orders: 4. Asstt. CIT v. Premier Consolidated Capital Trust India Ltd. [2004] 4 SOT 793 (Mum.)Wallfort Shares & Stock Brokers Ltd. v. ITO [2005] 96 ITD I2 (Mum.) (SB) 6. Order dated 16.5.2005 passed by "G" Bench Mumbai of the Tribunal in Red Rose Enterprise v. CIT IT Appeal No. 117 (Mum.) of 2004 for assessment year 2000-01.
6. In reply, Shri Rai, the learned Departmental Representative supported the order passed by the learned Commissioner under Section 263 of the Income-tax Act, 1961. He submitted that the Assessing Officer had not expressed any view in the assessment order and hence, there was no question of the Commissioner taking a different view in his order or substituting his own view for the view taken by the Assessing Officer. He submitted that the assessment order passed by the Assessing Officer was a non-speaking order, which did not reflect any application of mind on the part of the Assessing Officer. According to him, the Assessing Officer simply accepted mechanically what the assessee had claimed before him without any objective consideration or evaluation of the issues involved. He argued that mere passing of a mechanical and stereotyped order without any application of mind or objective evaluation of the relevant materials and issues by the Assessing Officer would render his order not only erroneous but also prejudicial to the interest of the revenue. Applying the aforesaid principles, the learned DR submitted that the learned Commissioner was, on the facts of the case, absolutely justified in exercising revisional jurisdiction under Section 263 of the Income-tax Act. He supported the order of the learned Commissioner with reference to the decisions in CIT v. M.M. Khambhaiwala [1992] 198 ITR 144 (Guj.) and Malabar Industrial Co. Ltd. v. CIT - affirmed by the Hon'ble Supreme Court in Malabar Industrial Co. Ltd. v. CIT .
7. We have considered the rival submissions. There is no dispute that the Assessing Officer had earlier taken into consideration and allowed deduction under Section 80HHC with reference to the import entitlements of Rs. 73,01,184 in assessment year 1996-97 obtained by the assessee.
Thus, the assessee first claimed and obtained, in assessment year 1996-97, 100% deduction on the said import entitlements under Section 80HHC on the basis of their mere receipt from the Government and without selling them. The assessee thereafter sold those licences and claimed loss of Rs. 13,90,096 on their sale in the assessment year under appeal. In other words, the assessee was claiming in the assessment year under appeal further deduction of Rs. 13,90,096 on account of the alleged loss over and above the deduction of Rs. 73,01,184 allowed by the Assessing Officer under Section 80HHC in assessment year 1996-97 on the basis of mere receipt of import licences.
8. The facts available on record clearly show that the assessee was not engaged in the business of purchase and sale of import licences during the relevant period. Import licences accrue to an exporter as incentive on the basis of exports made. Licences are neither sold by the Government nor are they purchased by the exporters. It is not a commodity but a licence or permit granted by the Government to the exporters as incentive to enable them to import the things specified therein. Such licences are also transferable. It therefore follows that an exporter cannot theoretically or otherwise suffer any loss on sale of import licences as he obtains them from the Government as incentive on the basis of exports made without paying separately any price for purchasing them. Loss is caused only when a thing's original cost exceeds its later selling price or when the dominion over the things are irretrievably destroyed or lost. An exporter does not pay any cost to the Government for obtaining the import licences and hence, there can be no loss to an assessee-exporter when he sells them. He always makes profit as and when he sells such licences. He however cannot make profit on the mere receipt of licences without selling them. Section 28(m) of the Income-tax Act seeks to bring the "profits on sale of a licence" granted under the Imports (Control) Order, 1955, made under the Imports and Exports (Control) Act, 1947 to the charge of tax. Two aspects thus clearly emerge; one, there can only be profit (and, in no case loss) on sale of import licences obtained by the assessee directly from the Government as incentive on the basis of exports made; and two, the profits can accrue to the assessee only in the year in which such licences are sold and not before. It is fairly well-settled that an assessee cannot adopt a method of showing profit or loss contrary to law. The Assessing Officer ought to have, therefore, examined as to whether the assessee, in the first instance, was justified in law in showing a higher profit (without selling licences) in an earlier year in order to claim exemption, e.g., under Section 80HHC and further thereafter in claiming loss in the year under consideration on the ground that the licences obtained earlier were sold without there being any actual loss to the assessee on such sale. He did not examine the aforesaid issues at all while making the assessment. We are not suggesting as to what view the Assessing Officer should have taken in the matter. We are simply highlighting the arbitrariness in the decision making of the Assessing Officer when the facts available on record should have provoked him to judicially inquire and examine the matter in accordance with law. We have therefore, no hesitation to hold that the assessment order mechanically passed by him without due application of mind was not only erroneous but was also prejudicial to the interest of the revenue within the meaning of Section 263 of the Income-tax Act.
9. Let us now examine the legality of the order passed by the learned Commissioner with reference to the statutory conditions laid down in Section 263. The scheme of the Income-tax Act is to levy and collect tax in accordance with the provisions of the Act and this task is entrusted to the revenue. If due to an erroneous order of the Assessing Officer, the revenue is losing tax lawfully payable by a person, it will certainly be prejudicial to the interests of the revenue. As held in Malabar Industrial Co. Ltd. 's case (supra), the Commissioner can exercise revisional jurisdiction under Section 263 if he is satisfied that the order of the Assessing Officer sought to be revised is (z) erroneous; and also (u) prejudicial to the interests of the revenue.
10. The word "erroneous" has not been defined in the Income-tax Act. It has however been defined at page 562 in Black's Law Dictionary (Seventh Edition) thus: "erroneous, adj. Involving error; deviating from the law." The word "error" has been defined at the same page in the same Dictionary thus: error. N. 1. A psychological state that does not conform to objective reality; a belief that what is false is true or that what is true is false.
11. At page 649/650 in P. Ramanatha Aiyer's Law Lexicon (Reprint 2002), the term "error" has been defined to mean thus: Error. A mistake in judgment or deviation from the truth in matters of fact, and from the law in matters of judgment;... 'Error', is a fault in judgment, or in the process or proceeding to judgment or in the execution upon the same, in a Court of Record; which in the Civil Law is called a Nullitie. (Termes de la Ley) Something incorrectly done through ignorance or inadvertence (Section 99, C.P.C. and Section 215, Cr.P.C.).
Error, Fault. Error respects the act; fault respects the agent, an error may lay in the judgment, or in the conduct; but a fault lies in the will or intention.
12. At page 650 of the aforesaid Law Lexicon, the scope of "ERROR, MISTAKE, BLUNDER, and HALLUCINATION" has been explained thus: An error is any deviation from the standard or course of right, truth, justice, or accuracy, which is not intentional. A mistake is an error committed under a misapprehension or misconception of the nature of a case. An error may be from the absence of knowledge; a mistake is from insufficient or false observation. Blunder is a practical error of a peculiarly gross or awkward kind, committed through glaring ignorance, heedlessness, or awkwardness. "An error may be overlooked or atoned for, a mistake may be rectified; but the shame or ridicule which is occasioned by a blunder, who can counteract." Strictly speaking, Hallucination is an illusion of the perception, a phantasm of the imagination. The one comes of disordered vision, the other of disordered imagination. It is extended in medical science to matters of sensation, whether there is no corresponding cause to produce it. In its ordinary use it denotes an unaccountable error in judgment or fact; especially in one remarkable otherwise for accurate information and right decision. It is exceptional error or mistake in those otherwise not likely to be deceived. (Smith, Syn. Dis) 13. In order to ascertain whether an order sought to be revised under Section 263 is erroneous, it should be seen whether it suffers from any of the aforesaid forms of error. In our view, an order sought to be revised under Section 263 would be erroneous and fall in the aforesaid category of "errors" if it is, inter alia, based on an incorrect assumption of facts or an incorrect application of law or non-application of mind to something which was obvious and required application of mind or based on no or insufficient materials so as to affect the merits of the case and thereby cause prejudice to the interest of the revenue.
14. Section 263 of the Income-tax Act seeks to remove the prejudice caused to the revenue by the erroneous order passed by the Assessing Officer. It empowers the Commissioner to initiate suo motu proceedings either where the Assessing Officer takes a wrong decision without considering the materials available on record or he takes a decision without making an enquiry into the matters, where such inquiry was prima facie warranted. The Commissioner will be well within his powers to regard an order as erroneous on the ground that in the circumstances of the case, the Assessing Officer should have made further inquiries before accepting the claim made by the assessee in his return. The reason is obvious. Unlike the Civil Court which is neutral in giving a decision on the basis of evidence produced before it, the role of an Assessing Officer under the Income-tax Act is not only that of an adjudicator but also of an investigator. He cannot remain passive in the face of a return, which is apparently in order but calls for further enquiry. He must discharge both the roles effectively. In other words, he must carry out investigation where the facts of the case so require and also decide the matter judiciously on the basis of materials collected by him as also those produced by the assessee before him. The scheme of assessment has undergone radical changes in recent years. It deserves to be noted that the present assessment was made under Section 143(3) of the Income-tax Act. In other words, the Assessing Officer was statutorily required to make the assessment under Section 143(3) after scrutiny and not in a summary manner as contemplated by Sub-section (1) of Section 143. Bulk of the returns filed by the assessees across the country is accepted by the Department under Section 143(1) without any scrutiny. Only a few cases are picked up for scrutiny. The Assessing Officer is therefore, required to act fairly while accepting or rejecting the claim of the assessee in cases of scrutiny assessments. He should be fair not only to the assessee but also to the Public Exchequer. The Assessing Officer has got to protect, on one hand, the interest of the assessee in the sense that he is not subjected to any amount of tax in excess of what is legitimately due from him, and on the other hand, he has a duty to protect the interests of the revenue and to see that no one dodged the revenue and escaped without paying the legitimate tax. The Assessing Officer is not expected lo put blinkers on his eyes and mechanically accept what the assessee claims before him. It is his duty to ascertain the truth of the facts stated and the genuineness of the claims made in the return when the circumstances of the case are such as to provoke inquiry.
Arbitrariness in either accepting or rejecting the claim has no place.
The order passed by the Assessing Officer becomes erroneous because an enquiry has not been made or genuineness of the claim has not been examined where the inquiries ought to have been made and the genuineness of the claim ought to have been examined and not because there is anything wrong with his order if all the facts stated or claim made therein are assumed to be correct. The Commissioner may consider an order of the Assessing Officer to be erroneous not only when it contains some apparent error of reasoning or of law or of fact on the face of it but also when it is a stereo-typed order which simply accepts what the assessee has stated in his return and fails to make enquiries or examine the genuineness of the claim which are called for in the circumstances of the case. In taking the aforesaid view, we are supported by the decisions of the Hon'ble Supreme Court in Rampyari Devi Saraogi v. CIT , Smt. Tara Devi Aggarwal v. CIT and Malabar Industrial Co. Lid's case (supra). In Malabar Industrial Co. Ltd. 's case (supra) the Hon'ble Court has held as under: There can be no doubt that the provision cannot be invoked to correct each and every type of mistake or error committed by the Assessing Officer, it is only when an order is erroneous that the section will be attracted. An incorrect assumption of facts or an incorrect application of law will satisfy the requirement of the order being erroneous. In the same category fall orders passed without applying the principles of natural justice or without application of mind.
15. In our humble view, arbitrariness in decision-making would always need correction regardless of whether it causes prejudice to an assessee or to the State Exchequer. The Legislature has taken ample care to provide for the mechanism to have such prejudice removed. While an assessee can have it corrected through revisional jurisdiction of the Commissioner under Section 264 or through appeals and other means of judicial review, the prejudice caused to the State Exchequer can also be corrected by invoking revisional jurisdiction of the Commissioner under Section 263. Arbitrariness in decision-making causing prejudice to either party cannot therefore be allowed to stand and stare at the legal system. It is difficult to countenance such arbitrariness in the actions of the Assessing Officer. It is the duty of the Assessing Officer to adequately protect the interest of both the parties, namely, the assessee as well as the State. If he fails to discharge his duties fairly, his arbitrary actions culminating in erroneous orders can always be corrected either at the instance of the assessee, if the assessee is prejudiced or at the instance of the Commissioner, if the revenue is prejudiced. The underlying philosophy of Section 263 is the removal of the prejudice caused to the revenue by the erroneous orders of the Assessing Officer. In CIT v. V.P. Agarwal [1993] 68 Taxman 236 (All.), the Hon'ble Allahabad High Court has held as under: 14. While making an assessment, the ITO has a varied role to play.
He is the investigator, prosecutor as well as adjudicator. As an adjudicator he is an arbitrator between the revenue and the taxpayer and he has to be fair to both. His duty to act fairly requires that when he enquires into a substantial matter like the present one, he must record a finding on the relevant issue giving, howsoever briefly, his reasons therefor. In S.N. Mukherjee v. Union of India AIR 1990 SC 1984, it has been observed by the Hon'ble Supreme Court as follows: 35. Reasons, when recorded by an administrative authority in an order passed by it while exercising quasi-judicial functions, would no doubt facilitate the exercise of its jurisdiction by the appellate or supervisory authority. But the other considerations, referred to above, which have also weighed with this Court in holding that an administrative authority must record reasons for its decision are of no less significance. These considerations show that the recording of reasons by an administrative authority serves a salutary purpose, namely, it excludes chances or arbitrariness and ensures a degree of fairness in the process of decision-making. The said purpose would apply equally to all decisions and its application cannot be confined to decisions which are subject to appeal, revision or judicial review. In our opinion, therefore, the requirement that reasons be recorded should govern the decisions of an administrative authority exercising quasi-judicial functions irrespective of the fact may, however, be added that it is not required that the reasons should be as elaborate as in the decision of a court of law. The extent and nature of the reasons would depend on particular facts and circumstances. What is necessary is that the reasons are clear and explicit so as to indicate that the authority has given due consideration to the points in controversy. The need for recording of reasons is greater in a case where the order is passed at the original stage. The appellate or revisional authority, if it affirms such an order, need not give separate reasons if the appellate or revisional authority agrees with the reasons contained in the order under challenge.
Similar view was earlier taken by the Hon'ble Supreme Court in Siemens Engg. & Mfg. Co. Ltd. v. Union of India AIR 1976 SC 1785. It is settled law that while making assessment on assessee, the ITO acts in a quasi-judicial capacity. An assessment order is amenable to appeal by the assessee and to revision by the Commissioner under Sections 263 and 264. Therefore, a reasoned order on a substantial issue is legally necessary. The judgment of the Hon'ble Madras High Court on which reliance was placed by the learned Counsel for the assessee also points to the same direction. We have reproduced above the relevant portion of the observations made by the learned Judges.
They have held that orders, which are subversive of the administration of revenue, must be regarded as erroneous and prejudicial to the interests of the revenue. If the Assessing Officers are allowed to make assessments in an arbitrary manner, as has been done in the case before us, the administration of revenue is bound to suffer. If without discussing the nature of the transaction and materials on record, the Assessing Officer had made certain addition to the income of the assessee, the same would have been considered erroneous by any appellate authority as being violative of the principles of natural justice which require that the authority must indicate the reasons for an adverse order. We find no reason why the same view should not be taken when an order is against the interests of the revenue. As a matter of fact such orders are prejudicial to the interests of both the parties, because even the assessee is deprived of the benefit of a positive finding in his favour, though he may have sufficiently established his case.
16. In view of the foregoing, it can safely be said that an order passed by the Assessing Officer becomes erroneous and prejudicial to the interest of the revenue under Section 263 in the following cases: (i) The order sought to be revised contains error of reasoning or of law or of fact on the face of it.
(ii) The order sought to be revised proceeds on incorrect assumption of facts or incorrect application of law. In the same category fall orders passed without applying the principles of natural justice or without application of mind.
(iii) The order passed by the Assessing Officer is a stereotyped order which simply accepts what the assessee has stated in his return or where he fails to make the requisite enquiries or examine the genuineness of the claim which is called for in the circumstances of the case.
17. We shall now turn to the facts of the case to see whether the case before us is covered by the aforesaid principles. We have already reproduced earlier the entire assessment order. Perusal of the assessment order passed by the Assessing Officer does not show any application of mind on his part. It simply says in one line that the loss returned by the assessee is accepted. No greater evidence is required than the mere reproduction of the aforesaid line from the assessment order to establish that it is a case where the Assessing Officer mechanically accepted what the assessee wanted him to accept without any application of mind or enquiry. No evidence has been placed before us that the claim made by the assessee was objectively examined or considered by the Assessing Officer either on record or in the assessment order. It is because of such non-consideration of the issues on the part of the Assessing Officer that the loss claimed by the assessee stood automatically allowed without any scrutiny. The assessment order placed before us is clearly erroneous as it was passed without proper examination or enquiry or verification or objective consideration of the claim made by the assessee. The Assessing Officer has completely omitted the issue in question from consideration and made the assessment in an arbitrary manner. His order is a completely non-speaking order. In our view, it was a fit case for the learned Commissioner to exercise his revisional jurisdiction under Section 263 which he rightly exercised by cancelling the assessment order and directing the Assessing Officer to pass a fresh order in accordance with law after giving a reasonable opportunity of hearing to the assessee. In our view, the assessee should have no grievance in that the learned Commissioner has simply asked the Assessing Officer to consider the claim of the assessee as per law. The assessee can neither contend nor expect that loss returned by it should be accepted by the Department without proper scrutiny and objective consideration of the issues by the Assessing Officer.
18. It was however contended by the learned Counsel that the Assessing Officer had taken a possible view in allowing the loss claimed by the assessee and hence, the Commissioner was not justified in assuming the revisional jurisdiction under Section 263. We have given our thoughtful consideration to the aforesaid submissions. As already stated earlier, an order becomes erroneous because inquiries, which ought to have been made on the facts of the case, were not made and not because there is anything wrong with the order if all the facts stated or the claims made in the return are assumed to be correct. Thus, it is mere failure on the part of the Assessing Officer to make the necessary inquiries or to examine the claim made by the assessee in accordance with law, which renders the resultant order erroneous and prejudicial to the interest of the revenue. Nothing more is required to be established in such a case. One would not know as to what would have happened if the Assessing Officer had made the requisite inquiries or examined the claim of the assessee in accordance with law. He could have accepted the assessee's claim. Equally, he could have also rejected the assessee's claim depending upon the results of his enquiry or examination into the claim of the assessee. Thus, the formation of any view by the Assessing Officer would necessarily depend upon the results of his inquiry and conscious, and not passive, examination into the claim of the assessee. If the Assessing Officer passes an order mechanically without making the requisite inquiries or examining the claim of the assessee in accordance with law, such an order will clearly be erroneous in law as it would not be based on objective consideration of the relevant materials. It is therefore, the mere failure on the part of the Assessing Officer in not making the inquiries or not examining the claim of the assessee in accordance with law that per se renders the resultant order erroneous and prejudicial to the interest of the revenue. Nothing else is required to be established in such a case to show that the order sought to be revised is erroneous and prejudicial to the interests of the revenue.
19. We are unable to accept the aforesaid submission of the learned Counsel for two other reasons also. First reason is that the view so taken by the Assessing Officer without making the requisite inquiries or examining the claim of the assessee will per se be an erroneous view and hence will be amenable to revisional jurisdiction under Section 263. Second reason is that it is not the taking of any view that will take the matter outside the scope of Section 263. The view taken by the Assessing Officer should not be a mere view in vacuum but a judicial view. It is well established that the Assessing Officer being a quasi-judicial authority cannot take a view, either against or in favour of the assessee/revenue, without making proper inquiries and without proper examination of the claim made by the assessee in the light of the applicable law. In Gruh Finance Ltd. v. Jt CIT , the argument against the initiation of proceedings under Section 147/148 that the claim for depreciation has been considered and hence cannot be disallowed on mere change of opinion was rejected because there was no conscious consideration of the materials which were on record. As already stated earlier, no material was placed before the Assessing Officer at the assessment stage on the basis of which he could take any view. The assessee has also not been able to show to us that any inquiry was made by the Assessing Officer in this regard. Therefore mere allegation that the Assessing Officer has taken a view in the matter will not put the matter beyond the purview of Section 263 unless the view so taken by the Assessing Officer is a judicial view consciously based upon proper inquiries and appreciation of all the relevant factual and legal aspects of the case. The judicial view taken by the Assessing Officer may perhaps place the matter outside the purview of Section 263 unless it is shown that the view so taken by the Assessing Officer contains some apparent error of reasoning or of law or of fact on the face of it.
20. The learned Counsel has strongly relied upon the following observations made in Malabar Industrial Co. Ltd. 's case (supra) and submitted that the learned Commissioner was not justified in substituting his view for that of the Assessing Officer: ... Every loss of revenue as a consequence of an order of the Assessing Officer cannot be treated as prejudicial to the interests of the revenue. For example, when an Income-tax Officer adopted one of the courses permissible in law and it has resulted in loss of revenue; or where two views are possible and the Income-tax Officer has taken one view with which the Commissioner does not agree, it cannot be treated as an erroneous order prejudicial to the interests of the revenue, unless the view taken by the Income-tax Officer is unsustainable in law.
21. We have carefully gone through the aforesaid observations.
"Adopting" one of the courses permissible in law necessarily requires the Assessing Officer to consciously analyse and evaluate the facts in the light of relevant law and bring them on record. It is only then that he can be said to have "adopted" or chosen one of the courses permissible in law. The Assessing Officer cannot be presumed or attributed to have "adopted" or chosen a course permissible in law when his order does not say so. Similarly, "taking" one view where two or more views are possible also necessarily imports the requirement of analysing the facts in the light of applicable law. Therefore, proper examination of facts in the light of relevant law is a necessary concomitant in order to say that the Assessing Officer has adopted a permissible course of law or taken a view where two or more views are possible. It is only after such proper examination and evaluation has been done by the Assessing Officer that he can come to a conclusion as to what are the permissible courses available in law or what are the possible views on the issue before him. In case he comes to the conclusion that more than one view is possible then he has necessarily to choose a view, which is most appropriate on the facts of the case.
In order to apply the aforesaid observations to a given case, it must therefore first be shown that the Assessing Officer has "adopted" a permissible course of law or, where two views are possible, the Assessing Officer has "taken" one such possible view in the order sought to be revised under Section 263. This requires the Assessing Officer to take a conscious decision else he would neither be able to "adopt" a course permissible in law nor "take" a view where two or more views are possible. In other words, it is the Assessing Officer who has to adopt a permissible course of law or take a view where two or more views are possible. It is difficult to comprehend as to how the Assessing Officer can be attributed to have "adopted" a permissible course of law or "taken" a view where two or more views are possible when the order passed by him does not say so. We cannot assume, in order to provide legitimacy to the assessment order, that the Assessing Officer has adopted a permissible course of law or taken a possible view where his order does not say so. The submissions made by the learned Counsel, if accepted, would require us to form, substitute and read our view in the order of the Assessing Officer when the Assessing Officer himself has not taken a view. It could have been a different position if the Assessing Officer had "adopted" or "taken" a view after analysing the facts and deciding the matter in the light of the applicable law. However, in the case before us, the Assessing Officer has not at all examined as to whether only one view was possible or two or more views were possible and hence, the question of his adopting or choosing one view over the other does not arise. The aforesaid observations of the Hon'ble Supreme Court do not, in our view, help the assessee; rather they go against the assessee.
22. In Padmasundara Rao v. State of Tamil Nadu , the Hon'ble Supreme Court has held that"... There is always peril in treating the words of a speech or judgment as though they are words in a legislative enactment, and it is to be remembered that judicial utterances are made in the setting of the facts of a particular case, said Lord Morrin in Harrington v. British Railways Board [1972] 2 WLR 537 (HL). Circumstantial flexibility, one additional or different fact may make a world of difference between conclusions in two cases...." Therefore, the observations of the Hon'ble Supreme Court in Malabar Industrial Co. Ltd's case (supra) on which reliance has been placed by the learned Counsel cannot be read in isolation. The judgment deserves to be read in its entirety to cull out the law laid down by the Hon'ble Supreme Court. If so read, it is quite evident that the orders passed on an incorrect assumption of facts or incorrect application of law or without applying the principles of natural justice or without application of mind will satisfy the requirement of the order being erroneous and prejudicial to the interest of the revenue. If the order sought to be revised under Section 263 suffers from any of the aforesaid vices, it cannot be said that the Assessing Officer has "adopted", in such an order, a course permissible in law or "taken" a view where two or more views are possible.
23. It was next contended by the learned Authorised Representative that the Assessing Officer had considered all the relevant aspects of the case carefully while passing the order. According to him, the mere fact that the assessment order passed by the Assessing Officer was short would neither mean failure on his part in not examining the matter carefully nor would render his order erroneous so long as the view taken by him was a possible view. In our view, the aforesaid submission of the assessee must fail partly for the reasons already explained earlier in this order and partly for the reasons that it is not the size or the length of the order that matters in deciding upon its legality. It is quite possible that a long order, which is sought to be revised under Section 263 may suffer from the same errors as pointed out above. It is equally possible that even a short order, which is sought to be revised under Section 263 may reflect proper application of mind by the Assessing Officer and thus may not be amenable to revision under Section 263. Therefore, it is not the length of the order but the judicial strength of the order that is material in deciding whether the order sought to be revised is erroneous and prejudicial to the interest of the revenue. In the case before us, the assessment order passed by the Assessing Officer lacks judicial strength to stand. It is not a case where the order is short but is supported by judicial strength. It is in this view of the matter that we feel that the learned Commissioner has correctly exercised his revisional jurisdiction under Section 263.
24. As held in V.P. Agarwal's case (supra), the Assessing Officer has been entrusted the role of an investigator, prosecutor as well as adjudicator under the scheme of the Income-tax Act. If he commits an error while discharging the aforesaid roles and consequently passes an erroneous order causing prejudice either to the assessee or to the State Exchequer or to both, the order so passed by him is liable to be corrected. As mentioned earlier, the assessee can have the prejudice caused to him corrected by filing appeal as also by filing a revision application under Section 264. But the State Exchequer has no right of appeal against the orders of the Assessing Officer. Section 263 has therefore been enacted to empower the Commissioner to correct an erroneous order-passed by the Assessing Officer which he considers to be prejudicial to the interest of the revenue. The Commissioner has also been empowered to invoke his revisional jurisdiction under Section 264 at the instance of the assessee also. The line of difference between Sections 263 and 264 is that while the former can be invoked to remove the prejudice caused to the State the later can be invoked to remove the prejudice caused to the assessee. The provisions of Section 263 would loose significance if they were to be interpreted in a manner that prevented the Commissioner from revising the erroneous order passed by the Assessing Officer, which was prejudicial to the interest of the revenue. In fact, such a course would be counter productive as it would have the effect of promoting arbitrariness in the decisions of the Assessing Officers and thus destroy the very fabric of sound tax discipline. If erroneous orders, which are prejudicial to the interest of the revenue are allowed to stand, the consequences would be disastrous in that the honest tax payers would be required to pay more than others to compensate for the loss caused by such erroneous orders.
For this reason also, we are of the view that the orders passed on an incorrect assumption of facts or incorrect application of law or without applying the principles of natural justice or without application of mind or without making requisite inquiries will satisfy the requirement of the order being erroneous and prejudicial to the interest of the revenue within the meaning of Section 263.
25. Before we conclude the matter, we wish to clarify that the observations made by us in the preceding paragraphs are in the context of the provisions of Section 263. They have been made in order to examine the legality of the impugned order passed by the learned Commissioner under Section 263. The Assessing Officer is however free to decide the matter in the fresh round of assessment initiated as a result of the order of the learned Commissioner on merits and in accordance with law without being influenced by the aforesaid observations.
26. In view of the above, the appeal filed by the assessee is dismissed.