Full Judgment
2. At the outset, the learned Counsel for the assessee, Sh. S.K.Bansal, submitted that this appeal relates to an order passed by the CIT, Patiala, under Section 263 of the Act and does not relate to income computed by the AO. Therefore, the case of the assessee is covered under the residuary Clause (b) of Sub-section (6) of Section 253 of the Act. He submitted that the assessee was required to pay only a fee of Rs. 500. As against the same, the assessee had paid a fee of Rs. 5,521. The assessee vide his counsel's application dt. 31st Jan., 2006 requested for refund of the excess fee paid of Rs. 5,021. At the time of hearing of the appeal, the learned Counsel drew our attention to the booklet titled as "A Fine Balance : Law and Procedure before Income-tax Appellate Tribunal" published by All India Federation of Tax Practitioners, where in reply to question No. 29, it has been mentioned that the assessee can make an application before the Tribunal for claiming the refund of the excess Tribunal fee paid for which directions can be issued by the Bench to the AO for granting a refund of the same.
3. The learned Departmental Representative did not make any specific submission in the matter on the ground that this relates to procedure for filing the appeal before the Tribunal.
4. We have heard both the parties. Admittedly, the appeal in this case relates to an order passed under Section 263. Therefore, the case of the assessee is covered under a residuary Clause (b) of Sub-section (6) of Section 253 of the Act. The assessee was required to pay only a fee of Rs. 500. In view of the above, the assessee is entitled to refund of excess fee paid of Rs. 5,021. The AO is directed to refund this amount either by way of adjusting the same against the outstanding demand, if any, or by way of grant of refund within a period of one month from the date of receipt of this order. We order accordingly.
5. During the course of hearing of the appeal, the assessee has made a request vide his counsel's letter dt. 20th Aug., 2005 for admission of additional grounds mentioned at si. Nos. l(a) to l(h). However, subsequently, the learned Counsel submitted that admission of these additional grounds was not pressed. Therefore, the additional grounds are not admitted.
1. That the learned CIT has erred in setting aside the order passed by the AO as the order is neither erroneous nor prejudicial to the interest of Revenue within the meaning of Section 263. The order of the CIT is illegal and may kindly be cancelled.
The facts of the case are that the assessee was a partner in the firm of M/s Deep Cinema situated at Plot No. 39, Block-A, Wazirpur, Community Scheme, Phase-1, New Delhi. The plot for cinema was acquired by the firm in 1970. Thereafter, a building known as Deep Cinema was constructed. As per partnership deed dt. 22nd March, 1979, there were 14 partners. This building was reported to have been burnt in 1984 in Delhi riots. Before burning of cinema building, a dispute arose among the partners of the firm. Therefore, a Suit No. 1710/82 was filed before the Delhi High Court. Subsequently, a receiver was appointed by the Court on 24th Feb., 1983 to takeover the business and management including all assets of the partnership firm. It was observed that Deep Cinema belonged to the partnership firm, i.e., M/s Deep Cinema, in which the assessee had 5 per cent share. Subsequently, the said building was sold by executing fourteen sale deeds, i.e., each partner selling his share in the property. The assessee's share in the sale proceeds amounted to Rs. 13,08,150. In the return filed, the assessee had declared the cost at 25 per cent of the sale proceeds as on 1st April, 1981 which worked out to Rs. 3,27,037 and by applying index cost @ 2.44 per cent, the long-term capital gain was computed at Rs. 5,10,180, i.e., after deducting indexed cost of Rs. 7,97,970. During the course of assessment proceedings, the AO observed that the building known as Deep Cinema belonged to a partnership firm on which depreciation had also been claimed by the firm. She was, therefore, of the view that as per provisions of Section 50 of the Act, the entire excess amount received by the assessee was deemed to be a short-term capital gain. She observed that the WDV of the cinema as on 31st March, 1984 was Rs. 15,55,697 and the property was sold at Rs. 2,61,63,000.
Therefore, the capital gain liable to be assessed in the hands of the firm amounted to Rs. 2,46,07,303 as per provisions of Section 50(1) of the Act for which the necessary intimation was sent to the AO. Since the assessee had declared the long-term capital gain of Rs. 5,10,180 in his return of income, the AO assessed the same in the hands of the assessee on protective basis.
7. Subsequently, the CIT, Patiala, observed that the order passed by the AO was erroneous insofar as it was prejudicial to the interest of Revenue within the meaning of Section 263 of the Act, for the reason that the AO failed to determine the capital gain on the basis of information in her possession. He observed that some other partners of the firm had filed returns of income.by taking the market value as on 1st April, 1981 at Rs. 12 lakhs as against adopted by assessee at more than Rs. 65 lakhs. The CIT, therefore, issued show-cause notice under Section 263 dt. 1st Nov., 2000 (a copy placed at p. 26 of the paper book) asking the assessee to indicate the basis of adopting market value as on 1st April, 1981, a copy of dissolution deed of the firm and a copy of assets and liabilities in the firm as on the date of dissolution. In reply, the assessee stated that market value as on 1st April, 1981 was estimated differently by each group of partners. It was submitted that AO had completed the assessment under Section 143(3) where cost declared was accepted. Thus, it was submitted that the assessment order could not be considered as erroneous and prejudicial to the interest of Revenue. The learned CIT considered the reply and observed that although the sale was made by making separate agreements whereby each partner separately sold his share in the partnership firm, yet the fact remained that the said property belonged to a partnership firm on which depreciation had been allowed. Therefore, the long-term capital gain in the hands of the assessee even though assessed on protective basis was also required to be computed as per provisions of Section 50 of the Act. He observed that assessee's 5 per cent share in the WDV of Rs. 15,55,697 worked out to Rs. 77,785 and not at Rs. 7,97,970 as claimed in the return of income filed. Therefore, the long-term capital gain liable to be computed even on protective basis worked out to Rs. 12,30,365 (i.e., Rs. 13,08,150 - Rs. 77,785) and not at Rs. 5,10,810 as shown in the return. Thus, the CIT, Patiala, found the assessment order erroneous insofar as prejudicial to the interest of Revenue and, accordingly set aside the assessment order with the direction to the AO to pass fresh order after giving reasonable opportunity of being heard to the assessee. The relevant findings of the order of CIT, Patiala, as recorded in paras 4 to 6 are as under: 4. The arguments put forth by the assessee have been examined with reference to facts on record and the relevant provisions of IT Act, 1961 and found that there is no merit in his arguments. It is a fact that the assessee was partner in M/s Deep Cinema, Ashok Vihar, New Delhi, with 5 per cent share and the said property was a part of the assets of the firm. The WDV of the building as on 31st March, 1980 as per the balance sheet available on record has been shown as Rs. 19,09,974 and after allowing the depreciation @ 5 per cent the WDV of the said property as on 31st March, 1984 comes to Rs. 15,55,697.
It is a fact that the super structure of the cinema excluding basement had been burnt during riots in November, 1984. It is also an admitted fact that the firm had not been dissolved as per the provisions of IT Act, 1961, on the date of sale consideration and as such it continued to be operative even though there was a dispute between the partners and the litigation was going on in the Delhi High Court. Therefore, as per law the capital gain if any arising out of the sale proceeds of the said property was required to be assessed in the hands of the firm. At the same time, it is also an admitted fact that the partners had entered into an agreement to sell their respective share out of the said property individually and only because of that agreement, each individual partner entered into a separate agreement with the third party for sale of their respective share and the capital gain if any arising out of the sale proceeds has been declared individually in their returns of income.
5. Now the point at issue is what should be the cost of acquisition and in whose hand the resultant capital gain is assessable under such circumstances. Since the firm was in existence on the date of sale deed and the assessee was admittedly a partner of that firm at that time, the WDV of the assets on the date of sale should have been taken while calculating the capital gain. The adoption of the cost of acquisition of the asset as on 1st April, 1981 as claimed by the assessee is irrelevant and has no locus standi in the matter.
The AO though in his order dt. 25th Sept., 1998, adopted the depreciated value of the property as on 31st March, 1984 to be the cost of acquisition and worked out the capital gain accordingly but he had held that since the building was belonging to M/s Deep Cinema, Ashok Vihar, New Delhi, and the firm was claiming depreciation thereon, the excess amount received by the assessee to be deemed as capital gain. However, he held this income was to be assessable in the hands of the firm. The WDV of the said property as on 31st March, 1984 as reported supra was Rs. 15,55,697 and the AO accordingly determined the short-term capital gain at Rs. 2,46,07,303 to be assessable in the hands of the firm in view of the provisions of Section 50(1) of the IT Act, 1961. The assessment in the case of assessee under reference was however, completed on protective basis on the income returned at Rs. 5,52,100.
6. Though the AO proceeded to make the assessment on protective basis by accepting the income returned but to my view the AO should have taken the capital gain as worked out by him on pro rata basis in order to protect the revenue as all the partners had entered into an agreement with the third party for sale of their respective shares. Even though at the same time they continued to be partners of the firm, and the firm was also in existence. The WDV of the asset as worked out was Rs. 15,55,697 as on 31st March, 1984 and the assessee's share was admittedly 5 per cent. The cost of acquisition on pro rata basis as his share works out to Rs. 77,785. The sale consideration of his share in the said-property was Rs. 13,08,150.
Thus, the capital gain on pro rata basis works out to Rs. 12,30,365 against the declared capital gain of Rs. 5,10,180. As the capital gain declared has been accepted by the AO under his order dt. 25th Sept., 1998 passed under Section 143(3), I am of the view that the order so passed on 25th Sept., 1998 was erroneous insofar as it was prejudicial to the Revenue. I, therefore, under the provisions of Section 263 of the IT Act, 1961 set aside the order passed by the AO with the directions that fresh order be passed after giving reasonable opportunity of being heard to the assessee.
The assessee is aggrieved with the order of the CIT. Hence, this appeal before us.
8. The learned Counsel for the assessee, Sh. S.K. Bansal, submitted that the assessee was a partner in M/s Deep Cinema, Wazirpur, New Delhi. The said firm acquired a plot from DDA in 1970 on which building was constructed known as Deep Cinema. As per partnership deed dt. 22nd March, 1979, there were 14 partners and first storey of the building was burnt in 1984 riots. There arose a dispute amongst the partners and suit was filed before the Delhi High Court. The Delhi High Court appointed a receiver on 24th Feb., 1983 to takeover the business and management including assets of the partnership firm. At the time when the property was burnt, the same was under the management of receiver.
The receiver lodged a claim of Rs. 50 lakhs with United India Insurance Co. and the claim was settled at Rs. 25 lakhs. Rent for the ground floor was also being collected by the receiver because the dispute was going on in the Delhi High Court. The firm was not dissolved as the litigation was going on. Subsequently, the property was sold by executing 14 sale deeds. Since the assessee had also 5 per cent share in M/s Deep Cinema, he also executed sale deed. The total consideration for sale of the entire property was Rs. 2,61,63,000. In response to notice issued under Section 148 by the AO on 22nd July, 1996, the assessee filed the return declaring therein long-term capital gain on sale of a share in the property at Rs. 5,10,180 and the total income declared in the return was at Rs. 5,52,100. Since the share in the sale proceeds was at Rs. 13,08,150, the assessee had taken the cost on estimate basis as on 1st April, 1981 at 25 per cent of the sale consideration, i.e., at Rs. 3,27,037 for the purpose of computing capital gain. The capital gain declared in the return was indeed liable to tax in the hands of firm and not in the hands of the assessee. An application under Section 154 was moved with the AO which remained undisposed of till date. He also drew our attention to observations made by the AO in para 5 on p. 3 of the assessment order where she has observed that since the property belonged to M/s Deep Cinema on which depreciation had been allowed, the resultant surplus was to be treated as short-term capital gain in the hands of the firm under Section 50(1) of the Act. He also submitted that intimation in this regard was given to the AO having jurisdiction over the case of M/s Deep Cinema, Delhi.
The learned Counsel for the assessee submitted that the CIT, Patiala, has not revised the order of the AO on the ground that the resultant surplus realized over the cost was to be taxed as deemed short-term capital gain where such capital was liable to tax at 44.8 per cent in the hands of firm as against long-term capital gain taxed at 20 per cent in the case of the assessee. He submitted that the learned CIT has not touched this issue. He further stated that the learned CIT has totally overlooked the provisions of Sub-section (4) of Section 45 of the Act which provide that the profit or gain arising from the transfer of the capital asset by way of distribution of capital asset was liable to be charged in the hands of the firm. He further stated that the CIT has revised the order under Section 263 merely on the basis of change of opinion. Such course of action was not justified. He relied on the decision of the Tribunal, Delhi Bench, in the case of Modi Xerox Ltd. v. Dy. CIT (1999) 63 TTJ (Del) 278 : 154 Taxation 91 (Del) and Tribunal, Jaipur Bench reported in 158 Taxation 25 (Jp). He further stated that action under Section 263 was taken in the case of the assessee and, the other partners of the firm who had equally sold their shares in the property were not touched. He also relied on the following judgments: In this case, the AO had rectified the mistake under Section 154 and the assessee had failed to claim exemption of compensation. This was allowed under Section 154 by AO. The CIT revised the order under Section 263 of the Act. The Hon'ble High Court held that the order under Section 263 of the Act was not valid because the order passed by the AO was not prejudicial to interest of Revenue.
In this case, the CIT revised the order under Section 263 with a direction to the AO to make further enquiry relating to cash credits and allow commission at 7 per cent to agent. On appeal, the Tribunal reversed the order of CIT on the ground that at the time of completing the assessment, the AO had made due and proper enquiry relating to the identity and source of the creditor and the commission at the same rate had been allowed by the Tribunal in the past.
In this case, the AO had made proper enquiry at the time of completing the assessment, where addition was also made in respect of certain unexplained cash credits. Subsequently, the CIT revised the order under Section 263 on the ground that there was a search at the premises of the assessee and the matter relating to cash credits and paid-up capital required further enquiry. On appeal, the Tribunal held that there was a exhaustive reference to the evidence examined by the AO at the time of completing the assessment and, therefore, there was no basis for the CIT to come to the conclusion that the order of the AO was erroneous and prejudicial to the interest of the Revenue. Accordingly, the order under Section 263 was quashed. The Hon'ble High Court upheld the order.
In this case, it was held that in order to exercise power under Section 263 of the Act by the CIT, the order of the AO must be erroneous and should also be prejudicial to the interest of the Revenue. If the view taken by the AO was a possible view, CIT could not exercise jurisdiction under Section 263 of the IT Act.CIT v. G.M. Mittal Stainless Steel (P) Ltd. (2003) 179 CTR (SC) 553 : (2003) 263 TTR 255 (SC) In this case, the CIT passed an order under Section 263 without giving any reason as to why the assessment was considered as erroneous.
In this case, the order passed under Section 263 was held to be not valid on the ground that merely because some other view was possible than taken by the AO, would not justify revision under Section 263.
In this case, the order passed under Section 263 was held to be invalid because there was no finding that the assessment was prejudicial to the interest of the Revenue.
(viii) B. Raghurama Prabhu Estate, Executrix Smt. M. Kaveri Bai and Ors. v. Jt. CIT In this case, it was held that the capital gains on sale of assets of firm as a going concern was assessable in the hands of firm.
(i) Tribunal, Chandigarh Bench, in the case of Smithkline Beecham Consumer Healthcare Ltd. v. Dy. CIT (1999) 63 TTJ (Chd) 33 : (1999) 68 ITD 163 (Chd); (ii) Tribunal, Pune Bench, in the case of Jamnadas T. Mehta v. ITO (2002) 75 TTJ (Pwe)(TM) 843 : (2002) 81 ITD 103 (Pune)(TM);Dhruv N. Shah v. Dy.
CIT (iv) Tribunal, Chandigarh Bench, in the case of Haryana State Co-op.
Supply & Marketing Federation Ltd. v. Dy. CIT (2004) 91 TTJ (Chd) 658 : (2004) 90 ITD 551 (Chd) (v) Tribunal, Chandigarh Bench, in the case of Sangrur Vanaspati Mills Ltd. v. Dy. CIT (2002) 74 TTJ (Chd)(TM) 857 : (2002) 80 ITD 143 (Chd)(TM) (vi) Tribunal, Chandigarh Bench, in the case of Nahar Exports Ltd. v. Asstt. CIT (2005) 93 TTJ (Chd) 186 : (2005) 92 ITD 484 (Chd) (vii) Tribunal, Pune Bench, in the case of Mirje Family Trust v. ITO (2000) 67 TTJ (Pune)(TM) 326 : (2000) 73 ITD 27 (Pune)(TM) (viii) Tribunal, Delhi Bench, in the case of Jai Commercial Co. Ltd. v. Jt. CIT (2000) 66 TTJ (Del) 731 : (2001) 76 ITD 65 (Del).
9. The learned Departmental Representative, on the other hand, relied on the order of the CIT, Patiala, and submitted that the order under Section 263 had been rightly passed.
10. We have heard both the parties and carefully considered the rival submissions, gone through the facts, evidence and material placed on record. We have also perused the orders of the authorities below and referred to the various judgments cited by the learned Counsel at the Bar. The undisputed facts of the case are that the assessee was a partner in the firm of M/s Deep Cinema. The said firm owned one building known as Deep Cinema. The firm was constituted in the year 1979. The firm had claimed depreciation on the said building as the same was a business asset. The partners of the firm had sold the building for a total consideration of Rs. 2,61,63,000 by way of 14 sale deeds executed by all the partners to the extent of their respective shares. The assessee also executed the sale deed to the extent of his 5 per cent share and admittedly received a consideration of Rs. 13,08,150. There is also no dispute about the fact that the surplus over WDV was liable to be assessed in the hands of the firm as deemed short-term capital gain within the meaning of Sub-section (4) of Section 45 r/w Section 50(1) of the Act. Further, there is also no dispute about the fact that since depreciation was allowed on the building sold, the manner in which the capital gain is to be computed was under Sub-section (1) of Section 50 of the Act. Despite specific opportunities allowed to the learned Counsel to state whether the firm had filed the return disclosing therein deemed short-term capital gain on the sale of the said property, the learned Counsel could not specifically reply whether such return was ever filed by the firm and also whether the said short-term capital gain was assessed in the hands of the firm. It is also a fact that the AO had assessed the long-term capital gain in the hands of the assessee on protective basis without disturbing the quantum of capital gain shown in the return. Now the question that requires to be decided is whether the CIT was justified in law to exercise his powers vested under Section 263 of the Act in setting aside the assessment completed by the AO. Before dealing with the merits of the case, it would be relevant to reproduce herein the main provisions of Section 263 of the Act which read as under: 263. (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, (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 Tribunal, the High Court or the Supreme Court.
ExplanationIn 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.
A bare reading of the aforesaid section shows that the learned CIT is vested with powers to call for and examine the records of any proceedings under the Act and consider if the order passed by the AO is erroneous and prejudicial to the interests of the Revenue. Thus, in order to confer jurisdiction on the CIT under Section 263, the twin conditions, i.e., (i) that order passed by the AO must be erroneous, and (ii) the same should be prejudicial to the interests of the Revenue must be satisfied. Both the conditions should be satisfied simultaneously. In case, the order passed under Section 263 is erroneous, but the same is not prejudicial to the interests of Revenue, the CIT shall have_ no jurisdiction to revise such order. For example in the present case, the CIT has revised the order on the ground that since depreciation was allowed on the building owned by the firm, capital gains should have been computed in the manner as provided under Sub-section (1) of Section 50, instead of cost adopted by the assessee at 25 per cent on the sale consideration on estimate basis. Had the AO adopted correct method for computation of capital gain as the same would have worked out to Rs. 12,30,365, (i.e., Rs. 13,08,150-77,785) instead of computed at Rs. 5,52,100. Assuming that the AO had computed capital gain by estimating the cost through some other method at Rs. 77,785 and computed the long-term capital gain at Rs. 12,30,365, the said order though erroneous, yet could not be considered as prejudicial to the interest of Revenue because ultimately long-term capital gains has been computed at the same figure as it should be. In such a case, the CIT would have no jurisdiction to exercise his powers vested under Section 263 of the Act because such order could not be considered as prejudicial to the interest of Revenue. Likewise, if the order is prejudicial to the interest of Revenue, but is not erroneous, the CIT would have no jurisdiction to revise such order under Section 263 of the Act. Thus, it is quite clear that in order to confer jurisdiction on the CIT under Section 263, both the conditions mentioned above must be fulfilled simultaneously. This issue was considered by the Hon'ble Supreme Court in the case of Malabar Industrial Co. Ltd. v. CIT (2000) 159 CTR (SC) 1 : (2000) 243 ITR 83 (SC), where it was held that prerequisite for the exercise of jurisdiction by the CIT is that the twin conditions must be satisfied, i.e., (i) the order of the AO sought to be revised is erroneous, and (ii) it is. prejudicial to the interests of the Revenue. The apex Court observed that if one of these conditions is absent, i.e., if the order of AO is erroneous but is not prejudicial to the Revenue, recourse cannot be had to Section 263 of the Act. The same view has been held by the various other judgments relied upon by the learned Authorised Representative and as summarized above.
10.1 Now the aspect that requires to be considered by this Bench is whether both the conditions laid down under Section 263 can be said to have been fulfilled in this case. In order to answer this issue, we have to first find out the meaning of expressions an assessment order being 'erroneous' and 'prejudicial to the interests of the Revenue'.
This issue was also considered by the Hon'ble Supreme Court in the aforesaid case of Malabar Industrial Co. Ltd. v. CIT (supra). The Hon'ble apex Court held that the expression 'erroneous' would mean an incorrect assumption of facts or an incorrect application of law. The apex Court further observed that even the assessment orders passed without applying principles of natural justice or without application of mind would be regarded as erroneous. As regards the expression 'prejudicial to the interests of the Revenue', the apex Court observed that this is not an expression of art and was not defined in the Act.
However, it was observed that in its ordinary meaning, it is of wide import and was not confined to loss of tax. The scheme of the 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 ITO, the Revenue is loosing tax lawfully payable by a person, it will certainly be prejudicial to the interests of the Revenue. The Hon'ble apex Court also observed that the phrase 'prejudicial to the interests of the Revenue' has to be read in conjunction with an erroneous order passed by the AO. The relevant findings recorded by the apex Court on p. 83 of ITR 243 are as under: A bare reading of Section 263 of the IT Act, 1961, makes it clear that the prerequisite for the exercise of jurisdiction by the CIT suo motu under it, is that the order of the ITO is erroneous insofar it is prejudicial to the interests of the Revenue. The CIT has to be satisfied of twin conditions, namely (i) the order of the AO sought to be revised is erroneous, and (ii) it is prejudicial to the interests of the Revenue. If one of them is absentif the order of the ITO is erroneous but is not prejudicial to the interests of the Revenue or if it is not erroneous but is prejudicial to the Revenuerecourse cannot be had to Section 263(1) of the Act. The provision cannot be invoked to correct each and every type of mistake or error committed by the AO, 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. The phrase 'prejudicial to the interests of the Revenue' is not an expression of art and is not defined in the Act. Understood in its ordinary meaning it is of wide import and is not confined to loss of tax. The scheme of the 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 ITO, the Revenue is losing tax lawfully payable by a person, it will certainly be prejudicial to the interests of the Revenue. The phrase 'prejudicial to the interests of the Revenue' has to be read in conjunction with an erroneous order passed by the AO. Every loss of revenue as a consequence of an order of the AO, cannot be treated as prejudicial to the interests of the Revenue, for example, when an ITO adopted one of the courses permissible in law and it has resulted in loss of revenue, or where two views are possible and the ITO has taken one view with which the CIT does not agree, it cannot be treated as an erroneous order prejudicial to the interests of the Revenue unless the view taken by the ITO is unsustainable in law.
From a bare reading of the above judgment, it is clear that the order could be considered as prejudicial to the interests of the Revenue, if the same has not been passed in accordance with the provisions of the Act or the procedure laid down under the law. However, the Supreme Court has also clarified that if the AO has taken one of the courses permissible in law or where two views are possible and the ITO has taken one view with which the CIT does not agree, it cannot be treated as an erroneous or prejudicial to the interests of the Revenue unless the view taken by the ITO is unsustainable in law.
10.2 Now the present case also requires to be decided by applying above tests laid down by the Hon'ble Supreme Court, i.e., whether the twin conditions laid down for exercise of powers under Section 263 by CIT could be considered to have been satisfied. In this case, the AO has made an assessment only on protective basis because she was of the view that the resultant surplus over the WDV of the sale proceeds was liable to be assessed in the hands of the firm. The purpose of making protective assessment is that in a case where income is considered to be assessable in the hands of assessee 'X' but the same has been declared in the case of 'Y' or the AO is not sure as to whether the income would be assessed in the hands of 'X' or 'Y', in such a case protective assessment is made in the hands of 'Y' and substantive assessment is made in the hands of 'X' where AO is of the view that such assessment should be made. In certain cases, where no substantive assessment is made, even the protective assessment made becomes substantive. In the present case, in the return of income filed, the assessee had himself shown the capital gain in his own hands like other partners of the firm. It appears that firm had neither filed the return where such surplus was liable to be assessed as deemed short-term capital gains within the meaning of Section 45(4) r/w Section 50(1) of the Act nor any assessment has been made in the case of firm because despite repeated opportunities allowed, the assessee has not been able to confirm this fact. In this case, the AO in order to protect the interest of the Revenue, completed the protective assessment in the hands of the assessee. But while making the protective assessment, the AO was required to apply her mind in regard to the computation of capital gain. The mere fact that the assessee had declared long-term capital gain at Rs. 5,10,180 in the return of income does not mean that the AO was not required to apply her mind about the computation of capital gain as to whether the same was correctly computed in accordance with the provisions of the Act or not. In para 5 of the assessment order, the AO has herself stated that capital gain in this case was required to be computed in the manner as provided under Sub-section (1) of Section 50 of the IT Act. She herself stated that WDV of the building after considering depreciation allowed in the past worked out to Rs. 15,55,697 and after adjusting the same, the net capital gain in the case of the firm worked out to Rs. 2,46,07,303. If we take assessee's 5 per cent share in the same, the same worked out to Rs. 12,30,365 as against declared at Rs. 5,10,180 in the return. Even for the purpose of making protective assessment, the AO ought to have adopted the figure at Rs. 12,30,365. Now the assessee had taken the cost as on 1st April, 1981 at 25 per cent of the sale consideration which is without any basis. There is absolutely no justification as to why the cost was taken at 25 per cent of the sale consideration. The AO has also not applied her mind to this aspect while determining the capital gain on protective basis, more so when she herself stated that the capital gain was to be computed in the manner as provided under Section 50(1) of the Act. Thus, we are of the opinion that the order passed by the AO was erroneous as she did not apply the correct provisions of law, i.e., Sub-section (1) of Section 50 of the Act for computing the capital gains in this case. Further, neither before the CIT nor before us the assessee has been able to indicate as to how the cost on 1st April, 1981 was shown at Rs. 3,27,037 and the basis therefor. It was also conceded before the CIT that different groups of partners had worked out the capital gains by adopting market value as on 1st April, 1981 at different amounts. The assessee has also not been able to state under what provisions, the capital gains shown in the return could be considered as correct. Thus, the first condition that the order should be erroneous is fully satisfied in the present case because the same was not computed as per provisions of law.
10.3 Now the next aspect to be considered is whether the assessment order could also be considered as prejudicial to the interests of the Revenue. As stated above, the correct amount of capital gain worked out to Rs. 12,30,365 as against computed by the AO at Rs. 5,10,180. In fact, subsequently the AO completed the assessment on 15th Feb., 2002 in pursuance of the impugned order of the CIT and then computed capital gains at Rs. 12,30,365. The assessee filed an appeal against the assessment order before the CIT(A). The CIT(A) vide his order dt. 27th March, 2003 upheld the assessment order. The assessee has not even filed an appeal against the order of the CIT(A). Thus, the capital gain computed at Rs. 12,30,365 in pursuance of the impugned order under Section 263 has become final. Therefore, this fact clearly shows that the assessment order computing capital gain at Rs. 5,10,180 as against Rs. 12,30,365 was prejudicial to the interests of the Revenue. Thus, both the conditions laid down under Section 263 for exercise of powers by the CIT are fulfilled. Nowhere, the CIT has held that the addition in this case should be made on substantive basis. His objection to the order passed by the AO was that instead of computing the capital gain at Rs. 5,10,180, the AO should have computed the same at Rs. 12,30,365 even if it was to be assessed on protective basis. In the light of these facts and circumstances of the case, we are of the considered view that CIT, Patiala, was justified in revising the order in exercise of powers conferred on him under Section 263 of the Act.
10.4 However, before parting with this issue, we wish to mention that the learned Counsel has relied upon a catena of judgments which have already been summarized above. Now whether the CIT was justified in exercising the powers under Section 263 or not is to be seen in the light of facts of each case. One has to see whether twin conditions necessary for exercise of powers under Section 263 in a given case are fulfilled or not. Reliance in this regard is placed on the judgment of Madhya Pradesh High Court in the case of Nazir Singh v. CIT (2001) 170 CTR (MP) 559 : (2001) 252 ITR 820 (MP) where it was held that the criteria laid down for exercise of power under Section 263 was only demonstrative and not exhaustive and each and every case has to be treated independently on its own facts and circumstances. Now various High Courts and the Supreme Court in the cases relied upon by the learned Counsel have found that the orders under Section 263 were invalid and accordingly quashed the same by taking into account the facts of those cases. But in none of the cases, the facts are exactly similar to the present case. Therefore, reliance of the learned Counsel on the judgments is also of no help to the assessee. Moreover, in the present case, action under Section 263 taken by the CIT is not based on change of opinion. By our detailed discussions in the preceding paras, we have already held that both the conditions necessary for exercise of powers under Section 263 have been fulfilled in the present case and, therefore, the present order is valid.
10.5 The learned Counsel also argued that in one other case of Shri Simarjit Singh, brother of the assessee who also sold his share in the said property, the CIT has not passed an order under Section 263. Only a copy of sale deed by Shri Simarjit Singh has been placed at pp. 55 to 65 of the paper book. A copy of the assessment order passed in his case is not on record. We do not know as to how much capital gain was declared in the return filed by him as the assessee had conceded before the CIT that different groups of partners had declared the capital gains by adopting different market value as on 1st April, 1981. Some had declared market value of the entire property as on 1st April, 1981 at Rs. 12 lakhs as against adopted by the assessee in,this case at Rs. 65 lakhs. Thus, we are not aware of full facts of the case and also whether the jurisdiction over the case vested with the CIT, Patiala, or with some other CIT. Therefore, we are unable to comment on this aspect of the case.
10.6 In the light of detailed discussions in the preceding paras and the legal position discussed, we are of the opinion that the learned CIT, Patiala, was justified in revising the assessment under Section 263 of the Act. We confirm his order and reject the ground of appeal of the assessee.
10.7 However, before parting with the case, we wish to mention that assessment in this case has been completed on protective basis. Even in the impugned order, the CIT has not held that the addition in this case was required, to be made on substantive basis. In fact, the order was not revised on this ground. Therefore, the nature of addition as per revised order continues to be only protective and not substantive because such capital gain is liable to be taxed in the hands of firm as per provisions of Section 45(4) of the Act on substantive basis.