Can the Commissioner exercise revisional jurisdiction under Section 263 of the Income Tax Act where the Assessing Officer conducted no basic inquiries?

Paragraph 6The Revenue carried the matters on appeal under Section 260A of the Act, 1961, before the High Court of Delhi. By the impugned Judgment, the High Court set aside the Orders of ITAT dated 07.09.2007 and 15.10.2007. The gist of the consideration and conclusion in the impugned Judgment is summarised hereunder: A. On Nature and Source of Receipt: Consideration received from the sale of export quota permits is not income “derived” from exports. The immediate and proximate source of the income is the domestic transaction with a third party in India to whom the permit was sold. B. On the Non-Applicability of Sections 28 (iiia) to (iiie) of the Act, 1961: Quota permits are not issued under the Imports (Control) Order, 1955, so Section 28(iiia) is inapplicable. Further, Quota earnings are not cash assistance or duty drawback, so Sections 28(iiib) and 28(iiic) are inapplicable. Quotas are entirely distinct from Duty Entitlement Pass Book (DEPB) entitlements under Section 28(iiid) and Duty Free replenishment certificates (DFRC) under Section 28(iiie). Hence, Quota premium constitutes a general business benefit falling within the residuary ambit of Section 28(iv) of the Act, 1961. C. On the Status and Limits of CBDT O.M.: The High Court rejected the Revenue’s argument that the CBDT O.M. was not a Circular under Section 119 of the Act, 1961, and applied the Constitution Bench Judgment of this Court in CCE, Bolpur v. Ratan Melting & Wire Industries[^1], holding that circulars contrary to statutory provisions have no existence in law and cannot prevail over judicial interpretation in pending matters before courts. The Revenue may challenge an erroneous interpretation before the appellate courts, notwithstanding any beneficial administrative circulars in favour of the Assessee. D. On Construction of Provisos to Section 80HHC(3): The Circular, at best, permits treating quota profits as business profits exigible under Explanation (baa) to Section 80HHC of the Act, 1961, which accounts for the 90% exclusion. The first proviso to Section 80HHC(3) of the Act, 1961, strictly and specifically refers only to sums referred to in Sections 28(iiia), (iiib), and (iiic) of the Act, 1961. The provisos contain specific statutory compliance conditions, such as the third proviso's requirement that turnover exceed Rs. 10 crores, which export quota premiums cannot satisfy, either logically or practically. Because the provisos do not include residuary business income, the benefits thereunder cannot be extended by analogy to the CBDT O.M. E. On Revisional Jurisdiction of C.I.T.: C.I.T. correctly exercised its powers under Section 263 because the AO failed to conduct basic inquiries or apply the statutory criteria for export incentives, thereby rendering the Order erroneous and prejudicial to the interests of the Revenue within the meaning of Section 263 of the Act, 1961.

Paragraph 6Under Section 260A of the Act, 1961, the Revenue filed ITA No. 1057 of 2008 before the High Court of Delhi. The Appeal was admitted on the following substantial questions of law: - “Whether ITAT was correct in law in deleting the addition made by the Assessing Officer by disallowing Assessee’s claim under Section 10A of the Act out of income earned on sale of export/import quota holding that the assessee was alternatively entitled to deduction under Section 80HHC of the Act? Whether ITAT was correct in law in deleting the addition made by the Assessing Officer by disallowing Assessee’s claim under Section 10A of the Act on interest on margin money by holding that the assessee was alternatively entitled to deduction under Section 80HHC of the Act?”

Paragraph 12The jurisdiction of the Commissioner under Section 263 of the Act, 1961, is well-defined by a catena of decisions of this Court, and for continuity, we briefly summarise the same: A. C.I.T. v. Max Limited (supra): This Court examined the validity of a Commissioner's Revision Order passed under Section 263 of the Act, 1961. The power of revision under Section 263 requires that the phrase "prejudicial to the interest of the revenue" be read in conjunction with the expression "erroneous" order. Every loss of revenue resulting from a course adopted by an AO cannot automatically be treated as prejudicial to the interest of the Revenue. Where two views are possible and the AO has taken one with which the Commissioner disagrees, the Order cannot be treated as an erroneous Order prejudicial to the interest of the revenue. The only exception is if the view taken by the AO is entirely unsustainable in law. The validity of a Commissioner's revision order must be evaluated based on the position of law exactly as it stood on the date the Order was passed. A subsequent statutory amendment, even if applied with retrospective effect, cannot be used to attract the provisions of Section 263 if the AO’s original stance was inherently possible at the relevant time. B. C.I.T. v. Amitabh Bachhan (supra). This Court held that Section 263 of the Act, 1961 requires the concurrent presence of two preconditions before revisional jurisdiction can be exercised. The Assessment Order passed by the primary Authority must be erroneous and prejudicial to the interests of the Revenue. Unlike the power to reopen an Assessment under Section 147, Section 263 does not require a prior Show-Cause Notice detailing the specific grounds for revision as a condition precedent. The statutory requirement of Section 263 is that the assessee must be afforded a reasonable opportunity of being heard, which is implicit in observing the Principles of Natural Justice. The Commissioner is not foreclosed from considering new issues and is not confined to the terms of the initial notice, provided the Assessee has a full opportunity to controvert the new facts and explain the circumstances before a final decision is made. No breach of natural justice occurs if the Commissioner records findings beyond the Show-Cause Notice, provided those findings are based on the existing assessment record and the Assessee had the opportunity to contest the basis during the revisional proceedings. C. Malabar Industries Co. (supra): This Court held that for the Commissioner to exercise suo motu jurisdiction under Section 263(1), two strict prerequisites must be met: the AO’s Order must be "erroneous" and "prejudicial to the interests of the Revenue". Both conditions must co-exist; if an Order is erroneous but not prejudicial, or prejudicial but not erroneous, this provision is unavailable. The Commissioner cannot use this power to correct every minor mistake made by an AO. An Assessment Order becomes "erroneous" if it rests on an incorrect assumption of facts, misapplies the law, violates Principles of Natural Justice, or is passed without application of mind. The phrase "Prejudicial to the Interests of the Revenue" has wide import and is not confined solely to the loss of tax. However, if an AO’s erroneous Order results in the Revenue losing tax that is lawfully payable, it is considered prejudicial to its interests.

Paragraph 12We have heard the parties and perused the record. 9 13. The controversy falls within a very narrow compass, and further consideration of the availability of deductions under Section 80HHC of the Act, 1961 would depend on the meaning the Court would attach to the CBDT O.M. for technically equating it with Sections 28(iiia) to 28(iiic) of the Act, 1961. This Court, in Ratan Melting & Wire Industries (supra), laid down the following principles on the scope and binding nature of the CBDT circulars: A. Departmental Circulars and instructions issued by the Central Board of Excise and Customs (CBEC) are binding on the subordinate Authorities functioning under the respective Statutes. However, once the Supreme Court or a High Court declares the law on a question arising for consideration, it is impermissible for any Court or Tribunal to direct that the Executive Circular be given effect in preference to the view expressed by the Constitutional Court. B. Administrative Circulars and clarifications issued by the Central or State Governments merely reflect the Executive’s understanding of statutory provisions. Such Circulars are not binding on the courts. Under the constitutional framework, only the Judiciary can interpret statutory provisions. The Executive does not have this power. C. Any Administrative Circular or clarification that runs contrary to statutory provisions or to the judicial declaration thereof has no force in the eyes of the law. D. Accepting the contention that the Revenue is precluded from challenging an interpretation contrary to its Circulars would extinguish the Revenue's valuable right of appeal. Because an assessee who benefits from a Circular will not appeal, precluding the Revenue from appealing would 10 prevent the High Courts and the Supreme Court from ever adjudicating the question. Such an outcome would directly undermine the law declared by the Supreme Court and compromise its binding force under Article 141 of the Constitution of India.

Paragraph 15For the limited purpose of assessing whether the impugned Judgment completely ignored the Tribunal's view on the C.I.T.'s decision under Section 263 of the Act, 1961, we have examined the C.I.T.'s Order, the ITAT's Order, and the impugned Judgment. We are of the view that, in considering the scope and ambit of Section 263 of the Act, 1961, the High Court noted the fact in issue between the Assessee and the Revenue and then recorded a finding that the C.I.T. had rightly exercised the revisional jurisdiction under Section 263 of the Act, 1961. We are not inclined to interfere with the impugned Judgment and are not keen to remand the matter to the High Court for reconsideration, particularly after appreciating the nature of the disputes between the Assessee and the Revenue. The Appeals fail and are dismissed.

Paragraph 15The CBDT O.M. is binding on Revenue Officers. The assessee can challenge it before the Court. The Revenue has availed of this remedy and has succeeded before the High Court. If accepted, the Assessee's argument would effectively enforce the CBDT Circular, which is otherwise not in line with the 11 Act, 1961 and the precedents of this Court. In essence, the CBDT O.M. creates a legal fiction by equating the export quota premium with the items mentioned in Section 28(iiia) to (iiic) of the Act, 1961. The application of a legal fiction contrary to the explicit statutory position is impermissible in law. Further, the scope for limiting legal fiction is well established in tax matters. Revenue from the sale of a quota generates horizontal revenue for the assessee but does not earn foreign exchange. The requisite for any of the revenues covered by Section 28(iiia) to (iiic) of the Act, 1961 is not present in the sale of the quota. Therefore, on a plain reading of Section 28, the sale of quota cannot be treated as business income.