Bombay High Court Upholds Revisional Jurisdiction Under Section 263 of the Income Tax Act, 1961, Holding That Failure of Assessing Officer to Examine Book Profit Computation Under Section 115J Rendered the Assessment Order Erroneous and Prejudicial to Revenue

Court’s Decision:

The Bombay High Court dismissed the appeal, upholding the Income Tax Appellate Tribunal’s (ITAT) ruling that confirmed the Commissioner of Income Tax’s (CIT) exercise of revisional jurisdiction under Section 263 of the Income Tax Act, 1961. The court ruled that:

1. The original assessment order was erroneous and prejudicial to revenue because the assessing officer (AO) had not examined the computation of book profits under Section 115J.
2. The CIT’s revisional order was justified since the AO had accepted the assessee’s computation without inquiry.
3. The assessee could not challenge the revisional order on merits when it had not appealed against the final order passed by the AO giving effect to the Section 263 revision.

Facts of the Case:

1. Corporate Background:
   • The assessee was the successor to the erstwhile Asian Cables Limited.
   • Asian Cables merged with Wiltech India Ltd. in 1987, and the merged entity changed its name to Asian Cables Ltd.
2. Accounting Treatment of Interest on Term Loans:
   • Wiltech India Ltd. had capitalized interest on term loans, including interest accrued after commercial production.
   • This capitalized interest amounted to ₹617.07 crores.
   • In prior years, depreciation on this interest was claimed.
3. Change in Accounting Policy (1988):
   • In the financial year 1987-88 (the year of amalgamation), the company changed its accounting policy:
     • The previously capitalized interest up to December 31, 1986, was decapitalized and charged as an expense in the Profit & Loss account.
     • The depreciation claimed on capitalized interest in earlier years was reversed.
4. Income Tax Returns and Assessments:
   • Original Return (July 28, 1988): Filed showing a loss.
   • Revised Return (July 7, 1989): Declared book profits of ₹49,19,380 under Section 115J.
   • Further Revision (April 23, 1990): Claimed deduction under Section 32AB but retained book profits at ₹49,19,380.
   • Assessment (February 28, 1991): AO assessed the income under normal provisions at ‘NIL’ but accepted the book profit computation under Section 115J.
5. Revisional Proceedings Under Section 263:
   • Notice Issued (February 25, 1993): The CIT issued a notice under Section 263, stating that:
     • The assessment order was erroneous and prejudicial to revenue.
     • The AO incorrectly computed deduction under Section 32AB.
     • Book profits under Section 115J were incorrectly calculated due to the decapitalization of interest adjustments.
   • Assessee’s Response (March 10, 1993): The assessee defended its computation but did not object to the CIT’s jurisdiction.
   • Revisional Order Passed (March 30, 1993):
     • The CIT set aside the assessment order.
     • Directed fresh computation of deductions under Section 32AB.
     • Directed fresh computation of book profits under Section 115J.
6. ITAT Appeal (October 8, 2002):
   • The Tribunal upheld the CIT’s revisional order, ruling that the AO had failed to apply his mind while accepting the book profit computation.
   • The Tribunal stated that the revisional order only directed reexamination, not a final determination.
7. Current Appeal Before the High Court:
   • The assessee challenged the ITAT’s order, arguing that:
     • The CIT’s revisional order contained a definite finding on merits, making it challengeable.
     • The AO’s acceptance of book profits implied examination under Section 115J.
     • Since two views were possible, the CIT could not invoke Section 263.
     • The case was covered by Supreme Court’s ruling in Apollo Tyres Ltd.

Issues for Determination:

1. Whether the Tribunal was justified in upholding the CIT’s exercise of revisional power under Section 263.
2. Whether the CIT’s order under Section 263 contained a definite finding on merits.
3. Whether the assessee could challenge the merits of the CIT’s revisional order when it did not appeal against the final assessment order passed after revision.

Petitioner’s (Assessee’s) Arguments:

1. The CIT’s Order Contained a Definite Finding on Merits:
   • The CIT conclusively held that the deduction under Section 115J was incorrect.
   • Since this was a final determination, it should be open to challenge.
2. If Two Views Are Possible, Revision Under Section 263 Is Not Justified:
   • The AO’s computation followed an earlier Cochin ITAT decision (Apollo Tyres Ltd. v. DCIT).
   • The Supreme Court (Max India Ltd.) ruled that if two views are possible, the CIT cannot revise an assessment.
3. Deemed Examination of Book Profits by AO:
   • The AO explicitly computed book profits in the original assessment order.
   • This implied application of mind to the issue.
4. Relevance of Supreme Court Rulings:
   • The issue was covered by Apollo Tyres Ltd. v. CIT (SC), where it was held that book profits should be accepted based on audited accounts.

Respondent’s (Revenue’s) Arguments:

1. The AO Never Examined the Issue in Original Assessment:
   • There was no evidence that the AO had considered the issue of decapitalized interest.
2. CIT’s Jurisdiction Under Section 263 Requires an Opinion on Merits:
   • The CIT must form a prima facie view that the assessment is erroneous and prejudicial.
3. The Assessee Cannot Challenge Merits After Accepting the Final Order:
   • The assessee never appealed against the final order passed after Section 263 revision.
4. Distinguishing Herdillia Chemicals Case:
   • Unlike Herdillia Chemicals Ltd., the CIT did not conclusively withdraw deductions but merely directed reconsideration.

Court’s Legal Analysis:

1. Scope of Revisional Powers Under Section 263:
   • The CIT can revise an order only if it is both erroneous and prejudicial to revenue.
2. Burden of Proof on Assessee to Show AO’s Examination:
   • The assessee failed to show that the AO had applied his mind to the book profit computation.
3. Supreme Court Rulings Not Applicable to Revisional Jurisdiction:
   • The Apollo Tyres Ltd. ruling came after the Section 263 order was passed.
   • The validity of the revisional order must be judged based on the law prevailing at that time.
4. Finality of Order Giving Effect to Section 263:
   • Since the assessee did not challenge the final order passed by the AO under Section 263, it could not later challenge the revision on merits.

Conclusion:

• The Bombay High Court dismissed the appeal, holding that:
  • The CIT was justified in invoking Section 263.
  • The AO had not examined the issue, making the assessment erroneous.
  • The CIT’s order did not contain a conclusive finding; it only directed fresh examination.
  • The assessee could not challenge the merits when it had accepted the final revised order.

Implications of the Judgment:

• Strengthens Revenue’s Supervisory Powers:
  • If an AO does not apply his mind, the CIT can revise the order under Section 263.
• Taxpayers Must Ensure Proper Examination in Original Assessments:
  • A failure to object at the right stage can lead to revision.
• Finality of Orders Under Section 263:
  • Taxpayers must challenge the final revised assessment order to contest the revision on merits.

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