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The Income- Tax Act, 1995
N.C. Dhoundial vs Union Of India (Uoi) And Ors. on 11 December, 2003
Section 263 in The Income- Tax Act, 1995
Commissioner Of Income Tax vs Sunil J. Kinariwala on 10 December, 2002
S.N. Mukherjee vs Union Of India on 28 August, 1990

Income Tax Appellate Tribunal - Cochin
Kinfra International Apparel ... vs Assessee on 12 October, 2012

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ITA No.297 & 298/Coch/2011

IN THE INCOME TAX APPELLATE TRIBUNAL

COCHIN BENCH, COCHIN

Before Shri N.R.S. Ganesan (JM) and Shri B.R. Baskaran(AM)

I.T.A No. 297 & 298/Coch/2011

(Assessment years 2006-07 & 2007-08)

Kinfra International Apparel Park Ltd vs The ITO, Wd.1(1) Park Office, St Xaviers College (PO) Trivandrum Thumba, Trivandrum

PAN : AABCK7521L

(Appellant) (Respondent)

Appellant by : Shri A.S. Narayanamurthy Respondent by : Shri Sreenivasu Kollipaka

Date of hearing : 18-09-2012

Date of pronouncement : 12-10-2012

ORDER

Per N.R.S. Ganesan (JM)

These appeals by the taxpayer are directed against the common order dated 03-03-2011 passed by the Administrative Commissioner u/s 263 of the Income-tax Act, 1961.

2. Shri A.S. Narayanamurthy, the ld.representative for the taxpayer submitted that the Administrative Commissioner while exercising his powers u/s 263 of the Income-tax Act found that the order of the assessing officer is erroneous and prejudicial to the interest of the revenue. According to the ld.representative, the taxpayer claimed pre-operative expenses u/s 35D of the 2

ITA No.297 & 298/Coch/2011

Act which was allowed by the assessing officer after considering the material available on record. According to the ld.representative, the taxpayer has filed all the materials before the assessing officer, therefore, there is no reason for the Administrative Commissioner to exercise his jurisdiction u/s 263 of the Income- tax Act. Referring to the order of this Tribunal in the case of Kuttukkaran Trading Ventures in ITA No.286/Coch/2010 dated 04-10-2011, the ld.representative submitted that on identical set of facts, this Tribunal found that there was no justification for the Administrative Commissioner to revise the order of assessment. We heard, Shri Srinivasu Kollipakku, the ld.DR also.

3. We have carefully gone through the order of lower authorities. The assessing officer simply accepted the claim of the taxpayer without any discussion in the assessment order. The application of mind on the material said to be filed by the taxpayer does not reflect in the assessment order. The assessment order being a quasi judicial order, the application of mind by the assessing officer shall reflect in the order itself. The reason for the conclusion or the conclusion reached by the assessing authority shall be reflected in the assessment order. The reason for a particular decision cannot be substituted either by way of filing affidavit or document in appellate proceedings. The very purpose of providing appeal / revisional jurisdiction under the Act is to ensure fairness in the proceedings before the assessing authority. The fairness can be ensured provided the assessing authority drafts the order in such a way that the application of mind is reflected in the order itself. The examination of material and the reasons for conclusion shall also be reflected in the order itself. This issue was examined by the Punjab & Haryana High Court in the case of Commissioner of Income-tax vs Sunil Kumar Goel (2005) 274 ITR 53 (P&H). The 3

ITA No.297 & 298/Coch/2011

Punjab & Haryana High Court after considering the judgment of the Apex Court in Mukherjee (S.N.) vs UOI (1990) AIR 1990 SC 1984 has observed as follows: " In S.N. Mukherjee v. Union of India, AIR 1990 SC 1984, a Constitution Bench of the Supreme Court discussed the development of law on this subject in India, Australia, Canada, England and the United States of America and after making reference to a large number of judicial precedents, their Lordships culled out the following propositions (page 1995):

"The decisions of this court referred to above indicate that with regard to the requirement to record reasons the approach of this court is more in line with that of the American Courts. An important consideration which has weighed with the court for holding that an administrative authority exercising quasi-judicial functions must record the reasons for its decision, is that such a decision is subject to the appellate jurisdiction of this court under article 136 of the Constitution as well as the supervisory jurisdiction of the High Courts under article 227 of the Constitution and that the reasons, if recorded, would enable this court or the High Courts to effectively exercise the appellate or supervisory power. But this is not the sole consideration. The other considerations which have also weighed with the court in taking this view are that the requirement of recording reasons would (i) guarantee consideration by the authority; (ii) introduce clarity in the decisions; and (iii) minimize chances of arbitrariness in decision making. In this regard a distinction has been drawn between ordinary courts of law and tribunals and authorities exercising judicial functions on the ground that a judge is trained to look at things objectively uninfluenced by considerations of policy or expediency whereas an executive officer generally looks at things from the stand point of policy and expediency.

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 recorded 4

ITA No.297 & 298/Coch/2011

of reasons by an administrative authority services a salutary purpose, namely, it excludes chances of 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 whether the decision is subject to appeal, revision or judicial review. It 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."

In Testeels Ltd v. N.M. Desai (1970) 37 FJR 7; AIR 1970 Guj 1, a Full Bench of the Gujarat High Court has made an extremely lucid enunciation of law on the subject and we can do no better than to extract some of the observations made in the decision. The same are (headnote of AIR 1970 (Guj)):

"The necessity of giving reasons flows as a necessary corollary from the rule of law which constitutes one of the basic principles of the Indian Constitutional set-up. The administrative authorities having a duty to act judicially cannot therefore decide on considerations of policy or expediency. They must decide the matter solely on the facts of the particular case, solely on the material before them and apart from any extraneous considerations by applying pre-existing legal norms to factual situations. Now the necessity of giving reasons is an important safeguard to ensure observance of the duty to act judicially. It introduces clarity, checks the introduction of extraneous or irrelevant considerations and excludes or, at any rate, minimizes arbitrariness in the decision-making process.

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ITA No.297 & 298/Coch/2011

Another reason which compels making of such an order is based on the power of judicial review which is possessed by the High Court under article 226 and the Supreme court under article 32 of the Constitution. These courts have the power under the said provisions to quash by certiorari a quasi-judicial order made by an administrative officer and this power of review can be effectively exercised only if the order is a speaking order. In the absence of any reasons in support of the order, the said courts cannot examine the correctness of the order under review. The High Court and the Supreme Court would be powerless to interfere so as to keep the administrative officer within the limits of the law. The result would be that the power of judicial review would be stultified and no redress being available to the citizen, there would be insidious encouragement to arbitrariness and caprice. If this requirement is insisted upon, then, they will be subject to judicial scrutiny and correction."

If the order passed by the Tribunal is scrutinized in the light of the aforementioned proposition of law, we do not find any difficulty in setting aside the same on the ground of violation of the rules of natural justice. The flowery language used by the Tribunal to justify its acceptance of the respondent's plea that he did not know the law does not warrant our affirmation. In our opinion, the Tribunal was duty bound to record tangible and cogent reasons for upsetting well reasoned orders passed by the Assessing Officer and the Commissioner of Income-tax (Appeals). It should have directed its attention to the language of section 271D and 271E of the Act in conjunction with other provisions of the same family and then decided by a reasoned order whether the respondent had been able to make out a case for deleting the penalty. The order passed by the Tribunal should have clearly reflected the application of mind by the learned members."

4. We also find that the Apex Court had an occasion to consider an identical issue in Toyota Motor Corporation vs Commissioner of Income-tax (2008) 306 ITR 52 (SC). The Apex Court, speaking through Hon'ble Mr. Jutice Dr Arijit Pasayat has observed as follows at page 53 of the ITR:

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ITA No.297 & 298/Coch/2011

" We are not inclined to interfere with the impugned order of the High Court. The High Court has held that the Assessing Officer had disposed of the proceedings stating the penalty proceedings initiated in this case under section 271C read with section 274 of the Income-tax Act, 1961 are hereby dropped. Accordingly to the High Court, there was no basis indicated for dropping the proceedings. The Tribunal referred to certain aspects and held that the initiation of proceedings under section 263 of the Income-tax Act, 1961 (in short, "the I.T. Act") was impermissible when considered in the background of the materials purportedly placed by the assessee before the Assessing Officer. What the High Court has done is to require the Assessing Officer to pass a reasoned order. The High Court was of the view that the Tribunal could not have substituted its own reasonings which were required to be recorded by the Assessing Officer. According to the assessee, all relevant aspects were placed for consideration and if the officer did not record reasons, the assessee cannot be faulted.

We do not think it necessary to interfere at this stage. It goes without saying that when the matter be taken up by the Assessing Officer on remand, it shall be his duty to take into account all the relevant aspects including the materials, if any, already placed by the assessee, and pass a reasoned order."

5. In view of the above decisions, the assessing authority is bound to draft the order in such a way that the application of mind to the material available on record and the conclusions and reasons of a particular decision shall be reflected in the assessment order. This Tribunal is of the considered opinion that the application of mind and the reasons for the conclusion shall ensure fairness in the decision of the assessing authority. Apart from that, it also enables the appellate / revisional authority to exercise their jurisdiction in a fair and reasonable manner.

6. We have also carefully gone through the order of this Tribunal in the case of Kuttukkaran Trading Ventures (supra). No doubt, this Tribunal set aside the order of the Administrative Commissioner but it is not known whether the 7

ITA No.297 & 298/Coch/2011

application of mind or the reason for the conclusion reached in the assessment order reflected in the assessment order itself. Moreover, in view of the judgment of the Apex Court in the case of Toyota Motor Corporation (supra) and the judgments of the Punjab & Haryana High Court in the case of Sunil Kumar Goel (supra) we find that the Administrative Commissioner has rightly exercised his powers u/s 263 of the Income-tax Act. However, we find that the Administrative Commissioner has directed the assessing officer to modify the assessment order as per his order without making any enquiry by the assessing authority. The very fact that the assessing authority has not made any enquiry or he had no occasion to discuss the material available on record may be a justification for exercising the revisional powers u/s 263 of the Income-tax Act. However, the Administrative Commissioner cannot step into the shoes of the assessing authority and decide the matter himself without allowing the assessing officer to examine the matter. This Tribunal is of the considered opinion that in the hierarchy, first the assessing authority has to apply his mind to the material available on record and then decide the issue in accordance with law one way or the other. Therefore, the Administrative Commissioner ought to have directed the assessing officer to examine the materials available on record and decide the matter in accordance with law after giving opportunity to the taxpayer. In this case, the Administrative Commissioner, instead of directing the assessing officer to examine the matter, has directed the assessing authority to decide the matter as per the decision arrived by the Administrative Commissioner. This Tribunal is of the considered opinion that in all fairness the assessing authority has to first examine the issue on the basis of the material available on record. Accordingly, while confirming the order of the Administrative Commissioner, we set aside the direction of the Administrative Commissioner and direct the assessing authority to examine the claim of the taxpayer u/s 35D of the Act on the basis of material 8

ITA No.297 & 298/Coch/2011

available on record and thereafter decide the same in accordance with law, after giving reasonable opportunity to the taxpayer without being influenced by any of the observations made by the Administrative Commissioner in the impugned order.

7. With the above observation, the appeal of the taxpayer is dismissed. Order pronounced in the open court on this 12th October, 2012. Sd/- sd/- (B.R. Baskaran) (N.R.S. Ganesan) ACCOUNTANT MEMBER JUDICIAL MEMBER Cochin, Dt : 12th October, 2012

pk/-

copy to:

1. The appellant

2. The respondent

3. The Commissioner of Income-tax

4. The Commissioner of Income-tax(A)

5. The DR

(True copy) By order

Asstt. Registrar, Income-tax Appellate Tribunal, Cochin Bench