The Gauhati High Court ruled that the Non-disclosure of the Long Term Capital Gain from sale of shares does not affect revenue’s interest or cause any loss as it is exempted from Income Tax under Section 10(38) of the Income Tax Act 1961. Thus, the court set aside and quashed the proceedings subsequent ex-parte Order.
The bench of Justice Kaushik Goswami observed that in the absence of any prejudice being caused to the revenue, wherein, the impugned proceedings initiated under section 263 of the Income Tax Act is wholly without jurisdiction, illegal and erroneous.
It was also noted by the court that, the PCIT (Principal commissioner of Income Tax) has initiated the proceedings simply on the basis of the proposal of the subordinate authority and has not applied his mind after perusal of the records called for by him and thereby the very initiation of the proceeding in the instant case is illegal, without jurisdiction and not tenable in law.
The sole issue raised in the writ petition for determination is whether the Assessment Order, can be considered erroneous and prejudicial to the interest of the revenue due to the non-disclosure of Rs. 5,30,257 as long-term profit in the computation sheet, despite it being shown in the capital account, thus justifying the exercise of revisional jurisdiction under Section 263 of the Income Tax Act.
The fact is that the petitioner filed their original return under Section 139(1) of the Income Tax Act for the assessment year 2017-18 on August 1, 2017, declaring a total income of Rs. 43,95,310. Subsequently, a Notice dated August 9, 2018, under Section 143(2) of the Act selected the petitioner’s case for “limited scrutiny” under the Computer Assisted Scrutiny Selection (CASS) system.
During the assessment proceedings, a Show Cause Notice was issued on September 29, 2018, by the then Assessing Officer (predecessor of respondent No. 4), to which the petitioner duly replied on December 19, 2018. The final assessment order under Sections 153D/143(3) was passed on December 28, 2018, accepting the returned income.
After the assessment’s completion, a Show Cause Notice dated March 24, 2021, was issued by respondent No. 2 – PCIT, requiring the petitioner to justify why the assessment order should not be revised under Section 263 of the Act due to an alleged discrepancy in reported long-term capital gains from share sales.
Given only one day to respond and attend a hearing on March 26, 2021, the petitioner could not attend, leading to an ex-parte order on March 28, 2021, declaring the original assessment erroneous and prejudicial to revenue interests, prompting the petitioner to challenge the December 28, 2018, Assessment Order before the High Court.
Dr. Saraf, the counsel for the petitioner submitted that the power of suo moto revision under Section 263 of the Act is supervisory and can only be exercised if specific circumstances exist: (i) the order in question must be erroneous, and (ii) the erroneous order must cause prejudice to the interests of the revenue. Both conditions must be met for the Commissioner to validly exercise this power.
He asserted that it is insufficient to show that the order is merely erroneous; it must also be prejudicial to the revenue’s interest. If an order is erroneous but does not harm the revenue, the Commissioner lacks the authority to invoke Section 263. Therefore, an order can only be deemed erroneous or prejudicial to the revenue if it meets these legal criteria.
Mr. S. Chetia, Standing Counsel for the Income Tax Department, submitted that the petitioner declared a total income of Rs. 43,95,310 for the assessment year 2017-18. The petitioner reported Rs. 36,89,039 as long-term capital gains from the sale of shares in the capital account but claimed Rs. 31,15,782 as exempt under Section 10(38) in the computation sheet, resulting in a discrepancy of Rs. 5,30,257 that was not taxed.
Due to this discrepancy, the Assessment Order dated December 28, 2018, is erroneous and prejudicial to the interest of the revenue. Therefore, the Principal Commissioner of Income Tax correctly invoked Section 263 of the Act on March 28, 2021.
Mr. Chetia further submitted that the order is flawed because it was issued without necessary inquiries or verification. He supports his argument by citing the decision of the Division Bench in Commissioner of Income vs. Jawahar Bhattacharjee (2012) 80 CCH 0026 GauHC.
The High Court noted the affidavit-in-opposition filed by the respondent No. 2 – PCIT where it was clearly mentioned that LTCG are admittedly exempted from Income Tax and therefore, the non-disclosure of Rs.5,30,257/- while computing the LTCG gains cannot result in causing prejudice to the department.
Further, the bench noted that the net long-term capital gain was shown in the return after deducting the long-term capital loss, and both were duly reported. Even if Rs. 5,30,257/- was considered as LTCG, it would not have resulted in further tax liability, causing no prejudice to the department.
Thus, the preconditions for exercising powers under Section 263 of the Act were not met, as the amount is exempt and its non-disclosure did not harm revenue interests. The Income Tax Department’s claim that the order is erroneous for lack of inquiry is unfounded. Therefore, the ex-parte Order is without jurisdiction, illegal, erroneous, and unsustainable in law.
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