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[Delhi HC] Cumulative Satisfaction of Twin Conditions Required for Invoking Section 263 Jurisdiction, Income-tax Act, 1961.

Introduction

In the case before the Delhi High Court (‘DHC’), Commissioner of Income Tax – International Taxation v. Saif Partner India IV Ltd.[i] deals with the revisionary jurisdiction power of the Commissioner of Income Tax (Appeals) (‘CIT(A)’) under s. 263 of the Income-tax Act, 1961 (‘Act’). The appeal was filed by the Revenue to contest the order dated 27.03.2022  (‘ITAT Order’) on grounds that the order passed by the assessing officer (‘AO’) was prejudicial to the interest of the Revenue, and thus the revisionary jurisdiction of the CIT(A) under s. 263 of the Act was justified.

Brief Facts

  • Saif Partner India IV Ltd. (‘Assessee’) is a public company incorporated under the laws of Mauritius, operating primarily as an investment holding company, and enjoys tax residency status in Mauritius.

  • The Assessee filed its return of income (‘ROI’) for the assessment year (‘AY’) 2017-18, declaring income from capital gains and losses from various investments. This ROI was subsequently selected for scrutiny assessment.

  • Subsequently, notice was issued under ss. 142(1) and 143(2) of the Act, to which a detailed reply was filed by the Assessee along with the notes to the computation of income. The reply of the Assessee along with notes to the computation of income was considered by the AO who passed the assessment order dated 09.12.2019 (‘AO Order’) in favour of the Assessee.

  • The CIT(A) based on the AO Order, assumed jurisdiction conferred under s. 263 of the Act and held that the AO Order under s. 143(3) of the Act is erroneous and prejudicial to the interest of the Revenue i.e., Appellants in this case.

  • Further, the Assessee approached the ITAT, which held that the CIT(A) had erroneously assumed jurisdiction under s. 263 of the Act in the ITAT Order. It was established that the AO Order was not erroneous and prejudicial against the revenue’s interest as initially claimed in the ITAT Order.

  • The crux of the matter lies in the Assessee’s claimed loss upon the transfer of shares involving Indian entities, deemed erroneous and prejudicial by CIT(A).

  • However, the Assessee had clarified that the cumulative loss would not be carried forward. The Assessee confirmed this stance that no prejudice would be caused to the revenue due to the non-carriage of the mentioned loss.

Held

  • The DHC ruled in favour of the Assessee, directing that the twin conditions under s. 263 of the Act has to be satisfied for invoking jurisdiction under this provision.

  • It was of the view that both the conditions under s. 263 of the Act, i.e., AO order should be erroneous, and AO order should be prejudicial to the interest of the revenue had to be satisfied cumulatively.

  • The DHC upheld the ITAT Order on the fact that the Assessee had mentioned that the cumulative loss as per the balance sheet would not be carried forward, which would thus not be prejudicial to the interest of the Appellant.

  • By dismissing the appeal, the DHC held that the Assessee’s submission did not meet the second condition—that the AO Order was prejudicial to the Revenue's interest—for invoking jurisdiction under s. 263 of the Act.

Our Analysis

The current decision of the DHC in favour of the Assessee sets an important precedent for issues involving jurisdictional assumptions under s. 263 of the Act. It emphasizes the importance of carrying out thorough assessments in order to avoid negative assumptions about the intentions of the taxpayer and underscores the necessity of clear communication during assessments.

The DHC decision was based on the principles formulated in prior high court decisions, emphasizing that an order cannot be considered erroneous until it deviates from the law. This ruling, therefore, emphasized the necessity of clear communication and conformity to current tax regulations and treaties, particularly for international investments and cross-border organizations.

In summary, the DHC’s ruling serves as a critical reminder that the revisionary powers of the CIT under s. 263 of the Act must be exercised within defined boundaries by respecting the appellate process and preventing unnecessary duplication of proceedings, safeguarding taxpayers’ rights during assessment and appeal processes.




End Note

[i] 2023 SCC OnLine Del 8477



Authored by Maarij Ahmad, Intern at Metalegal Advocates. The views expressed are personal and do not constitute legal opinion.

Metalegal Advocates is a litigation-based law firm based in New Delhi and Mumbai, providing litigation and advisory services in the fields of economic offences, tax (income-tax, GST, black money, VAT and other taxes), general corporate advisory, FEMA, commercial laws, and other related business and mercantile laws to businesses and individuals in a wide array of industry verticals. 

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