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Thursday, August 30, 2012

Assessing officer not exercising proper inquiry & not applying reasonable mind of facts and evidences on record would result into erroneous assessment order warranting exercise of Revision u/s. 263 of the Income Tax Act, 1961

Not holding proper inquiry and non-application of mind on facts and materials put on record would be 'erroneous' assessment warranting for the exercise of "Revisional Jurisdiction" and is covered u/s. 263   

Commissioner of Income-tax
Jawahar Bhattacharjee*


FEBRUARY 7, 2012

Adarsh Kumar Goel, CJ - This appeal has been placed before this Bench in pursuance of order of the Division Bench dated 17.2.2010 to resolve conflict in two decisions of this Court in CIT v. Daga Entrade (P.) Ltd. [2010] 327 ITR 467 and Rajendra Singh v.Superintendent of Taxes [1990] 79 STC 10 (Gau).

2. Reference may briefly be made to the facts giving rise to the issue. The assessee was assessed for the assessment year 2002-03 by the Assessing Officer (AO) giving benefit of exemption under Section 54F of the Income Tax Act, 1961 for long term capital gains from sale of shares. The shares were purchased on 21.4.2000 for Rs. 19,536/- and sold on 2.5.2001 for Rs. 6,36,640/-i.e. on the increased price of more than 30 times in one year. The Commissioner of Income Tax (CIT) held the order to be erroneous and prejudicial to the interest of revenue and exercised suo motu revisional jurisdiction under Section 263 of the Act. It was, inter alia, observed that while accepting genuineness of the share transaction, the AO failed to make any enquiry which, in the facts and circumstances, would normally be made to ascertain the capital gain in question. The assessee was not a habitual operator of share market and had no share of any other company; share was not of a well known company; the price jumped from Rs. 6 per share to Rs. 200/- per share within a short span of thirteen months without any apparent reason. The AO could have obtained annual accounts of the company to satisfy himself whether the commercial activities of the company justified such a jump in price. He could have obtained price quotations of the shares on few dates to examine reasonableness of the jump. The alleged sellers and buyers should have been examined. Accordingly, the order was held to be erroneous and prejudicial to the interest of the Revenue. The AO was directed to re-frame the assessment after conducting necessary enquiries.

3. On appeal of the assessee to the Tribunal, the order of the CIT was set aside on the ground that in absence of the order of the AO being without jurisdiction, the same could not be held to be 'erroneous' for invoking jurisdiction under Section 263. Reliance was placed on judgment of this Court in B & A Plantation & Industries v. CIT [2007] 290 ITR 395.

4. Aggrieved by the order of the Tribunal, the Revenue has preferred this appeal claiming following substantial questions of law:-
"1. Whether on the facts and in the circumstances of the case, the appellant was justified and correct in law in assuming jurisdiction u/s 263 of the Act and in passing the order dated 8-11-2006 u/s 263 of the Act setting aside the assessment order with the further direction to reframe the same in terms of the said order?
2. Whether on the facts and in the circumstances of the case, the tribunal was justified and correct in law in cancelling the order passed by the appellant u/s 263 of the Act, 1961 ?"

5. When the appeal came up for final hearing, the Revenue relied upon judgment of this Court in Daga Entrade P. Ltd. (supra) holding that exercise of suo motu revisional power under Section 263 of the Act was not confined to order passed in error of jurisdiction only as held in two Single Bench judgments of this Court in Bongaigaon Refinery & Petrochemicals Ltd. v. Union of India [2006] 287 ITR 120 andShyam Sunder Agarwal v. State of Assam [2003] 131 STC 70. The said power could be exercised if the order was 'erroneous' on account of relevant material being ignored. It was observed that since the said Single Bench judgments were based on Division Bench judgment inRajendra Singh (supra) there was conflict in two Division Bench judgments requiring the matter to be placed before larger Bench to decide as to which of the two judgments was correct. Relevant part of the order is as under:

"In the course of hearing, a recent judgment of this Court dated 17.2.2009 in ITA No.1/2005 and other connected cases has been placed before us by Sri U. Bhuyan, learned departmental counsel. In para-29 and 30 of the said judgment, the Division Bench seems to have taken the view that exercise of suo motu revisional power under Section 263 of the Act need not be confined to the orders passed in error of jurisdiction, and interference can be made in a situation where relevant materials have been ignored at the time of making of assessment, resulting in an erroneous order. The Division Bench, while deciding ITA No.1/05 and other connected cases has also overruled two decisions rendered by two separate single Benches of this Court in BRPL v. Union of India, reported in 2006 (287) ITR 120; and in SS Agarwal v. State of Assam, reported in 2003(1) GLR 448. The aforesaid decisions of the Single Benches in BRPL(supra) and in SS Agarwal (supra), we have noticed, were rendered after following an earlier Division Bench judgment of this Court inRajendra Singh v. Superintendent of Taxes, reported in 79 STC 10. In the aforesaid judgment, the Division Bench has clearly held that an erroneous order would be one which is plainly contrary to law and the error must pertain to one of jurisdiction. It therefore, appears that two different Division Benches have taken two different views on an identical subject matter. Which of the two views would be correct cannot be gone into by a co-ordinate Bench. We therefore, direct the office to place this matter before the Hon'ble Chief Justice for consideration as to whether this income tax appeal should be referred to a larger Bench. Office to act accordingly."

6. We have heard learned counsel for the parties.

7. To determine the question in hand, let us first have a look at the statutory provision:
"263. Revision of orders prejudicial to Revenue .- (1) The Commissioner may call for and examine the record of any proceeding under this Act, and if he considers that any order passed therein by the Assessing Officer is erroneous in so far as it is prejudicial to the interests of the revenue, he may, after giving the assessee an opportunity of being heard and after making or causing to be made such inquiry as he deems necessary, pass such order thereon as the circumstances of the case justify, including an order enhancing or modifying the assessment, or cancelling the assessment and directing a fresh assessment."

8. The object of the provision is to correct an erroneous order prejudicial to the interest of revenue, as the department has no right to file an appeal against the order of the AO. While the power is not meant to be substitute for the power of the AO to make assessment, the same can certainly be exercised when order of the AO is erroneous and prejudicial to the interest of the revenue. Whether or not order is erroneous has to be decided from case to case.

9. Interpretation of Section 263 has been subject matter of consideration in various decisions. In Malabar Industrial Co. Ltd. v. CIT [2000] 243 ITR 83/109 Taxman 66 (SC), it was observed:

"7. There can be no doubt that the provision cannot be invoked to correct each and every type of mistake or error committed by the Assessing Officer; it is only when an order is erroneous that the section will be attracted. An incorrect assumption of facts or an incorrect application of law will satisfy the requirement of the order being erroneous. In the same category fall orders passed without applying the principles of natural justice or without application of mind.

9. Mr Abraham relied on the judgment of the Division Bench of the High Court of Madras in Venkatakrishna Rice Co. v. CIT [1987] 163 ITR 129 interpreting "prejudicial to the interests of the Revenue". The High Court held:

"In this context, (it must) be regarded as involving a conception of acts or orders which are subversive of the administration of revenue. There must be some grievous error in the order passed by the Income Tax Officer, which might set a bad trend or pattern for similar assessments, which on a broad reckoning, the Commissioner might think to be prejudicial to the interests of Revenue Administration."

In our view this interpretation is too narrow to merit acceptance. The scheme of the Act is to levy and collect tax in accordance with the provisions of the Act and this task is entrusted to the Revenue. If due to an erroneous order of the Income Tax Officer, the Revenue is losing tax lawfully payable by a person, it will certainly be prejudicial to the interests of the Revenue."

10. We may now consider the view taken in the two judgments of this Court in Rajendra Singh (supra) and Daga Entrade P. Ltd. (supra)

11. In Rajendra Singh (supra), the issue arose in the context of Section 21 of the Tripura Sales Tax Act, 1976, which provided for suo motu revisional jurisdiction, which is in pari materia with Section 263 of the Act. The Commissioner observed that it was not necessary that the order to be revised should be erroneous. The same could be also revised if it was prejudicial to the interest of the revenue. This Court held:

"7. The power of suo motu revision under Sub-section (1) is in the nature of supervisory jurisdiction and the same can be exercised only if the circumstances specified therein exist. Two circumstances must exist to enable the Commissioner to exercise power of suo motu revision under this sub-section, (i) the order is erroneous ; (ii) by virtue of the order being erroneous prejudice has been caused to the interest of the revenue. It is not sufficient that the order is erroneous. It must be erroneous and also prejudicial to the interest of the revenue. If an order is erroneous but not prejudicial to the revenue, the Commissioner cannot exercise power under this sub-section. Likewise, it is not sufficient to exercise power under Section 21(1) that the order in question is prejudicial to the interest of the revenue. It must be erroneous first and if it is so then it can be revised in so far as it is prejudicial to the interest of the revenue. It has, therefore, to be considered firstly as to when an order can be said to be erroneous. We find that the expressions "erroneous", "erroneous assessment" and "erroneous judgment" have been defined in Black's Law Dictionary. According to definition "erroneous" means "involving error; deviating from the law". "Erroneous assessment" refers to an assessment that deviates from the law and is therefore invalid, and is a defect that is jurisdictional in its nature, and does not refer to the judgment of the assessing officer in fixing the amount of valuation of the property. Similarly "erroneous judgment" means: "One rendered according to course and practice of court, but contrary to law, upon mistaken view of law, or upon erroneous application of legal principles".

From the aforesaid definitions it is clear that an order cannot be termed as erroneous unless it is not in accordance with law. If an officer acting in accordance with law makes certain assessment and determines the turnover of a dealer, the same cannot be branded as erroneous by the Commissioner simply because according to him the order should have been written more elaborately. This section does not visualise a case of substitution of judgment of the Commissioner for that of the officer, who passed the order, unless the decision of the subordinate officer is held to be erroneous. Cases may be visualised where assessing officer while making an assessment examines the accounts, makes his enquiries, applies his mind to the facts and circumstances of the case and determines the turnover either by accepting the accounts or by making some estimates himself. The Commissioner on perusal of the records may be of the opinion that the estimate made by the officer concerned was on the lower side and left to the Commissioner he would have estimated the turnover at a higher figure than the one determined by the assessing officer. That would not vest the Commissioner with power to re-examine the accounts and determine the turnover himself at a higher figure. It is because the officer has exercised the quasi-judicial power vested in him in accordance with law and arrived at a conclusion and such a conclusion cannot be termed to be erroneous simply because the Commissioner does not feel satisfied with the conclusion. It may be said in such a case that in the opinion of the Commissioner the order in question is prejudicial to the interest of the revenue. But that by itself will not be enough to vest the Commissioner with the power of suo motu revision because the first requirement, namely, that the order is erroneous, is absent. Similarly if an order is erroneous but not prejudicial to the interest of the revenue, then also the power of suo motu revision cannot be exercised. Any and every erroneous order cannot be subject-matter of revision because the second requirement also must be fulfilled. There must be some prima facie material on record to show that tax which was lawfully exigible has not been imposed or that by the application of the relevant statute on an incorrect or incomplete interpretation a lesser tax than what was just has been imposed.

We, therefore, hold that in order to exercise power under Sub-section (1) of Section 21 of the Act there must be material before the Commissioner to consider that the order passed by the officer was erroneous in so far as it was prejudicial to the interest of the revenue. We have already held what is erroneous. It must be an order which is not in accordance with the law or which has been passed by the authority without making any enquiry in undue haste. We have also held as to what is prejudicial to the interest of the revenue. An order can be said to be prejudicial to the interest of the revenue if it is not in accordance with the law in consequence whereof the lawful revenue due to the State has not been realised or cannot be realised. There must be material available on record called for by the Commissioner to satisfy him prima facie that the aforesaid two requisites are present If not, he has no authority to initiate proceedings for revision. Exercise of power of suo motu revision under such circumstances will amount to arbitrary exercise of power. It is well-settled that when exercise of statutory power is dependent upon the existence of certain objective facts, the authority before exercising such power must have materials on records to satisfy it in that regard. If the action of the authority is challenged before the court it would be open to the courts to examine whether the relevant objective factors are available from the records called for and examined by such authority. Our aforesaid conclusion gets full support from a decision of Sabyasachi Mukharji, J. in Russell Properties Pvt. Ltd. v. A. Chowdhury, Addl. Commissioner of Income-tax [1977] 109 ITR 229 (Cal). In our opinion any other view in the matter will amount to giving unbridled and arbitrary power to revising authority to initiate proceedings for revision in every case and start re-examination and fresh enquiries in matters which have already been concluded under the law. As already stated it is quasi-judicial power hedged with limitation and has to be exercised subject to the same and within its scope and ambit. So far as calling for the records and examining the same is concerned, undoubtedly it is an administrative act, but on examination "to consider" or in other words, to form an opinion that the particular order is erroneous in so far as it is prejudicial to the interest of the revenue, is a quasi-judicial act because on this consideration or opinion the whole machinery of re-examination and reconsideration of an order of assessment, which has already been concluded and set at rest, is set in motion. It is an important decision and the same cannot be based on the whims or caprice of the revising authority. There must be materials available from records called for by the Commissioner."

12. Reference to the above quoted observations in the judgment shows that the exercise of the jurisdiction has not been limited to the defect of jurisdiction. It could extend to an order which may be found to be 'erroneous' or "not in accordance with law" for having been passed "without making any enquiry in undue haste". The 'jurisdictional' defect has been referred to in that sense. Only limitation laid down is that the order could not be revised without the same being 'erroneous' merely because a different view could also be taken. It has not been held that even an order passed, ignoring norms or material could not be interfered with under Section 263 of the Act.

13. It is well known that the word 'jurisdiction' does not have a fixed meaning. Though in one sense it means entitlement to enter upon the enquiry in question and in wider sense it implies right to conduct enquiry into the matter in lawful manner. Even if there is jurisdiction to go into a matter, failure to have regard to the relevant material may also render an order without jurisdiction. We may refer to discussion in the judgment of Hon'ble Supreme Court in Shri M.L. Sethi v. Shri R.P. Kapur [1972] 2 SCC 427 as follows:

"The word "jurisdiction" is a verbal coat of many colours. Jurisdiction originally seems to have had the meaning which Lord Reid ascribed to it in Anisminic Ltd. v. Foreign Compensation Commission [1969] 2 AC 147, namely, the entitlement "to enter upon the enquiry in question". If there was an entitlement to enter upon an enquiry into the question, then any subsequent error could only be regarded as an error within the jurisdiction. The best known formulation of this theory is that made by Lord Darman in R. v. Bolton(1841) 1 QB 66. He said that the question of jurisdiction is determinable at the commencement, not at the conclusion of the enquiry. InAnisminic (supra), Lord Reid said:
"But there are many cases where, although the tribunal had jurisdiction to enter on the enquiry it has done or failed to do something in the course of the enquiry which is of such a nature that its decision is a nullity. It may have given its decision in bad faith. It may have made a decision which it had no power to make. It may have failed in the course of the enquiry to comply with the requirements of natural justice. It may in perfect good faith have misconstrued the provisions giving it power to act so that it failed to deal with the question remitted to it and decided some question which was not remitted to it. It may have refused to take into account something which it was required to take into account. Or it may have based its decision on some matter which, under the provisions setting it up, it had no right to take into account. I do not intend this list to be exhaustive."

In the same case, Lord Pearce said:
"Lack of jurisdiction may arise in various ways. There may be an absence of those formalities or things which are conditions precedent to the tribunal having any jurisdiction to embark on an enquiry. Or the tribunal may at the end make an order that it has no jurisdiction to make. Or, in the intervening stage while engaged on a proper enquiry, the tribunal may depart from the rules of natural justice; or it may ask itself the wrong questions; or it may take into account matters which it was not directed to take into account. Thereby it would step outside its jurisdiction. It would turn its inquiry into something not directed by Parliament and fail to make the inquiry which the Parliament did direct. Any of these things would cause its purported decision to be a nullity."

The dicta of the majority of the House of Lords in the above case would show the extent to which 'lack' and 'excess' of jurisdiction have been assimilated or, in other words, the extent to which we have moved away from the traditional concept of "jurisdiction". The effect of the dicta in that case is to reduce the difference 'between jurisdictional error and error of law within jurisdiction almost to vanishing point. The practical effect of the decision is that any error of law can be reckoned as jurisdictional. This comes perilously close to saying that there is jurisdiction if the decision is right in law but none if it is wrong. Almost any misconstruction of a statute can be represented as "basing their decision on a matter with which they have no right to deal", "imposing an unwarranted condition" or "addressing themselves to a wrong question". The majority opinion in the case leaves a Court or Tribunal with virtually no margin of legal error. Whether there is excess of jurisdiction or merely error within jurisdiction can be determined only by construing the empowering statute, which will give little guidance. It is really a question of how much latitude the Court is prepared to allow. In the end it can only be a value judgment (see H.N. R. Wade, "Constitutional and Administrative Aspects of the Anisminic case", Law Quarterly Review, Vol. 85, 1969, p. 198). Why is it that a wrong decision on a question of limitation or res judicata 'was treated as a jurisdictional error and liable to be interfered with in revision? It is a bit difficult to understand how an erroneous decision on a question of limitation or res judicata would oust the jurisdiction of the Court in the primitive sense of the term and render the decision or a decree embodying the decision a nullity liable to collateral attack. The reason can only be that the error of law was considered as vital by the Court. And there is no yardstick to determine the magnitude of the error other than the opinion of the Court."

14. Expression 'jurisdictional error' has been used in Rajendra Singh (supra) in wider sense and not in narrow sense.

15. In Bongaigaon Refinery (supra), the order under Section 263 was quashed on the ground that the said order was passed only on audit objection and on the appreciation of materials on record on the ground that a different view could be taken. The operative part of the judgment is as follows:-

"26. Incidentally, this Court in Bongaigaon Refinery and Petrochemicals Ltd. [2005] 274 ITR 379, had answered both the questions referred to it (quoted hereinabove) under Section 256(2) of the Act, in favour of the petitioner. It held against the decision of the learned Tribunal that the petitioner ought to have submitted its audited accounts in support of its claim for deduction under sections 80HH and 80-I of the Act in respect of its new industrial undertaking from its gross total income. In view of the above determination, this Court also held against the assumption of jurisdiction by the Commissioner under Section 263 of the Act. This decision, as is submitted at the Bar, has remained unchallenged. On this ground alone, the impugned order is unsustainable. Apart thereform, the direction in the form issued by the Commissioner has the effect of predetermining the issue so much so that the proceeding before the Assessing Officer would be reduced to a formality. Assuming that the course sanctioned in the provisos to Sections 80HH(6) and 80-I(8) is adoptable in the instant case, the direction specifying the mode to be inflexibly observed by the Assessing Officer cannot be judicially countenanced, the same being in excess of the powers scriptable in Section 263 of the Act. Considering that the power of revision conferred on the Commissioner under the above provision of the Act is quasi-judicial in nature and not administrative, the impugned order is repugnant to the recognized traits of judicial determination and is liable to be interfered with.

27. In the result, the petition succeeds and is allowed. The order dated 27 February 5, 2001, passed by the learned Commissioner of Income-tax, Guwahati, is set aside. There would be no orders as to costs."

16. Even though the above was the basis of the judgment, reference was made to earlier judgment in Rajendra Singh (supra) as follows:

"12. …….This Court in Shri Rajendra Singh [1990] 79 STC 10, while dealing with Section 21 of the Tripura Sales Tax Act, 1976, which is in pari materia with Section 263 of the Act, held that two circumstances, i.e., (1) order is erroneous and, (2) it is thereby prejudicial to the interests of the Revenue, have to subsist so as to enable the Commissioner to exercise the power of suo motu revision thereunder. Dilating on the expression "erroneous assessment", it elucidated the same to signify an assessment in deviation from law and vitiated by a defect that is jurisdictional in nature. It ruled that the provision did not visualise substitution of the judgment of the Commissioner for that of the officer, who had passed the order even if the former on a perusal of the records would hold an opinion different from that of the latter on the merits. The power exercised by the Assessing Officer being quasi-judicial in nature and vested in him in law, a conclusion arrived at by him by invoking the same in accordance with law could not be branded as erroneous only because the Commissioner chose not to agree with him, it held."

14. The amplitude of the power of the revisional authority under Section 36 of the Assam General Sales Tax Act, 1993, was examined by this Court, in San-talal Mehendi Ratta, (HUF) [2002] 1 GLR 197 : [2006] 143 STC 511. Drawing sustenance, inter alia, from the ratio of the decisions in Rajendra Singh [1990] 79 STC 10 (Gauhati) and State of Kerala v. K.M. Cheria Abdulla and Co. [1965] 16 STC 875 (SC), it was held that an erroneous order cannot be equated with a wrong order as understood in common parlance and that an order of assessment passed within the limits of the jurisdiction of the assessing authority even if considered to be wrong by the revisional authority would not attract the invocation of suo motu revisional powers. It expressed itself further in the following terms (page 516 of 143 STC):

"The revisional authority for various good reasons may be inclined to view an assessment order from a negative standpoint. The revisional authority may likewise disagree with the views of the primary authority in its interpretation of the law imposing the liability or the extent or quantum thereof. It may disagree with the primary authority with regard to the determination of the amount of tax to be paid. It may also disagree with the primary authority on matters relating to deductions allowable under the statute. All such situations as aforesaid may render the order of the primary authority wrong or erroneous as commonly understood. Such situations, however, would not be facets of an erroneous decision in so far as the meaning of the said expression as appearing in Section 36 of the Act is concerned. Judicial opinion is unanimous that the expression as appearing in Section 36 must be confined to jurisdictional errors otherwise there would be no distinction between the different aspects of the corrective power conferred by the provisions of the Act for application in different situation. No distinction between the power to reopen an assessment and the appellate or revisional power or the power to rectify would exist. There would be an intermingling of the powers resulting in confusion and uncertainty, a situation definitely not contemplated by any statute."

15. While reiterating the same view in Shree Automobiles P. Ltd. v. Commissioner of Taxes [2003] 132 STC 125, this Court held that a suo motu exercise of the revisional jurisdiction would be warranted if the error is jurisdictional in nature or is a yield of a wrong or illegal exercise of the jurisdiction apparent on the face of the records. It was of the view that any and every error would not be amenable to such revisional power and has to be corrected by adopting other modes as contemplated by the statute.

16. The above judicial pronouncements therefore adumbrate the essence and extent of the revisional jurisdiction of an authority akin to the Commissioner of Income-tax under the Act. Not only is the exercise of the suo motu power conceptualised therein hedged by the two conditions of error in the order sought to be revised and the consequential prejudice to the Revenue, but no interference is permissible unless the same is afflicted by a jurisdictional error or a patent illegality rendering the same ex facie invalid and non-existent in law. The process to derive the satisfaction that the order is erroneous and is thus prejudicial to the interests of the Revenue, the sine qua non for invocation of the power, thus logically has to be informed with the above limitations."

17. In Shyam Sundar Agarwal (supra) referring to Division Bench judgment in Rajendra Singh, it was observed:

"3. …… The expressions "erroneous" and "prejudicial to the interest of revenue" carry a specific and definite connotation which has been interpreted by a Division Bench judgment of this Court in the case of Shri Rajendra Singh & ors. v. The Superintendent of Taxes and others, (1990) 1 GLR 449. This Court while interpreting the said expressions in the context of the parameteria provisions of the Tripura Sales Tax Act, 1976, has held that to invoke the suo motu power of revision both the conditions precedent, i.e., "erroneous" and "prejudicial to the interest of revenue" must co-exist. Taking into account the expression "erroneous" "erroneous assessment and erroneous judgment" as defined in the Black's Law Dictionary, this Court has held that both the expressions "erroneous" and "prejudicial to the interest of revenue" must reflect a defect which is jurisdictional in nature in the assessment/order which is sought to be revised. The power of suo motu revision, as held by this Court, would not be available to the Commissioner merely because the learned Commissioner disagrees with the views of the authority who had passed the order sought to be revised. Merely because the learned Commissioner is of the view that the order is incorrect or that a higher quantum of tax or penalty should have been levied would not make the order of the lower authority amenable to the suo motu revisional power. The order or decision of the lower authority must disclose some jurisdictional error and it is the aforesaid jurisdictional error that makes the order amenable to correction in exercise of the suo motu power of revision."

18. In above judgments, exercise of revisional jurisdiction was held to be limited to 'jurisdictional error' as against 'jurisdiction to substitute opinion of revisional authority for the opinion of primary authority', without excluding interference where there was "wrong or illegal exercise of jurisdiction". Expression 'jurisdictional error' cannot be understood in narrow sense.

19. We may now refer to Daga Entrade P. Ltd. (supra) Therein, the AO did not make any enquiry with regard to the appraisal report available with him on the basis of search conducted, showing that the assessee was providing accommodation entries. On this ground, the CIT exercised suo motu power under Section 263 which was held to be not permissible on the ground that the CIT had not discussed contents of the appraisal report. On further appeal to this Court, the assessee supported the order of the Tribunal by submitting that exercise of suo motu revisional jurisdiction by the CIT was not permissible in absence of a jurisdictional error in the order of the AO, as held by this Court in Shyam Sundar Agarwal (supra) and Bongaigaon Refinery & Petrochemicals Ltd. (supra). This Court held that if the order of the AO was passed ignoring relevant material, causing prejudice to the interest of the Revenue, suo motu revisional jurisdiction could be exercised by the CIT, even if it could be held that there was no jurisdictional error in the order of the AO. Observations of this Court are:

"It is also submitted that suo motu revisional power by the Commissioner of Income Tax can only be exercised for assessment orders passed in error of jurisdiction. But on a reading of section 263(1), we do not find that the power of the Commissioner is hedged by any such additional conditions. Therefore, we are unable to agree with the view taken by this Court in Bongaigaon Refinery & Petrochemicals Ltd. [2006] 287 ITR 120 (Gauhati) and in Shyam Sundar Agarwal [2003] 131 STC 70; [2003] 1 GLR 448."

20. For reaching the above conclusion, this Court referred to judgments of the Hon'ble Supreme Court in Rampyari Devi Saraogi v. CIT[1968] 67 ITR 84, Malabar Industrial Co. Ltd. (supra), Smt. Tara Devi Aggarwal v. CIT [1973] 88 ITR 323 and the Addl. CIT v.Mukur Corpn. [1978] 111 ITR 312 (Guj) as follows:

"The Supreme Court in Rampyari Devi Saraogi [1968] 67 ITR 84, while examining the scope of revisional power under Section 33B of the Income Tax Act, 1922, which is identical as section 263(1) of the current Income Tax Act, held that it is not necessary for the Commissioner to embellish the short reasoning recorded, for deciding to exercise suo motu revisional power since no prejudice would be caused to the assessee, who will have full opportunity to establish before the Assessing Officer, that the assessments, ordered to be by the Commissioner of Income Tax was correctly made.

In a later case, the Supreme Court in Malabar Industrial Co. Ltd. [2000] 243 ITR 83 held that pre-requisite for exercise of suo motu revisional jurisdiction by the Commissioner under Section 263 of the Income Tax Act is that, the order of the Income Tax Officer is erroneous in so far as it is pre-judicial to the interest of the Revenue and if the twin conditions, namely, (1) the order of the Assessing Officer sought to be revised is erroneous, and (2) it is prejudicial to the interests of the Revenue, the exercise of suo motu revisional power under Section 263(1) of the Act would be justified.

The Supreme Court in the case of Smt.Tara Devi Aggarwal [1973] 88 ITR 323 held that even where an income has not been earned and is not assessable, merely because the assessee wants it to be assessed in his or her hands in order to assist someone else, who would have been assessed for a larger amount, an assessment so made can certainly be erroneous and prejudicial to the interest of the Revenue and in such a situation, the Commissioner has ample justification to exercise his revisional power to cancel the assessment and initiate proceedings for assessment against some other assessee who, according to the income tax authorities, is liable for the income thereof.
The Gujarat High Court in Mukur Corporation [1978] 111 ITR 312 has held that when the Income Tax Officer at the stage of making assessment fails to make inquiry into relevant details, such assessment has to be considered as erroneous. If fresh assessment is thereafter ordered by the revisional authority, the only proper course for the revisional authority would be to desist from expressing any final opinion on controversial points."

21. Having referred to the earlier views of this Court leading to the reference to this Bench, the stage is now set to analyze the issue before this Bench.

22. We have already referred to judgments of this Court in Rajendra Singh (supra) and two Single Bench judgments following the said judgment in Bongaigaon Refinery and Petrochemicals Ltd. (supra) and Shyam Sundar Agarwal (supra) as also the second Division Bench judgment in Daga Entrade P. Ltd. (supra). No doubt, in Rajendra Singh (supra), an observation was made that erroneous assessment referred to the defect which is jurisdictional in nature, as against substitution of one view for the other, merely on the ground that a different view was possible. If read as a whole, the judgment does not exclude error in assessment order, by ignoring relevant material. Not holding such inquiry as is normal and not applying mind to relevant material would certainly be 'erroneous' assessment warranting exercise of revisional jurisdiction. Judgment has to be read as a whole and an observation during the course of reasoning in the judgment should not be divorced from the context in which it was used. The judgment is neither to be interpreted as an Act of Parliament nor as a holy book. If this principle is kept in mind, we do not find any conflict in the view taken in Rajendra Singh (supra) and Daga Entrade P. Ltd. (supra) Disagreement in Daga Entrade P. Ltd. (supra) is only to the interpretation which limits the ratio of the judgment by relying only one sentence in isolation divorced from the entire judgment. An incorrect assumption of facts or an incorrect application of law will satisfy the requirement of the order being 'erroneous' non-application of mind and omission to follow natural justice is in same category.

23. Accordingly, we hold that Daga Entrade P. Ltd. (supra) lays down correct law and the same is not in conflict with the earlier order of this Court in Rajendra Singh (supra). Jurisdiction under Section 263 can be exercised whenever it is found that the order of assessment was erroneous and prejudicial to the interest of the Revenue. Cases of assessment order passed on wrong assumption of facts, on incorrect application of law, without due application of mind or without following principles of natural justice are not beyond the scope of Section 263 of the Act.

24. The matter may now be placed before the Division Bench for decision on merits.

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