Mere Reproduction of Assessee’s Computation Does Not Imply Application of Mind: Bombay High Court Affirms CIT’s Power to Revise Erroneous Assessment Order

In a significant ruling Bombay High Court upheld the exercise of revisional jurisdiction by the Commissioner of Income Tax (CIT) under Section 263 of the Income Tax Act, 1961, holding that the Assessing Officer (AO) had failed to examine the computation of book profits under Section 115J.

A Division Bench comprising Justice M. S. Sonak and Justice Jitendra Jain, while dismissing Income Tax Appeal No. 324 of 2003 filed by KEC International Ltd. (successor to RPG Cables Ltd.), ruled that the CIT was justified in invoking Section 263 because the AO had not conducted an independent examination of the assessee’s book profit computation.

"Merely because an AO reproduces an assessee’s computation of book profits does not mean he has applied his mind. When an assessment order lacks scrutiny, the CIT has the authority to revise it under Section 263 to prevent revenue loss."

The Court rejected the appellant’s contention that the CIT’s revisional order contained a conclusive finding on the merits of the assessment, clarifying that the CIT had merely directed the AO to re-examine the computation under correct legal provisions.

Failure to Examine Computation of Book Profits Under Section 115J Justifies CIT’s Intervention
The case arose from the assessment proceedings for AY 1988-89, where the AO had accepted the assessee’s computation of book profits under Section 115J without independent verification. The CIT exercised revisional jurisdiction under Section 263, finding that:

The AO had not examined whether the computation of book profits under Section 115J was correct.
The AO had not scrutinized the assessee’s deduction under Section 32AB.
There was an erroneous deduction of ₹3.17 crore as decapitalized interest in computing book profits.
The assessee challenged the revisional order, arguing that the AO’s assessment was neither erroneous nor prejudicial to the interest of the revenue. However, the Tribunal upheld the CIT’s order, leading the assessee to file an appeal before the High Court.

The Bombay High Court categorically rejected the assessee’s plea, emphasizing that: "When the AO fails to make any inquiry into an issue, the order becomes erroneous and prejudicial to the interests of the revenue. The CIT was right in setting aside the assessment for fresh determination."

The Court further clarified that the AO’s failure to apply his mind was evident, as no queries were raised during the original assessment regarding the book profit computation under Section 115J.

"Consistency in Challenge is Essential" – Assessee Cannot Selectively Challenge Revisional Jurisdiction
The High Court criticized the assessee for accepting the CIT’s jurisdiction regarding the deduction under Section 32AB while simultaneously challenging the same jurisdiction for the computation of book profits under Section 115J.

"The assessee cannot have it both ways—accepting the revisional jurisdiction for one issue while rejecting it for another, when both were subject to similar scrutiny under Section 263."

The Court ruled that such an inconsistent challenge was self-contradictory and untenable in law.

Findings in Revisional Order Not Conclusive – AO Was Given Discretion to Re-examine the Computation
A key contention by the assessee was that the CIT had given a conclusive finding on merits in its revisional order, leaving no scope for re-examination by the AO. The Court rejected this argument, stating: "The revisional order merely directed the AO to re-examine the computation of book profits and did not preclude further inquiry. The CIT’s remarks were only to establish that the order was erroneous and prejudicial, and not a final determination."

The Court distinguished this case from Herdillia Chemicals Ltd. v. CIT (1994) 206 ITR 690 (Bom), where the CIT had explicitly withdrawn a deduction, noting that in the present case, the CIT had left the final computation open for reconsideration by the AO.

Supreme Court Precedents Reaffirm CIT’s Powers Under Section 263
The Court relied on several Supreme Court rulings to support its decision: Malabar Industrial Co. Ltd. v. CIT, (2000) 243 ITR 83 (SC): "If an AO fails to examine an issue, the order is both erroneous and prejudicial, justifying intervention under Section 263."

CIT v. Max India Ltd., (2007) 295 ITR 282 (SC): "Where two views are possible and the AO has taken one view, the CIT cannot invoke Section 263. However, this principle applies only if the AO has applied his mind in the first place."

Apollo Tyres Ltd. v. CIT, (2002) 255 ITR 273 (SC): "Computation of book profits under Section 115J must follow statutory provisions, and incorrect deductions are subject to revision."

The High Court observed that unlike in Max India Ltd., the AO in the present case had not examined the issue at all—hence, the revisional jurisdiction was validly exercised.

Appeal Dismissed, CIT’s Revisional Jurisdiction Upheld
The Bombay High Court dismissed the appeal, answering the question of law in favor of the Revenue and holding that:

•    The AO’s failure to examine the computation of book profits under Section 115J made the assessment order erroneous and prejudicial to the interest of the revenue.
•    The CIT was justified in exercising revisional jurisdiction under Section 263 to direct a fresh assessment.
•    The revisional order was not conclusive on merits but merely required the AO to conduct a proper inquiry.
"A revisional authority cannot remain a mute spectator when an AO has failed to scrutinize an issue. The CIT's intervention under Section 263 was necessary to correct an erroneous assessment."

By affirming the wide supervisory powers of the CIT, this judgment reinforces the principle that an AO cannot escape scrutiny by simply reproducing an assessee’s computations without independent verification.
 

Date of Decision: January 30, 2025