TaxTMI 
TaxTMI 
2013 (2) TMI 746
X X X X Extracts X X X X
X X X X Extracts X X X X
....has treated the income from bank interest on FDRs as business income without making necessary enquiries regarding the allowance of interest paid to third parties while estimating net profit and regarding the question of allowability of interest received on FDRs. Accordingly, a show-cause notice dt. 28.6.2011 was issued under s. 263 of the Act to the assessee which reads as under: "After having examined the records of your case, I am considered the assessment completed under s. 184(1) & (2)/143(3) on 27/4/2009 for the asst. yr. 2007-08 as erroneous in so far as it is prejudicial to the interest of revenue under s. 263 of the Act on the grounds mentioned below: 1. The AO has provide benefit of deducting third party interest amounting to Rs. 33,79,844/- from net profit at 8.07 percent determined on the gross receipts of contract receipts. In view of judgment of jurisdictional High Court in the case of Shri Ram Jhanwar, the interest to third party is not allowable. Income from FDR interest to be assessed as income from other source, whereas AO has assessed amount of FDR interest of Rs. 19,50,875/- as business income and applied profit. 2. The AO has not properly examined an....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... the judgment of Hon'ble Rajasthan High Court. From the perusal of both the appeal and the judgment, you will not find the word of the interest paid to third party. The issue in the appeal was in respect of the judgment was in respect of allowability of depreciation under s. 32 of the IT Act. In such circumstances you will observe that the issue was not at all a issue in respect of allowability of the interest paid to third party, therefore, the case referred by you is not at all applicable in case of the assessee and on this basis the order passed by the then AO cannot be called as erroneous as well as prejudicially to the interest of revenue. If you are having any other judgment of the Hon'ble Rajasthan High Court in which has been held that the interest paid to third party is not allowable. You are requested that the same may kindly be supplied to the assessee so that he may be able to rebut the same. Without prejudice to above it is stated that though you have only referred the case of Sri Ram Jhanwar (Not Correct) 1 in which the issue was not regarding allowability of the interest paid to third party, therefore, the same cannot be a basis for disallowing the interes....
X X X X Extracts X X X X
X X X X Extracts X X X X
....herefore, the order passed by the ITO is having no irregularity/illegality/mistake which is falling under the definition of erroneous as well as prejudicially to the interest of the revenue. The issue of allowability of interest paid to third party remained a precedent after application of rate of profit. The ITO, The Commissioner of Income-tax (Appeals) and Tribunal is allowing the interest paid to third party. Lastly, therefore, requested to kindly drop the proceedings initiated by you on this account. In this connection I also want to draw your kind attention towards the fact that this is not only a single case in which the interest paid to third party has been allowed by the AO of Sri Ganganagar but also there are dozens of cases assessed to tax at Sri Ganganagar, in cases of the contractors where interest paid to third party has been allowed. .1 does not want to bring the name of the contractors but same are subject to verification by your good self. In this connection it is stated that if any one case the interest paid to third party has been allowed in that case the interest paid to third party cannot be disallowed in another case. It will be worthwhile to mention here th....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ion here that in case of the assessee himself in the immediately preceding year the interest income from FDR was taken and treated as income from business. The AO, during the year under consideration, also committed no mistake in treating the interest from FDR as business income. You are, therefore, requested that the same may kindly be treated as in accordance with the law. If you are having any judicial pronouncements, please let us know. Please also show the reasons for treating it other than the business income we are relying on the order of the Tribunal in case of M/s Gopal Ram Pemaram .in this case the Hon'ble tribunal even went one step further that if surplus fund deposited in the FDR said also be taxed as income from business. I also want to draw your kind attention towards the case of Allied Construction Vs. Deputy Commissioner of Income Tax- Buland Shahar. reported in 105 ITD Page No. 1. The order is an order of special bench of Tribunal was binding on the AO and is also binding upon your good self in respect of adopting the past history. Further, I want to draw your kind attention towards the rule of precedent. The order of the Tribunal is having the character....
X X X X Extracts X X X X
X X X X Extracts X X X X
....respect of the following the past precedents. The past history has been mentioned in the order. As regards the legal position in respect of s. 263 of the IT Act it is stated as under: Sir, I want to draw your kind attention towards the fact that if two views are there and out of two views one view has been taken by the ITO that can be termed as in accordance with the law. If you are of another view in that case the order passed by the ITO cannot be called as order to the prejudicial to the interest of revenue as well as erroneous! I want to draw your kind attention towards the fact that the s. 263 of the IT Act is not a weapon so as rectify the mistake if committed. Though, in case of the assessee, no, mistake has been committed by the then ITO while passing the order. The ITO issued one notice under s. 154 of the" IT Act, but though, the mistake was not rectified by the ITO and not covered under the garb of the rectification. Now you r good self have utilized the weapon for treating it as prejudicial to the interest of revenue. The AO also expressed that the judgment of Hon'ble Rajasthan High Court in case of Sri Ram Jhanwar is applicable, but the mistake was not trea....
X X X X Extracts X X X X
X X X X Extracts X X X X
....nt again and again. In this respect your kind attention is invited towards in case of Commissioner of Income Tax Vs. Ganpat Ram Bishnoi (2005) 198 CTR (Raj) 546: (2006) 152 Taxman 242(Raj). If you are not satisfied with the order of the ITO cannot provide power to your good self so as to pass the order under s. 263 of the IT Act. In this respect your kind attention is invited towards T. K. International Ltd. vs. Asstt. CIT (2005) 92 TTJ (Cuttack) 188: (2005) 275 ITR 101(Cuttack)(Trib). The relevant portion is being reproduced here under: It was further observed that an ITO adopting one of the course permissible in law and it has resulted in loss of revenue or where two views are possible and the ITO has taken one view with which the CIT does not agree it cannot be treated as an erroneous order prejudicial to the interest of the revenue unless the view taken by the ITO is unsustainable in law. As far as the application of provisions of s. 263 of the IT Act I want to draw your kind attention that in case of the assessee the ITO already applied his mind properly and passed the order and allowed the deduction of the interest paid to third party as well as treated the income of in....
X X X X Extracts X X X X
X X X X Extracts X X X X
....th the interest of revenue. In this respect your kind attention is invited towards the following: Please refer Commissioner of Income Tax vs. Arvind Jewellers (2002) 177 CTR (Guj) 546: (2003) 259 ITR 502(Guj). In this case the Hon'ble High Court in last but one Para observed which is being reproduced as under: "it is the finding of fact given by the Tribunal that the assessee has produced relevant material and offered explanations in pursuance of the notices issued under s. 142(1) as well as s. 143(2) of the Act and after considering the materials and Explanation, the ITO has come to a definite conclusion. The CIT did not agree with the conclusion reached by the ITO. s. 263 of the Act does not empower him to take action on these facts to arrive at the conclusion that the order passed by the Income- tax Officer is erroneous and prejudicial to the interests of the Revenue. Since the material was there on record and the said material was considered by the ITO an<' a particular view was taken, the mere fact that a different view can be taken, should not be the basis for an action under s. 263 of the Act and it cannot be held to be justified." The AO made proper e....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ssment as made by the ITO is in this way has been made by him after conducting the proper enquiry and the Commissioner of income Tax was not justified in setting aside the assessment on the grounds of same, being erroneous, prejudicial of the interest of Revenue." Your kind attention is further invited towards the case of commissioner of Income Tax vs. Girdhari Lal (2002) 176 CTR (Raj) 92: (2002) 258 ITR 331(Raj) in which the Hon'ble Jurisdictional High Court held that the AO, after going through the material on record and after considering. In this connection I have made it clear that when in case of others the department accepted the one thing which is available in the case of the assessee, adverse different view cannot be taken. To the best of our knowledge I am mentioning the name of contractors of Bikaner in which almost same circumstances exist and same has taxed like as assessee for the assessment year. 1. Dana Ram Sri Ram 2. Dhundhwal Brothers 3. Dudi & Company 4. Meera Construction Company 5. Ali Mohd. Abdul Mazid 6. Mohata Construction Company 7. Maheshwari Construction Company Not only in Bikaner but in cases of contractor at Sri Ganganagar....
X X X X Extracts X X X X
X X X X Extracts X X X X
....dit. We are writing because on the basis of audit objection rectification notice under s. 154 was issued and proceedings thereof were dropped. The action if taken under s. 263 on the basis of audit objection is not in accordance with the law. The audit party is not supposed to intervene in the power of the AO. Though, the application of rate of profit with further deduction if any is the wisdom of the AO and the audit party is not supposed to dictate the condition in the power of the AO. Though, there is no direct judgment of any authority under the head 263 but there are so many judicial pronouncements that on the basis of audit objection, no action under s. 147/148 of the IT Act whatsoever can be taken at all. For instance, I want to draw your kind attention towards the judgment of Hon'ble Rajasthan High Court reported in 249 ITR Page 306 (supra) and 38 Tax World Page 52 (supra). The principle thereof is applicable in to in case of the assessee, therefore, prayed that if the action is taken so as to dispose off the objection of the audit the proceedings initiated may kindly be dropped. An application for disclosing the reasons is pending before your good self. If the reasons ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....while to mention here that without prejudice to above that even otherwise it is the Assessing authority who can allow further deduction after application of rate of profit and the Commissioner of Income-tax cannot impose his condition. If allowed by the AO in that case the order cannot be a subject matter of s. 263 of the IT Act. You are, therefore, requested that the same may kindly accepted. Regarding applicability of M/s Sri Ram Jhanwarlal, I have already made it clear, and again stated that the AO allowed the depreciation in this case but the ITAT refused to allow depreciation. The application of rate is always subject to further deduction. The rate can't include all expenses. Therefore the AO did as per law. I want to draw your kind attention towards the order of ITAT Jaipur Bench, Jaipur. In case of Vijay Builders & Sh. Rajendra Singh Bhambhu & Company assessed to Tax by the AO of Jhunjhunu in which interest paid to third party has been allowed by the ITAT. To the best of our knowledge this is the latest judgment of the Hon'ble Tribunal. The order of ITAT Jaipur Bench, Jaipur is binding also. Regarding the copies of order of AO referred in my last application....
X X X X Extracts X X X X
X X X X Extracts X X X X
....adopted net profit rate of 8.07 percent in the light of the Special Bench order in the case of Dy. CIT vs. Allied Construction (2007) 106 TTJ (Del)(SB) 595: (2007) 105 ITD 1(Del)(SB) to allow the impugned deductions. The AO has allowed the claim regarding third party interest. As per the ld. CIT, in the computation of income, the assessee has claimed only interest payment to partners. According to him, after the provisions of s. 145(3) of the Act are invoked all sorts of deductions including interest payment etc. are treated as covered and except for the statutory deductions like depreciation and remuneration and interest to partners are allowable. Therefore, according to him, the AO was not supposed to allow deduction of interest paid to third parties. He has also observed that the AO has not applied his mind while allowing deduction of interest paid to third party out of net profit rate arrived at by applying the rate of 8.07 percent. It is also mentioned that in asst. yr. 2003-04, the same AO has not allowed interest paid to third parties under identical facts. After considering the detailed reply of the assessee, the ld. CIT has found that the finding of the AO is erroneous in ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... which is desired as per the Rule of the application of Precedents whereby the later decision has to be followed on a given subject if there are contrary decisions on an issue. The ld. CIT (DR), however, admitted that there are various decisions of this Tribunal which do support the contention of the assessee and that there are number of decisions of the Jurisdictional High Court which directly or indirectly support the contention of the assessee regarding claim of deduction of interest paid to third parties and treating the interest on FDRs as business income under identical facts and circumstances. According to him, there is no serious disregard or contempt towards the binding decisions as has been alleged. 7. The ld. Authorised Representative Shri Ojha, quipped at this point and on the subject. According to him, decision of Hon'ble High Court on which the ld. CIT [DR] has relied in the case of Shri Ram Jhanwar Lal Vs. ITO & Ors. order dt. 3.7.2008 [reported at (2008) 10 DTR (Raj) 229-Ed.] does not talk about interest paid to a third party. In this decision it is not held that once the books of account are rejected by the AO and net profit is estimated interest paid to thi....
X X X X Extracts X X X X
X X X X Extracts X X X X
....the CIT does not have unfettered and unchequered discretion to revise an order. The CIT is required to exercise revisional power within the bounds of the law and has to satisfy the need of fairness in administrative action and fair play with due respect to the principle of audi alteram partem as envisaged in the Constitution of India as well as in s. 263. An order can be treated as 'erroneous' if it was passed in utter ignorance or in violation of any law; or passed without taking into consideration all the relevant facts or by taking into consideration irrelevant facts. The 'prejudice' that is contemplated under s. 263 is the prejudice to the Income Tax administration as a whole. The revision has to be done for the purpose of setting right distortions and prejudices caused to the Revenue in the above context. The fundamental principles which emerge from the several cases regarding the powers of the CIT under s. 263 may be summarized below: (i) The CIT must record satisfaction that the order of the AO is erroneous and prejudicial to the interests of the revenue. Both the conditions must be fulfilled. (ii) s. 263 cannot be invoked to correct each and every type....
X X X X Extracts X X X X
X X X X Extracts X X X X
....nut-shell the controversy between the parties can be decided by answering whether after the rejection of books and after applying net profit rate to business receipts deduction in respect of interest paid to third parties can be allowed and interest received on FDRs can be included in the total turnover or not? 11. After going through various decisions we have found that this Tribunal as well as the Jurisdictional High Court in more than two cases have given a finding in the favour of the assessee by holding that the interest paid to third parties can be allowable even when the net income is estimated under the provisions of s. 145(3) of the Act. In the given case, it cannot be said that the AO has not examined and not verified both the issues which are the subject matter of this appeal. The AO has verily made enquiries from the assessee and after relying on the decision of the Special Bench of the Tribunal in the case of Dy. CIT vs. Allied Construction (supra) has allowed this deduction of interest paid to third party. As we have discussed above the legal position on the subject and have found that in case the AO applies his mind to a given issue and takes one of the possible v....