TaxTMI 
TaxTMI 
2017 (1) TMI 1144
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....issioner has infused jurisdiction in the AO to pass fresh assessment order. 3. Brief facts of the case are that the assessee is engaged in the manufacturing and trading of electric brass fittings/parts. He has filed his return of income on 31.10.2007 declaring total income at Rs. 8,52,600/-. The case of the assessee was selected for scrutiny assessment and notice under section 143(2) was served upon the assessee on 10.9.2008. The ld.AO has passed assessment order u/s.143(3) on 16.3.2009. He determined taxable income of the assessee at Rs. 9,03,600/- as against Rs. 8,58,630/- disclosed by the assessee. The ld.AO has made two ad hoc additions, viz. he disallowed telephone expenses to the extent of Rs. 36,000/- out of total expenditure claimed by the assessee at Rs. 2,68,650/-. Similarly, he disallowed travelling expenses at Rs. 15,000/- out of total expenditure of Rs. 1,41,920/- claimed by the assessee. 4. It is pertinent to mention that the assessee was partner in M/s.Metal Alloys Corporation, M/s.Aaditya International and M/s.Metal Recycling Industries. He was running a proprietorship, viz. M/s. Meera Impex. He was maintaining books of accounts of M/s.Meera Impex and his pers....
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.... Metal Alloys Corporation, In addition to this firm, he was also a partner of M/s. Aaditya International and M/s. Metal Recycling Industries at the relevant time. He carries out a proprietary business in the name M/s. Meera Impex. The books of accounts of M/s. Meera Impex personal books of Shri Mukesh Kanakhara are also maintained. 2. In the personal books of Mukesh Kanakhara, a sum of Rs. 2,96,88,720/ is receivable from M/s. Metal Alloys Corporation. This amount is standing in the capital account of Mr. Mukesh Kanakhara in the books of M/s. Metal Alloys Corporation. In the course of assessment proceedings there was a query from the assessing officer about the source of investment in partnership firms. This was dealt with a submission dated 06,03.2009. A copy of the said submission is enclosed herewith for your kind perusal. 3. You would observe that Shri Mukesh Kanakham was holding a capital far Rs. 415.90 Lacs in addition to non-interest hearing loans for Rs. 60.37 Lacs. The investment in partnership firms and shares was far Rs. 333J 7 Lacs. In view of this, a question of disallowance u/s 14A read with Rule SD was ruled out. 4. M/s. Meera Impex carries out the activity o....
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....unds. Had it been any other concern, would the assessee have allowed the sale consideration to remain outstanding so long? All these facts clearly indicated that the assessee diverted its interest bearing funds to earn tax free income. Further, as per the decision of the hon'ble Punjab and Haryana High Court in the case of CIT-I, Ludhiana Vs. Abhishek Industries Ltd. (2005) 156 taxman 257, the interest paid by the assessee to the extent of the amounts diverted to sister concerns on interest free basis were required to be disallowed. The AO has not verified all these things in proper perspective. Therefore, the order passed by the AO is erroneous and has caused grievous loss to the revenue. Reliance is placed on the following judicial pronouncements: a, Addl CITv. Saraya Distillery [1978] 115 ITRT 34 (All.) b. CIT v. Pushpa Devi (1987) 164 ITR 639/[1986]29 Taxman 377 (Pat). c. CIT v. Seshasayee Paper & Boards Ltd. [2000J 242 ITR 490/108 Taxman 464 (Mad), 5. I, therefore, hold that the assessment finalized by the AO u/s. 143 (3) of the Income tax Act, 1961 is erroneous and prejudicial to the interest of revenue within the meaning of section 263 of th....
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.... interest bearing funds for non-business purpose and allowed partnership firm to earn tax free income. He made reference to the decision of the Hon'ble Supreme Court in the case of Malabar Industrial Co. Ltd. CIT, 243 ITR 83 (SC), CIT Vs. Arvind Jewellers, 259 ITR 502 (Guj), CIT Vs. Max India Ltd., 295 ITR 282 (SC) and cited large number of decisions in his written submissions. 6. On the other hand, the ld.CIT-DR has also field written submissions. In his written submission he has reiterated finding recorded by the ld.CIT. He made reference to the decision of the Hon'ble Supreme Court in the case of CIT Vs. Amitabh Bachhan, 384 ITR 0200 (SC). 7. With the assistance of the ld.representatives, we gone through the record carefully. Section 263 has a direct bearing on the controversy, therefore, it is pertinent to take note of this section. It reads as under:- "263(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 interest of the revenue, he may, after giving the assessee an opportunity of being heard and after ma....
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....er or injunction of any court shall be excluded." 8. On a bare perusal of the sub section-1 would reveal that powers of revision granted by section 263 to the learned Commissioner have four compartments. In the first place, the learned Commissioner may call for and examine the records of any proceedings under this Act. For calling of the record and examination, the learned Commissioner was not required to show any reason. It is a part of his administrative control to call for the records and examine them. The second feature would come when he will judge an order passed by an Assessing Officer on culmination of any proceedings or during the pendency of those proceedings. On an analysis of the record and of the order passed by the Assessing Officer, he formed an opinion that such an order is erroneous in so far as it is prejudicial to the interests of the Revenue. By this stage the learned Commissioner was not required the assistance of the assessee. Thereafter the third stage would come. The learned Commissioner would issue a show cause notice pointing out the reasons for the formation of his belief that action u/s 263 is required on a particular order of the Assessing Officer. A....
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.... with law and arrive at a conclusion, such conclusion cannot be termed to be erroneous simply because the CIT does not fee stratified with the conclusion. (viii) The CIT, before exercising his jurisdiction under s. 263 must have material on record to arrive at a satisfaction. (ix) If the AO has made enquiries during the course of assessment proceedings on the relevant issues and the assessee has given detailed explanation by a letter in writing and the AO allows the claim on being satisfied with the explanation of the assessee, the decision of the AO cannot be held to be erroneous simply because in his order he does not make an elaborate discussion in that regard. 9. Apart from the above principles, we deem it appropriate to make reference to the decision of the Hon'ble Delhi High Court in the case of CIT vs. Sun Beam Auto reported in 227 CTR 113 and Gee Vee Enterprises Ltd vs. Addl. Commissioner of Income Tax (99 ITR 375). In the case of Sun Beam Auto, the Hon'ble High Court has pointed out a distinction between lack of inquiry and inadequate inquiry. If there is a lack of enquiry, then the assessment order can be branded as erroneous. The following observations o....
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....om that of a civil court. The statement made in a pleading proved by the minimum amount of evidence may be adopted by a civil court in the absence of any rebuttal. The civil court is neutral. It simply gives decision on the basis of the pleading and evidence which comes before it. The Income-tax Officer is not only on adjudicator but also an investigator. He cannot remain passive in the face of the return which is apparently in order but called for further inquiry. It is his duty to ascertain the truth of the facts stated in the return when the circumstances of the case are such as to provoke an inquiry... It is because it is incumbent on the Income-tax Officer to further investigate the facts stated in the return when circumstances would made such an inquiry prudent that the word 'erroneous' in section 263 includes the failure to make such an enquiry. The order becomes erroneous because such an inquiry has not been made and not because there is anything wrong with the order if all the facts stated therein are assumed to be correct." 11. In the light of the above, let us examine the facts of the present case. In brief the case of the ld.Commissioner is that the assessee owes a s....
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....permissible. An order is not erroneous, unless the CIT hold and records reasons why it is erroneous. An order will not become erroneous because on remit, the Assessing Officer may decide that the order is erroneous. Therefore CIT must after recording reasons hold that the order is erroneous. The jurisdictional precondition stipulated is that the CIT must come to the conclusion that the order is erroneous and is unsustainable in law. We may notice that the material which the CIT can rely includes not only the record as it stands at the time when the order in question was passed by the Assessing Officer but also the record as it stands at the time of examination by the CIT [see CIT vs. Shree Manjunathesware Packing Products, 231 ITR 53 (SC)]. Nothing bars/prohibits the CIT from collecting and relying upon new/additional material/evidence to show and state that the order of the Assessing Officer is erroneous." 12. A perusal of the above would indicate that unless the ld.CIT hold and records reason as to how assessment order is erroneous, he cannot set aside the assessment order by merely making a mention that the AO has not conducted proper inquiry. Even if he has not conducted, th....
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....d before the ld.Commissioner. The ld.Commissioner failed to take cognizance of these facts in right perspective. Though the finding recorded by the ld.CIT(A) in the appeal of the assessee filed against the assessment order passed under section 143(3) r.w.s. section 263 is not very relevant material for judging the action under section 263, because this finding was not available when action under section 263 was taken. But in order to buttress ourselves as to how the assessee has not borne undue interest expenditure of M/s.Metal Alloys Corporation, we are of the view that ld.CIT(A) has made an analysis of the figure in right perspective in demonstrating as to how no interest expenditure was required to be disallowed on the ground that interest bearing funds were not used for non-business purpose. We deem it pertinent to take note of this finding. It reads as under: "6. I have duly considered the submission of the appellant and also gone through the assessment order. 6.1 The reason for disallowance is that, appellant did not charge any interest on the amount owed by M/s Metal Alloy Corporation to the tune of Rs. 7,45,05,836/- (2,96,88,720 + 4,48,17,116) holding that the appella....
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....the sales to M/s Metal Alloy Corporation is only Rs. 3.37 crores which in terms percentage comes to 15.65 % whereas out of sundry creditors of Rs. 6.00 crores, the share of Metal Alloy Corporation is Rs. 4.48 crores which in terms of percentage comes to 74.65 %, has no bearing to the facts and circumstances of the case. The partnership firm may or may not delay the payment to the proprietary concern of the appellant, but it in no way negates the fact that the appellant had sufficient own funds. This is part of the business expediency and such analysis cannot justify the fact that' the appellant had diverted his interest bearing funds for non-interest bearing activities. 6.3 To sum up, since the appellant had sufficient interest free own funds, as the transaction with the partnership firm was business in nature wherein the appellant had sold goods to the firm and as the appellant had interest free loans in his personal capacity in the proprietary concern, there is no diversion of fund to reduce the profits, as alleged by the AO in the assessment order. Therefore, the disallowance made is deleted." 13. Taking into consideration all the facts and circumstances, we are of the....