2011 (10) TMI 614 - AT - Income Tax

Revision u/s 263 - order passed by the AO erroneous or prejudicial to the interest of revenue - C.I.T holding that receipt of share capital was not properly investigated - non entitled to the credit u/s. 88E while determining tax liability U/s. 115JB

Issues Involved:
1. Initiation of proceedings under Section 263.
2. Setting aside the assessment order by the CIT.
3. Investigation of receipt of share capital.
4. Entitlement to credit under Section 88E while determining tax liability under Section 115JB.
5. Invocation of Section 263 for payment of staff salary.
6. Verification of investments in Mutual Funds.

Issue-wise Detailed Analysis:

1. Initiation of Proceedings under Section 263:
The assessee argued that the CIT erred in initiating proceedings under Section 263 when the assessment was completed after due enquiry and in accordance with law. The CIT issued a show cause notice stating that the assessee was not eligible for deduction under Section 88E when the tax was payable under MAT provisions of Section 115JB, resulting in an undercharge of tax liability.

2. Setting Aside the Assessment Order by the CIT:
The CIT set aside the assessment order on the grounds that it was erroneous and prejudicial to the interest of revenue. The assessee contended that the assessment order was neither erroneous nor prejudicial to the interest of revenue, and both conditions for invoking Section 263 were not present.

3. Investigation of Receipt of Share Capital:
The CIT held that the receipt of share capital was not properly investigated. The assessee countered that the AO had duly examined the share capital, and the CIT could not impose his own view on the manner of enquiry. The assessee provided complete details of the shareholders, including names, addresses, cheque numbers, and bank details. The AO issued notices under Section 133(6) to the shareholders, who confirmed their contributions and provided the necessary documentation.

4. Entitlement to Credit under Section 88E while Determining Tax Liability under Section 115JB:
The CIT argued that the assessee was not entitled to credit under Section 88E while determining tax liability under Section 115JB. The assessee relied on the decision of the Bangalore Bench of the Tribunal in the case of M/s. Horizon Capital Limited, which held that the rebate of STT paid by the assessee is allowable from the income tax computed against the total income under Section 115JB. The Tribunal found this issue to be squarely covered in favor of the assessee.

5. Invocation of Section 263 for Payment of Staff Salary:
The CIT invoked Section 263 for the payment of staff salary, arguing that the salary paid was not fair and reasonable considering the volume of business. The assessee contended that the salary was duly certified by the Auditor and there was no evidence that the claim was not genuine.

6. Verification of Investments in Mutual Funds:
The CIT noted that the AO had not verified the source of funds for investments in Mutual Funds during the assessment proceedings. The assessee provided complete details along with bank statements, which were verified by the AO.

Conclusion:
The Tribunal concluded that the assessment order was neither erroneous nor prejudicial to the interest of revenue. The CIT's invocation of Section 263 was not justified as the AO had conducted proper enquiries and verifications. The appeal of the assessee was allowed, and the order of the CIT passed under Section 263 was set aside. The Tribunal emphasized that for the CIT to revise an assessment order under Section 263, both conditions of the order being erroneous and prejudicial to the interest of revenue must be satisfied, as held by the Hon'ble Apex Court in Malabar Industrial Co. Ltd. v. CIT.

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