2014 (2) TMI 1291 - AT - Income Tax

Revision u/s 263 - issuance of notice under section 263 on the basis of the proposal made by the ITO - Held that - The present case, it is abundantly clear from para 2 of the impugned order that the ITO, Ward-1(2), Kota vide letter No. 14 dated 01/04/2011 proposed action under section 263 of the Act and it was not the Ld. CIT, who himself called record and examined the same for any proceeding under section 263 of the Act. Therefore, it can be said that the Ld. CIT had not applied his mind but the matter was referred by the Assessing Officer for initiating the proceeding under section 263 of the Act. In the present case, from para 3 of the impugned order, it is noticed that the notice dated 11/01/2013 under section 263 of the Act was issued only on receipt of the proposal under section 263 of the Act from the ITO, Ward-1(2), Kota and the assessee explained, vide written submission which has been reproduced in para 4 of the impugned order, each and every objection raised by the ITO, Ward-1(2), Kota. It is well settled that the Ld. CIT while exercising the revisionary powers under section 263 of the Act may call for and examine the records of any proceedings and thereafter if he considers that any order passed therein is erroneous insofar as it is prejudicial to the interest 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 justified. Therefore, before taking any action, Ld. CIT himself shall apply his mind after examining the record of any proceedings and his satisfaction is must. However, in the present case, the satisfaction was of the ITO (Tech.) who proposed action under section 263 of the Act, but not of the Ld. CIT. Therefore, issuance of notice under section 263 of the Act on the basis of the proposal made by the ITO was void ab initio. We, therefore, set aside the same. - Decided in favour of assessee

Summary

Issues Involved
1. Jurisdiction and validity of the order under section 263 of the Income Tax Act.
2. Examination of specific allegations regarding non-charging of interest on various advances and debtors.
3. Verification of sales tax demand and household expenses.
4. Examination of the shortage claimed in Dhania and the weight of Bardana.

Detailed Analysis

1. Jurisdiction and Validity of the Order under Section 263
The primary issue raised by the assessee was that the order under section 263 dated 07/03/2013 was "bad in law and on facts of the case for want of jurisdiction." The assessee contended that the Commissioner of Income Tax (CIT) initiated proceedings under section 263 based on a proposal from the Income Tax Officer (ITO) and not on his own examination of the records. The Tribunal agreed with the assessee, stating that the CIT must apply his mind and examine the records himself before initiating proceedings under section 263. The Tribunal cited various case laws, including *Rajiv Arora Vs. CIT 135 TTJ 01 (Jp.)*, to support this view and concluded that the issuance of notice under section 263 based on the ITO's proposal was void ab initio.

2. Examination of Specific Allegations
The CIT had invoked section 263 on several grounds, including:
- Non-charging of interest on farmer debtors of Rs. 16,40,083/-: The assessee argued that advances to farmers without interest were a part of the business practice to secure their produce for sale, which was accepted by the Tribunal.
- Advance of Rs. 11.00 lakhs to Shri Namokar Mal Jain: The assessee explained that the advance was for property purchase and covered by the capital balance, with no interest-bearing funds used. The Tribunal found this explanation satisfactory.
- Non-charging of interest on trade debtors of Rs. 2,52,000/- (M/s Falodi Earth Movers): The assessee clarified that this amount was subsequently recovered and covered by sufficient capital balance. The Tribunal accepted this explanation.

3. Verification of Sales Tax Demand and Household Expenses
- Sales Tax Demand of Rs. 40,800/-: The assessee provided details and documentary evidence showing that the amount related to the interest and sales tax of various years paid during the year under consideration. The Tribunal found this explanation adequate.
- Household Expenses: The assessee had provided details of household expenses and contributions from his wife, which were considered reasonable by the Assessing Officer. The Tribunal noted that proper enquiry had been made by the AO, and the CIT's action was not justified.

4. Examination of Shortage Claimed in Dhania and Weight of Bardana
- Shortage in Dhania: The assessee claimed a shortage of 2.51%, which was within the acceptable range for the business. The AO had already made a trading addition of Rs. 1 lakh after rejecting the books of accounts under section 145(3). The Tribunal found that the AO had examined this issue adequately.
- Weight of Bardana: The CIT alleged that the weight of Bardana had not been accounted for in the weight of goods purchased, leading to potential unaccounted stock. The Tribunal found that the AO had examined the records and made necessary additions, thus no further action was required under section 263.

Conclusion
The Tribunal concluded that the CIT had not applied his mind independently and had relied on the ITO's proposal to initiate proceedings under section 263. This was against the provisions of the law, making the order void ab initio. The Tribunal allowed the appeal of the assessee, setting aside the order under section 263.