2011 (4) TMI 922 - AT - Income Tax

Jurisdiction under section 263 by CIT(A) - Held that - In the present case the original intimation/assessment order issued under section 143(1) on which AO has not applied his mind at all and return was processed as it is accepting the returned income. Since, the CIT(A) passed the impugned order under section 263 against the regular assessment order passed under section 143(3)/147 dated 28-12-2007, therefore, the impugned order is clearly passed within the period of limitation as provided under section 263(2). The CIT(A) cannot revise the summary assessment under section 143(1) as per the decision of Commissioner of Income-Tax Versus Vikrant Crimpers 2006 (1) TMI 67 - GUJARAT HIGH COURT therefore, the contention of the assessee that limitation is to be counted from 2-5-2001 when the return was processed under section 143(1) has no force and is rejected. Interest bearing funds whether used for non-business purposes & whether closing stock of shares have been shown at fair market value on the date of conversion of the same into stock-in-trade from investment - Held that - The record reveal that the AO has failed to make any inquiry on both the issues in the reassessment proceedings despite specific material was available on record to prove prima facie that income escaped assessment on both the issues. AO has thus failed to make any inquiries on both the issues at the reassessment proceedings. He has not issued any notice to the assessee raising query on both the items. The AO has not applied his mind on both the items in reassessment stage and thus, he has failed to make any inquiry on both the items. Thus CIT(A) has noted that in the absence of detailed inquiry on both the items, the matter required fresh consideration by the AO. - against assessee.

Issues Involved:
1. Jurisdiction and time-limit for revision under section 263 of the IT Act.
2. Assumption of jurisdiction by the CIT based on the Assessing Officer's proposal.
3. Validity of the assessment order being erroneous and prejudicial to the revenue.
4. Conditions for invoking section 263: Error and prejudice to the revenue.
5. Use of interest-bearing funds for non-business purposes.
6. Valuation of closing stock of shares at fair market value on conversion to stock-in-trade.
7. Consideration of facts, submissions, and legal perspectives by the CIT.

Detailed Analysis:

1. Jurisdiction and Time-limit for Revision under Section 263:
The assessee argued that the CIT assumed jurisdiction beyond the permissible time-limit since the original order was passed on 2-5-2001, and thus, the revision under section 263 was time-barred. The CIT's revision was based on the reassessment order dated 28-12-2007. The tribunal held that the limitation period for revision under section 263 should be counted from the date of the reassessment order (28-12-2007) and not from the original assessment (2-5-2001). The tribunal cited the Supreme Court's decision in CIT v. Alagendran Finance Ltd. to support this view, affirming that the reassessment order sets aside the original assessment, thus resetting the limitation period.

2. Assumption of Jurisdiction by the CIT:
The assessee contended that the CIT wrongly assumed jurisdiction based on the Assessing Officer's proposal without independent consideration. The tribunal found that the CIT had a credible basis for assuming jurisdiction under section 263, as the assessment order was erroneous and prejudicial to the revenue. The CIT's action was justified as the Assessing Officer had failed to address significant issues during the reassessment proceedings.

3. Validity of the Assessment Order:
The CIT found the assessment order dated 28-12-2007 to be erroneous and prejudicial to the revenue due to the omission of critical issues such as disallowance of interest on loans and the valuation of shares converted to stock-in-trade. The tribunal upheld the CIT's findings, noting that the Assessing Officer did not make necessary inquiries or consider these issues during the reassessment.

4. Conditions for Invoking Section 263:
The tribunal emphasized that for section 263 to be invoked, the assessment order must be both erroneous and prejudicial to the revenue. In this case, the Assessing Officer's failure to examine the use of interest-bearing funds and the valuation of shares led to an erroneous assessment order. The tribunal cited the Supreme Court's decision in Malabar Industrial Co. Ltd. v. CIT, affirming that the CIT's revision was justified as the Assessing Officer's order lacked proper inquiry and consideration.

5. Use of Interest-bearing Funds for Non-business Purposes:
The CIT noted that the assessee's capital account showed a significant debit balance, indicating the use of interest-bearing funds for non-business purposes. The tribunal supported the CIT's view, stating that the Assessing Officer should have made a proportionate disallowance of interest under section 36(1)(iii) of the Act. The failure to do so resulted in an under-assessment of income.

6. Valuation of Closing Stock of Shares:
The CIT found that the assessee did not disclose the closing stock of shares at fair market value upon conversion to stock-in-trade, as required by section 45(2) of the Act. The tribunal agreed with the CIT, noting that the Assessing Officer failed to consider this issue during the reassessment, leading to an erroneous order.

7. Consideration of Facts and Legal Perspectives:
The assessee argued that the CIT did not properly consider the facts, submissions, and legal perspectives. The tribunal found that the CIT had carefully reviewed the case records and submissions. The CIT's decision to set aside the assessment order and direct a fresh assessment was based on a thorough examination of the issues. The tribunal dismissed the appeal, affirming that the CIT's order was justified and within the period of limitation.

Conclusion:
The tribunal upheld the CIT's order under section 263, finding that the reassessment order was erroneous and prejudicial to the revenue. The appeal by the assessee was dismissed, and the CIT's directions for a fresh assessment were deemed appropriate and within the legal framework.

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