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2012 (12) TMI 657 - AT - Income TaxJurisdiction power u/s 263 by CIT(A) treatment to advance rent received Held that - As special audit report categorically admits that the assessee has maintained his accounts on mercantile system, thus once it is accepted that the assessee is following the mercantile system of accounting, then the advance of rent received by the assessee cannot be treated as rent receipt during the year. This is also because the assessee has offered the advance rent as his income during the relevant assessment year to which it relates and the same has also been accepted. In the circumstances, finding of CIT u/s. 263 is erroneous and unsustainable in law and his liable to be quashed as without jurisdiction provided by the show-cause notice - appeal of the assessee allowed.
Issues Involved:
1. Erroneous and prejudicial order to the interest of revenue. 2. Legality of holding an order erroneous and prejudicial when two views are possible. 3. Legality of passing an order beyond the terms of the original notice under section 263. 4. Conducting fishing and roving inquiries beyond the scope of section 263. 5. Assumption of jurisdiction under section 263. 6. Specific errors in the Commissioner's findings on rental income, advance rent, TDS, mixed system of accounting, property categorization, and other accounting practices. Issue-wise Detailed Analysis: 1. Erroneous and Prejudicial Order to the Interest of Revenue: The assessee contended that the Commissioner of Income Tax (CIT) erred in holding the order erroneous and prejudicial to the interest of revenue. The Tribunal noted that the CIT's primary issue was the assessee following a cash system of accounting and not disclosing advance rent received. However, the Tribunal found that the assessee had disclosed all figures, and the difference was due to advance rent, which was accounted for in respective years as per CBDT Circular No. 05/2001. Thus, the Tribunal concluded that the CIT's findings were unsustainable. 2. Legality of Holding an Order Erroneous and Prejudicial When Two Views Are Possible: The Tribunal observed that the CIT's decision to hold the order erroneous and prejudicial was based on the assumption that the assessee followed a mixed system of accounting. However, the special audit report under section 142(2A) confirmed the assessee followed the mercantile system. The Tribunal held that when two views are possible, the CIT cannot invoke section 263 merely because he has a different view. 3. Legality of Passing an Order Beyond the Terms of the Original Notice under Section 263: The Tribunal highlighted that the CIT included issues in his order that were not part of the original show-cause notice. Specifically, issues in paragraphs 11-13 of the CIT's order did not find reference in the show-cause notice. The Tribunal emphasized that the jurisdiction of the CIT under section 263 is restricted to issues raised in the show-cause notice. Therefore, directions given by the CIT on issues not included in the notice were struck down. 4. Conducting Fishing and Roving Inquiries Beyond the Scope of Section 263: The assessee argued that the CIT conducted fishing and roving inquiries beyond the scope of section 263. The Tribunal agreed, noting that the CIT's directions on issues not mentioned in the show-cause notice constituted such inquiries. The Tribunal held that the CIT's order on these issues was without jurisdiction. 5. Assumption of Jurisdiction Under Section 263: The Tribunal found that the CIT assumed jurisdiction under section 263 based on the erroneous belief that the assessee followed a mixed system of accounting. The special audit report confirmed the mercantile system, and the Tribunal held that the CIT's assumption of jurisdiction was incorrect. 6. Specific Errors in the Commissioner's Findings: - Rental Income and Advance Rent: The CIT held that rental income should be accounted for on a cash basis and considered advance rent as income. The Tribunal, referencing the special audit and CBDT Circular No. 05/2001, held that the assessee correctly accounted for advance rent on an accrual basis. - TDS and Mixed System of Accounting: The CIT's findings on TDS and the mixed system of accounting were found to be incorrect. The special audit confirmed the mercantile system, and the Tribunal held that the CIT's findings were unsustainable. - Property Categorization and Other Accounting Practices: The Tribunal found no evidence to support the CIT's findings on property categorization and other accounting practices. The CIT's directions on these issues were beyond the scope of the show-cause notice and were struck down. Conclusion: The Tribunal quashed the CIT's order under section 263, finding it erroneous and unsustainable in law. The appeal of the assessee was allowed.
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