1989 (7) TMI 141 - AT - Income Tax

Issues Involved:
1. Validity of the CIT's proceedings under Section 263 of the IT Act, 1961.
2. Jurisdiction of the ITO in passing the assessment orders.
3. Whether the assessments were erroneous and prejudicial to the interests of Revenue.
4. Limitation period for invoking Section 263.
5. Application of the Supreme Court's decision in McDowell & Co. Ltd. vs. CTO.

Detailed Analysis:

1. Validity of the CIT's Proceedings under Section 263:
The CIT initiated proceedings under Section 263 on the grounds that the ITO's assessment orders were erroneous and prejudicial to the interests of Revenue. The CIT observed that the ITO did not conduct adequate inquiries into the relationship between the settlors, trustees, and beneficiaries of the trusts. The CIT concluded that the trusts appeared to be a "sham transaction" created to evade taxes.

2. Jurisdiction of the ITO in Passing the Assessment Orders:
The appellants argued that the ITO had jurisdiction to pass the assessment orders and that the initial show cause notice issued by the CIT, which questioned the ITO's jurisdiction, was invalid. The CIT, however, issued a subsequent notice focusing on the lack of investigation by the ITO, which was deemed valid.

3. Whether the Assessments were Erroneous and Prejudicial to the Interests of Revenue:
The CIT found that the ITO had accepted the claims of the assessees without proper investigation. The trusts were created immediately after a search operation, and the business assets were transferred to the trusts with minimal corpus. The beneficiaries were all members of the Advani Family, and the control and management remained with the same family members. The CIT concluded that the assessments were erroneous and prejudicial to the interests of Revenue.

4. Limitation Period for Invoking Section 263:
The appellants argued that the CIT's order under Section 263 was barred by limitation as it was passed more than two years after the assessment orders. The CIT's order was passed on 28th Jan., 1986, while the assessments were completed on 7th Sept., 1983, and 26th Sept., 1983. The Tribunal referred to a decision of the Madras Bench, which held that the amendment to Section 263 extending the limitation period applied to all pending assessments. The Tribunal concluded that the CIT's order was within the extended time limit.

5. Application of the Supreme Court's Decision in McDowell & Co. Ltd. vs. CTO:
The CIT referred to the Supreme Court's decision in McDowell & Co. Ltd., which emphasized that transactions designed to avoid tax should not receive judicial approval. The CIT concluded that the trusts were created as a device to avoid tax, and the ITO's failure to investigate this aspect rendered the assessments erroneous and prejudicial to Revenue.

Conclusion:
The Tribunal upheld the CIT's consolidated order under Section 263, concluding that the ITO had shown undue haste in completing the assessments without proper investigation. The assessments were set aside, and the ITO was directed to conduct a thorough inquiry and pass fresh orders in accordance with the law. The appeals were dismissed.

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