1982 (10) TMI 70 - AT - Income Tax

Issues Involved:

1. Validity of the CIT's action under Section 263 of the IT Act, 1961.
2. Whether the CIT applied his judicial mind independently.
3. The relevance of the subsequent judgment of the Punjab and Haryana High Court.
4. The effectiveness and legality of the CIT's order setting aside the ITO's order.
5. The jurisdiction of the CIT to review the ITO's order under Section 185(1)(a).

Issue-wise Detailed Analysis:

1. Validity of the CIT's action under Section 263 of the IT Act, 1961:

The appeal challenges the CIT's order made under Section 263 of the IT Act, 1961, which set aside the ITO's order granting registration to the assessee firm. The CIT's action was based on an audit objection pointing out that the firm was not entitled to registration as the licenses were not in the name of the firm constituted of four partners. The CIT's order was contested on the grounds that it was based solely on the audit report without independent application of judicial mind, as required by law.

2. Whether the CIT applied his judicial mind independently:

The assessee's counsel argued that the CIT did not apply his judicial mind independently and merely acted on the audit report forwarded by a subordinate authority. This was supported by the fact that the CIT's order lacked a clear finding that the ITO's order was erroneous and prejudicial to the revenue. The CIT's reliance on the audit report without independent verification was deemed insufficient to assume jurisdiction under Section 263. The judgment of the Calcutta High Court in Jeewan Lal (1929) Ltd. (1977) 108 ITR 407 (Cal) was cited to support this contention.

3. The relevance of the subsequent judgment of the Punjab and Haryana High Court:

The ITO's order, which granted registration to the assessee firm, was made before the judgment of the Punjab and Haryana High Court in CIT vs. Hardit Singh Pal Chand and Co. (1979) 120 ITR 289 (P&H) was reported. The ITO could not have been aware of this judgment at the time of making his order. The assessee's counsel argued that the ITO's decision was based on the facts and the law prevailing at the time and could not be altered by the CIT based on a subsequent judgment.

4. The effectiveness and legality of the CIT's order setting aside the ITO's order:

The assessee's counsel contended that even if the CIT's order were valid, it would be ineffective and infructuous because the CIT only set aside the ITO's order under Section 185(1)(a) and did not address the assessment order under Section 143(3). The firm was still assessed as a registered firm, and the CIT's order did not change this status. Therefore, the CIT's order was argued to be legally ineffective.

5. The jurisdiction of the CIT to review the ITO's order under Section 185(1)(a):

The assessee's counsel argued that the CIT could not issue directions to grant or refuse registration under Section 263, as such registration could only be canceled under Section 186 of the Act. The CIT's order directing the ITO to make a detailed inquiry and reconsider the registration was challenged as beyond the CIT's jurisdiction. However, the Tribunal clarified that the CIT does have the power to review any order passed by the ITO, including those under Section 185(1)(a), if it is erroneous and prejudicial to the revenue.

Conclusion:

The Tribunal found that the CIT did not independently apply his mind and relied solely on the audit report, which made his order unsustainable. The ITO's decision was based on the facts and law at the time and could not be altered by the CIT based on a subsequent judgment. The CIT's order was also deemed ineffective as it did not address the assessment order under Section 143(3). Therefore, the appeal was allowed, and the CIT's order was canceled.

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