1998 (7) TMI 122 - AT - Income Tax

Summary

Issues Involved:
1. Whether the orders passed under section 185(1) read with section 143(3) by the Assessing Officer (AO) were erroneous and prejudicial to the interests of the Revenue.
2. Whether the firms were genuinely constituted or were proprietary concerns with benami partners.
3. Whether the Commissioner of Income Tax (CIT) was justified in exercising jurisdiction under section 263 of the Income Tax Act.

Issue-Wise Detailed Analysis:

1. Erroneous and Prejudicial Orders:
The CIT, Meerut, while examining the records, found that the orders passed by the AO under section 185(1) read with section 143(3) were erroneous and prejudicial to the Revenue. The CIT issued a notice under section 263, requiring the assessee to show cause why the order granting registration should not be canceled. The CIT concluded that the AO erred in granting registration without proper examination, referencing the Supreme Court decision in Dy. Commr. of (Sales-tax) vs. Kalu Kutty (1985) 155 ITR 150 (SC). The CIT set aside the AO's order for re-framing after proper enquiry.

2. Genuineness of Firms:
The CIT questioned the genuineness of the firms, suggesting that the firms appeared to be proprietary concerns of Mool Raj Singh with benami partners. The CIT based this on the relationships and financial transactions among the partners, particularly the gifts made by some partners to Mool Raj Singh and his family. However, the AO had previously examined the firm's constitution, profit-sharing, and capital investments, concluding that the firms were genuine. The AO had also assessed the gifts made by individual partners in their respective gift-tax assessments.

3. Jurisdiction under Section 263:
The Tribunal analyzed whether the CIT was justified in invoking section 263. The Tribunal noted that for section 263 to apply, the order must be both erroneous and prejudicial to the interests of the Revenue, citing various judicial precedents, including CIT vs. Gabriel India Ltd. (1993) 203 ITR 108 (Bom) and V.G. Krishnamurthy vs. CIT (1985) 152 ITR 683 (Kar). The Tribunal found that the AO had made reasonable enquiries and that the CIT's doubts were based on guesswork without material evidence. The Tribunal emphasized that the CIT's power under section 263 is not to substitute his judgment for that of the AO but to correct errors that are both erroneous and prejudicial to the Revenue.

Conclusion:
The Tribunal concluded that the CIT had wrongly exercised jurisdiction under section 263. The AO had conducted proper enquiries and assessments, and the CIT's order lacked material evidence to support the claim of erroneous and prejudicial orders. Consequently, the Tribunal set aside the CIT's order under section 263 and allowed the appeals of the assessees.