1987 (1) TMI 168 - AT - Income Tax

Summary

Issues Involved:
1. Whether the assessment made by the Income-tax Officer (ITO) was erroneous and prejudicial to the interests of revenue.
2. Whether the Commissioner of Income-tax was justified in invoking the provisions of section 263 of the Income-tax Act.

Summary:

Issue 1: Erroneous and Prejudicial Assessment
The appellant-company contested the order passed u/s 263 by the Commissioner of Income-tax, which set aside the assessment for the assessment year 1980-81. The Commissioner issued a notice stating that the assessment was erroneous and prejudicial to the interests of revenue because the ITO did not properly scrutinize the investments made by seven shareholders. The Commissioner noted that no details were obtained regarding the bank accounts from where these amounts were invested, nor was any enquiry made from the shareholders regarding the source of their investments. The company argued that the ITO had verified these deposits and examined the bank accounts during the assessment proceedings, and thus, the assessment was neither erroneous nor prejudicial to the interests of revenue.

Issue 2: Justification of Section 263 Invocation
The Tribunal held that the Commissioner was not justified in finding the assessment made by the ITO to be erroneous and prejudicial to the interests of revenue within the meaning of section 263 of the Act. It was emphasized that a private limited company is a separate juridical entity distinct from its shareholders. The company is required to maintain a statutory register of shareholders but is not authorized to enquire about the source of their investments. The Tribunal noted that the ITO had asked for and received confirmations from the shareholders, and thus, the ITO had not proceeded outside the framework of the law. The Tribunal concluded that the enquiry about the source of investment by the shareholders was unauthorized and uncalled for in the assessment of the company. The Tribunal also clarified that the onus on the company was discharged once it referred to the credits to persons who are its shareholders. Therefore, the Commissioner's order u/s 263 was made without a correct appraisal of facts and appreciation of law, and hence, it was cancelled, restoring the order of the ITO.

Conclusion:
The appeal was allowed, and the order of the Commissioner passed u/s 263 was cancelled, restoring the original assessment order made by the ITO.