1986 (10) TMI 93 - AT - Income Tax

Summary

Issues Involved:
1. Legality of the Commissioner's order under Section 263 of the Income-tax Act, 1961.
2. Examination of loss suffered on the purchase and sale of rice.
3. Disallowance of certain payments under Section 40A(3) of the Income-tax Act, 1961.
4. Theory of merger of the ITO's order with the Commissioner (Appeals)'s order.

Detailed Analysis:

1. Legality of the Commissioner's Order under Section 263:
The assessee objected to the legality of the Commissioner's order under Section 263, arguing that the ITO's order had already been appealed and reviewed by the appellate authority, which had the power to examine the entire assessment. The Commissioner set aside the ITO's order to be redone de novo, which the assessee contended was not justified, especially since the appellate authority had sustained the ITO's additions.

2. Examination of Loss Suffered on the Purchase and Sale of Rice:
The assessee had provided detailed particulars of the loss suffered in the purchase and sale of rice along with the return of income. The ITO had accepted the loss after examining the transactions through an agent, Jairam Dass Baburam & Co. The Commissioner started the proceedings by examining the loss but later held that certain payments were disallowable under Section 40A(3), which were not initially put to the assessee. The Commissioner doubted the entire transaction but did not bring out anything concrete to conclude that the ITO's order was erroneous and prejudicial to the revenue.

3. Disallowance of Certain Payments under Section 40A(3):
The Commissioner disallowed certain payments under Section 40A(3), arguing that payments made in cash by the agent on behalf of the assessee should be treated as cash payments by the assessee. The assessee contended that the amount due to the agent was paid by draft, with only a small amount paid in cash, and thus the conclusion drawn by the Commissioner was incorrect. The department argued that whether the payment was made by the assessee or through the agent, it amounted to the same thing, i.e., cash purchases by the assessee.

4. Theory of Merger of the ITO's Order with the Commissioner (Appeals)'s Order:
The assessee argued that the ITO's order had merged with the Commissioner (Appeals)'s order, and thus the Commissioner could not revise the order under Section 263. The Special Bench had previously considered the merger theory, concluding that once the ITO's order was appealed, it merged with the appellate order, preventing the Commissioner from revising it under Section 263. However, the Rajasthan High Court in Smt. Ganga Devi v. CWT held that only the part of the assessment order not considered by the appellate authority did not merge, allowing the Commissioner to revise it. Following this decision, the Tribunal held that there was no merger of the ITO's order regarding the rice dealings, justifying the Commissioner's action under Section 263.

Conclusion:
The Tribunal dismissed the appeal, holding that the Commissioner's order under Section 263 was justified. The ITO's order regarding the rice dealings did not merge with the appellate order, allowing the Commissioner to invoke his powers under Section 263. The Tribunal found that the transactions appeared genuine, but the ITO did not apply his mind to the allowability under Section 40A(3), and thus the Commissioner's setting aside of the order was proper.