2006 (7) TMI 302 - AT - Income Tax

Summary

Issues Involved:
1. Jurisdiction of the CIT under section 263.
2. Assessment of undisclosed income based on diary entries.
3. Validity of the revisionary order passed by the CIT.
4. Examination and verification of entries in the diaries.
5. Hypothetical vs. actual financial transactions.

Issue-wise Detailed Analysis:

1. Jurisdiction of the CIT under section 263:
The assessee argued that the CIT (Central), Nagpur had no jurisdiction to pass the order under section 263 as the assessment order had merged with the order of the CIT(A). However, this ground was not pressed before the Tribunal as the revisionary order was passed prior to the appellate order. Therefore, the Tribunal found no merit in this ground.

2. Assessment of undisclosed income based on diary entries:
The CIT added Rs. 1 crore to the assessed undisclosed income of the appellant based on an entry in the seized diary, which was not considered by the Assessing Officer during the block assessment. The CIT concluded that the entry was not hypothetical but represented a real transaction of placing an amount of Rs. 50 lakh as a deposit, doubling to Rs. 1 crore over five years. The assessee contended that the entry was hypothetical and no actual financial transaction took place.

3. Validity of the revisionary order passed by the CIT:
The Tribunal examined whether the order of the Assessing Officer was erroneous and prejudicial to the interests of the revenue. It was found that the Assessing Officer had made due enquiries and considered the explanations provided by the assessee. The Tribunal held that the CIT's order was based on the same facts without any further enquiry, indicating it was a mere change of opinion rather than an error in the original assessment.

4. Examination and verification of entries in the diaries:
The Tribunal noted that the diaries were found and seized during the search, and the entries were examined both in the course of search and assessment proceedings. The assessee consistently maintained that the impugned entry was hypothetical. The Tribunal found that the CIT did not conduct any further enquiry to substantiate the addition of Rs. 1 crore, which was based on the same evidence already considered by the Assessing Officer.

5. Hypothetical vs. actual financial transactions:
The Tribunal considered the assessee's explanation that the entry was a hypothetical illustration of money doubling over a period of five years. The Tribunal found no evidence of actual financial transactions corresponding to the impugned entry. The CIT(A) also concluded that the entry did not pertain to the assessee but to other parties involved in the transactions recorded in the diaries.

Conclusion:
The Tribunal held that the order passed by the Assessing Officer was not erroneous and prejudicial to the interests of the revenue as contemplated under section 263 of the Act. Consequently, the addition of Rs. 1 crore made by the CIT in his revisionary order was deleted. Both appeals of the assessees were allowed, and the Tribunal found that the CIT's order was based on a mere change of opinion without any further substantive evidence or enquiry.