2009 (1) TMI 343 - AT - Income Tax

Revision u/s 263 - Creditworthiness of cash credits - assessment order - erroneous and prejudicial to the interest of Revenue - assessee is an individual and derives income from manufacture and export of shoes - 100% EU - claimed relief u/s 80HHC - Third Member order - CIT acting u/s 263 considered the order passed by the AO as erroneous and also prejudicial to the interest of the Revenue as no query about the sources of amount of loan in the hands of the creditors and creditworthiness of the creditors and also the source of the cash deposit immediately before the clearance of the cheque of the creditor as also the nature of the transfer entry has not been enquired into by the AO - Ld JM did not find favour with the order of the ld CIT and according to her, there was no error in the impugned assessment order, let alone causing prejudice to the interest of the Revenue - ld AM, on the other hand, supported the order of the CIT. HELD THAT - Following the decision in the case of CIT v. Gabriel India Ltd. 1993 (4) TMI 55 - BOMBAY HIGH COURT , I am entirely in agreement with the order of Id. JM, who has come to a correct conclusion that in the light of the decision of the Supreme Court in the case of Malabar Industrial Co. Ltd. 2000 (2) TMI 10 - SUPREME COURT , the order of CIT u/s 263 cannot be sustained. She has correctly vacated the order and I agree with her finding on the first issue. The cash creditors are identified. They have also furnished the proof of source from which they have offered the credits to the assessee and most of the cases they were all assessed to tax. In a situation like this, it is for the AO to choose what he wants from out of such details. If he is not satisfied with the creditworthiness of any of the creditors, he could have made an addition in their hands. So far as the assessee is concerned, it has come from known source which has been properly explained. Moreover, in all these cases, the transactions have been conducted through regular banking channels. From the perusal of the records that were there before the AO, it cannot be said that the AO did not make any enquiry. It can only be said he did not reach the same conclusion as the CIT has done. Having regard to the facts and details that were there before him, he would have left with no other alternative but to definite conclusion that the cash credits deserve to be accepted. I, therefore, agree with the findings of the Id. JM. The matter will now go back to the Division Bench. The ld Third Member has agreed with the view taken by the ld JM. Thus, in the light of the majority view, the appeal of the assessee stands allowed.

Summary

Issues Involved:
1. Whether the CIT-I, Agra is justified in holding the assessment order dated 20.06.2005 as erroneous and prejudicial to the interests of revenue.
2. Whether the CIT-I, Agra is justified in taking action under Section 263 of the Act and directing further enquiry into the creditworthiness of certain cash credits.

Issue-wise Detailed Analysis:

1. Justification of the CIT-I, Agra in Holding the Assessment Order as Erroneous and Prejudicial to the Interests of Revenue:

The CIT-I, Agra considered the assessment order dated 20.06.2005 erroneous and prejudicial to the interests of revenue due to certain cash credits in the assessee's books. The CIT observed that the AO did not adequately inquire into the sources of the loans, the creditworthiness of the creditors, or the nature of the cash deposits preceding the cheque clearances. The CIT argued that the AO accepted the cash credits based on the papers filed by the assessee without making necessary inquiries. The learned Judicial Member disagreed with the CIT, stating there was no error in the assessment order. The Accountant Member supported the CIT's view. The Third Member reviewed the records and concluded that the proceedings under Section 263 were not justified as the AO had issued notices under Sections 143(2) and 142(1), and the assessee had provided confirmation letters, affidavits, and bank passbooks of the creditors. The details showed that the creditors were assessed to tax, and the information was part of the assessment record. Thus, the order of the AO could not be considered erroneous and prejudicial to the interests of revenue.

2. Justification of the CIT-I, Agra in Taking Action under Section 263 and Directing Further Enquiry into Creditworthiness of Cash Credits:

The CIT-I, Agra directed further inquiry into the creditworthiness of certain creditors, including Smt. Madhu Rani Bansal, Smt. Anju Bansal, Shri Manish Kumar Bansal, Smt. Pushpa Devi, Smt. Rajni Jain, M/s. Devki Nandan Agarwal & Co., Shri Narendra Kumar Agarwal, and Shri Amit Kumar Bansal. The CIT issued a detailed notice under Section 263, stating that the AO did not make necessary inquiries about the genuineness and creditworthiness of the creditors. The assessee argued that all creditors were assessed to tax, their identities were established, and the transactions were genuine. The Third Member found that the AO had made sufficient inquiries, and the assessee had provided relevant documents, including confirmation letters, affidavits, and bank details. The Third Member agreed with the Judicial Member that the AO had exercised quasi-judicial power vested in him in accordance with law, and the CIT's action under Section 263 was not justified. The Judicial Member emphasized that the AO had made due and necessary inquiries, and the CIT's view was based on substitution of judgment rather than identifying any actual error in the AO's order.

Conclusion:

The majority view held that the CIT-I, Agra's action under Section 263 was not justified. The AO had made proper inquiries and exercised quasi-judicial power in accordance with law. The assessment order was not erroneous or prejudicial to the interests of revenue. The appeal of the assessee was allowed, and the CIT's order under Section 263 was quashed.