2005 (7) TMI 289 - AT - Income Tax

Challenged the Order passed u/s 263 - No Opportunity Of Being Heard - erroneous or prejudicial - nonpayment to certificate-holders - Violation Of principles of natural justice - HELD THAT - We have noted that the CIT had given the assessee less than one day's time to comply to his query with respect to the said sum of Rs. 657 crores, inasmuch as he issued the notice/letter on 29th March, 2005, which was served upon the receiving section of the assessee at 5.30 p.m. and, thereafter, required the assessee to reply to his query by 11.30 a.m. the very next day, i.e., 30th March, 2005. Admittedly, the assessee could not comply with such requisition. However, the fact remains that granting an opportunity to comply with the query raised in a proceeding u/s 263 of the Act within less than a day, cannot under any stretch of imagination, be held to be a reasonable opportunity of hearing and such unreasonable short time should be condemned as violating the principles of natural justice, as laid down by the Hon'ble Calcutta High Court in the case of Bagsu Devi Bafna vs. CIT Ors. 1964 (7) TMI 43 - CALCUTTA HIGH COURT . Therefore, in our view, the order of the CIT passed u/s 263 of the Act, dt. 31st March, 2005, and also the proceedings initiated u/s. 263 of the Act vide the notice dt. 18th March, 2005, read with the letter dt. 29th March, 2005, to the extent the same revises the assessment order passed u/s 143(3) of the Act dt. 31st March, 2003, with a view to set aside the issue of allowability of the liability on account of return to certificate-holders amounting to Kb. 657 crores to the file of the AO for fresh verification, is to be treated as bad in law and ab initio void in view of the binding principles of the Hon'ble Calcutta High Court. We find in the instant case that there was no material before the CIT to even come to a conclusion that the payment of Rs. 584 crores to the certificate-holders on maturity of the certificates, which was a balance sheet item, could have any impact on the taxable profits of the assessee for the relevant assessment year. The CIT has alleged in the order passed u/s 263 of the Act that the AO had failed to examine whether tax had been deducted at source by the assessee on payments made to certificate-holders. We agree with the submissions of the learned Authorised Representative that examination of such matters does not fall within the jurisdiction of the AO and the CIT, under whom the AO works. It is a matter of concern of the TDS Officer and, therefore, the CIT had no occasion to say that the AO had failed to carry out such examination, when the same was not even warranted by law. Thus, in a nutshell we are of the considered opinion that the revision of the assessment order by the CIT u/s. 263 of the Act with respect to the said sum of Rs. 584 crores is an attempt on the part of the CIT to initiate a fishing and roving enquiry while acting on mere suspicion and without having any material on record and the same is without necessary jurisdiction and thus, the order of the CIT passed u/s 263 of the Act to the extent the same relates to the CIT setting aside the said issue to the file of the AO for fresh verification, is totally arbitrary and erroneous. We, therefore, reverse the order passed u/s 263 of the Act to the said extent also. Therefore, in totality, the order passed u/s 263 of the Act is quashed and/or set aside in its entirety and the appeal of the assessee is, therefore, fully allowed.

Issues Involved:

1. Jurisdiction of the CIT under Section 263 of the IT Act.
2. Validity of the notice issued under Section 263.
3. Whether the assessment order was erroneous or prejudicial to the interest of the Revenue.
4. Adequacy of opportunity of being heard to the appellant.
5. Examination of appellant's liability of Rs. 657 crores.
6. Examination of non-payment to certificate-holders amounting to Rs. 584 crores.
7. Impact of non-payment on the total income of the appellant.
8. Scope of issues raised in the show-cause letters.
9. Cancellation of the entire assessment order.
10. Disputed additions considered by CIT(A).
11. Leave to alter, amend, and substitute grounds.

Detailed Analysis:

1. Jurisdiction of the CIT under Section 263 of the IT Act:
The appellant argued that the CIT, Kolkata-I, erred in assuming jurisdiction and passing an order under Section 263 of the IT Act for the assessment year 2000-01. The CIT held that the AO's order was erroneous and prejudicial to the interest of the Revenue as the AO did not conduct necessary inquiries regarding two sums, Rs. 657 crores and Rs. 584 crores. The CIT's jurisdiction under Section 263 was questioned on the grounds that the show-cause notice was issued by the ITO, not under the signature of the CIT.

2. Validity of the notice issued under Section 263:
The appellant contended that the notice directing them to show cause was issued by the ITO, Headquarters-1, Technical, and not under the signature of the CIT, thus questioning the validity of the notice and subsequent order under Section 263.

3. Whether the assessment order was erroneous or prejudicial to the interest of the Revenue:
The CIT's order under Section 263 was challenged on the basis that the assessment order was neither erroneous nor prejudicial to the interest of the Revenue. The appellant argued that the CIT failed to establish the assessment order's error or prejudice to Revenue.

4. Adequacy of opportunity of being heard to the appellant:
The appellant claimed that they were not given a real opportunity of being heard regarding the sum of Rs. 657 crores, as required under Section 263(1). The notice was served late in the evening, and the hearing was scheduled for the next morning, providing less than a day to respond.

5. Examination of appellant's liability of Rs. 657 crores:
The CIT observed that the AO did not examine the appellant's liability of Rs. 657 crores under the head "return to certificate-holders." The appellant argued that the liability was correctly estimated based on actuarial valuation and was properly accounted for in the balance sheet. The CIT's allegation that the sum did not qualify as a deduction due to not being credited against individual certificate-holders was contested.

6. Examination of non-payment to certificate-holders amounting to Rs. 584 crores:
The CIT alleged that the AO failed to examine the non-payment of Rs. 584 crores to certificate-holders, as shown in the balance sheet. The appellant argued that this amount represented actual payments made to certificate-holders on maturity and had no impact on the business profits for the relevant financial year.

7. Impact of non-payment on the total income of the appellant:
The appellant contended that the non-payment of Rs. 584 crores did not affect their total income for the assessment year 2000-01 and did not result in any loss of revenue. The CIT's order was challenged on the grounds of being based on conjecture, suspicion, and doubt.

8. Scope of issues raised in the show-cause letters:
The appellant argued that the CIT erred in cancelling the entire assessment order based on two issues raised in the show-cause letters, namely, "return to certificate-holders" and "payment to certificate-holders." The CIT was not justified in travelling beyond these two issues without providing a reasonable opportunity of being heard.

9. Cancellation of the entire assessment order:
The appellant contended that the CIT erred in cancelling the entire assessment order, as several disputed additions were already considered by the CIT(A) in appeal. The cancellation was in violation of Section 263(1)(c) of the IT Act.

10. Disputed additions considered by CIT(A):
The appellant argued that the assessment order contained several disputed additions already considered by the CIT(A), and the CIT erred in cancelling the entire assessment order without addressing these issues.

11. Leave to alter, amend, and substitute grounds:
The appellant sought leave to alter, amend, and substitute any of the grounds mentioned and to add further grounds before or at the time of the hearing of the appeal.

Conclusion:

The Tribunal concluded that the assessee should succeed on both issues of Rs. 657 crores and Rs. 584 crores. The CIT's order under Section 263 was deemed bad in law and void ab initio for not providing reasonable opportunity and for baseless allegations. The Tribunal quashed the CIT's order under Section 263 in its entirety, allowing the appeal of the assessee.

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