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TMI Blog1988 (12) TMI 148X X X X Extracts X X X X X X X X Extracts X X X X ..... sst.) into the order of the Commissioner (A) and its further manifestations as to full merger or partial merger, the effect of amendments made were discussed before us in great length for a long time pressing into service various decisions of the High Courts and the Tribunal but we felt the basic issue in this case is a pure question of fact to be tackled for its answer on the question that we have set out above, namely, whether an enquiry had been made into the varies aspects necessary for making an assessment before completing the assessment by the IAC. 2. We shall now narrate the facts that prevailed with the CIT to intervene under s. 263 of the IT Act, 1961. The assessee is a private limited company carrying on business in manufacture of components for Air Compressors. For the assessment year under appeal i.e. 1984-85 a return was filed on29th June, 1984disclosing an income of Rs. 11,56,130. The assessment was completed on20th July, 1984on a total income of Rs. 11,60, 970 by the IAC. The CIT, who called for the file felt tha the assessment was not properly made. He gave a notice under s. 263 on3rd Dec., 1985. On 22nd Jan., 1987 he made the order under s. 263 rejecting the ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ese creditors was called for, which according to the CIT showed that the IAC did not satisfy himself about the genuineness of these loans. (v) The auditors report contained an observation that the assessee company made purchases from another company, in which the directors were interested, that the goods purchased were highly specialised and enjoying monopolistic character without any alternative sources for the purchase, with the result the comparative prices could not be verified. This comment, according to the CIT should have alerted the IAC to call for further particulars of purchases to ascertain whether these transactions were genuine and whether there was any indication of inflation. By citing these five instances, the CIT was prima facie convinced that the assessment made by the IAC (Asst) was unduly haste and that he did not apply his mind at al even to scrutinise the details filed by the assessee much less to conduct a further enquiry. In reply to the notice issued by the CIT calling for the explanation of the assessee, the assessee submitted first by a letter dt.27th Dec., 1985that the impugned notice was bad in law because the assessment was completed by the IAC and a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is in effect an order passed by him as an ITO and as such the CIT would have jurisdiction to interfere with the order passed by the IAC. Taking sustenance for his view that an order of assessment passed without proper enquiry, where enquiry was to be made, from the judgment of the Delhi High Court in Gee Vee Enterprises vs. Addl. CIT (1975) 99 ITR 375 (Del) and Karnataka High Court decision in the case of Thalibai F. Jain and Ors. vs. ITO (1975) 101 ITR 1 (Kar) and Gujarat High Court decision in Addl. CIT vs. Mukur Corporation (1978) 111 ITR 132 (Guj) the CIT held that the IAC (Asst) made the assessment without calling for the basic details and it is an assessment resulting in prejudice to the interests of the Revenue and therefore erroneous. That was who the CIT justified his action to invoke the provisions of s. 263 to set aside the order passed by the IAC (Asst.) 4. The vivid description of the events that prevailed with the CIT to interfere with the order passed by the IAC would lead any one to believe that the assessment made by the IAC was a most haphazard and uncaring assessment done in a most casual and cavalier way but when these observations are seen in the light of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... unless proper adjustments were made. This fact was brought to the notice of the CIT by the assessee and the variation in the period of account but yet we do not find any mention about it in the order of the CIT, which may lead to the belief that the CIT had not applied his mind to this very significant step in coming to his conclusions. The copies of statements filed before the IAC alongwith the return were given to us in the paper book. All the details were available in these papers and from those details one cannot draw the inference that the IAC had not or could not have applied his mind to the assessment. This will show that the CIT had only entertained prima facie a strong suspicion and not very concrete reasons to justify his findings. 5. Now coming to the specific points raised by the CIT, we find that details in respect of each of these items were filed before him, which were also enclosed in the paper book. In pages 23 to 27 the details of repair and maintenance of land and building was concluded from 1981 onwards. These details were also filed before the IAC. These details show cost of painting, cost of white washing, cost of cloth used for washing, repairing of sofas, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onclusion that they are not incurred for the purpose of the business and they could not be included under the head other expenses like raw materials, salaries and wages etc. We do not know as to why the CIT before whom the details were filed, had not adverted to the details but came to a different conclusion that these expenses could not be in the nature of expenses allowable under s. 37. We have gone through these details and we do not find even one item of expenditure which could be disallowed under s. 37. This appears to be the normal pattern of expenditure and method of claiming them in the past, which was also adopted for this year and the IAC had allowed the claim not by overlooking the claim but by looking into the details and applying his mind. It may be that the IAC has not left any note in the order sheet but that does not justify a conclusion that the IAC had not looked into the details because we feel it is also a duty cast upon the CIT to independently come to the conclusion from the details filed whether they contain any disallowable items before setting aside the assessment. We do not think it is open to the CIT to ignore the details, whether filed before the IAC or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essee company was always receiving deposits from outsides and they were being accepted. The deposits received from the asst. yrs. 1976-77 to 1983-84 were Rs. 9,000 to Rs. 2,42,800. They were always accepted. Therefore the mere fact that the assessee was receiving deposits should not have been suspected. This shows that the CIT had not properly appreciated this fact. The details for the deposits of Rs. 2,90,800 were given in the paper book, which were all field before the CIT also. These details show that the deposits were received from the public out of which Rs. 95,000 only was received during the year and there was an opening balance of Rs. 2,42,800. Out of Rs. 95,000 Rs. 25,000 was received from Mrs. Sudhanshu Verma by cheque. The CIT pointed out that for the other Rs. 70,000, no details were called for. Actually details were filed before the IAC, a copy of which is made available to us at page 46 of the paper book. These details were also given to the CIT. It became little controversial whether this sheet was before the IAC but it is undisputedly before the CIT. This shows the names and addresses of each of the depositors, the date of deposit, the amount of deposit and how the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... represented the income of the assessee from undisclosed sources, which was the inference the CIT sought to draw when he referred to this sum as one of the reasons for setting aside the assessment made by the IAC. We therefore feel that even this could not be a reason for the CIT to justify his conclusion. 9. Then there is another item of Rs. 1 lac of the same nature as of Rs. 70,000. The point made out by the CIT was that this sum was shown to have been received from Mrs. Uma Narula and Miss Anita Narula but the IAC did not care to find out the addresses of these creditors and to call upon them to prove the genuineness of the loans. But page 48 of the paper book reduced before us shows an altogether different picture. There were two items of Rs. 1 lacs each borrowed, one from M/s R.K. Investment Financial Consultant and the other from Mrs. Uma Narula and Miss Anita Narula. In respect of both these items, the addresses were not given. The type of enquiry made by the IAC in regard to both these items appeared to be the same and the information furnished by the assessee also appears to be similar. Even so the loan from M/s R.K. Investment Financial Consultants was taken to have ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... "7. The Company has purchased Stores, Raw Materials or Components exceeding Rs. 10,000 in value from the Companies in which Directors are interested. We have been informed that supplies of items are of highly specialised nature and alternative sources of supplies are not readily available. Therefore, the comparative prices could not be verified." This report can never lead to the conclusion that the purchases were not genuine or an unduly high price was paid for purchases made from the companies in which the directors were interested. 11. Thus we find that the reasons adduced by the CIT to come to the finding that the assessment made by the IAC was without any enquiry and serious prejudice was caused to the interests of the Revenue does not appear to be founded on justifiable, proper and correct grounds. In the directions given by the CIT at the end of the order, we find that he has mentioned that the ITO would not only make enquiries and investigations into the issues listed in the order which we have discussed above, and found no need for making any enquiry or investigation, but also mentioned that various other aspects also should be looked into without specifying what thos ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts and we do not have to dwell upon this subject any further. 13. Now we may add that reference was made to Supreme Court to a large catena of decisions reported in Srinivasa Metal Works vs. ITO (1987) 20 ITD 768 (Hyd); Brooke Bond India Ltd. vs. IAC (1986) 15 ITD 508 (Cal); Vinodkumar Jaichand Shah vs. Fifth ITO (1986) 18 ITD 220 (Bom) and Khusal Singh (S) vs. ITO (1988) 39 Taxman (Trib) 287 (Ind), all for the view that whenever an order was passed by a lower authority and if that order becomes the subject matter of appeal or review by a superior authority, the order passed by the lower authority would merge in the order passed by the superior authority, and the power so merged would not be amenable to review by the CIT under s. 263, as his power of review is only confined to orders passed by the lowed authority, namely, the ITO. There has been cleavage of judicial opinion on the subject. We think for the purposes of this case it would not really be necessary to go into the question at length for the reasons that on facts we found, that the order passed by the IAC could not be said to be erroneous causing prejudice to the interests of the Revenue. Nonetheless it might become nec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n terms of s. 263. While holding so, the High Court pointed out that it was obligatory on the part of the CIT to exercise jurisdiction where the order of assessment was erroneous and prejudicial to the interests of the Revenue. By referring to the facts in the case, the High Court pointed out that the returns of income were filed and the assessments were completed on the same day, that there was no enquiry regarding the source of funds. Therefore the Tribunal was not justified in holding that the CIT was in error in stating that no proper enquiry was made by the ITO. The Patna High Court also pointed out that the conclusion of the CIT that the funds for the business must have come from the assessee's husband was neither a surmise nor a conjecture but a pure application of common sense. The CIT was therefore justified in setting aside the assessment. Relying upon this decision, the learned Departmental Representative strongly submitted that unless we hold that the CIT had jurisdiction, we cannot go it no the merits. It is also urged that this was a case where no proper enquiry was made by the IAC. The time of 10 days taken by the IAC to completed the assessment was very insufficient ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... CIT a discretion to make enquiry as the deemed necessary and when the CIT gave a direction to the ITO to give proper opportunity to the assessee to cross-examine Dr. Vyas, the Commissioner did not commit any error in law nor could he be said to have crossed his bounds. The Gujarat High Court specifically pointed out that the CIT was not bound to make any enquiry before passing a final order and the lack could not be said to have caused prejudice to the assessee when he was given another opportunity to cross-examine. Placing reliance upon these observations, the learned Departmental Representative stressed that the CIT even though collected information by way of a reply to the show cause notice issued by him, was not bound to examine the merits of the case at that time and therefore all the arguments addressed that the CIT should have examined the mertis and then arrived at a conclusion, would have no legs to stand. He was also fair enough to point out that there was a decision of the Allahabad High Court taking a contrary view which appeared as an appendix to this decision at page 326 of the same Report and submitted that since the Gujarat High Court had distinguished this case, we ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the erroneous order passed by the ITO was against the interests of the Revenue, the High Court concluded that the order passed by the Commissioner in setting aside the original assessment was wrong. This case is easily distinguishable on facts because, so far as the case under consideration is concerned, it is evident that the failure of the ITO to make proper inquiry with regard to both the deductions during the course of his original assessment was clearly prejudicial to the Revenue, because the deductions in question were quite substantial in nature. In our opinion, therefore, the decision relied upon by Shri Patel is of no help to the respondent-assessee." It would be seen from these observations that in the case before the Allahabad High Court the finding was that the CIT did not apply his mind to the merits of the case. In other words in a case where the CIT did not apply his mind to the merits of the case, he would not acquire the jurisdiction under s. 263 to interfere with the assessment order. But in the case before the Gujrat High Court, the categorical finding of the High Court was that the CIT applied his mind to the facts of the case and therefore was entitled ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the conclusion that none of the points mentioned by him would be a point on which he could peg his decision to set aside the assessment because the first and foremost is the assessment with which he was comparing was an assessment made for a period of 5 months whereas the assessment now under appeal was an assessment for a period of 12 months and the proportion of expenditure for a period of 12 months would definitely be higher than the expenditure incurred for a period of 5 months and this distinction though brought to his notice, specifically was not referred to by him at all. We have also given the various facts, which were on record and which were brought to his notice and to which he had not adverted to in his order. We are therefore of the opinion that this is a case to which the Allahabad High Court decision in the case of J.P. Srivastave and Sons (Kanpur) Ltd. vs. CIT (1978) 111 ITR 326 (All) applies more than the decision of the Gujarat High Court appearing in the same Report at page 312. The order sheet entries may be three, that is neither here nor there because when all the information was furnished and when the ITA was satisfied, it is theoretically possible to comple ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessment was completed just two days after-wards on a total income of Rs. 35,000. There was nothing in the order to show as to how the income was determined at Rs. 35,000. The CIT considered that the ITO failed to make proper enquires as regard the receipts and expenditure and therefore the order was prejudicial to the interests of the Revenue. The assessment was set aside by invoking his powers under s. 263. Before the Commissioner the assessee appeared and contended that all the details were furnished and the relevant documents were produced at the time of assessment alongwith the books of account and the ITO had examined them in detail and then arrived ate the income. But the CIT held that the order passed by the ITO was in a hurry. The Tribunal, on appeal, held that he CIT failed to specify as to how the order passed by the ITO was erroneous and therefore the proceedings under s. 263 were not properly initiated. The Madhya Pradesh High Court held while reiterating the principal that where the ITO made the assessment in undue hurry accepting whatever the assessee had returned without making any enquires, the Commissioner would be justified in holding the order to be erroneous ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e construed as reference to the IAC. This is a view that we have taken in certain cases. But there are certain decisions of the Tribunal taking a contrary view also. But we note here that the notice in this case was issued by the CIT on1st Dec., 1985and he passed the order on22nd Jan., 1987. Thus the order passed by him was long after the Explanation was inserted on1st Oct., 1984. We have therefore to hold that even after the insertion of Explanation, which was only to remove doubts, the actiosn taken by the CIT could not be said to be without jurisdiction. In both the cases cited before us reported as Turner Morrison and Co. Ltd. vs. ITO (1987) 20 ITD 1 (Cal) and Brooke Bond India Ltd. vs. IAC (1986) 15 ITD 508 (Cal), the assessments related to the asst. yrs. 1975-76 in one case and 1978-79 in the other case. But in the case before us the assessment was for asst. yr. 1984-85 during which period the Explanation stood inserted having become a part of s. 263 and the action taken by the CIT also was long after1st Oct., 1984as we have observed earlier. Thus the action taken by the CIT could not be said to be without jurisdiction. Further the purpose of the Explanation was to declare th ..... X X X X Extracts X X X X X X X X Extracts X X X X
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