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TMI Blog2005 (7) TMI 289X X X X Extracts X X X X X X X X Extracts X X X X ..... nable 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eal are as under: 1. That, on the facts and in the circumstances of the case, the learned CIT, Kol-I, erred in assuming jurisdiction and passing an order under s. 263 of the IT Act in the case of the appellant in respect of asst. yr. 2000-01. 2. That, since the letter directing the appellant to show cause against the proposed action under s. 263 of the IT Act was issued by the ITO, Head Quarters-1, Technical, and not under the signature of the learned CIT, Kol-I, he was not justified in passing orders under s. 263 of the IT Act. 3. That, as the learned CIT, Kol-I, failed to establish that the assessment order passed by the AO for asst. yr. 2000-01 was either erroneous or prejudicial to the interest of the Revenue, he erred in cancelling the said order in terms of s. 263 of the IT Act. 4. That, on the facts and in the circumstances of the case, since no real opportunity of being heard was given to the appellant as required under s. 263(1) in respect of the sum of Rs. 657 crores referred to in the second show-cause letter dt. 29th March, 2005, the learned CIT, Kol-I, in his orders under s. 263 of the IT Act erred in issuing any direction to the learned AO in respect of the said amoun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssee. His submissions are as under: (a) Rs. 657 crores, representing liability provided on account of return to certificate-holders: The appellant is a residual non-banking financial company, primarily engaged in the business of offering various types of savings deposit schemes to the public in general. The deposits received from the public under the various savings schemes are returned on maturity along with appropriate interest thereon. The aggregate amount of deposit received from the public and the interest accumulated thereon are reflected as liability in schedule 3 to the balance sheet under the broad heading 'Social Welfare Scheme Fund'. During the relevant financial year, the appellant had made a provision on account of the liability to pay interest and bonus to the depositors, amounting to Rs. 657 crores, which was debited to the P L a/c and correspondingly credited to the 'Social Welfare Scheme Fund'. The said sum was computed on the basis of valuation done by an actuary and represents the correct estimate of the liability on account of interest and bonus payable to the depositors for the relevant financial year. The 'Social Welfare Scheme Fund also re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... respect to the sum of Rs. 657 crores, which was provided by the appellant as liability on account of interest and bonus payable to the certificate-holders, and not with respect to the sum of Rs. 65 crores, which the CIT had admittedly referred to in the said notice and with respect to which the appellant had filed submissions to the effect that the said sum stood already disallowed by the AO. In the said subsequent letter dt. 29th March, 2005, the CIT alleged that since the appellant had not credited the sum of Rs. 657 crores against each individual certificate-holder, the said sum did not qualify as deduction while computing the business profits for the relevant assessment year. The CIT further alleged that there was no basis on the part of the appellant in arriving at the said figure of Rs. 657 crores. The CIT held that since the AO had not conducted necessary enquiry with respect to the said sum of Rs. 657 crores, the assessment order passed under s. 143(3) of the Act was erroneous and prejudicial to the interest of the Revenue inter alia with respect to the said issue and he required the appellant to show cause as to why the said assessment order would not be set aside by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Act permits the CIT to revise an order of assessment as being erroneous and prejudicial to the interest of the Revenue if the AO has not conducted necessary enquiry with respect to any particular item of income/expenditure, and accordingly direct the AO in exercise of the powers conferred upon him by the said section to conduct a de novo verification/examination of the relevant issue after giving an opportunity of hearing to the assessee. However, the fact remains that before the CIT proceeds to take such an action under s. 263 of the Act, there are certain basic or fundamental conditions, which he must satisfy, failing which the order passed by the CIT containing such direction to the AO to conduct a de novo verification examination, would be rendered illegal and void ab initio. The Hon'ble Calcutta High Court, namely, the Hon'ble High Court of jurisdiction had laid down, in the case of Bagsu Devi Bafna vs. CIT Ors. (1966) 62 ITR 506, 522 (Cal), certain principles on the rules of natural justice, applicable to a proceeding under s. 263 of the Act, inter alia, as follows: '(a) The CIT must disclose, in his notice to the assessee, the grounds on which he desires to re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the assessee. Requiring the assessee to respond within an unreasonably short time should be condemned as violating the principles of natural justice, which would make the order passed under s. 263 of the Act ab initio void. (ii) While passing the order under s. 263 of the Act, the CIT cannot traverse or travel beyond the allegations raised in the notice issued under s. 263 of the Act, to which the assessee could have responded in the course of the hearing afforded to him. If the CIT, in the final order passed under s. 263 of the Act, revises the order of assessment passed by the AO on a logic or ground or material which was not earlier disclosed to the assessee vide the notice under s. 263 of the Act, then the order passed by the CIT under s. 263 of the Act would be illegal and ah initio void, as violating the fundamental principles of natural justice. In fact, on a similar issue, the Hon'ble Kolkata Tribunal, in the case of GEC Alsthom India Ltd. vs. Dy. CIT has delivered a decision in favour of the assessee by following the principles of natural justice relating to proceedings under s. 263 of the Act, which had been laid down by the Hon'ble Calcutta High Court, as abo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rofits for the relevant assessment year. The CIT further alleged that there was no basis on the part of the appellant in arriving at the said figure of Rs. 657 crores. The CIT held that since the AO had not conducted necessary enquiry with respect to the said sum of Rs. 657 crores, the assessment order passed under s. 143(3) of the Act was erroneous and prejudicial to the interest of the Revenue inter aha, with respect to the said issue and he required the appellant to show cause as to why the said assessment order would not be set aside by the CIT under s. 263 of the Act on the said ground. It is submitted that the allegations made by the CIT in the notice/letter dt. 29th March, 2005, with respect to the sum of Rs. 657 crores, on a stand alone basis or by themselves, are totally baseless and merely on the strength of the said allegations, the CIT could not have set aside the issue to the file of the AO for fresh verification. If a liability is properly calculated, then it is immaterial as to whether the same is credited to the account of the recipient or booked in the form of a liability as such, in the balance sheet of an assessee, for the purposes of the same being allowed as de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lated and the AO having failed to conduct an enquiry or verification with respect to the quantification thereof, the order passed by the AO under s. 143(3) of the Act was erroneous and prejudicial to the interest of the Revenue to that extent and accordingly proceeded to set aside the said order and restore the issue to the file of the AO for fresh verification after giving an opportunity of hearing to the assessee. It is submitted that revision of the order by the CIT under s. 263 of the Act on the lines referred to above, by adopting the logic or grounds not disclosed to the appellant in the notices/letters issued under s. 263 of the Act dt. 18th March, 2005, and 29th March, 2005 is clearly without necessary jurisdiction and accordingly the order of the CIT is patently bad in law and ab initio void, having infringed the principles of natural justice, which is inextricably linked and inseparably blended with the revisionary powers of the CIT under s. 263 of the Act, as observed in the decision referred to above. (b) Rs. 584 crores, representing payment to certificate-holders on maturity of certificates/deposits: The 'Social Welfare Scheme Fund' account appearing in schedul ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lant and proceeded to set aside the issue to the file of the AO for fresh verification after giving the appellant an opportunity of being heard. In the order passed under s. 263 of the Act, the CIT had also alleged that the AO failed to examine whether tax had been deducted from the payments made to the certificate-holders. There is no dispute to the fact that s. 263 of the Act permits the CIT to revise an order of assessment as being erroneous and prejudicial to the interest of the Revenue if the AO has not conducted necessary enquiry with respect to any particular item of income/expenditure, and accordingly direct the AO in exercise of the powers conferred upon him by the said section, to conduct a de novo verification/examination of the relevant issue after giving an opportunity of hearing to the assessee. However, the fact remains that before the CIT proceeds to take such an action under s. 263 of the Act, there are certain basic or fundamental conditions, which he must satisfy, failing which the order passed by the CIT containing such direction to the AO to conduct a de novo verification/examination, would be rendered illegal and void ab initio. The Hon'ble Bombay High Cou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... connection it may be kindly noted that the examination of such matters neither falls within the jurisdiction of the CIT nor the AO. It is a matter of TDS Officer and, therefore, the CIT was wrong in alleging that such examination had not been carried out by the AO, while setting aside the issue to the file of the AO under s. 263 of the Act. It is, therefore, submitted that revision of the order by the CIT under s. 263 of the Act on the lines referred to above, by trying to make fishing and roving enquiry and acting on mere suspicion without having any material on record is clearly without necessary jurisdiction and accordingly the order of the CIT is patently bad in law and ab initio void. Without prejudice to the submissions made hereinabove, it is submitted that in the event the direction of set aside and restoration of the aforesaid issues by the CIT to the file of the AO in exercise of the powers conferred upon him under s. 263 of the Act are ultimately upheld by the Hon'ble Tribunal, then the Hon'ble Tribunal may kindly issue a direction to the effect that such setting aside/restoration may be limited to only the issues referred to in the order passed under s. 263 of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sment order passed under 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. 7. However, as requested by the learned Authorised Representative of the assessee, we also proceed to consider another aspect of the argument preferred by the said learned Authorised Representative with respect to the said issue of Rs. 657 crores in his attempt to prove that the CIT was wrong in setting aside the said issue to the file of the AO vide the order under s. 263 of the Act. We again respectfully follow the binding precedent of the Hon'ble Calcutta High Court in the aforesaid case and the principles laid down by the Hon'ble Andhra Pradesh High Court in the case of CIT vs. G.K. Kabra (1995) 125 CTR (AP) 55 : (1995) 211 ITR 336, 340 (AP), for the proposition as referred to for our consideration by the learned Authorised Representative, that if the CIT discloses one or more grounds in the notice ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h, 2005, by themselves were totally baseless and merely on the strength of such allegations, the CIT could not have set aside the issue relating to the allowability of the sum of Rs. 657 crores to the file of the AO for fresh verification. 9. We have observed that in the order passed under s. 263 of the Act, the CIT has given several other grounds or logic, based on certain observations of the auditors of the assessee, which were not disclosed to the assessee during the proceedings under s. 263 of the Act, to hold that the liability for the said sum of Rs. 657 crores was not properly quantified or calculated and the AO having failed to conduct an enquiry or verification with respect to the quantification thereof, the assessment order passed under s. 143(3) of the Act was erroneous and prejudicial to the interest of the Revenue to the extent thereof and accordingly, the CIT proceeded to set aside the issue to the file of the AO for fresh verification. 10. We agree with the submissions of the learned Authorised Representative that revision of the assessment order by the CIT under s. 263 of the Act on the above lines, namely, by adopting the logic or grounds not disclosed to the asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) and by the Hon'ble Rajasthan High Court in the case of CIT vs. Trustees of Anupam Charitable Trust (1987) 65 CTR (Raj) 30 : (1987) 167 ITR 129, 135 (Raj) which were referred to us by the learned Authorised Representative, that if there are no materials on record on the basis of which it can be said that the CIT acted in a reasonable manner in a proceeding under s. 263 of the Act, to come to a conclusion that the order passed by the AO was erroneous and prejudicial to the interest of the Revenue, then the very initiation of the proceedings would be illegal and without jurisdiction and that the CIT cannot initiate proceedings under s. 263 of the Act with a view to start fishing and roving enquiries in matters or orders which are already concluded. 14. 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 under s. 263 of the Act that the AO had failed to examine whether tax had ..... X X X X Extracts X X X X X X X X Extracts X X X X
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