1991 (5) TMI 104 - AT - Income Tax

Summary

Issues Involved:
1. Validity of the CIT's order u/s 263 of the IT Act.
2. Applicability of Section 68 of the IT Act regarding share capital received through public subscription.
3. Examination of the hybrid system of accounting for interest income.

Summary:

Issue 1: Validity of the CIT's order u/s 263 of the IT Act
The appeal by the assessee challenges the CIT's order u/s 263 of the IT Act, which set aside the assessment made by the Assessing Officer (AO) and directed a fresh assessment after providing the assessee with a full opportunity to be heard. The CIT initiated proceedings under s. 263, deeming the assessment erroneous and prejudicial to the interest of Revenue due to the AO's failure to verify the genuineness and creditworthiness of share subscribers and to examine whether the hybrid system of accounting was justified for interest income.

Issue 2: Applicability of Section 68 of the IT Act regarding share capital received through public subscription
The assessee argued that the AO had made necessary enquiries and accepted the share subscriptions after verification. The CIT's order was based on suspicion without pointing out any bogus shareholders. The Tribunal referred to the decision of the Delhi Bench in the case of Standard Cylinders P. Ltd. vs. ITO, which held that the AO cannot make enquiries about the source of investment by shareholders and treat unexplained investment as income of the assessee u/s 68 of the IT Act. The Tribunal found no reason to deviate from this precedent and concluded that the AO's acceptance of the share subscriptions was not erroneous or prejudicial to the interest of Revenue.

Issue 3: Examination of the hybrid system of accounting for interest income
The CIT's objection regarding the hybrid system of accounting was also addressed. The assessee had returned interest on an accrual basis, and the AO had accepted this method as consistent with past practices. The Tribunal found no error in the AO's assessment regarding interest income and noted that the CIT's initiation of action u/s 263 on this ground was unjustified. The Tribunal emphasized that the assessment order should not be set aside merely to conduct further enquiries based on suspicion.

Conclusion:
The Tribunal vacated the CIT's order u/s 263, finding that the AO's assessment was neither erroneous nor prejudicial to the interest of Revenue. The appeal by the assessee was allowed.