TMI Blog1992 (5) TMI 68X X X X Extracts X X X X X X X X Extracts X X X X ..... bserved that 'during the year 35,775 equity shares of Swadeshi Polytex Ltd. held as stock in trade investment were transferred to 'Investment Account' at prevailing market rate, difference in cost and market rate has been transferred to 'Investment Fluctuation Reserve Account'. Thereafter these shares have been contributed as company's capital in M/s. Gayatri Annapurna, a partnership firm. (b) In para 6 of the Schedule 'B', it is observed that during the year under audit, the company has changed its method of accounting from mercantile to cash basis. If this change has not occurred the profit during the year as per profit and loss account would have been higher by Rs. 1,650. The above observations which are basically material to the correct computation of income for the year under consideration have not been subjected to even preliminary examination by the Assessing Officer. Therefore, the assessment so framed is erroneous in so far as it is prejudicial to the interest of revenue. In the circumstances, you are hereby given an opportunity to show cause as to why the assessment may not be set aside. " 4. In response to the show-cause notice, it was stated that the observation i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e CIT, thereafter, set aside the assessment order and directed the Assessing Officer to reframe it after looking into the aforesaid aspects. In doing so, the CIT observed as under :-- " On a careful consideration of the facts and circumstances of the case and in view of the foregoing discussion, I hold that as the Assessing Officer has failed to make even basic enquiries about the precise nature of transaction relating to 35,775 shares and the consequences flowing from it and has also failed to look into the aspect relating to change in the method of accounting, the assessment order under section 143(1) dated 17-10-1988 is erroneous in so far as it is prejudicial to the interest of revenue. Therefore, in exercise of the powers conferred upon me under section 263 of the Income-tax Act, 1961, I would set aside the assessment with the directions that the same may be made afresh after looking into the above referred two aspects. " 8. The learned counsel for the appellant at the outset contended that in the case of an assessment completed under section 143(1), no detailed investigation was required on the part of the ITO and all that was required to be done, was to follow the execut ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , the Departmental Representative placed reliance on the following decisions : 1. CIT v. Smt. Bibi Zaibunnisa [1990] 185 ITR 284 (Pat.). 2. CIT v. Vithal Textiles [1989] 175 ITR 629 (MP). 3. Addl. CIT v. Mukur Corpn. [1978] 111 ITR 312 (Guj.). 13. On the merits of the case, namely, the conversion of stock-in-trade into investments, contribution of shares as capital to a firm and the change in the system of accounting, the learned Departmental Representative reiterated the reasons recorded by the CIT in invoking the provisions of section 263. 14. In his short reply, the learned counsel for the appellant stated that this was a case where an enquiry not of facts but of law arising from a decision of Supreme Court had been directed and this could never be the subject-matter of action under section 263. As regards the decisions relied upon by the learned Departmental Representative, it was contended that these were distinguishable on facts and not at all applicable. 15. In ITA No. 3071 (Del.)/91, the facts leading to the initiation of proceedings-under section 263 are more or less the same except that the assessment year involved is 1986-87 and the return was filed declaring ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ment by making fishing enquiries. The CIT in his orders has referred to the decision of the Hon'ble Supreme Court in the case of McDowell Co. Ltd. referring in this connection to a 'tax planning device' having been resorted to by the assessee. This, according to me, is purely on surmises and conjectures and as rightly pointed out by the learned counsel, there is ultimately no tax effect in respect of any of the transactions referred to by the CIT. The Hon'ble Supreme Court in the case of Sunil Siddharthbhai has clearly held that contribution of assets as capital in a firm does not result in taxable capital gains in the absence of a 'consideration' although it constitutes a 'transfer'. In case the issue before me is viewed in the light of the aforesaid decision, then no capital gains are attracted and in case the transaction is to be treated as non-genuine or bogus, then the net result would be that the act of contributing the shares as capital in the firm is presumed not to have taken place at all. This is the view expressed by their Lordships of the Gujarat High Court in the case of CIT v. Harikishan Jethalal Patel [1987] 33 Taxman 217. It is only with effect from1-4-1988that su ..... 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