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TMI Blog2008 (12) TMI 242X X X X Extracts X X X X X X X X Extracts X X X X ..... h April, 2008 while the order under s. 263 was served on 8th April, 2008 and thus, the order, passed under s. 263 is without jurisdiction and null and void on that score also. 3. That having regard to the facts and circumstances of the case, learned CIT has erred in law and on facts in holding that the AO did not examine the claim of gifts from Mr. O.P. Khadaria and Mr. Ajay Agarwal and did not conduct proper enquiries during the course of assessment, which is contrary to the records of the case. 4. That having regard to the facts and circumstances of the case, learned CIT has erred in law and on facts in holding that the gift of Rs. 1,00,000 from Mr. O.P. Khadaria was liable to be taxed as her 'income from other sources' by treating it as a vocational income. 5. That having regard to the facts and circumstances of the case, learned CIT has erred in law and on facts in holding that gift of Rs. 10,00,000 from Mr. Ajay Agarwal may be taxable in hands of appellant. 6. That having regard to the facts and circumstances of the case, learned CIT has erred in passing the impugned order under s. 263 by recording incorrect facts and findings and irrelevant observation and without observi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dding these two gifts were given. For the sake of convenience the office note relating to the said gifts as given by the AO in the assessment order reads as under: "The assessee has received gift of Rs. 1,00,000 from Shri O.P. Khadaria. He is an advocate by profession and the assessee had been her student when she was student of law. His statement on oath was recorded by Addl. Director of IT (Inv.), New Delhi, and myself. He is showing handsome income as also he is having sufficient assets, etc. Keeping in view his financial status as also tile fact that the assessee had been his student and at present also he is her advocate as also of BSP the same has been accepted. The assessee has also claimed to have received a gift of Rs. 10,00,000 from Shri Ajay Agarwal. It is seen that he is grandson of Seth Mukand Lal. He received certain properties in family partition as per copy of the partition deed filed by the assessee. He got Hotel Sherton of Mussorie in partition and he sold this property in the year 2002 as per copy of letter issued by the AO under s. 230A filed by the assessee. Shri Agarwal appeared before me and had given a statement that he has gifted Rs. 10,00,000 out of natur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2001-02 to 2003-04 the income of Shri Ajay Agarwal was below taxable limit and he did not make gift to any other persons for the five or six years preceding to the gift made to the assessee. Shri Agarwal was asked to explain the credit entries in the bank account furnished by him. When he replied that he would do so next day, but he never did submit such details. Thus, learned CIT has observed that non-furnishing of such details casts a doubt on the creditworthiness of Shri Agarwal and the AO did not make any addition on that account. He pointed out that failure of the AO to consider the evidences emerging from the statement of Shri Ajay Agarwal casts doubt on his creditworthiness and the AO overlooked the failure of Shri Agarwal to specifically explain the credit entries in his bank account resulted into the order of AO being erroneous as well as prejudicial to the interest of Revenue. Thereafter, learned CIT has mentioned that a show-cause notice under s. 263 was served on assessee on 24th March, 2008 asking the assessee to show-cause as to why the order passed by the AO should not be revised to that extent under s. 263 and why the AO should not be directed to inquire into the c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sult into invocation of power under s. 263. For the reasons mentioned above he arrived at a conclusion that an amount of Rs. 1 lac received by the assessee from Shri O.P. Khadaria was taxable as income of the assessee from profession of politics. Similarly, in case of Shri Ajay Agarwal he held that the gift was accepted without ascertaining either the creditworthiness of the donor or the genuineness of the transaction and it was incumbent upon the AO to examine the taxability of the receipt to see whether it arose out of love and affection and was thereby not taxable or whether it was related to the assessee's profession and was thereby taxable and failure to conduct these inquiries is an error on the part of the AO which resulted in loss to the Revenue. In this manner, the CIT has set aside the order of the AO to that extent with a direction to examine the issue afresh after making proper inquiries to determine the genuineness of the gifts and thereafter the nature of such gifts with a view to determining their taxability. 6. Both of the parties have submitted synopsis of their arguments on the basis of which the present appeal was argued. 7. Shri Rakesh Gupta, learned counsel a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... p; Annex.-VI Details of gifts received during the year 1-4-2002 to 31-3-2003 ------------------------------------------------------------------ Sl. Name (donor), Address, Ch./Dft. Bank Date Amount No. IT Ward No. No. (Rs.) ------------------------------------------------------------------ (1) Mr. Pankaj Jain S/o 171816 Andhra 7-12-2002 2,00,000 Late Shri P.C. Jain R/o Bank, KD-5, Kavi Nagar, Navyug Ghaziabad PAN :& ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ----------------------------------------------- 10. Then, learned Authorised Representative referred to the following pages of paper book which consisted of evidence with regard to the said gifts: Page No. Description of document 6. Affidavit of Shri Ajay Agarwal s/o Shri Ved Prakash Agarwal in which he has confirmed of having made gift of Rs. 10 lacs which was paid through savings bank a/c No. 40171 with PNB, GT Road, Ghaziabad, by cheque No. 921359, dt. 7th Dec., 2002 and the source is stated to be out of sale proceeds of immovable property, namely, Sylverton Estate, Mussoorie, and it is mentioned that donee has accepted the gift. 7 & 8 Copy of memo of gift of Shri O.P. Khadaria. 9 & 10 A letter writ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessee's reply dt. 25th March, 2006 with regard to the gifts which included abovementioned two gifts. The explanation of the assessee with regard to these two gifts given to, AO vide letter dt. 25th March, 2006 is reproduced below: "1. Mr. O.P. Khadaria-Gift of Rs. 1,00,000 Mr. O.P. Khadaria is a practicing advocate and is taxpayer for last thirty years. His educational qualificational is M.A., LL. B, LL.M (Delhi University) and his family consists of his wife and two sons. His son Deepak Khadaria is also a practicing advocate and his other son Vikas Khadaria ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... In his statement he also stated that apart from the assessee he had also, given the gifts to his son Vikas Khadaria. Mother Teresa Orphanage and blind school at Panchkuian Road. 2. Ajay Agarwal-Gift of Rs. 10,00,000 (Ten lakh Rupees). Mr. Ajay Agarwal is grandson of Late Seth Shri Mukund Lal, promoter of the renowned steel plant of India, M/s Mukund Steel Ltd. Mr. Ajay Agarwal resides with his natural mother Smt. Shakuntala Devi since 1986 in the house constructed on plot No. KF-20-21, Kavi Nagar, Ghaziabad measurin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... p; The copies of his bank statements were also filed with you wherein the immediate source of the money gifted was also explained with documentary evidence. Copy of a cheque of Rs. 9,95,000 received back from Food Corporation of India was also submitted to you along with a covering letter from M/s G.C. International. Copies of the same are also enclosed herewith once again for your perusal. The identity, immediate source of money and the genuineness are hence proved." The said gifts were also explained in the said ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is contrary to the evidence and the queries made by the AO during the course of assessment proceedings. He contended that even the CIT who has passed order under s. 263 in the statement filed before the Hon'ble High Court in the appeal filed by the Revenue in respect of asst. yr. 2003-04 has stated as follows: "(z) Because the observations of the Tribunal in para 4.9 on pp. 8-9 that the AO has not adopted a consistent approach regarding the other two gifts, hence the approach is self-contradictory and inconsistent are unwarranted and should be ignored. The ITO has accepted the other two gifts as the creditworthiness of the other two donors was proved." Learned Authorised Representative has filed before us copy of affidavit filed by Shri M.D. Kabra, CIT, Central-I, New Delhi, in respect of appeal in the case of assessee filed by the Department against the order of the Tribunal in ITA No. 422/Del/2007, dt. 30th Nov., 2007 for asst. yr. 2003-04 [reported as Dy. CIT vs. Ms. Mayawati (2008) 1 DTR (Del) 68 : (2008) (2008) 113 TTJ (Del) 178-Ed.]. 14. He contended that above statement of CIT clearly shows that these two gifts of the assessee were accepted by the Revenue as the creditwor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 4 (Cal); (vi) Sadhu Ram & Sons vs. CIT (2007) 108 TTJ (Asr) 373; (vii) Marico Industries Ltd. vs. Asstt. CIT (2008) 115 TTJ (Mumbai) 497. 16. Then, the argument of the learned Authorised Representative is that the inherent nature of gift is capital receipt and only statute has right to tax the capital receipt and now the gift has been made taxable vide s. 56(2)(v) and he pleaded that nature of gift can never be changed to revenue receipt unless specifically provided by the statute. 17. The next argument of the learned Authorised Representative was that CIT has not given specific findings in the impugned order that assessment order was erroneous as well as prejudicial to the interest of Revenue and, therefore, also the order of CIT is liable to be quashed and for that proposition he relied upon the following decisions: (i) Sunil Lamba vs. Dy. CIT (2004) 83 TTJ (Del) 174; (ii) Sandwik A.B. Sweden vs. IAC (1996) 55 TTJ (Pune) 144 : (1996) 56 ITD 330 (Pune); (iii) Indian Aluminium Co. Ltd. vs. CIT (1994) 50 TTJ (Cal) 281. 18. The next argument of learned Authorised Representative was that the order has been passed by CIT without giving any show-cause notice. However, at the tim ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... merely unfavourable order and bring to tax some more revenue to the treasury, when investigation is made and then the case is accepted, it cannot be held that order is erroneous and prejudicial to the interest of Revenue. (iii) It has been held by Delhi Bench of Tribunal in the case of Shivam. Leasing & Finance Ltd. vs. ITO (1993) 68 Taxman 211 (Del)(Mag) that mere suspicion that AO allowed claims of assessee without enquiry, jurisdiction under s. 263 could not be invoked especially when entire material was available on record of AO. (iv) Chandigarh Bench in the case of Kewal Ram Chauhan vs. ITO (1997) 91 Taxman 167 (Chd)(Mag) has held that assessment cannot be cancelled on the ground that desired enquiries had not been made by the AO because it was mainly satisfaction of AO who made enquiries. (v) It was held by Delhi Bench of Tribunal in the case of Hindustan Marketing & Advertising Co. Ltd. vs. ITO (1989) 28 ITD 231 (Del) that when ITO collected evidences, discussed the points with the representative of the assessee, got clarification from them and thereafter drew conclusion to make the assessment, it cannot be said that the order was erroneous and prejudicial to the interes ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t order in a perfunctory manner without making the necessary inquiries. Referring to the decision of Hon'ble Delhi High Court in the case of Gee Vee Enterprises and Duggal & Co. vs. CIT (1994) 122 CTR (Del) 171 : (1996) 220 ITR 456 (Del), it was pleaded by learned Departmental Representative that functions of AO are very different from that of civil Court and, thus, the AO cannot be passive. The AO not only should take information on record, but is also required to verify the same to reveal the truth. 24. He pleaded that the word "erroneous" as referred to in s. 263 means failure to make necessary inquiry and, thus, even ill a case where the AO did not make necessary inquiries the order can be held to be erroneous and for that purpose he relied on, the following decisions: (i) Thalibhai F. Jain vs. ITO 1975 CTR (Kar) 66 : (1975) 101 ITR 1 (Kar) (ii) Smt Taradevi Aggarwal vs. CIT 1973 CTR (SC) 107 : (1973) 88 ITR 323 (SC) (iii) Pearl Polymers Ltd. vs. Dy. CIT (2002) 74 TTJ (Del)(SB)1 : (2002) 80 ITD 1 (Del)(SB) (iv)Indian Spices Co. vs. CIT (2003) 184 CTR (Ker) 303 : (2004) 267 ITR 445 (Ker) 25. He pleaded that even if full facts were disclosed before the AO, the CIT will be w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Mills vs. Asstt. CIT. 28. Learned Departmental Representative further pleaded that in, the case of gifts mere movement of funds through banking channel is not sufficient and financial capacity is also to be proved and he in this regard referred to the following decisions of Hon'ble Delhi High Court: (i) Sajjan Dass & Sons vs. CIT (2003) 181 CTR (Del) 581 : (2003) 264 ITR 435 (Del); (ii) CIT vs. Anil Kumar (2007) 292 ITR 552 (Del). 29. Concluding his arguments learned Departmental Representative pleaded that CIT has rightly invoked his power under s. 263 and his order should be upheld. 30. In the rejoinder the learned Authorised Representative pleaded that learned Departmental Representative is incorrect in saying that the AO has simply placed the information on record. He contended that office note written by the AO as well as correspondence exchanged between the assessee and the AO clearly show that not only he has sought evidence to prove the genuineness of those gifts, but also has applied his mind and after being satisfied with the evidence placed on record which included the examination of both the donors by the AO, the gifts have been accepted and it will be incorrect to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s observed that an incorrect assumption of facts or an incorrect application of law will satisfy the requirement of the order being erroneous and to fall in the same category orders passed without applying the principles of natural justice or without application of mind will also fall. It was observed that the phrase "prejudicial to the interests of Revenue" is not an expression of art or is not defined in the Act and it has a wide import and is not confined to laws of taxes and if due to an erroneous order of AO Revenue is losing tax lawfully payable by a person then the order will be prejudicial to the interests of Revenue. It was observed that every loss of revenue as a consequence of an order of the AO cannot be treated as prejudicial to the interests of Revenue and giving an example their Lordships observed that when an AO adopted one of the courses permissible in law and it has resulted in loss of revenue or where two views are possible and the ITO has taken one view with which the CIT does not agree, it cannot be treated as erroneous order prejudicial to the interest of the Revenue unless the view taken by ITO is unsustainable in law. The relevant observations are reproduced ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... this interpretation is too narrow to merit acceptance, The scheme of the Act is to levy and collect tax in accordance with the provisions of the Act and this task is entrusted to the Revenue. If due to an erroneous order of the ITO, the Revenue is losing tax lawfully payable by a person, it will certainly be prejudicial to the interests of the Revenue. The phrase 'prejudicial to the interests of the Revenue' has to be read in conjunction with an erroneous order passed by the AO. Every loss of revenue as a consequence of an order of the AO cannot be treated as prejudicial to the interests of the Revenue. For example, when an ITO adopted one of the courses permissible in law and it has resulted in loss of revenue or where two views are possible and the ITO has taken one view with which the CIT does not agree, it cannot be treated as an erroneous order prejudicial to the interests of the Revenue, unless the view taken by the ITO is unsustainable in law." 33. Now, adverting to the facts of the present case to examine that whether the invocation of power under s. 263 by the CIT has rightly been exercised, it has been mentioned in the assessment order that the assessee and family member ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Shri Ajay Agarwal. In respect of Shri O.P. Khadaria the AO has specifically mentioned that he is an advocate by profession and also relation of teacher and student existed between donor and donee and statement of donor was not only recorded by Addl. DIT (Inv.) New Delhi, but by the AO himself. According to the AO the donor was showing handsome income and was having sufficient assets and keeping in view the financial status of the donor and also keeping in view the fact that assessee was his student and also keeping in view that the donor was an advocate of BSP, he has accepted the gift of Shri O.P. Khadaria. Thus, while accepting the genuineness of the gift of Shri O.P. Khadaria, the AO has in his mind the status of donor, his income and assets and his relationship with the assessee not only as a student, but also being an advocate of BSP. It will not be out of place to mention that the assessee while explaining the gift of Shri O.P. Khadaria has mentioned in the letter dt. 25th March, 2006 that return of income by the donor is Rs. 12,07,419 which if seen from angle of amount of gift of Rs. 1 lac, is handsome income. 35. Similarly, in the note with regard to gift received by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al Company Ltd. When it is not a case of improper inquiry or where it has not been shown that the view taken by the AO is unsustainable in law, the order of AO cannot be held to be erroneous as well as prejudicial to the interest of Revenue. The above view has also been adopted by Hon'ble Gujarat High Court in the case of CIT vs. R.K. Construction Co. wherein their Lordships have observed as under: "16. As far as law is concerned, the AO has taken a particular view on the basis of evidence produced before him. On the basis of the said material and materials which were collected by the CIT in revisional proceedings, the CIT has taken a different View. However, in the revisional proceedings under s. 263, it is not open for the CIT to take such a different view in view of the decision of the Hon'ble Supreme Court in the case of Malabar Industrial Co. Ltd. There is nothing on record to suggest that the view taken by the AO is unsustainable at law. This Court has also taken the same view in case of Arvind Jewellers whereby the order passed by the CIT under s. 263 of the Act was quashed and set aside." 38. In view of the above discussion it has to be held that CIT was wrong in exercisi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a to the assessee, we find no merit in such argument of the learned Departmental Representative in view of the findings recorded by the AO in the office note and similarly in the case of Ajay Agarwal the AO has recorded his findings in the office note that he possesses the source to make the gift to the assessee of an amount of Rs. 10 lacs. 43. So far as it relates to merger of the assessment order with the appellate order, we find no force in such argument of the learned Authorised Representative as these two gifts on the basis of which learned CIT has invoked power under s. 263 were not the issue before CIT(A). Therefore, on account of merger the order under s. 263 cannot be held invalid. Therefore, we agree with the learned Departmental Representative that on theory of merger the order passed by CIT under s. 263 cannot be held to be invalid. 44. So far as it relates to the argument of learned Authorised Representative that CIT did not record his findings in express words that the assessment order is erroneous and prejudicial to the interest of Revenue we find no force in such argument as he has expressly mentioned in the order that the order of AO is erroneous and prejudicial ..... X X X X Extracts X X X X X X X X Extracts X X X X
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