TMI Blog2010 (3) TMI 544X X X X Extracts X X X X X X X X Extracts X X X X ..... lowing substantial question of law : "Whether the Income-tax Appellate Tribunal was right in holding that the second respondent had validly invoked jurisdiction and exercised powers under section 263 of the Income-tax Act, 1961." 2. The assessee manufactures and trades in gold jewellery and silver articles. A search was conducted at its premises on October 24, 2002. A special audit was carried out under section 142(2A). By an order dated December 31, 2004, a block assessment was completed for the period April 1, 1996, to October 24, 2002 under section 158BC. The undisclosed income of the assessee was estimated at Rs. 5.23 crores. A notice was issued on February 9, 2007 by the Commissioner of Income-tax (Central) to the assessee to show cause why the order of assessment should not be revised in exercise of powers under section 263. The assessee responded to the notice following which an order was passed on March 26, 2007 by the Commissioner of Income-tax (Central) under section 263, setting aside the order of block assessment and directing the Assessing Officer to pass a fresh order of assessment. 3. The power under section 263 has been exercised on two grounds which are eluci ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e aforesaid two grounds separately, taking the second ground up for consideration initially. Re : Section 40A(3) : 6. During the course of the block assessment proceedings, on June 2, 2004, the Assessing Officer called for a special audit under section 142(2A). The audit was required, inter alia, in respect of cash transactions which fell within the ambit of the provisions of section 40A(3). The audit report contained the following observations on the issue of the cash transactions, particularly with reference to section 40A(3) : "The details of cash payments in excess of limits specified under section 40A(3) are given in paragraph 11 of the audit report wherein pagewise explanation of the seized material is given. However, since a consolidated figure of purchase and expense is given in jamakharch papers it is not possible to state whether any individual payment is made in excess of limits specified under section 40A(3). The assessee has explained that in view of the decision in the case of Janta Tiles v. Asst. CIT [2000] 66 TTJ 695 (Pune) and Madhuvana House Building Co-op. Society v. Asst. CIT [2002] 76 TTJ 948 (Bangalore) the undisclosed transactions are outside the purvi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... en remitted under a covering letter dated June 19, 2006 of the Additional Commissioner of Income-tax, Central Range 1, Pune. 9. The grievance of the assessee is that despite the fact that the issue of the applicability of section 40A(3) formed the subject-matter of the special audit and though the Assessing Officer did not come to the conclusion that there was any violation of those provisions ; on February 9, 2007, a notice was issued under section 263 by the same Commissioner of Income-tax contrary to his own view which was recorded in response to the audit query. 10. From the material on the record, it has emerged that during the course of the assessment proceedings, the Assessing Officer had directed a special audit under section 142(2A) and among the aspects on which the audit was requisitioned, was the issue relating to transactions which were carried out in excess of an amount of Rs. 20,000 in cash. The auditor came to the conclusion that it was not possible to state as to whether any individual payment had been made in excess of the limit specified in section 40A(3). The auditor recorded the submissions of the assessee, based on the decisions of the Tribunal, that undis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that if the view which was taken by the Assessing Officer is a possible view, it would not be within the jurisdiction of the revisional authority to exercise the power under section 263. Re : Initial investment or seed capital : 12. The second basis on which the jurisdiction under section 263 has been exercised is that while determining the initial investment at Rs. 10 lakhs, the turnover of Rs. 75 lakhs was taken only on the basis of the first three years of the block period. The Commissioner of Income-tax is of the view that in considering the turnover of only the first three years of the block in determining the initial investment, the substantially higher turnover for the remaining years of the block had been ignored. 13. Now, on this aspect of the case, the record indicates that following the order of assessment, during the pendency of the proceedings before the Commissioner of Income-tax (Appeals), a request for enhancement was made by the Additional Commissioner of Income-tax, Central Range 1, Pune, by a letter dated May 16, 2005. In his request for enhancement of the returned income, the Additional Commissioner of Income-tax stated that in the block assessment order ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ercentage. The average of the turnover for the three years will work out to Rs. 75 lakhs and at the rate of 12.5 per cent. which is a reasonable percentage, the profit comes to Rs. 9,37,500. However, this figure is rounded off to Rs. 10,00,000. The undisclosed income will go up by Rs. 10 lakhs as worked out." 14. The submission of counsel appearing on behalf of the assessee is that these observations of the Commissioner of Income-tax (Appeals) ex facie demonstrate that the appellate authority has not merely confined itself to the determination of the initial investment on the basis of the turnover for the first three years of the block, but, as a matter of fact, the Commissioner also estimated what has been ploughed back in unaccounted trading for the remaining years of the block. 15. Reading paragraph 16.5 of the order of the Commissioner of Income-tax (Appeals), as it stands, there is merit in the submission of the assessee. The order of the Commissioner of Income-tax (Appeals) refers, firstly, to the fact that for the period between 1996-97 and 1st November 1999, the undisclosed profit of the assessee was determined at Rs. 69.33 lakhs which could be considered as being ploug ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... asonableness. The court is informed that the ground which is sought to be urged by the Revenue is still to be admitted by the Tribunal. We have adverted to these facts because the correctness of the order that has been passed by the Commissioner of Income-tax (Appeals) on the merits is an issue which, it is open to the Revenue to urge before the Tribunal and for the Tribunal to address. The legitimacy, correctness and maintainability of the ground which is sought to be advanced will be dealt with by the Tribunal. The Revenue having taken recourse to its appellate remedy before the Tribunal, we are of the view that the exercise of the jurisdiction, in the facts of this case under section 263 was not warranted since the exercise cannot be sustained under the section. 17. We must also advert to the circumstance that in so far as the second ground for the exercise of the jurisdiction under section 263 is concerned, there was an audit query specifically with reference to the initial investment made in purchases in the year 1999-2000. The audit query was responded to by the Additional Commissioner of Income-tax. The Additional Commissioner of Income-tax in his response to the audit que ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... determination which has been made by the Commissioner of Income-tax (Appeals). 18. The position in law was settled by the judgment of the Supreme Court in Malabar Industrial Co. Ltd. v. CIT [2000] 243 ITR 83 (SC). In CIT v. Max India Ltd. [2007] 295 ITR 282 (SC) the Supreme Court, while adverting to the earlier judgment in Malabar, has laid down the following principle of law (page 284) : "Every loss of revenue as a consequence of an order of the Assessing Officer cannot be treated as prejudicial to the interests of the Revenue. For example, when an Income-tax Officer adopted one of the courses permissible in law and it has resulted in loss of revenue ; or where two views are possible and the Income-tax Officer has taken one view with which the Commissioner does not agree, it cannot be treated as an erroneous order prejudicial to the interests of the Revenue, unless the view taken by the Income-tax Officer is unsustainable in law." 19. The power under section 263(1) can be exercised by the Commissioner where he considers that any order passed by the Assessing Officer is erroneous in so far as it is prejudicial to the interests of the Revenue. Explanation (c) to the provisio ..... 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