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Shiva Automobiles Versus Income-tax Officer. Ward-1A. Aligarh

2010 (1) TMI 951 - ITAT AGRA

Business disallowance - Interest, salary, etc., paid by firm to partner, Revision - Of orders prejudicial to interest of revenue - IT APPEAL NO. 110 (AGRA) OF 2006 - Dated:- 21-1-2010 - P.K. BANSAL, HARI OM MARATHA AND R.K. GUPTA, SANJAY ARORA, JJ. Sahib P. Satsangee for the Appellant. Deepak Tiwari and S.R. Sahu for the Respondent. ORDER Hari Om Maratha, Judicial Member. - This appeal of the assessee for assessment year 2001-02 emanates from the order of revision passed by the ld. CIT (Admn.) d .....

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ing the income of shares on which dividend income was earned and the same was transferred to the assessee firm by way of book entries in the partner s capital account represented by credits otherwise than credit of money, i.e., by transfer of shares held in the name of partners by book entry without the shares having been transferred in the name of the firm. From which it was inferred by CIT that interest allowed to the partners on the capital in respect of such credits is not admissible as a de .....

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e, CIT (Admn.) held that the order passed by the Assessing Officer on 29-8-2003 is erroneous and prejudicial to the interests of the revenue. Against this notice, the assessee filed a reply in the form of written submissions dated 27-3-2006 and 29-3-2006. The assessee has mainly emphasized on the fact that the order passed by the Assessing Officer on 29-8-2003 under section 143(3) is not erroneous because the provisions of section 185 can be applied only when the assessee does not fulfil the con .....

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year, it shall continue to be assessed in the same capacity for every subsequent year if there is no change in constitution of the firm and or the shares of the partners. In this case, the firm is assessed to tax as a partnership firm from 1-4-1998. The assessee objected to the assessment on the firm as A.O.P. It was further submitted that there is no bar in the Act whereby any assets from the partners to the firm or vice versa, cannot be transferred. It was further submitted that the assessee .....

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e assessee has opined that the issue under consideration is not concerned with the transfer of shares from the partner to the firm, but the same is concerned with the distribution of profits from dividend/shares, in accordance with the partnership deed. He observed that the assessee had filed partnership deed and that the assessee was assessed as a firm since 1-4-1998 but according to him if the partnership deed is not being followed in practical sense, the same becomes merely a written instrume .....

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to show that the same is distributed amongst the partners as per the provisions of the partnership deed and the ld. Assessing Officer has failed to investigate this issue. Finally, the ld. CIT (Admn.) concluded that the assessment order passed by the Assessing Officer on 28-8-2003 was erroneous insofar as it was prejudicial to the interests of the revenue. Therefore, he set aside the assessment order with the direction that the Assessing Officer shall make enquiries about the genuineness of the .....

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cts of the case. (2)The ld. CIT has erred in law and on facts of the case in holding that the assessment order dated 29-8-2003 was erroneous as well as prejudicial to the interest of revenue and set aside the same. (3)The ld. CIT has erred in law and on facts of the case in directing the Assessing Officer to make inquiries about the genuineness of the existence of the firm in view of the provisions contained under sections 184 and 185. (4)The ld. CIT has erred in law and on facts of the case in .....

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under section 263, the following issues were raised:- (i)Interest allowed to the partners on the capital in respect of credit entries for transfer of shares is not admissible as a deduction within the meaning of section 36(1)(iii). (ii)Dividend income from shares so transferred has been enjoyed by the partners, which amounts to sharing of profits otherwise than in accordance with the partnership deed and accordingly, the firm should have been assessed in the status of AOP. 4. Finally the assessm .....

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ng order under section 263, the ld. CIT (Admn.) has given following directions :- "On the basis of the foregoing discussion, it is apparent that the assessment order passed by the ITO, Ward-1, Aligarh on 29-8-2003 was erroneous insofar as it was prejudicial to the interest of revenue. Therefore, the same is set aside with the direction that the Assessing Officer will make inquiries about the genuineness of the existence of the firm in view of the provisions contained under sections 184 and .....

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owed and that to make enquiries about the genuineness of the existence of the firm in view of the provisions contained in sections 184 and 185 of the Act. From the above, it is clearly found that the ground of revision in section 263 order are entirely different from the grounds taken in the notice issued under section 263. The revisional order based on grounds different from that stated in the notice issued under section 263 becomes patently invalid. There are plethora of judicial pronouncement .....

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TTJ 1049 are relevant. In the Chennai Bench decision (supra) the Hon ble Bench has held that proceedings under section 263 have to be strictly conformed to the notice issued invoking the jurisdiction under that section for the reasons stated therein. The law does not permit expanding proceedings under section 263 after its initiation beyond what is stated in the notice itself. The assessee has fulfilled all the conditions of section 184 and there is no such allegation in the order of CIT that t .....

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rned with transfer of shares from the partner of the firm, but the same is concerned with the distribution of profit from dividends/shares, in accordance with the partnership deed. The decisions relied by CIT are that of Hon ble Rajasthan High Court in the case of Bheruram Ratan Lal (supra) and that of Hon ble Delhi High Court in the case of Kalu Ram & Co. (HUF) v. CIT [2002] 254 ITR 307 . Both the above decisions were rendered in respect of law existing prior to 1-4-1993 and relate to regis .....

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ent; (ii)The individual shares of partners are specified in that instrument; and (iii)Certified copy of the partnership deed is filed. 6. The Assessing Officer had inquired into all the above three conditions even earlier and after and has satisfied himself and CIT also could not dispute the above factual situation in this case. The Hon ble Allahabad High Court in the case of CIT v. Nityanand Deokinandan [1981] 5 Taxman 262 has clearly held that the continuation of registration of the firm for s .....

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the stand that the dividend from shares is not appearing in the books of account of the assessee and there is no evidence to show that the same is being distributed amongst the partners as per the provisions of the partnership deed and the Assessing Officer has failed to investigate into this issue. He has also made a part-ground that interest is not allowable and the Assessing Officer has failed to look into this aspect as well. 8. After hearing both the sides it is noticed that there is no evi .....

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power vested in him and if he exercise the said power in accordance with law and arrive at a conclusion, such conclusion cannot be termed to be erroneous simply because the Commissioner does not feel satisfied with the conclusion. In such circumstances, order of the Assessing Officer cannot be termed as erroneous as far as the notice qua ground of dividend shares is concerned. 9. The second related point taken by the ld. CIT that he is satisfied that the provisions to section 14A are not being .....

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because it is exempt. The ld. CIT has also observed that the Assessing Officer has to see carefully that the expenses including interest against exempt are not allowed still there is no evidence on record before CIT that any expenses other than interest to partners against exemption income are allowed hence, the decision is based on presumption. The ld. CIT has himself admitted that provisions of section 14A are not being invoked at all. When the provisions of section 14A are not invoked, decisi .....

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tant Member. - I have carefully perused the proposed order by my ld. brother in this case. However, being unable to persuade myself to be in agreement therewith, I proceed to write my separate order, as under:- 2. The only issue that arises for adjudication in the present appeal is the maintainability in law of the invocation of section 263 of the Income-tax Act, 1961 ( the Act hereinafter) by the ld. Commissioner of Income-tax, Aligarh ( CIT for short) in the facts and circumstances of the case .....

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ssee, a partnership firm, at ₹ 91,240. Salary and interest to partners stood allowed at ₹ 1,22,646 and ₹ 32,685 respectively, i.e., by granting it the status of a firm, i.e., under which (status) it stood assessed in the past. Subsequently, an examination of the record by the ld. CIT, revealed that the assessee-firm carried shares on its books on the basis of the corresponding credit in the partner s account(s), on which interest stands allowed under section 36(1)(iii) read wit .....

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, or which stands to be received, on the said shares, being by the partners directly, the registered holders thereof, profit to that extent, though tax-exempt, is not distributed in accordance with the profit-sharing ratio specified in the partnership deed, being not routed through the Profit & Loss account for the relevant year. As such, there is also a non-compliance of the provisions of section 184 of the Act, so that the assessee is liable to be assessed as an Association of Persons (AOP .....

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its communications dated 27-3-2006 and 29-3-2006. 4.1 The undisputed factual position that emerges, including the perusal of the replies aforesaid (by the assessee), which are on the merits of its case, is that no enquiry in the matter stood made by the Assessing Officer, so that his order suffers from an inherent lack of application of mind in framing the assessment, i.e., insofar as these aspects thereof are concerned. His order, therefore, qualifies to be considered as erroneous insofar as it .....

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ithout due inquiry is per se erroneous insofar as it is prejudicial to the interest of the revenue, as it denotes non-application of mind in framing the assessment. Further, this is so even if the facts stated in the assessment order were to be correct; the raison de tre, which forms the basis of the legal challenge, is the lack of proper inquiry into and, thus, examination of, the issues under reference - a finding of fact, as the same only connotes a non-application of mind in the matter which .....

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the decision is also reproduced on account of the clarity of the expression, as well as to project its clear verdict in the matter in its own words : "It is not necessary for the Commissioner to make further inquiries before cancelling the assessment order of the Income-tax Officer. The Commissioner can regard the order as erroneous on the ground that in the circumstances of the case the Income-tax Officer should have made further inquiries before accepting the statements made by the assess .....

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the face of a return which is apparently in order but calls for further inquiry. It is his duty to ascertain the truth of the facts stated in the return when the circumstances of the case are such as to provoke an inquiry. It is because it is incumbent on the Income-tax Officer to further investigate the facts stated in the return when circumstances would make such an inquiry prudent that the word "erroneous" in section 263 includes the failure to make such an enquiry. The order become .....

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ts of the assessee s case would, in any case, be considered by the Assessing Officer in the set aside proceedings; it being even otherwise the province of the Assessing Officer to verify the assessee s claims [refer: Tin Box Co. v. CIT [2001] 249 ITR 216 (SC)]. The only exception to this rule I can think of is where the enquiry as pointed out by the ld. CIT is either not relevant or stands completely addressed by the assessee in the proceedings under section 263 itself, i.e., not requiring any v .....

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undisputed in the present case, the provision of section 263 stands rightly invoked by the ld. CIT. What, nevertheless, remains to be examined, is the addressal aforesaid; the relevance of the issues raised to the determination of the income chargeable to tax, being apparent from their narration itself (also refer para 3.1 of this order). 5.1 The assessee s submission before the ld. CIT, including the decisions relied upon, stand perused. There is no denial that the firm stood constituted for, .....

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s (at the rate of 18 per cent p.a.) does not qualify for deduction under section 36(1)(iii) of the Act, under which section it is to be allowed, subject of course, to the criteria and conditions specified in section 40(b)( iv) of the Act. The assessee s replies in the matter veer around the legality of the assessee s assets (shares) being validly held in the names of the partners, and which is neither an issue nor questioned by the ld. CIT. It has also stated of the non-application of section 14 .....

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ect to verification by the Assessing Officer, so that in effect it would be of no moment in the context of the present case, being revi-sionary proceedings and, rather, endorse the findings of the ld. CIT of the applicability of section 263, as well as his decision in restoring the matter back to the Assessing Officer s file for a decision on merits after due examination. 5.3 Further still, it may also be pertinent to state that the parameters of what constitutes business is well defined under l .....

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to be adequately funded, so that it has to be backed by proper financial arrangement or an appropriate line of credit, apart from a knowledge resource base, so as to fuel its investment engine with adequate inputs; the investment activity, being its business, only a continuous affair, and highly specialized, especially in the today s context of a highly competitive and dynamic business environment. Also, it has to be borne in mind that gains, whether short-term or long-term, being chargeable und .....

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rtners, with the assessee-firm crediting their capital account(s) with the Fair Market Value (FMV) thereof. While the principal controversy in that case revolved on the genuineness of the partnership firm with reference to this transaction(s) being a sham one, i.e., as being a device or ruse adopted to evade tax, the Hon ble Court observed that even if the firm is genuine, it needs to be seen, if the transaction of the transfer of the personal asset to the partnership represents a real attempt t .....

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relevant indica in this regard, viz., whether the partnership is formed between the assessee and his wife and children or substantially limited to them, whether the personal asset is sold by the partnership firm soon after it is transferred by the assessee to it, whether the partnership firm has no substantial or real business or the record shows that there was no real need for the partnership firm for such capital contribution from the assessee. All these and other pertinent considerations may .....

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evance of this is, again, un-arguable. If, and to the extent, the dividend stands received or receivable on the said shares, the firm s property, directly by the partner(s) without being routed through the firm s accounts, the allocation of the firm s profit would not be in accordance with the express provisions of the partnership deed (refer clause 11 thereof). The question has two aspects to it : (a)whether the assessee-firm could, given that the dealing in shares is not a part of its business .....

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sponse, i.e., qua the second part (b) of the issue, all it has stated is that the three ingredients of section 184 of the Act, as under, stand met, and that once assessed as a partnership firm, it has to, in view of section 184(3), be assessed in the same capacity for the subsequent years; (i)the partnership is evidenced by a partnership; (ii)the individual shares of partners are specified in that instrument; and (iii)the certified copy of the partnership is filed. The said argument only needs t .....

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s. A change either in the partners (not total) or in their shares, stand envisaged and dealt with under section 187 of the Act, deeming it as a change in the firm s constitution. The only requirement in law, for the firm to be assessed as a firm, even though with such changes as postulated in section 187, is that it is in either case evidenced by an extant instrument of partnership, i.e., in deed. Why, if that be not so, the firm could allocate the profits between the partners in the ratio of (s .....

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f a firm on the ground of it being only a change in the constitution of the firm in terms of section 187. The actual observance of the terms of the partnership deed is a sine qua non that cannot be bypassed or overlooked in any view of the matter. The registration of the assessee as a firm is not the question, which provisions (sections 182 and 183), stand dispensed with by Finance Act, 1992, and reference thereto or discussions thereon would only have the effect of obfuscating the issue involve .....

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dend, in fact, stands received by the partners, i.e., even if so, is purely incidental, and besides the issue which is purely a legal one. No doubt, it is open to the assessee to show, with reference to the distribution of dividend, that no dividend either in the year or in the past, stood in fact actually received or was receivable (as at the year end or even in the past), so that, if so, it would have only been through the assessee s P&L account, and which would satisfy the query (b) above .....

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applicable and valid in respect of this aspect of the matter as well. The purpose and premise of any enquiry, it would he appreciated, is only to arrive at a reasonable satisfaction, based on material and the surrounding circumstances, as to the truth of the transaction, so that it would necessarily include its different aspects, which are but the different angles or manners in which a transaction manifests itself. 7. In view of the foregoing, the action of the ld. CIT, and the consequent set as .....

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egards the decisions cited by the assessee in support of its case; as apparent, the action of the ld. CIT, to the extent it is being upheld (refer para 7 above), is on the basis of the non-conduction of any enquiry in the matter, deemed relevant, by the Assessing Officer while framing the assessment as well as no suitable redressing by it of the issues raised by the ld. CIT in the revisionary proceedings under section 263 of the Act or requiring verification for the purpose. As discussed in the .....

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applicability of the ratio of the said decision in the facts and circumstances of the present case. The same concerns the time of accrual of dividend, which the Hon ble Apex Court held to be the date of the relevant annual general meeting of the company (in which the relevant shares stand held), i.e., whereat the resolution regarding declaration of dividend stands passed. How, and to what extent, the said decision is relevant, and thus of assistance to the assessee, is difficult to say. These ar .....

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P.K. Bansal, Accountant Member. - This appeal came before me as a Third Member to express my opinion on the following question:- "Whether, in the given facts and the circumstances of this case, the assessment order in question, is not erroneous, insofar as it is prejudicial to the interests of the revenue or it is partly so?" 2. The brief facts of the case are given in the detailed orders of my ld. Brothers. Yet, for the disposal of this case, it is necessary for me to restate the fac .....

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on 9-3-2006 requiring him to show cause as to why the assessment order dated 29-8-2003 may not be set aside by invoking the provisions of section 263 of the Act on the following points :- "While going through the case records, it has been noticed that the assessee had made entries in the partner s capital account represented by credits otherwise than credit of money, i.e., transfer of shares held in the name of partners by book entry without the shares having been transferred in the name o .....

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to sharing the profits otherwise than in accordance with the partnership deed and accordingly, the firm should have been assessed in the status of AOP with the maximum marginal rate of tax after disallowing both salary and interest amounting to ₹ 1,22,646 and ₹ 32,685 respectively." 4. Against this notice, the assessee submitted reply to the CIT vide his submissions dated 27-3-2006 and 29-3-2006. The main contentions of the assessee was that the order passed by the Assessing Off .....

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t as AOP under section 185 of the Act. As per section 184(3), once the firm is assessed as a firm for any assessment year, it shall be assessed in the same capacity for every subsequent year, if there is no change in the constitution of the firm or the shares of the partners. The firm is assessed to tax as partnership firm since 1-4-1998. Therefore, the question of assessing the assessee as AOP does not arise. It was also submitted that there is no bar in the Partnership Act to transfer the asse .....

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d is exempt. As per proviso to section 14A, the Assessing Officer has no power to reassess or rectify the assessment for disallowing the interest. The CIT after considering the submissions of the assessee came to the view that the issue under consideration is not concerned with the transfer of the shares from partners to the firm, but the same is concerned with the distribution of profits from dividend/shares, in accordance with the partnership deed. It was observed that the assessee filed partn .....

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the CIT, since the dividend derived from the shares did not appear in the books of account of the assessee and there is no evidence to show that the same is distributed amongst the partners as per the provisions of partnership deed, the Assessing Officer failed to investigate this issue and, therefore, ultimately the CIT concluded that the order passed by the Assessing Officer on 29-8-2003 was erroneous insofar as prejudicial to the interest of the revenue. Accordingly, he set aside the assessme .....

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rder of CIT before the Tribunal. The ld. Judicial Member (J.M.) set aside the order passed under section 263 by the CIT. His reasoning as given are as under :- (i)There is no evidence that the dividends were actually received on shares and the same were distributed amongst the partners otherwise than as per the provisions of the partnership deed. (ii)Revisional powers under section 263 of the Act cannot be enlarged for reopening of the assessment proceedings which were concluded earlier only on .....

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ds of dividend shares is concerned. (iv)In respect to the second point taken by the CIT that he is satisfied that the provisions of section 14A are not being invoked at all, in that eventuality interest against dividend income becomes allowable if no dividend is received as per the decision of Hon ble Apex Court in the case of Raghunandan Prasad Moody (supra) and that of Indian Bank Ltd. s case (supra). (v)The decision of CIT is based on presumption, as there is no evidence on record before the .....

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the ld. J.M. in his dissenting order. Reasoning given in his dissenting order states as under:- (i)That no enquiry in the matter stood made by the Assessing Officer and, therefore, his order suffers from an inherent lack of application of mind in framing the assessment. (ii)He was of the opinion that this is clear and settled position of law laid down under section 263 of the Act in view of the following decisions of the Hon ble Supreme Court :- (a) Rampyari Devi Sarogi s case (supra). (b) Smt. .....

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the fact of no enquiry in this case on the stated issue was undisputed and, therefore, CIT has rightly invoked the provisions of section 263 of the Act. It was also observed that when the firm s capital stands invested in shares, to that extent it couldn t be said to be utilized or applied for the purpose of business of the assessee. Therefore, interest thereon which stands allowed to the partners does not qualify for deduction under section 36(1)(iii) subject to the conditions specified in sec .....

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t in shares cannot be regarded to be a business unless it is exhibited to be part of the firm s investment programme. (v)The second issue on which the assessment was set aside by the CIT is the non-compliance of the provisions of section 184, and consequently, application of section 185. This is also un-arguable as to the extent the dividend stands received on the shares that the firm s property directly by the partners without being routed through the firm s accounts, the allocation of the firm .....

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to the verification by the Assessing Officer in the set aside proceedings. 7. Thus, the ld. A.M. confirmed the action of CIT on the basis of non-conduction of enquiry by the Assessing Officer while framing the assessment. 8. I have heard both the parties in this case. The ld. A.R. supported the order of the ld. J.M. whereas the ld. D.R. supported the order of the ld. A.M. as also of the revenue authorities. Ld. A.R. before us pointed out that the show-cause notice under section 263 was issued i .....

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29-8-2003 is erroneous as well as prejudicial to the interest of revenue on the following two grounds :- (1)The dividends from sharers is not appearing in the books of account of the assessee and there is no evidence to show that the same is being distributed amongst the partners as per the provisions of the partnership deed and the Assessing Officer has failed to investigate this issue. (2)The interest against the dividend income is not allowable and the Assessing Officer has failed to look in .....

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ct. The jurisdiction under section 263 of the Act cannot be utilized as an instrument for reopening the concluded proceedings on flimsy grounds or on assumption. Reliance was placed in this regard on the decision of Mrs. Khatiza S. Oomerbhoy v. ITO [2006] 100 ITD 173 (Mum.). Section 36(1)(iii) of the Act pertains to allowability of interest on borrowed capital, while the allowability of the interest on capital of partners is further subject to the provisions of section 40(b) read with section 18 .....

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partners are specific in that instrument; and certified copies of the partnership deed is filed. The assessee fulfilled all the three conditions and, therefore, has to be assessed as a firm and not as AOP. Again it was pointed out that the provisions of section 184(3) are not applicable as there is no change in the constitution of the firm or shares of the partners. The assessee is assessed as partnership firm since 1-4-1998. The no evidence with CIT that the dividends were actually received on .....

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fficer. The CIT has stated that the provisions of the section 14A are not being invoked at all. When the provisions of section 14A is not invoked, interest against dividend income is allowable even if no dividend is received as per the decision of the Apex Court in the case of Raghunandan Prasad Mody (supra), and also the decision in the case of Indian Bank Ltd. (supra) and, therefore, the order of the Assessing Officer cannot be regarded to be erroneous. Further, the order is not prejudicial to .....

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hat whenever capital is required for the purpose of business, it shall be contributed by the partners in such manner as is mutually agreed upon amongst the partners from time to time and the partners are entitled for the simple interest @ 18 per cent per annum as may be prescribed under section 40(b) on their capital, current or loan account. Referring to page 56 of the Paper Book, it was pointed out that the partners have contributed capital by way of transferring the shares to the firm and the .....

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ce sheet which were duly examined by the Assessing Officer. Even the capital account was also duly looked into by the Assessing Officer. It was pointed out that the subsequent order passed after the impugned order under section 263 is available at pages 104 to 106 of the Paper Book. He also referred, during the course of the arguments, the following decisions:- CIT v. Max India Ltd. [2007] 295 ITR 282 (SC). Malabar Industrial Co. Ltd. v. CIT [2000] 243 ITR 83 (SC). CIT v. Arvind Jewellers [2003] .....

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nt assessment the assessee as a firm and not as AOP and this issue is also not before the Third Member. The question referred to Third Member only related to, whether the order passed under section 263 of the Act is erroneous insofar as it is prejudicial to the interest of the revenue. Lack of total inquiry on the part of the Assessing Officer tantamount to that the order passed by Assessing Officer is erroneous. He vehemently supported the order of the Ld. AM. 12. I have carefully considered th .....

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and transferred by each of them to the firm respectively. This is also an admitted fact that the dividend received on these shares has not been accounted for in the books of account of the firm and has been received by the partner, if distributed by the respective companies, in whose name the shares stand and partners has not given the account of the dividend income relating to the shares brought in the firm. The capital account of the partners since credited by the shares so transferred into th .....

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d in the name of partners by book entry without the shares having been transferred in the name of the firm. The implication is that interest allowed to the partners on the capital in respect of such credits is not admissible as a deduction within the meaning of section 36(1)(iii). The assessee deals in the business of automobiles and does not deal in shares. Moreover, the dividend income from shares so transferred to the firm by way of book entry has been enjoyed by the partners. Even though the .....

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e the enquiry and accordingly, he set aside the assessment as per the conclusion given under para 6 of his order. Section 263 of the Act lays down as under : "263. (1) The Commissioner may call for and examine the record of any proceeding under this Act, and if he considers that any order passed therein by the Assessing Officer is erroneous insofar as it is prejudicial to the interests of the revenue, he may, after giving the assessee an opportunity of being heard and after making or causin .....

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ommissioner or Deputy Director or the Income-tax Officer on the basis of the directions issued by the Joint Commissioner under section 144A; (ii)an order made by the Joint Commissioner in exercise of the power or in the performance of the functions of an Assessing Officer conferred on, or assigned to, him under the orders or directions issued by the Board or by the Chief Commissioner or Director General or Commissioner authorised by the Board in this behalf under section 120; (b)"record&quo .....

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considered and decided in such appeal. (2) No order shall be made under sub-section (1) after the expiry of two years from the end of the financial year in which the order sought to be revised was passed. (3) Notwithstanding anything contained in sub-section (2), an order in revision under this section may be passed at any time in the case of an order which has been passed in consequence of or to give effect to, any finding or direction contained in an order of the Appellate Tribunal, the High C .....

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ction 263 by the Commissioner of Income-tax. Firstly, the Commissioner may call for and examine the records of any proceedings under the Act and for this purpose he need not to show any reason or record any reason to believe. It is a part of his administrative power to call for the record and examine them relating to any assessee. Secondly, he may consider any order passed by the Assessing Officer as erroneous as well as prejudicial to the interest of the revenue. This consideration having regar .....

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ng to be made such enquiry as he may deem fit, pass such order thereon as the circumstances of the case may justify including an order enhancing or modifying the assessment or cancelling assessment and directing a fresh assessment. This empowers the CIT to cause or make such enquiries as he deems necessary. Fourthly, the CIT under section 263 can enhance or modify the assessment. 16. Thus, it is apparently clear that in order to invoke the provisions of section 263, both the conditions that the .....

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cation of law in the order by the Assessing Officer. If the Assessing Officer after making the enquiries and examining the records taken one of the possible view, it cannot be said that the order passed by the Assessing Officer was erroneous. 17. We have gone through various case laws as has been cited before us and referred to by my colleagues. In the case of Rampyari Devi Sarogi (supra), the question involved before the Hon ble Supreme Court was that no fair and reasonable opportunity was give .....

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ment were completed accepting the initial capital and the fact that the assessee was carrying on money lending and speculation business. For the assessment year 1960-61 also voluntary return was filed. The Assessing Officer transferred the case to the other Assessing Officer on the request of the assessee. The Assessing Officer completed the assessment. Subsequently, the CIT reopened the assessment when it was found that the assessment was made on the basis that the income had been earned by the .....

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on business made during the year nor there was any evidence regarding the interest received by her from different parties on her investment. Notwithstanding the facts the Assessing Officer did not investigate into the various sources to assess the assessee on a total income of ₹ 9,037. The action of the CIT under section 33(B) of the Act is held to be justified cancelling the assessment as the Assessing Officer accepted the initial capital, sale of ornament, income from business etc. of th .....

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assessee. An agreement was entered into between the company and the assessee for making the multi-storied building after taking advances from the licensees to whom flats were to be sold and the agreement came to an end after the building was constructed. The Income-tax Officer granted registration under sections 124 and 185 of the Act and made the assessment accordingly. In the proceedings under section 263 of the Act assessment was cancelled as the Assessing Officer has not made sufficient enqu .....

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investigator. He cannot remain passive in the base of a return which is apparent in order but call for further enquiry. It is his duty to ascertain the true facts stated in the return when the circumstances are such as to provoke any enquiry. The word erroneous in section 263 of the Act includes failure to make such an enquiry. In this case although the assessee had informed to the Assessing Officer that the assessee is a confirming party of the land purchased by the Society but did not enquire .....

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ntries in the partners capital account represented by creditors otherwise than credit of money, i.e., transfer of shares held in the name of partners by book entry without the shares having been transferred in the name of the firm. He was of the view that the interest allowed by the Assessing Officer to the partners on the capital in respect of such credits is not admissible as deduction within the meaning of section 36(1)(iii) read with section 14A. This is a fact that the assessee was not deal .....

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see and there is no evidence to show that the same is being distributed amongst the partners as per the provisions of the partnership deed and the Assessing Officer has failed to investigate this issue. Second being the interest against the dividend income is not allowable and the Assessing Officer has failed to look into this aspect. In my opinion the decision of Hon ble Supreme Court in the case of Raghunandan Prasad Moody (supra) and that of Indian Bank Ltd. s case (supra) are not applicable .....

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use, in this case, it has been specifically held that if there is non-application of mind on the part of the Assessing Officer or if the Assessing Officer has committed any glaring mistake of fact or law, the order passed will be erroneous and prejudicial to the interest of the revenue. In that case, I noted that the Assessing Officer has passed an order after examining the accounts, making enquiries and applying his mind and taken one of the views. But, in the case before me, there is no applic .....

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the income on which is exempt. The provision of section 14A has not at all been examined. This is also fact that the Assessing Officer has also not applied his mind to the fact whether the dividend income as received by the partner on the shares which has been brought into the partnership firm has been brought into the P&L account of the firm or not. This case clearly lays down, if there is lack of enquiry on the part of the Assessing Officer, provisions of section 263 of the Act can be appl .....

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Assessing Officer. 23. I have specifically asked the Ld. AR whether there is any evidence on record which may prove that the Assessing Officer has conducted the enquiry on the points as has been raised by the CIT while issuing notice under section 263. No enquiry letter or the reply of the assessee being filed during the original assessment proceeding was brought to our knowledge. This clearly prove that in this case, the Assessing Officer failed to carry out the necessary enquiries which he oug .....

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Officer to carry out necessary enquiries. 24. I have also gone through the decision of the Hon ble Supreme Court in the case of Max India Ltd. (supra). In this case it was held as under : "The phrase prejudicial to the interests of the revenue in section 263 of the Income-tax Act, 1961, has to be read in conjunction with the expression erroneous order passed by the Assessing Officer. Every loss of revenue as a consequence of an order of the Assessing Officer cannot be treated as prejudicia .....

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the word profits in section 80HHC, the Commissioner purported to exercise his power under section 263 to revise the order of t he Assessing Officer on the ground that the order passed by the Assessing Officer was prejudicial to the revenue : Held, that, since section 80HHC was amended eleven times and different views existed when the Commissioner passed the order and the mechanics of that section had become so complicated over the years, the subsequent amendment of section 80HHC, even though ret .....

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rder to be erroneous and prejudicial to the interest of the revenue. Thus, this decision would have assisted the assessee if CIT had invoked the provisions of section 263 of the Act had there been section 14A being inducted subsequently by retrospective amendment. The CIT did not invoke the provisions of section 263 of the Act due to the retrospective amendment but has invoked the provisions of section 263 of the Act due to lack of enquiries being carried out by the Assessing Officer while grant .....

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e order of the Assessing Officer sought to be revised is erroneous; and (ii) is prejudicial to the interests of the revenue. If one of them is absent - if the order of the Assessing Officer is erroneous but is not prejudicial to the revenue - recourse cannot be had to section 263(1). There can be no doubt that the provision cannot be invoked to correct each and every type of mistake or error committed by the Assessing Officer, it is only when an order is erroneous that the section will be attrac .....

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icial to the interests of the revenue. For example, if the Assessing Officer has adopted one of the courses permissible in law and it has resulted in loss of revenue, or where two views are possible and the Assessing 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 Assessing Officer is unsustainable in law. Where a sum not earned by a person is assessed as in .....

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