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2015 (4) TMI 330 - ITAT MUMBAI

2015 (4) TMI 330 - ITAT MUMBAI - TMI - Revision u/s 263 - three issues were taken up by the CIT, while revising the order of the AO determination of capital gains, computation of income from House Property and treatment of proportionate License fee written off - Held that:- The CIT has not only mentioned as to how the order were erroneous, but has also established, by giving convincing reasons, that it was prejudicial to interest of revenue. Thus, the twin conditions were satisfied. Reasons reco .....

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he available material reached to certain conclusions .It is not a case where two views were possible and the AO had taken one of the possible views. It is also not a case where the CIT has not recorded reasons or has not given a finding that the order of the AO was liable to revisionary provisions on both counts i.e.it was not sustainable legally and it was prejudicial to the interest of revenue. He successfully established that there was non-application of mind as well as non examination of the .....

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er Rajendra, A.M. Challenging the order of CIT-7,Mumbai,passed u/s.263 of the Act,the assessee has raised following grounds of appeal: On the facts and in the circumstances of the case and in law, the learned Commissioner of Income tax has erred in holding that the assessment order dated 15/12/06 passed by Additional CIT was erroneous and prejudicial to the interest of revenue. (i) The learned CIT erred in directing the Assessing Officer to work out the capital gains on sale of property, being 2 .....

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ppreciate that the appellant was not the owner of garages and hence the consideration for garages was rightly reduced from the total sale consideration of the property while arriving at the capital gain/(loss) assessable in the hands of appellant. (iii)(a)The learned CIT erred in holding that the appellant was not justified in reducing unexpired lease rent of ₹ 1,49,12,928/- from the total sale consideration of the property while working out the capital gain/loss from sale of property. (b) .....

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d through independent contract. He failed to appreciate that license fees was given for 11 years and hence each year it was being written off @ 1/1 1 in the books of accounts following Accounting Standards, though no expenditure was claimed as deductible for tax purposes. The learned Commissioner of Income tax erred in directing the AO to modify the computation of house property income so as to exclude loan processing charges of ₹ 15,56,250/- from the interest on the ground that it is not .....

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iness. (ii) He failed to appreciate that the amount paid to Nelco and THDC was in the nature of license fees and the same is spread over a period of 10 years for the purpose of claiming deduction in accordance with the matching concept. (i) He erred in holding that the income being license fees from leased premises was assessable under the head income from other sources. (ii) He failed to appreciate that the appellant is engaged in the business of managing a business centre and therefore license .....

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ard on 14.01.2010 but,at the request of the assessee, the matter was again adjourned to 02.02.2010.On that day assessee again requested for adjournment Accordingly, the assessee was given last opportunity to argue the case and matter was adjourned to 05.04.2010.On that day assessee again requested for adjournment and matter was adjourned to 02.06.2010.After that on several occasions(02.06. 2010, 02.10.2011, 31.03.2011,21.11.2011,09.01.2012,06.02.2012,06.12.2012) the assessee requested for adjour .....

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r could not be argued on that day. In these circumstances, we have been compelled to decide the case taking in to consideration he material available on record. 2.The assessment, for the year under appeal, was made vide order u/s.143(3) dated15.12.2006 by the Assessing Officer(AO)accepting the loss of the assessee at ₹ 8,75,03,000/-,as shown by it in its return. During the relevant year, the assessee had shown income from house property, loss from business and loss from long term capital l .....

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s deliberated upon by the CIT in his revisionary order. The relevant part of the notice is reads as under:- "Perusal of the assessment records revealed that the assessment order u/s .143(3) dated 15.12.2006 passed by the Addl . CIT, Range-7(3) , Mumbai ( incorrectly mentioned as DCIT-7(3) ) , Mumbai was deficient in further following respect and is considered to be erroneous and prejudicial to the interest of revenue : - i ) As per the P & L A/c. filed with the return, license fees rece .....

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license fees from various parties ( including other income) while computing income/ loss from income from business and profession. No reconciliation of the amount shown in P & L a/c. and that in the statement of total income was f i led or even examined by the A. O. I t was not examined as to how the license fee written off has been reduced while working out the income from house property. Fur the r, in the computation of los s from business and profession, proportionate license fees written .....

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profess ion Rs.2,50,36,062 Please reconcile the interest amount claimed at different places and also furnish bas is of such bifurcation. From the ledger a/c. of interest to HDFC loan i t is found that the amounts debited through journal entry on various dates include repayments were principle and interest EMI . I t means that what was claimed as interest included principal amount also. Please furnish necessary clarification in this respect . Secondly, while secured loans of ₹ 17 crores an .....

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own license fees from various parties of Rs .2,23,09,011/ - against which fol lowing expenses have been claimed showing a loss of ₹ 3,33,60,685/ - : - a) Proportionate license fees written off ₹ 2,37,11,188/ - b) Loan processing fees Rs.13,41,472/ - c) Interest on HDFC loan ₹ 2,50,36,062/ - d) Other expenses ₹ 55,80,974/ - Total Rs.5,56,69,696/ - It appears that figures have been taken from different heads of the P & L A/c. However, no reconciliation was filed as the .....

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ces for which the service charge s were being received and why this is not part of sale agreement dated 12.01.2004. v) It is found from the papers filed during the course of hearing that the proper ty was sold by Nelco and THDC being a confirming par ty whereas you were never a part of sale agreement dated 12.1.2004. It is only after the sale that a supplemental agreement was executed on 12.3.2004 whereby you surrendered your claim in the property and you forgo al l your rights in the property f .....

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t records for the relevant period were further perused, while the proceedings u/s.263 were in progress and it was found by the CIT that there were certain other issues in respect of which the AO had either not got the necessary clarification from the assessee or the relevant details were not called for and examined to see as to whether the claim made by the assessee-with reference to different heads of income as per the statement of computation of total income which was filed with the return and .....

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dified. The assessee in its reply stated that the assessee and M/s. Nelco Ltd.(NL)entered into an agreement dated 15.11. 1999 wherein NL leased land owned by it for a period of 11 years, that thereafter it entered into a construction agreement, dated 16.11.1999,with M/s. Tata Housing Development Co. Ltd. (THDC) for a sum of ₹ 25,90,22,500/-,that it sold the 2nd floor flat of building styled as Technopolis Knowledge Park(TKP)on 12.1.2004,that as per the agreement entered into between NL,THD .....

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rking spaces. It was further submitted that the said amount had not been claimed as deduction u/s.48 of the Act, but had only been reduced from the sale price since the agreement was a composite one including the sale of premises as well as the car parking which did not belong to the assessee. Reference was also made to supplementary agreement entered into between assessee and THDC, dated 12.03.2004whereunder net sale consideration of ₹ 26,37,27,127/-(27,60,27,127/-1,23, 00,000) had been t .....

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which the indexed cost of construct ion of ₹ 30,76,30,835/- was reduced and the net figure was further reduced by the cost of land i.e. unexpired lease rent of ₹ 1,49,12,928/- to arrive at the taxable capital gains/loss. 4.In response to further clarification asked in this connection, the assessee produced a title layout of the building TKP, vide letter dated 12.08.2008.The CIT found that the building had five floors of which area of 47095 sq. ft. on the 2nd floor and area of 22104. .....

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he 2nd floor of the building and the proportionate number of the parking spaces in respect of which it would have right, title, benefit and interest along with proportionate undivided share in the common areas and amenities provided on the said properties. With reference to the same, the assessee filed clarification, vide letter dated 12.08.2008,as to what was the proportionate share in the parking spaces and whether they were separate from the garages sold. It was stated that garages meant base .....

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super built up area of 47,095 sq. ft. of the 2nd floor of the building. According to the assessee, the said cost did not include any further cost of open car park. Vide item (iv) of the notice u/s.263 dated 25.09. 2008 the assessee was asked to specify the car parking spaces for which the service charges as per the agreement with the tenants were being received which was being shown as rental income by it. Vide item (v)of the said notice u/s.263 of the Act, it was also pointed out that the 2nd f .....

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CIT held that he was not satisfied with the clarification and the replies given by it, that open parking spaces and covered parking spaces included as part of the sale agreement were not owned by the assessee, that the position was not clear in that respect from the documents which had been filed before the AO at assessment stage and now before him, that the most primary document was the agreement wherein the assessee was granted licensed area for a term of 11years subject to further renewal on .....

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ssary amenities, facilities and services in respect of the same, for the purpose of selling, using or otherwise transferring the same to respective purchasers for commercial use. CIT referred to Clause 3(c) and Clasue 5 of the agreement in this regard. He held that the assessee was entitled to the proportionate number of parking spaces over which it had complete title, that the consideration of ₹ 25,90,22,500/-paid to THDC was the entire consideration payable which meant that it was inclus .....

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pened to the parking spaces which the assessee was entitled to as per the agreement, that the agreement did not distinguish between open car parking spaces/covered car parking spaces, that if the 2nd floor of the building which was entirety owned by the assessee was the subject matter of the sale agreement dated 12.1.2004 and the assessee was not left with any car parking spaces pursuant to the sale agreement then the only presumption was that the share of proportionate number of the parking spa .....

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at the rate of ₹ 3 lakhs each with the total amount at ₹ 123 lakhs, that the basis of the value of ₹ 3 lakhs per garage adopted by the assessee was not provided by it. As regards reducing the value of the land written off amounting to ₹ 1 ,49,12,928/- the CIT did not find the assessee's reply acceptable due to the reason that the amount payable as per the agreement dated 16.11. 1999 to NL was being treated as deferred revenue expenditure by the assessee and proportion .....

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f the said property which would enable to him to effect construction equivalent to 47,095 sq. ft. of super built-up area for 11 years commencing from the date of the agreement. As per Clause 2(a) of the agreement, the assessee as licensee was liable to make payment to NL a sum of ₹ 2,25,96,000/- as license fee for the license and permission granted in the aforesaid respect. Considering the same he held that it was not factually correct to say that the license fee paid was towards leased la .....

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ng out the capital gain/loss from sale of the property, that the assessee was not able to answer satisfactorily as to why it was not a party to sale agreement dated 12.01.2004 when it was owner of the licensed premises and why it had to surrender its rights under a supplemental deed of agreement dated 12.03.2004,that the role of market maker in the joint venture did not in any way affect the assessee's right as owner of the licensed premises and the very fact that the assessee was made to su .....

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and settling for any lesser amount under any arrangement with THDC and NL was only an internal affair and should not affect the taxability of the capital gains on transfer. Accordingly, he held that the assessment order dated 15.12.2006 was erroneous and in so far as it was prejudicial to the interest of revenue. He directed the AO to work out the capital gains adopting the sale consideration at ₹ 27.60 Crores and the cost of the property at ₹ 25,90,22,500/-,subject to allowing benef .....

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e found that apart from the interest paid to HDFC, the assessee had paid loan processing charges of ₹ 28,97,722/- to HDFC. The total amount of interest debited in the P & L A/c. was ₹ 5.53Crores out of which ₹ 2.50 Crores were debited against income from business and profession and the balance amount was adjusted in the computation of House Property income. Scrutiny of the details filed before him showed that the total interest amount as per the P&L a/c. included loan p .....

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the loan was incurred in respect of the property for which the income has been shown under the head 'House Property'. In its reply, dated 14.10.2008,the assessee filed explanation regarding the amount of loan taken from HDFC and treatment of the interest payable in computation of 'House Property' as well as the business income. It was clarified that the License fees being received in respect of the properties which were not owned by the assessee was being shown as business incom .....

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tment of proportionate License fee written off, amounting to ₹ 2,37,11,8881/-.In the show cause notice dated 25.09.2008,while working out the income from business and profession the assessee had written off proportionate license fee of ₹ 2.37Crores.On being asked to explain the transaction,the assessee filed copies of the tripartite agreements entered between THDC,NL and it.Vide letters dated 2.7.2008, 23.10.2008 and 14.10.2008,the assessee made submissions in this regard. It was arg .....

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off of unabsorbed capital loss in the subsequent years. In support of the same, a copy of return for A.Y.2007-08 was enclosed. 8.After perusal of the agreements, the CIT observed that all the agreements were dtd. 01.03.2001except the supplemental agreements each dated 5.03.2001,that same were in respect of some of the premises, that parties to the agreement were NL and THDC, that the subject matter of the agreement was to finance NL and THDC, that the amount paid to NL and THDC was not in the n .....

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xpenditure while working out the income against license fee of leased premises, that the income as License fee from the leased premises was correctly assessable under the head income from other sources as the income was in the nature of rental income only against which expenditure which was exclusively incurred in earning of the said income was al lowable. He held that the queries which were raised as per notice u/s. 263 originally vide letter dated 26.6.2008 and subsequently vide Letter dated 2 .....

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t proceedings, that the office note recorded was also very brief and did not touch upon any of the issues raised, that the copies of the 8 tripartite agreements which were filed before him during the course of this proceedings before him were never filed before the AO, that same were crucial to decide the admissibility of expenses claimed for computation of income under the business head shown by the assessee and accepted by the AO. He held that on account of non application of mind or non exami .....

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ter considering the material available on record. Before us, the Departmental Representative supported the order of the CIT. In our opinion, here, it would be useful to deliberate upon the principles governing the provisions of section 263 of the Act. We can summarise the principles as under: 9.1.The Department has no right to appeal against the order of the AO.It is in these circumstances that power of revision were conferred on the CIT u/s. 263 of the Act with a view to correct the orders of t .....

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invoking the provisions of section 263,where sections 148/154 were applicable, has been held to be invalid by the Hon ble Courts. 9.3.The CIT can exercise the jurisdiction u/s.263 of the Act sumotu. The pre-requisite condition for exercise of such jurisdiction is that the order of the AO is erroneous and prejudicial to the interests of the revenue. The twin conditions enshrined under the provisions are composite and cannot be segregated. Where the order of the AO appears to be erroneous, but is .....

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ction of the CIT. 9.4.There is a distinction between an order being erroneous and a mistake or error committed by the AO. An incorrect assumption of facts or improper application of law would satisfy the requirement of the order being erroneous. The order cannot be branded as erroneous if the CIT is not satisfied with the conclusion arrived by the AO. The order can be brought within the purview of an erroneous order, if it involves an error by deviating from law or upon erroneous application of .....

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the law. 9.6.The word considers applied in the statutory provision involved, signifies a genuine satisfaction of that authority that the order of the AO is erroneous and that the interests of the Revenue are prejudiced thereby. Any exercise of the revisional jurisdiction, bereft of such satisfaction or finding that the order of the AO satisfies twin conditions and is also based on tangible materials on record, is impermissible rendering the resultant order void. 9.7.Initial words of section 263 .....

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Hence, any proceedings in which an order is passed dropping penalty, is very much an order in any proceeding and thus, the order would come under the exercise of revisional jurisdiction of section 263. 9.8.Deciding the issue of justification with regard to revisionary order of the CIT what is to be seen as to whether there was application of mind before allowing the expenditure/deduction .If there was an inquiry ,even inadequate that would not by itself give occasion to the CIT to pass orders u .....

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or proper inference either on the facts disclosed or the weight of the circumstance. 9.9.While the AO is not called upon to write an elaborate judgment giving detailed reasons in respect of each any every disallowance, deduction, etc. ,it is incumbent upon the CIT not to exercise his suomotu revisional powers, unless supported by adequate reasons for doing so. The provisions of section 263 of the Act, when read as a composite whole, make it incumbent upon the CIT before exercising revisional po .....

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roper notice the order of revision has to be treated valid. 9.11.Once the preconditions of invoking provisions of Sec.263 are fulfilled, it is open to the CIT to consider the case on merits and pass a final order. But, in his view, the matter requires some adjudication or enquiry, the matter can be remanded to the AO. Such a remand could be made only after setting out the facts showing existence of both the conditions. 9.12. There are two stages of the revisionary orders i.e. invoking the jurisd .....

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order under that section, the CIT must necessarily and in all cases record final conclusions about the points in controversy before him. It is expected from the CIT that he should record final conclusions, which he thinks proper if he is to settle the assessment finally. But, if he does not settle the assessment finally and prefers to direct the AO to make an order for fresh assessment, it is proper that he does not express any final conclusions and recordes only prima facie conclusions at whic .....

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k the AO to decide whether the order was erroneous. Holding an order erroneous and prejudicial to reveneue is the duty of the CIT and he and only he can decide it. He cannot abduct it or assign the job to someone else. An order passed u/s.263 by the CIT, directing the AO to decide the error of an order or its prejudice to revenue is an invalid order. In other words a matter cannot be remitted for a fresh decision to the AO, u/s.263 of the Act, without a finding that the order is erroneous. In su .....

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to the interests of the revenue and cases where the AO conducts an enquiry but the finding recorded is erroneous and which is also prejudicial to the interests of the revenue. In the latter cases, the CIT has to examine the order or the decision taken by the AO on the merits and then form an opinion on the merits that the order passed by the AO is erroneous and prejudicial to the interests of the revenue. The order of the CIT should discuss as to how and in what manner the enquiry was lacking, w .....

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for a fresh assessment were called for, and must irresistibly lead to the conclusion that the order of the AO failed on both counts. While the AO is not called upon to write an elaborate judgment giving detailed reasons in respect of each and every disallowance or deduction, it is incumbent upon the CIT not to exercise his suomotu revisional powers unless supported by adequate reasons for doing so. In short, the reasons must be such as to show that the enhancement or modification of the assessm .....

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vailable before the AO. In order to protect the interests of the revenue, the CIT is entitled to examine any other records which are available at the time of examination by him and to take into consideration even those events which arose subsequent to the order of assessment. 9.20.If a query was raised during the course of the scrutiny by the AO, which was answered to the satisfaction of the AO, but neither the query nor the answer was reflected in the assessment order, this would not by itself .....

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ference to an issue which is covered by the original order of assessment under section 143(3) and which does not form the subject-matter of the re-assessment, limitation must necessarily begin to run from the order under section 143(3). 9.23(i) An order cannot be termed erroneous unless it is not in accordance with law. If an AO acting in accordance with law makes a certain assessment, it cannot be branded as erroneous by the CIT simply because, according to him, the order should have been writt .....

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CIT does not feel satisfied with the conclusions. But, the decisions by itself is not be enough to vest the CIT with the power of suo motu revision because the first requirement, namely, that the order is erroneous, is absent. Similarly, if an order is erroneous but not prejudicial to the interests of the revenue, then also the power of revision cannot be exercised. Any and every erroneous order cannot be subject-matter of revision because the second requirement also must be fulfilled. 23(iv) Fo .....

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liability or the extent or quantum thereof. He may disagree with the AO with regard to the determination of the amount of tax to be paid. He may also disagree with the AO on matters relating to deductions allowable under the statute .All such situations, as aforesaid, may render the order of the AO wrong or erroneous as commonly understood. Such situations, however, would not be facets of an erroneous decision. Judicial opinion is unanimous that the expression as appearing in section 263 must b .....

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e findings recorded by the CIT, with the finding that the order passed by the AO was prejudicial to the interests of the revenue, then the order of the CIT cannot be set aside on the ground that the two views were possible or probable. It would be incorrect to state as a broad proposition that an order of the AO cannot be erroneous, if the AO has taken one of two possible views. In such cases the order of the AO can erroneous provided the CIT holds and is able to demonstrate that the view taken .....

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to the interests of the revenue unless the view taken by the AO is unsustainable in law. If the CIT arrives at that conclusion, then the order of the CIT cannot be set aside on the ground that the two views were possible or probable. It would be incorrect to state as a broad proposition that an order of the AO cannot be erroneous, if the AO has taken one of two possible views. In such cases the order of the AO can erroneous, provided the CIT holds and is able to demonstrate that the view taken .....

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tion was required or deeper or further scrutiny should be undertaken. In cases where there is inadequate enquiry but not lack of enquiry, the CIT must record a finding that the order/inquiry made is erroneous i.e. that the order of the AO is unsustainable in law. 23(ix) A finding recorded by the CIT that order passed by the AO may be erroneous vitiates the revisionary order. If he has doubts about any transaction, he should examine the aspect himself and give a finding that the order passed by t .....

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dance with the provisions of the Act and this task is entrusted to the revenue. If due to an erroneous order of the AO, the Revenue is losing tax lawfully payable by a person, it will certainly be prejudicial to the interests of the revenue. 24(ii).The expression prejudicial to the interests of the revenue is of wide import and is not confined to loss of tax. But, it means that due to an erroneous order of the AO, Department is losing tax lawfully payable by a person it would be certainly prejud .....

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he assessee, the ITAT should not allow the appeal on merits. In such matters the right and proper course for the Tribunal is to ask the CIT to examine the factual aspects rather than give its own factual finding without there being a factual examination and verification or full and proper rebuttal. 25(ii) The Tribunal, being the second appellate authority, cannot consider the validity of an assessment or reassessment order while considering the appeal filed against an order issued u/s.263 25(iii .....

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ertainly be exercised. 26(i) If a query is raised during the course of scrutiny by the AO, which was answered to the satisfaction of the AO, but neither the query nor the answer were reflected in the assessment order, this would not by itself lead to the conclusion that the order of the AO called for interference and revision. 26(ii) When it comes on record that the AO had made reasonably detailed enquiries, collected relevant material and discussed various facets of the case with the assessee, .....

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of the section 263 proceedings. 26(iv) Where the AO while making an assessment examines the accounts, makes his enquiries, applies his mind to the facts and circumstances of the case and determines the turnover either by accepting the accounts or by making some estimates himself. The CIT, on a perusal of the records, is of the opinion that the estimate made by the officer concerned is on the lower side and left to the CIT he would have estimated the turnover at a higher figure than the one dete .....

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ustification to exercise his revisional power to cancel the assessment and initiate proceedings for assessment against some other assessee who, according to the Department, is liable for the income thereof. 26(vi).In search and seizure cases if the assessee shows lesser income than the admitted income and the AO does not discusses as to how and why the returned income was accepted against the surrendered income his order falls under the category of erroneous and prejudicial to revenue. In such m .....

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ear of commencement of business. So, if the AO allows deduction without deciding the year of commencement of operation and the CIT directs him to pass fresh order to decide the issue, then the order passed by the CIT u/s.263 of the Act is within the jurisdictional limit. Tribunal should not decide such cases on merits in appellate proceedings. 26(viii) If an AO does not apply provision of section 40A(3)and40(a)(ia) in the cases where the assessees pay for purchase of non-agricultural produce in .....

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section 263.Just taking note of the stand of the assessee before him and before the AO and refraining from forming any opinion as to whether the acceptance of the claim by the AO was erroneous or not will not justify passing a revisionary order. 26(x) If an assessee shows taxable and non taxable incomes in his return claiming interest expenditure, but does not show expenditure with respect to the non-taxable income and the AO accepts his claim then the exercise of power u/s. 263 of the Act by th .....

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deduction of payment twice and it was corrected by the CIT it cannot held that such an order is beyond his revisional jurisdiction. Similar objection of the audit party will not in any manner affect his powers, nor the fact that the error could be rectified by the AO or he could have taken resort to reassessment provision. 26(xiii) Without anything more, mere submission of a letter by an assessee to the AO, giving bifurcation of an account does not necessarily mean that proper verification and .....

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sessee. The contentions and issues raised by the assessee have to be dealt with by the CIT who has to examine whether the issue in question was raised before the AO and considered and verified or the course adopted was permissible. 26(xiv) When a circular is issued u/s.119 of the Act by the CBDT and its validity is upheld, it is binding on the AO. If he does not follow such circular and passes assessment order it would amount to making assessment without conducting proper inquiry and investigati .....

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nd directly connected with the business of the undertaking or not then the order passed by him is without application of mind. In such a situation it is a case where both the requirements of section 263 stand fulfilled. 26(xvii) .If the procedure adopted by the AO is not fair and reasonable, then there is nothing wrong in the CIT directing to examine the assessment afresh in exercise of powers u/s.263-e.g. granting of depreciation of ₹ 4 crores by the AO, without verifying whether the purc .....

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s not make an enquiry as expected, that would be a ground for the CIT to interfere with the order passed by the AO u/s. 263 of the Act. In a case where the assessee makes claim with regard to provision of warranty expenses and the AO does not inquires as to whether the assessee satisfies the triple test laid down by the Hon ble Apex court, the CIT can validly revise the order. 10.Now,we would like to decide the case keeping in mind the above mentioned principles. In the Paper book filed by the a .....

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should not be compared. Only on the basis of some observation passed by the Hon ble court with regard to peculiar circumstances of the case it cannot be said that issue is settled in favour of the assessee by a particular decision. In the cases relied upon by the assessee certain principles have been enumerated regarding revisionary powers of the CIT, but that does not ipso facto prove that same are applicable to the facts of the instant case. We find that three issues were taken up by the CIT, .....

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