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Jay Agriculture and Horticulture Pvt. Ltd. and Jay Infrastructure & Properties P. Ltd. Versus Pr. CIT-2, Ahmedabad.

2016 (3) TMI 548 - ITAT AHMEDABAD

Revision u/s 263 - taxability of alleged long term capital gain on sale of shares - DTTA between India and the Sri Lanka. - Held that:- Gains from alienation of the shares of capital stock of the company the property of which consists directly or indirectly principally of immovable property situated in a contracting State may be taxed in that State. The situs of the shares was in Sri Lanka. The Royale Exports Ltd. is a resident of Sri Lanka, and therefore, the transfer of shares of that company .....

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n the hands of the assessee, then, action u/s.263 should not be upheld. In view of the above discussion, we allow the appeal of the assessee and quash the order passed by the ld. Commissioner under section 263 of the Income Tax.

Revision u/s 263 - operation of weighbridge and income therefrom wrongly mentioned as per CIT(A) - as per CIT(A) expenditure is in higher side as compared to income from the operation of weigh-bridge - Held that:- The assessee has placed on record computation .....

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and this aspect has been accepted by the AO without verification. In our opinion, the assessee has placed on record the details. If the logic of the ld.Commissioner is accepted that against a miniscule income, expenses of more than ₹ 4,16,000/- has been claimed by the assessee, then no assessee would ever suffer loss. Certain expenditure are to be given to the assessee, even if in a particular year no business activity was carried out. The assessee has shown operation of weighbridge and i .....

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ICIAL MEMBER: The present two appeals are directed at the instances of the assessees against the orders of the ld.Pr.CIT-2, Ahmedabad dated 11.2.2015 and 17.2.2015 passed on the respective cases of the assessees for the Asstt.Year 2010-2011. 2. Since the legal issue involved in both the appeals is common, therefore, we heard them together and deem it appropriate to dispose of them by this common order. First we take up ITA No.605/Ahd/2015. 3. The grievance of the assessee is that the ld.Commissi .....

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under section 143(3) on 31.10.2012. The ld.AO has accepted the returned income of the assessee. On perusal of the record, the ld.commissioner harboured a belief that the AO did not examine the issues properly, and therefore, he took cognizance under section 263 of the Income Tax Act. He issued show cause notice to the assessee on 18.9.2014. The show cause notice issued by the ld.Commissioner reads as under: OFFICE OF THE COMMISSIONER OF INCOME-TAX, AHMEDABAD-II 1st Floor, Navjeevan Trust Buildin .....

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ed its business during the AY 2010-11 and has only Long Term Capital Gain during the year. The assessment u/s.143(3) of the Act was finalized on 31/10/2012 by the ITO.Wd.4(2), Ahmedabad accepting the returned income at ₹ 9,100/-. 2. A perusal of the case records, shows that : i) In computation of income, assessee computed book profit of ₹ 2,07,15,478/- and tax liability of ₹ 36,33,544/- (including interest). Assessee claimed to have payment made as ₹ 34,00,000/- as advanc .....

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ssessee in the computation of income that income of ₹ 2,17,29,927/- was considered separately. However, it is noticed that such income was not shown/considered separately. iv) It was noticed that assessee has LTCG of ₹ 2,17,29,927/- on account of sale of 6,25,074 shares of Royal Export Limited(REL) of Srilanka back to REL. As LTCG on transfer of shares of listed companies is liable for tax @ 20 percent u/s 112 of the Act, such LTCG on ₹ 2,17,29,927/- is worked out at ₹ 49 .....

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#39;Capital Gains'. However, it is pertinent to mention that the aforesaid clause was inserted subsequent to acquisition of the shares in question and therefore, the tax liability of the Profit from acquisition and sale (through buyback) was to be verified more closely. Other issues related to the same transaction (which is the only revenue generating transaction in its books of a/cs) are listed hereunder : i) Assessee has stated that the equity shares in question were acquired on 31.12.2004 .....

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ncy and the Exchange rate applied by assessee in this regard. v) No inquiry was made to check veracity of assessee's claim w.r.t the date and quantity of acquisition of shares or w.r.t the date and quantity of buyback offer in the company in which assessee claimed to have purchased equity shares, vi) Since the acquisition of shares pertained to foreign company, inquiry ought to have been made w.r.t the source of investment and whether such investment was made with RBI approval and on what te .....

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hereby given an opportunity to represent your case and show cause as to why the assessment order dated 31.10.2012 should not be set aside and income assessable to tax be modified to the extent of under assessment for the year under consideration. You are requested to attend the office of the undersigned on 30.09.2014 at 11 AM either personally or through an Authorised Representative and may also file written submissions, if any, on the said date. Yours faithfully, Sd/- (P.C. MODY) Commissioner o .....

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ure Products Pvt. Ltd. 2 3 Copy of Debit Note for purchase of 2083580 shares of Royal Exports Ltd. from M/s. Jupiter Corporate Services Ltd. by Jay Agriculture & Horticulture Products Pvt. Ltd. 3 4 Copy of letter dated 21-02-2007 for approval of transfer of shares given by Board of Investment of Sri Lanka 4 5 Copy of Bank book of Jay Trading & Investment Services Pvt. Ltd. 5 to 6 6 Copy of share certificate with memorandum of transfer of shares 7&7A Copy of letter of company and Boar .....

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filed by company for buyback of shares to RBI in compliance to FEMA dated 08-07-09 18 13 Copy of abstract of article of DTAA 19&20 14 Copy of computation of income, tax challans and Form no. 26AS 21 to 26 6. After analysis of the record, the ld.Commissioner has held that the AO failed to carry out adequate inquiry, and therefore, the assessment order is erroneous and prejudicial to the interest of the Revenue. Accordingly, the ld.Commissioner has set aside the assessment order with direction .....

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isturbed. But, if there is a total lack of inquiry, only then, the assessment order can be termed as erroneous; (b) Before terming any order as erroneous, the ld.Commissioner was bound to verify facts and circumstances and conduct an inquiry in order to arrive at a firm conclusion, demonstrating the erroneous nature of the assessment order; (c) That as far as the taxability of alleged long term capital gain on sale of shares is concerned, such transaction is covered under Article 13 (4) and (5) .....

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company may be taxed in the contracting State in which they have been issued. 7. Let us examine these fold of submissions raised by the ld.counsel for the assessee. 8. Brief facts of the case are that the assessee was incorporated on 6.6.2006, originally with the name Jay Trading & Investment Services P. Ltd. Thereafter, its name was changed to Jay Agriculture and Horticulture Products Pvt. Ltd. . M/s.Jupiter Corporate Services Ltd. (JCSL) had acquired shares of Royale Exports Ltd. The asse .....

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ddressed a letter to the assessee stating that it has received approval from Board of Investment of Sri Lanka as regards buy-back of 30% shares, according to which, 6,25,074 shares held by the assessee (20,83,580 x 30% = 6,25,074) shall be bought back by Royale Exports Ltd. An agreement dated 12.6.2009 in respect of such buy-back was entered into between the assessee and Royale Exports Ltd. The assessee has sold shares. Remittance letter dated 23.6.2009 was sent by Royale Exports Ltd. through SB .....

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shares sold by assessee work out to ₹ 29,08,205/-, and hence profit on sale of such shares as per the book is ₹ 2,17,29,927/-. The long term capital gain on such shares as per DTAA was taxable in Sri Lanka and not in India. Hence, the assessee was not liable for any capital gain on sale of shares held in Sri Lankan Company. While filing the return of income, the assessee has disclosed all these facts. It offered income at book profit, because, under the regular provision no capital g .....

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T submitted that the assessee has placed on record complete details with regard to the sale of shares of Sri Lankan Company. This was the only transaction in this year. The assessee has not carried out any other business activity. In the computation of income, the assessee has offered taxes on these receipts under MAT provision. The ld. counsel for the assessee took us through computation of income available at page no.37. He, thereafter, he drew our attention towards page no.54 of the paper boo .....

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s. Anil Kumar Sharma, 335 ITR 83 and CIT Vs. Vikas Polymers, 341 ITR 537 (Delhi), the ld. counsel for the assessee contended that inadequacy of inquiry by the AO cannot be a ground for taking action under section 263. 9. With regard to second fold of submissions, he contended that though the ld.Commissioner has harboured a belief that the assessment order is erroneous on the ground that the AO has not conducted any inquiry with regard to the sale of shares of Sri Lankan Company, but the ld.CIT w .....

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regard to his last proposition, the ld.counsel for the assessee drew our attention towards Article 13(4) and (5) of the DTAA between Republic of India and Republic of Sri Lanka. On strength of this Article, he submitted that gain from alienation of stock/shares of the company may be taxed in the contracting State in which they have been issued. Thus, the gain from buy-back of shares of Sri Lankan is taxable in the country in which they have been issued. Had the ld.Commissioner has considered th .....

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nd, the ld.CIT-DR relied upon the order of the CIT and contended that the AO has not carried any inquiry, therefore, CIT was justified in taking cognizance under section 263 of the Income Tax. 12. On our query with regard to the proposition of applicability of DTAA on the transaction and taxability of gains in Sri Lanka, the ld.DR contended that this aspect is also not discernible from the assessment order. 13. We have duly considered rival contentions and gone through the record carefully. Sect .....

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ecessary, pass such order thereon as the circumstances of the case justify, including an order enhancing or modifying the assessment, or cancelling the assessment and directing a fresh assessment. [Explanation.- For the removal of doubts, it is hereby declared that, for the purposes of this sub-section,- (a) an order passed on or before or after the 1st day of June, 1988 by the Assessing Officer shall include- (i) an order of assessment made by the Assistant Commissioner or Deputy Commissioner o .....

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s to have included all records relating to any proceeding under this Act available at the time of examination by the Commissioner; (c) where any order referred to in this sub-section and passed by the Assessing Officer had been the subject matter of any appeal filed on or before or after the 1st day of June, 1988, the powers of the Commissioner under this sub-section shall extend and shall be deemed always to have extended to such matters as had not been considered and decided in such appeal. (2 .....

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me Court. Explanation.- In computing the period of limitation for the purposes of sub-section (2), the time taken in giving an opportunity to the assessee to be reheard under the proviso to section 129 and any period during which any proceeding under this section is stayed by an order or injunction of any court shall be excluded. 14. On a bare perusal of the sub section-1 would reveal that powers of revision granted by section 263 to the learned Commissioner have four compartments. In the first .....

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e order passed by the Assessing Officer, he formed an opinion that such an order is erroneous in so far as it is prejudicial to the interests of the Revenue. By this stage the learned Commissioner was not required the assistance of the assessee. Thereafter the third stage would come. The learned Commissioner would issue a show cause notice pointing out the reasons for the formation of his belief that action u/s 263 is required on a particular order of the Assessing Officer. At this stage the opp .....

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entatives, we deem it pertinent to take note of the fundamental tests propounded in various judgments relevant for judging the action of the CIT taken u/s 263. The ITAT in the case of Mrs. Khatiza S. Oomerbhoy Vs. ITO, Mumbai, 101 TTJ 1095, analyzed in detail various authoritative pronouncements including the decision of Hon ble Supreme Court in the case of Malabar Industries 243 ITR 83 and has propounded the following broader principle to judge the action of CIT taken under section 263. (i) The .....

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t application of mind, such order will fall under the category of erroneous order. (v) Every loss of revenue cannot be treated as prejudicial to the interests of the Revenue and if the AO has adopted one of the courses permissible under law or where two views are possible and the AO has taken one view with which the CIT does not agree. If cannot be treated as an erroneous order, unless the view taken by the AO is unsustainable under law (vi) If while making the assessment, the AO examines the ac .....

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e conclusion. (viii) The CIT, before exercising his jurisdiction under s. 263 must have material on record to arrive at a satisfaction. (ix) If the AO has made enquiries during the course of assessment proceedings on the relevant issues and the assessee has given detailed explanation by a letter in writing and the AO allows the claim on being satisfied with the explanation of the assessee, the decision of the AO cannot be held to be erroneous simply because in his order he does not make an elabo .....

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enquiry, then the assessment order can be branded as erroneous. The following observations of the Hon'ble Delhi High Court are worth to note: 12. We have considered the rival submissions of the counsel on the other side and have gone through the records. The first issue that arises for our consideration is about the exercise of power by the Commissioner of Income-tax under section 263 of the Income-tax Act. As noted above, the submission of learned counsel for the revenue was that while pas .....

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the Assessing Officer in the assessment order is not required to give detailed reason in respect of each and every item of deduction, etc. Therefore, one has to see from the record as to whether there was application of mind before allowing the expenditure in question as revenue expenditure. Learned counsel for the assessee is right in his submission that one has to keep in mind the distinction between lack of inquiry and inadequate inquiry . If there was any inquiry, even inadequate, that woul .....

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ad as under:- … 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 assessee in his return. The reason is obvious. The position and function of the Income-tax Officer is very diffident from that of a civil c .....

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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 made such an inquiry prudent that the word erroneous in section 263 includes the failure to make such an enquiry. The order becomes erroneous because such an inquiry has not been made and not because there is anything wrong with the order if all the facts stated the .....

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DABAD. Sir/Madam, Sub: Scrutiny assessment for the A.Y.2010-11. Ref: (i) Return of income filed in your own case for A.Y.2010-11 (ii) Notice u/s.143(2) of the IT Act, dated 5.9.2011. Kindly refer to the above. 2. Please find herewith the formal/statutory notice u/s 142(1) of the IT Act 1961, calling for details enclosed with this letter. You are requested to submit the following details in respect of your assessment for A.Y. 2010-11 relevant to F.Y. 2009-10. (a) Copy of Capital Account, Balance .....

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orandum/Article of Association. (h) Complete details of addresses of all the business premises occupied by the assessee, viz. office/factory /godown/warehousing premises. Explain whether these premises are owned by the assessee or taken on rent. If the same is taken on rent, then kindly submit for each rented premises the details of rent paid and TDS deducted thereon, details of the land lord and submit a copy of rental agreement, if any. 3. The case is fixed for hearing on 22.8.2012 at 1.00, PM .....

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ble on the record. Yours faithfully, Sd/- ITO 18. During the course of the assessment proceedings, the assessee further submitted the details vide letter dated 22.10.2012. It reads as under: Pramodkumar Dad & Associates CHARTERED ACCOUNTANTS "KAISER" 110-112, Ashwamegh Avenue Nr. Mithakhali Under Bridge Navrangpura, AHMEDABAD 380 009 Phone No. (O) 26466027, Fax: (079) 26447906 Mobile: 98240-31207 Email:capkdassociates@yahoo.co.in - 22-10-2012 To, The Income Tax Officer Ward 4(2), 1 .....

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on 19-06-2009. The profits on buyback of these shares are in the nature of LTCG &the working of the same are as under: No. of shares buyback Sales Price Purchas e Price Profit Remark 625074 246381 32 290820 5 217299 27 Copy of Bank Statement furnished in Exb-1 The above details, information and evidences are filed for your kind consideration. Kindly do the needful and oblige. Thanking you, Yours faithfully, SD/- CA PRAMOD DAD) 19. Apart from the above, the assessee has filed computation of .....

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note at this stage. It reads as under: 18. This distinction must be kept in mind by the Commissioner of Income-tax while exercising jurisdiction under Section 263 of the Act and in the absence of the finding that the order is erroneous and prejudicial to the interest of Revenue, exercise of jurisdiction under the said section is not sustainable. In most cases of alleged inadequate investigation , it will be difficult to hold that the order of the Assessing Officer, who had conducted enquiries a .....

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roneous because on remit, the Assessing Officer may decide that the order is erroneous. Therefore CIT must after recording reasons hold that the order is erroneous. The jurisdictional precondition stipulated is that the CIT must come to the conclusion that the order is erroneous and is unsustainable in law. We may notice that the material which the CIT can rely includes not only the record as it stands at the time when the order in question was passed by the Assessing Officer but also the record .....

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assessee and thereafter accepted. It is the prerogative of the AO what to discuss in the assessment order and the assessee cannot force the AO to draft the assessment order in a particular manner. The assessment order cannot be termed erroneous as well as prejudicial to the interest of the Revenue on the ground that inquiry was not conducted by the AO. 21. Let us examine the last fold of submission raised by the ld. counsel for the assessee. It is pertinent to take note of Article 13 (4) and (5) .....

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Article would indicate that gains from alienation of the shares of capital stock of the company the property of which consists directly or indirectly principally of immovable property situated in a contracting State may be taxed in that State. The situs of the shares was in Sri Lanka. The Royale Exports Ltd. is a resident of Sri Lanka, and therefore, the transfer of shares of that company held by the assessee company in India would be taxable in Sri Lanka and if gain is to be taxed in Sri Lanka .....

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read as under: 2. The assessee had purchased a site at Rupena Agrahara in the financial year 1995-96 for a consideration of ₹ 3,46,520/-. He started construction of the building in April 1999. He agreed to sell the said property under the agreement dated 9-9-2000 in unfinished condition. Under the terms of agreement, the assessee should complete the construction of the building before execution of sale deed with the help of the funds provided by the purchaser. On 22-11-2000 the assessee ex .....

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d fully towards purchase of another property at Koramangala. The Commissioner of Income Tax issued notice under Section 263 of the Act stating that the Assessing Officer was not justified in treating the sale as long term capital gain and according to him, it should have been treated as short term capital gain. The assessee filed his reply to the show cause notice. Thereafter, the Commissioner proceeded to pass the order setting aside the order of assessment on the ground that it is prejudicial .....

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terest of the revenue. Therefore, set aside the order of the revisional authority and granted relief to the assessee. 9. The Hon'ble High Court while upholding the order of the ITAT has observed as under: Even if it is erroneous, unless the said erroneous order is prejudicial to the interest of the Revenue, the Commissioner could not have exercised the said power. From the admitted material on record, the amount that is ordered to be refunded to the assessee is not the amount, which is lawfu .....

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the assessment year he has put forth the claim. The said amount was not a lawful amount to the Government. It was an amount which should have been refunded to the assessee. Therefore, the condition precedent for exercising the revisional power under Section 263 of the Act is that the order under revision should not only be erroneous, but such erroneous order should result in prejudice to the interest of the revenue. Mere error would not confer jurisdiction to exercise revisional power under Sect .....

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ion. This is not the way, the revisional authority should exercise their power under Section 263 of the Act. The order of revisional authority should indicate the error committed by the Assessing Authority and consequential prejudice caused to the revenue because of the erroneous order. Unless these two conditions exist, the revisional authority does not get jurisdiction to pass any order under Section 263 of the Act. Once these two conditions are set out in the order, then it is open to the rev .....

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ty, certainly there is no iota of evidence to show how it is prejudicial to the interest of the revenue. On the contrary, in the reply to the notice, the assessee had filed a statement. Even if the assessment is to be made separately for the land on long term basis and to the building on short term basis, the assessee is not liable to pay any tax for the building. The assessee has demonstrated that in no event the order passed by the Assessing Officer is prejudicial to the interest of the revenu .....

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the order was not prejudicial. Therefore, the order passed by the revisional authority is illegal and rightly it has been set aside. In the light of what we have stated above, the substantial question of law is answered in favour of the assessee and against the revenue. The Hon'ble High Court has held that fulfillment of twin condition is must i.e. assessment order should be erroneous and it should cause a prejudice to the Revenue. If any one condition is lacking, then action u/s 263 would n .....

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we allow the appeal of the assessee and quash the order passed by the ld. Commissioner under section 263 of the Income Tax. 24. Now we take up the ITA No.606/Ahd/2015. In this case, the assessee has filed its return of income on 12.10.2010 declaring total income at ₹ 6,10,690/-. The case of the assessee was selected for scrutiny assessment and assessment order was passed under section 143(3) on 31.10.2012. The ld.AO has accepted the income disclosed by the assessee. After perusal of the r .....

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Ambuja Tower, Opp. Memnagar Station Vijay Char Rasta Navrangpura Ahmedabad. Sir, Sub : Notice u/s 263 of the I. T. Act 1961 for A.Y. 2010-11 PAN: AABCJ6891L Kindly refer to the above 1. The assessment u/s 143(3) of the IT Act was finalized on 31/10/2012 by the ITO, Ward-2(1)(2), Ahmedabad, by accepting the returned income as assessed income at ₹ 6,10,690/- 2. On verification of the records it has been observed that the Company was incorporated with the object of construction and acquiring .....

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377; 3045/-, income should have assessed at ₹ 11,18,157/-. But, the same was assessed at ₹ 6,10,690/-. The expenditure debited against rent income by assessee company were required to be capitalized as prior period expenditure as the company was incorporated with the object of construction and acquiring and its related incidental and ancillary activities. 3. The A.O. has neither called for any explanation on above issues nor furnished by you during the course of assessment proceeding .....

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sent your case and show cause as to why the Assessment order u/s 143(3) dtd. 31/10/2012 should not be set aside and income assessable to tax be modified to the extent of wrong claim of expenses claimed against the income from house property in profit and loss account. The hearing is fixed on 19.12.14 at 11.00 AM, in the office of the undersigned either personally or through an Authorized Representative and may also file written submissions, if any. on the said date. 25. With the assistance of th .....

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GPRUA, AHMEDABAD. Sir/Madam, Sub: Scrutiny assessment for the A.Y.2010-11. Ref: (i) Return of income filed in your own case for A.Y.2010-11 (ii) Notice u/s.143(2) of the IT Act, dated 5.9.2011. Kindly refer to the above. 2. Please find herewith the formal/statutory notice u/s 142(1) of the IT Act 1961, calling for details enclosed with this letter. You are requested to submit the following details in respect of your assessment for A.Y. 2010-11 relevant to F.Y. 2009-10. (a) Copy of Capital Accoun .....

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Copy of Memorandum/Article of Association. (h) Complete details of addresses of all the business premises occupied by the assessee, viz. office/factory /godown/warehousing premises. Explain whether these premises are owned by the assessee or taken on rent. If the same is taken on rent, then kindly submit for each rented premises the details of rent paid and TDS deducted thereon, details of the land lord and submit a copy of rental agreement, if any. 3. The case is fixed for hearing on 23.8.2012 .....

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