TMI Blog2010 (1) TMI 1187X X X X Extracts X X X X X X X X Extracts X X X X ..... st Nov., 2004 declaring income of ₹ 16,96,961. The return was subject to scrutiny assessment under s. 143(3) of the Act whereby the total income was determined at ₹ 17,64,870 after making a disallowance of ₹ 67,879 on account of s. 40A(2)(b) of the Act. The assessment so completed under s. 143(3) on 23rd Oct., 2006 was examined by the CIT under s. 263 of the Act. The CIT issued show-cause notice under s. 263(1) of the Act dt. 20th Feb., 2009 requiring the assessee to explain as to why the assessment order dt. 23rd Oct., 2006 be not treated as erroneous insofar as it is prejudicial to the interests of the Revenue. As per the CIT, the assessee was a shareholder with more than 10 per cent of voting power in M/s Nexo Industries (P) Ltd. (hereinafter referred to as 'the company'). The company had advanced a sum of ₹ 69,49,203 to 'P', a proprietary concern of the assessee. As per the CIT, the provisions of s. 2(22)(e) of the Act were attracted and such advance was assessable in the hands of the assessee as deemed dividend under s. 2(22)(e) of the Act. Accordingly, the assessee was required to show cause as to why the aforesaid assessment order dt. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing power of the company. As per the CIT, all the pre-requisites specified in s. 2(22)(e) of the Act are satisfied so as to assess the amount advanced to the assessee as deemed dividend. Hence, as per the CIT, peak amount of advance to the proprietary concern 'P', was assessable as dividend income in the hands of the assessee under s. 2(22)(e) of the Act. After observing so, the CIT noted that the said issue has not been discussed in the assessment order and therefore, it was a case of incorrect application of law as well as non-application of mind by the AO. Therefore, the CIT held that the assessment order dt. 23rd Oct., 2006 was erroneous, and it has resulted into underassessment of income, which was prejudicial to the interests of the Revenue. In the result, the CIT set aside the assessment order dt. 23rd Oct., 2006 on the limited point and restored it to the file of the AO to be decided afresh after calling for a complete account of the company. 6. Against such a decision of the CIT, the learned counsel for the assessee vehemently argued that the assessment order dt. 23rd Oct., 2006 is neither a case of incorrect application of law nor non-application of mind by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... per cent less than the market value from the company. It was further pointed out that subsequently, due to a breach of the terms of the agreement, the entire business of the assessee has been taken over by the company in subsequent year on 1st Aug., 2007. In any case, the learned counsel contended that complete evidence was furnished before the CIT to show that the aforesaid arrangement was based on business exigencies and there was no element of loan or advance per se so as to attract the provisions of s. 2(22)(e) of the Act. It is contended that the entire material placed by the assessee before the CIT along with the relevant case laws, have been arbitrarily brushed aside. 8. In the course of submissions, learned counsel has relied upon the following decisions : (i) Malabar Industrial Co. Ltd. vs. CIT (2000) 159 CTR (SC) 1 : (2000) 243 ITR 83 (SC); (ii) CIT vs. Gabrial India Ltd. (1993) 114 CTR (Bom) 81 : (1993) 203 ITR 108 (Bom); (iii) Hari Iron Trading Co. vs. CIT (2003) 183 CTR (P H) 228 : (2003) 263 ITR 437 (P H); (iv) CIT vs. Smt. Nirmal Anand (2000) 245 ITR 836(Del). 9. On the other hand, the learned Departmental Representative has defended the action of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to loss of tax. The scheme of the Act is to levy and collect tax in accordance with the provisions of the Act and this task is entrusted to the Revenue. If due to an erroneous order of the ITO, the Revenue is losing tax lawfully payable by a person, it will certainly be prejudicial to the interests of the Revenue. The phrase 'prejudicial to the interests of the Revenue' has to be read in conjunction with an erroneous order passed by the AO. Every loss of revenue as a consequence of an order of the AO, cannot be treated as prejudicial to the interests of the Revenue, for example, when an ITO adopted one of the courses permissible in law and it has resulted in loss of revenue, or where two views are possible and the ITO has taken one view with which the CIT does not agree, it cannot be treated as an erroneous order prejudicial to the interests of the Revenue unless the view taken by the ITO is unsustainable in law. 11. From a perusal of the said judgment, it is evident that in order to exercise jurisdiction under s. 263, the CIT has to satisfy the pre-requisites that the assessment order is erroneous and that the same is prejudicial to the interests of the Revenue. Both t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ount falls for consideration under s. 2(22)(e) of the Act is not relevant since the merits of the dispute are not being adjudicated. It would be sufficient for us, first to observe that as per the material placed on record during the assessment proceedings, the AO made enquiries regarding the nature of advance received by the assessee from the company and the assessee replied to the same by submitting that he was undertaking job work for the company and such advance was being adjusted against the dues for the job work done. The requisite queries raised by the AO and the written reply of the assessee in this regard have been placed in the paper book at pp. 2 to 8. No doubt, the AO has not stated so in the assessment order but the same by itself cannot be construed as a non-application of mind by the AO. It is quite well-settled that while evaluating whether or not the AO has applied his mind, examination has not to be confined to the assessment order but to the entire record available on the file of the AO. The said proposition is supported by the judgment of the Hon'ble Punjab Haryana High Court in the case of Hari Iron Trading Co. (supra). Thus, the conclusion of the CIT tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , 2003 entered between the company and the assessee regarding the advance in question. The assessee had explained that the provisions of s. 2(22)(e) were not attracted in this case. On the basis of the material and the case laws referred therein (which have been briefly noted by us in paras 3 and 4 above) it was contended that the impugned amount does not fall for consideration under s. 2(22)(e) of the Act. Having perused the order of the CIT in the context of the aforesaid submissions set up by the assessee, we find no finding by the CIT. The factual matrix of the transaction and case laws relied upon by the assessee have not been controverted by the CIT in any manner. Without recording any reasons in the context of the position canvassed by the assessee, the CIT, in our view incorrectly came to a conclusion that all the pre-requisites specified in s. 2(22)(e) are satisfied to assess amount of advance as deemed dividend . Moreover, the aforesaid approach of the CIT is contrary to the judgment of the Hon'ble Punjab Haryana High Court in the case of CIT vs. Kanda Rice Mills (1990) 85 CTR (P H) 5 : (1989) 178 ITR 446(P H). On this point also, we find enough force in the pleas ..... X X X X Extracts X X X X X X X X Extracts X X X X
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