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Shri Vinod Agarwal, Shri Shyam Sundar Agarwal, Shri Ram Naresh Agarwal And Shri Pawan Kumar Agarwal Versus Pr. C.I.T. Central, Kolkata-2, Kolkata

2018 (1) TMI 241 - ITAT KOLKATA

Revision u/s 263 - Exemption u/s 10(2A) denial - Held that:- We are of the view that where an enquiry is conducted by the AO and he is satisfied with a reply given on a query raised, then the CIT cannot intervene through revision for coming to a conclusion that the assessment order passed by the AO was erroneous and prejudicial to the interests of the Revenue for lack of or inadequate enquiry. The CIT in the impugned order has merely pointed out that the Assessee has claimed exemption u/s.10(2A) .....

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he AO ought to have made and which he failed to make. - In the decision of the Hon’ble Bombay High Court in the case of CIT Vs. Gabriel (1993 (4) TMI 55 - BOMBAY High Court) has been laid down that the consideration of the Commissioner as to whether an order is erroneous insofar as it is prejudicial to the interests of the Revenue, must be based on materials on the record of the proceedings called for by him. If there are no materials on record on the basis of which it can be said that the C .....

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ticular stage and that lapse of time must induce repose in and set at rest judicial and quasi-judicial controversies as it must in other spheres of human activity. The above decision is applicable to the facts of the present case. We therefore hold that orders u/s.263 of the Act cannot be sustained as the conditions for exercise of jurisdiction under the said provisions are absent in the present case. We therefore quash the impugned orders u/s.263 of the Act - Decided in favour of assessee. - I. .....

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d arises out of the same facts and circumstances. These appeals were heard together. We deem it convenient to pass a common order. 3. There is a delay of 93 days in filing these appeals. It has been explained in an affidavit filed by the four assesses in these appeals that their tax matters were being looked after by one Shri Mukesh Khaitan, ACA. For A.Y.2013-14 assessment orders were passed on 30.03.2015 in the case of all the assesses. Subsequently on 16.09.2016 all the assesses received a sho .....

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er the order for necessary suggestions to Shri Mukesh Khaitan, ACA for further course of action. It appears that Shri Mukesh Khaitan did not seek any legal opinion for filing the appeal against the orders u/s 263 dated 21.03.2017. In the meantime the assessees received a notice from the AO u/s 142(1) of the Act dated 30.03.2017 for framing de novo assessments pursuant to the impugned order u/s 263 of the Act dated 21.03.2017. Thereafter the assessees themselves contacted a senior lawyer, who opi .....

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ed the present appeals on taking an opinion from a senior lawyer, the delay in filing the appeals is not deliberate and was due to unavoidable reasons. It has been mentioned that there is no malafide intention behind not filing the appeals within the prescribed time. It has also been mentioned that the assessees will be put to serious stress if the delay is not condoned. 4. The ld. Counsel for the assessee reiterated the facts as contained in the affidavit filed by the assessee and further place .....

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-that being the life-purpose for the existence of the institution of Courts. It is common knowledge that this Court has been making a justifiably liberal approach in matters instituted in this Court. But the message does not appear to have percolated down to all the other Courts in the hierarchy. And such a liberal approach is adopted on principle as it is realized that:- 1. Ordinarily a litigant does not stand to benefit by lodging an appeal late. 2. Refusing to condone delay can result in a me .....

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l considerations are pitted against each other, cause of substantial justice deserves to be preferred for the other side cannot claim to have vested right in injustice being done because of a non-deliberate delay. 5. There is no presumption that delay is occasioned deliberately, or on account of culpable negligence, or on account of mala fides. A litigant does not stand to benefit by resorting to delay. In fact he runs a serious risk. 6. It must be grasped that judiciary is respected not on acco .....

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s appeal papers. The appeal was filed by the assessee after getting a letter from the Tax Recovery Officer. The explanation for the delay in filing the appeal as to the act of the Chartered Accountant misplacing the appeal papers was held to be a sufficient cause for the delay in filing the appeal. 6. The ld. DR opposed the prayer of the assesee for condonation of delay. It was submitted by him that the reasons given in the affidavit for condonation of delay will not constitute a reasonable and .....

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17 a notice u/s 142 (1) of the Act was issued by the AO pursuant to the directions contained in the impugned orders passed u/s 263 of the Act to do a denovo assessments. The assessments pursuant to the directions u/s 263 of the Act were concluded by the AO on 07.08.2017. On 14.08.2017 the assessees received the said assessment orders and thereafter contacted a senior advocate and according to his opinion the appeals have been fled. The sequence of events clearly demonstrates that the assessees w .....

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r appeals are individuals. There was a search and seizure operation carried out by the revenue under the provision of section 132 of the Act on 10.05.2012 against the assessees and various business concerns of Srijan Group at various premises at Kolkata. Srijan Group is mainly engaged in real estate, construction and real estate marketing. All the Assessees in these appeals were also searched on 10.05.2012. 9. For AY 2013-14, the Asssessees filed their returns of Income in which each of the Asse .....

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poses of this clause, the share of a partner in the total income of a firm separately assessed as such shall, notwithstanding anything contained in any other law, be an amount which bears to the total income of the firm the same proportion as the amount of his share in the profits of the firm in accordance with the partnership deed bears to such profits; 10. In the course of assessment proceedings for AY 2013-14, the AO, in the case of Shri Vinod Agarwal, issued a notice u/s 142(1) of the Act da .....

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year and a certified copy of partnership deed. 11. In reply to the aforesaid notice the assessee gave several details. The facts with regard to the assessee becoming a partner of the partnership firm M/s. Avantika Advisory Services LLP was also given by the Assessee. M/s. Avantika Advisory Services LLP was a limited liability partnership(LLP). It had four partners namely Active Nirman Pvt. Ltd, Finestar Consultancy Pvt. Ltd., Sumangal Vintrade Pvt. Ltd and Timely Commercial Pvt. Ltd. The partne .....

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t sharing ratio was as follows :- 3. PARTNERS CONTRIBUTION AND PROFIT SHARING BETWEEN THE PARTNERS The contribution in the LLP shall be ₹ 10,00,000/- (Rupees Ten Lacs only) and it may be brought in by the Partners as cash/moneys worth of any property, rights or services agreed to between the LLP and any Partner in proportion as mutually agreed unanimously by the partners. The contribution may be increased or reduced at any time and from time to time in the same way. The partners of the LLP .....

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P agreement that loss upto 31.2.2012will be borne only by the existing partners and the new partners shall not be liable for such loss. Clause-5 referred to the above reads as follows : 5. INTERIM ACCOUNTS The Existing Partners shall finalize Accounts from the beginning of the financial year to 31st December, 2012 i.e. 9 months from 01.04.2012 to 31.12.2012. The loss upto 31.12.2012 should be debited in the Accounts of the Existing Partners. The new partners shall not be responsible for any Loss .....

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ement in the ratio of 24% each in favour of the new partners .i.e. Assessees in thee appeals and 1% each in the account of the existing partners. 14. As far as the partnership firm M/s. Avantika Advisory Services LLP is concerned for the previous year relevant to A.Y.2013-14 it filed the return of income declaring the total income of ₹ 3,88,780/-. As we have already seen that the firm incurred a loss of ₹ 20,17,79,738/- between 01.04.2012 and 31.12.2013 and earned a profit of ₹ .....

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for this loss. As far as the profit from 01.01.2013 to 31.03.2013 is concerned that was distributed and credited in the partners s capital Account (existing partners as well as new/incoming Partners) as per the profit sharing ratio mentioned in clause-3 in the supplementary LLP agreement dated 01.01.2013. The share of each of the new partners in the profits so credited in their capital account was a sum of ₹ 4,84,89,051/-. This was claimed by each of the new partners who are the 4 Assessee .....

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r there is no reference to the claim of the assessees for exemption u/s 10(2A) of the Act. There is however a reference in these orders to the notice u/s 142(1) of the Act dated 21.03.2015 issued by the AO and a reference to the receipt of replies to the queries raised in the notice. There is an observation in the orders of assessment reply has been submitted, perused and placed on record. The AO has also observed that in response to Shri Mukesh Khaitan, AR of the assessee appeared from time to .....

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2016. The principal contention of the Pr.CIT in the show cause notice was as follows :- On analysis of assessment records, it is observed that the assessee became partner of Avantika Advisory Services LLP (PAN:AASFA3815F) on 01.01.2013 vide supplemental LLP agreement dated 01.01.2013. As per the supplemental, LLP agreement (clause 3), the partners of the LLP were entitled to share of Profit and Losses in definite proportions and assessee's share of Profit and Loss was 24%. As per the terms o .....

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10(2A) which includes share of profit of ₹ 4,84,89,051/- from Avantika Advisory Services LLP for A.Y. 2013-14 and it was subsequently allowed at the time of assessment. But as per the provisions of section 10(2A) of the Act, the assessee is entitled for exemption of ₹ 93,355/- being 24% of ₹ 3,88,982/- ₹ 3,88,982/- is profit before tax of Avantika Advisory Services LLP for A. Y. 2013-14. Therefore allowing exemption of ₹ 4,84,89,051/- resulted in underassessment of .....

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c.263 of the Income Tax Act. 18. In reply to the aforesaid show cause notice the assessee submitted that Sec.10(2A) of the Act clearly specifies that the total income of the firm needs to be distributed among the partners strictly and in conformity with the profit sharing ratio as defined in the partnership deed/LLP deed. The object of sub-section (2A) of Section 10 is to avoid double taxation vis-a-vis, the profits of the firm, which is distributed in the hands of the partners. It does not mean .....

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are of a partner in the profits of the firm is exempt u/s l0(2A) of the Act and such exemption is not restricted to amounts which is taxable in the hands of the partnership firm's hands but also includes exempt income in the hands of the firm. The Assessees also drew attention of the CIT to circular No.8/2014 dated 31-03-2014 issued by the CBDT on the provisions of section 10(2A) of the Act which clarified that 'total income' of the firm for sub section (2A) of section 10 of the Act, .....

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x in the hands of such partners, even if the income chargeable to tax becomes NIL in the hands of the firm on account of any exemption or deduction as per the provisions of the Act. It was submitted that the above clarification in the Circular implies that the share of profit in the hands of the partners is independent of the profits of the firm which is finally distributed among the partners. Even if the income of the firm chargeable to tax becomes NIL on account of exemption/deduction, it does .....

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1-04-2012 to 31-12-2012 amounting to ₹ 20,17,79,738/-, and b. Profits for the period 01-01-2013 to 31-03-2013 amounting to ₹ 20,20,37,712/- Rs, 2,57,976/- It was argued that as per the terms of the supplementary LLP agreement dated 01-01- 2013, losses for the period 01-04-2012 to 31-12-2012 amounting to ₹ 20,17,79,738/- was distributed to the existing partners of the LLP as per the predetermined ratio and the profits for the period 01-01-2013 to 31-03-2013 amounting to ₹ .....

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ms of the partnership deed. It was submitted that there was no error in the order of the AO allowing exemption u/s.10(2A) of the Act as claimed by the Assessee and therefore, the proceeding u1s.263 of the Act, may kindly be dropped. 19. The Pr.CIT however did not deal with the above submissions in the impugned order. He proceeded on a totally different basis in holding that the order of the AO was erroneous and prejudicial to the interest of the revenue by holding that the AO before concluding t .....

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interest of revenue for the reason that the applicability or section 10(2A) with respect to the exemption or ₹ 48642696/- u/s 10(2A) claimed by the assessee which included share of profit of ₹ 48489051/- from Avantika Advisory Services LLP for AY 2013-14 was not examined by the AO at the time of assessment. Record reveals that M/s. Avantika Advisory Services, LLP filed its return of income for the AY 2013-14 on 25.07.2013 declaring total income of ₹ 388780/- and tax paid there .....

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ns specified in sec. 263 of the Act is satisfied. viz. the assessment order was erroneous and it was prejudicial to the interest of the revenue, Consequently. in exercise of the jurisdiction conferred by section 263 of the Act. the said order of assessment dated 30.03.2015 for A. Y, 2013-14 is set aside on the above mentioned specific point with a direction to the A.O. to make necessary examination on the above issues and directed to pass a fresh assessment order and re-compute the assessee' .....

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the provisions in the following words: 48.2 The share of the partner in the income of the firm will not be included in computing his total income [section 10(2A)]. However, interest, salary, bonus, commission or any other remuneration allowed by the firm to a partner will be liable to be taxed as business income in the partner's hand, [section 2(24)( ve) and section 28(v)]. An Explanation has been added to the newly inserted clause (2A) of section 10 to make it clear that the remuneration or .....

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ty distinct from its partners) and that the Partners are not liable to tax in respect of the share of income of the firm. He also made a reference to Circular No.8/2014, dt.31.03.2014 issued with respect to the interpretation of provisions of Section 10(2A). The relevant portion of the said circular has already been set out in the earlier part of this order and is not being repeated. It was submitted that it is not the requirement for applicability of Sec.l0(2A) or its Explanation that the share .....

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is in line with the main section, so as to promote the object of that section. Sometimes, an explanation is added to include something within or to exclude something from the ambit of the main enactment or the connotation of some word occurring in it. An explanation, normally, should be read so as to harmonise with and clear up any ambiguity in the main section and should not be so construed as to widen the ambit of the section. It is also possible that an explanation may have been added in a d .....

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% of ₹ 20,20,377,12 (being of ₹ 48489051/-) that shall rightly be eligible for exemption - as against computing profit sharing percentage from the gross profit shown at the end of the F.Y. (that comprises of both profit and loss). It was submitted that the claim of the Assessees is in accordance with law and only after considering his total gross income from various sources including his share in the profits of the firm (which are to be excluded from the gross income vide Sec.l0(2A) .....

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Hon ble Delhi High Court in the case of CIT. Delhi IV v. International Travel House, [2010] 194 taxman 324 wherein the Hon ble Delhi High Court on exercise of powers u/s.263 of the Act held as follows: 13. It has to be kept in mind that while exercising power under section 263 of the Act, the Commissioner has to be satisfied that the order is prejudicial to the interest of the revenue and there are materials available on record which require the Commissioner to satisfy him in a prima facie mann .....

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He has been conferred with a quasi-judicial power and the same is hedged with limitation and, therefore, it has to be exercised within the parameters of the provision. When the Commissioner is himself not able to form an opinion, he cannot direct another inquiry by the Assessing Officer under section 263 of the Act. In this context, we may refer to the decision in Gabriel India Ltd. 's case (supra) wherein the Commissioner, after scrutiny of the order of the Income-tax Officer, found that t .....

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b-section (1) of section 263, it is clear that the power of suo motu revision can be exercised by the Commissioner only if, on examination of the records of any proceedings under this Act, he considers that any order passed therein by the Income- tax Officer is erroneous insofar as it is prejudicial to the interests of the Revenue . It is not an arbitrary or unchartered power. It can be exercised only on fulfilment of the requirements laid down in sub-section (l). The consideration of the Commis .....

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fishing and roving enquiries in matters or orders which are already concluded. Such action will be against the well-accepted policy of law that there must be a point of finality in all legal proceedings, that stale issues should not be reactivated beyond a particular stage and that lapse of time must induce repose in and set at rest judicial and quasijudicial controversies as it must in other spheres of human activity. 23. The ld. DR submitted that the AO has not applied his mind to the issue wh .....

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this issue when he completed the Assessment. He brought our attention to the fact that the facts per se reflected rather unusual happenings, viz., the firm earning a loss of ₹ 20 corres in the first three quarters and making a profit of ₹ 20 crores in the last quarter, when new persons are inducted. These circumstances ought to have prompted him to make proper and adequate enquiries. It was submitted by him that the AO is both an investigator and adjudicator. He drew our attention to .....

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ity of the assessee to exempt u/s10(2A) of the Act a sum of ₹ 4,84,89,051/- the ld. Counsel submitted that the CBDT Circular No.8/2014 has been cited by the assessee totally out of context. In this regard he drew our attention to the fact that the said circular was issued in the context of deduction in Chapter-VIA to a partnership firm and exemption in Chapter-III to the income of a partnership firm. The Partnership firm could receive certain exempt income and these are not shown as part o .....

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/s 10(34)of the Act and in that context the Hon ble Karnataka High Court held that exempt income cannot be taxed in the hands of the partners. He laid emphasis on the fact that section 10(2A) of the Act clearly makes a reference only to total income of the firm (in the main section as well as Explanation to section 10(2A) of the Act). He also submitted that the purpose of section 10(2A) of the Act is that the same income should not be taxed twice. It was submitted by him that in the case of the .....

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period from 1.1.2013 to 31.3.2013 of ₹ 20,20,37,712 which is the share of profits credited in his capital account with the firm or the sum of ₹ 93,355 being 24% of the total income of the firm declared in the return of income by the firm for the relevant AY 2013-14. Section 10 of the Act deals with incomes which is not included in the total income. Subsection (2A) to section 10 of the Act reads as follows: in the case of a person being a partner of a firm which is separately assesse .....

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of a Partnership firm is his share in the total income of the firm . Explanation to Sec.10(2A) of the Act makes it clear that the share referred to in the Section is share in total income . Total income has been defined in Sec.2(45) of the Act, as follows: (45) total income means the total amount of income referred to in section 5, computed in the manner laid down in this Act Chapter-II of the Act, from section 4 to 9 deal with Basis of Charge. Chapter-III of the Act, deals with income which do .....

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income of other persons, to 65 of the Act. Chapter-VI (containing sec. 66 to 80) then lays down provisions regarding aggregation of income and set off or carry forward of loss. Section 66 reads as under:- Total income - in computing the total income of an assessee, there shall be included all income on which no income-tax is payable under Chapter VII. The provisions of section 66 are not applicable to incomes which are absolutely exempt from tax as per Section 10, Section 11 etc., falling under .....

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sessee. Sec. 2 (45) defines total income to mean total amount of income referred to in Sec.5, computed in the manner laid down in this Act. An income in order to come within the purview of that definition must satisfy two conditions. Firstly, it must comprise the total amount of income, profits and gains. Secondly, it must be computed in the manner laid down in the Act . The sum of ₹ 3,88,982 is the total income of the firm computed in the manner laid down in the Act and only on this sum t .....

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the firm for sub section (2A) of section 10 of the Act, it has been claried that Sec.10(2A) of the Act as interpreted contextually, includes income which is exempt or deductible under various provisions of the Act. In particular it has been clarified by the CBDT in the said Circular that the income of a firm is to be taxed in the hands of the firm only and the same can under no circumstances be taxed in the hands of its partners. It has further been clarified in the said Circular that the entir .....

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s account in the firm in the present case. The above clarification in the Circular implies that the share of profit in the hands of the partners is independent of the profits of the firm which is finally distributed among the partners. Even if the income of the firm chargeable to tax becomes NIL on account of exemption/deduction, it does not mean that the income before claiming exemption will be taxed in the hands of the partners. 26. Therefore there are two views possible on the issue as to whe .....

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e firm in the capital account of the partners, even though they are not declared by the firm in their return of income. 27. As pointed out by the Supreme Court in Malabar Industrial Co. s case (supra), the prerequisite to the exercise of jurisdiction by the Commissioner suo motu under it, is that the order of the Income-tax Officer is erroneous insofar as it is prejudicial to the interests of the Revenue. The Commissioner has to be satisfied of twin conditions, namely, (i) the order of the Asses .....

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fficer, it is only when an order is erroneous that the section will be attracted. An incorrect assumption of facts or an incorrect application of law will satisfy the requirement of the order being erroneous. In the same category fall orders passed without applying the principles of natural justice or without application of mind. The phrase prejudicial to the interests of the Revenue is not an expression of art and is not defined in the Act. Understood in its ordinary meaning it is of wide impor .....

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n one view with which the Commissioner does not agree, it cannot be treated as an erroneous order prejudicial to the interests of the Revenue, unless the view taken by the Income-tax Officer is unsustainable in law. 28. The Hon ble Bombay High Court in the case of Gabriel India Ltd. (supra) has held that the power of suo motu revision under sub-s. (1) of s. 263 is in the nature of supervisory jurisdiction and the same can be exercised only if the circumstances specified therein exist. Two circum .....

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d as erroneous by the Commissioner simply because according to him the order should have been written more elaborately. This section does not visualise a case of substitution of judgment of the Commissioner for that of the ITO, who passed the order, unless the decision is held to be erroneous. 29. The AO has adopted one course permissible in law and therefore jurisdiction u/s.263 of the Act cannot be exercised merely because the CIT does not agree with the view of the AO. 30. We however find tha .....

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,95,696/- (Rs. 4.84,89,051/- ₹ 93.355/-). In the impugned order the CIT did not consider the correctness or otherwise of the above issue but proceeded to exercise jurisdiction u/s.263 of the Act for the reason that the AO, while completing the Assessment did not make proper enquiry on the above issue before concluding the assessment and therefore the order of the AO was erroneous and prejudicial to the interest of the revenue for lack of or inadequate enquiry by the AO. 31. It has to be cl .....

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he show cause notice u/s 263 of the Act there was not even a mention that the AO failed to examine the assessee s claim for eligibility of exempt u/s 10(2A) of the Act of a sum of ₹ 4,84,80,951/-. However, in the impugned order the Pr. CIT has without deciding the correctness of the stand taken by him in the show cause notice u/s 263 of the Act proceeded on a different basis that the AO failed to make proper inquiries on this issue while completing this original assessment. The AO before c .....

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such a new case, it appears that he has not afforded opportunity of being heard to the assessee. 32. Since the AO conducted enquiry the question is whether there can be no revision because the power u/s 263 can be invoked only in cases of lack of inquiry and not conducting inadequate inquiry. We are of the view that where an enquiry is conducted by the AO and he is satisfied with a reply given on a query raised, then the CIT cannot intervene through revision for coming to a conclusion that the a .....

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