TMI Blog1975 (12) TMI 23X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee of being heard on the question why the revisional powers contemplated by section 263 of the Act, should not be exercised. This notice refers to the date on which the Additional Commissioner considered that the order passed by the Income-tax Officer at the time of the original assessment was erroneous as well as prejudicial to the interests of the revenue. Shortly stated these facts are as under: At the relevant time the assessee-firm was dealing in land transactions by making agreements to purchase or to take land on lease and assign it to others with profit. The transaction with which we are concerned in this case was with regard to the leasehold rights of land bearing to one Manekji Hormasji and Bai Tehmina Jivanji. It is found that the banakhat for this land was originally obtained by one Ambalal Vyas. The said banakhat rights were transferred by Ambalal Vyas to a firm named Dev Co. and this Dev Co. transferred these banakhat rights to the assessee-firm. Assessee-firm in its turn sold these banakhat rights to a society named Jaldarshan Co-operative Housing Society. It was further found that out of this transaction, the assessee earned gross profit of Rs. 5,00,000 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... show-cause notice: In returning 'the said income' you had claimed a deduction of Rs. 1,45,000 being a payment for purchase consideration of the buildings 'standing on the said land. According to the documents registered on October 31, 1964, the buildings were to be purchased by you from the land- lords and you were to be the sole owner of the buildings and also of sale realisation in the event of the sale of'said buildings by you. The building a ,Were however transferred to Jaldarshan Co-operative Housing Society by the landlords and the said Jaldarshan Co-operative Housing Society, paid to the landlords the sale consideration of the said building; but since according to your agreement with the said Jaldarshan Society the buildings were to remain your property' and you were to be the sole owner of the realisation from. the said buildings, you agreed to reimburse the said Jaldarshan Co-operative Housing Society for the payment made by it to the landlords in respect of the said buildings. Thus, the payment of a sum of Rs. 1,45,000 by you for acquisition of the buildings has nothing to do with the profit of Rs. 5,00,000 which 'you received on sale of banakhat rights for the lease ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the relevant time The initiation,of the proceedings under section 263 can be made' if the Commissioner considers that any 'order passed by the Income-tax Officer is erroneous and prejudicial to the interests of the revenue. The above averments, which are quoted from the show-cause notice clearly reveal that in the opinion of the Commissioner, the order passed by the Income-tax Officer was erroneous inasmuch as he had 'not made the necessary inquiry on certain important points with regard to these deduc- tions and, therefore, the order passed by him was prejudicial to the interest of the revenue. In reply to the show-cause notice, the assessee submitted its written statement on March 15, 1972. With regard to the deduction of Rs. 1,45,000 it stated as under: It was the scheme of the Mukur Corporation to demolish the old structures and float a multi-storeyed residential building on, flat system and to building a commercial building on the road side so as to enable the society that may be proposed (to be formed) to earn the sufficient lease rent. It would have been impossible to carry out this scheme if the buildings were not demolished and as a matter of fact the buildings were ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cted the Income-tax Officer to make fresh assessment. In this order, he also directed the Income-tax Officer to give the assessee proper opportunity to prove its case including the cross- examination of Dr. Vyas as desired by it. One important fact, which was revealed from the subsequent affidavit of Dr. Vyas was that Dev Co. consisted of brothers, wives, father-in-law and brother-in-law of two partners of the assessee-firm. The Commissioner found that the Income-tax Officer has acted to the prejudice of the revenue in not making any inquiry as regards the constitution of Dev Co. Being aggrieved by this order of the Commissioner, the respondent-assessee approached the Appellate Tribunal. The Appellate Tribunal was of the opinion that the Commissioner had failed to come to any "firm" conclusion that the above referred two items of deductions were allowed by the Income-tax Officer incorrectly during the course of the assessment. After quoting the provisions of section 263, the Tribunal finally disposed of the matter with the following observations : " In our reading of this provision, the Commissioner of Income-tax can pass air order only if he considers that any order pass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... when his subsequent affidavit was obtained by the department as early as 10th March, 1971, and during the course of almost one year thereafter, the department did not take any steps in the matter. According to Shri Patel, the Commissioner was bound to make an inquiry into the matter even if he wanted to send the matter back to the Income-tax Officer for reassess- ment. He pointed out that if the Commissioner had made such an inquiry,, the assessee would have been able to show that the Income-tax Officer had not committed any error during the course of the original proceedings and that the affidavit, which was filed by Dr. Vyas, on March 10, 1971, was not a document on which any reliance whatever could be placed. - Before touching the legal aspect of the extent of the revisional powers, which the Commissioner possesses under section 263 of the Act, it would be necessary to advert to some facts, which, in our opinion, are absolutely necessary to dispose, of this reference. These facts will also be helpful in deciding whether the Commissioner was in any " doubt " as regards the controversial points raised before him at the time of making the final order. We shall first refer to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ommissioner has recorded his reasonings and conclusions on the question of deduction of Rs. 2,00,000 as under in his order : " The above deposition would mean that according to Shri Vyas he was the benami of the assessee-firm and its two partners, viz., Shri R. P. Modi and Shri B. M. Raval, and that the so-called firm of Dev Company was incorporated only in October, 1964, when the deed dated October 31, 1964, was executed. It is also significant to note that the firm called Dev and Company comprises nine partners including two lady partners, seven and eight, viz., Gauriben Jyotindranath Dev and Nirmalaben Jagjivandas Upadhayaya, who apparently, were the wives of the two partners, Shri R. P. Modi and Shri B. M. Raval, though this relationship is not disclosed in the description of their names in the lease deed. This is a curious aspect of the matter which assumes significance. It is also seen from clause (2) of the lease deed dated October 31, 1964, that though Dev and Company is mentioned as the party to the deed, the condition of the banakhat provide that the assessee was to pay Rs. 25,000 per annum in advance only to these two ladies for the duration of the lease deed and th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1 has to pay the amount to the landlord being the liability assigned to it by No. 4, i.e., the assessee (clause 4) and ownership of the superstructure shall be of the assessee and any realisation from the superstructure shall belong to the assessee, and the liability to pay a sum of Rs. 1,45,000 shall be of the assessee (clause 5). The profit and loss statement filed with the return merely mentioned the sale of superstructure for Rs. 2,018.50 without details and deduction for superstructure amount payable to owner, Manekji Hormasji, Rs. 1,45,000. Since the assessment is proposed to be set aside, the above issue can also be examined by the Income-tax Officer after taking into account the assessee's explanation and other relevant material." These excerpts quoted from the order of the Commissioner clearly show that he has recorded a detailed and reasoned order and has taken a prima facie view of the matter before setting aside the original assessment. Important facts, which are very material for appreciating the controversial points raised by the parties in this reference, are that the Income-tax Officer at the time of carrying out original assessment did not care to probe furt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed therein by the Income-tax Officer is erroneous in so far as it is prejudicial to the interests of the revenue, he may, after giving the assessee an opportunity of being heard and after making or causing to be made such inquiry as he deems necessary, 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." A bare perusal of this section shows that before the Commissioner initiates action under it, he should not only call for and examine the record of the assessment but should consider, (1) that the order passed by the Income-tax Officer is erroneous, and (2) that it is prejudicial to the interests of the revenue. Therefore, unless these three conditions are satisfied, namely, (1) that he should call for and examine the record of the proceedings in question, (2) he should consider that the order passed by the Income-tax Officer is erroneous and (3) that the order passed by the Income-tax Officer is prejudicial to the interests of the revenue, the Commissioner has no jurisdiction to initiate any revisional proceedings. Up to this stage, the Commission ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... after reading the relevant portion of sub-section (1) of section 263, we do not find any justification for the view that in every case the Commissioner is expected to make an inquiry before passing the final order. The concluding portion of this sub-section (1) of section 263 shows that the Commissioner can pass various orders such as enhancing or modifying the assessment or cancelling the assessment and directing a fresh assessment. If the Commissioner in this case had enhanced or modified the assessment, then looking to the facts of the present case, Shri Patel would have been justified in contending that, before passing the final order of enhancement or modification of the assessment, the assessee ought to have been given an opportunity to cross-examine Dr. Vyas. But here the Commissioner has not himself passed any final order as regards the assessment. What he has done is to cancel the original assessment and to direct a fresh assessment by the Income-tax Officer with a further direction to the Income-tax Officer to give proper opportunity to the assessee to substantiate its pleas as well as to cross-examine Dr. Vyas. Therefore, the question is whether it is obligatory on the C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er did was to cancel the assessment and ask the Income-tax Officer to make a fresh assessment according law after making proper enquiries and investigations with regard to the jurisdiction, carrying on the business, possession of initial capital and the sources of moneys invested in the name of the assessee and, therefore, the assessee would again get full opportunity to produce evidence, if any, in support of her case. In view of this, we find that considering the facts of this case, the Commissioner was not bound to make any inquiry before passing the final order and that in substance no prejudice is caused to the assessee by failure of the Commissioner to give it any opportunity to cross-examine Dr. Vyas. Next question is whether at the time of passing the final order, the Commissioner was bound to record final conclusions, Now, even on this question, we find that there is nothing in section 263(1) to show that before passing the final order under that section, the Commissioner must necessarily and in all cases record final conclusions about the points in controversy before him. As already noted by us above, we would have expected him to record final conclusions, which he th ..... X X X X Extracts X X X X X X X X Extracts X X X X
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