ORDER
Chander Singh, A.M.
1. These two appeals by the assessee for the asst. yrs. 1992-93 and 1993-94 have been directed against the order under s. 263 of the CIT.
2. The search operations under s. 132 were carried out in the premises of the assessee and its sister concern D. B. Bandodkar & Sons (P) Ltd. The search operations commenced on 9th March, 1994 and were concluded on 13th April, 1994. The Asstt. Director of Income-tax (Inv.) [ADIT (Inv.)] submitted an interim appraisal report on 6th April, 1994. The final report regarding the search operations was submitted by the ADIT (Inv.) on 9th May, 1994.
3. In the interim report of the ADIT (Inv.), it was observed that the assessee company was claiming losses towards shortage of iron ore every year. As per the agreement entered into with the sister concern D.B. Bandodkar & Sons ((P)) Ltd., the weighment of iron ore was as per the bill of lading in the case of full shipment and barge draught in the case of partial shipment. On examination of the records for the years from 1986-87 to 1992-93, the ADIT (Inv.) was of the view that in most of the cases the iron ore purchased by the assessee from D.B. Bandodkar & Sons ((P)) Ltd. was for full shipment for which weighment had to be taken as per the bill of lading. As such, shortage of iron ore as claimed by the assessee was, therefore, bogus and had to be disallowed. The ADIT (Inv.) worked out the claim of shortage from asst. yr. 1986-87 to asst. yr. 1993-94 at Rs. 1,91,88,112. The figures of shortage relevant for asst. yrs. 1992-93 and 1993-94 are respectively Rs. 32,99,357 and Rs. 36,24,263. The ADIT (Inv.) therefore expressed the opinion that the shortage claimed by the assessee were bogus and were liable to be assessed as the income of the assessee.
4. In the said report, the Investigation Wing of the Department also dealt with the inflation of barge hire expenses. The ADIT (Inv.) noticed that the assessee-company was making barge hire payment to D.B. Bandodkar & Sons (P) Ltd. and SKUB Industries (P) Ltd. For the years under consideration, the assessee-company had hired two barges, namely, Shivapriya and Dayasagar from D.B. Bandodkar & Sons (P) Ltd. and SKUB Industries (P) Ltd. The barge hire charges of Rs. 58,00,400 for the year ended 31st March, 1992 and Rs. 61,58,775 for the year ended 31st March, 1993, were paid to these two sister concerns. It was mentioned in the appraisal report that these payments represented barge hire charges payable for 160 trips by each of the two barges separately during these years as per the terms and conditions specified in the agreement, dt. 30th June, 1986, entered into by the owners of the barges and the assessee-company. The Investigation Wing, however, noticed that the assessee had utilised these barges for making lesser number of trips than 160 for which charges were calculated as per the rates mutually agreed upon and also paid by the assessee-company to its two sister concerns. The excessive payment made towards barge hire charges by the assessee-company were worked out by the ADIT (Inv.) as under :
———————————————————————-
Excessive payment made to Asst. yr. Amount Unutilised trips
for which payments
made
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D.B. Bandodkar & Sons (P) Ltd. 1992-93 55,090 3
1993-94 3,11,440 16
SKUB Industries (P) Ltd. 1992-93 2,96,480 16
1993-94 4,03,765 21
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5. The ADIT (Inv.) was of the view that excessive payments were liable to be disallowed under the provisions of s. 40A(2) of the IT Act.
6. The third issue in the said appraisal report was regarding the inflation of purchases. During the course of the search, the Investigation Wing found that in the ledger of asst. yr. 1992-93 purchases of iron ore were to the tune of Rs. 6,63,95,690 from D.B. Bandodkar & Sons (P) Ltd. However, the assessee has accounted for the purchases of Rs. 7,49,63,985 and as such, there was inflation of purchases to the extent of Rs. 85,68,295. In the appraisal report, the ADIT (Inv.) desired that full investigation on these three issues should be made by the AO and amounts of (a) excess barge hire charges, (b) shortage of iron ore and (c) inflation of purchases should be disallowed as concealed income of the assessee. The ADIT (Inv.) also informed the AO that prosecution proceedings under ss. 276C and 277 of the IT Act may also be initiated.
7. On receipt of the appraisal report and other material seized during the course of the search and seizure operations, the AO took up the case for scrutiny. It is, however, very important to mention that the CIT had selected this case for his direct supervision and the AO was directed not to complete the assessment unless the CIT is informed of the various investigations by the AO. In other words, before the completion of the assessment order by the AO the CIT’s permission was required as he was directly monitoring the case.
8. As the CIT was directly involved in the investigation of the case, the AO to submit a report of investigation carried out by the AO. In response to the direction of the CIT the AO sent a report dt. 24th June, 1994, to the CIT and appraised him with the facts of the case. The AO in the said report sought the permission of the CIT to accept the assessee’s explanation in regard to all the three issues. This report of the AO was with regard to the completion of the order under s. 132(5) of the Act.
9. The CIT in his turn informed the AO that he may pass the order in accordance with law after due consideration of the explanations given by the assessee.
10. On receipt of the above communication from the CIT, the AO passed the order under s. 132(5) on 4th July, 1994.
11. In the meantime the assessee had also filed an application under s. 132(11), dt. 2nd August, 1994, to the CIT. The CIT forwarded the said application under s. 132(11) to the AO for the report. In response to the said communication from the CIT the AO sent a report to the CIT, vide his letter, dt. 1st September, 1994, wherein it was stated that the AO was in a position to complete both the assessments by 20th September, 1994, and, therefore, the report in connection with the application of the assessee under s. 132(11) was not necessary.
12. On 13th September, 1994, the CIT addressed a letter to the AO stating that a brief report giving the details of investigation carried out and also result of such investigation was required to be submitted to him well before the completion of the assessments and to await further instructions in the matter.
13. On receipt of this letter, the AO vide his letter, dt. 21st September, 1994, submitted a report to the CIT giving details of investigation carried out and also results of such investigation in the case of the assessee. This report from the AO forms part of the order under s. 263 of the CIT as Annexure 5. In this report, the AO has dealt with the issues in detail and also expressed his opinion about the three issues under consideration.
14. On receipt of the AO’s letter mentioned in the preceding para, the CIT issued a detailed letter, dt. 17th October, 1994 (Annexure 6) suggesting further lines of enquiry and instructed the AO for specific verification of certain issues. The AO in reply to the letter of the CIT, wrote another detailed letter to the CIT, dt. 9th December, 1994. This letter is placed as Annexure 7 of the order under s. 263 of the CIT.
15. After receipt of the letter of the AO the CIT issued further instructions to the AO vide his letter dt. 10th January, 1995. This letter forms part of s. 263 order as Annexure 8. In this letter, the CIT directed the AO to further investigate the three issues under consideration. The CIT also directed the AO to examine the applicability of s. 40A(2) of the Act. This letter of the CIT was again replied by the AO vide his letter, dt. 27th January, 1995, wherein the AO reiterated his earlier stand and was of the view that on the facts and in the circumstances of the case, no addition could be made on either of the issues. Regarding the applicability of s. 40A(2), the AO informed the CIT that the assessee had furnished details of payments made to the sister concerns. The transactions with sister concerns were with prevailing market price. The AO, therefore, expressed opinion that provisions of s. 40A(2) were not applicable. This letter of the AO is Annexure 9 to the order of the CIT under s. 263.
16. On receipt of this letter, the CIT wrote a letter, dt. 7th February, 1995, in which he directed the AO to complete the assessment as per law after taking into account the results of verification made by him. As per this letter, the CIT also returned the records back to the AO.
17. The AO accordingly completed the assessment on 20th February, 1995 without making any additions suggested by the ADIT (Inv.)
18. The CIT called for the records of the assessee and examined the same. After perusal of the records, the CIT was of the view that the order of the AO was erroneous as well as prejudicial to the interest of Revenue. He accordingly issued show-cause notice, dt. 24th April, 1996, to the assessee to show-cause why the assessment order of the AO should not be vacated. The reasons for the assumption of jurisdiction by the CIT had been mentioned by him in his letter referred to above.
19. The assessee strongly objected to the assumption of jurisdiction under s. 263 by the CIT and refuted the allegations vide their letter, dt. 30th August, 1996. The issues raised by the CIT in his notice were dealt with seriatim and it was urged that on the facts and in the circumstances of the case, assumption of jurisdiction was not justified as the AO had completed the assessments in accordance with law. Detailed explanation on each of the three points was also submitted to the CIT.
20. The CIT however, was not convinced and was of the view that the order of the AO was erroneous, inasmuch as it was prejudicial to the interest of the Revenue. In para 29 of his order under s. 263 of the Act, the CIT observed :
“In view of the above discussion, I am satisfied that these assessments which were made totally ignoring the findings of concealment recorded by the Investigation Wing were totally erroneous and absolutely prejudicial to the interests of the Revenue and as such, these assessments are set aside with directions to the AO to make fresh assessments in accordance with law after allowing due opportunity to the assessee to establish his case. Wherever independent verification is possible, the same should be undertaken before the fresh assessments are made.”
21. Against the order under s. 263 of the CIT the assessee is aggrieved and is in appeal before us.
22. The learned counsel J.D. Mistry along with Miss H.R. Doshi pointed out that during the search operations no incriminating documents, cash or any other valuable articles was found and seized. As a matter of fact, the search operations were total failure and the Department was not able to find out any asset during the course of the search. Only fixed deposits worth rupees one crore were discovered which was seized. However, the said fixed deposits were disclosed assets of the assessee and these have been unnecessarily detained by the Department under s. 281B of the IT Act.
23. The learned counsel continued and pointed out that before the assumption of jurisdiction under s. 263, the CIT has to satisfy himself that there was an error in the order of the AO which has caused prejudice to the Revenue. He pointed out that no such finding, supported by evidence, has been given by the CIT. As matter of fact, the AO had made detailed investigations as is apparent from the correspondence between the AO and the then CIT. The AO had examined every aspect of the case with regard to the three issues and the assessment was completed by him after due and proper enquiries. After detailed investigation, the AO came to the justifiable conclusion that no addition was called for in the case of the assessee either on account of barge hire charges or shortages claimed or inflation of purchases. All these three issues were fully explained by the assessee before the AO and as a result of such explanation, the AO was satisfied and accordingly accepted the contention of the assessee. It is, therefore, not correct to say that the AO failed to make any enquiry in the matter.
24. It is also submitted that it is a condition precedent to issue of an order under s. 263 that the assessee is given an opportunity of being heard. It is, therefore, a requirement that the CIT considers the assessee’s objections to the proposed order. In the case of the assessee, the CIT has clearly refused to consider the assessee’s objections and has stated so in his order under s. 263 of the IT Act. There is thus a failure of natural justice in the case of the assessee. In this regard, the learned counsel has drawn our attention to para 28 of the order under s. 263 of the CIT. He pointed out that s. 263 of the Act contemplates a notice to the assessee. In response to the notice, the assessee may show to the CIT that the order sought to be revised is not prejudicial to the interests of the Revenue. In that event, the CIT would have no jurisdiction to take any further action. The CIT would be competent to take action only if he rejects the plea of the assessee. It thus becomes necessary for the CIT to examine the merits of the objection raised by the assessee. He cannot delegate that power to the AO by setting aside the assessment order and directing him to make a fresh assessment after taking into consideration the objection of the assessee. In this regard, the assessee has placed reliance on the decision of the Allahabad High Court in the case of J.P. Srivastava & Sons (Kanpur) Ltd. vs. CIT (1978) 111 ITR 326 (All).
25. The learned counsel further urged that the requirement of s. 263 is that the CIT should not only record a finding that the order of the AO was prejudicial to the interests of Revenue and was erroneous, but he should also mention the material on the basis of which he has arrived at such conclusion. Non-recording of reasons by the CIT would vitiate the order passed by him under s. 263 of the Act. In this regard, the learned counsel has drawn our attention to the decision of the Tribunal, Calcutta Bench in the case of Machino Techno Sales (P) Ltd. vs. Dy. CIT (1996) 56 TTJ (Cal) 613 : (1996) 59 ITD 303 (Cal). The learned counsel further urged that the written submissions of the assessee, as stated above, have not at all been considered by the CIT. As a matter of fact, he has made a specific mention that he need not consider the written submissions of the assessee. By drawing our attention to the decision of the Tribunal, Ahmedabad Bench in the case of Pankaj Dhirajlal Dhruve vs. ITO (1996) 55 TTJ (Ahd) 667 : (86 Taxman 121 – Magazine section) he pointed out that it is mandatory for the CIT to consider the written submissions made by the assessee. If the CIT had failed to deal with each and every objections contained in the written submissions, the order of the CIT would be without any jurisdiction. Without considering the merits of the objections, the CIT could not say that his order holding that the assessment order was erroneous and prejudicial to the interests of Revenue was correct. In the case of the assessee, the CIT has not followed this cardinal principle of natural justice.
26. The learned counsel continued and urged that failure to deal with written submissions of the assessee cannot be cured at this late stage. No purpose would be served to give a second chance to the CIT.
27. The learned counsel also pointed out that the assessment order was passed by the AO in pursuant to the directions of the CIT. An order passed by an AO pursuant to the directions or in accordance with binding precedents, etc. cannot be said to be erroneous and prejudicial to the interest of Revenue and consequently, such an order cannot be revised under s. 263 of the Act. The IT Act does not contain any provision by which an order of the CIT could be revised by another CIT. The order passed in pursuance of a direction of a superior authority like the appellate authority or the High Court or as a consequence of settlement arrived at by the CIT could not be the subject-matter of revision because the AO could not be said to have applied his mind to it and, therefore, his order could not said to be erroneous so as to be prejudicial to the interests of Revenue. In the case of the assessee, the AO had deeply investigated the case and result of the investigation was brought to the notice of the CIT. The CIT had also issued directions to the AO to further examine the case in the light of the instructions issued by him. After further examination, the AO had again reported to the CIT that the three issues were acceptable on account of the facts available on record. After careful perusal of the investigation by the AO the CIT had directed the AO to complete the assessment in accordance with law. The assessment order passed by the AO thus, in fact, became the order of the CIT himself. Such an order could not be revised by another CIT and, therefore, on this issue alone the s. 263 order of the present CIT is beyond jurisdiction. In this regard, the learned counsel has drawn our attention to the following judicial precedents :
(1) Trustees of Parsi Panchayat Funds & Properties vs. D.I (1996) 55 TTJ (Bom) 605 : (1996) 57 ITD 328 (Bom);
(2) K.N. Agarwal vs. CIT (1991) 189 ITR 769 (All);
(3) Russell Properties (P) Ltd. vs. A. Chowdhury, Addl. CIT (1977) 109 ITR 229 (Cal);
(4) Rajan Ramakrishna vs. CWT (1981) 127 ITR 1 (Guj); and
(5) Savani Transport Ltd. vs. Dy. CIT (1997) 60 ITD 513 (Mum).
28. The learned counsel has also drawn our attention to the decision of the Bombay Bench of the Tribunal in the case of Kiran & Co. vs. ITO, in ITA No. 1623 to 1626/Bom/1986 dt. 22nd June, 1990, the learned counsel pointed out, it was held that where the AO had passed the order in pursuance of the directions of the CIT, such an order cannot be revised under s. 263 by another CIT. The learned counsel contended that the decision of the Bombay Tribunal is directly on the issue and supports the case of the assessee.
29. The learned counsel also took us through the notice under s. 263 issued by the CIT which is placed on pp. 1 to 7 in paper-book No. 1 of the assessee. He pointed out that the CIT had taken up three points for the revision of the order, but the final order under s. 263 passed by him was on totally different grounds. Thus, the CIT issued notice for different issue, but the order was passed on different ground. By drawing our attention to the decision of the Punjab & Haryana High Court in the case of CIT vs. Jagadhri Electric Supply & Industrial Co. (1983) 140 ITR 490 (P&H), he pointed out that if the assessee can satisfy the Tribunal that grounds for the decision given in the order by the CIT are wrong on facts or are not tenable in law, the Tribunal has no option but to accept the appeal and to set aside the order of the CIT. The Tribunal cannot uphold the order of the CIT on any other ground which, in its opinion, was available to the CIT as well. If the Tribunal is allowed to find out grounds available to the CIT to pass an order under s. 263, then it will amount to sharing of the exclusive jurisdiction vested in the CIT which is not warranted under the Act. As the CIT has passed the order on totally different grounds than the grounds taken by him in the notice, his order is not tenable. In this regard, the assessee has also placed reliance on the decision of the Karnataka High Court in the case of CIT vs. L. F. D’Silva (1991) 192 ITR 547 (Kar).
30. The next argument of the learned counsel is that the assessment order completed by an AO in accordance with law cannot be subject-matter of revision under s. 263 of the Act. The learned counsel pointed out that an order under s. 263 of the Act passed in a case where the CIT takes a view different from the AO or to initiate roving enquiries as in the present case cannot be upheld. In this regard, the learned counsel has placed reliance on the decision of the Bombay High Court in the case of CIT vs. Gabriel India Ltd. (1993) 203 ITR 108 (Bom).
31. The learned counsel continued and argued that prior to passing any order under s. 263 the CIT must go into the issue in question and hold that the treatment thereof in the assessment order is erroneous. In the case of the assessee in the order under s. 263 the CIT has merely stated that some issues required reconsideration. The CIT has not given a clear finding regarding the error in the order of the AO which has caused prejudice to the Revenue. Such an order, in the opinion of the learned counsel, cannot be revised in view of the decision of the Punjab & Haryana High Court in the case of CIT vs. Kanda Rice Mills (1990) 178 ITR 446 (P&H).
32. The learned counsel further submitted that prior to passing any order under s. 263, the CIT must go into and consider the issue in question. The present order under s. 263 where the CIT has merely set aside the assessment order re-consideration is invalid, in view of the following decisions :
(1) J.P. Srivastava & Sons (Kanpur) Ltd. vs. CIT (supra);.
(2) CIT vs. Kashi Nath & Co. (1988) 170 ITR 28 (All); and
(3) CIT vs. Goyal Private Family Specific Trust (1998) 171 ITR 698 (All).
33. The records of the assessee clearly demonstrate that the AO was aware of the issues and the legal provisions. In fact, the three issues involved in the assessee’s case were dealt with by the AO at the time of passing order under s. 132(5) as well as were also considered by him by submitting various reports to the CIT who was monitoring the case and also were considered while passing the final order. From this, therefore, it is apparent that the AO was aware about the controversy and after proper application of the mind had passed the order. Such an order cannot be revised in the opinion of the learned counsel in view of the decision of the Madhya Pradesh High Court in CIT vs. Shri Govindram Seksariya Charity Trust (1987) 166 ITR 580 (MP).
34. The learned counsel further stated that a valid order under s. 263 of the Act must categorically show and deal with the alleged error in the assessment order. A s. 263 order which sets out the possibility of an error or guesses as to alleged errors cannot be upheld by the Tribunal. He argued that in the case of the assessee, there is no categorical finding by the CIT that there is an error in the assessment order of the AO on each of the three issues in question, the most possible enquiry has been undertaken on a number of occasions by Officers including those of the rank of the CIT. Further every parameter in connection with the same are in accordance with all published figures of the concerned authorities and other assessees in this area of business. Such an order, in the view of the learned counsel, cannot be erroneous so as to attract the provisions of s. 263 of the Act.
35. The learned counsel also pointed out that the CIT has failed to appreciate the facts of the case. The assessee has no reason to pass on its profits to the sister concern. The assessee is entitled to the deduction under s. 80HHC and need not pay tax on its income. D.B. Bandodkar & Sons (P) Ltd. on the other hand, are not entitled to s. 80HHC and therefore, it does not stand to logic as to why a non-taxable assessee should pass on its profit to a taxable entity. On this ground alone, the decision of the CIT cannot be supported.
36. The learned counsel also took us through the order under s. 263 of the CIT and pointed out that the said order shows sheer unreasonableness and bias on the part of the CIT. He pointed out that the CIT who assumed the jurisdiction under s. 263 was the Director (Inv) at the time of search and seizure operations. During the course of search and seizure operations a report was submitted by his Wing alleging that the assessee was guilty of concealment and was liable to be prosecuted. When he assumed the charge as CIT, he was biased and was not happy with the assessment order in which the report of the Investigation Wing was not accepted. The s. 263 order passed on bias is ab initio void and cannot be sustained. In this connection, the learned counsel has drawn our attention to para 27 of the order of the CIT in which he has observed : “The above discussion would clearly show that the entire exercise was a charade undertaken by the assessee and his representative on the one hand and the AO and the CIT on the other hand, to give a semblance of normality, to their actions”.
37. The learned counsel also pleaded that no purpose would be served to send the matter back to the CIT because post-decisional opportunity of hearing does not subserve the rules of natural justice. The authority who embarks upon a post-decisional hearing will naturally proceed with a closed mind and there is hardly any chance of getting a proper consideration of the representation at such a post-decisional opportunity. In this connection, the learned counsel has placed reliance in the case of Hindustan Petroleum Corpn. Ltd. vs. H.L. Trehan & Ors. in Civil Appeal No. 3214 of 1979, which is placed on the paper-book.
38. The learned counsel has also briefly dealt with the merits of the case. Regarding the barge hire charges, he pointed out that the assessee is an exporter of iron ore and for the purpose the barges are required to transport the goods from the river loading point to Marmugao harbour. The assessee, therefore, was in need of having a fleet of barges at its disposal. The assessee himself had owned two barges and other barges were requisitioned on hire as per the agreement entered into between the assessee and D.B. Bandodkar & Sons (P) Ltd. and SKUB Industries (P) Ltd. As per the agreements, guaranteed trips were agreed to be 160 per year which the assessee did not utilise. However, when the hired barges were not utilised for the business of the assessee, the assessee had given those barges on hire to other parties, and in fact had earned a sum of Rs. 1,03,24,264 in the accounting year 1991-92 and Rs. 1,09,73,721 in the accounting year 1992-93. As against the said income, the Department has alleged that the assessee has made excessive payment to the sister concerns as indicated above. In fact, the assessee has earned much more income than the payment to sister concerns and, therefore, no mala fide intention could be alleged to the assessee. Moreover, the payments to the sister concerns are as per the agreements and the other assessees doing similar business are also paying similar hire charges. As a matter of fact, the hire charges rates are fixed by the Goa Barge Owners’ Association. The AO who completed the assessment of the assessee was also dealing with similar cases of other assessees and was aware that every assessee was paying barge hire charges as per the rate fixed by the Goa Barge Owners’ Association. On merit, therefore, there was no justification to disallow the expenditure. The provisions of s. 40A(2) were also not attracted as the payments were made on the market rate and there was no material on record that the assessee had made excessive payments in anyway. Whenever hired barges were not utilised by the assessee, these were hired out to others on which substantial profit was earned. There was, therefore, no reason for the CIT to suspect any mala fide on this issue.
39. Regarding the shortage of iron ore, the learned counsel pointed out that the shortages are incurred throughout the year from time to time in the case of handling of ore. The shortages during the year are, however, determined on physical verification of the stock at the end of the accounting period. Accordingly, in the month of March, shortages were determined and, therefore, claimed as such. In this regard also, the AO was aware of the shortages incurred by other mine owners also. As a matter of fact, such shortages were allowed by the same AO in the case of other mine owners also. Even in the case of the assessee, such shortages were allowed in the past years. There was, therefore, no reason to suspect the bona fide of the assessee for the years under consideration. The learned counsel also pointed out that the assessee was not purchasing the ore as per the bill of lading as was wrongly assumed by the CIT. As a matter of fact, the assessee has purchased the ore on the basis of the same being loaded on the barges and the price was negotiated and agreed upon on such basis. The facts of the case, therefore, were misconstrued by the CIT. He also pointed out that the shortages occurred for variety of reasons like spillage, etc. for which our attention has been drawn to the report prepared by the Goa Mineral Ore Exporters Association. The shortage was also within the permissible limits. Therefore, there was no reason to doubt the bona fide of the assessee.
40. Regarding the inflation in purchases, the learned counsel pointed out that the assessee purchased ore from D.B. Bandodkar & Sons (P) Ltd. under long-term contract. During the year 1991-92 D.B. Bandodkar & Sons (P) Ltd. sought an upward revision in the price of the ore. The price of ore was billed by them on the basis of earlier price and the revised price negotiated were billed at the year end. The difference in price payable for ore purchased during the years was Rs. 85,68,295. The voucher for the same was prepared and even the seller had confirmed the same. It is also pointed out that D.B. Bandodkar & Sons (P) Ltd. had accounted for the sales of the ore including the price difference of Rs. 85,68,295. There was thus no reason to doubt the transaction. Thus, even no merit the addition on this ground was not at all justified. The learned counsel thus concluded that the assumption of jurisdiction under s. 263 by the CIT was wholly without any basis and legally not sustainable. Even on facts, the CIT has not discovered any error which has caused prejudice to the Revenue and, therefore, his order is liable to be quashed. He, therefore, prayed that the order under s. 263 of the CIT should be set aside.
41. On the other hand, the learned Senior Departmental Representative, Shri Hari Krishan, refuted the contentions of the learned counsel for the assessee. The learned Senior Departmental Representative first dealt with the legal issues regarding the assumption of jurisdiction under s. 263 by the CIT. Regarding the opportunity to be given to the assessee, the learned Senior Departmental Representative explained that the Allahabad High Court in the case of J.P. Srivastava & Sons Ltd. (supra) has held that it was obligatory on the CIT to examine the merits of the objections raised by the assessee. This judgment of the Allahabad High Court, however, has been overruled by the Gujarat High Court in the case of Addl. CIT vs. Mukur Corporation (1978) 111 ITR 312 (Guj) wherein it has been laid down that where it is evident that the ITO has failed to make proper enquiry during the course of the assessment, such assessment was clearly erroneous and prejudicial to the interests of Revenue. In such a situation, when the answer is self-evident, the CIT need not consider the objections of the assessee. Thus, the decision of the Allahabad High Court in the case of J.P. Srivastava & Sons (supra) cannot be applied and that it was not necessary for the CIT to come to a firm conclusion and consider the written submissions of the assessee. He further pointed out that it is clear in this case that on account of failure to make proper, sufficient and necessary enquiries by the AO the order is erroneous. When on the face of the order itself it is clear that the order is erroneous, if the CIT was to consider the objections and submissions of the assessee, it would only amount to the CIT himself making further enquiries. The CIT instead of making those enquiries himself has directed the AO to complete the assessment afresh after making necessary enquiries.
42. The learned Senior Departmental Representative continued and pointed out that in the case of Gee Vee Enterprises (1975) 99 ITR 375 (Del), the Delhi High Court has held that it is not necessary for the CIT to make such enquiry before cancelling the order of assessment. Again in the case of Rampyari Devi Saraogi & Ors. vs. CIT (1968) 67 ITR 84 (SC) the Supreme Court did not feel it necessary that the CIT should give detailed reasons for cancelling the assessment order because in the opinion of the Supreme Court, on the face of the records the orders are prejudicial to the interest of Revenue and in such a case, the CIT need not record his reasons in detail. The import of these observations of the Supreme Court, according to the Senior Departmental Representative, is that even if the assessee was not given an opportunity of being heard in respect of certain facts and enquiries, it will not in anyway adversely affect the order of the CIT revising the assessment order. In the case of the assessee also, at best it can be said that by not looking to its objections and observations, it has been effectively denied the opportunity of being heard. This alone cannot adversely affect the order of the CIT. In the aforesaid decision, the Supreme Court further held that the assessee will have full opportunity for raising objections before the AO. In the case of the assessee also the assessment has been only set aside and to be made afresh after making necessary enquiries and giving full opportunity to the assessee of being heard.
43. By drawing our attention to the decision of the Karnataka High Court in the case of Thalibai F. Jain & Ors. vs. ITO (1975) 101 ITR 1 (Kar), the learned Senior Departmental Representative pointed out that no prejudice is caused to the assessee by not disclosing in the nature of the materials collected by the CIT behind their back. The CIT has directed the AO to make the assessment afresh according to law after making proper enquiries and, therefore, the assessee will have full opportunity of showing to the AO that the assessments earlier made were correct and the enquiries subsequently made were incorrect. This shows that non-consideration of the objections and submissions made by the assessee does not lead to any denial of natural justice.
44. The learned Senior Departmental Representative has also drawn our attention to the judgment of the Calcutta High Court in the case of CIT vs. Panna Devi Saraogi (1970) 78 ITR 728 (Cal) wherein the High Court has held that there was no violation of the principles of natural justice on the question of opportunity being given to the assessee. When the CIT has given reasonable opportunity by stating the basic grounds on which the CIT thought that the AO’s order was erroneous and that the CIT was to cancel the assessment and asked the AO to make a fresh assessment according to law after making proper enquiries and investigation, no violation of natural justice could be alleged. In the case of the assessee, he pointed out that the CIT has set aside the assessment giving direction to the AO to make fresh assessment in accordance with law.
45. By drawing our attention again to the decision of the Gujarat High Court in the case of Mukur Corporation (supra), the learned Senior Departmental Representative pointed out that there is nothing in s. 263(1) to show that before passing final order under that section, the CIT must necessarily and in all cases record final conclusion about the points in controversy. Rather, the High Court held that when the CIT preferred to direct the AO to make an order for fresh assessment, it was proper that he did not express any final conclusions and recorded only prima facie conclusions at which he arrived with reference to the facts of the case.
46. The learned Senior Departmental Representative also relied on the decision of the Allahabad High Court in the case of Smt. Lajja Wati Singhal vs. CIT (1997) 226 ITR 527 (All) and pointed out that there is no need for the CIT to make enquiry and it was open to the Tribunal if it feels necessary to see the facts and come to a conclusion whether there was material to say that the order was erroneous. Further in the case of Y.N. Sharma vs. ITO (1990) 33 ITD 308 (All), the learned Senior Departmental Representative pointed out that it was held that it is not necessary for the CIT to himself make any enquiry and consider the assessee’s explanation before making the order under s. 263. The learned Senior Departmental Representative continued and urged that even if for a moment it is considered that the assessee was not heard or his submissions were not considered, it would not be justified in holding that the CIT’s order was void. For this proposition, the learned Senior Departmental Representative has relied on the decision of the Madhya Pradesh High Court in CIT vs. Prem Syndicate (1983) 141 ITR 290 (MP). In his opinion, the matter can only be restored back to the CIT to pass a fresh order, as held by the Supreme Court in the case of CIT vs. National Taj Traders (1980) 121 ITR 535 (SC).
47. The learned Senior Departmental Representative further contended that even if the assessment order was passed by the AO in pursuant to the directions of the CIT, such an order was liable to be revised under s. 263 by the succeeding CIT. In this regard, he drew our attention to the decision of the Tribunal in the case of Jayantilal C. Jhaveri vs. Asstt. CIT (1995) 55 ITD 313 (Bom) wherein it was held that the order passed by simply following the orders of the CIT without making independent enquiries can be revised under s. 263. This view, according to the learned Senior Departmental Representative, is also supported by the decision of the Jaipur Bench of the Tribunal in the case of H.H. Rajdadi Smt. Badan Kanwar Medical Trust vs. WTO (1989) 28 ITD 29 (JP) wherein it has been held that an order passed in consultation with the CIT can be revised under s. 263 of the Act. He further argued that the Calcutta Bench of the Tribunal in the case of J.P. Goel (HUF) vs. IAC (1992) 41 ITD 390 (Cal) also held that the instructions issued by the predecessor CIT cannot act as estoppel for the successor CIT to invoke the powers of s. 263 if otherwise the case involves revision.
48. Further, the learned Senior Departmental Representative pointed out that the assessee’s reliance on the decision in the case of Kiran & Co. vs. ITO (supra) is misplaced. In the said decision, the Bombay Bench of the Tribunal had held that where the ITO passed an order under the directions of the CIT, he cannot exercise jurisdiction under s. 263. However, if the direction was in the nature that the ITO will check up and allow the claim as may be admissible in law, the order passed by the AO in consequence of such directions, shall be an independent order and if the said order is erroneous it can be made the subject-matter of revision under s. 263 of the IT Act. In the case of the assessee, the AO has not followed the directions of the CIT, rather his order is contrary to the directions of the CIT. In fact, the CIT has directed the AO to investigate various matters and make further enquiries and complete the assessment as per law. However, in spite of the directions, the AO had completed the assessment without making any investigations and enquiries warranted by the circumstances of the case.
49. Further, the Senior Departmental Representative refuted the contention of the learned counsel and stated that the CIT did not order for roving enquiries but has only directed the AO to complete the assessment afresh after making necessary enquiries, which the AO has not made at the time of the original assessment. In the case of the assessee, the CIT has not also attempted to substitute the opinion of the AO. Actually, the CIT has not formed any opinion of his own, rightly so, as no opinion could be correctly formed in the absence of necessary enquiries having been made, data/information having been collected and necessary evidence having been seen. The CIT has only directed the AO to make enquiries and reach his own conclusions as per law.
50. Thereafter, the learned Senior Departmental Representative dealt with the decision of the Bombay High Court in the case of Gabriel India Ltd. (supra) and contended that the said decision is distinguishable on facts. In the said decision, the issue before the Hon’ble High Court was whether the expenditure in question was of capital in nature as against the opinion of the AO that the said expenditure was revenue in nature. Such is not the controversy in the case of the assessee. The CIT, therefore, in the case of the assessee did not impose his opinion on the AO.
51. In refuting the argument of the learned counsel who asserted that prior to passing any order under s. 263 the CIT must go into the issue in question and hold on the basis of material that the assessment is erroneous, the learned Senior Departmental Representative pointed out that the CIT has clearly given such a finding in his order under s. 263. The CIT has clearly mentioned that the order of the AO was erroneous because necessary investigations have not been conducted. It is, therefore, wrong to state that the CIT has directed the AO to reconsider the issue. The CIT has only stated that the assessment should be made afresh after proper enquiries.
52. Next, the learned Senior Departmental Representative dealt with the contention of the assessee in which the learned counsel has stated that jurisdiction under s. 263 cannot be assumed where most exhaustive possible enquiries have been undertaken on a number of occasions by the officers including those of the rank of the CIT. The learned counsel also asserted that the AO was aware of the issues and legal provisions. In this regard, the learned Senior Departmental Representative argued that the question before the Tribunal in the present case is not of the awareness of the AO rather the issues involved are whether the assessment has been passed by the AO after conducting necessary and sufficient enquiries warranted by the circumstances. It is evident from the facts of the case that no enquiry whatsoever was conducted by the AO. It is also evident that no independent information has been collected by him for deciding the various issues. Neither the assessee had furnished any information as evidence for examination by the AO to come to the satisfaction that the claims made by the assessee were correct. In the present case, the AO failed to realise that in search and seizure cases, it is normal for him to collect information from various sources independently either under s. 131 of the Act or otherwise to examine the assessee’s claim.
53. Regarding the assessee’s assertion that the assessee is entitled to s. 80HHC benefits and, therefore, there cannot be any tax effect, the learned Senior Departmental Representative pointed out that it is a common knowledge that even 100 per cent export oriented units and the assessees entitled to deduction under s. 80HHC are resorting to various methods to manipulate the Foreign Exchange Regulation Act and to reduce their income. Moreover, the reasons for reducing their income despite being eligible to deduction under s. 80HHC may be best known to the assessee. The learned Senior Departmental Representative contended that in the case of the assessee the issue before us is to determine whether the AO had conducted all the necessary enquiries and consequently whether or not the assessment order was erroneous and prejudicial to the interests of Revenue so as to be made subject-matter of revision under s. 263 of the Act.
54. Regarding the allegation of the learned counsel that the order under s. 263 shows sheer unreasonableness and bias, the learned Senior Departmental Representative pleaded that the basic ground for setting aside the assessment order by the CIT under s. 263 of the Act was failure of the AO to conduct necessary enquiries. The reference to other aspects of the matter like proceedings under s. 132(5), etc. are only the supporting remarks. The Supreme Court in the case of Rampyari Devi Saraogi (supra) has held that the CIT can make use of the supporting material which may not be basic ground for passing a revision order.
55. The learned Senior Departmental Representative reiterated that when the AO is expected to make an enquiry of a particular item of income and if he does not make such an enquiry as indicated, it would be a ground for the CIT to interfere under s. 263 of the Act. In this regard, he has drawn our attention to the decision of the Madras High Court in the case of K.A. Ramaswamy Chettiar & Anr. vs. CIT (1996) 220 ITR 657 (Mad).
56. The learned Senior Departmental Representative also argued “some further aspects of the matter” which, according to us, are not relevant. Nevertheless, we reproduce his arguments. He has contended that consolidated notice can be given for more than one assessment year; that in case the AO has granted relief to the assessee without verifying the facts, revision under s. 263 can be justified; that where the AO has merely accepted the submissions of the assessee, revision is justified; that even though the AO has passed the order after considering the assessee’s explanation given in various letters, still revision under s. 263 was possible; that the AO is expected to delve deep into subterranean details before accepting the claim of the assessee; and that if the assessment is made and with predetermined mind, such an assessment can also be revised. For these aspects of the matter, the learned Senior Departmental Representative has relied on the following decisions :
(1) Indian Textiles vs. CIT (1986) 157 ITR 112 (Mad);
(2) Smt. Sumitra Devi Khirwal vs. CIT (1972) 84 ITR 26 (Cal);
(3) Swarup Vegetable Products Ind. Ltd. vs. CIT (1991) 187 ITR 412 (All);
(4) KEC International Ltd. vs. ITO (1994) 51 ITD 178 (Bom);
(5) Dindayal Prasad vs. CIT (1993) 44 ITD 202 (Cal);
(6) Mayur Trading Co. vs. ITO (1991) 39 ITD 49 (Pune);
(7) Sunil Sidharthbhai vs. GTO (1991) 38 ITD 5 (Ahd); and
(8) Tejinder S. Makkar vs. Asstt. CIT (1997) 58 TTJ (Mumbai)(TM) 416 : (1997) 61 ITD 57 (Mumbai)(TM).
57. The learned Senior Departmental Representative also took us through the notes on order-sheet and the appraisal report with a view to show that the required investigation was not done by the AO. The material papers in this regard are placed on pp. 1 to 25 of the Department’s paper-book. Thereafter, the learned Senior Departmental Representative also drew our attention to agreement dt. 22nd November, 1982, between D.B. Bandodkar & Sons (P) Ltd. and the assessee.
58. The learned Senior Departmental Representative argued the case at length on the merits of the case. Regarding the inflation of expenses on account of barge hire charges, he pointed out that the AO has simply accepted the assessee’s explanation that chartering barges on annual basis is prevailing practice among all the mine owners in Goa and that whenever the barges in question are idle, they are given on hire to third parties. In this regard, the AO has not conducted any independent enquiries and has not looked into any comparable data of other assessees in similar trade. He arrived at that conclusion that the assessee’s explanation is acceptable despite there being a clear allegation by the Investigation Wing that the agreement for payment of barge hire charges by the assessee to sister concerns D.B. Bandodkar & Sons (P) Ltd. and SKUB Industries (P) Ltd. was intentionally done to reduce the tax liability and deprive the Government of its legitimate taxes. He contended that when the assessee was having its own barges and was giving them on hire, there was no necessity to take barges on hire from the sister concerns.
According to the learned Senior Departmental Representative, this aspect has not been investigated by the AO.
59. Regarding the shortage of iron ore, the learned Senior Departmental Representative pointed out that the report of the Investigation Wing was not acted upon. The AO did not care to examine that the assessee was purchasing iron ore as per bill of lading in cases of full shipment and by barge draught in case of partial shipment. As the payments had to be made as per weighment of ship, there should not be any shortage of iron ore. In this case also, the AO has accepted the explanation of the assessee without any independent enquiries.
60. The learned Senior Departmental Representative continued and stated that any allegation of the Investigation Wing that in the general ledger purchases from D.B. Bandodkar & Sons (P) Ltd. were shown at Rs. 6,63,95,690, whereas in the P&L a/c based on which the return of income for the year 1992-93 was filed by the assessee the purchases were shown at Rs. 7,49,63,985 has not been examined by the AO. Thus, the inflation of expenses to the extent of Rs. 85,68,295 has escaped assessment.
61. Thereafter, the Senior Departmental Representative took us through the office note and pointed out that everywhere in the said office note, the AO has accepted the explanation of the assessee without making any independent enquiries. The learned Senior Departmental Representative, therefore, concluded that the revision order under s. 263 of the CIT is justified and need not be interfered with.
62. In reply, the learned counsel Mistry objected to the filing of the paper-book containing 69 pp. by the Department. He pointed out that the paper-book filed by the Department is improper and impermissible in view of r. 18 of the Tribunal Rules, 1963. He, therefore, urged that the said paper-book should be ignored.
63. The learned counsel further alleged that despite an order of the Bench to grant inspection of the files, the Departmental Representative has refused to grant inspection of the files of the assessee other than the assessment file. He urged that in view of this attitude of the Department, the Tribunal must draw an adverse inference and must come to the conclusion that the Department is trying to suppress materials which would irrefutably establish the assessee’s case and negate that of the Department.
64. After this preliminary objection to the filing of the paper-book by the Revenue, the learned counsel of the assessee dealt with the arguments of the learned Departmental Representative. He submitted that one of the main issues in these appeals is whether it is legal for the CIT to ignore the express provisions of s. 263(1) of the IT Act and state that it is not necessary to hear the assessee or consider his objections before passing any order under s. 263 of the Act. In the opinion of the learned counsel, this issue has not even been attempted to be dealt with by the learned Senior Departmental Representative and he has not given any answer to the objection raised by the assessee.
65. The learned counsel further contended that the learned Senior Departmental Representative has made an attempt to confuse the issues and to try and create prejudice by raising other questions. The other aspects raised by him are not at all relevant to the issue and, therefore, the learned Senior Departmental Representative should have made an attempt to answer the objections of the assessee to the effect whether the order under s. 263 can be passed without hearing the assessee or considering the objections.
66. The learned counsel continued and pointed out that the ground on which powers under s. 263 have been invoked by the CIT are according to him : “the entire exercise was a charade undertaken by the assessee and his representative on the one hand and the AO and the CIT on the other hand to give a semblance of normality to their actions … The sequence of events narrated lead only to the inescapable conclusion that these assessments were not made bona fide in the normal course of the discharge of their duties by either the AO or the CIT …. I am satisfied that these assessments which were made totally ignoring the findings of concealment recorded by the Investigation Wing were totally erroneous and absolutely prejudicial to the interests of the Revenue”. The learned counsel pointed out that the question of alleged mala fide was never put to the assessee and not even mentioned in the show-cause notice and, therefore, no order under s. 263 can be passed on this basis. According to him, this crucial issue has not even been attempted to be dealt with by the learned Departmental Representative.
67. The learned counsel further pleaded that the main limb of the argument of the learned Senior Departmental Representative was that the AO failed to investigate the case. This attempt of the learned Senior Departmental Representative, he asserted, was only to confuse the issues and to try and create prejudice.
68. Further, the learned counsel took us through the various propositions on the basis of which he has built-up his case. He pointed out that the assessee’s propositions have not been properly dealt with by the Senior Departmental Representative. He again took us through his own propositions and the answer thereto by the learned Senior Departmental Representative and pointed out that the learned Senior Departmental Representative has not effectively dealt with these propositions. According to the learned counsel, the learned Senior Departmental Representative has made an attempt to confuse the issues. Regarding the arguments of the learned Senior Departmental Representative on “some further aspects of the matter” the learned counsel pointed out that these are not at all relevant to the issue before the Tribunal. The learned counsel, therefore, maintained that on the facts and in the circumstances of the case, the order under s. 263 of the CIT cannot be maintained.
69. We have heard the rival submissions. Assumption of jurisdiction under s. 263 by the CIT is dependent upon the error in the assessment order and the prejudice to the Revenue. These two conditions must be satisfied before the CIT assumes his revisional jurisdiction under s. 263 of the IT Act. There may be cases where the order of the AO is merely erroneous and no prejudice has been caused to the Revenue. Such orders are not subject to revision under the said section. Conversely, certain orders may be prejudicial to the interests of Revenue, but there may not be any error in the order of the AO. Such order also cannot be the subject-matter of revision. It is, therefore, imperative that both these conditions should be satisfied before the CIT takes recourse to s. 263 of the IT Act.
70. We may also mention that the order of the AO may be brief or cryptic, but that by itself is not sufficient reason to brand the assessment order as erroneous and prejudicial to the interests of Revenue so as to give the CIT jurisdiction to invoke the provisions of s. 263. Writing an order in detail may be desirable, but the order not fulfilling this condition cannot be said to be erroneous and prejudicial to the interest of Revenue merely on this basis. It is for the CIT to point out as to what error was committed by the AO in having reached the conclusion on the various issues before the AO. It is settled position of law that if the CIT failed to point out any error, no error can be inferred from the orders of the AO for the simple reason that they are bereft of details.
71. Moreover, in order to exercise the power under s. 263, (i) there must be material for the CIT to consider that the order passed by the AO was erroneous insofar as it was prejudicial to the interest of Revenue : It is true, unlike s. 147, for the initiation of proceedings under s. 263(1), no conditions precedent are required to be fulfilled, but when a statutory authority proceeds to act by virtue of the power given under a statutory enactment, exercise of which is dependent upon the existence of certain objective factors and when a challenge is thrown that such objective factors are not present and such challenge is made by placing before the Tribunal factors which the statutory authority considered to be factors relevant for the exercise of the power, it is open to the Tribunal to examine whether such factors are relevant for the exercise of the power. In other words, the order under s. 263(1) of the CIT should be judicious and should be based on the objective factors. The prejudice or bias has no place under the statute to exercise the revisional jurisdiction under s. 263 of the IT Act.
72. In the case before us, as already stated above, the premises of the assessee were subjected to search on the basis of which the interim appraisal report and final appraisal reports were prepared by the Investigation Wing. In the said appraisal reports, it was alleged that the assessee had paid (i) excess amount for hiring the barges from the sister concerns, (ii) the assessee had claimed shortages in iron ore which was not justified, and (iii) the assessee was guilty of inflation of purchases. These appraisal reports were duly forwarded by the Investigation Wing to the AO with a view to investigate the issues with reference to the books of account maintained by the assessee and other materials which might be furnished by the assessee to the AO. On receipt of the appraisal reports, the AO had examined the three issues under consideration, first at the time of order under s. 132(5) and second when the regular assessment was made. As a result of the investigations, the AO had given a finding that as regards the barge hire charges the assessee had hired out these barges to outsiders and earned Rs. 1,03,24,264 in the accounting year 1991-92 and Rs. 1,09,73,721 in the accounting year 1992-93. The AO also found out, as a result of investigation, that the rate of hire charges were fixed by the Goa Barge Owners’ Association. The AO also gave a finding that such barge hire charges were paid by other mine owners also. It is also pertinent to mention that the same AO was assessing the other mine owners also and therefore, he must be aware that the mine owners were hiring barges on the rate fixed by the Goa Barge Owners’ Association. Considering all these facts, the AO was of the view that the assessee did not make any excess payment to the sister concerns. He also gave a finding that even the provisions of s. 40A(2) were not applicable. In our view, therefore, these findings by the AO were based on investigation and on the facts of the case.
73. Regarding the shortage in iron ore, the AO has also taken into account various factors due to which the shortage normally occurs. He has also mentioned that such shortages are claimed by other mine owners also. It may also be mentioned that such shortages were allowed by the Department in the case of the assessee itself in the previous years. The AO therefore, decided to accept the shortage as reasonable on the basis of facts available before him and on the basis of prevalent market conditions in the case of other mine owners.
74. Regarding the allegation of inflation of purchases, we find that the assessee had given the explanation that the difference was on account of price fixation between the assessee and its sister concerns. It was brought to the notice of the AO that difference in prices was shown by the sister concerns also as their sales. The sister concerns also admitted that the price difference was on account of negotiations to increase the prices. This issue was also investigated by the AO and after such investigation accepted the contention of the assessee.
75. As far as appraisal reports are concerned, we are of the view that these reports raised certain presumptions regarding the concealment of income under three heads under review. These presumptions raised by the Investigation Wing were on the basis of preliminary enquiry and without any detailed investigation. These presumptions were rebuttable and were in fact rebutted by the assessee before the AO by filing the necessary evidence. It, therefore, cannot be said that the issues raised in the appraisal reports were not dealt with by the AO. There is no law that the appraisal reports should be accepted as such if the facts of the case warrant otherwise. The only grievance of the CIT in this case appears to be that the AO did not accept the appraisal reports. In our view, the appraisal reports cannot be taken as the conclusive evidence and after investigation if the AO finds that the contention of the assessee is acceptable and if the issues are clarified by the assessee, no addition need be made on the basis of appraisal reports only.
76. We have mentioned the sequence of events in the earlier part of our order. Various letters were exchanged between the AO and the CIT who was monitoring the case. The CIT in his turn had directed the AO to make certain investigation and report the results of the said investigation to the CIT. The AO had duly complied with such instructions of the CIT. After the investigation by the AO at the time of s. 132(5) order and at the time of regular assessments, the CIT was appraised that on the facts and in the circumstances of the case, no addition was justified. On the basis of such reports from the AO, the CIT has directed the AO to complete the assessments in accordance with law. The assertion of the Senior Departmental Representative that the CIT did not specifically approve the report of the AO has no legs to stand upon. If the AO had written a detailed letter to the CIT stating the reasons for not making the additions and thereafter the CIT directs the AO to complete the assessments in accordance with law taking into account the investigation done by the AO, it clearly means that the CIT had accepted the report of the AO. Had it not been so, the CIT would have directed the AO to make some further investigation in the matter. In our view, therefore, the AO has made the investigation required in the matter and, therefore, there is no force in the argument of the learned Senior Departmental Representative that proper investigation was not done in this case. The learned Senior Departmental Representative’s assertion that the AO had merely accepted the submissions filed by the assessee cannot be supported in view of the fact that if on investigation the AO does not come to any other conclusion and further he finds that the explanation is acceptable, the AO has no other option but to accept the explanation of the assessee. In our view, therefore, the assessment order was not passed without proper investigation. On this aspect of the case alone, the order of the CIT is liable to be set aside.
77. It is a settled legal position that there must be some material on record to enable the CIT to come to the conclusion that the order of the AO is erroneous as well as prejudicial to the interest of Revenue. The scope of interference under s. 263 is not to set aside merely unfavourable orders and bring to tax some more money to the treasury, nor is the section meant to get at sheer escapement of revenue which is taken care of by s. 147 of the Act. The scope of s. 263 can only be applied where there is a clear-cut material on record to show that the order of the AO is erroneous as well as prejudicial to the interest of Revenue. In the case before us, except the appraisal report, there is no other material on record to show that any error has crept in in the order of the AO which has caused prejudice to the Revenue. Regarding the appraisal reports, we have already discussed above that it cannot be taken as a conclusive evidence unless corroborated by further evidence. If the provisions of s. 263 were to be invoked by the CIT merely on the basis of appraisal report, it was for him to point out as to how and to what extent the investigation done by the AO is not upto the mark. In other words, it was incumbent on the part of the CIT to demolish the base on which the AO has accepted the explanation of the assessee. It was for the CIT to clearly demonstrate that the AO had gone wrong for the reasons which the CIT should have stated in his order under s. 263. In other words, the CIT must dispassionately and objectively examine the records and on the basis of material on record should come to the conclusion that there was an error in the order of the AO which has caused prejudice to the Revenue. Mere suspicion will not be enough to apply s. 263 of the Act. As already mentioned we do not find any other material except the appraisal report which may have prompted the CIT to conclude that there was an error in the order of the AO. It, therefore, appears that the CIT invoked the provisions of s. 263 merely on the basis of appraisal reports. On this ground also, the order of the CIT cannot be sustained.
78. The CIT had issued revision notice to the assessee vide his letter, dt. 24th April, 1996. The three issues under consideration were mentioned by him in the said notice. The assessee was asked to show-cause as to why the order of the AO should not be set aside.
79. In response to the notice issued by the CIT, the assessee had submitted detailed reply vide their letter, dt. 30th August, 1996. The clarification regarding all the three issues were furnished. Certain documents in the form of copy of agreements were also furnished by the assessee to the CIT. The CIT was appraised of the full facts of the case and was requested to drop the proceedings. The CIT, however, did not consider the written submissions of the assessee and vide para 28 of his order observed :
“In view of the above position, I do not think it is necessary to consider the detailed written submissions made by T. Pooran, advocate, on behalf of the assessee. T. Pooran, has been instructed to make these submissions, as if these assessments were made bona fide in the normal course. These submissions have been made only with a view to mislead me to accept that these assessments were made bona fide and that the AO after full detailed consideration and examination had come to different conclusions from that drawn by the Investigation Wing. Had the assessments been made bona fide, I would certainly have examined the various contentions raised by T. Pooran. In the facts of this case, there is no justification for considering the same, since it proceeds on the misleading footing that the assessments were made in the normal course after due examination and exercise of due care in coming to various conclusions.”
From the order of the CIT, it is clear that he did not consider the submissions of the assessee and in fact did not allow meaningful and effective opportunity of being heard. Sec. 263 of the IT Act contemplates a notice to the assessee. In response to the said notice, the assessee may show to the CIT that the order sought to be revised is not prejudicial to the interest of Revenue. Under the law, it is open to the assessee to urge any ground, whether such ground was urged or not before the AO, to establish that the order is not prejudicial to the interest of Revenue. In such a case, the CIT would have no jurisdiction to take any further action if he is satisfied with the explanation of the assessee. He would be competent to take action only if he rejects the plea of the assessee. It thus becomes necessary for the CIT to examine the merits of the objections raised by the assessee. It is incumbent on the part of the CIT to deal with each and every objection and come to an objective finding before either accepting those contentions or rejecting the same. The CIT cannot delegate that power to the AO by setting aside the assessment order and directing him to make fresh assessment after taking into consideration the objections of the assessee. This is more so, because under s. 263 the CIT can himself modify or enhance the assessment and that he can only do if he considers and decides on merits the objections raised by the assessee. Without going into the merits of the claim of the assessee, it is not permissible for the CIT to say that the order of the AO had caused any prejudice to the interest of Revenue and as such, he is not competent to set aside the assessment order and remand the matter to the AO. In other words, the CIT should not only hear the assessee, but also should deal with the objections raised by the assessee before him. After dealing with the objections from the assessee only the CIT can decide whether there is any error in the order of the AO which has caused prejudice to the Revenue. Failure to follow the above procedure would amount to failure of natural justice and on this issue alone, the order of the CIT under review is liable to be set aside. The CIT has clearly stated that he need not consider the written submissions of the assessee. He has also not considered objectively the various objections raised by the assessee. He has also not examined the provisions of various agreements which were on record before the CIT which supported the payment of barge hire charges. As a matter of fact, as it appears from the facts of the case, the CIT totally shut his eyes to any other aspect of the case, except the appraisal reports of the Investigation Wing. On this ground also, the order of the CIT cannot be supported.
80. We have adverted above to the facts that the CIT had monitored this case and the assessment order was passed by the AO after the approval by the CIT. The CIT, while invoking the provisions of s. 263 of the Act was, however, of the view that the entire exercise was a charade undertaken by the assessee and his representative on the one hand and the AO and the CIT on the other hand to give a semblance of normality to their actions. According to the CIT, no serious investigation was undertaken by the AO. He has merely accepted the explanation filed by the assessee. The fact, however, remains that the AO had completed the assessment under the direct supervision of the CIT. In our view, the order of the AO cannot be said to be erroneous if he had merely followed the instructions of the CIT. We have mentioned the relevant dates, etc. on which letters were exchanged between the AO and the CIT. From time to time, the AO had brought to the notice of the CIT the investigations done by him and the CIT in turn had also asked the AO to make certain further enquiries. After the CIT was satisfied that the AO has made sufficient enquiry in his opinion, the CIT had directed the AO to complete the assessment in accordance with law and on the basis of investigation made by him. It is, therefore, clear that the assessment order was passed by the AO under the directions of the CIT. The Act does not contain any provision by which an order of the CIT could be revised by another CIT. The order passed in pursuance of a direction of a superior authority, like the appellate authority or High Court or as a consequence of settlement arrived at by the CIT could not be subject-matter of revision under s. 263 because the AO could not be said to have applied his mind to it and, therefore, his order could not be said to be erroneous so as to be prejudicial to the interest of Revenue. In this regard, we are very well supported by the decision of the Tribunal, Bombay Bench in the case of Trustees of Parsi Panchayat Funds & Properties vs. DI (supra). The Bombay Tribunal in the case of Savani Transport Ltd. vs. Dy. CIT (supra) has also laid down the same proposition. In this case even reference application of the Department was rejected by the Tribunal. These two decisions clearly lay down that the assessment order passed by the AO at the direction of the CIT cannot be subject-matter of revision by another CIT. This issue was also decided by the Bombay Bench of the Tribunal in the case of Kiran & Co. vs. ITO (supra). Thus, there are sufficient number of judicial decisions which support our view that the order passed by the AO following directions of the CIT cannot be revised. On this ground also, the order of the CIT cannot be maintained.
81. We have carefully gone through the judicial decisions brought to our notice by the learned Departmental Representative. These decisions can be classified into several categories. Some of the decisions relied upon by the learned Senior Departmental Representative lay down the proposition that the CIT himself need not make enquiry before assuming jurisdiction under s. 263. For this proposition, we have no quarrel with the Department. This, however, is not the issue before us. Those decisions, therefore, are not applicable to the facts of the case.
82. The second set of decisions given by the learned Departmental Representative are on the proposition that the written submissions of the assessee need not be considered by the CIT if the error and prejudice are self-evident in the assessment order of the AO. According to the learned Senior Departmental Representative, if the errors are self-evident, there is no necessity of giving opportunity to the assessee. This proposition of the learned Senior Departmental Representative is not acceptable to us. The principles of natural justice are embedded in s. 263(1) itself which clearly lays down that the assessee has to be heard before the CIT assumes jurisdiction under s. 263 of the Act. These decisions, therefore, in our view, do not advance the case of the Revenue.
83. The third set of decisions given by the learned Departmental Representative are to the effect that provisions of s. 263(1) can be applied in cases where proper investigation has not been made by the AO. These decisions also do not support the case of the Department in view of our finding that proper and sufficient investigation was done by the AO in the case of the assessee.
84. We have also gone through the other judicial decisions cited by the learned Senior Departmental Representative and we are of the view that these decisions do not change the legal position as enumerated by us above.
85. Viewed from any angle, we are, therefore, of the view that the CIT was not justified in assuming revisional jurisdiction under s. 263 of the IT Act. We accordingly set aside his order.
86. Since the assessee has succeeded on the preliminary ground itself, we do not consider it necessary to deal with the merits of the case.
87. In the result, the appeals are allowed.