ORDER
Per Shri R. Rangayya, Accountant Member – This is an appeal filed by the assessee against the order passed by the Commissioner of Income-tax under section 263 of the Income-tax Act, 1961 for the asst. year 1984-85. The ITO by an assessment order passed on 18-8-1984 computed the assessees total income at Rs. 11,980. The Commissioner on a perusal of the records found that the balance-sheet filed by the assessee showed borrowings from 24 parties aggregating to Rs. 10,90,687. The ITO had accepted the credits as genuine on the basis of the confirmatory letters filed but the assessee. However, a survey conducted subsequently showed that many of the creditors are not available at the address given and the summons served to them had returned unserved by the postal authorities. In the circumstances, the Commissioner was of the opinion that the credits shown by the assessee in the names of the various parties are not genuine. He therefore, issued a notice to the assessee to show cause why the assessment should not be properly revised or modified for considering the genuineness of the cash credits appearing in the names of the above 24 parties, in accordance with the provisions of section 68 of the Income-tax Act, 1961. In reply to the above notice, the assessee submitted that the ITO had accepted the credits of Rs. 10,90,687 on the basis of confirmatory letters filed by him. Since all the relevant information and material was available before the ITO while completing the assessment under section 143(3), the ITO could not be said to have committed any error in making the assessment. There was also no basis to consider that the assessment made by the ITO is prejudicial to the interest of the Revenue. It was also pointed out that the information obtained by the department on the basis of subsequent survey cannot constitute record within the meaning of the term used in section 263 as it stood at that time. Since the Commissioner could not rely on record, which came into the possession of the department after completion of the assessment, it is contended that he had no jurisdiction to act under section 263 by taking into account the results of the survey. It was accordingly prayed that the proposal to modify or revise the assessment under section 263 be withdrawn.
2. After hearing the assessee, the Commissioner by his order dated 12-8-1986 observed that in a case where the ITO had not made the normal enquiry which should have been made, and in a case where prima facie, the returned income appears to be understated, the Commissioner has the power to invoke the provisions of section 263. He accordingly set aside the assessment order with a direction that the ITO should redo the same after enquiring into the guanines of the credits appearing in the books of the assessee. Aggrieved with the above order of the Commissioner, the assessee is in appeal before us.
3. Shri Seetharaman, the learned representative for the assessee contends that the Commissioner could not have taken into account the results of survey made by the department after completion of the assessment in order to pass the order under section 263. It is submitted that any material obtained after the assessment cannot form part of the record as envisaged in section 263 and it cannot be taken into consideration for the purpose of invoking the provisions of section 263, in view of the decision in the case of Ganga Properties v. ITO [1979] 118 ITR 447 (Cal.). It was further contended that the ITO while making the assessment was satisfied on the basis of the confirmation letters issued by the creditors that the credits were genuine and that in the absence of any contrary material, there was no basis to suggest that the assessment order was erroneous and prejudicial to the interest of the revenue for the Commissioner to invoke the provisions of section 263. In the circumstances, it is contended that the order passed by the Commissioner under section 263 should be cancelled and the assessment made by the ITO should be restored.
4. The learned departmental representative, on the other hand, brings to our notice that the provisions for section 263 have been amended by inserting Explanation (b) which runs as follows :
“Explanation : For the removal of doubts, it is hereby declared that, for the purpose of this sub-section an order passed by the Assessing Officer (on or before or after the 1st day of June, 1988) shall include :
(a) …………………………..
(b) record (shall include and shall be deemed always to have included) all records relating to any proceeding under the Act available at the time of examination by the Commissioner.”
Since the word “record” includes and shall be deemed always to have included all records relating to any proceeding under the Act available at the time of examination by the Commissioner, the results of survey undertaken by the Department should also be taken as part of the record. Since it is found in the course of the survey that most of the creditors were non-existing persons at the given address, all the 24 credits appear to be spurious, and the Commissioner is perfectly justified in invoking the provision of section 263. It is pointed out that any assessment made by the ITO without making proper and necessary enquiries, which ought to have been made, will be an order erroneous and prejudicial to the interests of the Revenue. Reliance in this connection was placed on the following decision :
1. Madras High Courts decision in the case of Indian Textiles v. CIT [1986] 157 ITR 112,
2. Patna High Courts decision in the case of CIT v. Pushpa Devi [1987] 164 ITR 639,
3. Delhi High Courts decision in the case of L. Bansi Dhar & Sons v. CIT [1978] 111 ITR 330,
4. Delhi High Courts decision in the case of Gee Vee Enterprises v. Addl. CIT [1975] 99 ITR 375, and
5. ITAT, Bombay Bench A decision in the case of Vinay D. Valia v. Addl. Second ITO 27 ITD 109.
5. In reply, Shri Seetharaman, the learned representative for the assessee, contends that the Amendment made on sec. 263 takes effect only from 1-6-1988 and as the order of the Commissioner was passed much earlier, the benefit of this amendment cannot be availed of by the Revenue. It is further contended that even the earlier amendment brought into existence w. e. f. 1.6.1988 by Finance Act, 1988 also is of no avail as that Amendment also comes into effect from 1-6-1988.
6. We have considered the rival submission. In our opinion, the assessees appeal has no substance and requires to be rejected. The assessee in this case filed a return on 9-8-1984 disclosing an income of Rs. 6,162. A balance sheet was filed before the ITO in which credits of Rs. 10,90,687 were appearing in the names of 24 persons. In the course of the assessment made by the ITO on 18-8-84 i. e., within nine days from the date of filing the return, the ITO without making any independent enquires seems to have accepted the confirmatory letters filed by the assessee and completed the assessment accepting the genuineness of the credits. Later, when the department conducted a survey under section 133A on 21-6-1985, it was found that most of the creditors were non existing persons inasmuch as, the summons addressed to them could not be served by the postal department since no such persons existed at the given addresses. This clearly showed that the substantial credits of Rs. 10,90,687 are not genuine and the action of the ITO in accepting the cash credits without examination regarding the genuineness of the credits is erron0eous and prejudicial to the interests of the Revenue.
7. The Delhi High Court in the case of Gee Vee Enterprises (supra) held that the Commissioner can regard the order as erroneous on the ground that in the circumstances of the case the ITO should have made further enquiries before accepting the statements made by the assessee in his return. The reason is obvious. The position and function of the ITO is very different from that of a civil court. The statements made in a pleading proved by the minimum amount of evidence may be adopted by a civil court in the absence of any rebuttal. The civil court is neutral. It simply gives decision on the basis of the 0pleading and evidence which comes before it. The ITO is not only an adjudicator but also an investigator. He cannot remain passive in the face of a return which is apparently in order but calls for further inquiry. It is his duty to ascertain the truth of the facts stated in the return when the circumstances of the case are such as to provoke an inquiry. It is because it is incumbent on the ITO to further investigate the facts stated in the return when circumstances would make such an inquiry prudent that the word “erroneous” in section 263 includes the failure to make such an enquiry. The order becomes erroneous because such an inquiry has not been made and not because there is anything wrong with the order if all the facts stated therein are assumed to be correct.
8. 0In Addl. CIT v. Mukur Corpn. [1978] 111 ITR 312, the Gujarat High Court had held that where it is obvious that the ITO had committed an error in not making enquiry into the details as regards both the deductions and also that want of such enquiry had resulted in prejudice to the interest of the revenue, to that extent the initiation of action under section 263 by the Commissioner was quite proper.
9. The Madras High Court in the case of Indian Textiles (supra) held that where the ITO had given relief without any proper verification and such an order being an order prejudicial to the Revenue, it could properly form the subject-matter of revision, under section 263.
100. In the case before us when the assessee had claimed huge sum of Rs. 10,90,687 as borrowings made from certain creditors, the action of the ITO in not making enquiries in order to find out the genuineness of these credits, is certainly erroneous and prejudicial to the interests of the Revenue, especially in the light of the further facts brought on record during the course of survey, which showed that the creditors are not available at the addresses given by the assessee.
11. The claim of the assessee that the Amendment made to section 263 by insertion of clause (b) defining the word “record” which came into effect from 1-6-1988, will not be available to the Revenue, had to be rejected. Firstly, the Explanation which has been 0enacted w. e. f. 1-6-1988 clearly states that it has been enacted for removal of doubts. This is clearly in the nature of a declaratory legislation for removal of doubts.
12. The Madhya Pradesh High Court in the case of CIT v. Vithal Textiles [1989] 175 ITR 629, while examining the retrospective effect of Explanation held that the declaratory Act may be defined as an act to remove doubts existing as to the common law, or the meaning or effect of any statute. Such Acts are usually held to be retrospective. In that case the Court was considering clause (a) of Explanation to section 263 which is also enacted for removal of doubts. Though the Explanation came into force from October 1, 1984, it was held that the amending Act, being declaratory, must be held to be retrospective.
13. The position has been further clarified beyond the pale of any controversy, by reason the amendment made by Finance Act, 1989, with retrospective effect from 1-6-88. By this amendment, clause (b) of Explanation runs as follows :
“Explanation (b) : record (shall include and shall be deemed always to have included) all records relating to any proceeding under this Act available at the time of examination by the Commissioner.”
The above amendment clearly lays down that the word record shall be deemed always to have included, all records relating to any proceeding under the Act available at the time of examination by the Commissioner. The above definition of record clearly shows the intention of the legislation in making the definition specifically retrospective in nature, as to the meaning to be given to the word “record”. Examining the case in the light of the definition now brought into existence, the results of the survey made by the department after the completion of assessment will form part of the record and the Commissioner will be entitled to take into account such results for purpose of deciding whether a particular order passed by the ITO is erroneous and prejudicial to the interests of the Revenue or not. In the circumstances, we are of the opinion that the Commissioner is justified in coming to the conclusion that the order passed by the ITO is erroneous and prejudicial to the interest of the Revenue and directing the ITO to redo the assessment after enquiring into the genuineness of the credits appearing in the assessees books.
14. In the result, the appeal is dismissed.