ORDER
I.S. Verma, J.M.
1. In this appeal by the assessee against the order under Section 263 of the IT Act (hereinafter called ‘the Act’), passed by the CIT, Central Circle, Kanpur on 22nd March, 1999, the assessee has assailed the CIT’s order by way of as much as 13 grounds extracted as under:
“1. The CIT (Central), Kanpur, has erred against law and facts on record in framing the order dt. 22nd March, 1999, under Section 263 of the IT Act contrary of law and facts on record.
2. The CIT (Central) is in error in passing an order under Section 263 with respect to order of assessment dt. 27th March, 1997, despite the facts that the order of assessment dt. 27th March, 1997, was neither erroneous nor prejudicial to the interests of the Revenue on the facts and circumstances of the case.
3. The CIT while framing the order under Section 263 had failed to take cognizance of the record available at the time of its examination by the learned CIT in accordance with the Section 263, Explanation Clause (b), of the IT Act, 1961.
4. The order passed under Section 263 by the CIT, (Central) Kanpur, is without jurisdiction as the CIT failed to appreciate that the order of assessment dt. 27th March, 1997, had merged with the order of the CIT(A) for the asst. yr. 1994-95 and that the order under Section 263 passed by the CIT was contrary to the provisions of Section 263 Expln. Clause (c) of the IT Act, 1961, and that the CIT(A) in the appellate order for asst. yr. 1994-95 had considered the matters in respect of which the order under Section 263 has been passed, as issue of deposits as well as, interest payable on them was subject-matter of appeal before the CIT(A) and consequentially the CIT had no jurisdiction under Section 263 for revising the assessment order on that issue.
5. The CIT ought to have considered while framing the order under Section 263 that the assessment had been framed by the AO after making all necessary enquiries and after considering the law applicable in the circumstances of the case and therefore, the order of assessment was not passed in undue haste and without proper enquiry and therefore, such order could not be considered as erroneous within the meaning of Section 263 of the IT Act.
6. The CIT while framing the order under Section 263 has failed to appreciate correctly the facts and circumstances of the case with respect to provisions of interest on deposits has erred against law and facts on record in setting aside the order of assessment made by the AO for the purpose of considering the allowance to disallowance of the interest.
7. The CIT has not correctly appreciated and understood the terms and conditions of the various deposits scheme run by the appellant particularly with regard to charge of interest and therefore, the various observations made in the order under Section 263 with regard to provisions of interest are not correct/have not been properly understood in the facts and circumstances of the case.
8. That the CIT, is not justified in concluding that the liability on account of interest payable on deposits under GGF and GFDA Schemes was a contingent liability.
9. That the CIT erred in law and facts in presuming that the AO did not investigate the issues relating to the correctness of the liability provided on account of interest payable on deposits under GGF and GFDA Schemes and the allowability of such liability on accrual basis.
10. That the CIT Central have erred in holding, that the liability on account of interest payable on deposits under GGF and GFDA Schemes could be determinate or ascertainable only if individual accounts of depositors were credited.
11. That the CIT Central was not justified in considering the assessment order as erroneous and prejudicial to the interest of Revenue without pointing out as to how the action of the AO allowing the liability on account of provision of interest payable on deposits under GGF and GFDA Schemes has rendered the assessment order as erroneous and prejudicial to the interest of Revenue.
12. That the order of the CIT Central is erroneous and merely a change of opinion inasmuch as the interest provisions made on the deposits under GGF and GFDA Schemes has been accepted by the Department in earlier years as well as, in the subsequent year i.e. asst. yr. 1995-96, there being no change in system thereof during the asst. yr. 1994-95.
13. The CIT’s order under Section 263 of the IT Act does not fulfil the jurisdictional conditions necessary for framing such order.”
1.1. Since the arguments advanced by the parties were on the basis of issues and not groundwise we, after hearing the arguments for both the parties, are of the opinion that the issues raised by the appellate can be dealt with and adjudicated upon by way of decisions of following issues formulated by us.
Issue No. 1
Was the notice under Section 263 of the Act dt. 22nd Feb., 1999, issued without
proper examination/consideration/perusal of assessee’s assessment records by the CIT, and therefore, there was no application of mind as well as exercise of quasi-judicial discretion and judgment by the CIT and, if that being the case, were the notice under Section 263, dt. 22nd Feb., 1999, and consequently the order under Section 263, dt. 22nd March, 1999, bad in law and void ab initio.
Issue No. 2
Was the assessment order dt. 27th March 1997, was neither erroneous nor prejudicial to the interest of the Revenue, as claimed by the assessee ?
Issue No. 3
If the assessment order was erroneous so far as prejudicial to the interest of the Revenue, than the CIT having not given any reason as to how the action of the AO allowing the liability on account of interest payable on deposits under two schemes, namely, ‘Golden Fixed Deposit Account called as GFDA) and ‘Golden Growth Fund, (called as GGF) has rendered the assessment order erroneous and prejudicial to the interest of Revenue, could the order under Section 263 of the Act cannot be sustained.
Issue No. 4
Had the assessment order dt. 27th March 1997, on the issue of allowability of deduction of expenditure on account of interest payable on deposits received under the two schemes, merged with the order of CIT(A), dt. 1st Jan., 1999 ? If it had merged then had the CIT’s jurisdiction to revise the assessment order with respect to the issue of allowability of the interest.
Issue No. 5
Was the CIT not justified to observe that the liability on account of interest payable on the deposits under these two schemes was a contingent liability and that the AO has not investigated the issue, and that liability on account of interest payable could be said to have been ascertained only if individual accounts of the depositors were credited ?
Issue No. 6
Was the CIT justified in concluding that AO has not disallowed the interest payable on lapsed and unclaimed matured accounts, without making any enquiry or pointing out as to which of the specific accounts were “lapsed” or were “unclaimed matured accounts”.
2. Issue No. 1
Arguing on the first issue, the learned Senior Advocate Mr. Dastur, appearing on behalf of the appellant-assessee, submitted, after drawing our attention to paras 5 and 6 of the order under Section 263 of the Act, para 15 of the assessment order and para 98 of the order of the CIT(A), that it is an admitted fact that the AO had disallowed an amount of Rs. 5,35,29,140 out of assessee’s claim of expenditure on account of provision made for interest payable on deposits under the two schemes, namely GFDA and GGF, and the issue of disallowance of any interest out of such expenditure has been set aside by the CIT(A) (para 98 of his order dt. 1st Jan., 1999), but the CIT in para 5 of order under Section 263 of the Act on the one hand states that the result of making minimum provision of interest payable (c) 12 per cent will result into lower charge in the initial period
and higher charge in the later years whereas, in para 6 of his order the CIT has observed that the AO did not investigate the issue relating to the allowance of deduction on account of interest payable on these two schemes and has allowed the claim of interest @ 12 per cent per annum, without proper enquiry. According to the learned counsel, these conflicting observations of the CIT leads to one and only one conclusion that the CIT had not applied his mind at all and this could be only because of any of the following situation namely (1) either the A’s assessment records were not before the CIT or (2) if the assessment records were with him, he had not examined the same of his own.
2.1. Another submission in support of claim that CIT had not applied his mind or the assessment records were not before him, the learned Senior Advocate submitted that the CIT, while issuing notice under Section 263 of the Act on 22nd Feb., 1999, started with the contention that assessee had claimed interest on the defaulted and lapsed account as well as, on unclaimed matured accounts on which interest was not payable after the date of default/maturity, as the case may be, which is quite wrong on facts because in case of both the deposit schemes, namely, GFDA and GGF, there was no question of any lapsed or unclaimed matured account and in support of this he referred to the terms and conditions of both the schemes (certified copies furnished before the Bench), which are made Annexures ‘A’ and ‘B’ to this order.
2.2. Referring to the GFDA Scheme, the counsel, after referring to the terms and conditions of the scheme, submitted that the tenure of the account, which was fixed, was for 12,24,36,48 or 60 months, if an account holder kept his fixed deposit for any period as mentioned in the term No. 2 of the scheme, then the yearly rate of interest payable was 12 per cent, 14 per cent, 14.5 per cent, 15 per cent and 16 per cent for first year, second year, third year, fourth year and fifth year, respectively. But in case an account holder desired to avail the facility of monthly interest, then the rate of interest payable as per term No. 6 was 9.9 per cent per month for one thousand, if the account was held for 12 months, 11.50 per month for every one thousand if the account was held for 24 months, 12 per month for every one thousand if the account was held for 36 months, 12.40 per month for every one thousand if the accounts was held for 48 months and 13-20 per month for every one thousand if the account was held for 60 months. According to the learned counsel, none of the account holders having opted for prematured finalisation of account, the deposits in this scheme were for a fixed period of five years and, therefore, the question of any lapsed account did not arise. Similarly, the first maturity year being 1997, there was no question of any unclaimed matured account also.
2.3. Coming to the second scheme, i.e., GGF, the learned counsel pointed out that it was in the name of a recurring account for 10 years with an option of prematured closing of the account after completion of a period of three years. The scheme having been launched only in January, 1991, there was no question of any prematured settlement of accounts or unclaimed matured account under this scheme also.
2.4. In view of these facts, the assessee’s counsel submitted that non-consideration of these factual position, i.e., the terms and conditions of these schemes by the CIT further strengthens the assessee’s claim that the
assessee’s assessment records were not examined by the CIT if were before him, or the assessment records were, not at all, before him.
2.5. In view of above facts and circumstances, the learned counsel claimed that the notice issued under Section 263 of the Act on 22nd Feb., 1999, having been issued without examination of assessee’s assessment records and/or without application of mind by the CIT, the same was illegal and bad in law and consequently, the jurisdiction assumed by the CIT for passing an order under Section 263 was also illegal. According to the learned council the jurisdiction to issue notice under Section 263 had been assumed illegally, the order passed under Section 263 on 22nd March, 1999, was bad in law and void ad initio.
3. The learned standing counsel, Shri A.N. Mahajan, on the other hand, disputed the assessee’s claim that CIT had not considered the assessee’s assessment records or that the same were before the CIT and pleaded that notice under Section 263 was issued on 22nd Feb., 1999, by the CIT after due examination of assessee’s assessment records and, therefore, the assessee’s claim is unfounded and this was supported by the claim that a proposal from Asstt. CIT (CCI), Lucknow, was received by Fax on 22nd Feb., 1999, and the notice was issued later on the same day. The learned standing counsel alternatively submitted that under the law it is not necessary that the CIT should examine the assessee’s records himself before issuing a notice under Section 263, the records can be examined by the subordinate staff also. He, therefore, submitted that the notice under Section 263, issued on 22nd Feb., 1999, and consequently, the order under Section 263 dt. 22nd March, 1999, were valid in all respects.
4. We have considered the rival submissions but before deciding the issue, we would like to mention the facts relating to the various issues raised in this appeal–as borne out from the records and the orders of the Revenue authorities available on records.
4.1. The assesses is a limited company registered under the Companies Act and was carrying on the business of para-banking activities. The assessee-company started two deposit schemes, namely, Golden Fixed Deposit Account (in short known as GFDA Scheme) and Golden Growth Fund (in short, known as GGF Scheme) on the terms and conditions as are evident from Annexures ‘A’ and ‘B’ to this order. The assessee-company had appointed one of its sister concerns, namely M/s Sahara (India) Firm, as its collecting agent. The agent was to collect the amounts under both the schemes and remit the same to the assessee. The terms and conditions for carrying on the agency business by the sister concern were contained in a separate agreement between the two.
4.2. During the previous year relevant to asst. yrs. 1994-95 the total collection made by the assessee under these two schemes was as under :
Rs.
(i) Under the GFDA Scheme 1,52,93,36,700 (ii) Under the GGF Scheme 67,300 ---------------- Total 1,52,94.04,000 --------------- 4.3 The return of income, as per provisions of Section 139(1), was due to be furnished
by 30th Nov., 1994, but the same furnished on llth April, 1995, in spite of notice under Section 142(1)(i) of the Act having been served upon the assessee on 14th Dec., 1994, itself. The AO seems to have directed the assessee, in terms of provisions of Section 142(2A) of the Act, to get special audit of its accounts, but the directions seem to have not been complied with by the assessee. The AO considering the assessee as defaulter in complying with the provisions of Section 139(1), 142(1)(i) as well as 142(2A) of the Act proceeded to complete the assessment under Section 144 of the Act. The assessee’s dealings with the RBI and alleged non-compliance of the provisions of Sections 139(1), 142(1)(i) and 142(2A) have been discussed by the AO in paras 1.8 to 3.4 of the assessment order. Since M/s Sahara India Firm was assessee’s collecting agent, the AO had carried on detailed enquiries in the case of M/s Sahara India Firm and investigated the genuineness of deposits collected on behalf of the assessee. As a result of detailed investigation so conducted, the AO had come to the conclusion that 50 per cent of the total deposits collected by the agent, which came to Rs. 74,47,02,000 were not genuine and liable to be added in the hands of assessee-company by virtue of provisions of Section 68.
4.4. While drafting the assessment order of the present assessee, the AO accepted the details relating to the investigation on this account carried on and being a part of assessment order of M/s Sahara India Firm for asst. yr. 1994-95 reproduced in paras 3.4 to 3.21 of the assessee’s assessment order, as investigations with reference to the genuineness of the deposits in assessee’s hands also.
4.5. As per para 3.20 of the assessment order of M/s Sahara India firm so accepted by the AO and made a part of present assessee’s assessment order, the issue relating to the genuineness of deposits under the two schemes was concluded as under :
“3.20. Inasmuch as the assessee-company has claimed to collect deposits which are largely not open to verification and there is not enough of evidence to establish genuineness of deposits regarding the source of money, addition of 50 per cent of deposits during the year, which comes to Rs. 74,47,02,000, will be made in the hands of the company under Section 68 of the IT Act, 1961, of the unproved deposits received this year and found credited in the books of accounts, for which notice was already given to the assessee on 3rd Dec., 1996. The facts were in the knowledge of assessee and were not revealed to IT Department despite several opportunities.”
4.6. The assessee, in the P&L a/c for asst. yr. 1994-95, had claimed a deduction of expenses worth Rs. 16,87,88,857 payable on account of interest liability payable on the total deposits of Rs. 2,27,95,11,883 upto 31st March, 1994, and inclusive of deposits of Rs. 1,52,94,04,000 collected during the current year.
4.7. While completing the assessment of the assessee for the asst. yr. 1994-95, the AO made the following disallowances/additions.
(i) Since the AO had considered the deposits worth Rs. 76,47,02,000 as not genuine (para 3.20 of assessment order), he disallowed the proportionate interest on such alleged ungenuine deposits which came to be at Rs. 5,35,29,140 (para 15 of the assessment order).
(ii) Since the agent M/s Sahara India Firm was to remit the collections made on behalf of the assessee, to the assessee within a period of 2 to 2.5 months, a portion of the deposits so collected always remained with the agent and since the assessee was not charging any interest on such amount remaining with the agent, the AO after considering a period of one month as reasonable for remitting the amount by the agent to the assessee, added an amount of Rs. 34,96,173 by calculating interest @ 18 per cent on average balance remaining with the agent at a given point of time computed as per para 7 of the assessment order.
(iii) There was a debit balance, exceeding, six months, of Rs. 1,17,16,752 in the account of another assessee’s sister concern known as M/s Sisicol. The AO considered that if this amount had been invested property by the assessee for its business, then the assessee should have earned an interest income of Rs. 21,09,011. Consequently, the AO after considering this interest free debit balance, as use of interest-bearing deposits not for the purpose of assessee’s business, disallowed an expenditure of Rs. 21,09,011 out of interest expenditure of Rs. 16,87,88,857 claimed by the assessee (para 8).
(iv) The AO had further noticed that the assessee had given a working capital of 2.5 crores without any interest to its collecting agent, namely, Sahara India Firm. The AO came to the conclusion that the interest bearing funds had been utilised for non-business purposes and since the assessee has born the burden, of interest, the interest bearing deposits to this extent have not been used for assessee’s business. Consequently, the AO added an amount of Rs. 60 lacs after calculating the notional interest income @ 24 per cent on interest-free loan of Rs. 2.5 crores (paras 9 and 10 of the assessment order).
4.8. On appeal by the assessee, the CIT(A), as per his order dt. 1st Jan., 1999, decided the issues relating to the aforesaid four disallowances/additions as under :
(i) The issue relating to disallowance of an expenditure of Rs. 5,35,29,440 out of claim of expenditure on account of interest payable on deposits under the two schemes has been set aside for fresh disposal (para 98 of his order) because the issue relating to genuineness of deposits to the extent of Rs. 74,47,02.000 has been set aside by him (para 43 of his order).
(ii) The disallowance of Rs. 34,96,173, additions of Rs. 21,09,011 and of Rs. 60 lacs have been deleted as per paras 65 and 76 of his order.
5. Since there was dispute amongst the parties on the point of examination of assessee’s assessment records by the CIT on or before 22nd Feb., 1999-the date when the notice under Section 263 of the Act was issued, or thereafter but before passing of the order under Section 263 of the Act and there being nothing on record in favour of either of the parties and in view of the observation made in first para of notice under Section 263 of the Act dt. 22nd Feb., 1999, which reads as “It is ascertained that you have provided on historical average basis periodically on the current deposits as well as old balance of deposits without actually crediting the corresponding interest to the individual account of the depositors. You have also claimed interest on the defaulted and lapsed accounts and on the unclaimed matured accounts on which interest is not payable after the date of default/maturity. Thus the liability claimed by you towards interest payable
on such deposits was contingent and unascertained and, therefore, not allowable under the provisions of IT Act, 1961. The assessment order passed under Section 144 for asst. yr. 1994-95 by the Asstt. CIT, CC-1, Lucknow, is therefore, erroneous and prejudicial to the interest of Revenue. I, therefore, propose to invoke provisions of Section 263 of the IT Act, 1961, and issue suitable directions to the AO to allow only that amount of interest for which the liability is ascertained and determinate instead of the total claim made by you and so allowed”, and the fact that the Revenue has disclosed the fact of issuance of the notice under Section 263 on the basis of a proposal received from AO by fax on 22nd Feb., 1999, only, the Bench, in the interest of justice, considered it justified first to verify the rival claims and therefore, to verify the factum of availability and examination of assessee’s assessment records by the CIT on or before 22nd Feb., 1999, or thereafter but before 22nd March, 1999, when the order under Section 263 of the Act had been passed, the learned Sr. Departmental Representative was directed, on 14th Sept., 1999, to produce the material on the basis of which the CIT had come to the conclusion stated in the notice or had issued notice under Section 263 of the Act and the hearing was fixed on 4th Oct., 1999.
5.1. On 4th Oct., 1999, the learned Sr. Departmental Representative furnished a letter No. Nil, dt. 1st Oct., 1999, along with the documents listed as per index given below :
Sl. No. Items Page Nos. 1. Forwarding letter of the Dy. CIT (Judt). Kanpur 1 2. Notice under Section 263 2 3. Fax copy of the proposal under Section 263 sent by the AO 3-4 4. Postal copy of the proposal under Section 263 5-6 5. Order under Section 263 of the CIT (Central) 7-8 6. Assessee's reply to show-cause notice under Section 263 Annexures 9-17 5.2. Letter No. F. No. Dy. CIT (J)/CIT(C)/Misc./99-2000, dt. 23rd Sept., 1999, signed for the CIT by Dy. CIT (Judicial) and enclosed at p 1 of Departmental Representative's aforesaid letter reads as under: "F. No. DCIT(J)/CIT(C)/Misc/99-2000/dt. 23rd Sept., 1999 By Speed Post To The Sr. Authorised Representative, Income Tax Appellate Tribunal, Allahabad. Sir, Sub : ITA No. 509 in the case of M/s Sahara India Mutual Benefit Co. Ltd.-- hearing held on 14th Sept., 1999 before the Tribunal 'A' Bench, Allahabad. Kindly refer to your letter F. No. Sr. AR/ITAT/All/99-2000/dt. Mth.Sept, 199.9, on the subject mentioned above. In this connection, I am sending herewith certified copy of. the notice under s.
263 of the IT Act dt. 22nd Feb., 1999, a copy of the AO’s report received through fax on 22nd Feb., 1999, recommending action under Section 263, written submissions of the assessee and the copy of order under Section 263 written submissions of the assessee and the copy of order under Section 263 dt. 22nd March, 1999. From the. facts of the case, it appears that the notice under Section 263 was issued on the basis of report of the AO which was received on 22nd Feb., 1999 through fax in which it was clearly stated that the interest claimed by the assessee was not allowable as per the provisions of the IT Act. This opinion was formed on the basis of details furnished by the assessee from time to time and its written submissions during the course of hearing before the AO.”
5.3. Since the letter extracted above had clearly specified that the notice under Section 263 of the Act was issued on 22nd Feb., 1999, on the basis of report of the AO received on 22nd Feb., 1999, through fax, it was indicative of the possibility that when the notice under Section 263 oE the Act was issued by the CIT, assessee’s assessment record was not before him and consequently it could be easily gathered that in such circumstances there was no question of examination of assessee’s assessment records by the CIT but still, in the interest of justice, the Bench allowed the learned senior Departmental Representative a further opportunity as per order-sheet entry dt. 4th Oct., 1999, directing him to furnish necessary documents/evidence in support of the claim that AO’s proposal was received by the CIT before issuing notice under Section 263 of the Act and also to furnish the details of record relating to the assessee which was before the CIT and was considered/examined by him before issuing the notice under Section 263. The order sheet entry reads as under :
“4-10-1999
The senior Departmental Representative is directed to furnish necessary documents/evidence in support of claim that Asstt. CIT, Central Cir-I, Lucknow’s letter No. F. No. Addl. CIT(C)/LKO/263/SIMBCOL/1998-99/1155 dt. 22nd Feb., 1999, was received by the CIT before issuing notice No. F. No. Tech/3(xxxii)/CIT(C)/under 263/1998-99 dt. 22nd Feb., 1999, under Section 263 of IT Act. Also to furnish the details of record relating to the present assessee which was before the CIT and was considered by him before issuing the notice under Section 263.
The required details should be furnished by 30th Oct., 1999.
Hearing in the case is adjourned to 1st Nov., 1999.”
5.4. On 4th Nov., 1999, the hearing was adjourned to 25th Nov., 1999.
On 25th Nov., 1999, the learned senior Departmental Representative Mr. Dogra, appearing on behalf of the Revenue, admitted that (i) proposal for initiating proceedings under Section 263 in case of the assessee under reference for asst. yr. 1994-95 was received by the CIT through fax at 3.15 P.M. on 22nd Feb., 1999, without any enclosure and notice under Section 263 of the Act was issued on the same day, i.e., 22nd Feb., 1999, (if) the AO had not sent either assessment order or assessee’s assessment record for asst. yr. 1994-95 to the CIT either along with the proposal sent by fax or along with the copy of the proposal sent by post, (iii) there was no record of meeting of CIT with AO as well as, of the discussion between them, and (iv) there was no evidence to show that
availability of assesses’ record with CIT.
5.5. Since the requisite information/record was not furnished and to avoid retraction on the part of the Revenue from the admission made by the learned senior Departmental Representative, he was again directed to produce the file relating to the proceedings under Section 263 in the assessee’s case, maintained in CIT’s office along with the order sheet and the hearing was adjourned to 30th Nov., 1999. On 30th Nov., 1999, the learned senior Departmental Representative sought adjournment which was allowed and the case was fixed for 3rd Dec., 1999. On 3rd Dec., 1999, the learned senior Departmental Representative furnished a written reply as per his letter No. Nil, dt. 2nd Dec., 1999, which reads as under :
Letter dt 2nd Dec., 1999
“Your honour had desired to persue the original record of the CIT pertaining to proceedings under Section 263 in the above two cases. I have discussed the issue with the worthy CIT (Central), Kanpur, and I have been directed to inform your goodself’s that no separate 263 proceedings record is maintained either in the above two cases or any other case and there is only a comprehensive and compact cord of Section 263 is maintained in one composite folder of the CIT. All the relevant documents pertain to Section 263 proceedings in the above two cases have been submitted before your honour in shape of certified photocopies and there is no other documents besides what has already been submitted. I have also been directed by the CIT to submit before your honour that a number of ancillary acts like discussing the case with the AO and the concerned Range Addl. CIT and going through the assessment records are not brought on record in either the order sheet or the order. However, in the notice issued under Section 263 assessee has been given opportunity to state his case and submit any relevant documents in the propose.
The final order is passed only after taking into account all the relevant material that is taken/available on record. Perusal of the assessment record and discussion with the AO need not form part of the official documentation of CIT’s satisfaction but are still very much in the knowledge of the CIT concerned. I have been directed by the CIT(Central) to request your honour to take decision in the case accordingly.”
5.6. Since the Revenue had not produced the records directed to be produced, the learned senior Departmental Representative was once again asked to produce the requisite records at the time of next hearing and was told that in case he fails to produce the records at the time of next hearing and was told that in case he fails to produce the records as already directed or any evidence with respect to any meeting/discussion between the CIT and the AO then it will be taken that the notice under Section 263 was issued without examination of assessee’s assessment records by the CIT and that the CIT had not examined assessee’s assessment records even till the passing of the order under Section 263.
On this, the learned senior Departmental Representative once again reiterated his admission made on 25th Nov., 1999 (supra).
5.7. After admission by the learned senior Departmental Representative twice first on 4th Oct., 1999, and again on 3rd Dec., 1999, that the AO had not sent
assessee’s assessment records or even assessment order for asst. yr. 1994-95 to the CIT and that there was no evidence with respect to either CIT’s meeting/discussion with the AO or availability of assessee’s assessment records or assessment order before the notice under Section 263 was issued or even thereafter till passing of order under Section 263, it was quite easy/convenient for the Tribunal to hold that CIT had not examined the assessee’s assessment records at any time of the proceedings till the passing of the order under Section 263 of the Act but since the matter was likely to result in serious consciences and also was related to the working in the office of almost seniormost authority of the Department, i.e., the CIT, and there being no communication from the CIT himself and also the fact that the records, as directed by the Tribunal, were not yet produced, the Tribunal, in the interest of justice and fair play and to avoid any uncalled for comments on the working in the office of the CIT allowed the learned Departmental Representative yet another opportunity, though final one, to produce the records relating to the proceedings under Section 263 in assessee’s case as maintained by the CIT on the next date of hearing which was fixed for 15th Dec., 1999.
5.8. On 16th Dec., 1999, the learned Sr. Departmental Representative furnished another written reply under his letter No. Nil dt. 15th Jan., 1999, along with the photocopies of two pages claiming the same to be the acknowledgements for having returned the assessment records of the assessee and also of another company, namely, M/s Sahara India Savings and Investment Corpn. Ltd., Lucknow, in one volume each, and for asst. yr. 1994-95, by the CIT’s office on 17th March, and 23rd Feb., 1999, respectively, and also produced the file maintained by the CIT, Kanpur, relating to proceedings under Section 263 of the Act for asst. yr. 1994-95 in the case of present appellant, which was containing one order sheet for which there were three entries with respect to the proceedings under Section 263 for asst. yr. 1994-95 in assessee’s case. The other entries were for asst. yr. 1995-96. The learned Departmental Representative was directed to file certified copy of p No. 1 of the order sheet available in the file and also the alleged evidence for the receipt of assessment records by the CIT and the hearing was adjourned to 11th January, then to 17th January, then to 25th January, and then to 9th Feb., 2000.
5.9. The case could not be heard either on 10th January, or 17th January or 25th January, or on 2nd Feb., 2000, because of the absence of the learned AM, who was on leave. On 9th Feb., 2000, the case was finally heard when the learned Departmental Representative furnished the certified photostat copy of p. 1 of the order-sheet containing four entries-first three relating to asst. yr. 1994-95 and 4th one relating to asst. yr. 1995-96. The three entries relating to asst. yr. 1994-95 read as under :
26th Feb., 1999
PUC is letter dt. Nil from Asstt. CIT, CCI, Lkn. regarding proposal under Section 263 in case of M/s Sahara India Mutual Benefit Co. Ltd. for asst. yr. 1994-95.
The case has already been fixed for hearing by the learned CIT Camp Kanpur For 9th March, 1999. The notice of hearing was taken to Lucknow. By the learned CIT himself. Hence, if approved, the letters may be kept in file.
Submitted please.
Sd/-ACC(T) Sd/- ITO
26-2-1999
15th March,1999
Sri J.J. Mehrotra, authorised representative and Shri R.K. Singh, Controller Finance, attend. Filed written submissions. Discussed.
22nd March, 1999
Order under Section 263 passed.
Sd/-”
6, We have considered the rival submissions, facts and circumstances of the case, documents furnished by the learned Sr. Departmental Representative, the contents of letter written by the Dy. CIT (Judl) on behalf of the CIT, Kanpur, dt. 23rd Sept., 1999, proposal sent by the AO, provisions of Section 263 and also the case laws available on the point of prerequisite condition/requirement of examination of assessee’s records before issuing a notice under Section 263 or passing of the order under Section 263 of the Act.
6.1. Considering the totality of the circumstances, so far as the availability of evidence with the Revenue with respect of its claim that the CIT had, before issuing notice under Section 263 or before passing order under Section 263 of the Act, examined the assessee’s assessment records is concerned, we now proceed to decide the same on the basis of material before us and the legal provisions in this respect.
6.2. Coming to the assessee’s claim that the CIT had not examined the assessee’s assessment records properly before issuing notice under Section 263 of the Act on 22nd Feb., 1999, we after considering the facts stated in the Dy. CIT’s (Judt.)’s letter written for and on behalf of the CIT, bearing No. F. No. Dy. CIT(J)/CIT(C)/Misc./1999-2000, dt. 23rd Sept.. 1999, clear admission by the learned Sr. Departmental Representative made on 4th Oct., and 3rd Dec., 1999, that there was no other evidence with respect to meeting or discussion between the CIT and the AO and that there were no other documents/records, including order-sheets, with the CIT, so far as, the proceedings under Section 263 of the Act for asst. yr. 1994-95 in the case of present assessee are concerned, (except the documents furnished on 4th Oct., 1999), we are of the opinion that Revenue’s stand till 16th Dec., 1999 was :
(i) That in the case of present assessee the CIT, Kanpur, had not maintained any separate records relating to the proceedings under Section 263 of the IT Act.
(ii) That all relevant documents pertaining to the proceedings under Section 263 in the present case had been furnished before the Tribunal on 4th Oct., 1999, under Sr. Departmental Representative’s letter dt. 1st Dec., 1999 as per letter dt. 1st Oct., 1999, copies of six documents, list of which has already been extracted in para 4.10 (supra) were filed.
In view of these facts, the Revenue’s stand was that the CIT had no other document of any nature relating to the proceeding under Section 263 in the case of the assessee before us.
(iii) That the details of ancillary acts like discussing the case with the AO and Range Addl. CIT and going through the assessment records are never brought
on record either in the order-sheet or otherwise.
(iv) That perusal/examination of assessment records of the assessee and
discussion with the AO need not from part of the official documentation for the
CIT’s satisfaction but still very must in the knowledge of the CIT.
(v) That by the time the notice under Section 263 of the Act was issued, i.e., 22nd
Jan., 1999, the AO had not sent either assessee’s assessment records or
assessment order for asst. yr. 1994-95.
(vi) That there was no evidence with respect to the meeting/discussion of the
CIT with the AO.
(vii) That the learned Sr. Departmental Representative was not aware of the
evidence for receipt of assessee’s assessment record or assessment order for
asst. yr. 1994-95 by the CIT because he has not been supplied with any
evidence in this respect.
6.3. If the Revenue’s stand till 16th Dec., 1999, on the one hand and the stand taken as per letter dt. 15th Dec., 1999, furnished on 16th Dec., 1999. and the photocopy of a loose sheet claiming the same to be an acknowledgement for return of assessee’s assessment records for asst. yr. 1994-95 by the CIT on 17th March, 1999, on the other hand, is considered, then every prudent man will come to one and the only conclusion that there was something wrong in the stand taken by the Revenue i.e., either the stand taken prior to 16th Dec., 1999, was correct or the stand taken thereafter was correct and to decide the issue, we have once again to consider the nature of the proceedings and the documents maintained for such proceedings.
6.4. It is well known and settled principle of law that the proceedings under Section 263 of the Act before the CIT are quasi-judicial and as per the law every authority, while conducting quasi-judicial proceeding, has to maintain a proper and complete record of the proceedings. If such record is not maintained, then it smacks of something wrong with the working of such an authority. The ‘proceedings relating to the quasi-judicial functions are not one’s private affairs–such as going to the market and not keeping the record of enquiries or bargains carried out with the shopkeepers. Non-keeping of such records clearly leads to presume that the authority concerned has either not carried on such functions or has proceeded without having met with the mandatory prerequisite conditions.
Further, when the Revenue had time and again been claiming that there were no other documents except furnished on 4th Oct., 1999, then the authenticity of the so-called acknowledgement receipt for showing to have returned the assessee’s assessment records by the CIT on 17th March, 1999, cannot be taken as an evidence for CIT having examined the A’s records before issue of a notice under Section 263 on 22nd Feb., 1999, specially when no evidence for the receipt of assessment records by the CIT has been brought to our notice by the Revenue.
6.5. What amounts to a ‘record’ is another aspect to be considered in the present case and for that the definition of ‘record’ given as per Expln (b) to Section 263 (already reproduced in the foregoing para) is to be considered.
6.6. The definition starting with the word ‘records’ shall include and shall be
deemed always to have included all records at the time of examination by the CIT.
6.7. The definition being unambiguous and clear, one can easily understand that the records, as contemplated under Section 263, means records relating to any proceedings under the Act available before the AO which resulted in passing of the order to be revised and also the records available before the CIT at that time in addition to record available till the stage of passing of the order, the records available at the time of examination of the records by the CIT.
6.8. The expression ‘record’, as used in Section 263(1), is comprehensive enough to include the whole record of evidence on which the order to be revised was based.
All proceedings, which constitute evidence and on which the order is based, must normally be recorded as part of the record. We have come to this conclusion after considering the decision of Hon’ble Supreme Court of India in case of Maharana Mitts (P) Ltd. v. ITO (1959) 36 ITR 350 (SC). In this case, the Hon’ble apex Court was to consider the meaning of the word ‘record’ appearing in the provisions of Section 35 of the 1921 Act (corresponding to Section 154 of the IT Act, 1961), under which rectification of mistakes apparent from the records was permitted. The Hon’ble apex Court, while considering the meaning of the term ‘record’ contemplated by Section 35 (a term similar to that used in provision of Section 154 as well as, Section 263 of the IT Act, 1961) held that ‘the record’ contemplated by Section 35 does not mean only the order of assessment but it comprises of proceedings on which the assessment order is based.
6.9. In view of above discussion and the decision of the Hon’ble Supreme Court, we are of the opinion that the records, as contemplated under Section 263, do not mean only an assessment order but it comprises of proceedings on which the assessment order is based.
6.10. In view of above facts and circumstances, we are of the opinion that the Revenue has failed to establish the availability. as well as examination of assessee’s assessment records–even assessment order, by the CIT before issuing a notice under Section 263 of 22nd Feb., 1999. The availability thereafter and before passing of the order under Section 263 of the Act on 22nd March, 1999, even if assumed, cannot be of any help to the Revenue.
7. Having come to the conclusion as above, the next issue for our consideration arises as to the consequences, of issuing a notice under Section 263 of the Act without examining the assessment records of the assessee by the CIT and to decide this issue, we consider it necessary to consider the requirements for exercise of a lawful jurisdiction for invoking the quasi judical powers vested in the CIT by virtue of provisions of Section 263 of the Act and for that purpose it is desirable first to go through the provisions of Section 263, which are in the following terms.
‘263(1), The CIT may call for and examine the record of any proceedings under this Act, and if he considers that any order passed therein by the AO is erroneous insofar 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.
Explanation. For the removal of doubts, it is hereby declared that, for the purposes of this sub-section.”
(a) an order passed on of before or after the 1st day of June, 1988, by the Ao
shall include :
(i) an order of assessment made by the Asstt. CIT or Dy. CIT or the ITO on the
basis of the directions issued by the Jt. CIT under Section 144A;
(ii) an order made by the Jt. CIT in exercise of the powers or in the performance of the functions of an AO conferred on, or assigned to, him under the orders or directions issued by the Board or by the Chief CIT or Director General or CIT authorised by the Board in this behalf under Section 120;
“(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 CIT;
(c) where any order referred to in this sub-section and passed by the AO had been the subject-matter of any appeal filed on or before or after the 1st June, 1988, the powers of the CIT under this sub-section shall extend and shall be deemed always to have extended to such matters as had not been considered and decided in such appeal. .
(2)…… (not relevant)
(3).-… (not relevant)
7.1. From the analytical examination of the provisions of Section 263, it is gathered that features of the power of revision granted by Section 263 are :
(i) The CIT may call for and examine the records of any proceedings under the Act. The stage upto the calling of the records is an administrative act but examining of the same by the CIT is a quasi-judicial function.
(ii) On examination of such records, the CIT may consider any order passed by the AO as erroneous insofar as, prejudicial to the interest of the Revenue and such a consideration is only after having come to be satisfied oh this account and the stage of coming to the satisfaction is also a quasi-judicial stage.
(iii) After complying with the aforesaid two stages, the third stage, which is again quasi-judicial in nature in view of the principles of natural justice, is to give an opportunity of hearing to the assessee and also to make enquiries, if need be and
(iv) it is only after going through the aforesaid three stages of various nature that the power to reduce or enhance or modify or cancel any order passed by the AO and give directions for passing a fresh order can be exercised.
Our analysis finds support from the decision of the Hon’ble High Court in the case of CIT v. Panna Dew Saiaogi (Cal) (1970) 78 ITR 728 (Cal) and of Gujarat High Court in the case of AddJ. CFT v. Mukur Corporation (1978) 111 ITR 312 (Guj).
7.2. The first feature includes the placing of records before the CIT by his subordinates as well, i.e., if the records are placed before the CIT by any of his
subordinates and he points out errors and prejudice suo motu, the CIT is not debarred from proceeding with the exercise as envisaged in the Provisions o! Section 263 Sumitra Dew Khirwal v. CIT (1972) 84 ITR 26 (Cai), but it does not mean that the CIT can exercise his powers under Section 263, under such eventuality, without examining the records of his own and thereupon applying his mind to the records so that the correctness of the error/prejudice can be verified.
Similarly, it is not only the records which can be placed before the CIT by any of his subordinates but even a proposal for revision on being pointed out errors/deficiencies in the order of the AO can be placed before the CIT by any of the subordinates. But in that eventuality also, the CIT cannot proceed with the proceedings under Section 263 unless and until he has examined the assessment record/records which had culminated in the passing of the order placed before him for .revision and coming to his own satisfaction, .after applying his mind to the facts and circumstances available in such records, with regard to the erroneousness available in such records, with regard to the erroneousness and prejudicial to the interest of the Revenue aspects of the order.
7.3. This is so, because; most important feature for the CIT to exercise powers under Section 263 is that the CIT must examine the records and apply his mind before assuming a lawful jurisdiction for proceeding with the proceedings under Section 263. If the records are not placed before the CIT and only a proposal is placed by the subordinate or if records as well as, the proposal is placed before the CIT by any of the subordinates pointing but errors or prejudice and the CIT acts upon such a proposal without examination of the records in first case without calling and examining the records and in second case without examining the records and arriving at the satisfaction, as envisaged in the provisions of Section 263, then there is no question of application of mind by the CIT. In earlier case, i.e., in the absence of records nothing can be said to have been examined, whereas, in latter’s case it may be examination of records by the subordinate but the CIT cannot be said to have examined the records if he simply proceeds with the proposal.
7.4. From the above discussion, we are of the opinion that what follows from the legal provisions is that the CIT, before assuming lawful jurisdiction to proceed with the proceedings under Section 263 of the Act, must comply with the following :
(i) Assessee’s records, which have culminated into passing of the order to be revised must have been before the CIT.
(ii) It is the CIT and CIT alone himself who must examine such records, and
(iii) After such examination, must have applied his mind before coming to the satisfaction for lawful exercise of quasi-judicial functions.
7.5. Since the lawful assumption of jurisdiction is the stage before issuing a notice under Section 263, so the aforesaid three conditions, which, in our opinion are mandatory prerequisite conditions, must be complied with even before issuing a notice under Section 263. In other words, if in a given case it is found as a fact that the records itself were not before the CIT or, if the records were before him but had not been examined the same before proceedings with the proceedings
under Section 263, i.e., the CIT assumes jurisdiction to carry on the functions of a quasi-judicial authority, the action to proceed with or assumption of jurisdiction cannot be said to be in accordance with law, rather is to be termed as bad in law and void ab initio for want of compliance to the mandatory prerequisite conditions.
8. So far as, the present case is concerned, the admitted facts are that by the time the notice under Section 263 was issued i.e., 22nd Feb., 1999, the assessment record of assessee for asst. yr. 1994-95 were not before/with CIT (Central, Kanpur). The CIT was seized of only a letter from the AO, Lucknow, purported to be a proposal for initiating proceeding under Section 263 of the Act in assessee’s case. Further, as confirmed by the CIT, Kanpur, in letter dt. 23rd Sept., 1999 (supra) and also admitted by the learned Sr. Departmental Representative during the course of hearing of the appeal, that the proposal from the AO, Lucknow, was received by the CIT, Kanpur, by fax at 1.35 P.M. on 22nd Feb., 1999, and the notice under Section 263 of the Act was issued on the same date. The copy of proposal by post was received on 26th Feb., 1999, but assessment records were not received.
9. From the above discussion and the facts and circumstances, it is quite evident that by the time the CIT, Kanpur, invoked his quasi-judicial power in view of third and fourth feature of Section 263 (discussed supra), i.e., issued a notice under Section 263 of the Act providing the assessee an opportunity of hearing, he had ho occasion to examine or apply his mind to the assessee’s assessment records because the same were not before him and the conclusion that the assessee’s records were not before the CIT by the time notice under Section 263 of the Act was issued is arrived at on the basis of the following facts :
(i) that the CIT had received only a letter proporting to be the proposal from the AO and that too through fax, on the basis of which the notice under Section 263 of the Act was issued. No enclosure was received.
(ii) the learned Sr. Departmental Representative admitted this fact during the course of hearing, and
(iii) the Revenue has not furnished any evidence for receipt of assessee’s assessment records by the CIT and that being the case, the question of satisfaction of the CIT with regard to the erroneousness or prejudicial nature of the assessment order do not arise at all and even if it is assumed to be, then the same cannot be said to be in accordance with the provisions of law, which otherwise means that the assumption of jurisdiction by the CIT, Kanpur, for proceeding with the proceedings under Section 263–which were quasi-judicial in nature, was not in accordance with law and the same is the fate of subsequent proceedings, i.e., passing of order under Section 263.
10. Further the Revenue has taken the stand that records of ancillary actions such as discussions with the AO etc. had not been maintained. This plea is not ascertainable because the process of carrying on for the quasi-judicial proceedings is not one’s private affairs. The proceeding under Section 263 of the Act being of quasi-judicial nature, the authority is duty-bound to maintain the complete record of each and every proceeding. Non-keeping of such records cannot be taken as carrying on of the proceedings; rather it leads to presume that no such proceedings were ever carried on. It is mandatory in Government offices to maintain the records of every outside office visit of the authority and purpose thereof because the authority claim T.A., etc. For the sake of arguments if the Revenue’s plea is admitted, then the discussion must have been either at Kanpur or at Lucknow or at the most by telephone and for that there should have been some evidence in the form of T.A. bills of either of the authority or of the telephone bill, but no such evidence has been furnished by the Revenue. Even otherwise, such a discussion cannot amount to examination of records by the CIT.
11. The Revenue has further made efforts to establish the availability of assessee’s records before the CIT by producing photostat copy of a loose paper claiming the same to be acknowledgement for having returned the assessee’s assessment records on 17th March, 1999, though has not specifically claimed so.
12. After careful consideration of the statement made by the Dy. CIT (Judl). Kanpur, on behalf of the CIT in his letter dt. 23rd Sept., 1999, stating that : (i) “from the facts of the case, it appears that the notice under Section 263 was issued on the basis of report of the AO which was received on 22nd Feb., 1999, through fax in which it was clearly stated that the interest claimed by the assessee was not allowable as per the provisions of the IT Act. (ii) This opinion was formed on the basis of details furnished by the assessee from time to time and its written submissions during the course of hearing before the AO”, the admission of the learned Sr. Departmental Representative, and statement made by the learned Sr. Departmental Representative in his letter dt. 2nd Dec., 1999, in which he stated that (i) “I have also been directed by the CIT to submit before your honour that a number of ancillary acts like discussing the case with the AO and the concerned range Addl. CIT and going through the assessment records are not brought on record in either the order sheet or the order, (ii) that in the notice issued under Section 263 assessee has been given opportunity to state his case and submit any relevant documents in the purpose, (iii) that the final order is passed only after taking into account all the relevant material that is taken/available on record, (iv) that perusal of the assessment record and discussion with the AO need not form part of the official documentation of CIT’s satisfaction but are still very much in the knowledge of the CIT concerned, and letter of the learned Sr. Departmental Representative dt. 15th Dec., 1999, which reads as :
“The learned CIT has also desired that I may make a brief submission before your honours regarding the records being submitted.
2. All the cases of M/s Sahara Group are perused by the CIT(A) with due attention and concern and most of the deficiencies of the assessments come to light during scrutiny of the appeals and above during inspection and once drawbacks of the case are noticed, a report is either suo motto sent by the AO or the Addl. CIT/Jt. CIT and in some cases even by the CIT. Only later on, action according to the IT Act is initiated. ‘
3. So far as, above two cases are concerned, the deficiencies regarding assessment were seen during judicial and administrative review and later on reports were received on which immediate action had to be taken since they were getting time barred. This would be seen from the note sheets also.
4. In conclusion, I may also point out that all the records available in the CIT’s office are by themselves part of the proceedings and any action taken is supposed to be on the basis of records/evidence available”,
as well as, the so-called photostat copies of two loose papers, we, except to observe that the same are contradictory to each other, do not consider it advisable to make any further comment.”
13. The Revenue’s latest stand is that the deficiency in the present case were seen during judicial and administrative review and later on reports were received on which immediate action had been taken.
13.1. After careful consideration of the totality of the facts and circumstances of the case, we are of the opinion that so far as, the coming of the deficiencies into the knowledge is concerned, there is no denying the fact that one can come to know of such deficiencies during the course of any of the proceedings such as,internal audit, special audit, so called judicial review or inspection, scrutiny of appellate order or during any other proceedings under the Act but the dispute before us is not as to whether the deficiencies were in the knowledge of the CIT as a result of examination of records or otherwise, i.e., the dispute is as to how the CIT carne to know of the deficiencies. Before deciding this issue, we would like to observe that there is no dispute on the point that subordinate authority can also bring the deficiency in knowledge of the CIT. In our opinion, the CIT could come to know of the deficiency by any of the following modes :
(i) After examination of the assessee’s records of his own, i.e., himself during any proceedings, or
(ii) as a result of examination of assessee’s records by any of the subordinates, including officials in the office of the CIT or AO or himself, or
(iii) as a result of examination of assessee’s records by any other authority, such
as, Addl. CIT or CIT(A), etc., or
(iv) as a result of internal or special audit by audit parties.
13.2. So far as, the prerequisite mandatory condition relating to examination of assessment records under Section 263 is concerned it is settled law and we have also concurred with the same, that it is the CIT–personally, who must examine the assessment records before coming to the satisfaction for issuing notice under Section 263. Even if the deficiency is brought to the notice of the CIT by any other mode, (including the mode at Serial Nos. (ii), (iii) and, (iv) (supra), it is mandatory and incumbent upon the CIT to call for assessment records and examine the same vis-a-vis the veracity and correctness of the deficiency brought to his knowledge or of the proposal and get himself satisfied with regard to the erroneous and prejudicial nature of the order likely to be revised. If the CIT does not comply with this mandatory requirement and proceeds blindly, i.e., simply on the basis of such reports/proposal having been received and fails to call for and carry on the examination of records before agting on such report/proposal, the assumption of jurisdiction to issue notice under Section 263 cannot be said to be lawful and consequently the notice under Section 263 so issued cannot be sustained–more so, because of the non-compliance of prerequisite mandatory requirement of examination of records by himself, absence of
application of mind and exercise of quasi-judicial discretion, including satisfaction. The quasi-judicial powers of an authority cannot be controlled by any other authority. The proposition of ours is not only clear from the unambiguous provisions of Section 263(1) but is supported by the decision of the Hon’ble Supreme Court in the case of Srpur Paper Mills Ltd. v. CIT (1970) 77 ITR 6 (SC) and Calcutta High Court in case of Jiven Lal (1929) Ltd. v. Addl. CIT (1977) 108 ITR 407 (Cal).
13.3. In the case of Sirpur Paper Mills Ltd. (supra), the assessee had moved a revision petition under Section 25 of the WT Act (corresponding to Section 264 of the IT Act). The CIT, from the inception of the proceedings, put himself in communication with the Central Board and sought satisfaction from the Board as to how the revision application filed before him should be decided. The CIT did not exercise his independent judgment in passing the order thereupon. On these facts and the fact that the matter before the Hon’ble Supreme Court was by way of appeal under Article 136 of the Constitution, the Hon’ble apex Court, after holding as under, set aside the order of the CIT and directed him to hear and decide the assessee’s petition in accordance with law and uninfluenced by any direction of the Central Board. The Hon’ble apex Court, at pp. 7 and 8, held as under :
“We do not encourage an aggrieved party to appeal directly to this Court against the order of a Tribunal exercising judicial functions under a taxing statute, and thereby to bypass the normal procedure of appeal and reference to the High Court, but in the present case, it appears to us that a question of principle of great importance arises. We have entertained these appeals because in our judgment the CWT has surrendered his authority and judgment to the Board of Revenue in deciding the questions, which were sought to be raised by the company in its revision applications.”
xx xx xx
“The power conferred by Section 25 is not administrative, it is quasi-judicial. The
expression “may make such inquiry and pass such order thereon” does not
confer any obsolute discretion on the CIT. In exercise of the power the CIT
must bring to bear an unbiased mind, consider impartially the objections raised
by the aggrieved party, and decide the dispute according to procedure
consistent with the principles of natural justice, he cannot permit his judgment
to be influenced by matters not disclosed to the assessee, nor by dictation of
another authority. Sec. 13 of the WT Act provides that all officers and other
persons employed in the execution of this Act shall observe and follow the
orders, instructions and directions of the Board. These instructions may control
the exercise of the power of the officers of the Department in matters
administrative but not quasi-judicial. The proviso to Section 13 is somewhat obscure
in its import. It enacts that no orders, instructions or directions shall be given
by the Board so as to interfere with the discretion of the AAC of WT in the
exercise of his appellate functions. It does not, however, imply that the Board
may given any directions or instructions to the WTO or to the CWT in exercise
of his quasi-judicial function. Such an interpretation would be plainly contrary
to the scheme of the Act and the nature of the power conferred upon the
authorities invested with quasi-judicial power.”
13.4. The jurisdiction of the CIT for the purpose of Section 263 or Section 264 being as quasi-judicial as it is for the purpose of Section 25 of the WT Act and the prerequisite condition relating to examination of the records being the same, we are of the opinion that the CIT, while exercising his quasi-judicial discretion under Section 263 should not put himself in the control of any other authority–be it a superior or subordinate one.
13.5. Hence a question may arise that since in the case of Sirpur Paper Mill Ltd. (supra), the apex Court had set aside the order of the CIT and had directed him to decide the assessee’s petition in accordance with law, the order of the CIT in the present case may also be set aside with similar directions but we are unable to accept this proposition because in the case before the Hon’ble Court the matter was relating to the assessee’s petition and the Court was right in directing the CIT to decide the same in accordance with law. Had the Court not given such directions and stopped at the point of set aside, the assessee’s purpose of going before the Hon’ble Supreme Court itself would have stood defeated. In view of this distinguishable fact and the order of the Hon’ble High Court of Calcutta discussed hereinafter, we are of the opinion that the ratio of the decision of the apex Court (supra) is that the CIT’s action for issuing notice under Section 263 simply on the advice/report of other authorities cannot be sustained, i.e., such a notice has to be cancelled and no further opportunity to the CIT is permissible.
13.6. Not only this, the order, if passed as a result of such a notice, also has to be quashed, because, it is now well settled law that any order passed by a quasi-judicial authority, by exercising the jurisdiction assumed unlawfully, cannot be said to be in accordance with taw and consequently has to be quashed. This view, as we have already stated, is fortified by the decision of the Hon’ble Calcutta High Court in the case of Jeevan Lal (1929) Ltd. v. Addl. CIT (supra).
13.7. The facts of the case before the Hon’ble High Court, as revealed from the headnotes, were that:
“In making the assessment on the assessee-company for the asst. yr. 1965-66, the ITO held that the company was one in which the public were not substantially interested and applied the rate of tax applicable to such a company. The company applied to the ITO to rectify the order under Section 154 of the IT Act, 1961 (the Act), by recomputing the tax on the basis that the company was one in which the public were substantially interested. The company also preferred an appeal to the AAC contending, inter alia in ground No. 10 that the company, being one in which the public were substantially interested, the ITO wrongly treated the company as one in which the public were not substantially interest. The ITO rectified the assessment order as prayed for. Therefore, when the appeal before the AAC was heard the assessee did not press ground No. 10, and the AAC did not deal with that contention in his appellate order. Later, the Addl. CIT issued a notice under Section 263 of the Act to show cause why the order passed by the ITO. under Section 154 should not be rectified as being prejudicial to the Revenue. The company filed a writ petition challenging the said notice.”
On above facts, The Hon’ble Court held that:
“(i) the power that the CIT exercises under Section 263 is a power in respect of the order of the ITO. The CIT has no power to revise the order passed by the AAC.
When the assessment order of the ITO was rectified by him under Section 154 of the Act, the order in existence was the order as rectified.
Vedentam Raghaviah v. ITO (1963) 49 ITR 314 (Mad) and S. Authanari v. ITO (1972) 83ITR 828 (Mad) relied on.
The application of the doctrine of merger depends on the nature of the appellate or revisional order in each case. If the original order of the ITO as rectified was the effective and operative order, the same was the subject-matter of appeal before the AAC and the AAC having passed the order thereafter, that was the only effective order and the original order had merged in that order. Therefore, the CIT had no jurisdiction to rectify the order [CIT v. Teja Ji Farasram Khamwala (1953) 23 ITR 412 (Bom) relied on]. (ii) It was clear from the affidavit-in-opposition filed in this case that the Addl. CIT issued the notice under Section 263 at the instance of the audit department without exercising his own discretion and judgment. The notice could not, therefore, be sustained.”
13.8. It was also found by the Hon’ble Court from para 4(d) of the affidavit-in-opposition, filed by the respondent that the CIT had exercised the powers of issuing notice under Section 263 at the suggestion of the audit department.
13.9. On these facts, the Hon’ble High Court, not only set aside the notice under Section 263 so issued, but also held that in case any order has been passed by the CIT, the same is also set aside and quashed by observing at p No. 412 as under:
“The second ground of attack was, as I mentioned before, that this order was passed at the suggestion of the audit department of the Revenue and not by the Addl. CIT in exercise of his quasi-judicial discretion. I have noticed the terms of Section 263 of the Act, which empowers the CIT to call for examination of the record and thereafter to make an order. In this case the CIT purported to exercise the power at the suggestion of the audit Department. This position would be clear if one refers to the averment made in para 4{d) of the affidavit-in-opposition, by one Madan Mohan Lal, filed on behalf of the respondents, From the forms it is apparent that the Addl. CIT did not exercise his discretion and judgment. In the aforesaid view of the matter, on the basis of the principles enunciated by the Supreme Court in the case of Sirpur Paper Mills Ltd. v. CWT (1970) 77 ITR 6 (SC), this notice cannot also be sustained. The notice, therefore, issued on the 24th of March, 1972, is hereby quashed and set. aside. The respondent CIT is restrained from giving effect to the same. If any order has been passed by the CIT, the same is also set aside and quashed. The rule is made absolute to the extent indicated above. There will be no order as to costs.”
14. Coming to the facts of the present case, since the Revenue has not furnished any evidence with regard to the factum of compliance to the mandatory prerequisite requirement of examination of assessee’s records by the CIT, Kanpur, either before receipt of the proposal from AO by fax on 22nd Feb., 1999, or thereafter and before passing, the order under Section 263 on 22nd March,
1999, we have no option but to hold that the notice under Section 263 issued on 22nd Feb., 1999, was issued by the CIT, Kanpur, without examination of assessee’s records and application of his mind as well as, consequential satisfaction, which cannot be sustained. We, therefore, relying on the aforesaid decisions and in the facts and circumstances of the case, quash and set aside the notice under Section 263 dt. 22nd Feb., 1999, and since the CIT has passed an order in consequence upon issue of such notice, we set aside and quash the order under Section 263 dt. 22nd March, 1999, as well.
14.1. Before parting with the matter, we would like to deal, with the Revenue’s plea raised by way of furnishing a photocopy of two loose papers claiming the same to be acknowledgement for having returned the assessment records of the assessee and of another company by the CIT, Kanpur, on 23rd Feb., 1999, and 17th March, 1999, respectively. By filing these documents, the Revenue has tried, though of course, has not claimed specifically, to establish the availability of assessee’s records with the CIT, Kanpur, on and before 17th March, 1999. The authenticity/correctness of this evidence being in doubt cannot be accepted because of the following reasons (observations). First of all, the Revenue till 16th Dec., 1999, had been admitting that there was no other record or document with the CIT except the documents furnished before the Tribunal on 4th Oct., 1999, and, secondly, the learned Sr. Departmental Representative himself had admitted that there was no evidence for establishing the existence of assessee’s assessment records with the CIT, Kanpur.
Even otherwise, it is a well known and established fact that in the office of
every IT authority, be it ITO or the CIT or Chief CIT every letter or record or
parcels, etc. are passed on to the concerned official for dealing with the matter
only after recording the receipt of such letter/record/parcel in mandatory
maintained receipt register and outgoing are sent after routing/recording
through to the despatch register. This system is not only mandatory but is
compulsory and forms a part of official record to decide the dispute regarding
receipt or despatch of a document. This system has to be followed and is being
followed even if the letters/records/parcels are brought or sent by special
messenger and in that case signatures of the messenger, in case of despatch,
are secured on the despatch register itself or at the most on the covering letter
and not on any loose paper.
14.2. So far as, the piece of paper placed before us is concerned, on one page there are several entries relating to Kanpur and one entry relating to Lucknow and the dates mentioned therein are 1st Feb., 1999, 15th Feb., 1999 and 22nd Feb., 1999, which go to show that between 2nd February to 14th February and between 16th February to 21st February, there were no despatches for the CIT’s office at all–an unbelievable fact. Similarly, on the second page, there are entires relating to Allahabad and Lucknow and the dates mentioned are 11th March and 16th March, 1999, which again go to show that there were no despatch between 12th and 15th March, which is again an unbelievable. Further, on one page there are three entries relating to Lucknow with respect to records of Shri Krishan Bidi Co. (in two volumes), records of M/s Sri Krishan Bidi Co. in one volume and records of M/s Sahara India Mutual Benefits Co.
Ltd. (in one volume) and the person receiving these records had put his signatures against first two cases without mentioning the number of volumes whereas, against entry of assessee concerned before us the words “received records–one volume” are mentioned. Similarly, on other page there is no mention of number of volumes so far as entries for Kanpur are concerned but against entries of M/s Sahara India Savings and Investment Corporation Ltd., the words “received in one volume” are appearing.
14.3. For all the aforesaid abnormalities and absence of evidence for receipt of the assessee’s records were received by the CIT, Kanpur, and, therefore, this piece of evidence is rejected being unreliable.
issue Nos. 2, 3 & 6
15. With regard to the issue that assessment order passed by the AO on 27th March, 1997, was neither erroneous nor prejudicial to the Revenue the learned Sr. Advocate Mr. Dastur, appearing on behalf of the assessee, submitted that an order passed by the AO can be said to be erroneous if it has been passed in disregard to the legal provisions or in haste without making proper enquiries and will be prejudicial to the interest of the Revenue if it is found that as a result of violation of any legal provision or failure of making proper enquiries the lawful tax due to the State has not been charged or has escaped or cannot be recovered. According to him, it is also not necessary that an order, which is erroneous, will also be prejudicial to the interest of the Revenue and that being the case, it is incumbent upon the CIT to establish, before invoking the jurisdiction under Section 263, that the order, which he is going to revise, is not only erroneous but is prejudicial to the interest of the Revenue also. It was further submitted that these two factors depend upon the facts and circumstances of the individual case and, therefore, every order has to be considered in the light of facts and circumstances of that case alone.
15.1. Coming to the facts of the present case, the learned counsel submitted that so far as, the allowance of assessee’s claim of deduction of expenditure on account of interest on deposits under the two schemes, namely, GFDA and GGF (supra) is concerned, the assessee has claimed the total deduction on this account at Rs. 16,87,88,857 on total deposits upto 31st March, 1994, amounting to Rs. 2,27,95,11,883 out of which–during the period relevant for asst. yr. 1994-95, i.e., current year, was Rs. 1,52,94,04,000. In the light of these facts, the learned counsel vehemently submitted that the AO had not only made detailed investigation with respect to the allowability of the deduction of expenditure on account of interest but had also considered the genuineness of the deposits under these two schemes and this was the reason that he considered the deposits worth Rs. 74,47,02,000 out of current deposits of Rs. 1,52,94,04,000 as ungenuine (para 3.20 of the assessment order), added the sum by invoking the provisions of Section 68 and dealt on to disallow the proportionate claim of deduction on account of expenditure for interest payable on the deposits–disallowed an amount of Rs. 5,35,29,140 out of total claim of deduction on account of interest payable of Rs. 16,87,88,856 (para 15 of the assessment order).
15.2. Referring to paras 7 to 10 of the assessment order, the learned counsel submitted that the AO had not stopped at the stage of disallowing an expenditure on this account to the extent of Rs. 5,35,29,140 but went further to
disallow, indirectly or directly, another amount of Rs. 34,96,173 (para 7), Rs. 21,09,001 (para 8) and Rs. 60,00,000 (paras 9 & 10) by disallowing or making additions which relates to the assessee’s claim of deduction on account of expenditure incurred towards interest payable on deposits. These disallowances/ additions have been made by the AO by holding that the interest-free advances/ loans/deposits were out of interest-bearing, deposits under the two schemes on which assessee had claimed the expenditure on account of interest.
15.3. On the aforesaid facts, the learned counsel submitted that so far, as the issue relating to the allowability of expenditure on account of interest payable deposits under the two schemes was concerned, the total disallowance of interest expenditure was more than Rs. 6.51 crores (the total of above disallowances/additions) and, therefore, the action of the AO could not be said to be erroneous only it it was found after making enquiries as suggested by the CIT, later on, that the disallowance would have been more. The learned counsel, referring to his submissions made while arguing first issue, reiterated his stand that out of total collection in the current year of Rs. 1,52,94,04,000, the collection to the extent of Rs. 1,52,93,36,700 was under the fixed scheme, i.e., GFDA and there was no question of any lapsed or unclaimed matured accounts. The collection under the second scheme was only to the extent of Rs. 67.300 and the fact that pre-matured claim was permitted and the prernatured period was (sic) there was no question of lapsed or unclaimed matured account under that scheme also.
15.4. Referring to the terms and conditions of the two schemes, the learned counsel further submitted that so far as, the question of time of accrual of liability, i.e., ascertainment of the liability was concerned, first of all it was an admitted fact that the assessee, who was carrying on the business of para banking nature, was following the mercantile system of accounting and was carrying on a business into the banking companies with the difference that it was not a banking company. According to the counsel, the scheme GFDA was just at par with the bank’s scheme of procuring term or fixed deposits and scheme GGF was just at par with the bank’s scheme of recurring deposits and since, admittedly the banks have been providing interest on accrual basis, the assessee was bound to provide for the payment of interest as per terms and conditions of the scheme–being contractual obligation i.e, on accrual basis.
15.5. Explaining further, the learned counsel submitted that under GFDA scheme, the fixed period was for 12, 24, 36, 48 or 60 months and as per condition No. 5, interest was payable on quarterly compounding basis as per the chart mentioned in the scheme (supra). As per condition No. 6, the account-holder had an option to withdraw the amount of interest monthly as per chart in the scheme itself (supra).
15.6. In view of these terms and conditions of the scheme and assessee having followed mercantile system of accounting, the assessee was under obligation to make provisions for payment of interest on accrual basis–on rnonthly/quarterly/half-yearly or yearly basis, and since the rate of interest varied from 12 per cent in the first year to 16 per cent in the last year, the provision @ 12. per cent in no case could be said to be excessive or unreasonable so as to render the assessment order erroneous and prejudicial to
the Interest of the Revenue.
15.7. Coming to the second scheme, i.e., GGF, the counsel, after referring to the chart for computation of interest, submitted that the interest (c) 15 per cent on half-yearly rest basis only has been provided and, therefore, there is no question of paying of interest on lapsed or unclaimed matured accounts.
15.8. The counsel further submitted that even if for the sake of arguments it is assumed that there were some lapsed or unclaimed matured accounts, then it was for the CIT first to make necessary enquiries/verification as to which of the accounts were of that nature, before making such general observations. According to the counsel, it was incumbent upon the CIT first to establish as to how the order was erroneous and then to establish by specific reasons/instances that such order was prejudicial to the case of the Revenue. According to the counsel, the revision of an order with the purpose of making of specific’ enquiry only is permissible only if the impugned order is found to have been made without making proper enquiries or in haste; otherwise not. Coming to the assessee’s case, the counsel submitted that it is now established fact that the order of the AO was passed neither in haste nor without detailed enquiries and, therefore, revision of such an order only for the purpose of making general enquiries cannot be sustained.
15.9. Adverting to the matter regarding the prejudicial nature of the assessment order, the learned counsel submitted that even if it is assumed for the sake of arguments that the AO had failed to make enquiries with respect to the disllowability/allowability of the interest, then such a failure may render an order erroneous but that by itself, in the absence of any other material cannot be sufficient material to hold the order as prejudicial to the interest of Revenue, and therefore, it was obligatory for the CIT to show as to how the order was prejudicial to the interest of Revenue. In the present case, the CIT, except making a bald observation, has not brought any other material on record and, therefore, his conclusion that the order was prejudicial to the interest of the Revenue also cannot be upheld. In support of this submissions, the learned counsel relied on the Tribunal’s decision in the case of J.P, Sethi v. ITO (1989) 33 TTJ (Pune) 576–para 12.
15.10. The learned counsel further submitted that the AO had disallowed the assessee’s claim on account of interest payable on deposits under these two schemes to the extent of more than Rs. 6,500 crores (supra). But the CIT has not quantified as to what amount of interest on so-called lapsed or unclaimed matured accounts was likely to be disallowed when, according to him, such a disallowance was Nil. He, therefore, submitted that disallowance of an expenditure of more than Rs. 6,500 crores against Nil cannot be said to be prejudicial to the interest of the Revenue. In support of above submissions, the counsel relied on the decisions in the following cases ;
(1) CIT v. Goyal Private Family Specific Trust (1988) 171 ITR 698 701, 702 (AH);
(2) CIT v. Kashi Nath & Co, (1988)170 ITR 28 (All);
(3) CIT v. Trustees Anupam Charitable Trust (1987) 167 ITR 129 (Raj);
(4) OFT v. R.K. Metal Works (1978) 112ITR 445 (P&H); and
(5) CIT v. Late Sunder Lal (1974) 96 ITR 310 (All).
15.11. Coming to the next requirement that the CIT should have, before passing an order under Section 263, given reasons or explanation as to the manner (state the manner) the order of the AO Was considered to be erroneous and prejudicial to the interest of the Revenue and what is the basis of material was for such conclusion. The learned counsel submitted that simply saying, without pointing out as to which were the lapsed or unclaimed matured accounts and as to how the liability had not matured or was not ascertainable–when as per the terms and conditions of both the schemes, the interest was payable on half yearly or yearly basis and since the assessee was maintaining the account on mercantile system, it was obligatory to make provision on the basis of terms and conditions of the scheme, is nothing but a bald and vague statement on the part of the CIT and the order passed under Section 263 based on such vague statement cannot be sustained.
15.12. According to the counsel, the CIT failed to ascribe the reasons for his conclusion and, therefore, the order under Section 263 cannot be sustained as valid and for this purpose relied on the decision in the following cases :
(1) CIT v. R.K. Metal Works (supra), and
(2) CFT v. Late Sunder Lal (supra).
16. The learned Departmental Representative, on the other hand, submitted that the assessment order being silent on the point of allowability of the interest on lapsed and unclaimed matured accounts–a fact to be found only after necessary enquiries, the assessment order was not only erroneous but was prejudicial to the interest of the Revenue and the CIT was justified in revising the same and directing the AO to do the needful.
17. We have considered the rival submissions, facts and circumstances of the
case, the terms and conditions of the two schemes (supra), the assessee’s
system of accounting and method for making provision for payment of
interest, order under Section 263 as well as, the decisions in cases relied on by the
parties and after careful consideration are of the opinion that from the
provisions of Section 263 as well as the settled principles of law in this respect, it is
clear that CIT can exercise his powers of revision under Section 263 only if the
following factors co-exist :
(i) There should have been proceedings under the Act.
(ii) In such proceedings, the AO must have passed an order.
(iii) On the examination of assessee’s assessment records relevant for the
assessment year for which order has been passed, the CIT should consider that
the said order is erroneous and prejudicial to the interest of Revenue, and
(iv) The CIT for considering the order as such should spell out specific reasons.
17.1. Consequently, the CIT can revise the order passed by the AO only if;
(i) it is found to be erroneous, and
(ii) it is found to be prejudicial to the interest of the Revenue as well,
and therefore, the first question for our decision is as to which of the order of
the AO or under which circumstances an order of the AO can be said to be
erroneous so far as prejudicial to the interest of the Revenue.
18. In our opinion, an order passed by the AO can be said to be ‘erroneous’ if it has been passed in disregard to the legal provisions or as a result of “failure to make enquiries” and that is the reason that the various Hon’ble High Courts have held that “it is not each and every order passed by the AO which could be said to be erroneous so far as, prejudicial to the interest of Revenue and, therefore, can be revised under Section 263 of the Act.”
18.1. It is also an established law that mere failure to comply with certain provisions of law may render an order erroneous but the failure envisaged in Section 263 of the Act is not one which depends on possibility of guesswork–it should be actually an error either of fact or of law. This proposition is fortified by the decision of Hon’ble High Court of Rajasthan in the case of CIT v. Trustees of Anupam Charitable Trust (supra).
Here the Hon’ble High Court held that finding of the Tribunal to the effect that “the error envisaged by Section 263 was not one which depended on possibility of guess work but it should be actually an error either of fact or of law”, in the light of facts and circumstances of that case, to be the findings of fact based on material on record and rejected the Revenue’s petition for reference.
18.2. At the same time, it is also the settled proposition that the order passed by the AO may be brief and cryptic but that by itself is not sufficient reason to hold the order as erroneous and prejudicial to the interest of Revenue and that is so because writing an order in detail may be a legal requirement but cannot render the order erroneous and prejudicial to the interest of the Revenue. This view is fortified by the decision of Hon’ble Allahabad High Court in the case of CIT v. Goyal Private Family Specific Trust (supra).
(a) In this case, the assessee-trust, which was found under a trust deed by way of Smt. Sudha Agrawal with corpus of Rs. 500 for the benefits of the beneficiaries, mentioned therein, filed the returns of income for asst. yrs 1979-80, and 1980-81 for the first time on 20th Feb., 1982, in the status of private trust. The ITO completed both the assessments in the same status. The assessment order for the asst. yr. 1979-80 was in the following terms :
“Return filed declaring an income of Rs. 39,540. In response to a notice under Section 143(2), Shri D.K. Agrawal, CA, attended. Case discussed. This is a case of Goyal Private Family Specific Trust (1988) 171 ITK 698 (All), in which shares of beneficiaries are specified. Therefore, income in the hands of the trust is exempt and taxable in the hands of beneficiaries. The trust has been created, vide trust deed dt. 24th Jan., 1973, a copy of which has been filed and placed on record, for the benefit of beneficiaries, Km. Mira Agarwal. Km. Usha Agarwal, Km. Rekha Agarwal and Master Kapil Agarwal. After discussion and scrutiny, income to Rs. 9,890. Assessed. Issue N.D.”
Thereafter, the CIT, after allowing the assessee an opportunity of hearing by way of notice under Section 263, set aside the assessment order for both the years for making de novo assessments by holding that the orders were erroneous and prejudicial to the interest of the Revenue inasmuch as, they were passed in haste/hurry without proper and adequate enquiry.
(b) The Tribunal, on appeal by the assessee, set aside the order of the CIT after observing that “assessee had filed trading and P&L a/c balance sheet, copies of account of the beneficiaries and, therefore, there was no reason to doubt the assessee’s contention of having produced the books of account.”
(c) The Hon’ble High Court, for the reasons stated in the 5th paragraph at page No. 701 and second paragraph at page No. 702, as reproduced hereinafter, rejected the Revenue’s application under Section 256(1) of the IT Act and refused to direct the Tribunal to refer the question proposed by the Revenue :
5th para-page No. 701 :
19. There is no finding by the CIT that the ITO reached an erroneous conclusion and that, on the facts and circumstances of the case, the conclusion would have been different. The orders of the ITO may be brief and cryptic, but that by itself is not sufficient reason to brand the assessment orders as erroneous and prejudicial to the interest of the Revenue. Writing an order in detail may be a legal requirement, but the order not fulfilling this requirement, cannot be said to be erroneous and prejudicial to the interest of the Revenue. It was for the CIT to point out as to what error was committed by the ITO in having reached the conclusion that the income of the trust was exempt in its hands and was assessable only in the hands of the beneficiaries. The CIT having failed to point out any error, no error can be inferred from the orders of the ITO for the simple reason that they are benefit of details. It the order is not erroneous, then it cannot be prejudicial to the interest of the Revenue. There is nothing to show in the order of the CIT that the ITO would have reached a different conclusion had he passed a detailed order. So, the conclusion of the CIT that the orders of the ITO are erroneous and prejudicial to the interest of the Revenue are based merely on suspicion and surmises in the absence of any enquiry having been made by him.”
2nd para page No. 702
“In the income-tax assessments, all questions boil down to this, whether income has been properly determined and whether the correct rate of tax has been applied. The CIT does not say that the income was higher or that it was assessed on a wrong entity or at a low rate of that any exemption was wrongly allowed. In the absence of such a finding, the assessment orders cannot be said to be erroneous and prejudicial to the interest of the Revenue.”
19.1. The next requirement, before the CIT can assume the jurisdiction under Section 263, is that such erroneous order should be prejudicial to the interest of Revenue and, therefore, coming to the ‘prejudicial to the interest of Revenue’ aspect of the order of the AO, we are of the opinion that since the words ‘prejudicial to the interest of Revenue’ have not been defined in the Act, one has to go by the meaning understood in the common parlance which, according to us, is that an erroneous order can be said to be prejudicial to the interest of the Revenue if the order is found to be not in accordance with law, in consequence whereof the lawful revenue due to the state has escaped or has not been realised or cannot be realised.
19.2. As to what is the meaning, of the expression ‘prejudicial to the interest of the Revenue’, the Hon’ble High Court of Calcutta has in case of Dawjee Dadabhai & Co. v. S.P. Jain (1957) 31 FTR 872 (Gal), has held as under :
“The words, ‘prejudicial to the interest of Revenue’, have not been defined, but it must mean that the orders of assessment challenged are such as are not in accordance with law in consequence whereof the lawful revenue due to the state has not been realised or cannot be realised. It can mean nothing else.”
19.3 The meaning ascribed to the term ‘prejudicial to the interest of the Revenue’ by the Hon’ble Calcutta has been accepted by the Hon’ble High Court of Gujarat in case of Addl. CIT v. Mukur Corporation (1978) 111 HR 312 (Guj) also.
20. Respectfully following the meaning of the terms ‘prejudicial to the interest of Revenue’, ascribed by the Hon’ble High Courts of Calcutta and Gujarat (supra), we hold that an order passed by the AO shall be prejudicial to the interest of the Revenue if it is found to be in violation of provisions of law as a result whereof the due tax to the State has escaped,
21.1. After considering the aforesaid requirements for assumption of a lawful jurisdictional power for proceedings under Section 263 of the Act, another question, which arises for our consideration, is the validity of the order of the CIT passed under Section 263 in spite of assuming a lawful jurisdiction. In our opinion, it is not each and every order under Section 263 which in spite of the fact that the order of the AO is erroneous and prejudicial to the interest of the Revenue, can be held to be valid. For an order under Section 263 to be valid, there are, in addition to earlier discussed prerequisite conditions, some other requirements such as compliance to the principle of natural justice, satisfaction of the CIT and specification of the reasons for which the order of the AO is considered erroneous and prejudicial to the interest of the Revenue. The power conferred under Section 263 undoubtedly being of quasi-judicial nature, it is imperative on the CIT to explain as to the manner (state in what manner) the order of the AO was considered as erroneous and prejudicial to the interest of Revenue and what is the basis or material for such a conclusion. Though, Section 263(1) vests power in the CIT in the substantive term, but even when a statute (and enactment) vests discretion in any authority saying “if it appears”, “if he is satisfied”, “if he considers necessary”, then also the authority has to judge the circumstances in an objective manner also, because use of the terms (supra) for vesting the power does not mean that it is a matter only of subjective satisfaction CIT v. Shanti Lal Agaiwalla (1983) 142 FTR 778, 783 (Pat).
21.2. If the CIT fails to give a finding as to (in what) manner the order of the AO was erroneous and as to how it was prejudicial to the interest of the Revenue, his order is liable to be quashed. This proposition is fortified by the decisions of the Hon’ble High Court of Allahabad in the case of CJT v. Kashi Nath & Co. (supra) and CIT v. Late Sunder Lal (supra).
(i) In the case of Kashi Nath & Co. the assessment of the assessee, who was carrying on the Sarrafa and pawning business, for asst. yr. 1975-76, was completed by the ITO at Rs. 77,599. The CIT in exercise of his powers under Section 263, set aside the assessment order and directed the ITO to redo the assessment as it was prejudicial to the interests of the Revenue on the grounds that the ITO while completing the assessment did not make detailed enquiries in respect ol various cash credits appearing in the name of different ladies and also did not obtain necessary details about the interest income from pawning. The Tribunal allowed the appeal of the assessee on the ground that the CIT had not given reasons for his conclusion that the assessment order was prejudicial to the interests of the Revenue. On a reference, the Hon’ble High Court at p. No. 30 held as under ;
(underlined, italicised in print, by us]
“It will be seen from the above order that the CIT did not examine the various cash credits said to be appearing in the names of different ladies which were said to have escaped the attention of the ITO. He only complained of the order of the ITO for not examining the details of the credits appearing in various names. What those details required to be examined were have not been set out. There is thus absolutely no reason in support of the conclusion of the CIT that the assessment order was erroneous and prejudicial to the interest of the Revenue.
The power of the CIT under Section 263 is quasi-judicial in character. He must give reasons in support of his conclusion that the assessment order is erroneous in so far as, it is prejudicial to the interest of the Revenue. If he does not give reasons, the order would be vitiated. This was the view taken by this Court in the case of J.P. Srivastava & Sons Ltd. v. CIT (1978) 111 ITR 326 (All) and CIT v. Sunder Lal (supra).
In the instant case, since the CIT has not applied is mind to the relevant material on record and has not given reasons for his conclusions that the assessment order was prejudicial to the interest of the Revenue, the Tribunal was justified in reversing that order.
In the result, we answer the question in the affirmative and against the Revenue. In the circumstances, we make no order as to costs.”
(ii)(a) In the case of CIT v Late Sunder Lal (supra) the facts were that the assessee, Sunder Lai, had filed a return for the asst. yr. 1959-60 on 6th Sept.. 1959, in response to a notice under Section 22(2) dt. 2nd May, 1959. In the return, he showed a net loss of Rs. 4,229. In Section D of the return, the assessee claimed that a sum of Rs. 1,02,500 received by him on retirement from the firm styled M/s Ram Kishore Sunder Lal & Co. (sic) and was, therefore, not includible in his income. The assessee died on 11th Feb., 1961, but the ITO completed the assessment on 6th Feb., 1964. The ITO did not include the amount of Rs. 1,02,500 in the income of that year on the ground that it was received in April, 1959, and as such, was to be considered in the asst, yr. 1960-61 only.
The ITO, thereafter, assessed this amount as capital gain in the asst. yr. 1960-61. An appeal was filed by the assessee against the aforesaid inclusion and the AAC deleted the addition on the ground that the amount was assessable as capital gain in the asst. yr. 1959-60 and not in the asst. yr. 1960-61. The CIT being of the view that the order of the ITO for the year 1959-60 was prejudicial to the interest of the Revenue, issued a notice under Section 33B of the 1922 IT Act to Bankey Behari Lal, the legal heir of the deceased assessee, to show-cause why action under Section 33B of the Act should not be
taken. In the meantime, it appears that the Department had field an appeal
before the Tribunal for the asst. yr. 1960-61. The CIT, however, passed the
following order :
“The counsel only wanted that action under Section 33B be deferred till the disposal
of the appeal for the asst. yr.1960-61 by the Tribunal. 1 do not find any force in
this argument and his request cannot, therefore, be adhered to. For the reasons
in para 2 above (wherein the order of the AAC for the asst. yr. 1960-61 has
been discussed), the ITO’s order under Section 23(3) of the Indian IT Act, 1922, dt.
6th Feb., 1964, is erroneous, the assessment is, therefore, set aside and the ITO
is directed to make a fresh assessment in accordance with law.”
(b) On appeal by the assessee, the Hon’ble High Court held as under:
“The revisional power conferred on the CIT is undoubtedly a quasi-judicial power [see Dwarka Nath v. ITO (1965) 57 TTR 349 (SC)]. Although the case deals with the nature of the powers conferred on the CIT under Section 33A(2) of the Act, we see no difference in that power and the one exercised under Section 33B of the Act. This being so, he must give his own reasons for being satisfied that the order passed by the ITO is prejudicial to the interest of the Revenue. This conclusion is further strengthened by the use of the words ‘if he considers’ used in the sub-section which postulates a scrutiny by the CIT of all the relevant facts for holding that the order is prejudicial to the interest of the Revenue. A perusal of the order of the CIT shows that after referring to the fact that the AAC had held that the amount in question was taxable in the asst. yr. 1959-60 and not in the asst. yr. 1960-61, and stating the reasons which led the AAC to come to this conclusion, the CIT held as under:
“The ITO had failed to assess the said capital gains in his order for the asst. yr. 1959-60. The ITO’s order under Section 23(3) of the IT Act., 1922, dt. 6th Feb., 1964, was, therefore, erroneous insofar as, it is prejudicial to the interest of the Revenue…..”
[underlined, italicised in print, by us]
“It will be seen that no reasons at all have been given by the CIT for coming to the conclusion that the order in question was prejudicial to the interest of the Revenue. It is also not possible to accept the argument on behalf of the Revenue that the CIT must be deemed to have adopted the reasoning of the AAC, in as much as, he had authorised the ITO to file an appeal to the Tribunal against the order of the AAC. It is settled law that an order passed by a quasi-judicial authority without giving any reasons for its conclusion is vitiated in law [See Bhagat Raja v. Union of India AIR 1967 (SC) 16061 The order passed by the CIT clearly suffers from this infirmity.”
(iii) The case of CIT v. Goyal Private Family Specific Trust (supra) have already been discussed. As well as, the case reported in 167 ITR 129 (Raj), in para No. 17.2 and 17.1 (supra).
(iv) In the case of CIT v. R.K. Metal Works (supra), an order of revision was passed by the CIT on the ground that the capital borrowed by the assessee-firm was not used entirely for purposes of the assessee’s business. There was no indication in the order as to the basis on which the CIT came to the prima facie conclusion that the capital borrowed by the firm was utilised for purposes
other than that of the firm’s business. The CIT’s order was set aside by the Tribunal. On a reference to the High Court, it was held that the Tribunal was right in law in setting aside the order passed by the CIT under Section 263.
22. In the light of above facts and circumstances, the decisions and by considering the terms and conditions of both the schemes extracted supra, we, now proceed to verify/consider the rival claims as under:
22.1. After giving our thoughtful consideration to the terms and conditions of the two schemes, we are of the opinion that there was no question of any account having become lapsed or any matured account being unclaimed on maturity so far as the scheme GFDA is concurred. So far as the scheme GGF is concerned, the maturity period being the year 2001 and there being provision for premature claim and guaranteed repurchase before maturity, there was no possibility of any account having become lapsed or as unclaimed. Even if, there was such an account, it was for the CIT first to find out the same after making proper enquiries and then only should have exercised his powers under Section 263. Even otherwise, if the receipts under these two schemes were considered as capital receipts than also the so-called lapsed or unclaimed matured accounts along with interest provided on them, if any, being taxable in the year the assessee closes the account, there was no likelihood of any loss to the Revenue, because if the deduction for interest was allowed in this year the same was likely to be taxed in the year of close of the account. At the same time, the issue relating to the allowability of the deduction on account of interest having been dealt with by the AO in accordance with law, the terms and conditions of the schemes and the contractual obligation of the assessees, the assessment order could not be said to be erroneous and there being no violation of any of the provision of law it cannot be said that the due state’s tax has not been charged and consequently, the order cannot be said to be prejudicial to the interest of the Revenue.
22.2. So far as the question as to whether the liability was contingent and unascertained, as observed by the CIT, or was determinate or ascertained (as claimed by the assessee), we, after going through the terms and conditions of the two schemes (supra) are of the opinion that the liability to pay interest was;
(i) firstly, of contractual nature; and
(ii) secondly, was well ascertained or determinate, and
(iii) thirdly, since the assessee was following mercantile system of accounting and was under obligation to pay for the payment of accrual basis as per the terms and conditions of the two schemes relating to time and the rates, the assessment order dealing with the issue of allowability of assessee’s claim of deduction on account of interest payable on deposits under these two schemes cannot be considered to be erroneous and prejudicial to the interest of the Revenue,
23.1. Coming to the next issue that the CIT having not specified any reason as to how and in what manner and to what extent the assessment was erroneous and prejudicial to the interest of the Revenue, we, in view of the decision of various High Courts, including the decisions of the jurisdictional
High Court in case of Late Sunder Lal (supra), are of the opinion that the order of revision made by simply making bald statement is not sustainable in law. The assessment order, so far as the issue relating to allowance of interest is concerned, has been passed after making proper and detailed enquiries and consequently it cannot be said to have been passed in haste also.
23.2. In view of the aforesaid facts and circumstances, we are of the opinion that the assessment order dt. 22nd March, 1999, so far as the issues raised by the CIT are concerned, cannot be said to be erroneous insofar as prejudicial to the interest of the Revenue and, therefore, the CIT was not justified in revising the same. Further, the CIT having not specified the reasons for his conclusion, we, following the decision of the Hon’ble Allahabad High Court, are of the opinion that even if the assessment order is held to be erroneous and prejudicial to the interest of the Revenue, then also it cannot be sustained a valid order. In the result, the order under Section 263 dt. 22nd March, 1999, is quashed and set aside.
Issue No. 4
Relating to the doctrine of merger:
24. In relation to the doctrine of merger of the order of the AO with that of the CIT(A), that to Sr. Advocate, appearing on behalf of the assessee, submitted that once a particular issue is the subject-matter of appeal before the CIT(A), the CIT’s jurisdiction under Section 263 is ousted. According to him, the CIT is debarred from revising the assessment order with respect to that issue/item/sufaject-matter even on the ground other than the ground on which the matter has been before the CIT(A) or the ground on which it has been dealt with by the CIT(A).
Elaborating his concept relating to the doctrine of merger, the learned Sr. Advocate submitted that once any of the ‘aspects’ of ‘an issue’ is subject-matter of appeal, matter even on the ground other than the ground on which the matter has been before the CIT(A) or the ground on which it has been dealt with by the CIT(A),
Elaborating his concept relating to the doctrine of merger, the learned Sr. Advocate submitted that once any of the ‘aspects’ of ‘an issue’ is subject-matter of appeal, then it is the ‘issue’ and not the ‘aspect of the issue’, which shall be deemed to have been the subject-matter of appeal, Yet, explaining further, the learned counsel submitted that if an ‘issue’ involves various ‘aspects’ and the appeal is with respect to one or more aspects alone, then it is the ‘issue’ which shall be said to be the subject-matter of appeal. In support of this interpretation of his with respect to the doctrine of merger, the learned Sr. Advocate relied on the decision in the following cases :
(1) Oil India Ltd. v. CIT (1962) 138 ITR 836 (Cal);
(2) Remex Constructions/Remex Electricals v. ITO and Ors. (1987) 116 FTR 18 (Bom);
(3) CIT v. Goodricke Group Ltd.;
(4) (1989) 33 TTJ 576 (supra);
(5) Progressive Services Ltd. v. ITO (1991) 40 TTJ (Cal) 595;
(6) Decision of Tribunal, Bombay, in the case of M/s Hill Properties Ltd. (Asst. yrs. 1985-86, 1986-87 and 1987-88) dt. 23rd Nov., 1993 (copy filed); and
(7) Tribunal Bombay decision in the case of M/s Seamen’s Ltd. for the asst. yr. 1987-88, dt. 21st July, 1999 (copy filed).
24.1. Explaining the facts and circumstances of the aforesaid cases with respect to the issues and the aspects, which were the subject-matter of appeals, the learned counsel derived the ratio of all these decisions with respect tp the doctrine of merger. The ratio, as derived, according to the learned counsel, was that even if the appeal before the CIT(A) is only with respect to one or more aspects of the issue, it is the issue as a whole which will be said to be the subject-matter of appeal and not the aspects alone.
24.2. In view of the aforesaid submissions and ratio of the various decisions derived by him, the learned counsel submitted that so far as the case before the Tribunal is concerned, the issue before the AO was the “allowability of deduction of expenditure on account of interest payable on deposits received by the assessee under the two schemes (supra), “which could be dealt with by the learned AO from various angles, i.e., could be dealt with respect to various aspects of this issue. According to the counsel, the various aspects to be decided for adjudicating the issue as a whole were :
(i) allowability of the expenditure on account of interest payable on the basis of genuineness of the deposits, i.e., if the deposits as a whole or part thereof itself were not found to be genuine, then there was no question of allowability of deduction on this account to that extent,
(ii) the allowability on the basis of accrual theory explaining this aspect, the learned counsel submitted that the AO, before allowing the assessee’s claim on this account, was first to satisfy himself with respect to the accrual of the liability and it was only after such satisfaction that the assessee’s claim could be allowed, otherwise not,
(iii) the third aspect of the issue, according to the learned counsel, was the allowability of assessee’s claim on the basis of the quantum of deposits. According to the learned counsel, it was incumbent upon the AO to allow the assessee’s claim after satisfying himself with respect to the quantum of deposits meaning thereby that if assessee’s claim was found to be on the basis of the amount more than the deposits entitled for such interest, the AO could disallow the assessee’s claim to that extent. According to him, the AO was supposed to have looked into all these aspects before deciding the issue relating to the assessee’s claim of deduction for expenditure on account of interest payable on deposits under the two schemes (supra). It was further submitted that if an authority prefers to consider the assessee’s claim in view of one or more aspects but not all of them, then (i) it cannot be said that other aspects have not been considered by the authority and (ii) it cannot be said that the issue as a whole itself has not been dealt with. In the light of this proposition, it was submitted that if the AO has decided the issue only with regard to one or more but not all the aspects of the issue and the subject-matter of appeal are the aspects dealt with by the AO, then it is not that/those aspects alone which will be said to be the subject-matter of appeal but it is the issue as a whole itself which will be said to be the subject-matter of appeal.
24.3. Coming to the assessee’s case, the learned counsel submitted that though the AO seems to have dealt with the issue in this case only by way of dealing with only a few aspects and the assessee had gone in appeal before the CIT(A) with respect to those aspects, which is not so because while considering the allowability of assessee’s claim the AO had duly considered the genuineness of the deposits received during the years, quantum of the deduction claimed by the assessee and disallowable portion of assessee’s claim and therefore, it was the issue as a whole which in this case was the assessee’s claim of deduction of expenditure on account of interest payable on deposits under these two schemes, which was the subject-matter of appeal before the CIT(A). Similarly, the allowance of assessee’s claim of deduction on this account by the AO clearly confirms that assessee’s claim was allowed after considering the aspects relating to the allowability on accrual basis. Had it not been the case, then the AO would not have allowed the claim rather would have disallowed the whole claim. In view of these facts, the assessment order with respect to this issue had merged with the order of the CIT(A) [on 1st Jan., 1999, i.e., the date of the order of the CIT(A)]. That being the case, the CIT, on 22nd Feb., 1999, had no jurisdiction to exercise his powers of revision vested by virtue or provisions of Section 263 of the Act for the revision of the assessment order on the issue in this case (supra).
24.4. The learned Departmental Representative, on the other hand, pleaded that so-called aspects detailed by the assessee’s counsel could not be said to be part and parcel of a single issue; rather were different and independent issues in themselves and since the issue relating to the aDowability of interest on lapsed and unclaimed matured accounts and accrual of the liability were not discussed either by the AO or by the CIT{A), it cannot be said that the order of the AO had merged with the order of the CIT(A) on this issue and consequently, the CIT was well within his powers to revise the assessment order on this issue.
25. We have considered the rival submissions, facts and circumstances of the case and the various decisions relied upon by the learned Sr. Advocate.
25.1. The facts, as revealed from the records before us, so far as the issue relating to assessee’s claim of deduction for expenditure on account of interest payable on deposits under two schemes (supra) is concerned, are that the assessee, who is a residency non-banking financial institution, had started two deposit schemes, namely, GFDA and GGF, on the terms and conditions stipulated in the relevant schemes–the details of which have been extracted in the earlier part of this order. Since the deposits invited under these schemes were interest bearing, the deduction of allowability on account of interest payable on the deposits under these two schemes was being claimed on accrual basis since inception of these appeals and the liability was computed by adopting a rate of 12 per cent for GFDA and 15 per cent for GGF, So far as the liability of GFDA is concerned, the same was computed on the basis of net deposits at the end of the financial year. The liability on deposits under GGF scheme was computed on six monthly basis after excluding the accounts, which were to mature during that period of six months. This system of providing liability had been accepted in the past years as well in subsequent
asst. yr. 1995-96.
25.2. During the course of assessment proceedings for asst. yr. 1994-95, the AO considered the assessee’s claim of deduction on account of liability provided for interest payable on deposits under these two schemes–which was provided on the basis adopted in previous year, did not deposit the admissibility of the deduction on accrual basis. The AO, however, disallowed part of assessee’s claim on the basis of other aspects as detailed below :
(i) An expenditure of Rs. 5,35,29,140 being the proportionate liability on account of interest payable on deposits worth Rs. 74,47,200 out of tota! deposits of Rs. 1,52,94,04,000 received during the current year because the deposits to that extent were considered as ungenuine and had been added but assessee’s income by invoking, the provisions of Section 68 of the Act (para. 15 and 3.2 of the assessment order respectively).
(ii) The AO disallowed an interest amounting to Rs. 34,96,173 out of assessee’s total claim of interest on this account by holding that an amount equal to the average balance of Rs. 23,30,78,196 has always remained with the assessee’s collecting agent M/s Sahara India Firm, of which no interest was being charged by the assessee, meaning thereby that the expenditure to this extent was disallowed because, according to the AO, the interest bearing deposits to the extent of average balance remaining with the collecting agent were without interest, i.e., were not used for assessee’s business (para 7 of the assessment order)
(iii) The AO, further added a notional income of Rs. 21,09,011 on the same reasoning as given against disallowance listed at Sl. No. 2 above (para 8 of the assessment order). This addition is nothing but disallowance of assessee’s claim of interest-though indirectly.
25.3 On appeal by the assessee, the CIT(A) set aside the issue relating to addition made under Section 68 and a disallowance of interest amounting to Rs. 5,35,29,140 but disallowed the other three additions/disallowances. 26. So far as, the present case is concerned, the question before us, in the light of the above facts and circumstances, is whether it was the “issue relating to the allowability of assessee’s claim of deduction on account of liability for interest payable on two schemes (supra) as a whole, i.e., inclusive of all aspects/grounds on which the claim could be denied; was the subject-matter of appeal, as claimed by the assessee, or it were only the aspects of the issue which was the subject-matter of appeal, as claimed by the Revenue. In other words, can, on the facts and circumstances of the case, it be said that the issues relating to the accruality of liability and allowability of deduction on lapsed and unclaimed matured accounts were not the subject-matter of appeal before the CIT and to decide this question, let us first consider the various case laws relied upon by the assessee, because it is the ratio of these decisions which is quite relevant and will’throw light on the outcome of the issue under our consideration.
26.1. Oil India Ltd. v. CIT (supra) .
(i) The facts of the case, as are borne out from the decision, were that for asst. yr. 1970-71, the ITO had allowed the assessee’s claim of depreciation on
vehicles @ 2.5 per cent as against 5 per cent claimed by the assessee and in this way the amount inadmissible under Section 40{a)(v) was calculated at Rs. 3,15,343 calculating on the basis of depreciation allowed at 5 per cent. Before the AAC the assessee had contended that the allowance of depreciation on bungalow @ 2.5 per cent as against 5 per cent claimed by the assessee was proper. It was also contended that the ITO had not given the correct details of the written down value and it was not known how the disallowance of Rs. 3,15,343 had been arrived at by the ITO. Under these circumstances, it was pleaded that the ITO should be directed to work out the correct WDV of the building in the light of the previous appellate order–the AAC in assessee’s appeal for the asst. yr. 1964-65 had held that the building in question was of second class and depreciation was allowable at 5 per cent, and allowed depreciation @ 5 per cent of such WDV.
(ii) Dealing with these contentions, the AAC inter alia observed as under:
“7. The next contention relates to an alternative ground, ground No. 6, where the rate of depreciation is disputed. Here it is contended that the ITO was not justified in disallowing Rs. 9,74,788 by taking the allowance of the depreciation at 5 per cent as claimed by the appellant. It is contended that the ITO has allowed depreciation @ 2.5 per cent only and the same rates should be taken for disallowance under Section 40(a)(v) taking the depreciation in that manner.”
(iii) After this appeal to the AAC, which was disposed of on 3rd April, 1974, the CIT issued a notice dt. 5th March, 1975, under Section 263 except to this very assessment year, i.e., asst. yr. 1970-71 and in paras 3 and 4 of the notice stated as under:
“In the said notice, in paras 3 and 4, it was further stated :
“3. In view of what has been stated in the preceding paragraph the order of ITO under Section 143(3), dt. 24th March, 1973, appears to be erroneous insofar as it is prejudicial to the interest of Revenue.
(iii) I, therefore, propose to pass an order setting aside the ITO’s order dt. 24th March, 1973, insofar as it relates to the aforesaid sum of Rs. 1,44,540 and directing him to make a fresh assessment according to law.”
(iv) Before the CIT the assessee contended that the allowance and disallowance of depreciation as well as the quantum thereof were the subject-matter of appeal before the AAC. Before the AAC, however, this aspect was not pressed either by the assessee or the Revenue nor did the AAC give any direction in respect of this aspect. But this order of the ITO having merged in the order of the AAC on the question of alienability of depreciation, the CIT had no jurisdiction to pass any order of revision under Section 263 of the Act (the other contentions are not relevant for our purpose). The CIT rejected the assessee’s contention.
(v) On appeal by the assessee, the Tribunal was of the view that this aspect, viz., whether 11 months’ depreciation or 12 months’ depreciation should be allowed or not because of the fact that the employee was in occupation for one month, was not the aspect of the appeal before the AAC. Therefore, according to the Tribunal, the CIT had properly exercised his jurisdiction, i.e., the CIT had jurisdiction to go into this aspect.
(vi) The Hon’ble High Court, in the facts and circumstances of the case, held at pp 840 and 841 as under :
“Upon this the three questions as mentioned hereinbefore have been referred to this Court. The first question is directed to the aspect whether after the appellate order was passed by the AAC or an appeal had been preferred, the CIT had jurisdiction in the facts and circumstances of this case under Section 263 of the Act. Now, it is well settled that before an appeal was before the AAC certain orders are appealable. It is also well settled that in an appeal preferred before the AAC the sole assessment is open for review by the AAC. He is both the appellate as well as the adjudicating authority. But his jurisdiction is limited to the appeal preferred before him. There were certain orders which are not appealable for the AAC but certain types of allegations can be taken up in an appeal by separate appeals. Apart from those two cases if an assessment is the subject-matter of appeal then any ground which was held in favour of the assessee can also be held against him though the appeal was preferred by the assessee. This jurisdiction of the AAC is indisputable. In this case the question is whether the quantum of allowance or disallowance or depreciation was the subject-matter of appeal or not. It is true that whether depreciation should be calculated on the basis of 12 months or it should be calculated on the basis of 11 months was not a specific aspect which was agitated before the AAC nor did he give any direction on this aspect of the matter but he had this aspect kept open for adjudication by him even though not taken by the assessee. Then, on that, he could have allowed 5 per cent or 2.5 per cent depreciation and should have directed the ITO to compute the same on such basis as he considered fit and proper, namely, 11 months or 12 months on the view that the employee of the assessee was on leave for one month and as such could not be said to be entitled to this accommodation. If that is the position, then, in our opinion, once the appeal has been preferred before the AAC on any aspect of the quantum of depreciation, the CIT cannot assume jurisdiction, otherwise an anomalous position would arise. The ITO has been directed by the AAC to fix depreciation at a certain percentage, indicated by the AAC, without any further direction that it should be confined to 11 months or 12 months. But, now, if further consideration is superimposed by the CIT by rectification made by the ITO as a result of the order passed by the CIT under Section 263 then that would be in conflict with the direction given by the AAC in his appellate order.’ Therefore, where an appeal is preferred and the subject-matter of appeal, particularly raised, is the subject-matter before the AAC, then that order, in our opinion, cannot be the subject-matter of an order of revision by the CIT. This principle, however, comes where the appeal does not lie from the order of the ITO and before the AAC where different kinds of appeal are provided for in the scheme of the IT Act. This principle was enumerated by the Supreme Court in the case of CIT v. Amrit Lal Bhogi Lal & Co. (1958) 34 ITR 130 (SC). This was also reiterated in the decision in the case of Jeevan Lal (1929) Ltd. v. Addl. CIT (1977) 108 ITR 407 (Cal) and the decision in the case of Premchand Sitanath Roy v. Addl. CJT (1977) 109 ITR 751 (Cai). The Allahabad High Court reiterated the same principle in the case of J.K. Synthetics Ltd. v. Addl. CIT (1976) 105 ITR 345 (All). Therefore, it appears to us that as the quantum of depreciation was the subject-matter of appeal and the CIT had no
jurisdiction, in the facts and circumstances of this case, to issue the notice under Section 263 and to pass any order on this aspect of the matter. Question No. 1, therefore, in our opinion, must be answered in the negative and in favour of the assessee.”
26.2. Remex Construction/Remex Electticals v. ITO (supra) (i) The fact of the case were that the petitioner was a registered firm carrying on business of construction of factory sheds in the name of M/s Remex Constructions and of Electrical installations in the name of M/s Remex Electrical. The petitioner firm was assessed for the purpose of income-tax filed returns for the asst, yrs. 1972-73, 1973-74 and 1974-75 along with copies of the P&L a/cs and balance sheets. The 1st ITO (respondent No. 1 herein), on perusal of the returns and while passing the assessment orders, took the view that the petitioner did not maintain a day-to-day Stock Book in respect of materials consumed in both the business and that in the absence of the same, it was not possible to verify the book results and that it was necessary to ascertain the book results on the basis of estimates. The gross profit shown by the petitioner in respect of construction business was 13.77 per cent, 14.63 per cent and 16.35 per cent for the three years, respectively, while the ITO estimated it at the flat rate of 17.5 per cent for all the years. The gross profits shown by the petitioner in respect of electrical business was 11.64 per cent, 11.82 per cent and 22.87 per cent, respectively, for the relevant assessment years and that was estimated by the ITO at 12.5 per cent for the first two assessment years, while retaining the gross profit shown by the petitioner for the last assessment year.
(ii) The petitioner carried three appeals against the orders of assessment passed in respect of the three assessment years before the AAC of IT. The AAC by order dt. 10th Feb., 1977, deleted the addition of Rs. 8,486 and Rs.. 16,558 for the asst. yr. 1972-73 in respect of electrical and construction business. For the asst. yr. 1973-74, relief of Rs. 9,463 in respect of electrical business and Rs. 56,323 in respect of construction business was granted. For the asst. yr. 1974-75 relief of Rs. 6,000 for electrical business and of Rs. 14,450 for construction business was granted.
(iii) Thereupon, the CIT, by exercising his powers under Section 263 set aside all the assessment orders with the observation that payments to M/s Architect Combined and P.L. Company being for the purpose of supervision work relating to trading account could not have been debited to the P&L a/c. He, therefore, directed the ITO to pass fresh assessment orders.
(iv) The assessee’s appeal before the Tribunal was dismissed on the ground that the appeals were barred by time and assessee has not filed any application for condonation.
(v) On petition under Article 226 of the Constitution of India made before the Hon’ble High Court of Bombay–in all the six appeals, the Hon’ble High Court, on the facts and circumstances of the case, held at pp 21 and 22, as under: “A plain reading of Section 263(1) of the Act, establishes that the CIT could exercise revisional power only in cases where any order passed by the ITO is found to be erroneous and prejudicial to the interests of the Revenue. Shri Pandit is right in his submission that the order of the ITO in respect of the three assessment years was carried in appeal before the AAC and the appellate authority granted relief to the petitioner by modifying the orders passed by the ITO. Shri Pandit did not dispute that revisional powers could be exercised by the CIT cases where the order of an ITO is not carried in appeal or where the appeal is restricted only to a part of the order. The order of the ITO would merge in the appellate order provided the entire order of the ITO is challenged and considered by the appellate authority and if any part of the order of the ITO is not challenged, then that part of the order is open for revision by the CIT. Shri Jetly, learned counsel appearing on behalf of the Department, submitted that the CIT ‘exercised the power to ascertain whether the expenses claimed by the petitioner are of trading nature and that was not an aspect which was considered by the AAC. The submission is not correct. The order under Section 263 of the Act clearly sets out that the point for consideration was that the payments made to Kampani and M/s Architect Combine were expenses of trading nature and, therefore, deemed to have been covered by the estimate of gross profits. The petitioner had filed the appeals before the AAC because of the decision of the ITO that the gross profits disclosed by the assessee could not be accepted in the absence of day-to-day Stock Book, and, therefore, gross profit has to be ascertained by estimate. It is, therefore, obvious that on this aspect of the matter, the CIT should not have exercised revisional powers.”
26.3. CIT v. Goodncke Group Ltd. (supra).
(i) Shortly stated, the facts are that the CIT exercised his Jurisdiction under Section 263 of the IT Act, 1961, in respect of the asstt. yr. 1977-78 as, according to him, the order passed by the ITO was erroneous, inasmuch as, the ITO came to the conclusion that only 7/12th of the head office expenses should be taken into account for disallowing the expenses as provided under Section 44C. He also observed that the ITO erred in calculating the correct amount of disallowance. According to the CIT the order of the ITO was erroneous and prejudicial to the interest of the Revenue. He initiated proceedings under Section 263. The assessee protested against the proceedings initiated by the CIT. Amongst other things a point was raised that the CIT(A) heard the appeal filed by the assessee which was disposed of and, therefore, the CIT cannot exercise his jurisdiction under Section 263 in respect of the order of the ITO which was the subject-matter of appeal before the CIT(A).
(ii) The CIT in his order under Section 263 noted that the CIT(A) upheld the order of the ITO. The point regarding the applicability of Section 44C was the only point agitated by the assessee in the aforesaid appeal. The point whether the head office expenses for the entire year had been taken into account was not agitated by the assessee. Accordingly, he was of the view that the contention of the assessee that action under Section 263 was bad cannot be upheld. The CIT further noted that as the ITO erred in applying a pro rata basis for head office expenses and as there were mistakes in the computation, the CIT set aside the assessment order and directed the ITO to redo the assessment after hearing the assessee.
On appeal, the learned High Court, at p 628, held as under:
(iii) “From the narration of facts it would appear that the question regarding the application of 44C was directly in issue before the ITO. The matter also went to the CIT(A). Thereafter it was taken up before the Tribunal. The Tribunal directed the CIT(A) to reconsider the matter on the basis of the directions given in the Appellate order of the Tribunal. In such a case, it cannot be said that the issue was not considered by the ITO, This is a case where the order of the ITO merged with that of, the CIT(A) as appeal was preferred and decided on the identical issue.”
26.4. Hill Properties Ltd. v. Asstt. CIT (before the ITAT ‘B’ Bench, for asst. yrs. 1985-86, 1986-87 and 1987-88, dt. 23rd Nov., 1993).
(i) The facts of the case were that the annual letting value of certain properties owned by the assessee was determined by the AO on the basis of their municipal valuation.
The property in question was a group of large number of flats all of which stand in the name of the various shareholders of the assessee-company.
While the annual letting value of the property on the basis of its municipal valuation was determined by the AO at Rs. 3,57,257 for all the 3 years, the assessee received from its members the following amounts as their contribution :
Rs.
(1) 1985-86 9,70,642
(2) 1986-87 7,96,023
(3) 1987-88 3,85,573
The learned CIT on scrutiny of records took the view that the assessments in question were erroneous and prejudicial to the interest of the Revenue.
(ii) In response to Section 263 notice the assessee raised several objections before the CIT. Inter alia, they are that the assessment had already merged with orders passed by the learned CIT(A); that the assessment orders were not prejudicial to the interest of the Revenue and that the amount received by the assessee from its shareholders did not partake the character of rent as it was only a reimbursement of expenses made by them to the assessee-company and finally that in law it were the shareholders occupying the flats who were real owners thereof and as such there was no question of the liability of the payment of any income from house property by the assessee-company.
(iii) The learned CIT disagreed with the assessee on all counts. To be stated succinctly, despite the first appeals, in the view of the CIT, the issues before him were different than the subject-matter of the appeals before the CIT(A).
(iv) On the aforesaid facts, the Hon’ble Bench, after giving the details regarding the dates of various orders and considering the provisions of Section 23 of the Act, held as under :
“As per the learned CIT the issue in the appeals before the learned CIT(A) related to the deduction of municipal and various other taxes while, the issue before him was the adoption of annual value. And as such the assessments survived qua the 263 action to be decided on merits. As against this the learned counsel for the assessee submitted that the issue before the learned CIT(A) and the CIT (Admn.) was the same inasmuch as the assessee was forced to file appeals against the assessment orders as the AO although took
the annual letting value on the basis of municipal valuation, he did not allow municipal taxes to be deducted therefor. Similarly, in the submission of the counsel the CIT was also considering the fixation of the annual letting value in which he disagreed with the AO.
8. It was urged on behalf of the assessee that the deduction of the taxes levied by any local authorities was an integral part and parcel of the exercise of the determination of the annual letting value and it was this aspect of the matter that the assessee had challenged before the CIT(A) assailing the refusal of: the deduction of the taxes from the municipal valuation. The same issue, namely, the correct determination of the annual value, it was submitted, was the subject-matter of 263 proceedings by the CIT and that being so, it cannot be said that there were two different aspects before the two authorities. In support of this contention reliance has been placed by the assessee’s counsel on two
decisions.
*** *** ***
We are therefore, of the considered opinion that insofar as the deduction of municipal taxes is concerned, it is not one of the deductions provided for by the Act separately. In fact it is a part of the process of the determination of the annual value which aspect is dealt with by Section 23 under the captain “annual value how determined.
10. If that be so, with the denial of the deduction of the municipal taxes to the assessee by the AO the challenge made by them before the CIT(A)’ could be only to the determination of annual value. Similarly, what was sought to be reopened by the CIT under Section 263 concern/the determination of the annual value inasmuch as he wanted to take into consideration the compensation received by the assessee-company from its shareholders, which was in excess than the annual value determined by the AO on the basis of municipal taxes. In deciding this aspect of the matter, we are unable to concern ourselves as to whether the procedure adopted by the AO accorded with law or not. The scope for our consideration is rather limited, namely, as to whether the issue raised by the assessee in the three appeals before the CIT(A) and the one stated to be opened by the Administrative Commr. on the scrutiny of the assessment records were similar or dissimilar. Surely at both the ends the subject-matter was the correct determination of the annual value of the property in question.
11. Once this appeal was examined by the CIT(A) the assessment order rendered by the AO ceased to exist and got merged in the appellate order which cannot be subjected to any revisional jurisdiction. In saying so get support from various authorities, to mention the one on which reliance has been placed by the assessee that is the Remex Constructions case referred to supra.
12. (In this para the Hon’ble Tribunal has discussed the decision in the case of Indian Oil Ltd.–reproduction not necessary)
13. Applying the aforesaid law, the contrary of which has not been brought to our notice at all, the issue before the CIT(A) broadly speaking was only the determination of the annual value of the property inasmuch as despite the claim of the assessee, the AO did not allow the municipal taxes to the
assessee. The CIT tried to invoke jurisdiction under Section 263 saying that the annual letting value should not be determined on the basis of the municipal valuation but be based on the receipt by the assessee from its various shareholders, who were holding-different flats in the property. As to whether Clause (a) or Clause (b) of Sub-section (1) of Section 23 was applicable is not the precise question. The controversy raked up by the assessee before the CIT(A) was the correct determination of annual value alone which alone was intended to be upset by the CIT under Section 263. The one aspect of the matter namely, as to whether the annual value should be guided by the municipal valuation or by the particular receipt of the assessee which incidentally has seen a step fall and stood during the asst. yr. 1987-88 only nearly as high as the annual value determined on municipal valuation, the two figures respectively being Rs. 3,85,573, Rs. 3,27,257 could have no bearing or relevance for arriving at as to what was the subject-matter of the appeals before the CIT. Our categorical answer is that the scope and the amplitude of both the proceedings were only the correct determination of annual value of the property.
14. That being so all the three assessment orders stood merged in the orders rendered by the learned CIT(A) in the first appeal on 17th Dec., 1988, and 26th July, 1989, making the assessments non-existent and becoming a part of the appellate order rendered by the CIT(A), thereby leaving nothing to be revised under Section 263.
The assesses have to succeed on this count alone. Ordered accordingly.”
26.5. Seaman’s Ltd. Formerly Seamens India Ltd. v. Dy. CIT
The Tribunal, Bombay Bench ‘A’–For the asst. yr. 1987-88, dt. 21st June. 1999 :
(i) The facts of this case were that the AO, while computing the deduction admissible under Section 80HHC of the Act, did not include the amount of sales-tax and excise-duty–amounting to Rs. 15,82,21,950 in the total turnover meant, for the purpose of computation of deduction under Section 80HHC. The AO had also excluded from the total turnover so taken an amount of Rs. 22,66,000 being the value of goods purchased by the assessee from a place outside India and exported directly from that place to some other place outside India.
(ii) On appeal by the assessee, the CIT(A), as per his order dt. 30th Nov., 1999, allowed the assessee’s claim relating to the consideration of the export amounting to Rs. 22.66,000 as part of export turnover as envisaged in Section 80HHC.
(iii) After the order of the CIT(A) dt, 30th Nov., 1990, the CIT, as per his order dt. 26th March, 1992, revised the assessment order and directed the AO to recompute the deduction allowable under Section 80HHC after including the amounts of sales-tax and excise duty collected amounting to Rs. 15,82,21,950 in the total turnover because, according to the CIT, the failure on the part of the AO to include this amount in the total turnover had resulted, while calculating the export provided in terms of Section 80HHC, in an order which was erroneous insofar as prejudicial to the interest of the Revenue.
(iv) Before the Tribunal, the assessee’s stand was that the deduction under Section 80HHC had been the subject-matter of appeal before the CIT{A), the assessment order cannot be revised by the CIT from including the amount of
sales-tax in the gross turnover in exercise of powers under Section 263 because of the application of doctrine of merger and for this purpose had relied on the decisions in the case of Oil India Ltd. and Remex Construction (supra). The Revenue’s stand, however, was that what is not considered by the AO cannot be considered by the CIT(A) and as the question whether the sales-tax and excise duty should be included in the total turnover for working out the export profit in terms of Section 80HHC(3) had not been considered by the AO which could not be the subject-matter of appeal before the CIT(A) and, as such, the CIT had rightly assumed the jurisdiction to revise the assessment order on that point. In support of this, the Revenue had placed reliance on seven decisions listed in para 4 of the Tribunal’s order.
(v) The Tribunal, after considering the rival submissions and distinguishing the decision relied on by the learned Departmental Representative as listed in para 4 of the order, negatived the Revenue’s stand and upheld the contention of the assessed after following the decisions (supra) held in para 6 of its order as under:
“6. Having regard to the rival submissions we are of the view that the assessee deserves to succeed. Firstly, the deduction under Section 80HHC was the subject-matter of appeal before the CIT(A), as is evident from the relevant portions of his order, which we extracted hereinbefore. The subject-matter of the appeal before him is the deduction under Section 80HHC and not any other element which goes into the computation of the deduction under Section 80HHC like export turnover or total turnover. We find that the decision of the Hon’ble Calcutta High Court in the case of OH India Ltd., cited supra, clearly covers this issue and it is in favour of the assessee.”
The headnote of this decision reads as follows :
“Where an appeal is preferred before the AAC and a subject is particularly raised, the CIT cannot revise such an order taking into account an aspect not dealt with by the AAC.
Where the appeal before the AAC related to the rate of depreciation of a building to be taken into account for purposes of disallowance under Section 40(a)(v) and the question whether depreciation should be calculated on the basis of user of the building for 12 months or of 11 months was not a specific aspect which was agitated before the AAC nor was it one on which he gave any direction :
Held, that as the quantum of depreciation was the subject-matter of appeal, the CIT had no jurisdiction under Section 263 to revise the order with reference to this aspect.”
We find that the decision of the jurisdictional High Court in the case of Remex Constructions relied upon by the learned counsel, cited supra, is also in favour of the assessee. In this case, the AO estimated the gross profit and it was the subject-matter of appeal before the CIT(A). Accordingly, it was held that the CIT did not have jurisdiction to revise the assessment under Section 263 on the ground that certain expenses were disallowable. In the light of these two decisions and also the decisions of the Tribunal cited by the learned counsel for the assessee, which we have referred to hereinbefore, we have to hold that the assessment order had merged with the order of the CIT(A) on the question of the deduction under Section 80HHC and accordingly, the CIT did not have
jurisdiction to the assessment order under the provisions of Section 263 as admittedly, it is only the assessment order and not the appellate order which could be revised under Section 263.”
27. After giving our thoughtful consideration to the rival submissions, facts and circumstances of the case and the ratio of the decisions (supra), we are of the opinion that so far as the doctrine of merger, even after the amendment of the provisions of Section 263 is concerned, once any of the ‘aspects’ of an ‘issue’ is the subject-matter of appeal before the CIT(A), then; it is the ‘issue’ as a whole which is said to be the subject-matter of appeal and not only the ‘aspect’ alone. Coming to the assessee’s case before us, the ‘issue’ before the AO was the allowability of the liability on account of interest payable on the deposits under the two schemes discussed hereinbefore and the allowability issue had more than one aspect such as :
(i) liability on account of interest payable could be allowed only if the deposits were found or considered to be as of capital nature and genuine because if the deposits were not found to be of capital nature, i.e., were found or considered as of revenue nature, then there was no question of allowance of deduction on this account. Similarly, if any of the deposits was found to be ungenuine in terms of provisions of Section 68, then there was no question of allowance of liability on account of interest on such deposits.
(ii) The liability on account of interest payable could be allowed on accrual basis only if it was found that the liability to pay interest had accrued or had materialised or was ascertained one and for that purpose the terms and conditions of the schemes, i.e.. assessee’s obligation under the scheme, and the system of accounting followed by the assessee were to be investigated.
(iii) It was also necessary to verify the quantum of deposit which, inter alia, included verification of lapsed or unclaimed matured account.
28 While considering an issue which is comprised of various aspects, the AO is supposed to consider the issue from all angles, i.e., to consider all the aspects and if the issue relates to allowability of a deduction, then the AO is supposed to have considered the allowability from all angles/aspects involved for allowability of the deduction under that issue. If the officer allows the whole of the claim or disallows the claim as a whole or any part by considering one or more or all aspects involved in that issue, it cannot be said that AO had not considered the issue or has considered only a few aspects. That being the case, if such an action of the AO is brought before CIT(A) by way of appeal–even with respect to those very few aspects which have been considered by the AO, it cannot be said that the subject-matter of appeal were only those issues. On the contrary, it is the issue as a whole which will be said to be the subject-matter of appeal and consequently by virtue of application of the doctrine of merger, the order of the AO with respect to that issue as a whole will be said to have merged with the order of the CIT(A). This is the ratio of decisions discussed supra. – ‘ ,
29. So far as, the assessee’s case is concerned, as we have already said that the issue before the AO was the allowability of assessee’s claim of deduction on account of liability for interest payable on deposits under the two schemes, the facts that AO had dealt only with one or few aspects of the
issue and the fact that those aspects were only in appeal before the CIT(A) will not be hindrance for the applicability of doctrine of merger because in view of the ratio of various decisions supra it is the issue as a whole which has to be said to be subject-matter of appeal before the CIT(A) and not the aspects alone.
30. In view of above discussions, we are of the opinion that so far as the assessee’s claim of deduction of liability on account of interest payable on deposits under the two schemes was concerned, it was, as a whole-including all aspects, such as accrual of the liability, quantum of claim, etc., subject-matter of appeal before the CIT(A) and since the CIT(A) also has dealt with those aspects, the assessment order, so far as this issue is concerned, had merged in the order of the CIT(A) passed on 1st Jan., 1999. That being the position, the CIT, Kanpur, on 22nd Feb., 1999, had no jurisdiction to revise the impugned assessment order by exercising the powers available under the provisions of Section 263 of the Act and consequently, the order under 263 of the Act passed on 22nd March, 1999, was bad in law and void ab initio for want of lawful jurisdiction.
31. The other issue, such as the issue relating to ascertainability of the liability only if individual accounts of the depositors were credited or the liability was contingent one, we are of the opinion that these issues stand covered by our decision against the other issue supra and consequently, no separate comments are required.
32. In the result, the CIT’s order under Section 263, passed on 22nd March, 1999, revising the assessment order for asst. yr. 1994-95, on the point/issue of allowability of liabilities on account of interest payable on deposits under the aforesaid two schemes is declared bad in law and void ab initio and consequently, quashed and set aside. The assessee’s appeal is allowed.