C.I.T. PATIALA vs. M/S SOHANA WOOLLEN MILLS

ITR/36/1990HC Punjab & HaryanaPHHC01021586199022 September 2006Author: MR. JUSTICE RAJESH BINDAL,MR. JUSTICE ADARSH KUMAR GOEL4 pages
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What did the High Court hold?

The High Court held that the Appellate Tribunal was right in annulling the order passed by the Commissioner of Income Tax under Section 263. The Court reasoned that the Commissioner can exercise power under Section 263 only if the order of the Assessing Officer is erroneous and prejudicial to the interest of the revenue, and this satisfaction must be based on the Commissioner's own application of mind, not merely on an audit objection. The Tribunal had found that the assessee had disclosed in its return that Rs. 1 lakh out of the sale consideration was for the sale of the permit. Therefore, there was no error in the Assessing Officer's view, and no case was made out for invoking jurisdiction under Section 263. The question of law was answered against the revenue and in favour of the assessee. The reference was disposed of accordingly.

What were the facts?

The assessee, M/s Sohana Woollen Mills, Ludhiana, sold machinery and a permit for 1200 spindles for manufacturing woollen worsted yarn. The sale agreement was dated 26.7.1974. The assessee calculated profit under Section 41(2) at Rs. 51,067 and capital gains at Rs. 55,006. Additionally, Rs. 1 lakh was shown as goodwill on account of the sale of the permit. The Assessing Officer accepted the return, assessing net income at Rs. 99,000. The Commissioner of Income Tax (CIT) initiated proceedings under Section 263 of the Income Tax Act, 1961, based on an audit note. The Income Tax Appellate Tribunal annulled the CIT's order, finding that the CIT erred in assuming jurisdiction under Section 263.

What were the issues?

1. Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in law in annulling the order passed by the Commissioner of Income Tax under section 263 of the Income Tax Act, 1961? Assessee's arguments: The assessee contended that the CIT could not exercise jurisdiction under Section 263 solely based on an audit note, as the Commissioner must apply his own mind. Reliance was placed on *Jeewanlal (1929) Limited v. Additional CIT* and *Indian and Eastern Newspaper Society v. CIT*. The assessee also argued that the transfer of goodwill does not give rise to capital gains, citing *CIT, Bangalore v. B.C.Srinivasa Setty*, and that a route permit is a self-generating asset whose consideration is not assessable as capital gains, citing *CIT v. New Suraj Transport Corporation (P) Limited*, *CIT v. V.Prakashan*, and *Rayon Silk Mills v. CIT*. Revenue's arguments: The revenue argued that the invocation of jurisdiction under Section 263 was justified because the consideration for the machinery sold was Rs. 3,50,000, not Rs. 2,50,000, and the agreement did not specify Rs. 1 lakh as consideration for the permit.

Which sections of the Income-tax Act were involved?

Section 263,Section 41(2)

AI-generated summary — verify with the full judgment below

Cause title — parties, addresses and appearances
ITR No.36 of 1990 1 IN THE HIGH COURT OF PUNJAB AND HARYANA AT CHANDIGARH ITR No.36 of 1990 Date of decision:22.9.2006 The Commissioner of Income Tax, Patiala. ....Petitioner versus M/s Sohana Woollen Mills, Ludhiana. Respondent. CORAM: HON'BLE MR. JUSTICE ADARSH KUMAR GOEL HON'BLE MR. JUSTICE RAJESH BINDAL Present: Mr. SK Garg Narwana, Advocate, for the revenue. Mr. HO Arora, Advocate. Mr. SK Mukhi, Advocate.

JUDGMENT: Following question of law has been referred for opinion of this Court by the Income Tax Appellate Tribunal, Chandigarh Bench, Chandigarh, arising out of its order dated 8.4.1983 in ITA No.1076/ASR/79, in respect of assessment year 1975-76:- “Whether on the facts and in the circumstances of the case, the Appellate Tribunal was right in law in annulling the order passed by the Commissioner of Income Tax under section 263 of the Income Tax Act, 1961?”

Facts noticed by the Tribunal in the statement of case are that :- “The assessee held certain machinery and was in possession of a permit obtained from the Textile Commissioner for the working of 1200 spindles for the manufacture of woollen worsted yarn. The said 1200 spindles we

The order continues below.

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