COMMISSIONER OF INCOME TAX,BILASPUR vs. INCOME TAX APPELLATE TRIBUNAL AND ANR.

^ HIGH COURT OF CHHATTISGARH AT BILASPUR ~€~ Tax Case No.26 of 2006 APPELLANT: Commissioner of Income Tax, Bilaspur Versus RESPONDENTS: Income Tax Appellate Tribunal, Jabalpur and another JUDGMENT FOR CONSIDERATION riON'BLE SHRI R.N. CHANDRAKAR^J -3 ci<y^^ POST FOR JUDGIUENT ON o_? -1 -2011 Sd/- Dhirendra Mishra Judge SA'- R.N. Chandrakar Judge Sd/-

n.. ^s;^ ••—-,, ^ •3 -^ i'^~.:irL,^ ~""^^^y 2^D HIGH COURT OF CHHATTESGARH AT BILASPUR TT Tax Case No.26 of 2QQ6 APPELLANT: Commissioner of Income Tax, Bilaspur RESPONDENTS: Versus 1. 2. Income Tax Appellate Tribunal, Jabalpur fihanshyam t)as Agrawal, Proprietor - Agrawa\ Engineering Works, Nehru Park Road, Surajpur (C6) Present: Shri Rajeev Shrivastava, counsel for the appellant. Shri Shashank Dubey, Sr. Advocate with Shri Amrito bas, Advocate for respondent No.2. bivision Bench: Hon'ble Shri bhirendra Mishra & Hon'ble Shri R.N. Chandrakar. JJ. JU06MENT (Delivered on_22^1January, 2011) The following judgment of the Court was delivered by Dhirendra Mishra, J. 1. This tax appeal preferred by the Revenue under Section 260-A of the Income Tax Act, 1961 (for short 'the Act of 1961') against the order of the Income Tax Appellate Tribunal, Jabalpur Bench, Jabalpur (for short 'the Tribunal') has been admitted on following substantial question of law;- "Whether on the facts and in the circumstances of the case, the Income Tax Appellate Tribunal was justified in law in canceling the order of CIT under Section 263 of the Act by holding that the same was not sustainable thou9h the Assessing Officer made assessment without adequate enquiry? 2. Briefly stated factsof the case, as projected in the impugned order, are that assessment in this case was completed under Section 143 (3) of the Act of

^' a wrsa 2-2- •-'•-sria la<<^ ^-rf6' 1961 on 22nd March, 2004 (Annexure-A/1) which was';,,appealed against and learned CIT (A) vide order dated 28-7-2004 (Annexure-A/2) deleted the addition of Rs.1,99,582/- in full and other disallowances made by the Assessing Officer were restricted to 107o instead of 207o as done by the Assessing Officer. Consequent upon the appellate order, the income was computed at Rs.1,36,640/- against Rs.3,52,660/- assessed by the Assessing Officer. Learned CIT, on perusal of the assessment order, noted that the order is erroneous insofar as it is prejudicial to the interest of Revenue with regard to following:- "1, The Assessing Officer has failed to examine the genuineness of the unsecured loans of Rs.12,49,802/- and the element of unreasonability and excessiveness, if any, of the interest paid to the tune of Rs.2,43,404/- in respect of the same in terms ofsection 40A(2) of the Act. 2. The Assessing Officer has failed to verify the reasons, mode of payment, source and the nature of advance for a sum of Rs.l- lahhs by the assessee to M/s Mahamaya Sponge Iron. 3. The Assessing Officer failed to verify the genuineness and correctness of the transactions made by the assessee with M/s Super Industries, Surajpur with specific reference to the discrepancy in bill no and date." 3. Show causs notice was issued under Section 263 and after considering the reply of the assessee as well as arguments advanced before learned CIT, issue in relation to unseeured loan of Rs.12,49,802/- and advance of Rs.IO lakhs given by the assessee were set aside and theAssessing Officer- was directed to re-decide these issues afresh after making necessary enquiries/ verification and examination and after givjng reasonable opportunity to the assessee in accordance with law while holding the order of the Assessing Officer with respect to these two items to be erroneous and prejudicial to the interest of revenue. 4. The assessee preferred an appeal against the above order of the CIT and the Tribunal by the impugned order allowed the appeal and held that there was no occasion for learned Commissioner of Income Tax to invoke the provisions of section 263 with regard to above two issues.

ife-.»- •<.*':<£—.;.-• '&^ •sl S '.!</^ ^l^- 5. Shri Rajeev Shrivastava, learned counsel appearing oritibehalf of the revenue argued that the Commissioner of Income Tax, on scrutiriY of the assessment order dated 22-3-2004 passed under- Section 143(3) observed that the Assessing Officer had failed to examine the genuineness of unsecured loan of Rs.12,49,802/- and the element of unr-easonability and excessiveness, if any, of the interest paid to the tune of Rs.2,43,494/- in respect of the same in terms of Section 40/\(2) of the Act of 1961 and further considering that the Assessing Officer has failed to verify the reasons, mode of pdyment, source and nature of advance for a sum of Rs.IO lakhs by the assessee to M/s Mahamaya Sponge Iron and also on third ground, passed order under Section 263 after- issuing notice to the assessee and after affording opportunity of hearing with a finding that the Assessing Officer has failed to apply his mind and make proper enquiries and verification in respect of loans taken by the assessee during the year under consideration as well as the source of advance of a sum of Rs.IO lakhs to M/s Mahamaya Sponge Iron Private Limited and thus, the order passed under Section 143 of the Act of 1961 on 22nd March, 2004 is erroneous and pr'ejudicial to the interest of revenue. 6. After setting aside the assessment order in respect of the above two issues, the Assessing Officer (A.O.) has been directed to reframe the same after making necessary enquiries, examination and verification, after giving reasonable opportunity of hearing to the assessee in accordance with law. 7. From perusal of the order of the CIT under Section 263, it is evident that the /\.0. has not dealt with the questions raised by the Commissioner in the assessment order and even representative of the assessee admitted that no ' such explanation and details were furnished by the assessee before the A.O. during the course of assessment proceedings. However, the Tribunal has set aside the order- of CIT uuith a finding that for unsecured loan of Rs.3,63,000/- the assessee had furnished confirmation letters from the parties before the A.O., though the Commissioner in its order has mentioned about the admission of representative of the assessee that no explanation was given in this regard.

'"S^ v^ -•f ^', 8. With respect to the objection raised by the re,spondent that fresh assessment order was passed on 1-9-2004 after the ordsr dated 28-7-2004 was passed by the CIT (A) and, therefore, the Commissioner had no jurisdiction to revise the order dated 22-3-2004 under Section 263 of the Act of 1961, as no assessment order dated 22-3-2004 existed, it was argued that these points we.re. never agitated either before the Commissioner in proceedings under Section 263 of the Act of 1961 or before the Tribunal in appeal, therefore, respondent No.2 cannot be permitted to raise this new issue which has not been raised at any point of time. 9. It was further argued that powers under Sections 263 and 246A of the Act of 1961 are quite different, as they are exercisable by the different authorities. Under Section 246A, any assessee aggrieved by the order mentioned in Section 246 of the Act of 1961 may prefer appeal to the CIT(/\) whereas, the power-s under Section 263 of the Act of 1961 can be exercised by the Commissioner if the Commissioner finds that the or-der is erroneous insofar as it is prejudicial to the interest of revenue. Reliance is placed in the matter of Commissioner of Income Tax, Bhopal Vs. Ralson Industries Ltd. reported in (2007) 2 Supreme Court Cases 326 = 2007 (1) Supreme 65. 10. It was fur-ther argued that the assessment order dated 1-9-2004 was passed in compliance of the order of CIT (A) and the same is not a speaking order. The objection that the Commissioner was required to revise the order dated 1-9-2004 instead of order dated 22-3-2004 is mere technical in nature and it is me.re ir'regularity and not illegality and for" that reason the order under Section 263 of the Act of 1961 cannot be set aside. 11. On the other hand, Shri Shashank Dubey, learned Senior Advocate with Shri Amrito Das, Advocate appean'ng on behalf of respondent No.2 vehemently argued that proceedings under Section 263 can be conducted against any order passed by the A.O. and not assessment order. In the instant case, the assessment order was passed on 22-3-2004. The appeal was preferred before the Commissioner (Appeals) and the appellate order was passed on 28-7-2004. The A.O. passed another order on 1-9-2004 giving effect to the

^i\ order of Commissioner (Appeals) and thus, the order qf Commissioner was a 1;. fresh order and it was an order under Section 154 of tKfc Act of 1961. The proceedings for rectification of assessment order consequent to appellate order are pcoceedings for- assessment. In these circumstances, when notice under Section 263 was issued by the CIT on 4-8-2005 it could only be directed against order dated 1-9-2004 and the reference in notice under Section 263 to the assessment order dated 22-3-2004 was misplaced since that order did not exist on 4-8-2005. Similarly, when an order was passed under Section 263 on 14-11-2005 with respect of assessment order dated 22-3-2004, the same was also bad as no such assessment order was in existence. Thus, there could be no revision under Section 263 of a non existent order. 12. On merits of the case, it was 'argued that notice under Section 263 was issued firstly on the ground that loans of Rs.12,49,802/- were not verified and interest paid on them to the extent of Rs.2,43,494/-. From perusal of the order of Commissioner, it is clear that the Commissioner came to the conclusion that only loan of Rs.3,60,000/- related to the assessment year. All loans of Rs.3,60,000/- were taken by account payee cheques from persons who were income tax assessee and all evidence was produced before the authorities. So far as advance of Rs.IO lakhs given to Mahamaya Sponge Irori Pvt. Ltd., Calcutta, is concerned, the details of amount and source were furnished before the authorities including the Commissioner and the Tribunal has recorded a finding that they qre from accounts of assessee. In view of the above facts also, there is no justification for interfering with the impugned order of the Tribunal. 13.We have heard learned counsel for the parties. 14. We first propose to consider the arguments advanced on behalf of the assessee that the assessment order dated 22-3-2004 was rectified on 1-9- 2004 consequent to the appellate order- and this or-der could be subjected to revisional proceedings under Section 263 and not original assessment order dated 22-3-2004.

•2,2^ 15. From perusal of the order of CIT dated 14-11-2€),05 as also from the 11... • impugnedorder of the Tribunal, it is clear that no such objection was raised before the forums below against initiation of proceedings under Section 263 of the Act of 1961 by the CIT. Appeal under Section 260-A has been admitted on substantial question of law arising from decision of the Tribunal. Since there was no issue before the CIT or the Tribunal regarding exercise of revisional jurisdiction against original order dated 22-3-2004, no such question arises for adjudication of this appeal. 16. That apart, CIT, on perusal of the assessment order dated 22-3-2004 passed under Section 143(3) of the Act of 1961, found that the A.O. has failed to examine the genuineness of the unsecured loans of Rs.12,49,802/- and the element of unreasonability and excessiveness, if any, of the interest paid to the tune of Rs.2,43,494/- in respect of the same in terms of Section 40A(2) of the Act of 1961. It also found that the A.O. has failed to verify the reasons, mode of payment, source and the nature of advance for a sum of Rs.IO lakhs by the assessee to M/s Mahamaya Sponge Iron. 17. After considering the explanation offered by the assessee and after hearing representative of the assessee, it has been observed that the A.R. admitted that the assessee had not produced the above loan creditors before the A.O. Neither any written explanation regarding the source of loans advanced by them to the assessee was furnished before the A.O. and in these circumstances, it has been observed that the A.O. has failed to examine the genuineness of the above loan transactions, including the sources thereof and he has not made any verification from the relevant assessment records of the above loan creditors. The A.O. has also not made any attempt to examine the reasonability of the rate of interest paid on these loans ©18% p.a. after verifying the prevailing market rate for the same. Mere filing of confirmation letters is not enough to establish the genuineness of the loan transactions. Reliance has been placed on certain decisions referred to in the order.

a"'i?-.. ..•l'~ ^'- F;.^ '•^ ^ 6 a ''^-s.B IS.Similarly, the A.R. also admitted that no any explanation and details we.re i.. furnished by the assessee before the A.O. regarding adwnces of Rs.IO lakhs 9iven to M/s Mahamaya Sponge Iron Pvt. Ltd. and accordingly, it has been observed that the A.O. has failed to apply his mind and examine the above issues in proper perspective. It has been held that the assessment order passed under Section 143(3) of the Act of 1961 in this case on 22-3-2004 is erroneous and prejudicial to the interests of revenue. The objections pointed out in the revisional order under Section 263 do not even find reference in the order of assessment. The order of Appellate Commissioner dated 28-7- 2004 also does not deal with any of the issues raised by the Commissioner in his revisional order under Section 263. From perusal of the order under Section 263, it is clear that CIT has also considered that total income was assessed at Rs.3,52,660/- in the original assessment order, however, in compliance of order of the CIT (A), the revised total income for the year has been computed at Rs.1,36,640/- by the A.O. vide his order dated 1-9-2004. 19. It is settled law that Section 263 gives the Commissioner- the power to call for and examine the record of any proceeding under the Act and if he considers that any order passed by the Income-tax Officer, insofar as it is prejudicial to the interest of the revenue, he might after" giving the assessee an opportunity of being heard and after making or causing to be made such enquiry as he deems necessary pass such order thereon as the circumstances of the case might justify. Thus, the power that he exercises under the section is a power in respect of the order of the Income-tax Officer. He has no power to r-ectify the order passed by the Appellate Commissioner. 'ZO.The question is - whether the order passed by theAppellate Commissioner deleting addition of Rs.1,99,582/- on account of closing stock and deduction of disallowance © 10% from 207o of the expenditure claimed has any bearing with regard to the objections raised in the revisional order under Section 263?

CL^T "^ 21. The application of the doctrine of merger dependsnpn the nature of the i;., appellate or revisional order" in each case and the sco()p of thestatutory provisions conferring the appellate or revisional jurisdiction. As already pointed out in the for'egoing paragraphs that the issue before the Appellate Commissioner in appeal preferred by the assessee was entir'ely different and it had no co-relation with the objections roised by the CIT in its revisional order. 22.In the matter of Ralspn Industries Ltd. (Supra), the Supreme Court, while dealing with interpretation of the provisions of Section 154 viz. a viz. section 263 of the Act of 1961, observed thus:- "12. When different jurisdictions are conferred upon different authorities to be exercised on different conditions both may not be held to be overlapping with each other. Jurisdiction under Section 154 of the Act is only to be exercised by him when there is an error apparent on the face of the record. It does not confer any power of review. An order of assessment may or may not be rectified. If an order of rectification is passed by the assessing authority, the rectified order shall be given effect to. However, only because an order of assessment has undergone rectification at the hands of the assessing officer, in our opinion, the same would not mean that revisional authority shall be denuded of exercising its r'evisional jurisdiction. Such an interpretation, in our opinion, would run counter to the scheme of the Act. 14. An order of assessment is subject to exercise of . an order of a revisional jurisdiction under- Section 263 of the Act. Doctrine of merger in such a case will have no application. 15. The decision of the Madhya Pradesh High Court in Chunnilal Onkarmal is also not apposite. Initiation of a proceeding under Section 263 of the Act cannot be held to have become bad in law only because an order of rectification was passed. No such hard-and-fast rule can, in our opinion, be laid douvn. Each case is required to be considered on its own facts. In d given situation, the High Court may be held to be entitled to set aside both orders and remit the matter for consideration afre.sh. But in our opinion, it would not be correct to contend that

2^ only because a proceeding for rectifical'jon was initiated subsequently, the revisional jurisdictibn^could not have been invoked under any circumstances whdtsoever. If such a proceeding was initiated, in our opinion, the contesting parties could bring the same to the notice of the Commissioner so as to enable him to take into consideration the subsequent events also. It goes without saying that if and when the Commissioner of Income Tax takes up for consideration a subsequent event, the assessee uvould be entitled to make its submission also in regard thereto." 23. In the instant case, CIT exercising revisional jurisdiction under Section 263 has examined the record of the assessment proceeding of the assessee, considered the order of assessment as per directions of the Appellate Commissioner and held that the assessment order passed on 22-3-2004 was prejudicial to the interest of revenue on two aspects as detailed above. The order nowhere revises or in any way interferes with the order of the Appellate Commissioner. Therefore, in our opinion, the objection put forth by the assessee against exercise of jurisdiction under Section 263 raised for the first time before this Court in appeal under Section 260-A is uvithout any force. 24.The Tribunal has set aside the order of the CIT without dealing with specific observations of CIT in its order under Section 263. The findings of the appellate Tribunal - that as regards unsecured loan of Rs.3,60,000/- from 3 different persons, the assessee has furnished confirmation letters fr-om these parties before fhe A.O. and these creditors are also assessed to income tax and necessary documents in this regard were also filed before the A.O., as he was fully satisfied with such unsecured loan so he did not deem fit to call the parties or to have further clarification, are contrary to the observations in the revisional order passed by the CIT under Section 263 wherein it is clearly mentioned that the A.R. admitted that the assessee had not produced the above loan creditors before the A.O., neither any written explanation regarding the source of loan advanced by them to the assessee was furnished before the A.O..

10 ^ 25.After considering the explanation fur-nished by tbe A.R,, the CIT has x.. observed that the A.O. has failed to examine the genuineness of the above loan transactions, including the sources thereof and the A.O. has apparently not made any verification from the relevant assessment record of the above loan creditors. The CIT has r-ejected the explanation and details fur-nished by the A.R. before him regarding advances of Rs.IO lakhs to Mahamaya Sponge Iron on the ground that no such explanation and details were furnished by the assessee before the A.O. during the course of the assessment proceedings, as admitted by the A.R. and thus, the A.O. has failed to apply his mind and examine the above issues in proper perspective. However, this objection has been brushed aside by the Tribunal with an observation that advancing of amount of Rs.IO lakhs by the assessee from the books of accounts, when proper details about dates and payments were filed before the A.O., even in the absence of any further explanation, there was no occasion for learned Commissioner of Income Tax to invoke the provisions of Section 263. 26. On the basis of aforesaid discussion, we are of the opinion that the Tribunal was not justified in law in canceling the order of the CIT under- Section 263 of the Act of 1961, as the CIT has rightly held that the Assessing Officer made assessment without adequate enquiry. 27.In the result, the appeal is allowed and the impugned order of the Tribunal dated 21-6-2006 is set aside and the order of CIT is confirmed. Sd/- Dhirendra Mishra Judge Sd'- R-N. Chandrakar Judge Barve