2000-VIL-289-ITAT-DEL
Equivalent Citation: ITD 076, 065, TTJ 066, 731,
Income Tax Appellate Tribunal DELHI
Date: 21.01.2000
JAI COMMERCIAL CO. LTD.
Vs
JOINT COMMISSIONER OF INCOME-TAX.
BENCH
Member(s) : V. DONGZATHANG., M. K. CHATURVEDI.
JUDGMENT
Per Chaturvedi, J. M. --- This appeal by the assessee is directed against the order of the Commissioner of Income-tax, Delhi-II,New Delhi, passed under section 263 of the Income-tax Act, 1961 [hereinafter called the Act] and relates to the assessment year 1995-96.
Briefly the facts :
2. The assessee is a group company of Hindustan Development Pvt. Ltd. [in short HDL]. It raised loan amounting to Rs. 14,32,10,000 to purchase the shares of HDL. The loan was raised from the other group companies, namely, Lakshmangarh Estates & TradingCo.; Paramount Enterprises Ltd.; United General Finance Industries Ltd. Orient Bonds & Stock Ltd. and Hindustan Development Pvt. Ltd. During the year under consideration the assessee paid interest of Rs. 1,33,11,190. The details of the loan and interest are given here as under :-
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"S. No. Name of the party Loan. Interest paid
(in Rs.) (in Rs.)
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1. Lakshmangarh Estates & Trading Co. 2,60,00,000 22,41,127
2. Paramount Enterprises Ltd. 4,62,00,000 43,75,815
3. United General Finance Inds. Ltd. 1,28,10,000 13,10,544
4. Orient Bonds & Stock Ltd. 5,46,00,000 52,88,164
5. Hindustan Development Pvt. Ltd. 36,00,000 95,540
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Total 14,32,10,000 1,33,11,190"
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3. The issue on which Commissioner of Income-tax found that assessment was erroneous and prejudicial to the interest of Revenue was in regard to the payment of interest only.
4. The block assessment of Paramount Enterprises Ltd. [1/4/87to21/11/96] was completed on30-11-1996. There it was found that the said company along with other group companies purchased shares of their flagship company, HDL @, Rs. 97.42 per share on a single day i.e. on15-7-1994from M/s. C.R. Banshali Securities Ltd.
5. The bill was raised on 10-8-1994 i.e., after 26 days from the date of signing the contract and after the sale of these shares to M/s. Kejriwal & Co., Share Broker on 8-8-1994 @ Rs. 63.15 per share. The assessee purchased these shares from M/s. Kejriwal & Co. The CIT opined that the financial transaction like payment to M/s. CRB Securities Ltd. and receipts of the payments by the assessee were entered into after the accommodation transactions were tied up. The total number of shares transacted through Kejriwal & Co. were 28 lakhs and the value of the shares were Rs. 17,68,20,000. Thus, group companies incurred losses to the tune of Rs. 9,63,25,000 in the transaction. This was to reduce the long term capital gain earned by them from the sale of shares of ABB & Ingersol Rand Ltd.
6. The CIT further found that M/s. Kajriwal & Co. which was a conduit between the group companies and the assessee company in the transaction received Rs. 0.15 per share. The assessee company made payment on14/9/1994to M/s. Kejriwal & Co. This payment was made after obtaining loan of Rs. 14,32,10,000 from the group companies referred to in para 2. According to the CIT, the sole purpose to purchase these shares and to park with the assessee, was to accommodate the sister concern to book mirror losses and reduce the tax liabilities by colourful device. Accordingly, the CIT held that the interest of Rs. 1,33,11,190 paid to the group companies was a non-business expenditure.
7. Shri C.S. Aggarwal along with Shri Salil Aggarwal appeared on behalf of the assessee. Revenue was represented by Shri B. B. Nanawati. Relevant documents and papers were filed at the time of hearing. The learned counsel for the assessee contended that the conditions precedent for assuming jurisdiction under section 263 did not exist in the facts and circumstances of the present case. It was submitted that during regular assessment proceedings the Assessing Officer examined the complete details of shares purchased. Interest paid was allowed out of the dividend income, as the assessee borrowed the funds to acquire the shares of HDL. The assessee also earned on such shares a dividend of Rs. 45,61,069. The Assessing Officer stated in the order of assessment that since the funds were borrowed for earning the dividend, therefore, interest is to be deducted from the dividend income and not from the business income.
8. It was further submitted that the block assessment was completed in the case of the assessee and no material was found during the search. There was no addition on account of the block assessment. There is absolutely nothing on record to indicate that the assessee purchased shares to accommodate group concerns. The shares were purchased from the stock and share broker, M/s. Kejriwal & Co. The assessee did not purchase shares to help the group companies. It was an honest and bona fide investment.
9. Our attention was invited on the decision of the Apex Court rendered in the case of CIT v. Rajendra Prasad Moody [1978] 115 ITR 519 (SC). Hon'ble Supreme Court has held that the interest on moneys borrowed for investment and shares which had not yielded any dividend was admissible as deduction under section 57(iii) of the Act, in computing its income from dividend under the head "Income from other sources".
10. To buttress the point apropos the bona fide, learned counsel furnished details of various quotations of Calcutta Stock Exchange and Delhi Stock Exchange. It was pointed out that the shares were purchased at prevailing market price. At pages 170 to 182 of the paper book, an order of the Income-tax Appellate Tribunal in the case of Lakshmangarh Estates & Trading Co. Ltd. [see Hindustan Consultancy & Services Ltd.] in [I.T. Appeal No. 5314 (Del) of 1998 dated29-6-1999] was appended. This order is in relation to assessment year 1995-96. It was submitted by the learned counsel that in this case the Tribunal held that the appellant genuinely sold the shares to M/s. Jai Commercial Company Ltd. [assessee in the present case] at the contracted price. It was also held that funds were utilised by the assessee for the purchase of shares on which interest was paid. Further it was submitted that the amount of interest paid to group companies was duly assessed as income of each of the companies from whom the assessee borrowed the funds.
11. The learned counsel invited our attention on the decision of the Tribunal rendered in the case of Andhra Valley Power Supply Co. Ltd. v. Dy. CIT [1995] 55 ITD 24 (Bom.) wherein it was held that the Commissioner's action under section 263 must resemble that of a surgeon's knife. He cannot open the assessment wide and direct the Assessing Officer to consider everything afresh. Only errors which had crept into the assessment need to be corrected, Reference was also made to the case of CIT v. Shanti Lal Agarwalla [1983] 142 ITR 778/15 Taxman 107 (Pat.) wherein it was held that in order to invoke powers under section 263 the Commissioner of Income-tax must have material to show that in what respect there was under assessment and how the order was prejudicial to the interests of the Revenue. It is pertinent to note that the Hon'ble Patna High Court in this case distinguished the ratio laid down in the case of Rampyari Devi Saraogi v. CIT[1968] 67 ITR 84 (SC) and Smt. Tara Devi Aggarwal v. CIT [1973] 88 ITR 323 (SC). Shri Aggarwal submitted that the scope of interference under section 263 is not to set aside merely unfavourable orders and bring to tax some more money to the treasury nor is the section meant to get at sheer escapement of revenue which is taken care of by other provisions in the Act. The prejudice that is contemplated under section 263 is prejudice to the Income-tax administration as a whole. Section 263 is to be invoked not as a jurisdictional corrective or as a review of the subordinate's order in exercise of the supervisory power, but it is to be invoked and employed only for the purpose of setting right distortions and prejudices to the Revenue which is a unique conception which has to be understood in the context of and in the interest of Revenue administration. For this proposition, reliance was placed on the decision of Hon'ble Madras High Court rendered in the case of Venkata Krishna Rice Co. v. CIT[1987] 163 ITR 129/30 Taxman 528.
12. Our attention was further invited on the decision of CIT v. Smt. D. Valliammal [1998] 230 ITR 695 (Mad.) wherein it was held that the Commissioner of Income-tax cannot set aside assessment order under section 263 on the ground that verification of accounts was needed. Shri Aggarwal further placed reliance on the decision of CIT v. R. K. Metal Works [1978] 112 ITR 445 (Punj. & Har.). In this case 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 the purposes of the assessee's business. There was no indication in the order as to the basis on which CIT came to the prima facie conclusion that the capital borrowed by the firm was utilised for the purposes other than that of the firm's business. The Tribunal set aside the order of the Commissioner of Income-tax, On a reference Hon'ble High Court has held that the Tribunal was right in law in setting aside the order passed by the CIT under section 263 of the Act. It is necessary for the CIT to state in what manner he considered that the order of the Income-tax Officer was erroneous and prejudicial to the interests of the Revenue. He should also give the basis for arriving at such conclusion. The learned counsel also relied on some decisions to indicate that in the absence of a specific finding by the CIT, assessment order cannot be construed to be erroneous and prejudicial to the interest of Revenue. Thus, cancellation of assessment was not proper.
13. The learned Departmental Representative, Shri B. B. Nanawati, submitted that the order of the Assessing Officer was erroneous and prejudicial to the interest of Revenue. As such, Commissioner of Income-tax rightly assumed jurisdiction under section 263 of the Act.
14. It is beyond dispute that under section 263, the CIT does have the power to set aside the assessment order and sent the matter for a fresh assessment if he is satisfied that further enquiry is necessary, and that the order of the Assessing Officer is prejudicial to the interests of the Revenue.
15. In order that the CIT may consider an order to be erroneous for the purposes of section 263, Shri Nanawati submitted that the error of law need not be apparent on the face of the order. The CIT may consider the order of the Assessing Officer to be erroneous not only if it contains some apparent error of reasoning or of law or of fact on the face of it, but also otherwise, if the order is stereo type. If the Assessing Officer blindly accepted what is stated in the return and fails to make necessary enquiries. In these circumstances the CIT can regard the order as erroneous and prejudicial to the interest of Revenue. He can direct the Assessing Officer to make further enquiries before accepting the submissions made by the assessee in his return.
16. Shri Nanawati made reference to the decision of the jurisdictional High Court rendered in the case of Gee Vee Enterprises v. Addl. CIT [1975] 99 ITR 375 (Delhi). In this case, Hon'ble High Court has held that it is not necessary for the CIT to make further enquiries before cancelling the assessment order of the Income-tax Officer. The CIT can regard the order as erroneous on the ground that in the circumstances of the case the Income-tax Officer should have made further enquiries before accepting the statements made by the assessee in his return. The reason is obvious, The position and functioning of the Income-tax Officer is very different from that of aCivil Court. It simply gives decision on the basis of the pleadings and evidence which comes before it. The Income-tax Officer is not only an adjudicator, but also investigator. He cannot remain passive. If a return is apparently in order but calls for further enquiries, it is the duty of the I.T.O. to ascertain the facts, by making necessary enquiries. The word "erroneous" in section 263 also includes such passive acts on the part of the Assessing Officer of not making such enquiries when circumstances calls for it.
17. Shri Nanawati further submitted that section 263 can always be invoked for the purpose of setting right the distortions and prejudice caused to the interest of revenue. The prejudice that is contemplated under section 263 is prejudice to the Income-tax administration as a whole. He relied on the decision rendered in the case of Venkata Krishna Rice Co. Referring to this decision, Sri Nanawati raised a question that why the assessee made the borrowing? What was the motive behind it? The learned Departmental Representative contended that totality of circumstances transpire that the purpose of borrowings was only to hoodwink the interest of the revenue. Reliance was also placed on the decision of the CIT v. Chandan Wood Products [1996] 217 ITR 834/85 Taxman 158 (MP).
18. The learned Departmental Representative further relied on the decision of theApex Courtrendered in the case of CIT v. Rampiyari Devi Sarogi. In this case reliance was made on the supporting material to cancel the assessment. TheApex Courthas held that the additional material only supported the original plank and did not constitute the bedrock on the basis of which the order was passed. The assessee had in no way suffered from the failure of the CIT to indicate the results of the enquiries. His order was in conformity with the cannons of natural justice.
19. Shri Nanawati also relied on the decision of the Rajasthan High Court rendered in the case of CIT v. Emery Stone Mfg. Co. [1995] 213 ITR 843 (Raj.). In this case the assessment was made under section 143(3) of the Act. It was found that the IAC did not apply his mind. He allowed depreciation at the enhanced value without considering the law. The order was found to be prejudicial to the interest of Revenue. In such a situation Hon'ble High Court has held that powers under section 263 was correctly exercised by the CIT.
20. Shri Nanawati laid emphasis on the point that it was a colourful device to evade tax liability. If totality of facts to be considered it will come out that the assessee was instrumental in reducing the tax liability of the associated companies. The purpose of all this planning was to avoid tax liability. In the given circumstances, the CIT rightly assumed jurisdiction under section 263. The impugned order was perfectly correct.
21. We have heard the rival submissions in the light of material placed before us and precedents relied upon. It is open for the CIT to call for and examine the record of any proceedings under the Act, in exercise of his administrative powers. If an order is found to be erroneous and prejudicial to the interest of the Revenue. CIT can assume jurisdiction under section 263. The scope of interference under section 263 is not to set aside merely unfavourable orders and bring to tax some more money to the treasury. The prejudice that is contemplated under section 263 is prejudice to the Income-tax administration as a whole. Section 263 is to be invoked for the purpose of setting right distortions and prejudice to the interest of the revenue. Indisputably under section 263 the CIT does have the power to set aside the assessment order and restore the matter for a fresh assessment if he is satisfied that further enquiry is necessary and that the order of the Assessing Officer is erroneous and prejudicial to the interest of the Revenue.
22. It is, sine qua non, for the CIT to put that in what manner he considered that the order of the Assessing Officer was erroneous and prejudicial to the interest of the Revenue and what the basis or material was for such conclusion. The CIT must give his own reasons for being satisfied that the conditions precedent for assuming jurisdiction under section 263 did exist in the facts and circumstances of the case.
23. Adverting to the facts of the present case, we find that the assessee raised loan amounting to Rs. 14,32,10,000. Admittedly this loan was raised to purchase shares of HDL. During the year under consideration the assessee paid interest of Rs. 1,33,11,190. The reason adduced in the impugned order for assuming jurisdiction under section 263 concerns only with the payment of interest amount to the group companies. The CIT observed that M/s. Kejriwal & Co. was a conduit between the group companies and the assessee company in the transaction. The CIT opined that financial transaction like payment to CRB Securities Ltd. and receipt of payment by the assessee were entered into after the accommodation transfer were tied up. The total number of shares purchased through M/s. Kejriwal & Co. were 28,00,000 and the value of the shares was Rs. 17,68,20,206. Thus, the group companies incurred losses of Rs. 9,63,25,000 in the transaction. The CIT opined that this was to reduce the long term capital gain earned by them from the sale of shares to ABB & Ingerwoll Rand Ltd. It is, therefore, necessary to examine that whether this payment was made to defraud the Revenue or for the genuine needs of the business.
24. We have examined the order of assessment. It transpires from the perusal of the same that the Assessing Officer added the amount with the following narration :---
"Assessee had borrowed funds to acquire shares of M/s. Hindustan Development Corporation on which dividend of Rs. 45,61,069 was earned. It is clear that funds have been borrowed for earning this dividend and, therefore, interest is to be deducted from dividend income and not from business income. Hence, the same is added here to be considered separately."
Thereafter the Assessing Officer added Rs. 1,33,11,190 and deducted the same out of the dividend income of Rs. 48,34,293 which was earned from the shares of the HDL purchased by the assessee out of the proceeds of loan transaction.
25. It was brought to our notice that the Assessing Officer made full and necessary enquiries before allowing the amount of interest. Our attention was invited on letter dated24-10-1996reproduced at page 22 of the paper book. Vide this letter the assessee furnished the details of unsecured loan and other profits of investment. Details of loan taken were furnished. Confirmations from the parties were given to the Assessing Officer. Details of investment were also furnished. Regarding the source the Assessing Officer was intimated vide letter dated5-11-1995appended at page 30 of the paper book. We find that the assessee also furnished the contract notes and bills in regard to the purchase of shares of HDL. The quotation of the stock exchange were also placed before the Revenue authorities to indicate that the shares were purchased at the prevailing market price.
26. Apex Courtin the case of Rajendra Prasad Moody has held that the interest on money borrowed for investment in shares which had not yielded any dividend was admissible as deduction under section 57(iii) of the Income-tax Act, 1961, in computing income from dividend under the head "income from other sources." In the present case, we find that the shares brought by the assessee yielded dividend to the tune of Rs. 48,36,293.
27. We have also noted that the assessee was assessed under section 158BC of the Act for the block period1-4-1987to22-11-1996. A copy of the assessment order was placed before us which runs at pages 44 to 46 of the paper book. As per the said order which is dated28-11-1997the undisclosed income for the block period was found to be NIL. The shares are reflected in the balance sheet as investment in Schedule VI at page 11 of the balance sheet.
28. We have also noted that the case of one of the group companies Lakshmangarh Estates & Trading Co. Ltd. had considered, the facts connected with the claim of deduction of Rs. 4,50,04,414 being the loss incurred on purchase and sale of shares of Hindustan Development Corporation Ltd. The transaction entered with the assessee company was also taken note of. The genuineness of the transaction was accepted.
29. There are not more meshes in a net than there are in the administration of human justice. Thus, justice should be administered with due caution and care. The power conferred on the Commissioner under section 263 deals with corrective measure. If an error had crept in the order of assessment and that error is prejudicial to the interest of the Revenue, the Commissioner can assume jurisdiction under section 263 of the Act. The Commissioner's action under section 263 must resemble that of a Surgeon's knife. He cannot open the assessment wide and direct the Assessing Officer to consider everything de novo. Only errors, which had crept into the assessment need to be corrected. He must give a clear cut finding as to the error. He must establish that the said error is prejudicial to the interest of Revenue. He should see that the justice is done. There cannot be anything of greater consequence then to keep the stream of justice clear and pure, that parties may proceed with safety both to themselves and their characters.
30. In the present case, we find that the interest paid by the assessee for the purchase of shares of "HDL" was allowable in view of the decision of theApex Courtrendered in the case of Rajendra Prasad Moody. The Tribunal in the case of Lakshmangarh Estate & Trading Co. Ltd. held this transaction to be genuine. Nothing was placed before us to demonstrate that how the interest of Revenue got prejudiced. It also appears from the record that the Assessing Officer allowed the amount of interest after due enquiry. As such, it cannot be said that the assessment was crept with error. Therefore, in our opinion, conditions precedent for assuming jurisdiction under section 263 did not exist. Accordingly, we quash the impugned order.
31. In the result, the appeal of the assessee, stands allowed.
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