2002-VIL-191-ITAT-ALH
Equivalent Citation: ITD 084, 124, TTJ 079, 634,
Income Tax Appellate Tribunal ALLAHABAD
Date: 15.02.2002
SHYAM BIRI WORKS PVT. LTD.
Vs
ASSISTANT COMMISSIONER OF INCOME-TAX
BENCH
Member(s) : P. S. KAILASAM., BHAVNESH SAINI.
JUDGMENT
1. These appeals by the assessee are directed against the order of the Commissioner of Income-tax (Central), Kanpur (hereinafter referred to as "the CIT(C)" dated 5-1-2001 passed under section 263 of the Income-tax Act, 1961 setting aside the assessment orders directing the Assessing Officer to complete the re-assessments for the assessment years 1987-88, 1988-89 and 1989-90.
2. The brief facts of the case are that there was a search on 29-11-1988 in the premises of the assessee and its directors. Certain material was seized during search and seizure and during the period, proceedings under section 132(5), 132(11) and 132(12) were conducted by the concerned Income-tax Authorities and ultimately regular assessments were framed under section 143(3) on dated 30-3-1990. The CIT(C) issued show-cause notice under section 263 of the income-tax Act in all the three years on 2-1-1992 and passed the impugned order dated 5-1-2001. The assessee has challenged the order of the CIT(C) dated 5-1-2001 in the three appeals before us. Since the impugned order dated 5-1-2001 is common order, all the appeals relate to the same assessee and we have heard them together, therefore, all the appeals are decided by this consolidated order in all the three appeals. The assessee has filed these appeals on many common grounds and for the sake of convenience grounds of appeal for the assessment year 1987-88 are reproduced as under:
"1. Because the revised income of the appellant has been accepted by the Assessing Officer on agreed basis and in pursuance of the directions and instructions of the then Commissioner of Income-tax, Central, Kanpur, the respondent is legally stopped to take action under section 263 of the Act on the basis of same material.
2. Because section 263 does not envisage the revision or review of an order passed on the directions of the Commissioner of Income-tax, Central, Kanpur himself and the notice dated 2-1-1992 is wholly without jurisdiction.
3. Because the word Assessing Officer used in the section refers to subordinate officer and an order of assessment framed on the direction and instructions of the Commissioner of Income-tax, Central, Kanpur himself cannot be revised by him.
4. Because the order passed under section 263 is illegal, erroneous, unreasonable, arbitrary and against the provisions of law.
5. Because the order passed under section 263 is liable to be quashed since it is mere change of opinion of the new incumbent which is not permissible under law.
6. Because in view of the factual position the order passed under section 143(3) dated 30-3-1990 cannot be held to be prejudicial to the interest of revenue as it is merely change of opinion.
7. Because the order passed under section 263 is void and is liable to be quashed since there was no application of mind in absence of summoning of the files from the Assessing Officer.
8. Because the Commissioner of Income-tax (Central), Kanpur has erred in law and on facts in reopening the assessments under section 263 in view of the fact that assessment was completed under section 143(3) after detailed scrutiny and complying with the directions/guidance/monitoring/submission of reports to Commissioner of Income-tax (Central), Kanpur as well as discussions that took place with Commissioner of Income-tax (Central), Kanpur.
9. Because admittedly scrutiny of seized material was done which was finally discussed on Sunday, 25-3-1990 at Kanpur therefore, the order passed under section 263 on the pretext that no scrutiny was done is illegal, unwarranted and contrary to the principles of natural justice.
10. Because the learned Commissioner of Income-tax, Central, Kanpur has erred in law and on facts in setting aside the assessment and in holding as under:
'I have already given my finding in the earlier part of' the order which will be equally applicable to assessment year 1987-88.'
and
'Thus, the assessment framed is erroneous and has been passed without proper scrutiny of the seized material and the facts and, therefore, the assessment is required to be set aside for assessment year 1989-90 to be framed afresh.'
11. Because, the entire seized material and documents were scrutinised, examined and dealt with by the Commissioner of Income-tax (Central), Kanpur and other Officers before quantifying the income to be disclosed by the assessee in the revised return and therefore is it wholly incorrect and without jurisdiction to allege that the seized material and documents were not properly examined by the Assessing Officer and as such the action under section 263 is called for.
12. Because, the Commissioner of Income-tax (Central), Kanpur before initiating the impugned action has not looked into the records of the case consisting of various reports and Office Note made by respective authorities involved in the quantification of income, to be disclosed by the assessee in the revised Return. In the premises, the impugned action is uncalled for and is against the provisions of law.
13. Because, the impugned action has been initiated by the respondent on the basis of change of opinion, surmises and conjectures and just to make a fishing and roving enquiry.
14. Because the entire seized material having considered and duly examined by the then Commissioner of Income-tax (Central), Kanpur, the action of the respondent in initiating the impugned proceeding would tantamount to review the directions/instructions of the then Commissioner of Income-tax (Central), Kanpur.
15. Because, the Commissioner of Income-tax (Central), Kanpur cannot legally reopen a proceeding which has already been concluded between the parties and became final by his predecessor.
16. Because Commissioner of Income-tax (Central), Kanpur has erred in law and on facts as ground mentioned in the notice is not a valid ground to hold that the order passed under section 143(3) was prejudicial to the interests of revenue.
'3. While determining the income under section 143(3) at Rs. 10,46,370 the Assessing Officer has failed to consider the expenditure of Rs. 1,82,01,000 on which income of Rs. 17,00,000 was estimated in the order passed under section 132(5) on 28-3-1989.'
17. Because Commissioner of Income-tax (Central), Kanpur has erred in law and on facts in directing for reopening under section 263 after relying upon the order passed under section 132(5), which is no longer valid in the eyes of law.
18. Because the order passed under section 132(5) has since merged with the order passed under section 132(12) by a superior authority which do not give any ground to Commissioner of Income-tax (Central), Kanpur under section 263 for setting aside the completed assessment for making a fresh assessment.
19. Because the impugned notice is also illegal and without jurisdiction for the simple reason that the very basis of the impugned action, i.e., order under section 132(5) of the Act has been knocked off by the order of the Commissioner of Income-tax (Central), under section 132(12) of the Act.
20. Because the Commissioner of Income-tax (Central), Kanpur, has erred in law and on facts in reopening the assessment under section 263 of the Act even after holding as under:
'4. Therefore, it can be held that the order framed under section 143(3) does not suffer from the infirmity of issue of notice which could be prejudicial to the interest of revenue.'
21. Because Commissioner of Income-tax (Central), Kanpur has erred in law and on facts in setting aside the order passed under section 263 since no reason is given in the notice under section 263 as under:
'4. The assessee has been allowed deduction under section 80HH amounting to Rs. 22,664 which is not allowable to it.'
22. Because in view of the legal and factual position, Commissioner of Income-tax (Central), Kanpur, has erred in law and on facts in setting aside the deduction allowed under sections 80HH and 80HHA.
23. Because the Commissioner of Income-tax (Central), Kanpur has erred in directing that deduction under sections 80HH and 80HHA of the Act, has incorrectly been allowed.
24. Because order contested in appeal is contrary to facts, law and principles of natural justice."
3. For assessment year 1988-89, separate grounds are as under:
16. Because Commissioner of Income-tax (Central), Kanpur has erred in law and on facts as ground mentioned in the notice is not a valid ground to hold that the order passed under section 143(3) was prejudicial to the interests of revenue."
"21. Because Commissioner of Income-tax (Central), Kanpur has erred in law and on facts in setting aside the order passed under section 263 as under:
'3. The assessee has been allowed deduction under sections 80HH and 80HHA of the Income-tax Act, 1961 amounting to Rs. 38,371 and Rs. 7,417 which is not allowable to it."'
4. For assessment year 1989-90, the different grounds of appeal arc as under:
16. Because Commissioner of Income-tax (Central), Kanpur has erred in law and on facts as ground mentioned in the notice is not a valid ground to hold that the order passed under section 143(3) was prejudicial to the interest of revenue.
21. Because it is not legally permissible to give direction under section 263 to initiate penalty proceedings under section 271(1)(c).
22. Because Commissioner of Income-tax (Central), Kanpur has erred in law and on facts in directing under section 263 to initiate penalty proceedings under section 271(1)(c) after ignoring the decisions of High Courts.
23. Because Commissioner of Income-tax (Central), Kanpur has erred in law and on facts in setting aside the order passed under section 263 since no reason is given in the notice under section 263 as under:
'4. The assessee has been allowed deduction under sections 80HH and 80HHA amounting to Rs. 2,76,487 and Rs. 1,94,364 respectively which is not allowable to it."'
5. The ld. Counsel for the assessee for the sake of convenience of the Bench and for the parties filed Dates Schedule:
We would like to mention the dates, which will he convenient for the decision of this case:
29-6-1987 Return of income for assessment year 1987-88 was filed.
17-9-1987 Notice under section 143(2) issued for assessment 1987-88 for 29-9-1987.
28-10-1987 to Hearing continued before ITO [Inv. Circle and later before the ACIT
6-6-1988 (Central Circle): Allahabad], Further notice under section 143(2) issued
by him for the same year.
30-7-1988 Return for assessment year 1988-89 filed. 29-11-1988 Search was conducted in
the premises of the assessee and its directors under section 132.
20-3-1989 to Discussion with CIT (Central), DDI (Inv.), D.C. (C), Varanasi and Allahabad.
21-3-1989
28-3-1989 Order under section 132(5) was passed by the Assessing Officer covering all
the assessment years.
23-4-1989 Objection by assessee under section 132(11) filed before CIT (Central), Kanpur
against order under section 132(5).
25-4-1989 Notices under sections 143(2) and 142(1) issued for 9-11-1989 for assessment
year 1988-89.
19-7-1989 to Hearing continued before the Assessing Officer.
30-3-1989 Notices under sections 142(1) and 143(2) were issued and replied for the
assessment year 1987-88.
9-11-1989 to Hearing continued before Assessing Officer for assessment year 1988-89.
30-3-1990
31-12-1989 Return of income filed for assessment year 1989-90.
31-1-1990 Notice under sections 143(2) and 142(1) issued for assessment year 1989-90.
15-2-1990 to Hearing for all the assessment years continued before the Assessing Officer.
30-3-1990
5-3-1990 Order under section 132(12) passed by the CIT (Central) on the order under
section 132(5) directing the Assessing Officer to examine the seized material
again in regular assessments.
7-3-1990 First report on scrutiny of seized material submitted by the Assessing Officer
to the CIT (Central).
16-3-1990 Discussion with CIT (Contra]) on his tour at Allahabad in the office of ACIT
(Central), Allahabad continued with the assessee for all the years.
19-3-1990 Second report on scrutiny of seized materiall submitted by the Assessing
Officer to CIT(Central).
25-3-1990 Discussion took place in the office of CIT (Central)on Sunday wherein Shri
B.P. Gupta, CIT (Central), Shri G.C. Srivastava, D.D.I., Shri Daya Shankar,
ACIT (Ccntral), (Assessing Officer) representing the department while
Mr. Shyama Charan Gupta, Managing Director M/s Shyam Biri Works Pvt. Ltd.,
Mr. S.K. Garg, F.C.A. and Mr. N..C. Agrawal, FCA participated to quantify
the income. The appellant agreed to department's version.
29-3-1990 Third report on scrutiny of seized material and in compliance to direction
given on 25-3-1990 by CIT (Central) submitted by the Assessing Officer again
to CIT (Central).
30-3-1990 Revised return for all year filed and Assessment orders passed on the same.
20-7-1990 Reconciliation statement regarding undisclosed incomes determined in the order
under sections 132(5) and 143(3) submitted by the Assessing Officer to DC
(Central), Varanasi.
2-1-1992 Show cause notice under section 263 issued by Shri W. Hasan, CIT (C) to the
assessee for all the three years.
28-1-1992 Hearing against show cause notice under section 263 took place and written
submissions filed before CIT(C).
26-2-1992 Hon'ble Allahabad High Court stayed the proceed ings before the CIT(C) under
section 263 on the writ petition filed by the assessee against the show cause
notice.
28-2-1992 Hearing attended and written submissions filed before the CIT(C) by the
assessee.
29-5-1998 Writ petition was admitted by the Hon'ble High Court.
7-12-2000 Hon'ble Allahabad High Court rejected the writ petition and directed the
assessee to attend the proceedings before the CIT(C).
4-1-2001 Shri Shyama Charan Gupta, Managing Director and Shri N.C. Agrawal, F.C.A.
attended before the CIT(C) suo motu without receipt of any notice though the
proceedings were going to be time-barred on 9-1-2001.
5-1-2001 Impugned order under section 263 passed by the CIT(C) setting aside all the
assessments in the matter and directing fresh assessments.
6. We have heard the learned Counsel for the assessee, Shri N.C. Agrawal, S/Shri A.K. Manchanda, Shri R.N. Gupta and Shri R.N. Chaudhary, Ld. D.Rs for the Revenue at length. Both the parties have filed their Paper Books which were supplied to the respective parties. The ld. Counsel for the assessee in his first Paper Book filed copy of the Show Cause notice under section 263 dated 2-1-1992, submissions made before the CIT(C) on dated 28-1-1992, 28-2-1992 and 4-1-2001, copy of the order dated 28-3-1989 passed under section 132(5), copy of the objection filed under section 132(11) dated 23-4-1989, copy of the order dated 5-3-1990 passed under section 132(12) of the I.T. Act by the CIT(C), copy of the reports dated 7-3-1990, 19-3-1990, 29-3-1990 submitted by the ACIT (Central Circle) (AO) to the CIT(C), copy of revised computation of income filed alongwith the note for all the assessment years, copy of the assessment order under section 143(3) passed by the Assessing Officer on 30-3-1990 alongwith office note, copy of re-conciliation statement regarding the undisclosed income determined in the order under sections 132(5) and 143(3) of the Act, copy of the order sheets for the assessment year 1987-88 from 19-6-1987 to 30-3-1990, for the assessment year 1988-89 from 25-4-1989 to 30-3-1990 and for the assessment year 1989-90 from 31-1-1990 to 30-3-1990, copy of the order dated 27-9-1999 passed by the Income-tax Appellate Tribunal deleting the penalty under section 271(1)(c) of the same assessee for the assessment years 1987-88 and 1988-89. In the second Paper Book all the records of the writ petition filed before the Hon'ble High Court, Counteraffidavit by Shri B.P. Gupta, the then CIT(C), copy of the counter-affidavit filed by Shri Mahesh Chandra, ACIT, Rejoinder Affidavit and final order are filed. He has also filed copies of the Audited Balance Sheet and Written Arguments in support of his contentions.
7. On the other hand, the ld. D.R. filed the Paper Book containing 19 pages which were the compilation of the assessee and second Paper Book also containing documents of the assessee in support of the contention of the Revenue as well as copy of the affidavit of Shri B.P. Gupta, the then CIT(C), which has already been filed by the Counsel for the assessee. The ld. D.R. Shri R.N. Gupta also filed objection to the appellant's Paper Book on dated 18-12-2001 stating therein that the copies of the reports dated 7-3-1990, 19-3-1990 and 29-3-1990 were not used by the Revenue (Department) against the appellant in the order passed under section 263 nor the appellant had produced them before him in the proceedings under section 263 and, as such they are additional evidence in nature. Copy of the objection is taken on record. During the course of arguments, the ld. D.R. conceded that the report dated 7-3-1990, 19-3-1990 and 29-3-1990 are part of the record of the department and were with the Assessing Officer. He has further conceded that first two reports were sent to CIT(C) but last report was not sent. The ld. D.R. also objected to the office note filed by the ld. Counsel for the assessee but he has conceded that the office note is available on the record of the Assessing Officer. The ld. D.R. further objected to the reconciliation statement, which we shall deal at appropriate stage.
8. We have directed the ld. D.R. vide order dated 23-11-2001 to produce true copies of the reports to prove to which Authority these three reports were sent but despite our directions no true copy was filed till the conclusion of the hearing. Therefore, adverse inference is drawn against the Department. Even otherwise the CIT(C), Shri B.P. Gupta in his Counter-affidavit before the Allahabad High Court stated in para 4 that "the Assessing Officer was submitting records to him from time to time and after going through those reports of the Assessing Officer the deponent was only giving proper guidance to the Assessing Officer in the matter of investigation so that the assessment proceedings may be finalised by the Assessing Officer". He has further deposed in his affidavit that these reports were part of the confidential record, which have been obtained by the assessee by undesirable means. Though CIT(C) in the same affidavit denied that the last report dated 29-3-1990 was received in his office, but facts stated in the affidavit and our directions having not been complied with, clearly show that all the reports were sent to the CIT(C) and are part of the revenue record.
9. The ld. Counsel for the assessee besides relying upon the grounds of appeal argued that the CIT(C) was the same person who was monitoring the investigation by the Assessing Officer and as such he should not have passed the impugned order under section 263. He has further argued that the CIT(C) did not refer to all the papers submitted by the department in search and survey. The CIT(C) had not gone into whole record. He has further argued that the CIT(C) supervised whole assessment proceedings and also filed affidavit in the High Court confirming the joining and guiding the Assessing Officer in assessment after going through the three reports. He further argued that order dated 5-3-1990 of CIT(C) under section 132(12) merged with the order of the Assessing Officer passed under section 132(5) directing the Assessing Officer to consider the case and evidence of assessee. The ld. Counsel for the assessee also filed Written Submissions having all the details. The ld. Counsel for the assessee further argued that the case law relied upon by the ld. CIT(C) in impugned order are not applicable. He has further argued that page 7 of the order of the CIT(C) clearly shows that everything was done by the Assessing Officer. He has referred to pages 143, 146 and 149 of the Paper Book which arc the assessment orders in which it is mentioned that the assessee agreed to surrender income in the revised return. He has further argued that about the tendu leaves which are mentioned at pages 153, 109 and 115 of the Paper Book, proper investigation is made by the Assessing Officer. He has further referred to the issue of Gahranala at pages 153, 111 and 112 and argued that all the details have been discussed by the Assessing Officer and all these details have been gone into by the Assessing Officer and CIT(C) in the office note and were also examined by CIT(C). He has further argued that diary of Shri Shyama Charan Gupta was sent to CIT(C) and was examined by him. The ld. Counsel for the assessee further argued that the three reports dated 7-3-1990, 19-3-1990 and 29-3-1990 at pages 107, 114 and 118 of PB were sent to CIT (Central) by Assessing Officer on all the grounds taken under section 263 order and noticed and discussed with the CIT(C). The revised return was filed after completion of all the discussion and scrutiny of the seized material. The CIT(C) wrongly stated that these items have not been considered but in the reports all these points have been examined by the Assessing Officer. He has further argued that CIT(C) at page 7 says why order is passed in 15 days as no minimum time is prescribed under the Act. He has also referred to pages 151 and 153 of the Paper Book which is Office Note found mentioning of Rs. 76 lakhs, which is one of the reasons mentioned for the issue of show cause notice, as well as in the order. He has also argued that the CIT(C) is having all the details. He has further referred to page 78 of the Paper Book which is order under section 132(5). He has further argued that notice was issued under section 263 on 2-1-1992 but was stayed by Hon'ble High Court and ultimately that writ petition was dismissed on 7-12-2000. The assessee appeared before the CIT(C) on 4-1-2001 of their own and impugned order under section 263 was passed on 4-1-2001, as such, no sufficient opportunity was given to the assessee. The Ld. Counsel for the assessee relied upon the decision of Hon'ble Bombay High Court in the case of CIT v. Gabriel India Ltd [1993] 203 ITR 108. He has further argued that CIT(C) has not pointed out any error in the impugned order. He has further argued that the CIT(C) in the notice under section 263 has not mentioned any specific lapse in the order under section 143(3) and as such, it is liable to be set aside. He has taken us to page 8 of the CIT(C)'s order to show that the order is passed by the CIT(C) without application of mind. He has relied on the decision of the Hon'ble Madras High Court in the case of CIT v. Smt. D. Valliammal [1998] 230 ITR 695, and the decision of the Hon'ble Madhya Pradesh High Court, Indore Bench in the case of CIT v. Ratlam Coal Ash Co. [1988] 171 ITR 141 (M.P.). He has further argued that deduction under sections 80HH and 80HHA is mentioned in the Paper Book giving all the details of computation and all the conditions are satisfied for claiming the deduction and the assessee has complied with the same and the same has not been disputed by the Department.
10. On the other hand, the Ld. DR. did not dispute the dates as mentioned above in this order, which were supplied in the Dates Schedule by the counsel for the assessee. The Ld. D.R. argued that some irregularities and loopholes were found in the assessment orders and, therefore, the CIT(C) was right in exercising power under section 263 and as such the Assessing Officer is bound by that order. The Ld. D.R. further argued that the assessee was not entitled to deduction under sections 80HH and 80HHA. The Ld. D.R. further argued that the revised return was filed on 30-3-1990 and the assessment order was passed on the same day. Therefore, the earlier proceedings are no proceedings under the Act. The Ld. D.R. further argued that the CIT(C) was only monitoring the assessment proceedings. He has relied upon the decision in the case of Dhampur Sugar Mills Ltd. v. CIT [1973] 90 ITR 236 (All.) on this point. The Ld. D.R. further argued that Rs. 82 lakhs were surrendered by two directors but this issue is not considered. The Ld. D.R. further argued that order under section 132(5) was passed by the Assessing Officer and was again objected to by the assessee and CIT(C) passed the order under section 132(12) directing the Assessing Officer to give opportunity to discuss the evidence in regular proceedings thoroughly. The Ld. D.R. further argued that pages 10 and 11 of the Paper Book show that the assessee filed revised return voluntarily. It shows that the additional income surrendered was not scrutinised by the Assessing Officer. He has further argued that limitation of one year or more was available. He has further argued that the CIT(C) never gave direction to quantification of income in the assessment orders. He has further argued that the three reports are not used by the CIT(C) in 263 proceedings. The assessee also did not claim any relief on these grounds. He has relied upon the decision in the case of Seth Champalal Ramswarup v. CIT [1964] 52 ITR 201 & 215 (All.), and further argued that these are additional evidence in nature and can not be considered by the Tribunal without moving application. The Ld. D.R. further argued that these are public documents. The Ld. D.R. CIT also argued on behalf of the Revenue. He has filed computation of income filed originally showing that the assessee himself decreased deduction under sections 80HH and 80HHA. In original return, the assessee claimed deduction of full amount but in revised return of specified amount. The assessee has not given all the details how he claimed deduction. The Assessing Officer did not go through the details. Both deduction under sections 80HH and 80HHA have been claimed together, but both are exclusive and the assessee has to specify under which head how much he was entitled. He has also referred to the point that the assessee has claimed both the deductions together. He has also argued that no depreciation was claimed on machinery and in earlier year no machinery was used and then it is irregularity to claim deduction under, sections 80HH and 80HHA. No number of employees was mentioned and no separate balance sheet was prepared. He has further argued that page 122 of the Paper Book of the assessee shows that for 1987-88 the accounting year closed on 31-12-1986, but area of Jangi was declared backward on 19-12-1986 and then how in 12 days production was raised to and submitted that it needs examination which the Assessing Officer did not do. He has further referred to page 124 of the Paper Book of the assessee and submitted that the assessee has taken factory on lease, which means existing factory was taken which was not qualified for deduction under sections 80HH and 80HHA. He has further submitted that given up claims under sections 80HH and 80HHA have not been surrendered to income in revised return. The Ld. D.R. further argued from his Paper Book-I that figure of Rs. 14 lakhs is shown but with the department it is Rs. 15 lakhs. The Ld. D.R. further referred to page 116 of the Paper Book of the assessee where figure of Rs. 4.67 per kg. has been taken. He has further referred to page 108 of the Paper Book of the assessee where the rate of Rs. 210 per bag is given by the assessee without reason and argued that the Assessing Officer adopted lower rate of Rs. 4.67 per kg. though purchase price is more than about Rs. 6 per kg. and if stock is valued properly then further addition is called for on this account. He has further referred to the amount of cash of about Rs. 7 lakhs recovered in search which has not been shown in the revised return. He has referred to the decisions in the cases of Indian Textiles v. CIT [1986] 157 ITR 112 (Mad.) and Malabar Industrial Co. Ltd. v. CIT [2000] 243 ITR 83 (SC).
11. The Counsel for the assessee in counter to the argument of the Ld. DR. further argued that the decision in the case of Dhampur Sugar Mills Ltd. is not applicable as in the old Act, section 132(12) was not inserted. The Ld. Counsel for the assessee argued that no minimum time was provided to complete the assessment. He has further argued that if CIT(C) has not considered these three reports as stated by the Ld. D.R. then the order under section 263 was passed by the CIT(C) without application of mind and without going through the record of the proceeding. He has referred to the Explanation to section 263 which provides the definition of the word "record" and further argued that once the CIT(C) has not considered the entire record, the impugned order is liable to be set aside, He has further referred to pages 13, 14, 24 and 25 of his Paper Book to show that the assessee in his reply has always referred to these reports before the CIT(C). He has relied upon the decision in the case of Bagsu Devi Bafna v. CIT [1967] 63 ITR 333 (Cal.) and argued that the Ld. D.R. has presented altogether new facts for which no notice was given to the assessee under section 263 and even CIT(C) cannot travel beyond the show-cause notice. He has further argued that the record relating to High Court case was with the CIT(C) before passing section 263 orders as he was the respondent in the writ petition filed by the assessee. He has relied upon the decision in the cases of Gabriel India Ltd. and CIT v. George Williamson (Assam) Ltd [2001] 250 ITR 747. He has further argued that at page 141 of the Paper Book, additional income of Rs. 76,60,000 was shown out of which Rs. 47,20,559 was deduction, which was already, shown in the Profit and Loss Account. Copy of the Audited Balance Sheet was also filed to explain this position and argued that there was no discrepancy in the undisclosed income. The Ld. Counsel for the assessee further argued that for deduction under sections 80HH and 80HHA, the claim was reduced only to factory in backward area in revised return. In the original return claim was made on entire production of all the factories. According to him, the assessee has now claimed deduction as per law. He has further argued that there is no requirement to use machinery under sections 80HH and 80HHA. Only Bhatti i.e., 'Heat Ghar' is plant and machinery. The Ld. Counsel further argued that no notice under section 263 was issued on this point. On quantification, other remedies were available with the department, but on allowability no details were furnished to the assessee in the show-cause notice. He has argued that all seized record was with the department. Details of the loans have been mentioned and these details are also mentioned in order under section 132(5) which was objected to by the assessee. The Ld. Counsel for the assessee referred to page 92, which is explanation of the cash and page 27 of the Paper Book which is about seizure. He has referred to page 104 of the Paper Book on the issue of tendu leaves and page 115 of his Paper Book shows that A.K. Gupta's figure could not be taken as his investment is nil According to him, even if remaining position of tendu leaves is taken i.e., 24815.076, the value would be 24815.076 X 6.93 = about Rs. 77 lakhs. The transporter wastage was not included, hence lower rate was adopted as goods did not reach the factory. He has further argued that this point was discussed with the authorities on 25-3-1990. He has further referred to page 109 of the Paper Book, which is observation of the Assessing Officer saving that about deduction of unexplained investment in the hands of DR. Singh, M/s Ramesh and Co., Uma Shankar Singh. He has further referred to the authority in the cases of Malabar Industrial Co. Ltd. which is also relied upon by the Ld. D.R. on different aspects and Amrit Steel, Ltd. v. Dy. CIT [2001] 79 ITD 498 (Delhi).
12. The ld. D.R., Shri A.K. Manchanda in counter to the argument of the learned counsel for the assessee further argued that for section 263 proceedings only opportunity of being heard is necessary and there is no requirement for issue of separate notice. He has further argued that for deduction under sections 80HH and 80HHA even machinery is necessary, which is without power to say it is industrial undertaking. He has further argued that the assessee claimed deduction on pro rata basis with separate books of account on ad hoc basis. He has argued that the assessee has failed to establish that these were separate entities. He has further argued that the Assessing Officer did not look into the requirements of sections 80HH and 80HHA. The ld. DR. further argued that for assessment years 1990-91 and 1991-92, the claim of the assessee is denied by the department on this count. However, it was admitted by him that both the appeals are pending before this Tribunal on this issue and have not yet reached finalisation. The ld. DR. further referred to page 11 of the Paper Book of the assessee and argued that the assessee himself proceeded to quantify the additional income. The income assessed by the Assessing Officer is not according to the record and statement of the assessee. The ld. D.R. further argued that Explanation 5 to section 271(1)(c) is applicable in case of search, which is mandatory in nature and as such, the penalty should be initiated by the Assessing Officer.
13. The ld. Counsel for the assessee in rejoinder to the argument of the ld. D.R. further argued that the assessee had filed explanation which is at pages 120 and 121 of the Paper Book about the earlier reports. He has further referred to page 179 of the Paper Book, which is the order of I.T.A.T., Allahabad Bench deleting the penalty in the case of the same assessee for assessment years 1987-88 and 1988-89. He has further argued that the CIT(C) could not have given direction to the AO to initiate penalty under section 271(1)(c). He has further argued that there is no requirement to maintain separate books of account. The ld. Counsel for the assessee referred to object of sections 80HH and 80HHA and argued that each of these sections is to rehabilitate industry in backward area. All the requirements are complied in the case of the assessee. According to him, even, otherwise in the search all the books of account were seized which are separately maintained for each unit as per Seizure Memo. He has further argued that Excise Register is separate and provident fund is payable for more than 20 employees and that sales-tax registration was also obtained. According to him, the Department could easily see that requirements of sections 80HH and 80HHA are complied with. Even according to him, the AO has gone into all the details of the seized material before satisfying with the correctness of the claim of the assessee on this account.
14. The ld. Counsel apart from referring to authorities in his arguments also referred to many authorities, photostat copies of which have been filed in compilation and taken on record.
I.T.A. Nos. 37, 38 and 39(All)/2001.
15. We have carefully considered the submissions of the parties and have gone through the record, Paper Book of both the parties and case laws relied upon by both the parties.
16. During the course of argument, it was objected to that no new material should be taken into consideration by this Tribunal which was never raised, argued or considered by the CIT(C). It was further objected to that CIT(C) has also taken into consideration certain points in the order under section 263 of the Income-tax Act for which assessee was not given any notice. The ld. Counsel for the assessee hence argued whatever material has not come on record either before the CIT(C) or before the Tribunal may not be considered. We have noticed during the course of arguments that certain points have been argued which we do not find mention in the order under section 263 of the Income-tax Act, 1961. The Ld. D.R., however, argued that there was no requirement of issue of show-cause notice under section 263 of the Income-tax Act, 1961 before passing of the order by the CIT. However only the opportunity of being heard should be given to the assessee. Hon'ble Gauhati High Court in the matter of Smt. Daljeet Kaur v. CIT [1990] 184 ITR 149 has held:--
"Under section 263(1) of the Income-tax Act, 1961, two pre-requisites must be present before the Commissioner can exercise the revisional jurisdiction conferred on him. First is that the order passed by the Income-tax Officer must be erroneous. Second is that the error must be such that it is prejudicial to the interests of Revenue. If the order is erroneous but it is not prejudicial to the interests of the Revenue, the Commissioner cannot exercise the revisional jurisdiction under section 263(1). Materials which were not in existence a, the time the assessment was made but came into existence afterwards cannot form part of the record of the proceeding of the income-tax Officer at the time when he passes the order and, accordingly it cannot be taken into consideration by the Commissioner for the purposes of invoking his jurisdiction under this section, for he is not an appellate authority under the section and exercises only revisional jurisdiction and hence he can take into consideration only the record as it stood before the Income-tax Officer and the materials in such record for the purpose of ascertaining whether the order in question was erroneous and prejudicial to the interests of the Revenue."
17. Hon'ble Calcutta High Court in the matter of Bagsu Devi Bafna has held:--
"It is well-settled that if an order was made relying upon materials collected behind the back of a party and without giving the party an opportunity of contesting the legality, or binding effect of such materials, the order must be treated as bad for having been made in violation of the principles of natural justice."
18. Hon'ble Calcutta High Court in the matter of Shakuntala Devi v. CIT [1971] 82 ITR 416 has held: "What is definitely enjoined by the rules of natural justice is that the Party concerned should be specifically informed of what the charges or the allegations are and that at the stage of enquiry no material should be considered behind the back of the delinquent or the aggrieved party."
19. The crux of the above authorities would be that the assessee cannot be given surprise by the department on the material upon which no show-cause notice has been issued. We also do not agree with the contention of the Ld. D.R. that there is no requirement of issue of notice under section 263 of the Income-tax Act. Though the Act provides that opportunity of being heard should be given to the assessee before passing the order under section 263 it significantly implies that for giving opportunity to the assessee, he should be made aware of the allegations or material upon which the CIT wants to proceed in the matter for which necessarily show-cause notice has to be issued giving the material and the reasons upon which the Authority was to act under section 263 so that the assessee would be having adequate opportunity to reply to the material on which CIT wants to rely and pass an order under section 263 of the Act. We are, therefore, of the considered view that no new case should be set up by the CIT or by the D.R. which was never brought to the notice of the assessee at the time of commencement of the proceeding under section 263 or which was not part of the record before proceeding in the matter. We would deal with the remaining aspects of the matter in this order with regard to the powers of the Commissioner at appropriate stage.
20. Before proceeding with the arguments of both the parties on merits of their claim with regard to the order under section 263 of I.T. Act, we would like to deal with the arguments advanced on the principle of merger. In this case return was filed under the amended Income-tax Act in which the amended provisions of section 132(5), (11) and (12) have been incorporated. It is a complete code in itself. The purpose of these sections had been that the AO has to estimate the undisclosed income under section 132(5) of the I.T. Act though in a summary manner to the best of his judgment on the basis of such material as may be available with him which was found during the course of search and seizure operation. It has further authorised the AO to calculate the estimated tax and retain the assets for realisation of the tax due to the Revenue. However the assessee has been assigned the right to challenge the order passed by the AO under section 132(5) of the I.T. Act in the form of petition/appeal to the CIT under section 132(11) of the I.T. Act. The CIT on receipt of the appeal/petition of the assessee is required to give hearing to the assessee and pass appropriate order under section 132(12) of the I.T. Act. In this case also the AO has passed order under section 132(5) vide order dated 28-3-1989 and estimated the undisclosed income in a summary manner. The assessee filed objection/appeal under section 132(11) of the I.T. Act to the CIT(C) vide petition dated 23-4-1989. The CIT(C) has disposed of the objections under section 132(12) of the I.T Act vide order dated 5-3-1990. Therefore order passed under section 132(5) which was of summary nature merged with the order under section 132(12) of the Act. On the doctrine of merger the order passed under section 132(5), ceased to exist and stands merged with the order of the CIT under section 132(12) of the I.T. Act. The principle is that the order of the inferior authority merges with the order of the superior authority.
21. The Hon'ble Gujarat High Court in the case of Pradip Chandulal Patel v. P.G. Karode [1992] 197 ITR 385 held:--
"The Assessing Officer is to estimate the undisclosed income though in a summary manner to the best of his judgment on the basis of such materials as may be available with him."
22. The Hon'ble Punjab and Haryana High Court in the matter of Gardhara Singh v. CIT [1980] 125 ITR 340 held:--
"True scope of sub-section (5) of section 132 is not so limited as the duty cast to, inter alia, is to estimate the undisclosed income and not merely to the value of the "assets" which had been seized in the search."
23. The Hon'ble Supreme Court in the matter of Pooran Mal v. Director of Inspection (Investigation) [1974] 93 ITR 505 held:
"Sub-section (5) requires that a summary enquiry must be made by the Income-tax Officer with a view to ascertain how much of the seized valuables should be retained against unpaid tax dues. The balance must be forthwith released."
24. The Hon'ble Supreme Court in the matter of Gojer Bros. (P.) Ltd. v. Ratan Lal Singh AIR 1974 SC 1380 in para 10 has held:
"10. The juristic justification of the doctrine of merger may be sought in the principle that there cannot be, at one and the same time, more than one operative order governing the same subject-matter. Therefore, the judgment of an inferior Court, if subjected to an examination by the superior Court ceases to have existence in the eye of law and is treated as being superseded by the judgment of the superior court. In other words, the judgment of the inferior court loses its identity by its merger with the judgment of the superior Court."
25. The Hon'ble Karnataka High Court in the matter of Kothari Industrial Corpn. Ltd. v. Agri. ITO [1998] 230 ITR 306 held:--
"Thus, where the subject-matter of the order of a lower authority is the same as the subject matter of the order of the appellate or revisional authority, the order of the lower authority cannot remain to stand simultaneously with the order of the higher authority on the very same subject matter. In such an event, the order of the lower authority gets merged with the order of the higher authority, so that there is only one order holding the field."
26. The Hon'ble Allahabad High Court in the matter of Saran Engg. Co. Ltd v. CIT [1983] 143 ITR 765 held:--
"Once reassessment proceedings are started, the earlier order ceases to exist and the ITO starts the assessment proceedings afresh."
27. Keeping in view the above discussion and the authorities, it would be clear that the order of the AO under section 132(5) merged with the order of the CIT(C) passed under section 132(12) of the Act. It would be worthwhile to mention here that the CIT(C) in the order under section 132(12) has held:--
"I direct the Assessing Officer to weigh the evidences given by the assessee and the evidences seized in search and seizure operations and then arrive at a correct and judicious conclusion in the regular assessment proceedings and then determine properly in a reasonable way whether the amount of undisclosed assets and effect of purchase, diaries seized in search, is fully covered by the disclosure made under section 132(4) or it is not sufficient to cover the same."
With these directions, petition was disposed of. The AO proceeded with the assessment proceedings in view of the directions under section 132(12) of the Act as passed by the CIT(C). He again scrutinized the seized material and passed the assessment order in all the years. Therefore, the CIT(C) was wrong in relying upon the order under section 132(5) while issuing notice under section 263 of the Act. We are also fortified by the judgment of the Allahabad High Court in the matter of Vijay Kumar v. CIT [1991] 187 ITR 559, in which it was held:--
"Since a regular assessment had been made in the instant case, it was unnecessary to go into the validity of the summary assessment order under section 132(5) of the Income-tax Act, 1961."
28. Therefore, the CIT(C) should not have relied upon the order passed under section 132(5) while issuing notice under section 263 of the Act as the same ceased to have existed on the day when order under section 132(12) and regular assessment was passed. However, that does not mean that the CIT(C) could not have exercised powers under section 263 of the Act against the assessment order passed by the AO. Section 263(1) of the Act provides that the Commissioner may call for and examine the record of any proceeding under this Act and if he considers that any order passed therein by the Assessing Officer is erroneous, in so far 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 enquiry as he deems necessary pass such order therein as the circumstances of the case justify including an order enhancing or modifying the assessment or cancelling the assessment and directing a fresh assessment. Therefore, the CIT(C) could have exercised power under section 263 directing a fresh assessement in the matter on two conditions:--
I. If he considers that order is erroneous insofar as;
II. It is prejudicial to the interests of Revenue. Therefore, we have to see and examine in this case whether the CIT(C) has exercised jurisdiction on these conditions correctly or not as per law. Mumbai I.T.A.T., a Bench in the matter of Sterling Construction & Investment v. Asstt. CIT [2001] 79 ITD 299 held:
"Whether even though assessment order was passed under section 143(3) read with section 144A Commissioner was competent to revise it--Held, yes."
Though the facts are not identical to this but is clearly held that even if Dy. CIT(A) considered the matter under section 144A of the Act still the CIT has power under section 263 to cancel the assessment. Before proceeding further in the matter with regard to whether the CIT(C) has correctly considered that order of Assessing Officer is erroneous insofar as it is prejudicial to the interests of Revenue, we would like to deal with the objections raised by the Ld. D.R. on the strength of the authority of Allahabad High Court in Dhampur Sugar Mills Ltd.'s case
The Ld. D.R. argued that the revised return was filed on 30-3-1990, assessment order was also passed on the same day, therefore, earlier proceedings are no proceedings under the Act. The ld. D.R. further argued that the CIT(C) has only monitored the earlier proceedings. The Ld. D.R, further argued that no enquiries were held and the Assessing Officer passed the assessment without application of mind. On the other hand, the Ld. Counsel for the assessee argued that this authority is not applicable as in the old Act when this judgment was passed section 132(12) was not inserted. In this case, return was filed under the amended Income-tax Act, 1961 when sections 132(5), (11) and (12) were incorporated which were not incorporated in old Act when this decision was rendered by Allahabad High Court. It is a special procedure incorporated in the amended Act by amendment in 1975/1984. It is a complete Code in itself. In this case also proceedings started after search and culminated in regular assessment order. The Assessing Officer conducted preliminary enquiry under section 132(5) on the articles seized as a result of search. Therefore, the Assessing Officer has to estimate the undisclosed income in a summary manner to the best of his judgment on the material as available before him after giving opportunity of being heard to the assessee. Even the CIT(C) in 263 order has held that section 132(5) is summary in nature and is not binding on the Assessing Officer. We fail to understand why the Ld. CIT(C) had relied upon the same order under section 132(5) while issuing notice to the assessee which according to him was not even binding on the Assessing Officer. The CIT(C) in 263 order on the first issue with regard to the issue of notice under section 143(2)/143(1) has also held that the same was not prejudicial to the interests of Revenue. The CIT(C) himself mentioned in the impugned order that the assessment order has been passed in continuation of the search and seizure operation, which was subjected to scrutiny at different levels. He himself dropped the first issue with regard to non-scrutiny of the revised return by the Assessing Officer as no notice under section 143(2)/143(1) was issued on the revised return. This issue was not agitated by both the parties. The assessee has not taken any ground on this issue. Therefore, in view of the amended provision and the order of the CIT(C) under section 132(12), we are of the considered view that the assessment proceedings were part of the search and seizure operation. The estimation of the income started from the search materials and the same were scrutinised at different levels and ultimately assessment order was passed. Therefore, we are of the considered view that the judgment of Hon'ble Allahabad High Court in Dhampur Sugar Mills Ltd's case is distinguishable on facts and in law, and is not applicable to the facts of this case.
29. Now, we proceed to examine whether the CIT(C) has correctly considered that the assessment order was erroneous insofar as it is prejudicial to the interests of Revenue and further whether the CIT(C) has gone into all the records and passed the impugned order in accordance with law after giving proper opportunity of hearing to the assessee.
30. We have already indicated above that on issue No. 1 in all the assessment years, the Ld. CIT(C) has issued show cause notice under section 263 of the Act on the ground "no scrutiny of the revised return was made by the Assessing Officer as no notice under section 143(2)/143(1) was issued on the revised return. The CIT(C) himself dropped notice on this ground in the impugned order and specifically held that notice was waived by the assessee and that the assessment order does not suffer from the infirmity of issue of notice which could be prejudicial to the interests of Revenue.
Therefore, notice was cancelled on this ground. The assessee has not challenged this view. Even otherwise we have decided above that the assessment proceedings were part of search and seizure operation as the estimation of income under section 132 ultimately culminated in regular assessment order under section 143(3). Therefore, the first issue is disposed of accordingly.
31. The second issue in the assessment years 1987-88, 1988-89 and 1989-90 upon which show cause notices under section 263 of the Act were issued, is as under:
Assessment year 1987-88:
"While determining the income under section 143(3) at Rs. 10,46,370 the Assessing Officer has failed to consider the expenditure of Rs. 1,82,01,000 on which income of Rs. 17,00,000 was estimated in the order passed under section 132(5) on 28-3-1989."
Assessment year 1988-89:
"The income estimated under section 132(5) is Rs. 71 lakhs which, inter alia, included income estimated on the basis of transactions recorded in a diary seized from the Managing Director and unexplained investment in Tendu Leaves. The Assessing Officer has accepted the revised return without properly examining the seized material and the extent of income reflected in the seized papers."
Assessment year 1989-90:
"The income estimated under section 132(5) was over Rs. 2.47 crores which, inter alia, included unexplained investment in Tendu [caves and income from No. 2 set of account books. The Assessing Officer has accepted the revised return without properly examining the seized material and the extent of income reflected in the investments and No. 2 account books."
32. The CIT(C) mainly has given finding in the assessment year 1989-90 for cancelling the assessment orders. The first reason given is "It is necessary to see whether the Assessing Officer had merely accepted the return or carried on detailed scrutiny of the seized material". The CIT(C) further mentioned that the Assessing Officer completed the assessment within three months of filing of the return and on the same date of filing of the revised return.
33. We have considered the objection of the CIT(C), with regard to assessment year 1987-88, on the addition of Rs. 17 lakhs in the order passed under section 132(5) has been made stating the same as unexplained investment in the business outside account books which is mentioned in the order under section 132(5). Para 15.5 of the order reads:--
"Annexure A (item 3) shows the expenditure to the tune of Rs. 1,81,01,000."
34. This was explained by the assessee in his petition under section 132(11) against the order passed under section 132(5) and the same was clarified in para 13.5 of the petition of the assessee which is mentioned at page 100 of the Paper Book filed by the assessee. The CIT(C) in his order dated 5-3-1990 passed under section 132(12) has observed as under:--
"First of all, the assessee has objected to estimate of income of the Assessing Officer made in the order under section 132(5) of the Income-tax Act, 1961 for assessment year 1987-88 at Rs. 17 lakhs for assessment year 1988-89 at Rs. 71 lakhs and for assessment year 1989-90 at Rs. 2,47,59,180 I have gone through the petition of the assessee on this point. The points mention relate to evaluate of seized evidence from the point of view of determination of concealed income. The Assessing Officer will give opportunity of hearing to the assessee and take a judicial decision on these matters in regular assessment proceedings."
35. These expenditures and estimates of income have been discussed and scrutinised by the Assessing Officer in his reports, dated 7-3-1990, 19-3-1990 and 29-3-1990. The assessment order was passed on the basis of scrutiny made by the Assessing Officer and these three reports were sent to CIT(C). The Assessing Officer in paragraph 6 of the office note attached with the assessment order for 1989-90 has specifically mentioned that:--
"6. All the seized documents/account books have been scrutinised by me and almost all immovable properties belong to the firm/company, but at Satna, have been got valued by the Valuation Cell. The effect of each paper seized and valuation reports has been taken into before arriving at the figures of the concealment as mentioned para 2 (Annexure 'A'). The principles of asset formations out of income earned, have been taken into account while directing the concealment attributable to search and for this purpose and the purposes of other investigations, the help of the I.T.Is. of Investigation Wing has been taken to arrive at conclusions regarding the investment in Tendu Leaves in the names of other persons."
36. In the assessment year 1988-89 on this issue the show-cause notice has been issued mainly on the transactions recorded in the diary seized from the Managing Director and the unexplained investment in the Tendu leaves. The issue of estimate of income at Rs. 48 lakhs in the order under section 132(5) on account of diary of the Managing Director finds mention in paragraph 4 of the report dated 19-3-1990 and paragraph 12 of the report dated 29-3-1990. Scrutiny of the seized material was done by the Assessing Officer. This fact is also mentioned in Annexure A to the Office Note to the assessment order passed under section 143(3). As regards the second issue regarding unexplained investment in Tendu leaves, it has been explained thoroughly by the Assessing Officer and mentioned in reports dated 7-3-1990 and 19-3-1990 and 29-3-1990. These additions have also been mentioned in Annexure 'A' to the office note to the regular assessment under section 143(3). The same method was employed as mentioned above. As far as assessment year 1989-90 is concerned the show-cause notice was issued on two points namely, income on account of unexplained investment in Tendu leaves and secondly income reflected in No. 2 set of account books, The issue of investment in Tendu leaves has been examined and find mention in reports dated 7-3-1990, 19-3-1990 and 29-3-1990. These reports show that the seized material has been thoroughly examined by the Assessing Officer. The addition on this account has also been made in Annexure 'A' to the office note of the regular assessment order under section 143(3).
37. Regarding the issue of income Form No. 2 set of account books, the matter has been thoroughly examined and finds mention in reports dated 7-3-1990, 19-3-1990 and 29-3-1990 and is also mentioned in Annexure 'A' to the office note of the regular assessment order. The material was thoroughly examined by the Assessing Officer in these reports and was sent to CIT(C). The same principle of asset formation was followed to assess the concealed income as mentioned above. No defects have been pointed out on these counts. We would like to mention here that search took place on 29-11-1988 at the registered office and other branches and factories of the assessee and residential premises of the directors. The revenue has seized certain incriminating evidences and as noted earlier the discussions with the revenue authorities were continuing to arrive at correct concealed income in consequence of the search. As per the date of schedule filed by the learned Counsel for the assessee, the discussion took place on 20-3-1989 & 21-3-1989 with CIT(C), DDI, DC(C), Varanasi at Allahabad. The scrutiny of the seized material was made by the Assessing Officer while issuing notice under section 132(5), which were replied by the assessee. Thereafter notices under section 143(2)/142(2) were issued from time to time and hearing took place on various dates which is mentioned in the date Schedule. The copies of order sheet entries have been filed in the Paper Book at Sl. No. 10 which show that the discussion was going for assessment year 1987-88 from 19-6-1987 to 30-3-1990 for assessment year 1988-89 from 24-4-1989 to 30-3-1990 and for assessment year 1989-90 from 31-1-1990 to 31-3-1990. The penalty proceedings continued even thereafter. The order under section 132(5) was passed by the Assessing Officer on 28-3-1989 which was challenged before the CIT(C) under section 132(11) on 23-4-1989 and order under section 132(12) was passed by the CIT(C) on 5-3-1990 and thereafter the reports dated 7-3-1990, 19-3-1990 and 29-3-1990 were prepared by the Assessing Officer after scrutiny of the seized material with the help of authorities and were sent to CIT(C). The assessee filed revised return and regular assessment orders were passed on revised returns. Therefore, scrutiny of the seized material was done and assessee explained all the documents at appropriate stage. The ACIT(C) Circle, Allahabad also filed his counter affidavit dated 23-3-1993 in reply to the writ petition filed by the assessee in which in para No. 6 he has affirmed with regard to proceeding under section 132(5), 132(11) and 132(12) and lastly affirmed that the Assessing Authority was only directed to evaluate judicially and reasonably the evidences found from the seized paper and record during the course of search and seizure and this was done by the Assessing Officer in the regular assessment proceedings, which are final proceedings. Similarly Sh. B.P. Gupta the then CIT(C) who was monitoring the scrutiny of the seized material also filed the counter affidavit dated January, 1993 in which he has affirmed in paragraph 3 which is reproduced below:--
"3. That the contents of paragraph No. 11 of the writ petition are not admitted except to the extent that the assessments were made after examination of the seized books etc. by the Assistant Commissioner of Income-tax (Central Circle), Allahabad. The Commissioner of Income-tax (Central), Kanpur and DDI (Investigation), Kanpur and Deputy Commissioner of Income-tax (Central), Varanasi were only guiding and helping the Assessing Officer during the course of finalisation of assessment proceedings"
He has further affirmed:--
"The scope of 'Monitoring' is only limited to guide the Assessing Officer and helping him in adopting proper line of action for investigation. The Assessing Officer was submitting records to the Commissioner of Income-Tax (Central), Kanpur from time to time and after going through those reports of the Assessing Officer, the deponent was only giving proper guidance to the Assessing Officer in the matter of investigation so that the assessment proceedings may be finalised by the Assessing Officer.
38. These counter affidavits clearly established that the Assessing Officer has properly scrutinised all the seized material in accordance with law on the guidance of the Senior Officers including the CIT(C) who has issued show-cause notice under section 263 of the Income-tax Act. The assessments were made on 30-3-1990 and the affidavit was filed by the then CIT(C) in Allahabad High Court in January, 1993. However, the show-cause notices under section 263 of the Act were issued on 2-1-1992 and that too by Sh. W. Hasan, CIT(C), Kanpur. It is interesting to note that the impugned order was passed on 5-1-2001. We fail to understand why Department was taking contradictory stand at different stages. The then CIT(C), Sh. B.P. Gupta in his affidavit made to believe the Hon'ble High Court that the assessments were made after examining seized books etc. by the Assessing Officer and that he himself DDI (Investigation) and Dy. CIT(C) were guiding and helping the Assessing Officer during the course of finalisation of the assessment proceedings. It is surprising even after filing this affidavit in High Court in January, 1993, still the next incumbent CIT(C) came to the conclusion that the assessment order was erroneous and has been passed without proper scrutiny of the seized material. The observation of the CIT(C) are, therefore, absolutely contradictory which were affirmed in the affidavit filed before the Hon'ble Allahabad High Court. Even on first issue with regard to non-issue of notice on the revised return was dropped by the CIT(A) himself goes to show that the earlier proceedings were part of the assessment proceedings.
39. The Assessing Officer in the assessment order mentioned that the revision of return is mainly attributable to the additional income surrendered under section 132(4) and assessment proceedings have been attended from time to time by Sh. S.K. Garg and Sh. N.C. Agrawal for the assessee and case has been discussed with them. It clearly established that the Assessing Officer has secutinised all the seized material and sent the three reports to CIT(C) and after coming to the conclusion of the same, the assessee surrendered the income in the revised return. The Assessing Officer has also prepared office note for the assessment year 1989-90 and was also relying upon in the assessment orders of 1987-88 and 1988-89 for the sake of clarity on these issues, we would like to reproduce this office note:
1. This search case was under monitoring of ld. CIT(C) and assessment has been completed after complying with all the directions/instructions given to me from time to time with reference to Scrutiny/Appraisal of all the seized material in search operation dated 29-11-1988 and completing the investigation on the lines suggested by DIT/DDIT-I Audit/CIT(C)/DC(C).
2. The investigation and scrutiny of the seized material alongwith the valuation Reports from valuation cells, suggests the extent of undisclosed income as per Annexure-A attached.
3. On scrutiny of seized material and investigations done Appraisal reports have already been submitted to learned CIT(C) before finalising the assessment order.
4. The revised return includes the additional incomes in the assessment years which are compared with the extent of undisclosed income based on seized material and attributable to search as below:--
----------------------------------------------------------------------------------
Asst. Additional income Additional income as per
Year per return appraisal reports
[Note 2 of Ann.(A)].
----------------------------------------------------------------------------------
1989-90 76,60,000.00 76,49,065.00
1988-89 13,30,000.00 3,25,145.00
1987-88 1,70,000.00 1,54,881.00
1986-87 - 9,508.00
1985-86 76,000.00 75,515.00
1984-85 2,47,845.00 2,13,590.00
1983-84 2,00,000.00 1,25,413.00
1982-83 - 60,881.00
1981-82 - 3,505.00
1980-81 - 12,807.00
----------------------------------------------------------------------------------
Total 96,83,845.00 96,31,310.00
----------------------------------------------------------------------------------
From the above chart, it is evident that additional income disclosed by the assessee covers the concealed income, hence the Asstt. has been completed on the returned figures. Since the assessment year 1989-90 is the only year where the benefit of section 132(4) read with section 271(1)(c) Explanation 5 be given, hence no penalty proceedings are initiated in this year only. As the revision of returns in earlier years is attributable to search & seizure operation, the penalty proceedings for earlier years are initiated as per law.
5. The assessee company has come into existence since assessment year 1987-88 and before that the same business was being done by the firm, the concealed investment in immovables prior to 1987-88, has been considered in the hands of the firm.
6. All the seized documents/account books have been scrutinised by me and almost all immovable properties belong to the firm/company, but at Satna, have been got valued by the valuation cells. The effect of each paper seized and valuation reports has been taken into account before arriving at the figures of the concealment as mentioned in para 2 (Annexure 'A'). The principles of asset formations out of income earned, has been taken into account while detecting the concealment attributable to search and for this purpose and the purposes of other investigations, the help of the I.T.I.'s of Investigation Wing has been taken to arrive at conclusions regarding the investment in Tendu leaves in the names of other persons.
7. The Appraisal reports arc complementary to these office notes. Sd/-AC(IT) CC, ALLD.
40. Assessing Officer has also prepared Annexure-A of the Office Note showing the determination of undisclosed income for all the three years. Assessee has filed reconciliation statement regarding the undisclosed income determined in the order under sections 132(5) and 143(3) in his paper book from pages 154 to 160. Though the Ld. D.R. during the course of arguments objected to the reconciliation statement and stated that it was not part of the record, yet one thing is clear that this reconciliation statement as filed by the Counsel for the assessee was with regard to the reconciliation of the undisclosed income determined in order under sections 132(5) and 143(3). Even if Department has denied the existence of the document, yet it is probable that the reconciliation must have been made for reconciliation purpose as the contents of the same are similar to that as noted in the order under section 132(5), three reports and assessment order. We may further add here that in paragraph I of the office note the Assessing Officer has specifically mentioned that CIT(C) was monitoring the assessment and the assessment has been completed after complying all the directions and instructions given to him from time to time with reference to scrutiny/appraisal of all the seized material in search operation and completing the investigation on the lines suggested by DIT/DDIT-1 Audit/CIT(C)/DC(C). The Assessing Officer has mentioned all the figures in Annexure A and has also given method on which concealed income was calculated. This office note is part of the assessment record along with Annexure A. Therefore, CIT(C) was wrong in stating that no scrutiny of the seized material has been done in the matter. The ld. Counsel for the assessee also filed copy of the audited Balance Sheet which was filed before authorities below in which entire clarification has been made with regard to the alleged differences as stated by CIT(C) in the impugned order.
41. Now we deal with the observation of the CIT C) in the impugned order under section 263 of the Income-tax Act. The CIT(C) observed that 'I also do not agree with the assessee's arguments given in para 4.4 of the paper book that the amount disclosed broadly tallied with additional income estimated in the appraisal report and, therefore, there was no error in the asstt. order. An appraisal report is only an indicator prepared in a summary fashion just as order under section 132(5) is framed and does not, in any way, exempt the Assessing Officer from examining the seized material.' However, the CIT(C) has given reason on this issue that despite time available the Assessing Officer completed assessment within three months of the filing of the return and on the same day of filing of the revised return. We fail to understand why the CIT(C) has given this reason in the impugned order. He himself on first issue dropped the proceedings holding that the order was not prejudicial to the interests of Revenue even if order was passed on the date when revised return was filed. Furthermore, the reconciliation of the undisclosed income has already been scrutinised by the Assessing Officer which is mentioned in detail above. Further with regard to time frame, we are of the considered view that maximum time limit is provided under the Income-tax Act to complete the assessment, but no minimum time has been prescribed. The CIT(C) himself passed the impugned order within one day as noted above as on 7-12-2000, the Hon'ble High Court rejected the writ petition and the assessee alongwith his counsel appeared before the CIT(C) and on 4-1-2001 of their own and impugned order was passed on 5-1-2001. When CIT(C) himself can pass impugned order within one day, then why the Assessing Officer could not have passed the order which he was scrutinising from the date of the search i.e. 29-11-1988 and regular assessment orders were passed on 30-3-1990. The observation of the CIT(C) is, therefore, wrong, contradictory and against the law and could not be used for the purpose of exercising jurisdiction under section 263 of the Income-tax Act.
42. The CIT(C) has further taken the objection in the impugned order that no break up of the amount of Rs. 76,60,000 is available in the assessment order or in the office note. In the assessment order for 1989-90, this break up has been mentioned by the Assessing Officer. He has specifically mentioned additional income disclosed under section 132(4) of the Act i.e. Rs. 76,60,000 and reduced Rs. 47,20,559 which was already accounted in the books of account. The entire income assessed was mentioned in Annexure 'A' to the assessment order with regard to the break up also, the assessee has filed audited Balance Sheet on this issue which clarified specifically this point. All these records were available with the Assessing Officer who has scrutinised the same in detail. Therefore, the observation of the CIT(C) is unfounded and is liable to be rejected.
43. The CIT(C) further had objected in the impugned order with regard to the declared income of Rs. 82 lakhs to cover all the loose papers etc. He has further observed that the fact that it was brought into the books much later and noted in the closing stock shows that there was an attempt to adjust the declaration with the stock of Tendu leaves found in order to reduce the tax liability. He has further stated that this position would have been clarified only if the Assessing Officer had carried on scrutiny of the books of' account and gave specific finding.
44. On the No. 2 Book and Diary of Sh. Shyama Charan Gupta were found during the course of search, we have already observed that the Assessing Officer has scrutinised all the records and the seized material in three reports. Books of account were with the Department with the seized material. This fact is also discussed by the Assessing Officer in his report dated 7-3-1990 which is incorporated in the Paper Book at page 108. We have also gone through the order of the ITAT, Allahabad Bench 'A' in ITA Nos. 2322 and 2657 of 1991 in the cast, of the same assessee for the same assessment years 1987-88 and 1988-89 with regard to the penalty under section 271(1)(c). The ITAT, Allahabad Bench vide order dated 27-9-1999 has deleted the penalty against the same assessee and para 5 had dealt with this issue of Rs. 82 lakhs in detail. Therefore, we are unable to understand why again the same issue is raised. So far as No. 2 book is concerned, which CIT(C) has connected with the peak credits and allegedly found some discrepancy in the same and according to the CIT (C), the variation is to the tune of Rs. 24,66,674 resulting in short addition of Rs. 7,55,000. We would like to mention here that in the report dated 7-3-1990 which is incorporated in the Paper Book and at page 111 this point has been clarified by the Assessing Officer himself and he has clearly stated with regard to the amount of Rs. 17,11,577 as this cash was not found by the search party. He has estimated the peak credits at Rs. 22,20,557 out of which Rs. 5,08,982 could be treated as invested in patti and not whole peak of the amount. CIT(C) has taken a wrong figure of Rs. 24,66,674 in the impugned order. In fact this figure was mentioned at Rs. 22,20,559 and if out of the same, Rs. 17,11,557 was reduced, therefore, the investment would work out to Rs. 5,08,982. Instead of it, the addition was of Rs. 7,55,000. We do not understand why the department is still feeling aggrieved of this situation. This point was also clarified with regard to No. 2 book and diary in the second report dated 19-3-1990 which is mentioned at page 114 of the Paper Book by the Assessing Officer as well as at page 118 of the Paper Book which is report dated 29-3-1990. Therefore, the observation of the CIT(C) in his objection has stated that there appears to be a discrepancy. He himself was not sure about the discrepancy and no definite finding was given by him.
45. The CIT(C) further objected to the cash found in various branches in the impugned order, we have clarified this position that at page 111 of the Paper Book which is a report dated 7-3-1990 cash position has been specifically clarified and in the above paragraph it is clarified that the Assessing Officer has mentioned that cash in a sum of Rs. 17,11,577 was not found by the search party. The assessee has clarified this position in his report before the CIT (C) in petition under section 132(11) of the Act and the relevant para is mentioned at page 92 of the paper book. This point was not raised by the CIT(C) in the show-cause notice and no explanation of the assessee was sought. Therefore, even otherwise also, the CIT(C) should not have made this ground for setting aside the assessment order which was never put to the assessee. The CIT(C) further objected the impugned order that it is possible that the assessee had introduced fresh stock valued at Rs. 47,20,559 and further observed that the Assessing Officer has not examined any of these issues. We have already clarified this position above that these facts are specifically mentioned in the audit reports filed by the assessee and the assessee has clarified the same position and this explanation was also mentioned in the assessment order for the assessment year 1988-89. All these details are also considered by the Assessing Officer in all the three reports submitted by him to the CIT(C) under the supervision of DDIT and Dy. CIT(C). Again the CIT(C) is not sure about this addition. He has only stated that "It is possible". It was only the guess work of the CIT(C) to raise this ground for setting aside the assessment order. Further this ground was not raised in the show-cause notice in any of the years.
46. The CIT(C) further observed that the depreciation claimed has not been computed by the Assessing Officer as well as conveyance and travelling expenses. The CIT(C) has not issued any show-cause notice to the assessee on this point also. No explanation was ever called for from the assessee, therefore, the assessee cannot be given surprises on the items which have never been put to him. Therefore, the findings are against the record and are liable to be set aside.
47. The last and major ground given by the CIT(C) is that the assessment framed is erroneous and has been passed without proper scrutiny of the seized material. We are unable to agree with the finding of the CIT(C). Time and again, we have mentioned that the Assessing Officer had scrutinised all the seized material and made proper scrutiny of the seized material and came to the conclusion. The Assessing Officer was having all the material before him including the seized material, explanation of the assessee, direction of the Senior Officers including CIT(C) and the books of account of the assessee and audited balance sheet etc. Therefore, it could be safely held that the Assessing Officer was alive to all these points which are raised by the CIT(C) and Assessing Officer has scrutinised all the records in detail with the help of senior officers. CIT(C) appears to have merely raised these points on guess work without going into the records and merits of the claim of the assessee. The CIT(C) has not taken any firm decision for setting aside the assessment orders. We are fortified in our view with the following authorities:
(i) Hon'ble Madras High Court in the matter of Smt. D. Valliammal's case has held:--
"That the Commissioner of Income-tax set aside the order passed by the Income-tax Officer on the ground that verification of account was needed. This could not be a ground for invoking jurisdiction under section 263. Moreover, when the explanation offered by the assessee was accepted by the Commissioner of Income-tax with regard to the alleged undisclosed income of rupees one lakh, there was no error in the order passed by the Income-tax Officer in the case of the assessee in the assessment year 1974-75. The Commissioner of Income-tax's order of revision was not valid."
(ii) Hon'ble Rajasthan High Court in the matter of CIT v. Trustees Anupam Charitable Trust [1987] 167 ITR 129 held:--
"The error envisaged by section 263 was not one which depended on possibility or guess work, but it should be actually an error either of fact or of law."
(iii) Hon'ble Punjab & Haryana High Court in the matter of CIT v. Kanda Rice Mills [1989] 178 ITR 446 has held:
"That a reading of the entire order of the Commissioner clearly showed that he did not furnish his opinion or consider the cited cases or the argument raised and merely observed that these were the points which deserved consideration and after setting aside the order of the Income-tax Officer, issued a direction for making assessment afresh, which was not permissible under the provisions contained in section 263 of the Act. The Commissioner had to come to a firm decision that the order of the Income-tax Officer was erroneous and was prejudicial to the interests of the Revenue. Since no decision about the erroneous nature of the order was firmly taken, the Tribunal was right in vacating the order of the Commissioner under section 263."
(iv) Hon'ble Madhya Pradesh High Court in the matter of CIT v. Shri Govindram Seksariya Charity Trust [1987] 166 ITR 580 held:
"Tribunal finding that ITO was alive to relevant provisions of law and facts before passing orders of assessment Commissioner not justified in setting aside assessments."
(v) Hon'ble Allahabad High Court in the matter of J.P. Srivastava & Sons, Kanpur Ltd v. CIT [1978] 111 ITR 326 has held:--
"We are, therefore, of the opinion that without going into the merits of the claim of the assessee it was not possible for the Commissioner to say that the order of the Income-tax Officer had caused any prejudice to the interests of the revenue and, as such, he was not competent to set aside the assessment order and remand the matter to the Income-lax Officer."
(vi) The Hon'ble Patna High Court in the case of CIT v. Shantilal Agarwalla [1983] 142 ITR 778 has held:
"Though sub-section 263 vests power in the Commissioner in subjective terms, yet even when an enactments vests discretion in any authority saying 'if he considers necessary', that does not mean that it is a matter of only a subjective satisfaction and such authority has not to judge the circumstances in an objective manner."
It was further held:--
"That the Commissioner never examined the assessment order in the light of whether the assessment order was prejudicial to the interests of the Revenue. The Commissioner merely observed that there was under assessment and/or wrong computation of income. The Commissioner then further observed that the ITO 'appeared to have made an under assessment if one looked at the assessee's records and profits shown by others in the same line'. But the Commissioner had not pointed out how it was a case of under assessment and how the order of the ITO was prejudicial to the interests of the Revenue. There was nothing in the order of the Commissioner or on the record of the case on the basis of which the Commissioner could have exercised the power under section 263(1). Therefore, the Tribunal was right in cancelling the order of the Commissioner under section 263(1)."
48. In view of the above authorities, we are of the considered view that the Assessing Officer has scrutinised all the seized record in accordance with law with the help of Senior Income-tax Officers, like DDIT and DCIT(C) and at the same time submitted three reports to the CIT(C) who monitoring and guiding the Assessing Officer in coming to the correct assessment in the matter. Therefore, the finding of the CIT(C) that the assessment framed is erroneous and has been passed without proper scrutiny of the seized record, is wrong and contrary to record. The writ petition was dismissed by the Allahabad High Court on 7-12-2000 and the assessee himself appeared before the CIT(C) on 4-1-2001 even without notice. Earlier proceedings were stayed by the Hon'ble High Court. The impugned order was passed on 5-1-2001 The ld. DR even during the course of the proceedings before us argued that the three reports dated 7-3-1990, 19-3-1990 and 29-3-1990 are not used by the CIT(C) in section 263 proceedings and the assessee also did not claim relief on these grounds. We do not agree with the ld. DR that the assessee did not rely on these reports. The assessee since the beginning had been asserting that all the seized material was scrutinized by the Assessing Officer with the help of senior officers and proceedings were guided and monitored by the CIT(C). This fact is also mentioned by the Assessing Officer in the office note attached to the regular assessments. He had placed reliance on all the reports, but the circumstances show that after appearance of the assessee before the CIT(C) on 4-1-2001, the CIT(C) passed the order on 5-1-2001 without applying his mind. This fact was also confirmed by the ld. D.R. That the CIT(C) has not gone into these reports in the order under section 263 of the Act. The CIT(C) nowhere has mentioned in the impugned order that he has considered these three reports. The CIT(C) also did not see the seized material. The impugned order also nowhere mentioned that the CIT(C) had called for seized record or the reports or examined the record. He has mentioned at page 1 of the impugned order that "following short-comings and erroneous decisions prejudicial to the interests of revenue were noticed by the then Commissioner of Income-Tax (Central), Kanpur. On page 3 he has mentioned that he has perused the written submissions taken on record. Sh. W. Hasan, CIT(C), Kanpur issued the show cause but the impugned order under section 263 was passed by Sh. K. Vasudevan, CIT(C), Kanpur. The requirement of section 263(1) is that "the Commissioner may call for and examine the record of any proceedings under this Act and if he considers that any order passed therein by the Assessing Officer is erroneous insofar as it is prejudicial to the interests of Revenue......"Therefore, the duty cast upon the CIT according to the section 263 of the Income-tax Act is that while exercising the jurisdiction under this section, he has to call for and examine the record. The definition of 'record' is mentioned in Explanation 2 (b) to section 263(1) and it, provides:--
"(b) 'record' shall include and shall be deemed always to have included all records relating to any proceedings under this Act available at the time of examination by the Commissioner."
The CIT(C) himself has nowhere mentioned in the impugned order whether he has called for the record. He has not gone into the three reports. He has not considered the explanation of' the assessee. He has not called for the seized material before arriving at the decision under section 263. Therefore, question would be whether the CIT(C) has properly exercised jurisdiction under section 263 according to law. Our answer would be 'No'. When the CIT(C) has not called for and examined the record of the case, he should not have exercised his jurisdiction under section 263(1) in cancelling the assessment orders. This fact alone is sufficient to quash the entire order of the CIT(C). The CIT(C) has failed to comply with the necessary ingredients of section 263(1) in the matter. Even on principle of merger, the order under section 132(5) which has merged with the order of the CIT(C) under section 132(12) should not have been relied upon by the CIT(C) while issuing show-cause notice to the assessee. Therefore, the entire order has been passed without going into the record of the case by the CIT(C). It appears from the above discussion that the assessee surrendered income in the revised return after scrutiny of the seized material. We fail to understand why the same CIT(C) who mentioned the proceedings, issued show-cause notice under section 263.
49. The learned Counsel for the assessee relied upon the following case laws in support of his contention:-
I. Smt. Daljeet Kaur's case wherein the Hon'ble Court held:--
"Under section 263(1) of the Income-tax Act, 1961, two pre-requisites must be present before the Commissioner can exercise the revisional jurisdiction conferred on him. First is that the order passed by the Income-tax Officer must be erroneous. Second is that the error must be such that it is prejudicial to the interests of the revenue, if the order is erroneous but it is not prejudicial to the interests of the revenue, the Commissioner cannot exercise the revisional jurisdiction under section 263(1). Materials which were not in existence at the time of the assessment was made but came into existence afterwards cannot form part of the proceedings of the Income-tax Officer at the time when he passes the order and, accordingly, it cannot be taken into consideration by the Commissioner for the purposes of invoking this jurisdiction under this section, for he is not an appellate authority under the section and exercises only revision all jurisdiction and hence he can take into consideration only the record as it stood before the Income-tax Officer and the materials in such record for the purpose of ascertaining whether the order in question was erroneous and prejudicial to the interests of the Revenue."
II. CIT v. Bhagat Shyam & Co. [1991] 188 ITR 608 wherein the Hon'ble Allahabad High Court held:
"There is no bar to the Income-tax Officer bring materials to the notice of the Commissioner of Income-tax for initiation of revisional proceedings. But the Commissioner must apply his mind to the material placed before him and satisfy himself that it is a case where he ought, to exercise his revisional power."
It was further held:
"That in the instant case the Commissioner of Income-tax initiated proceedings under section 263 of the Income-tax Act without properly considering all the facts and circumstances of the case. The proceedings were not valid.
III. CIT v. J.P. Goel (HUF) [2001] 247 ITR 555 where Hon'ble Calcutta High Court held:-
"That the question whether proper enquiry was made by the Assessing Officer and whether the assessee has explained the income found on the basis of seized material was a basic question of fact and if a possible view had been taken for the finding of facts, though another view was possible it could not be said that the finding of the Tribunal was perverse. The Tribunal had not taken an impossible view. On the material available, that the assessee had explained the income based on the seized material and there was a detailed inquiry by the Assessing Officer before completing the assessment for the assessment year 1981-82. The Tribunal was justified in law in setting aside the order of the Commissioner of Income-tax under section 263 of the Act and restoring the original assessment order."
IV. V.R. & Co. v. ITO [1995] 53 TTJ (Hyd.) 505 wherein Income-tax Appellate Tribunal, Hyderabad 'A' Bench held:--
"However, if an Assessing Officer has completed an assessment by one of the two permissible methods prescribed under the law it cannot be said to be erroneous or prejudicial to the interests of Revenue--Only ground on which assessment was set aside is that Assessing Officer had not made inquiries with respect to a particular loss claimed by assessee. Not erroneous or prejudicial to the interests of Revenue."
V. Malabar Industrial Co. Ltd's case wherein it was held:--
"The phrase 'prejudicial to the interests of the Revenue' has to be read in conjunction with an erroneous order passed by the Assessing Officer. Every loss of revenue as a consequence of an order of the Assessing Officer cannot be treated as prejudicial to the interests of the Revenue, for example when an Income-tax Officer adopted one of the courses permissible in law and it was resulted in loss of revenue, or where two views are possible and the Income-tax Officer has taken one with which the Commissioner does not agree it cannot be treated as an erroneous order prejudicial to the interests of the Revenue unless the view taken by the Income-tax Officer is unsustainable in law."
VI. George Eilliamson (Assam) Ltd.'s case wherein Hon'ble Gauhati High Court held:--
"In the order of the Commissioner of Income-tax, it was nowhere mentioned as to what the material was with him to order enquiry into the matter. Therefore, no proceedings could be taken under section 263 on assessment order completed under section 143. The Tribunal was justified in quashing the order passed by the Commissioner of Income-tax under section 263."
VII. Ratlam Coal Ash Co.'s case Indore Bench Hon'ble M.P. High Court held:--
"In the instant case, however, the Tribunal has found that the assessee had furnished all the requisite information and that the Income-tax Officer considering all the facts had completed the assessment. Tribunal further held that in the circumstances of the case it could not be held that the Income-tax Officer had made the assessment without making proper enquiries. In view of these facts the Tribunal in our opinion was justified in law in reversing the order passed by the Commissioner of Income-tax."
VIII. Gabriel India Ltd.'s case where the Hon'ble Bombay High Court held:--
"CIT cannot revise order mererly because he disagrees with conclusion arrived at by ITO."
IX. Indian Hotels Co. Ltd. v. Dy. CIT [2000] 68 TTJ 706 Hon'ble ITAT, Mumbai Bench 'B' held:
"Mere lack of discussion of the issue in the order by the Assessing Officer would not render the order to be erroneous,"
50. All these authorities are clearly applicable to the case of the assessee and support our view. The ld. DR. relied on Malabar Industrial Co. Ltd.'s case wherein the Hon'ble Supreme Court observed at page 88 as:--
"In our view, this interpretation is too narrow to merit acceptance. The scheme of the Act is to levy and collect tax in accordance with the provisions of the Act and this task is entrusted to the Revenue. If due to an erroneous order of the Income-tax Officer, the Revenue is losing tax lawfully payable by a person, it will certainly be prejudicial to the interests of the Revenue."
There is no dispute about this legal proposition but the facts of this case are entirely different. The ld. D.R. also relied upon Indian Textiles' case. In this case no enquiry was made by the ITO, hence it was held to be prejudicial to the interests of Revenue. This authority is distinguishable on facts and is not applicable to this case.
51. The CIT(C) in the impugned order has relied on (1) Rampyari Devi Saraogi v. CIT [1968] 67 ITR 84 (SC), (2) Smt. Tara Devi Aggarwal v. CIT [1973] 88 ITR 323 (SC) and (3) Swarup Vegetable Products Industries Ltd. No. 1 v. CIT [1991] 187 ITR 412 (All.). The first authority is with regard to the jurisdiction of the CIT in pursuance to the order passed on repeal by Income-tax Act. The second authority is with regard to the income which has not been earned and the assessee wants it to be assessed and last authority is with regard to the fact where the ITO has accepted the claim of the assessee erroneously without making proper enquiries and, therefore, it was held that the Commissioner was justified in taking action under section 263. But the appeals in hand show that the Assessing Officer has properly scrutinised all the seized material and considered the claim of the parties on merits when he was guided by the senior officers and also by the CIT(C). Therefore, the facts of the present case are clearly distinguishable from the cases cited by the ld. D.R. and CIT(C) in order and the same are not applicable to this case.
52. On ground Nos. 3 and 4 of the notices under section 263 for the assessment years 1987-88, 1988-89 and 1989-90, respectively, CIT(C) issued show-cause notices that deduction under sections 80HH and 80HHA is not allowable to the assessee. The contents of show-cause notices are reproduced below:--
Assessment year 1987-88:
The assessee has been allowed deduction under section 80HH amounting to Rs. 22,664 which is not allowable to it.
Assessment year 1988-89:
The assessee has been allowed deduction under sections 80HH and 80HHA of the I.T. Act, 1961 amounting to Rs. 38,371 and Rs. 7,417 which is not allowable to it.
Assessment year 1989-90:
The assessee has been allowed deduction under sections 80HH and 80HHA amounting to Rs. 2,76,487 and 1,94,364 respectively which is not allowable to it.
53. The requirements of section 80HH are that section 80HH(2). This section applies to any industrial undertaking which fulfils all the following conditions namely:--
(i) as begun or begins to manufacture or produce articles after the 31-12-1970 but before the 1-4-1990 in any backward area.
(ii) It is not formed by the splitting up or the reconstruction of a business already in existence in any backward area; provided that his condition shall not apply in respect of any industrial undertaking which is formed as a result of the re-establishment, reconstruction or revival by the assessee of the business of any such industrial undertaking as is referred to in section 33B, in the circumstances and within the period specified in that section.
(iii) It is not formed by the transfer to a new business of machinery or plant previously used for any purpose in any backward area.
(iv) It employs ten or more workers in a manufacturing process carried on with the aid of power or employs twenty or more workers in a anufacturing process carried on without the aid of power."
The requirements of section 80HHA are that:--
Section 80HHA(2). This section applies to any small scale industrial undertaking which fulfils all the following conditions, namely:--
(i) it begins to manufacture or produce articles after the 30-9-1977 but before the 1-4-1990 in any rural area.
(ii) it is not formed by the splitting up, or the reconstruction of a business already in existence:
Provided that this condition shall not apply in respect of any small scale industrial undertaking such is formed as a result of the re-establishment, reconstruction or revival by the assessee of the business of any such industrial undertaking as is referred to in section 33B, in the circumstances and within the period specified in that section;
(iii) it is not formed by the transfer of to a new business of machinery of plant previously used for any purpose;
(iv) it employs ten or more workers in a manufacturing process carried on with the aid of power, or employs twenty or more workers in a manufacturing process carried on without the aid of power."
54. The Counsel for the assessee has argued that. the deductions have been correctly allowed as the assessee fulfilled all the conditions of these sections. He has further argued that the assessee is an industrial undertaking engaged in manufacture of hand made biris. The company came into existence for the first time in the previous year relevant to the assessment year 1987-88. Deductions have been claimed only with reference to units established by the company itself as against the factories taken on lease from others firm. The record shows that the production started after the relevant date as mentioned in sections 80HH and 80HHA and before 1-4-1990. Nothing was brought on record to show that there was any splitting up or reconstruction of the business already in existence in the backward area as according to the ld. Counsel new factories were established and new licences were obtained under Central Excise. According to him all the records were available with the Assessing Officer who was seized of the matter on all the points and he has properly considered all the conditions for granting the deduction under both the sections. The CIT(C) has objected to the deduction as the Assessing Officer has not examined whether the assessee was industrial undertaking or was having more workers with regard to deduction under section 80HH. It was established that assessment year 1987-88 is the first year of assessment and as such new business was started. It was also not in dispute that factories were established in backward area. According to the assessee the only plant and machinery is Heat Ghar. Therefore, there was no transfer of plant or machinery. The assessee filed audited balance sheet before the Assessing Officer mentioning the details of salary to staff, sales tax, provident fund and excise etc. which are in lakhs showing that workers were more than the prescribed condition. Further regarding the condition that it employs 20 or more workers in the manufacturing process carried on with the aid of power, it was argued that the seized material like Salary Register, Wages Register etc. were examined by the Assessing Officer and therefore, though no specific finding is given but Assessing Officer was satisfied on this issue. The assessee had been explaining time and again that it, is a manufacturing unit and was entitled to deduction under sections 80HH and 80HHA. Further objection of the CIT(C) had been that in view of section 80HH(9A) where deduction in relation to profit or gain are available under section 80HHA, the benefit of section 80HH will not be available. He has further objected that the assessee cannot claim both the benefits under these circumstances and on this reason set aside the assessment orders. We would like to mention here that the assessee in his computation of income filed with the revised return on page 122 of the Paper Book for assessment year 1987-88 at page 131 for the assessment year 1988-89 and at page 141 for the assessment year 1989-90 has clearly specified that with regard to his claim of deduction under sections 80HH and 80HHA the assessee has claimed deduction under section 80HH in 1987-88 in respect of the industrial unit at Jangipur in West Bengal, He has not claimed any deduction under section 80HHA in that year. In the assessment year 1988-89 the assessee has claimed deduction under section 80HH in respect of industrial unit at Jangipur and Chamagram. However the assessee has claimed deduction under section 80HHA in respect of industrial unit of Uchahara and Budhara. For the assessment year 1989-90 the assessee has claimed deduction under section 80HH in respect of industrial unit at Jangipur and Chamagram. For deduction under section 80HHA the assessee has claimed deduction in respect of industrial units at Uchahara, Budhara, Pachpedi and Bachhiya. The explanation clearly ruled out the observation of the ld. CIT(C). It appears that the CIT(C) has passed the impugned order on this issue also without going into the record of the case and claim of the assessee. Therefore, the observation of CIT(C) on this issue are liable to be set aside. The ld. Counsel for the assessee relied on the following decisions:
(i) Textile Machinery Corpn. Ltd v. CIT [1977] 107 ITR 195 wherein Hon'ble Supreme Court held:
"Reversing the decision of the High Court that the steel division and the jute mill division were not formed by the reconstruction business already in existence within the meaning of section 15C(2)(i), therefore, the appellant was entitled to the exemption claimed. For the reconstruction of an existing business there must be transfer of assets of the existing business to the new industrial undertaking."
(ii) CIT v. Indian Resins & Polymers [1999] 235 ITR 5 wherein Hon'ble Kerala High Court held:
"Casual and temporary workmen apart from permanent workmen employed by the assessee to be taken into consideration for finding whether assessee satisfied condition laid down in clause (iv) of section 80HH(2)."
Though there is no definition of the term Industrial Undertaking in the Income-tax Act. On the other hand the condition to be fulfilled by Industrial Undertaking as provided under sub-section (2) of section 80HH would indicate that a unit which is manufacturing or producing article can be treated as an Industrial Undertaking without further qualification.
(iii) CIT v. Khemchand Motilal Jain & Co. [1997] 228 ITR 333 wherein Hon'ble Madhya Pradesh High Court held:--
"That the company had taken New Sales Tax also Central Excise Registration besides new Labour Licence. New Branch opened. The facts showed that it was not a reconstruction of a business of the erstwhile firm but a new company merged though it had taken certain movable and immovable property and stocks. There was no reconstruction of the firm. The assessee company was entitled to special consideration under sections 80HH and 80-I of the Act."
(iv) CIT v. Associated Cement Co. Ltd. [1979] 118 ITR 406 wherein Hon'ble Bombay High Court held:
"Even though the construction of each of the new kilns at each of the four factories had resulted in an expansion of the factory itself, yet the new kilns were completely integrated units which could be put into production independently of the other units or production therefrom could cease without affecting the production from the other kilns. Moreover all the four kilns at the four different factories had been established with the plant and machinery newly purchased and required exclusively for purposes of the new kilns. Therefore, even though the business or the industrial establishment as a whole had been expanded by the addition of a kiln each new kiln by itself constituted a new industrial undertaking within the meaning of section 15C of the Indian I.T. Act, 1922. The Tribunal was therefore, right in holding that the assessee was entitled to the benefit of section 15C of Act."
(v) CIT v. Jalna Seeds Processing & Refrigeration Co. Ltd [2000] 246 ITR 156 wherein Hon'ble Bombay High Court held:
"Manufacture or processing of goods processing of raw seeds Tribunal finding that different commodity emerged after raw seeds underwent different stages justified as sets entitled to relief under section 80HH."
(vi) Blue Dart Express Ltd v. Joint CIT [2000] 75 ITD 414 wherein Hon'ble Mumbai Bench of the ITAT held:
"Whether Commissioner was justified in holding assessment order as erroneous and prejudicial to revenue simply because, according to him, order should have been written more elaborately held, no."
All these authorities are squarely applicable to the facts of the case and in favour of the assessee. Therefore, we hold that the finding of CIT(C) that the assessee is not eligible to the deduction is wrong and is not in accordance with the facts of the case. During the course of arguments, it was brought to our notice that for assessment years 1990-91 and 1991-92 the appeals on this issue are pending before the ITAT. We have not dealt with the merits of the claim of the assessee. We have considered the observations and reasons of the CIT(C) upon which the assessment orders were set aside. The assessee has not claimed both the benefits under sections 80HH and 80HHA in respect of the same industrial unit. The CIT(C) in the impugned order at page 5 itself did not dispute that the assessee is an industrial unit. Only the number of employees were mentioned. We, therefore, hold that the CIT(C) has passed this order without going through the record and claim of the assessee and the reasons given in the impugned order are not in accordance with law. Our findings shall not in any way influence the merits of the claim of both the parties with regard to their appeals which would be heard in future on this issue.
55. The last issue is with regard to penalty under section 271(1)(c) in the assessment year 1989-90. The reason given in the show-cause notice in the assessment year 1989-90 is reproduced as under:
"On the facts of the case penalty under section 271(1)(c) of the I.T. Act, 1961 is clearly attracted, but the same has not been initiated."
56. We have already mentioned above that for the assessment years 1987-88 and 1988-89, the ITAT, Allahabad Bench in the case of the same assessee vide order dated 27-9-1999 cancelled the penalty against the assessee. The impugned order was passed on 5-1-2001 and the only reason given is that the penalty was attracted which was not initiated. When at the time of passing the impugned order this Tribunal has already cancelled the penalty against the assessee in the same set of facts and circumstances then in our considered view the CIT(C) should not have taken this ground for setting aside the assessment order. Even otherwise it is the satisfaction of the Assessing Officer to initiate the penalty or not. It was so held in the case of CIT v. Ram Commercial Enterprises Ltd. [2000] 246 ITR 568 (Delhi). Even the Hon'ble Supreme Court in the case of CIT v. Suresh Chandra Mittal [2001] 251 ITR 9 has held "that the revised return filed after search to buy peace of mind and avoid litigation, no case of concealment is made out. Assessment and penalty proceedings are entirely two different proceedings could not have been taken together. The assessee has placed reliance on the following decisions:--
(i) Addl CIT v. J.K. D'Costa, [1982] 133 ITR 7 (Delhi) wherein Hon'ble High Court held:
"Failure by ITO to initiate penalty proceedings Commissioner not entitled to revise Assessment proceedings different from penalty proceedings."
(ii) CIT v. J.K. D'Costa [SLP (Civil) Nos. 11391-11392 of 1981] wherein Hon'ble Supreme Court held:
"The Commissioner...was not entitled to set aside the assessment order on the ground that there was no mention of initiation of penalty proceedings in the assessment order to direct the ITO to make fresh assessment and to initiate penalty proceedings."
(iii) CIT v. Linotype & Machinery Ltd. [1991] 192 ITR 337 wherein Hon'ble Calcutta High Court held:
"Failure of ITO to initiate penalty proceedings under section 273(a) Commissioner cannot direct ITO to make fresh assessment on ground that order passed was prejudicial to interests of Revenue."
(iv) CIT v. Nihal Chand Rekyan [2000] 242 ITR 45 wherein Hon'ble Delhi High Court held:
"Penalty--Commissioner directing Income-tax Officer to initiate penalty proceedings. Tribunal tight in quashing direction given by the Commissioner.
All these authorities are clearly applicable to the facts of the present case and as such the CIT(C) was wrong in setting aside the assessment order on this ground. No case for concealment of income is made out hence the findings of the CIT(C) are liable to be set aside. Even otherwise, the assessee in this case has made statement under sub-section (4) of section 132 and disclosed the income. Therefore, the case of the assessee would also fall in the exception to Explanation 5 to section 271(1)(c). In view of the above, the CIT(C) could not have given direction under section 263 to the Assessing Officer to initiate penalty proceedings under section 271(1)(c). Therefore, on merits as well as on law the CIT(C) fell in error in setting aside the assessment orders on this ground also.
57. During the course of arguments the learned D.R. argued that the three reports are not used by the CIT in section 263 proceedings and that these were additional evidence in nature and cannot be considered by the Tribunal without moving the application. He has placed reliance on the decision in the case of Seth Champalal Ramswarup.
We have already held that these reports were part of the record and as such it cannot be termed as additional evidence therefore, there was no bar for the assessee to refer the same before us. The arguments of the learned D.R. are unfounded and are rejected. The aforesaid authority is not applicable to this case. The learned D.R. further argued that no depreciation was claimed on the machinery in earlier year and then how the assessee will become industrial unit. It was further argued by the learned DR. that even machinery is necessary for industrial purpose and assessee has claimed the deduction on pro-rata basis. We are unable to agree with the learned D.R. on both the arguments. First of all the CIT(C) himself on page 5 of the impugned order did not dispute that the assessee was not industrial undertaking. The CIT(C) only mentioned about number of workers. Even otherwise both these points have not been taken into consideration by the CIT(C) while setting aside the assessment orders and as such the same cannot be considered at this stage on which no notice was given to the assessee. Therefore, the arguments of the learned D.R. have no force and are rejected. The learned D.R. further argued that the assessee for 1987-88 closed the accounts on 31-12-1986 but area of Jangipur was declared backward on 19-12-1986 then how in 12 days production was raised to Crores and argued that this point needs examination. We again do not agree with the learned D.R. on this issue. The show-cause notice was issued to the assessee under section 263 about allowability of deduction under sections 80HH and 80HHA. This point was never considered by the CIT(C) in the impugned order. Therefore, fresh material cannot be used at this stage which has never been considered by the CIT(C) himself. No quantum was ever discussed or considered by the CIT(C). Hence this point of learned D.R. is also rejected.
58. The learned DR. further argued from his Paper Book about difference of figure of Rs. 14 lakhs but the department claimed as Rs. 15 lakhs as well as about the rates for Tendu leaves at Rs. 4.67 per kg. mentioned at page 116 of the assessee's Paper Book. He has also taken us to page 108 about the rates of the Tendu leaves and adoption of lower rates stock and also about the cash recovered from the search. Though all these points have been scrutinised by the Assessing Officer in detail still we may note here that on these points CIT(C) himself has not set aside the assessment order. No show-cause notice issued to assessee on this point. Therefore, the same cannot be considered at this stage. These things have been explained in the office reports and clarified by the assessee during the assessment proceedings. The Assessing Officer scrutinised all the seized material and came to the finding with the help of DIT/DDIT-1 Audit and CIT(C) himself and DC(C). Therefore, there are no merits in the contention of the learned DR. The same are rejected.
59. We are constrained to note, though at the cost of repetition, that CIT(C) has issued show-cause notice under section 263 of the Income-tax Act, 1961 mainly relying upon the order under section 132(5) and that the Assessing Officer accepted the revised return without properly examining the seized material in all the assessment years under consideration. However, his reasons in issuing show-cause notice and reasons for decision in all the years are factually incorrect and against the record. Therefore, we are unable to uphold his views on the reasons discussed in our order. No other ground is pressed before us. Though CIT(C), on reasons specified under section 263(l) of the Act could exercise jurisdiction of revision yet this was not the fit case for doing so because same CIT(C) monitored the entire scrutiny proceedings of seized material therefore, the same authority should have given very sound reasons in invoking power of revision instead of deciding it in a casual way. Even otherwise in this case propriety demands that the CIT(C) who himself monitored the scrutiny of the seized material and affirmed this fact in his affidavit before the Hon'ble High Court that proper scrutiny of seized material is done by the Assessing Officer should not have exercised power under section 263.
60. Keeping in view the above discussion and authorities referred to in this order, we are of the considered view that:--
(i) CIT(C) should not have relied upon the order under section 132(5) while issuing show-cause notice under section 263 in all the years.
(ii) Assessing Officer has properly scrutinised all the seized material with the help of DIT/DDIT-1 Audit and CIT(C) himself and DC(C) and passed regular assessments accordingly. Therefore, finding of CIT(C) that the assessments framed are erroneous and have been passed without proper scrutiny of seized material is absolutely incorrect. The assessment orders are not erroneous insofar as the same are not prejudicial to the interests of Revenue.
(iii) CIT(C) himself has not looked into all the records of the assessments proceedings which include seized material and office reports etc. before passing the impugned order.
(iv) CIT(C) has wrongly exercised jurisdiction under section 263.
As a result the impugned order dated 5-1-2001 is set aside and quashed. All the appeals of the assessee are allowed and regular assessment orders dated 30-3-1990 are restored.
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