Mool Raj Singh & Ors. vs Income Tax Office
1998 Latest Caselaw 594 Del

ORDER

JA BENGRA, J.M.:

These are appeals by assessees against orders of CIT, Meerut passed under s. 263 of the IT Act, 1961, pertaining to asst. yr. 1985-86. Since appeals relate to one group of persons, in which there are common partners and the CIT has given basically same reasoning in all these cases, therefore, for the sake of convenience these appeals are being disposed of by this common order.

While examining the records of these assessees the CIT, Meerut was of the view that the orders passed under s. 185(1) r/w s. 143(3) passed by the AO was erroneous insofar as it was prejudicial to the Revenue (sic).

2. The share of each partner, capital employed, profit earned and gift made either to Mool Raj Singh or his family members is as under :

S. No.

S. No.

Name of the partner

Name of the partner

Ratio

Ratio

Profit

Profit

Capital employed

Capital employed

Gifted Amount

Gifted Amount

1 .

Mool Raj Singh

2%

1,744

1,000

2.

Smt. Devki Devi

4%

3,488

2,000

55,000

3.

Smt. Indrawati

4%

3,488

2,000

55,000

4.

Om Prakash

4%

3,488

2,000

5,000

5.

Bhopal Singh

43%

47,496

85,167

5,000

6.

Shiv Kumar

43%

37,496

45,934

5,000

3. A scrutiny of the record show that capital investment made by Smt. Devki Devi, Indrawati and Om Prakash was only Rs. 2,000 each with 4 per cent share. All these three partners were also partners in about 10 other firms of this group of liquor contractors. It is seen that Smt. Devki Devi, Smt. Indrawati and Om Prakash earned a profit of Rs. 3,488 each they made gifts as under :

Smt. Devki Devi

(i)

50,000

Raj Kumar

(ii)

5,000

Mool Raj Singh

Smt. Indrawati

(i)

50,000

Raj Kumar

(ii)

5,000

Mool Raj Singh

Om Prakash

(i)

55,000

Raj Kumar

(ii)

5,000

Mool Raj Singh

Shiv Kumar earned a profit of Rs. 37,496 and he made gift of Rs. 5,000 to Mool Raj Singh. Gopal Singh also made a gift of Rs. 5,000 to Mool Raj Singh.

4. Mool Raj Singh and his sons were liquor contractors during the year. Raj Kumar is his son.

5. The assessment records of the firms in which the donors were partners were looked into and it is found that Mool Raj Singh and his sons had taken the said donors as their partners in the country liquor contract firms constituted by them for the asst. yr. 1985-86. From the above facts, it appears that no genuine firm has come into existence and the firm appears to be a proprietary concern of Mool Raj Singh and other partners are the benami partners of Mool Raj Singh. "

2. Accordingly, a notice under s. 263 of the IT Act was issued to the assessee requiring the assessee to show cause why the order of the AO granting registration should not be cancelled. In reply to that the assessee submitted a detailed reply before the CIT vide letter dt. 27th March, 1989 (which is annexed as Annexure-A to this order), the contents of which have been mentioned by the CIT in his order discussing the plea as well as case law cited by the assessee. Ultimately he came to the conclusion that in view of the decision of the Hon'ble Supreme Court in the case of Dy. Commr. of (Sales-tax) vs. Kalu Kutty (1985) 155 ITR 150 (SQ), it was held that the AO was in error not to have examined the issues stated in earlier part of his order, whereby he granted registration to the firm. Therefore, he set aside the order of the AO for reframing the same de novo after making due and proper enquiry.

3. The learned counsel for the assessee very vehemently argued that the AO while granting registration to the assessee-firm made proper enquiries regarding genuineness of the firm and after satisfying himself passed following order in the case of Mool Raj Singh Sher Singh (ITA No. 3966/Del/1989):

"Order under s. 185(1)(a) of the IT Act Assessment in this case was completed under s. 143(1) on 21st Nov., 1986 in the status of URF as registration was not granted in view of reasons recorded in the order under s. 185(1)(b). The registration mainly refused for noncompliance/non-furnishing of information as required vide this office letter dt. 19th Sept., 1986.

2. The assessee went in appeal against the order passed under s. 185(1)(b) and the learned Dy. CIT vide order dt. 9th Aug., 1987, set aside the order under s. 185(10) with the directions to make the order of registration afresh after considering the reply of the assessee which was filed on 21st Nov., 1986.

3. After receipt of appellate order the assessee was allowed a fresh opportunity vide this office letter dt. 25th March, 1987, to prove genuineness of the firm.

The assessee filed a written reply dt. 31st March, 1987, stating that the reply filed by it on 21st Nov., 1986, be considered which was filed in reply to this office requirements made vide letter dt. 19th Sept,, 1986, and has further stated that the firm was genuinely constituted through a deed of partnership that regular books of accounts were maintained; and the profits of the firm had been divided amongst the partners as per stipulations in the deed. In the circumstances it has been requested that the firm be allowed registration as claimed.

4. The claim of the assessee has been examined in the light of the submissions made by the assessee in the petitions filed on 21st Nov., 1986, and 31st March, 1987. In view of the replies filed by the assessee and the fact that the deed of partnership drawn on 27th Feb., 1985 was filed within the time prescribed; that the profits have been divided amongst the partners in the share ratio stipulated in the deed and that the order of stipulation in the deed have also been acted upon, it appears that a genuine firm had come into existence. Therefore, the firm is allowed registration for the assessment year ending 31st March, 1986 (asst. yr. 1985-86)."

4. It is pointed out that sirywar orders were passed in all other cases, except two, wherein the AO mentioned that the contents of the deed having been looked into and profits of the firm have been distributed in accordance with the provisions contained in the partnership deed, the firm appears to be genuine. Therefore, registration has been allowed. In sum and substance he passed short orders in two cases namely, Mool Raj Singh Bhopal Singh and Mool Raj Singh Santa Singh. In this way the AO before granting registration made proper enquiries and when he was satisfied regarding the genuineness of the firms, after looking all the material fact regarding constitution of the firm, details of partners and explanation, if any thereof, he granted registration. He further pointed out that details of gifts were duly examined, as the AO in his capacity as GTO had assessed the gifts. It is submitted 4hat the order becomes erroneous only if an enquiry has not been made and not because there is anything wrong with the order, if all the facts stated therein are assumed to be correct. It is pointed out that gifts made by individual members have been assessed in their respective gift-tax assessments and tax has been paid. The Department has not reopened their assessments. Similarly, the firms and partners have also been assessed separately not only in this year but in earlier years also. Taxes have been paid. The firms have been found to be genuine. Therefore, the opinion of the CIT that the AO has not made proper enquiries is not correct. It is also pointed out that in his opinion, he has expressed doubt about the genuineness of the firm and its existence without bringing proper material on record. The doubt howsoever strong it may be, cannot form the basis of reviewing the order of the AO unless certain material is brought on record. In this connection, it is also pointed out that the CIT reproduced the submissions of the assessee in his order and passed a cryptic order in the end, saying that the AO has not examined the question of registration before granting it without bringing material on record to show as such. It is pointed out that the CIT can reopen the assessment by giving specific finding based on material that the order passed by the AO was not only erroneous but also prejudicial to the interest of Revenue. These two conditions are cumulative. Therefore, the CIT must prove these two conditions before setting aside the order of the AO. In this connection reliance was placed on the following decisions :

(i) H.H. Maharaja Raja Pawar Dewas vs. CIT (1982) 138 ITR 518 (MP).,

(ii) CIT vs. Gabriel India ITD. (1993) 114 CTR (Bom.) 81 : (1993) 203 1TR 108

(Bom.) -,

(iii) V. G. Kilshnainurthy vs. CIT (1985) 152 ITR 683 (Kar)

(iv) Fatechand Ralinal Jain vs. L4C (1997) 60 ITD 47 (Pune):

(v) Jagaqit Industries ITD. vs. Asstt. CIT (1998) 60 77J (Del) 544 : (1997) 60 ITD

295 (Del);

(vi) Bharat Dairy Farm vs. Dy. CIT (1997) 60 ITD 321 (Pun e)

(vii) Talinder S. Makkar vs. Asstt. CIT (1997) 58 TTJ (Bom.) (TM) 416.. (1997) 61 ITD 57 (Bom.) (I'M);

(viii) Sanco Trans ITD. vs. Asstt. CIT (1997) 58 7TJ (,Wad) 619(1997) 61 ITD 317

(Mad),.

(ix) JP. Snvastav & Sons (Kanpur) ITD. vs. CIT (1978) 111 ITR 326 (All); (x) CIT vs. Kashi Nath & Co. (1987) 64 CTR (All) 17(1988) 170 ITR 28 (AD),.

(xi) CIT vs. Jagadhil Electric Supply & Industrial Co. (1981) 25 CTR (P&H) 94 (1981) 140 1TR 490 (P&HI; and

(xii) CIT vs. Skit Minalben S. Parikh (1995) 127 CTR (Guj) 333: (1995) 215 1TR 81 (Guj).

4.1 Basically he reiterated the arguments which are given in writing in Annexure-A. It is pointed out that the word "benamidar" means the name lender. But in the present case partners have invested the capital from their own sources and there is nothing to show that their capital belong to Mool Raj Singh or any of his family members. All the partners are old assessees and are income-tax payees. Their individual capital invested were from the disclosed sources, which is on record of the AO and that has been accepted in individual cases of every partner. Therefore, presuming that the partners were benamidars were erroneous. The partners, who have gifted their funds voluntarily had paid gift-tax. Therefore, Explanation to s. 185(1)(a) of the IT Act is not attracted. It is further pointed out that legality of the genuineness of the partnership had not been a subject-matter of notice under s. 263. Therefore, this new issue cannot be raised at this stage.

5. As against this, the learned Departmental Representative relied on the order of the CIT and pointed out that the points raised by the assessee in his written reply have been commented upon and discussed at different places of his order. Therefore, to say that his order is cryptic is not correct. It is pointed out that diversion of profit by the partners were not looked into by the AO. The donors are related to Mool Raj Singh. Therefore, the CIT has rightly exercised his jurisdiction under s, 263 where the AO had failed to make enquiries. In this connection reliance was placed on the decisions of Sharda Trading Co. vs. CIT (1984) 40 CTR (Del) 274 : (1984) 149 ITR 19 (Del), Smt. Tara Deid Aggarwal vs. CIT 1973 CTR (SC) 107 1. (1973) 88 ITR 323 (SC), Indian Textiles vs. CIT (1986) 53 CTR (Mad) 104.. (1986) 157 ITR 112 (Mad) and Thali Bhai F Jain & Ors. vs. ITO & Anr. 1975 CTR (Kar) 66: (1975) 101 ITR 1 (Kar).

6. We have considered the rival submissions and have gone through the relevant material available on record and the case law. In the case of CIT vs. Gabriel India ITD. (supra), the Hon'ble Bombay High Court has observed that the power of suo motu revision under sub-s. (1) of s. 263 of the IT Act is in the nature of supervisory jurisdiction and can be exercised only if circumstances specified therein exist. Two circumstances must exist, namely, the order should be erroneous and second, by virtue of the order being erroneous prejudice must have been caused to the interests of Revenue. An order cannot be termed as erroneous unless it is not in accordance with law. If an AO acting in accordance with law makes certain assessment, the same cannot be branded as erroneous by CIT simply because, according to him, the order should have been written more elaborately. This section does not visualise a case of substitution of judgment of the CIT for that of the AO, who passed the order unless the decision is to be held erroneous. The second condition is that it must be prejudicial to the interest of Revenue. But that by itself would not be enough to vest the CIT with the power of suo motu revision because the first requirement, namely, that the order is erroneous is absent. Similarly, if an order is erroneous but not prejudicial to the interest of Revenue, then the power of suo motu revision cannot be exercised. Any and every erroneous order cannot be subject-matter of revision because the second requirement must be fulfillled. There must be some prima facie material on record to show that tax, which was lawfully exigible, has not been imposed or that by the application of relevant statute, on an incorrect or incomplete interpretation a lesser tax than what was just has been imposed.

7. Similar view was expressed in the case of VG. Kilshnamurthy vs. CIT (supra), where the Hon'ble Karnataka High Court has observed that s. 263 can be invoked only when CIT prima facie finds that the order made by the AO was erroneous and was prejudicial to the interests of Revenue. Both these factors must exist simultaneously. If one or the other of the factors is absent, the CIT cannot exercise suo motu power of revision under s. 263.

8. In the case of HH. Maharaja Raja Power Dewas vs. CIT (supra), similar view was expressed by the Hon'ble Madhya Pradesh High Court.

9. In the case of Jagajit Industries ITD. vs. Asstt. CIT (supra), the Tribunal observed that s. 263 can be invoked only when the order is erroneous and prejudicial to the interests of Revenue. The error envisaged in s. 263 is not one which depends on possibility or guesswork, it should be actually an error either of fact or of law. Further, being an extraordinary power it is to be employed not as a judicial corrective or as a review of the AO's order in exercise of supervisory capacity. It is to be invoked and employed only for the purpose of setting right distortions and prejudice to the Revenue. The power of the CIT under s. 263 being quasi-judicial makes it obligatory for him to act in a judicial manner. This view was also taken by Pune Bench of the Tribunal in the case of Fateh Chand Rajmal Jain vs. L4C (supra). Similar view was expressed in the case of Rajinder S. Makkar (supra) and in the case of Sanco Trans ITD. (supra).

10. In the case of Uppal Builders vs. Dy. CIT 90 Taxman 244, the assessee firm was engaged in construction and sale of flats. As a result of search on assessee's premises certain books of accounts were seized, whereupon assessment was completed under s. 143(3) of the Act. The CIT exercising his powers under s. 263 set aside the assessment on the ground that entries claimed to be un-posted posted in ledger from cash book, genuineness of imprest book not found during search and produced later, all required detailed verification/investigation. The question arose whether the CIT having not scrutinised and considered details have powers to exercise revision jurisdiction. The Tribunal observed that CIT had not given any finding with regard to any entry appearing in the imprest book to show that such expenditure was bogus or inflated expenditure. He simply said that the matter required detailed verification and investigation without applying his mind to the various details and documents submitted before him. The error envisaged under s. 263 could not be the one which was dependant on the possibility or guesswork but it should be actual error either of fact or of law. The existence of any such specific error has not been pointed out by the CIT nor be had pointed out any mistake or discrepancy in the voluminous details. He had not even scrutinised and considered detail submitted before him in response to show-cause notice. In view of this the order passed under s. 263 was held to be invalid.

11. Applying the principles laid down by various High Courts and the Tribunal discussed above, to the facts of the present case, we find that the assessment in this case was firstly completed under s. 143(1), wherein the status of URF was determined, thereby refusing registration. Against that order the assessee filed appeal and the learned first appellate authority set aside the matter with the direction to make order of registration afresh after considering the reply of the assessee dt. 21st Nov., 1986. In the second round of litigation, the question of registration was agitated before the AO on issuance of a fresh opportunity in pursuance of direction of the first appellate authority to the assessee, wherein the assessee had submitted reply dt. 31st March, 1987, and also reiterated his reply dt. 21st Nov,, 1986, and after going into the replies and also the fact that the firm was genuinely constituted through a deed of partnership, regular books of accounts were maintained and the profit of the have been divided amongst the partners, as stipulated in the deed, the AO came to the conclusion that registration should be granted to the assessee-firm. Thereby this order was passed on 28th July, 1987 in detail in five of the above cases and in two cases, in short and summary manner as the facts of the case and the parties involved were same. However, it will be pertinent to mention here that the AO had looked into the contents of the partnership deed, profit-sharing distribution according to the terms of the deed and then he came to the conclusion that the partnership is genuine. Under these circumstances, when the AO in second round of litigation as per direction of the first appellate authority, made reasonable enquiry on the issue involved and passed order taking into consideration all material available on record, it cannot be said that the AO either passed an order without making a reasonable enquiry on the issue involved or passed a stereotype order simply accepting what the assessee had stated in his return and failed to make enquiry called for in the circumstances of the case. The CIT in his reasons has expressed doubt in these words: "From the above it appeared that no genuine firm had come into existence and firm appeared to proprietary concern of Mool Raj Singh and other partners are benami partners of Mool Raj Singh".

12. These observations of the CIT is based on no material on record except a guesswork or a possibility that the assessee had diverted the funds by adopting such means. This fact is also belied by the fact that the gifts made by the parties named in the order were held as genuine gifts by the same AO while scrutinising their individual GT returns and even after exercise of powers under s. 263 no corrective measures were taken in their individual assessments by the AO or by the appellate authority. Secondly, the firm and their partners have been assessed on the income declared by them separately. They have paid taxes on the amount declared by them and this has been accepted by the Department. There the assessments either of the firm or the partners have not been reopened. In these circumstances, when there is no material on record and the AO had gone into aspect of genuineness of the firm in second round of litigation as per directions of the first appellate authority, it cannot be said that no proper enquiries were made by the AO. The CIT on perusal of record may be of the opinion that it appears that no genuine firm came into existence, but for holding this, he had no material on record. Simply because the CIT is of a different opinion, powers given under s. 263 of the Act cannot be invoked simply because a different conclusion can be arrived at in the given facts and circumstances of a particular case. Such a conclusion cannot be termed to be erroneous simply because the CIT does not feel satisfied with this conclusion. It may be said that in such a case in the opinion of the CIT the order in question is prejudicial to the interests of Revenue, but that itself would not be enough to vest the CIT with powers for suo motu revision, as per the principle of law laid down by various High Courts.

13. So far as the decision cited by the learned Departmental Representative in Sharda Trading Co. (supra) is concerned, that decision has been rendered in the particular facts of that case, in which it was found that mere issue of notice of reassessment by the ITO under s. 147 and s. 148 does not have the effect of cancelling or rendering non est the earlier order of assessment, and pending the notice and so long as an order of reassessment has not been made, the CIT has jurisdiction under s. 263. This is not the issue in the present case.

13.1 Similarly the other cases cited by the learned Departmental Representative are distinguishable on the facts itself. Therefore, they need not be discussed in details.

14. Taking into consideration the facts, circumstances and material on record, we are of the opinion that CIT has wrongly exercised jurisdiction under s. 263. Therefore, we hold the order passed under s. 263 invalid and thereby set aside the same. Accordingly, the appeals of the assessees are allowed.