Mukesh Jayantilal Kankhara, Prop.. Meera Impex, JAMNAGAR V. The Commissioner of Income Tax, JAMNAGAR

ITA 47/RJT/2011

• Counselvise Citation: [2017] 128 COUNSELVISE.COM (IT) 6730 (ITAT-RAJKOT)
• Duration Of Justice: 5 year(s) 11 month(s) 2 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 20-01-2017
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: DB
• Next Hearing Date: 17-11-2016
• Assessment Year: 2007-2008
• Appeal Filed On: 17-02-2011
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Assessee Lawyers: MJ RANPURA
• Keywords: Business income; Salary income; Opportunity of being heard; Period of limitation; Capital expenditure
• Section: 143(3); 14A; 263; 63

Judgement Text

, IN THE INCOME TAX APPELLATE TRIBUNAL, RAJKOT [CONDUCTED THROUGH E COURT AT AHMEDABAD] BEFORE SHRI RAJPAL YADAV, JUDICIAL MEMBER AND SHRI AMARJIT SINGH, ACCOUNTANT MEMBER ./ ITA NO.47/RJT/2011 ASSTT.YEAR 2007-2008 MUKESH JAYANTILAL KANAKHARA PROP. MEERA IMPEX GIDC PLOT NO.4, HIRJI MISTRY ROAD B/H. DINESH BUILDING SANKER TEKRI, UDYOG NAGAR JAMNAGAR. VS CIT/DCIT, JAMNAGAR CIR.2, JAMNAGAR. ITA NO.701/RJT/2014 ASSTT.YEAR 2007-2008 CIT/DCIT, JAMNAGAR CIR.2, JAMNAGAR. VS MUKESH JAYANTILAL KANAKHARA PROP. MEERA IMPEX GIDC PLOT NO.4, HIRJI MISTRY ROAD B/H. DINESH BUILDING SANKER TEKRI, UDYOG NAGAR JAMNAGAR. ./ / (APPELLANT) 01 ./ / (RESPONDENT) ASSESSEE BY : SHRI M.J. RANPURA, CA REVENUE BY : SHRI YOGESH PANDEY, CIT-DR / DATE OF HEARING : 17/11/2016 / DATE OF PRONOUNCEMENT: 20/01/2017 234/ O R D E R PER RAJPAL YADAV, JUDICIAL MEMBER: ITA NO.47/RJT/2011 IS DIRECTED AT THE INSTANCE OF T HE ASSESSEE AGAINST THE ORDER OF THE LD.COMMISSIONER DATED 10.1.2011 PA SSED UNDER SECTION 263 OF THE INCOME TAX ACT, 1961 IN THE ASSTT.YEAR 2007-08. WHEREAS ITA ITA NO.47/RJT/2011 AND 701/RJT/2014 2 NO.701/RJT/2014 HAS BEEN DIRECTED AT THE INSTANCE O F THE REVENUE AGAINST THE ORDER OF THE LD.CIT(A) DATED 17.9.2014 PASSED IN TH E ASSTT.YEAR 2007-08. 2. THE PROCEEDINGS IN THIS APPEAL HAS BEEN EMANATED FROM AN ORDER PASSED UNDER SECTION 143(3) R.W.S. 263 OF THE INCOME TAX A CT, 1961. THEREFORE, WE HEARD BOTH APPEALS TOGETHER AND DEEM IT APPROPRIATE TO DISPOSE OF BY THIS COMMON ORDER. FIRST WE TAKE APPEAL OF THE ASSESSEE , BECAUSE, ORDER UNDER SECTION 263 PASSED BY THE LD.COMMISSIONER HAS INFUS ED JURISDICTION IN THE AO TO PASS FRESH ASSESSMENT ORDER. 3. BRIEF FACTS OF THE CASE ARE THAT THE ASSESSEE IS ENGAGED IN THE MANUFACTURING AND TRADING OF ELECTRIC BRASS FITTING S/PARTS. HE HAS FILED HIS RETURN OF INCOME ON 31.10.2007 DECLARING TOTAL INCO ME AT RS.8,52,600/-. THE CASE OF THE ASSESSEE WAS SELECTED FOR SCRUTINY ASSE SSMENT AND NOTICE UNDER SECTION 143(2) WAS SERVED UPON THE ASSESSEE ON 10.9 .2008. THE LD.AO HAS PASSED ASSESSMENT ORDER U/S.143(3) ON 16.3.2009. H E DETERMINED TAXABLE INCOME OF THE ASSESSEE AT RS.9,03,600/- AS AGAINST RS.8,58,630/- DISCLOSED BY THE ASSESSEE. THE LD.AO HAS MADE TWO AD HOC ADDITIONS, VIZ. HE DISALLOWED TELEPHONE EXPENSES TO THE EXTENT OF RS.36,000/- OUT OF TOTAL EXPENDITURE CLAIMED BY THE ASSESSEE AT RS.2,68,650/-. SIMILARL Y, HE DISALLOWED TRAVELLING EXPENSES AT RS.15,000/- OUT OF TOTAL EXPENDITURE OF RS.1,41,920/- CLAIMED BY THE ASSESSEE. 4. IT IS PERTINENT TO MENTION THAT THE ASSESSEE WAS PARTNER IN M/S.METAL ALLOYS CORPORATION, M/S.AADITYA INTERNATIONAL AND M /S.METAL RECYCLING INDUSTRIES. HE WAS RUNNING A PROPRIETORSHIP, VIZ. M /S. MEERA IMPEX. HE WAS MAINTAINING BOOKS OF ACCOUNTS OF M/S.MEERA IMPEX AN D HIS PERSONAL BOOKS. AFTER SCRUTINIZING RECORD, THE LD.COMMISSIONER FORM ED AN OPINION THAT M/S.METAL ALLOYS CORPORATION WAS A UNIT WHICH IS EX EMPT FROM TAXATION UNDER SECTION 10(B) OF THE INCOME TAX ACT, 1961. H E MADE REFERENCE TO THE ITA NO.47/RJT/2011 AND 701/RJT/2014 3 ACCOUNTS AND OBSERVED THAT THE ASSESSEE HAD BORROWE D FUNDS IN HIS PROPRIETORSHIP CONCERN AND ADVANCED THOSE FUNDS TO M/S.METAL ALLOYS CORPORATION. IN THIS WAY, HE HAS REDUCED BURDEN OF INTEREST OF M/S.METAL ALLOYS CORPORATION WHICH RESULTED HIGHER INCOME, WH ICH IS EXEMPT FROM TAX. ON THE OTHER HAND, HE HAS SUFFERED INTEREST EXPENDI TURE OF MORE THAN RS.35 LAKHS ON THE FUNDS BORROWED IN HIS PROPRIETORSHIP C ONCERN. THE ASSESSEE HAD SALARY INCOME OF RS.60,000/- PER MONTH FROM M/S.MET AL ALLOYS CORPORATION I.E. PARTNERSHIP CONCERN. THUS, THE LD.COMMISSIONE R WAS OF THE VIEW THAT THE ASSESSEE OUGHT TO HAVE EARNED INTEREST INCOME FROM M/S.METAL ALLOYS CORPORATION AND BY FORGOING THE ALLEGED INTEREST IN COME ASSESSEE HAS ALLOWED M/S.METAL ALLOYS CORPORATION A HIGHER INCOME WHICH IS EXEMPT FROM TAX. ON THE OTHER HAND, THE ASSESSEE HAS BORNE UNNECESSARY INTEREST EXPENDITURE. ACCORDING TO THE LD.COMMISSIONER THE AO HAS NOT CON DUCTED PROPER INQUIRY, AND THEREFORE, THE ASSESSMENT ORDER IS ERRONEOUS AN D PREJUDICIAL TO THE INTEREST OF THE REVENUE. HE ISSUED A SHOW CAUSE NOTICE UNDER SECTION 263 OF THE ACT AND INVITED EXPLANATION OF THE ASSESSEE AS TO WHY T HE ASSESSMENT ORDER BE NOT SET SIDE ON THIS GROUND. IN RESPONSE TO THE QUERY OF THE LD.COMMISSIONER THE ASSESSEE FILED REPLY. RELEVANT PART OF THE ASSESSE ES LETTER HAS BEEN REPRODUCED IN PARA-3 OF THE IMPUGNED ORDER. WE DEE M IT APPROPRIATE TO TAKE NOTE THE REPLY GIVEN BY THE ASSESSEE AS WELL AS FIN DING RECORDED BY THE LD.COMMISSIONER. THEY READ AS UNDER: 3. THEREFORE, A SHOW CAUSE NOTICE U/S 263 WAS ISSU ED TO THE ASSESSEE ON 07/12/10 FIXING THE CASE FOR HEARING AT 11.30 HR S ON 08/12/2010. IN RESPONSE TO THE NOTICE, THE ASSESSEE HIMSELF ATTEND ED THE OFFICE AND REQUESTED TO ADJOURN THE HEARINGS FOR 23/12/2010, O N THE ADJOURNED DATE, SHRI DV SETH CA, AUTHORIZED REPRESENTATIVE OF THE ASSESSEE, APPEARED BEFORE THE UNDERSIGNED AND FILED WRITTEN S UBMISSIONS, WHICH IS REPRODUCED HEREUNDER. ITA NO.47/RJT/2011 AND 701/RJT/2014 4 'WITH REFERENCE TO THE ABOVE REFERRED LETTER AND AS PER THE INSTRUCTIONS OF OUR ABOVE NAMED CLIENT, WE HAVE TO STATE AS UNDE R FOR YOUR KIND CONSIDERATIONS: 1. SHRI MUKESH JAYABTITAL KANAKHARA IS A PARTNER OF M/S. METAL ALLOYS CORPORATION, IN ADDITION TO THIS FIRM, HE WAS ALSO A PARTNER OF M/S. AADITYA INTERNATIONAL AND M/S. METAL RECYCLING INDU STRIES AT THE RELEVANT TIME. HE CARRIES OUT A PROPRIETARY BUSINES S IN THE NAME M/S. MEERA IMPEX. THE BOOKS OF ACCOUNTS OF M/S. MEERA IM PEX PERSONAL BOOKS OF SHRI MUKESH KANAKHARA ARE ALSO MAINTAINED. 2. IN THE PERSONAL BOOKS OF MUKESH KANAKHARA, A SUM OF RS. 2,96,88,720/ IS RECEIVABLE FROM M/S. METAL ALLOYS C ORPORATION. THIS AMOUNT IS STANDING IN THE CAPITAL ACCOUNT OF MR. MU KESH KANAKHARA IN THE BOOKS OF M/S. METAL ALLOYS CORPORATION. IN THE COURSE OF ASSESSMENT PROCEEDINGS THERE WAS A QUERY FROM THE A SSESSING OFFICER ABOUT THE SOURCE OF INVESTMENT IN PARTNERSHIP FIRMS . THIS WAS DEALT WITH A SUBMISSION DATED 06,03.2009. A COPY OF THE SAID S UBMISSION IS ENCLOSED HEREWITH FOR YOUR KIND PERUSAL. 3. YOU WOULD OBSERVE THAT SHRI MUKESH KANAKHAM WAS HOLDING A CAPITAL FAR RS. 415.90 LACS IN ADDITION TO NON-INTE REST HEARING LOANS FOR RS. 60.37 LACS. THE INVESTMENT IN PARTNERSHIP FIRMS AND SHARES WAS FAR RS. 333J 7 LACS. IN VIEW OF THIS, A QUESTION OF DIS ALLOWANCE U/S 14A READ WITH RULE SD WAS RULED OUT. 4. M/S. MEERA IMPEX CARRIES OUT THE ACTIVITY OF MAN UFACTURING OF BRASS PARTS AND TRADING IN NON-FERROUS METAL SCRAP. DURIN G FY2006-07 AND 2005-06, M/S. MEERA IMPEX HAD SOLD GOODS TO M/S. ME TAL ALLOYS CORPORATION FAR RS. 3,36,94,932/~ AND 1,13,11,086/- RESPECTIVELY. TOTAL SALES OF GOODS DURING THIS BOTH YEARS COMES TO RS.4 ,50,06,018/ A BALANCE OF RS. 4,48,17,116/ WAS OUTSTANDING AS RECE IVABLE. 5. IT IS STATED THAT A SUM OF RS. 4,48J7,116/- RECE IVABLE FROM M/S. METAL ALLOYS CORPORATIONS AGAINST THE SUPPLY OF GOODS WHI CH HAS EMANATED OUT OF USUAL BUSINESS TRANSACTION, FT IS NOT A CASE OF GIVING ANY FINANCE OUT OF INTEREST BEARING FUNDS. IN THE LIGHT OF THE ABOVE WE SUBMIT THAT THE MATTER ABOUT THE PAYMENT OF INTEREST VIS-D-VIS INCOME FROM THE FIRM WAS CLEARLY CONSIDERED. ASSESSMENT IS NOT PREJUDICIAL TO THE INTEREST OF RE VENUE AND DOES NOT CALL FOR ANY ACTION U/S 263 OF THE ACT.' ITA NO.47/RJT/2011 AND 701/RJT/2014 5 4. THE CONTENTION OF THE AR OF THE ASSESSEE HAS BEE N CONSIDERED AT LENGTH AND IS FOUND TO BE UNACCEPTABLE. THOUGH THE AO MADE A QUERY ABOUT THE SOURCE OF INVESTMENTS IN PARTNERSHIP FIRM S, THERE IS NOTHING ON RECORDS TO SUGGEST THAT HE WENT INTO THE DETAILS AND CARRIED OUT PROPER INQUIRY. HE APPARENTLY DID NOT GO INTO THE D ETAILS OF THE ISSUE AND MERELY ACCEPTED THE SUBMISSION OF THE ASSESSEE WITHOUT ANY APPLICATION OF MIND AND PROPER VERIFICATIONS. THE S AME IS FURTHER VINDICATED BY THE SUBMISSION OF THE ASSESSEE NARRAT ED ABOVE WHEREIN THE ASSESSEE HIMSELF HAS ACCEPTED THAT THE SUM OF R S. 44817116/- PAYABLE BY M/S. METAL ALLOYS CORPORATION (A UNIT CL AIMING DEDUCTIONS U/S. 10B) TO THE PROPRIETARY CONCERN OF THE ASSESSE E IS ON ACCOUNT OF GOODS SOLD BY M/S. MEERA IMPEX, PROPRIETARY CONCERN OF THE ASSESSEE, TO M/S, METAL ALLOYS CORPORATION DURING FY 2005-06 (RS, 11311086/-) AND FY 2006-07 (RS. S3694932/-). IT IS INTERESTING TO NOTE THAT OUT OF TOTAL SALES AFFECTED BY M/S. MEERA IMPEX WORTH RS. 215280453/-DURING THE FY 2006-07, THE GOODS SOLD TO M/S. METAL ALLOYS CORPORATION (RS. 33694932/-) FORM A MERE 15.65% OF TOTAL SALES, WHER EAS OUT OF THE TOTAL SUNDRY DEBTORS (RS.6,00,28,759/-) FOR THE YEAR, IT FORMS A WHOPPING 74.65% OF TOTAL DEBTORS. THIS FACT ITSELF INDICATED THAT THE PROPRIETARY CONCERN OF THE ASSESSEE M/S. MEERA IMPEX HAS ALLOWE D THE USE OF ITS FUNDS FOR ALMOST TWO YEARS TO M/S. METAL ALLOYS COR PORATION IN THE GUISE OF SALE OF GOODS WITHOUT CHARGING ANY INTERES T AT THE SAME TIME PAYING HUGE INTEREST ON THE BORROWED FUNDS. HAD IT BEEN ANY OTHER CONCERN, WOULD THE ASSESSEE HAVE ALLOWED THE SALE C ONSIDERATION TO REMAIN OUTSTANDING SO LONG? ALL THESE FACTS CLEARLY INDICATED THAT THE ASSESSEE DIVERTED ITS INTEREST BEARING FUNDS TO EAR N TAX FREE INCOME. FURTHER, AS PER THE DECISION OF THE HON'BLE PUNJAB AND HARYANA HIGH COURT IN THE CASE OF CIT-I, LUDHIANA VS. ABHISHEK I NDUSTRIES LTD. (2005) 156 TAXMAN 257, THE INTEREST PAID BY THE ASS ESSEE TO THE EXTENT OF THE AMOUNTS DIVERTED TO SISTER CONCERNS ON INTER EST FREE BASIS WERE REQUIRED TO BE DISALLOWED. THE AO HAS NOT VERIFIED ALL THESE THINGS IN PROPER PERSPECTIVE. THEREFORE, THE ORDER PASSED BY THE AO IS ERRONEOUS AND HAS CAUSED GRIEVOUS LOSS TO THE REVENUE. RELIAN CE IS PLACED ON THE FOLLOWING JUDICIAL PRONOUNCEMENTS: A, ADDL CITV. SARAYA DISTILLERY [1978] 115 IT RT 34 (ALL.) B. CIT V. PUSHPA DEVI (1987) 164 ITR 639/[198 6]29 TAXMAN 377 (PAT). C. CIT V. SESHASAYEE PAPER & BOARDS LTD. [20 00J 242 ITR 490/108 TAXMAN 464 (MAD), 5. I, THEREFORE, HOLD THAT THE ASSESSMENT FINALIZED BY THE AO U/S. 143 (3) OF THE INCOME TAX ACT, 1961 IS ERRONEOUS AND PREJUD ICIAL TO THE INTEREST ITA NO.47/RJT/2011 AND 701/RJT/2014 6 OF REVENUE WITHIN THE MEANING OF SECTION 263 OF THE INCOME-TAX ACT, 1961. 6. ACCORDINGLY, THE ASSESSMENT IS SET ASIDE. THE AO IS DIRECTED TO REFRAME THE ASSESSMENT AFRESH AFTER GIVING THE ASSE SSEE AN OPPORTUNITY OF BEING HEARD. 5. THE LD.COUNSEL FOR THE ASSESSEE HAS FILED WRITTE N SUBMISSIONS. HE POINTED OUT THAT THE APPEAL OF THE ASSESSEE WAS EAR LIER ALLOWED BY THE TRIBUNAL FOLLOWING THE JUDGMENT OF THE HONBLE SUPREME COURT IN THE CASE OF S.A.BUILDERS, 288 ITR 1. HOWEVER, ON AN APPLICATIO N OF THE REVENUE, THE ORDER WAS RECALLED. HE POINTED OUT THAT THE TRIBUN AL HAS MENTIONED M/S.METAL ALLOYS CORPORATION AS WELL AS M/S.MEERA IMPEX AS PR OPRIETORSHIP CONCERNS AND DUE TO THIS, ORDER WAS RECALLED. HE FURTHER CO NTENDED THAT IN PURSUANCE OF THE LD.COMMISSIONERS ORDER, THE LD.AO HAS MADE DIS ALLOWANCE OF RS.43.78.L571/- OUT OF INTEREST EXPENDITURE. THIS DISALLOWANCE WAS CHALLENGED BY THE ASSESSEE BEFORE THE LD.CIT(A) AND THE LD.CIT (A) HAS DELETED THE DISALLOWANCE. THE ORDER OF THE LD.CIT(A) IS BEING IMPUGNED BY THE REVENUE. IN ORDER TO EXPLAIN AS TO HOW NO INTEREST EXPENDITU RE COULD BE DISALLOWED, HE DREW OUR ATTENTION TOWARDS THE FINDING OF THE LD.CI T(A). HE FURTHER CONTENDED THAT THE LD.AO HAS CARRIED OUT PROPER INQ UIRY BEFORE ACCEPTING THE ACCOUNTS OF THE ASSESSEE. THE ASSESSEE HAS DEMON STRATED AS TO HOW FUNDS HAVE BEEN GIVEN TO M/S. M/S.METAL ALLOYS CORPORATIO N. HE POINTED OUT THAT AT THE END OF THE ACCOUNTING YEAR, TOTAL AMOUNT RECEIV ABLE BY THE ASSESSEE IN THE BOOKS OF M/S.METAL ALLOYS CORPORATION WAS OF RS.7,4 5,05,836/- WHICH CONTAINS A SUM OF RS.2,96,88,720/- WHICH IS AN INV ESTMENT AND DULY REFLECTED IN PERSONAL BOOKS OF MUKESH KANAKHARA. THE ASSESSE E HAS DULY DISCLOSED THIS FACT BEFORE THE LD.COMMISSIONER. THE REMAINING AMO UNT IS RS.4,48,17,116/-. THIS WAS A TOTAL OF CLOSING BALANCE. M/S.MEERA IMP EX IS ENGAGED IN THE BUSINESS OF TRADING OF NON-FERROUS METALS. IT HAS SOLD SCRAP TO M/S.METAL ALLOYS CORPORATION FOR A SUM OF RS.3,36,94,932/-. M /S.MEERA IMPEX HAS ITA NO.47/RJT/2011 AND 701/RJT/2014 7 OPENING BALANCE OF RS.2,06,42,185/- IF ALL THESE E NTRIES ARE CONSIDERED IN RIGHT PERSPECTIVE, THEN THE DEBIT BALANCE IN THE FORM OF ALLEGED ADVANCED WOULD REMAIN AT RS.1.11 CRORES, BECAUSE IN THE CLOSING BA LANCE OF RS.4.48 CRORES, THERE WAS DEBIT SALES TO THE TUNE OF RS.3.37 CRORES . AGAINST THESE ALLEGED ADVANCES, THE ASSESSEE HAS HUGE INTEREST FREE FUND OF RS.4.76 CRORES. THERE CANNOT ANY ALLEGATION THAT THE ASSESSEE HAS SIPHONE D OFF INTEREST BEARING FUNDS FOR NON-BUSINESS PURPOSE AND ALLOWED PARTNERSHIP FI RM TO EARN TAX FREE INCOME. HE MADE REFERENCE TO THE DECISION OF THE H ONBLE SUPREME COURT IN THE CASE OF MALABAR INDUSTRIAL CO. LTD. CIT, 243 IT R 83 (SC), CIT VS. ARVIND JEWELLERS, 259 ITR 502 (GUJ), CIT VS. MAX IN DIA LTD., 295 ITR 282 (SC) AND CITED LARGE NUMBER OF DECISIONS IN HIS WRI TTEN SUBMISSIONS. 6. ON THE OTHER HAND, THE LD.CIT-DR HAS ALSO FIELD WRITTEN SUBMISSIONS. IN HIS WRITTEN SUBMISSION HE HAS REITERATED FINDING RECORDED BY THE LD.CIT. HE MADE REFERENCE TO THE DECISION OF THE HONBLE SUPRE ME COURT IN THE CASE OF CIT VS. AMITABH BACHHAN, 384 ITR 0200 (SC). 7 . WITH THE ASSISTANCE OF THE LD.REPRESENTATIVES, WE GONE THROUGH THE RECORD CAREFULLY. SECTION 263 HAS A DIRECT BEARING ON THE CONTROVERSY, THEREFORE, IT IS PERTINENT TO TAKE NOTE OF THIS SEC TION. IT READS AS UNDER:- 263(1) THE COMMISSIONER MAY CALL FOR AND EXAMINE T HE RECORD OF ANY PROCEEDING UNDER THIS ACT, AND IF HE CONSIDERS THAT ANY ORDER PASSED THEREIN BY THE ASSESSING OFFICER IS ERRONEOU S IN SO FAR AS IT IS PREJUDICIAL TO THE INTEREST OF THE REVENUE, HE M AY, AFTER GIVING THE ASSESSEE AN OPPORTUNITY OF BEING HEARD AND AFTE R MAKING OR CAUSING TO BE MADE SUCH INQUIRY AS HE DEEMS NECESSA RY, PASS SUCH ORDER THEREON AS THE CIRCUMSTANCES OF THE CASE JUSTIFY, INCLUDING AN ORDER ENHANCING OR MODIFYING THE ASSES SMENT, OR CANCELLING THE ASSESSMENT AND DIRECTING A FRESH ASS ESSMENT. [EXPLANATION.- FOR THE REMOVAL OF DOUBTS, IT IS HER EBY DECLARED THAT, FOR THE PURPOSES OF THIS SUB-SECTION ,- ITA NO.47/RJT/2011 AND 701/RJT/2014 8 (A) AN ORDER PASSED ON OR BEFORE OR AFTER THE 1ST DAY O F JUNE, 1988 BY THE ASSESSING OFFICER SHALL INCLUDE- (I) AN ORDER OF ASSESSMENT MADE BY THE ASSISTANT COMMISSIONER OR DEPUTY COMMISSIONER OR THE INCOME- TAX OFFICER ON THE BASIS OF THE DIRECTIONS ISSUED B Y THE JOINT COMMISSIONER UNDER SECTION 144A; (II) AN ORDER MADE BY THE JOINT COMMISSIONER IN EXE RCISE OF THE POWERS OR IN THE PERFORMANCE OF THE FUNCTION S OF AN ASSESSING OFFICER CONFERRED ON, OR ASSIGNED TO, HIM UNDER THE ORDERS OR DIRECTIONS ISSUED BY THE BOARD OR BY THE CHIEF COMMISSIONER OR DIRECTOR GENERAL OR COMMISSIONER AUTHORIZED BY THE BOARD IN THIS BEHALF UNDER SECTION 120; (B) RECORD SHALL INCLUDE AND SHALL BE DEEMED ALWAYS TO HAVE INCLUDED ALL RECORDS RELATING TO ANY PROCEEDIN G UNDER THIS ACT AVAILABLE AT THE TIME OF EXAMINATION BY THE COMMISSIONER; (C) WHERE ANY ORDER REFERRED TO IN THIS SUB-SECTION AND PASSED BY THE ASSESSING OFFICER HAD BEEN THE SUBJEC T MATTER OF ANY APPEAL FILED ON OR BEFORE OR AFTER TH E 1ST DAY OF JUNE, 1988, THE POWERS OF THE COMMISSIONER UNDER THIS SUB-SECTION SHALL EXTEND AND SHALL BE DE EMED ALWAYS TO HAVE EXTENDED TO SUCH MATTERS AS HAD NOT BEEN CONSIDERED AND DECIDED IN SUCH APPEAL. (2) NO ORDER SHALL BE MADE UNDER SUB-SECTION (1) AF TER THE EXPIRY OF TWO YEARS FROM THE END OF THE FINANCIAL Y EAR IN WHICH THE ORDER SOUGHT TO BE REVISED WAS PASSED. (3) NOTWITHSTANDING ANYTHING CONTAINED IN SUB-SECTI ON (2), AN ORDER IN REVISION UNDER THIS SECTION MAY BE PASS ED AT ANY TIME IN THE CASE OF AN ORDER WHICH HAS BEEN PASSED IN CONSEQUENCE OF, OR TO GIVE EFFECT TO, ANY FINDING O R DIRECTION CONTAINED IN AN ORDER OF THE APPELLATE TRIBUNAL, NA TIONAL TAX TRIBUNAL, THE HIGH COURT OR THE SUPREME COURT. EXPLANATION.- IN COMPUTING THE PERIOD OF LIMITATION FOR THE PURPOSES OF SUB-SECTION (2), THE TIME TAKEN IN GIVI NG AN OPPORTUNITY TO THE ASSESSEE TO BE REHEARD UNDER THE PROVISO TO SECTION 129 AND ANY PERIOD DURING WHICH ANY PROC EEDING UNDER THIS SECTION IS STAYED BY AN ORDER OR INJUNCT ION OF ANY COURT SHALL BE EXCLUDED. ITA NO.47/RJT/2011 AND 701/RJT/2014 9 8. ON A BARE PERUSAL OF THE SUB SECTION-1 WOULD REV EAL THAT POWERS OF REVISION GRANTED BY SECTION 263 TO THE LEARNED COMM ISSIONER HAVE FOUR COMPARTMENTS. IN THE FIRST PLACE, THE LEARNED COMMI SSIONER MAY CALL FOR AND EXAMINE THE RECORDS OF ANY PROCEEDINGS UNDER THIS A CT. FOR CALLING OF THE RECORD AND EXAMINATION, THE LEARNED COMMISSIONER WA S NOT REQUIRED TO SHOW ANY REASON. IT IS A PART OF HIS ADMINISTRATIVE CONT ROL TO CALL FOR THE RECORDS AND EXAMINE THEM. THE SECOND FEATURE WOULD COME WHEN HE WILL JUDGE AN ORDER PASSED BY AN ASSESSING OFFICER ON CULMINATION OF AN Y PROCEEDINGS OR DURING THE PENDENCY OF THOSE PROCEEDINGS. ON AN ANALYSIS O F THE RECORD AND OF THE ORDER PASSED BY THE ASSESSING OFFICER, HE FORMED AN OPINION THAT SUCH AN ORDER IS ERRONEOUS IN SO FAR AS IT IS PREJUDICIAL T O THE INTERESTS OF THE REVENUE. BY THIS STAGE THE LEARNED COMMISSIONER WAS NOT REQU IRED THE ASSISTANCE OF THE ASSESSEE. THEREAFTER THE THIRD STAGE WOULD COME. TH E LEARNED COMMISSIONER WOULD ISSUE A SHOW CAUSE NOTICE POINTING OUT THE RE ASONS FOR THE FORMATION OF HIS BELIEF THAT ACTION U/S 263 IS REQUIRED ON A PAR TICULAR ORDER OF THE ASSESSING OFFICER. AT THIS STAGE THE OPPORTUNITY TO THE ASSES SEE WOULD BE GIVEN. THE LEARNED COMMISSIONER HAS TO CONDUCT AN INQUIRY AS H E MAY DEEM FIT. AFTER HEARING THE ASSESSEE, HE WILL PASS THE ORDER. THIS IS THE 4TH COMPARTMENT OF THIS SECTION. THE LEARNED COMMISSIONER MAY ANNUL TH E ORDER OF THE ASSESSING OFFICER. HE MAY ENHANCE THE ASSESSED INCOME BY MODI FYING THE ORDER. HE MAY SET ASIDE THE ORDER AND DIRECT THE ASSESSING OF FICER TO PASS A FRESH ORDER. AT THIS STAGE, BEFORE CONSIDERING THE MULTI-FOLD CO NTENTIONS OF THE LD. REPRESENTATIVES, WE DEEM IT PERTINENT TO TAKE NOTE OF THE FUNDAMENTAL TESTS PROPOUNDED IN VARIOUS JUDGMENTS RELEVANT FOR JUDGIN G THE ACTION OF THE CIT TAKEN U/S 263. THE ITAT IN THE CASE OF MRS. KHATIZA S. OOMERBHOY VS. ITO, MUMBAI, 101 TTJ 1095, ANALYZED IN DETAIL VARIOUS AU THORITATIVE PRONOUNCEMENTS INCLUDING THE DECISION OF HONBLE SU PREME COURT IN THE CASE OF MALABAR INDUSTRIES 243 ITR 83 AND HAS PROPOUNDED THE FOLLOWING BROADER PRINCIPLE TO JUDGE THE ACTION OF CIT TAKEN UNDER SE CTION 263. ITA NO.47/RJT/2011 AND 701/RJT/2014 10 (I) THE CIT MUST RECORD SATISFACTION THAT THE ORDER OF THE AO IS ERRONEOUS AND PREJUDICIAL TO THE INTEREST OF THE REVENUE. BOTH THE CONDITIONS MUST BE FULFILLED. (II) SEC. 263 CANNOT BE INVOKED TO CORRECT EACH AND EVER Y TYPE OF MISTAKE OR ERROR COMMITTED BY THE AO AND IT WAS ONLY WHEN AN ORDER IS ERRONEOUS THAT THE SECTION WILL BE ATTRACTED. (III) AN INCORRECT ASSUMPTION OF FACTS OR AN INCORRECT APPLICATION OF LAW WILL SUFFICE THE REQUIREMENT OF ORDER BEING ERRONEOUS. (IV) IF THE ORDER IS PASSED WITHOUT APPLICATION OF MIND, SUCH ORDER WILL FALL UNDER THE CATEGORY OF ERRONEOUS ORD ER. (V) EVERY LOSS OF REVENUE CANNOT BE TREATED AS PREJUDIC IAL TO THE INTERESTS OF THE REVENUE AND IF THE AO HAS ADOP TED ONE OF THE COURSES PERMISSIBLE UNDER LAW OR WHERE TWO V IEWS ARE POSSIBLE AND THE AO HAS TAKEN ONE VIEW WITH WHI CH THE CIT DOES NOT AGREE. IF CANNOT BE TREATED AS AN ERRONEOUS ORDER, UNLESS THE VIEW TAKEN BY THE AO IS UNSUSTAINABLE UNDER LAW (VI) IF WHILE MAKING THE ASSESSMENT, THE AO EXAMINES THE ACCOUNTS, MAKES ENQUIRIES, APPLIES HIS MIND TO THE FACTS AND CIRCUMSTANCES OF THE CASE AND DETERMINE THE INC OME, THE CIT, WHILE EXERCISING HIS POWER UNDER S 263 IS NOT PERMITTED TO SUBSTITUTE HIS ESTIMATE OF INCOME IN P LACE OF THE INCOME ESTIMATED BY THE AO. (VII) THE AO EXERCISES QUASI-JUDICIAL POWER VESTED IN HIS AND IF HE EXERCISES SUCH POWER IN ACCORDANCE WITH LAW AND ARRIVE AT A CONCLUSION, SUCH CONCLUSION CANNOT BE TERMED T O BE ERRONEOUS SIMPLY BECAUSE THE CIT DOES NOT FEE STRAT IFIED WITH THE CONCLUSION. (VIII) THE CIT, BEFORE EXERCISING HIS JURISDICTION UNDER S . 263 MUST HAVE MATERIAL ON RECORD TO ARRIVE AT A SATISFA CTION. (IX) IF THE AO HAS MADE ENQUIRIES DURING THE COURSE OF ASSESSMENT PROCEEDINGS ON THE RELEVANT ISSUES AND T HE ASSESSEE HAS GIVEN DETAILED EXPLANATION BY A LETTER IN WRITING AND THE AO ALLOWS THE CLAIM ON BEING SATISF IED WITH THE EXPLANATION OF THE ASSESSEE, THE DECISION OF THE AO CANNOT BE HELD TO BE ERRONEOUS SIMPLY BECAUSE IN HIS ITA NO.47/RJT/2011 AND 701/RJT/2014 11 ORDER HE DOES NOT MAKE AN ELABORATE DISCUSSION IN T HAT REGARD. 9. APART FROM THE ABOVE PRINCIPLES, WE DEEM IT APPR OPRIATE TO MAKE REFERENCE TO THE DECISION OF THE HON'BLE DELHI HIGH COURT IN THE CASE OF CIT VS. SUN BEAM AUTO REPORTED IN 227 CTR 113 AND GEE V EE ENTERPRISES LTD VS. ADDL. COMMISSIONER OF INCOME TAX (99 ITR 375). IN THE CASE OF SUN BEAM AUTO, THE HON'BLE HIGH COURT HAS POINTED OUT A DIST INCTION BETWEEN LACK OF INQUIRY AND INADEQUATE INQUIRY. IF THERE IS A LACK OF ENQUIRY, THEN THE ASSESSMENT ORDER CAN BE BRANDED AS ERRONEOUS. THE F OLLOWING OBSERVATIONS OF THE HON'BLE DELHI HIGH COURT ARE WORTH TO NOTE: 12. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS OF THE COUNSEL ON THE OTHER SIDE AND HAVE GONE THROUGH THE RECORDS. THE FIRST ISSUE THAT ARISES FOR OUR CONSID ERATION IS ABOUT THE EXERCISE OF POWER BY THE COMMISSIONER OF INCOME-TAX UNDER SECTION 263 OF THE INCOME-TAX ACT. AS NOTED ABOVE, THE SUBMISSION OF LEARNED COUNSEL FOR THE REVENUE WAS THAT WHILE PASSING THE ASSESSMENT ORDER , THE ASSESSING OFFICER DID NOT CONSIDER THIS ASPECT SPEC IFICALLY WHETHER THE EXPENDITURE IN QUESTION WAS REVENUE OR CAPITAL EXPENDITURE. THIS ARGUMENT PREDICATES ON THE ASSESS MENT ORDER WHICH APPARENTLY DOES NOT GIVE ANY REASONS WH ILE ALLOWING THE ENTIRE EXPENDITURE AS REVENUE EXPENDIT URE. HOWEVER, THAT BY ITSELF WOULD NOT BE INDICATIVE OF THE FACT THAT THE ASSESSING OFFICER HAD NOT APPLIED HIS MIND ON THE ISSUE. THERE ARE JUDGMENTS GALORE LAYING DOWN THE P RINCIPLE THAT THE ASSESSING OFFICER IN THE ASSESSMENT ORDER IS NOT REQUIRED TO GIVE DETAILED REASON IN RESPECT OF EACH AND EVERY ITEM OF DEDUCTION, ETC. THEREFORE, ONE HAS TO SEE FROM THE RECORD AS TO WHETHER THERE WAS APPLICATION OF M IND BEFORE ALLOWING THE EXPENDITURE IN QUESTION AS REVE NUE EXPENDITURE. LEARNED COUNSEL FOR THE ASSESSEE IS RI GHT IN HIS SUBMISSION THAT ONE HAS TO KEEP IN MIND THE DISTINC TION BETWEEN LACK OF INQUIRY AND INADEQUATE INQUIRY. IF THERE WAS ANY INQUIRY, EVEN INADEQUATE, THAT WOULD NOT BY ITSELF, GIVE OCCASION TO THE COMMISSIONER TO PASS ORDERS UN DER SECTION 263 OF THE ACT, MERELY BECAUSE HE HAS DIFFE RENT OPINION IN THE MATTER. IT IS ONLY IN CASES OF LACK OF INQUIRY, THAT SUCH A COURSE OF ACTION WOULD BE OPEN. ITA NO.47/RJT/2011 AND 701/RJT/2014 12 10. IN THE CASE OF GEE VEE ENTERPRISE VS. COMMISSIO NER OF INCOME TAX REPORTED IN 99 ITR PAGE 375, THE HONBLE COURT HAS EXPOUNDED THE APPROACH OF LD. ASSESSING OFFICER WHILE PASSING ASSESSMENT O RDER. THE OBSERVATION OF THE HONBLE COURT ON PAGES 386 OF JOURNAL READ AS U NDER:- IT IS NOT NECESSARY FOR THE COMMISSIONER TO MAKE FURTHER INQUIRIES BEFORE CANCELLING THE ASSESSMENT ORDER OF THE INCOM E-TAX OFFICER. THE COMMISSIONER CAN REGARD THE ORDER AS ERRONEOUS ON THE GROUND THAT IN THE CIRCUMSTANCES OF THE CASE THE INCOME-TA X OFFICER SHOULD HAVE MADE FURTHER INQUIRIES BEFORE ACCEPTING THE ST ATEMENTS MADE BY THE ASSESSEE IN HIS RETURN. THE REASON IS OBVIOUS. THE POSITION AND FUNCTION O F THE INCOME-TAX OFFICER IS VERY DIFFIDENT FROM THAT OF A CIVIL COUR T. THE STATEMENT MADE IN A PLEADING PROVED BY THE MINIMUM AMOUNT OF EVIDE NCE MAY BE ADOPTED BY A CIVIL COURT IN THE ABSENCE OF ANY REBU TTAL. THE CIVIL COURT IS NEUTRAL. IT SIMPLY GIVES DECISION ON THE BASIS OF THE PLEADING AND EVIDENCE WHICH COMES BEFORE IT. THE INCOME-TAX OFF ICER IS NOT ONLY ON ADJUDICATOR BUT ALSO AN INVESTIGATOR. HE CANNOT REMAIN PASSIVE IN THE FACE OF THE RETURN WHICH IS APPARENTLY IN ORDER BUT CALLED FOR FURTHER INQUIRY. IT IS HIS DUTY TO ASCERTAIN THE TRUTH OF THE FACTS STATED IN THE RETURN WHEN THE CIRCUMSTANCES OF THE CASE ARE SUCH AS TO PROVOKE AN INQUIRY IT IS BECAUSE IT IS INCUMBENT ON THE INCOM E-TAX OFFICER TO FURTHER INVESTIGATE THE FACTS STATED IN THE RETURN WHEN CIRCUMSTANCES WOULD MADE SUCH AN INQUIRY PRUDENT THAT THE WORD E RRONEOUS IN SECTION 263 INCLUDES THE FAILURE TO MAKE SUCH AN EN QUIRY. THE ORDER BECOMES ERRONEOUS BECAUSE SUCH AN INQUIRY HAS NOT B EEN MADE AND NOT BECAUSE THERE IS ANYTHING WRONG WITH THE ORDER IF ALL THE FACTS STATED THEREIN ARE ASSUMED TO BE CORRECT. 11. IN THE LIGHT OF THE ABOVE, LET US EXAMINE THE F ACTS OF THE PRESENT CASE. IN BRIEF THE CASE OF THE LD.COMMISSIONER IS THAT THE A SSESSEE OWES A SUM OF RS.7,45,05,836/- FROM M/S.METAL ALLOYS CORPORATION. IT CONTAINED TWO AMOUNTS. RS.2,96,88,720/- PLUS RS.4,48,17,116/-. HE FURTHER ALLEGED THAT THE ASSESSEE HAS BEEN EARNING AN INCOME OF RS.60,000/- PER ANNUM AS SALARY INCOME FROM M/S.METAL ALLOYS CORPORATION. ON THE O THER HAND, HE BORROWED UNSECURED LOANS AND PAID INTEREST. THE LD.COMMISSI OENR HAS MADE REFERENCE TO THE DECISION OF HONBLE PUNJAB & HARYANA HIGH CO URT IN THE CASE OF CIT ITA NO.47/RJT/2011 AND 701/RJT/2014 13 VS. ABHISHEK INDUSTRIES LTD. 156 TAXMANN.257. IN O RDER TO BRING AT HOME POINT THAT FOR BUSINESS PURPOSE OF SISTER CONCERN, THE ASSESSEE SHOULD NOT INCUR INTEREST EXPENDITURE. IN OTHER WORDS, GRIEVANCE OF THE LD.COMMISSIONER IS THAT THE ASSESSEE HAS ARRANGED HIS AFFAIRS IN THE PROPRI ETORSHIP CONCERN VIS--VIS PARTNERSHIP IN SUCH A MANNER WHERE AT THE COST OF P ROPRIETORSHIP, PARTNERSHIP WAS ALLOWED TO EARN MORE INCOME WHICH IS TAX FREE, AND THEREFORE, A PREJUDICE HAS BEEN CAUSED TO THE REVENUE. IN HIS NEXT FOLD O F GRIEVANCE, HE HAS DEMONSTRATED THAT THE AO HAS NOT CONDUCTED PROPER I NQUIRY. WE DO NOT FIND ANY MERIT IN BOTH FOLD OF PROPOSITION CONCEIVED BY THE LD.COMMISSIONER FOR SETTING ASIDE ASSESSMENT ORDER. IT IS PERTINENT TO MENTION THAT THE AO HAS CARRIED OUT INQUIRY. THE ASSESSEE HAS SPECIFICALLY PLEADED IN THE WRITTEN SUBMISSION FILED BEFORE THE LD.CIT. HONBLE DELHI HIGH COURT HAS CONSIDERED SOMEWHAT SIMILAR ASPECT IN THE CASE OF ITO VS. D.G. HOUSING PROJECTS LTD., REPORTED IN 243 ITR 329. IT IS PERTINENT TO TAKE NOTE OF OBSERVATION OF THE HONBLE DELHI HIGH COURT, WHICH READS AS UNDER: 18 . THIS DISTINCTION MUST BE KEPT IN MIND BY THE COMMIS SIONER OF INCOME-TAX WHILE EXERCISING JURISDICTION UNDER SECT ION 263 OF THE ACT AND IN THE ABSENCE OF THE FINDING THAT THE ORDE R IS ERRONEOUS AND PREJUDICIAL TO THE INTEREST OF REVENUE, EXERCIS E OF JURISDICTION UNDER THE SAID SECTION IS NOT SUSTAINABLE. IN MOST CASES OF ALLEGED INADEQUATE INVESTIGATION, IT WILL BE DIFFICULT TO HOLD THAT THE ORDER OF THE ASSESSING OFFICER, WHO HAD CONDUCTED ENQUIRI ES AND HAD ACTED AS AN INVESTIGATOR, IS ERRONEOUS, WITHOUT CIT CONDUCTING VERIFICATION/INQUIRY. THE ORDER OF THE ASSESSING OF FICER MAY BE OR MAY NOT BE WRONG. CIT CANNOT DIRECT RECONSIDERATION ON THIS GROUND BUT ONLY WHEN THE ORDER IS ERRONEOUS. AN ORD ER OF REMIT CANNOT BE PASSED BY THE CIT TO ASK THE ASSESSING OF FICER TO DECIDE WHETHER THE ORDER WAS ERRONEOUS. THIS IS NOT PERMISSIBLE. AN ORDER IS NOT ERRONEOUS, UNLESS THE CIT HOLD AND RECORDS REASONS WHY IT IS ERRONEOUS. AN ORDER WILL NOT BECO ME ERRONEOUS BECAUSE ON REMIT, THE ASSESSING OFFICER MAY DECIDE THAT THE ORDER IS ERRONEOUS. THEREFORE CIT MUST AFTER RECORDING RE ASONS HOLD THAT THE ORDER IS ERRONEOUS. THE JURISDICTIONAL PRE CONDITION STIPULATED IS THAT THE CIT MUST COME TO THE CONCLUS ION THAT THE ORDER IS ERRONEOUS AND IS UNSUSTAINABLE IN LAW. WE MAY NOTICE THAT THE MATERIAL WHICH THE CIT CAN RELY INCLUDES N OT ONLY THE ITA NO.47/RJT/2011 AND 701/RJT/2014 14 RECORD AS IT STANDS AT THE TIME WHEN THE ORDER IN Q UESTION WAS PASSED BY THE ASSESSING OFFICER BUT ALSO THE RECORD AS IT STANDS AT THE TIME OF EXAMINATION BY THE CIT [SEE CIT VS. SHR EE MANJUNATHESWARE PACKING PRODUCTS, 231 ITR 53 (SC)]. NOTHING BARS/PROHIBITS THE CIT FROM COLLECTING AND RELYING UPON NEW/ADDITIONAL MATERIAL/EVIDENCE TO SHOW AND STATE THAT THE ORDER OF THE ASSESSING OFFICER IS ERRONEOUS. 12. A PERUSAL OF THE ABOVE WOULD INDICATE THAT UNLE SS THE LD.CIT HOLD AND RECORDS REASON AS TO HOW ASSESSMENT ORDER IS ERRONE OUS, HE CANNOT SET ASIDE THE ASSESSMENT ORDER BY MERELY MAKING A MENTION THA T THE AO HAS NOT CONDUCTED PROPER INQUIRY. EVEN IF HE HAS NOT CONDU CTED, THEN HONBLE HIGH COURT HAS PROPOUNDED THAT THE LD.COMMISSIONER SHOUL D CONDUCT A FACTUAL INQUIRY AND RECORD SPECIFIC FINDING AS TO HOW APPRO ACH OF THE AO WAS WRONG, AND ONLY THEREAFTER HE CAN SET ASIDE THE ASSESSMENT ORDER. APART FROM THE ABOVE, WE HAVE MADE REFERENCE TO THE DECISION OF TH E HONBLE DELHI HIGH COURT IN THE CASE OF CIT VS. SUN BEAM AUTO WHEREIN THE HONBLE HIGH COURT HAS OBSERVED THAT INADEQUACY OF INQUIRY CANNOT BE A SUFFICIENT GROUND FOR TAKING ACTION UNDER SECTION 263. IF THERE IS A LA CK OF INQUIRY, THEN PROBABLY LD.COMMISSIONER WOULD BE JUSTIFIED. A READING OF T HE IMPUGNED ORDER WOULD SUGGEST THAT THE LD.COMMISSIONER HAS A PARTICULAR I DEA IN HIS MIND AS TO HOW THE ASSESSEE SHOULD CONDUCT HIS BUSINESS, AND IF BY DOING BUSINESS IN ANY OTHER MANNER, THE ASSESSEE HAS BEEN AVOIDING PAYMEN T OF TAX, THEN THAT MANNER SHOULD BE DEPRECIATED WHICH IS NOT IN CONSON ANCE WITH THE SPIRIT OF LAW. REVENUE CANNOT FORCE THE ASSESSEE AS TO HOW B USINESS HAS TO BE DONE. THIS IMPRESSION WILL BE CLEAR FROM THE FOLLOWING FA CTS. THE ASSESSEE HAS HIGHLIGHTED BEFORE THE LD.COMMSSIONER THAT M/S.MEER A IMPEX HAD SOLD SCRAP OF RS.3.36 CRORES TO M/S.METAL ALLOYS CORPORATION. THERE WAS A BUSINESS RELATIONSHIP. MOST OF THE CREDIT BALANCE IN THE AC COUNTS IS ON ACCOUNT OF SALES MADE BY M/S.MEERA IMPEX. IF ANY INVESTMENT HAS BEE N MADE THAT WAS MADE OUT OF PERSONAL BOOKS AND DULY REFLECTED. IT WAS NOT FROM INTEREST BEARING ITA NO.47/RJT/2011 AND 701/RJT/2014 15 FUNDS. THIS ARGUMENT HAS BEEN JETTISONED BY THE LD .COMMISSIONER BY MAKING A REFERENCE OF TOTAL BUSINESS VIS--VIS SUNDRY DEBT ORS. BOTH THE ISSUES ARE ALTOGETHER NON-COMPARABLES, SPECIFICALLY BY MAKING REFERENCE IN TERMS OF PERCENTAGE. HOW IT CAN BE ALLEGED THAT TOTAL UNSEC URED LOANS TAKEN BY THE ASSESSEE IN MEERA IMPEX SHOULD BE USED IN THE ITEMS SOLD TO PARTNERSHIP CONCERN ONLY THEN BUSINESS NEEDS WILL BE ACCEPTED. THE LOAN WAS TAKEN FOR THE BUSINESS PURPOSE OF MEERA IMPEX. IT CANNOT BE ASSUMED THAT IT WAS USED ONLY IN SALES MADE TO METAL ALLOYS. IT MIGHT HAVE BEEN USED FOR OTHER BUSINESS NEEDS OF MEERA IMPEX. THE LD.COMMISSIONER FAILED TO TAKE NOTE OF THE FACT THAT THE ASSESSEE WAS HOLDING A CAPITAL OF RS.415.90 LAKHS AND NON- INTEREST BEARING FUNDS OF RS.60.37 LAKHS. THESE T WO AMOUNTS ITSELF CAN TAKE CARE OF, IF ANY OUTSTANDING BALANCE WAS AVAILABLE T OWARDS M/S.METAL ALLOYS CORPORATION. THESE FACTS HAVE BEEN HIGHLIGHTED IN THE WRITTEN SUBMISSION FILED BEFORE THE LD.COMMISSIONER. THE LD.COMMISSIO NER FAILED TO TAKE COGNIZANCE OF THESE FACTS IN RIGHT PERSPECTIVE. T HOUGH THE FINDING RECORDED BY THE LD.CIT(A) IN THE APPEAL OF THE ASSESSEE FILE D AGAINST THE ASSESSMENT ORDER PASSED UNDER SECTION 143(3) R.W.S. SECTION 26 3 IS NOT VERY RELEVANT MATERIAL FOR JUDGING THE ACTION UNDER SECTION 263, BECAUSE THIS FINDING WAS NOT AVAILABLE WHEN ACTION UNDER SECTION 263 WAS TAKEN. BUT IN ORDER TO BUTTRESS OURSELVES AS TO HOW THE ASSESSEE HAS NOT BORNE UNDU E INTEREST EXPENDITURE OF M/S.METAL ALLOYS CORPORATION, WE ARE OF THE VIEW TH AT LD.CIT(A) HAS MADE AN ANALYSIS OF THE FIGURE IN RIGHT PERSPECTIVE IN DEMO NSTRATING AS TO HOW NO INTEREST EXPENDITURE WAS REQUIRED TO BE DISALLOWED ON THE GROUND THAT INTEREST BEARING FUNDS WERE NOT USED FOR NON-BUSINESS PURPOS E. WE DEEM IT PERTINENT TO TAKE NOTE OF THIS FINDING. IT READS AS UNDER: 6. I HAVE DULY CONSIDERED THE SUBMISSION O F THE APPELLANT AND ALSO GONE THROUGH THE ASSESSMENT ORDER. 6.1 THE REASON FOR DISALLOWANCE IS THAT, APPELLANT DID NOT CHARGE ANY INTEREST ON THE AMOUNT OWED BY M/S METAL ALLOY CORP ORATION TO THE ITA NO.47/RJT/2011 AND 701/RJT/2014 16 TUNE OF RS. 7,45,05,836/- (2,96,88,720 + 4,48,17,11 6) HOLDING THAT THE APPELLANT DID NOT USE THIS AMOUNT IN HIS BUSINESS A ND DIVERTED TO THE SAID FIRM. AS PER PARA 2 OF THE ASSESSMENT ORDER, A O OBSERVED THAT ADVANCES OF RS. 7,45,05,836/- TO THE FIRM M/S METAL ALLOY CORPORATION (WHERE HE IS A PARTNER), THE APPELLANT EARNED REMUN ERATION OF RS. 60,000/- ONLY. THE AO HOWEVER FAILED TO APPRECIATE THE FACT THAT, THE ENTIRE AMOUNT OF RS7,45,05,836/- IS NOT ADVANCES, A S ALLEGED IN THE ASSESSMENT ORDER. FROM THE COPIES OF ACCOUNT IT IS SEEN THAT, THE PROPRIETARY CONCERN (M/S.MEERA IMPEX), IS ENGAGED I N THE BUSINESS OF TRADING OF NON-FERROUS METALS, COMPUTER PERIPHERALS & MANUFACTURING OF BRASS PARTS AND IT HAD 'SOLD SCRAP OF RS. 3,36,9 4,932/- TO THE PARTNERSHIP FIRM M/S. METAL ALLOYS CORPORATION. OUT OF THE TOTAL CLOSING BALANCE OF RS.4,48,17,116/-, THERE IS OPENI NG BALANCE OF RS. 2,06,42,185/-, THEREFORE THE INCREASE IN AMOUNT REF ERS TO SALES MADE AS REDUCED BY REALIZATION OF SALES. THUS THE TRANSACTI ONS BETWEEN M/S.MEERA IMPEX AND M/S. METAL ALLOY CORPORATION AR E BUSINESS TRANSACTIONS AND THE PROFIT ELEMENT IS COVERED IN T HE SALES. THE ACCOUNT FURTHER REVEALS THAT AS AGAINST THE TOTAL DEBIT OF RS. 6.78 CR. THE APPELLANT RECEIVED RS. 2.31 CR. LEAVING CLOSING BAL ANCE OF RS. 4.48 CR. WHICH INCLUDES THE DEBIT SALES TO THE TUNE OF RS. 3 .37 CR. THUS THE NET DEBIT BALANCE IN THE FORM OF ALLEGED ADVANCES REMAI NS AT RS. 1.11 CR. (4.48 CR.- 3.37 CR.). ON THE OTHER HAND, INVESTMENT OF RS. 2,96,88,720/- IN M/S. METAL ALLOY CORPORATION WAS MADE FROM PERSO NAL BOOKS OF ACCOUNT FOR WHICH THE APPELLANT HAD SUFFICIENT INTE REST FREE FUNDS AT HIS DISPOSAL. IT IS SEEN FROM THE APPELLANT'S PERSONAL BALANCE NNEET THAT, HE WAS HAVING TOTAL INTEREST FREE FUNDS OF RS. 4,76,28 ,017/-, AS AGAINST THIS, INVESTMENT IN M/S. METAL ALLOY CORPORATION WAS ONLY RS. 2,96,88,720/-. 6.2 BEFORE ME IT WAS CONTENDED THAT THE CAPITAL ACC OUNT OF THE APPELLANT FROM THE BOOKS OF THE FIRM M/S METAL ALLOY CORPORAT ION AS ON 31.03.2007 STOOD AT RS. 2,96,88,720/- AFTER CREDITI NG REMUNERATION OF RS. 60,000/- AND SHARE OF PROFIT OF RS. 83,50,983/- . ON THE OTHER HAND, THE PROPRIETARY CONCERN M/S MEERA IMPEX WAS HAVING UNSECURED LOANS OF RS. 5.52 CR. OUT OF WHICH LOANS TO THE EXTENT OF RS. 2.98 CR. ARE NON INTEREST BEARING. DETAIL OF INTEREST FREE LOANS FOR MS PART OF THE WRITTEN SUBMISSION. SO FAR AS AO'S ALLEGATION THAT OUT OF T OTAL SALES OF RS. 21.53 CRORES BY M/S MEERA IMPEX THE SALES TO M/S METAL AL LOY CORPORATION IS ONLY RS. 3.37 CRORES WHICH IN TERMS PERCENTAGE COME S TO 15.65 % WHEREAS OUT OF SUNDRY CREDITORS OF RS. 6.00 CRORES, THE SHARE OF METAL ALLOY CORPORATION IS RS.4.48 CRORES WHICH IN TERMS OF PERCENTAGE COMES TO 74.65 %, HAS NO BEARING TO THE FACTS AND C IRCUMSTANCES OF THE CASE. THE PARTNERSHIP FIRM MAY OR MAY NOT DELAY THE PAYMENT TO THE PROPRIETARY CONCERN OF THE APPELLANT, BUT IT IN NO WAY NEGATES THE FACT ITA NO.47/RJT/2011 AND 701/RJT/2014 17 THAT THE APPELLANT HAD SUFFICIENT OWN FUNDS. THIS I S PART OF THE BUSINESS EXPEDIENCY AND SUCH ANALYSIS CANNOT JUSTIFY THE FAC T THAT' THE APPELLANT HAD DIVERTED HIS INTEREST BEARING FUNDS FOR NON-INT EREST BEARING ACTIVITIES. 6.3 TO SUM UP, SINCE THE APPELLANT HAD SUFFICIENT I NTEREST FREE OWN FUNDS, AS THE TRANSACTION WITH THE PARTNERSHIP FIRM WAS BUSINESS IN NATURE WHEREIN THE APPELLANT HAD SOLD GOODS TO THE FIRM AND AS THE APPELLANT HAD INTEREST FREE LOANS IN HIS PERSONAL C APACITY IN THE PROPRIETARY CONCERN, THERE IS NO DIVERSION OF FUND TO REDUCE THE PROFITS, AS ALLEGED BY THE AO IN THE ASSESSMENT ORDER. THERE FORE, THE DISALLOWANCE MADE IS DELETED. 13. TAKING INTO CONSIDERATION ALL THE FACTS AND CIR CUMSTANCES, WE ARE OF THE VIEW THAT THE LD.COMMISSIONER WAS NOT JUSTIFIED IN TAKING ACTION UNDER SECTION 263 OF THE INCOME TAX ACT, 1961, THEREFORE, WE ALLO W THE APPEAL OF THE ASSESSEE AND QUASH THE ORDER PASSED UNDER SECTION 2 63 OF THE ACT. 14. NOW WE TAKE THE APPEAL OF THE REVENUE. 15. GRIEVANCE OF THE REVENUE IS THAT THE LD.CIT(A) HAS ERRED IN DELETING THE DISALLOWANCE OF RS.43,67,561/-. AS OBSERVED EARLIE R, THELD.AO HAS DISALLOWED INTEREST EXPENDITURE ON THE GROUND THAT THE ASSESSE E HAS USED BORROWED FUNDS FOR NON-BUSINESS PURPOSE I.E. BY DIVERTING FUNDS TO M/S.METAL ALLOYS CORPORATION. THOUGH JURISDICTION OF THE AO HAS BEE N INFUSED BY VIRTUE OF THE ORDER PASSED UNDER SECTION 263 OF THE ACT, WE HAVE ALREADY QUASHED THAT ORDER AND THE SUBSEQUENT PROCEEDINGS BECAME REDUNDANT BY VIRTUE OF OUR FINDING RECORDED ON THE APPEAL OF THE ASSESSEE. EVEN OTHER WISE, FOR ACADEMIC PURPOSE, IT IS TO BE CONSIDERED THAT OUR ORDER MAY BE REVERSED BEFORE HIGHER AUTHORITIES, THEN RELEVANCY OF REVENUES APPEAL WOU LD BE THERE. CONSIDERING THE DISPUTE WITH THAT ANGLE, WE UPHELD THE ORDER OF THE LD.CIT(A) EXTRACTED (SUPRA), AND WE DO NOT FIND ANY MERIT IN THE APPEAL OF THE REVENUE, BECAUSE THE ASSESSEE HAS DEMONSTRATED THE AVAILABILITY OF INTER EST FREE FUNDS WITH HIM. ITA NO.47/RJT/2011 AND 701/RJT/2014 18 THEREFORE, WE DO NOT FIND ANY MERIT IN THE APPEAL O F THE REVENUE. IT IS DISMISSED. 16. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS AL LOWED. ORDER OF THE LD.CIT DATED 10.1.2011 PASSED UNDER SECTION 263 OF THE INC OME TAX ACT, 1961 IS QUASHED. THE APPEAL OF THE REVENUE IS DISMISSED. ORDER PRONOUNCED IN THE COURT ON 20 TH JANUARY, 2017 AT AHMEDABAD. SD/- SD/- (AMARJIT SINGH) ACCOUNTANT MEMBER (RAJPAL YADAV) JUDICIAL MEMBER