Manish Borad, Accountant Member.-This appeal of assessee for Asst. Year 2010-11 is directed against the order of ld. CIT, Valsad , dated 30.03.2015 passed u/s 263 of the IT Act, 1961 (in short the Act) vide No.CIT/VLS/263/GJP /2014-15. Assessee has raised following grounds of appeal :-
1. The Ld. Commissioner of Income Tax erred on treating Rs. 1,25,00,000/- as deemed dividend u/s.2(22)(e).
2. The Ld. Commissioner of Income Tax failed to appreciate that the fact that the original assessment of the is completed u/s.143(3) of Income Tax Act,1961 after verification of facts and also after completing specific examination and verification of the facts and accounts of the Assessee in relation to the Current Account of the Assessee for selling the goods and Shareholding of the customer.
3. The Ld. Commissioner of Income Tax failed to appreciate that on the facts and in law, the Notice u/s. 263 is invalid in law as the Order u/s. 143(3) dated 28/0372013 not erroneous and not it is prejudicial to the interests of the revenue.
4. The Ld. Commissioner of Income Tax failed to appreciate that The Appellant, during the assessment proceedings, had asserted before the Ld. AO that the sum of Rs. 1,25,00,000/- received from Canon Laminators Private Limited is payment for sale-proceeds and/or trade balance. This fact was discussed with and examined and accepted by the Ld. AO. Thus this issue was well in the knowledge of the Ld. AO and thoroughly examined by him and accepted by him. Accordingly, the order passed therein by the Assessing Officer is not erroneous and not prejudicial to the interests of the revenue.
5. The Ld. Commissioner of Income Tax failed to appreciate that the Assessee is not the Shareholder of the Customer Company.
6. The Ld. Commissioner of Income Tax failed to appreciate that Running Account trade balance are also subject to interest.
7. The Ld. Commissioner of Income Tax failed to appreciate that the order of the Ld. AC is not erroneous as the issue of section 2 (22) (e) has been already examined by the Ld. AO in his assessment order in response to the assessed submission dated 12th o: March, 2012. No adverse findings of the Ld, AO in view of the above issue signify and indicate that the contention of the assessee in the issue of Section 2 [22) (e) of Income Tax Act, 1961 is accepted by the Ld. AO. The ground for revision of assessment order u/s. 263 has 2 legs, the first leg {order passed therein by the Assessing Officer is erroneous) being the prerequisite to invoking the second and subsequent leg (in so far as it is prejudicial to the interests of the revenue). As the first leg (and the prerequisite for invoking second leg) is not applicable to the present case, the proposed action of order of revision u/s. 263 of Income Tax Act, 1961 may kindly be dropped.
2. Briefly stated facts are that the assessee is a partnership firm engaged in the business of manufacturing HDPE/PP Woven sacks. Assessee disclosed income at Rs. 5,88,95,898/- in the e-return filed on 21.09.2010. Casewas selected for scrutiny assessment and necessary proceedings were carried out. Assessment u/s 143(3) of the Act was framed on 28.3.2013 after disallowing certain expenses of Rs. 2,12,155/- and income was assessed at Rs. 5,91,11,053/-. Subsequently ld. CIT invoked his power under section 263 of the Act and perused the assessment records and observed that during F.Y.2009-10 assessee received and repaid Rs. 1,25,00,000/- to M/s Canon Lamination Private Ltd. Ld. CIT on further examination revealed that partners of the assessee firm are directors & shareholders in M/s Canon Lamination Private Ltd. and was of the view that provisions of section 2(22)(e) of the Act will apply on the amount received by assessee firm from M/s Canon Lamination Private Ltd. and is to be treated as deemed dividend in the hands of assessee. Accordingly notice u/s 263 of the Act was issued to assessee firm on 26.2.2015. Necessary details were submitted by assessee showing that assessee firm is not a beneficial & registered share holder of M/s Canon Lamination Private Ltd. and is having regular current account transaction in relation to goods sold by assessee firm to M/s Canon Lamination Private Ltd. and the transactions of Rs. 1.25 crores was part of the regular current account. However, ld. CIT was not convinced and observed that Assessing Officer has not examined this issue properly and the order u/s 143(3) of the Act was erroneous and prejudicial to the interest of Revenue. Accordingly ld. CIT set aside the assessment order u/s 143(3) of the Act dated 28.3.2013 by observing as follows :-
5. The submissions made by the assessee have been carefully examined. Considering the facts of the casethe explanation furnished by the assessee cannot be accepted in view of the following reasons.
i. From the details of the transactions available on record, it is clearly evident that the amount of Rs. 1,25,00,000/- paid to the assessee firm by M/s. Canon Laminators Pvt. ltd., is in the nature of unsecured loan which was repaid during the year along with interest. It is also observed from the copy of the 'statement of interest paid' that interest @ 12% amounting to Rs. 8,92,767/-has been charged on this loan amount. Therefore, from these details it is clearly evident that the amount received by the assessee from M/s. Canon Pvt. ltd., is in the nature of a loan and there cannot be any disputed in this regard.
ii. It is also seen that the partners of the firm namely Mr. Premji V. Bhanusali & Mr. Kanji V. Bhanusali, who hold 40% share in the partnership firm, are having share holding of 23.33% & 27.50% respectively in the share holding of company. This implies that these two partners are beneficial owners of share exceeding 10% of the company. Therefore, the provision of section 2(22)(e) of the I.T. Act is clearly applicable in the case.
iii. he claim of the assessee that the amount of Rs. 1,25,00,000/- received by the assessee from M/s. Canon Laminators Pvt.ltd, is in the nature of trade advance is also found to be factually incorrect, which is clearly evident from the records. In this regard, reference may be made clause-24(a) of form 3CD and annexure-VIII, furnished along with the audit report. The information relates to particulars of loan taken or accepted and repaid during the year. In the annexure-VIII, it is clearly stated that an amount of 'loan' accepted during the year is Rs. 1,25,00,000/-. Similarly, in the statement of interest paid for the F.Y. 2009-10, the amount of Rs. 1,25,00,000/- is clearly stated as the 'principal amount of loan' taken from M7s. Canon Laminators Pvt. ltd. In the same statement the rate of interest is stated as 12% and gross interest is found to be Rs. 8,92,767/-. The above two evidences clearly establish that the amount of Rs. 1,25,00,000/- received by the assessee from M7s. Canon Laminators Pvt. Ltd, is in the nature of loan.
iii. Further, it is also noticed that this amount of loan has been paid back to M/s. Canon Laminators Pvt. ltd by the assessee during the same financial year. If the contention of the assessee that the amount received is in the nature of trade advance was correct, then why was the amount received returned back to the company during the same financial year. Had this amount actually been in the nature of trade advance, the same should have been adjusted against regular trade transactions. In this connection, it is also relevant to not .that interest has not been charged on any other amount which has been received by the assessee from M/s. Canon Laminators Pvt. ltd, during the normal course of trading transactions.
6. Therefore, the amount of Rs. 1,25,00,000/- is clearly a loan taken from the company and the explanation of the assessee that this is in the nature of trade advance is merely an afterthought and cannot be accepted in view of the specific evidences as discussed above. However, it is found from the assessment records that this issue has not been considered by the Assessing Officer while completing the assessment u/s. 143(3) of the I.T. Act vide order dated 28.01.2013. Although, the assessee claims to have furnished details regarding the loan transactions, the Assessing Officer has not made any enquiries to ascertain the nature of the transactions. He has completely overlooked the entry found in clause-24(a) and annexure-VIII in form 3CD, furnished along with the audit report, where this amount has been specifically stated as loan.
7. Therefore, considering the above, it is clear that the Assessing Officer has not examined the above issue, which was very relevant for taxing the amount of Rs. 1,25,00,000/- as deemed dividend in the case of the assessee. Considering the facts of the case as discussed above it is apparent that this issue clearly warranted specific enquiry during the assessment proceedings. Failure to make enquiries, where such enquiry is prima-facie warranted, would constitute prejudice to the revenue, whether any under statement of income is otherwise inferable or not. Therefore, considering the specific issues as discussed above, the order passed u/s. 143(3) of the I.T. Act dated 28.03.2013 is found to be erroneous, in so far as it is prejudicial to the interest of revenue. Therefore, the assessment is set aside with the direction to the Assessing Officer to reframe the assessment afresh, after proper consideration of the issues relating to the taxation of the amount of Rs. 1,25,00,000/- as deemed dividend in the hands of the assessee, as discussed above.
3. Aggrieved, assessee is now in appeal before the Tribunal raising various grounds but the grievance of the assessee revolves round following issues :-
(i) Challenging the order u/s 263 of the Act being invalid in view of the fact that sufficient enquiry was conducted by the Assessing Officer with regard to the transaction of Rs. 1.25 crores between the assessee and M/s Canon Lamination Private Ltd.
(ii) Assessee has also challenged the order of Ld. CIT on merits. The provisions of section 2(22)(e) of the Act do not apply on the assessee with regard to amount of Rs. 1.25 crores received from M/s Canon Lamination Private Ltd. as regular business transactions have taken place round the year.
4. Ld. AR submitted that assessee firm is running business in the field of manufacturing HDPE/PP Woven sacks since 3rd April, 1999. During F.Y. 2009-10 assessee’s gross turnover stood at Rs. 51.80 crores approximately. Books of accounts are audited and no major adversity has been observed by the Assessing Officer during assessment proceedings. In the list of buyers of assessee’s products M/s Canon Lamination Private Ltd. is one of them. Assessee regularly makes sales to M/s Canon Lamination Private Ltd. and during F.Y 2009-10 assessee made sales of Rs. 14,42,50,640/- and regular transactions took place round the year. Assessee firm has four partners namely – (1) M/s Premji v. Bhanushali (40%), (2) M/s Premji v Bhanushali HUF (10%), (3) M/s Kanji v Bhanushali (40%) and (4) M/s Kanji v Bhanushali HUF (10). Some of the partners of assessee firm are also share-holders and directors in M/s Canon Lamination Private Ltd. However, assessee firm is not in the list of share holders of M/s Canon Lamination Private Ltd. There were regular transactions of receiving funds from M/s Canon Lamination Private Ltd. against sale and against this Rs. 1.25 crores was received as trade advance during the year and the same was repaid back in the year itself which has been reflected in the Tax Audit Report.
5. Ld. AR in support of his challenge to the order of ld. CIT u/s 263 of the Act submitted that ld. CIT can invoke the power u/s 263 of the Act only if the order u/s 143(3) is passed without making enquiries or verification which is not so in the case of assessee. Ld. AF referred to the show cause notice u/s 142(1) of the Act dated 13.1.2012 raising relevant query, reply by assessee dated 14.2.2012, 12.3.2012, 25.10.12 which inter alia included details relating to sales made, impugned amount received and paid to M/s Canon Lamination Private Ltd. and also supplying necessary information to prove that the amount of Rs. 1.25 crores cannot be treated as deemed dividend u/s 2(22)(e) of the Act. Ld. AR further submitted that before the issuance of notice u/s 263 of the Act on 26.2.15 there was a specific note of the audit party enquiring about the transactions of Rs. 1.25 crores between the assessee and M/s Canon Lamination Private Ltd. and also to enquire whether the impugned amount can be treated as deemed dividend under the provisions of section 2(22)(e) of the Act. A detailed note was furnished on 22.12.2014 by the assessee to ACIT, Vapi to establish that the impugned transaction of Rs. 1.25 crores is de jure and de facto advance for purchase of goods and there is no element of loan given by figment of imagination.
6. As regards the merit of the case, ld. AR made two fold submissions which read as follows :-
(i) That assessee is not a sharehold of M/s Canon Lamination Private Ltd. and the provisions of section 2(22)(e) of the Act are applicable only in the case of registered shareholders being a person who is a beneficial owner of the share.
(ii) M/s Canon Lamination Private Ltd. is a client of the assessee and regular sales transactions have been entered into between the assessee & M/s Canon Lamination Private Ltd. and the flow of funds is either for repaying sales made or advance for making supplies.
7. Ld. AR in support of the contentions made challenging the order u/s 263 of the Act and submissions on merit to establish that provisions of section 2(22)(e) of the Act are not applicable to the assessee with regard to the trade advance of Rs. 1.25 crores from M/s Canon Lamination Private Ltd. referred and relying on the following judicial pronouncements :-
1. Malabar Industrial Co. v. C.I.T. (2000)243ITR 83(SC)
2. C.I.T. v. Max India Ltd.(2007) 295 ITR 282 (SC)
3. C.I.T. v. C. P. Sarathy Mudaliar (1972) 83 ITR 170 (SC)
4. Ramcshwarlal Sanwarmal v. C.I.T. (1980) 122 ITR 1(SC)
5. A.C.I.T. v. Bhaumik Colour P. Ltd.(2009) 313 ITR (AT) 146 (Mum) (SB)
6. C.I.T. v Universal Medicare Pvt. Ltd. (2010) 324 ITR 263 (Bom)
7. C.I.T. v Rajkumar Singh & Co. (2007) 295 ITR 9 (All)
8. N. H, Securities Ltd. v. Dy. C.I.T. (2007)llS.O.T.302(Mum)
9. C.I.T. v Arvindkumar Jain ITA7589of2011
10. C.I.T. v Ambassador Hotels P. Ltd. (2009) 318 ITR 376 (Del)
11. Scamist Properties P. Ltd. v. I.T.O. (2005) 95 TTJ 201 (Mum)
12. Baidvanath Plastic Ind. (P) Ltd. & Others v. K. L. Anand, Incometax Officer (1998) 230 ITR 522 (Del)
13. C.I.T. v Development Credit Bank Ltd.(2010) 323 ITR 206 (Bom)
14. Pradip Kumar Malhotra v. C.I.T.(2011) 338 ITR 538 (Cal)
15. M/s. Simandhar Association v. Principal C.I.T. lTA/789/Mum/2016
16. Maya Gupta v. C.I.T., Delhi ITA/5701/Del/2014
17. IL & FS Investment Managers Ltd. v. I.T.O. & Others (2008) 298 ITR 32 (Bom)
8. On the other hand, ld. DR vehemently argued supporting the order of ld. CIT and submitted that the power of appeal and revision is contained in Chapter XX of the Act which includes Section 263 that confer suo motu power of revision in the Pr./ C.l.T. The provisions of section 263 of the IT Act, lays down the following conditions for the assumption of jurisdiction by Pr./Commissioner of Income Tax:
(i)The first place, the Commissioner may call for and examine the records of any proceeding under the Act. For this purpose, he does not need to show any reason. It is a part of his administrative control to call for records and examine them.
(ii)The second condition is that he may consider that any order passed under the Act by the AO is erroneous in so far as it is prejudicial to the interests of the revenue. This consideration, having regard to the language of section 263, apparently is a consideration which he exercises by calling for and examining the records as indicated above. During this particular stage of consideration, there is no question of the assessee appearing or making any submission. If after calling for and examining the records the Pr./Commissioner "considers" that the order of the AO is erroneous, in so far as it is prejudicial to the interests of the revenue.
(iii) The third condition of section 263 comes into operation, after these two stages, which are purely administrative. The proceeding in the next stage, which is the third stage, acquires quasi-judicial character. The third stage requires him to do what is stated in the statute: "he may, after giving the assessee an opportunity of being heard and after making or causing to be made such inquiry as he deems necessary, pass such order thereon as the circumstances of the case justify, including an order enhancing or modifying the assessment, or cancelling the assessment and directing a fresh assessment". This requires that the Pr/Commissioner must give the assessee an opportunity of being heard. It also confers on the Commissioner the power to cause or make such inquiry as he deems necessary.
(iii) The fourth condition under section 263 is the power of the Pr./Commissioner under that section. The Pr./Commissioner can enhance or modify the assessment. He has also the power to cancel the assessment and direct fresh assessment.
9. Ld. CIT, DR further submitted that explanation -2 to section 263 of the Act was inserted w.e.f. 1.6.2015 by Finance Bill 2015 wherein it has been declared that an order passed by Assessing Officer shall be deemed to be erroneous in so far as it is prejudicial to the interest of Revenue if in the opinion of Principal Commissioner/Commissioner the order passed is without making enquiries or verification or is without inquiring into the claim or the order has not been made in accordance with any order, direction or instruction issued by the Board under section 119 of the Act or the order has not been passed in accordance with any decision which is prejudicial to the assessee, rendered by the jurisdictional High Court or Supreme Court in the case of the assessee or any other person.
10. Ld. DR referred to the judgment of Hon. Delhi High Court in the case of National Travel Services (2011) 14 taxmann.com 14 and decision of Co-ordinate Bench Mumbai in the case of Crompton Greaves Ltd. in ITA No.1994/Mum/2013 vide its order dated 1.2.2016.
11. Ld. DR further submitted that the scope of interference under section 263 is not to set aside merely unfavourable orders and bring to tax some more money to the treasury nor is the section meant to get at sheer escapement of revenue which is taken care of by other provisions in the Act. The prejudice that is contemplated under section 263 is prejudice to the income-tax administration as a whole. Section 263 is to be invoked not as a jurisdictional corrective or as a review of a subordinate's order in exercise of the supervisory power but it is to be invoked and employed only for the purpose of setting right distortions and prejudices to the Revenue which is a unique conception which has to be understood in the context of and in the interest of revenue administration. Such a power cannot in any manner be equated to or regarded as approaching in any way in appellate jurisdiction or even the ordinary revisional jurisdiction conferred on the Commissioner under section 264 [Venkatakrishna Rice Co. v. CIT, (1987) 163 ITR 129 (Mad)]. This decision has been relied on in S.S. Muddanna v. State of Karnataka [(1993) 89 STC 90, 95-96 (Karn)].
12. The specific provisions of Section 263 of the Act lays down that a satisfaction that an order passed by the Authority under the Act is erroneous and prejudicial to the interest of the Revenue is the basic pre-condition for exercise of jurisdiction under Section 263 of the Act. Both are twin conditions that have to be conjointly present. Once such satisfaction is reached, jurisdiction to exercise the power would be available subject to observance of the principles of natural justice which is implicit in the requirement cast by the section to give the assessee an opportunity of being heard. The above conditions have been fulfilled in the instant case. In view of the above submissions, it is requested that the matter may be decided on merits keeping in view the various judicial pronouncements which have been enumerated in the written submissions filed by the Department and it is requested that the order of Pr./CIT may kindly be upheld.
13. Ld. DR further submitted on merit that in the Tax Audit Report at Annexure-8 it has been specifically mentioned that assessee has taken loan of Rs. 1.25 crores from M/s Canon Lamination Pvt. Ltd. and also repaid during the year. Further ld. DR in rebuttal to the submissions of ld. AR submitted that provisions of section 2(22)(e) of the Act are not applicable as it is not a share holder of Canon Laminiation Pvt. ltd. referred to the judgment of Hon. Delhi High Court in the case of CIT vs. National Travel Services (2011) 14 taxmann.com 14 (Delhi) wherein it has been held that for the for purpose of section 2 (22)(e), a partnership firm having purchased shares through its partners in company which has paid loans is to be treated as a shareholder and it is not necessary that it has to be 'registered shareholder' of company.
14. We have heard the rival contentions and perused the record before us and gone through the legal propositions referred and relied on by both the parties. Through this appeal assessee has raised various grounds but there are two fold grievance of assessee –firstly challenging the validity of the order u/s 263 of the Act and secondly assailing the CIT”s order u/s 263 wherein provisions of section 2(22)(e) of the Act have been invoked and Rs. 1.25 crores received by assessee from M/s Canon Lamination Pvt. Ltd. has been treated as deemed dividend.
15. We will first deal with the issue of validity of the order u/s 263 of the Act on as raised by the assessee. We observe that assessee firm is in the business of manufacturing HDPE/PP Woven sacks since F.Y.1999-2000. During F.Y.2009-10 gross turnover shown by assessee is at Rs. 51.80 crores. In the list of buyers of assessee’s goods name of M/s Canon Lamination Pvt. Ltd. also appears. From going through the ledger account at pages 84 to 87 of the paper book we observe that regular sales transactions (almost every week) have been entered into with Canon Lamination Pvt. Ltd. and gross sales made during the year comes to Rs. 14.42 crores approx. There are regular payments against sales. During F.Y.2009-10 apart from various payments received against sales there also was a trade advance totaling to Rs. 1.25 crores which was repaid by the assessee in December, 2009. At the close of the year balance in current accounts of Canon Lamination Pvt. Ltd. is NIL in the books of account of assessee.
16. Assessee’s case was selected for scrutiny assessment and all necessary details were called for and supplied as and when required and with a minor disallowance of expenses assessment u/s 143(3) of the Act was completed on 28.3.2013. Thereafter ld. CIT invoked the power u/s 263 of the Act and issued show cause notice to the assessee mentioning as to why the amount of Rs. 1.25 cr. received from M/s Canon Lamination Pvt. Ltd. be not treated as deemed dividend u/s 2(22)(e) of the Act as the assessee firm’s partners are also share holders of Canon Lamination Pvt. Ltd. Necessary replies were filed by assessee. However, ld. CIT was firm on his view and set aside the order u/s 143(3) of the Act and gave direction to the Assessing Officer to reframe the assessment afresh after proper consideration of the issue relating to tax of Rs. 1.25 crores as deemed dividend in the hands of assessee.
17. Further in order to examine as to whether ld. CIT has rightly assumed the power under section 263 of the Act, we find that Hon. Supreme Court in the case of Malabar Industrial Co. Ltd. vs. CIT 243 ITR 83 (SC) has laid down the following ratio :-
"A bare reading of section 263 of the Income-tax Act, 1961, makes it clear that the prerequisite for the exercise of jurisdiction by the Commissioner suo motu under it, is that the order of the Income-tax Officer is erroneous in so far as it is prejudicial to the interests of the Revenue. The Commissioner has to be satisfied of twin conditions, namely, (i) the order of the Assessing Officer sought to be revised is erroneous ; and (ii) it is prejudicial to the interests of the Revenue. If one of them is absent--if the order of the Income-tax Officer is erroneous but is not prejudicial to the Revenue or if it is not erroneous but is prejudicial to the Revenue-- recourse cannot be had to section 263(1) of the Act. The provision cannot be invoked to correct each and every type of mistake or error committed by the Assessing Officer, it is only when an order is erroneous that the section will be attracted. An incorrect assumption of facts or an incorrect application of law will satisfy the requirement of the order being erroneous"
18. In the light of above ratio let us examine whether the assessment has been made on incorrect assumption of facts or incorrect application of law. Firstly we observe that specific query was raised by ld. Assessing Officer vide his notice u/s 142(1) of the Act dated 13.1.2012 which was duly replied on 14.2.2012 followed by reply of 13th March, 2012. In the reply dated 12th March, 2012 assessee has specifically mentioned that it has not obtained any loan from Canon Lamination Pvt. Ltd. and the amounts lying in the ledger of the assessee are purely trade advance as assessee is regularly selling goods to this party. This reply dated 12th March, 2012 is placed at pages 58 to 61 of the paper book. It also emphasized the fact that like Canon Lamination Pvt. Ltd. there is another buyer of assessee’s goods namely Zuari Industries Ltd. which also has a regular current account for sale transaction and there also stands trade advance with this party on which interest is also paid.
19. We also observe that during the course of proceedings before us ld. AR placed copy of note sheet for the assessment records wherein on 16.10.2012 following queries were made :-
“Shri S. V. Bhanushali from a firm attended the hearing. Case discussed with reference to the details submitted by the assessee from time to time during the earlier hearings. Case also discussed with reference to the various schedules of the B/s and evidences thereof (s. creditors s. debtors) assessee was required to submit the ledger a/c of M/s Gold Coin Polypack Pvt. Ltd. and Canon Lamination in furtherance of his claim that (2(22)(e) was not applicable to its transaction with them. Case adjourned. Next date of hearing fixed for 25/10/2012 at 3.00 p.m.”
Thereafter on 25.10.12 assessee submitted the reply to this above query and this reply is placed at pages 63 to 97 of the paper book. We further observe that audit party examining the assessment records made a factual note with regard to the application of provisions of section 2(22)(e) of the Act and the amount of Rs. 1.25 crores from M/s Canon Lamination Pvt. Ltd. to which detailed submissions were made to ACIT, Valsad on 20th December, 2014 which was after the date of assessment. Going through the series of incidences which happened during the course of assessment proceedings and some post assessment proceedings makes it evident that a sufficient enquiry has been undertaken by the Assessing Officer and he has made full application of his mind on the issue relating to application of section 2(22)(e) of the Act on the assessee.
20. Similar type of facts came up before the Co-ordinate Bench, Mumbai in the case of M/s Simandhar Association vs. Principal CIT- 32 in ITA No.789/Mum/2016 for Asst. Year 2012-13, wherein order u/s 263 made by Ld. Pr. CIT was set aside as there was sufficient enquiries conducted by Assessing Officer along with application of mind on the issue. The Co-ordinate Bench held as follows :-
10. We have heard rival contentions and perused the record. Before going into the merits of the issue, we would like to discuss about the legal position with regard to the power of Learned CIT to invoke revision proceedings under section 263 of the Act. The scope of revision proceedings initiated under section 263 of the Act was considered by Hon'ble Bombay High Court, in the case of Grasim Industries Ltd. V CIT (321 ITR 92) by taking into account the law laid down by the Hon'ble Supreme Court. The relevant observations are extracted below:
“Section 263 of the Income-tax Act, 1961 empowers the Commissioner to call for and examine the record of any proceedings under the 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, to pass an order upon hearing the assessee and after an enquiry as is necessary, enhancing or modifying the assessment or cancelling the assessment and directing a fresh assessment. The key words that are used by section 263 are that the order must be considered by the Commissioner to be “erroneous in so far as it is prejudicial to the interests of the Revenue”. This provision has been interpreted by the Supreme Court in several judgments to which it is now necessary to turn. In Malabar Industrial Co. Ltd. v. CIT [2000] 243 ITR 83, the Supreme Court held that the provision “cannot be invoked to correct each and every type of mistake or error committed by the Assessing Officer” and “it is only when an order is erroneous that the section will be attracted”. The Supreme Court held that an incorrect assumption of fact or an incorrect application of law, will satisfy the requirement of the order being erroneous. An order passed in violation of the principles of natural justice or without application of mind, would be an order falling in that category. The expression “prejudicial to the interests of the Revenue”, the Supreme Court held, it is of wide import and is not confined to a loss of tax. What is prejudicial to the interest of the Revenue is explained in the judgment of the Supreme Court (headnote) :
“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 has resulted in loss of revenue, or where two views are possible and the Income-tax Officer has taken one view 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.”
The principle which has been laid down in Malabar Industrial Co. Ltd. [2000] 243 ITR 83 (SC) has been followed and explained in a subsequent judgment of the Supreme Court in CIT v. Max India Ltd. [2007] 295 ITR 282.”
The principles laid down by the courts are that the Learned CIT cannot invoke his powers of revision under section 263 if the Assessing Officer has conducted enquiries and applied his mind to the issues. If the assessment order has been passed by causing enquiries, then it would not give occasion to the Commissioner to pass orders under section 263 of the Act, merely because he has a different opinion in the matter. The consideration of the Commissioner as to whether an order is erroneous in so far it is prejudicial to the interests of Revenue must be based on materials on record of the proceedings called for by him. If there are no materials on record on the basis of which it can be said that the Commissioner acting in a reasonable manner could have come to such a conclusion, the very initiation of proceedings by him will be illegal and without jurisdiction. The Commissioner cannot initiate proceedings with a view to start fishing and roving enquiries in matters or orders which are already concluded.
11. The facts prevailing in the instant case and that were discussed in the earlier paragraphs would show that the assessee was constrained to incur expenses over the years, i.e., since 2006 onwards in order to clear the encumbrances and rival claims so that the plot of land on which the development took place is free from all kinds of encumbrances. There is no dispute with regard to the fact that the assessee is required to bear all the expenses in order to perfect the title of the land. There is also no dispute that the assessee has been incurring the expenses in this regard over many years. In fact, the assessing officer has sought to assess the income relating to the project in the hands of the assessee in AY 2009-10, by which time, the assessee has already incurred expenses to the tune of Rs. 2.13 crores. The said action of the assessing officer was set aside by Ld CIT(A), vide his order dated 27.2.2012 passed in Appeal No. CIT(A)35/ITO- 25(2)(3)/ITA.226/11-12. Thus, it is not a case that the assessing officer was not aware of the expenses claimed by the assessee. The facts narrated by the assessee shows that the assessee has purchased the land from the owners, who had earlier entered into an agreement with two other parties. Hence the possibility of creating hindrances by the concerned persons should have been available and the assessee was constrained to clear all of them, lest assessee’s project should suffer. However, the Ld Principal CIT has taken the assessee has incurred those expenses on humanitarian grounds or gratuitously and hence the same cannot be considered as business expenses. We are of the view that the learned CIT has merely taken a different view of the matter, where as it is seen that the view taken by the assessing officer in allowing the claim was one of the possible views, since the same has been incurred in furtherance of the business objectives. It is well settled proposition that the assessment order would not be rendered prejudicial to the interests of the revenue, if the assessing officer has taken a possible view of the matter.
12. Similarly, the view taken by the Ld CIT that the expenditure incurred by the assessee on the flats allotted to it as per the development agreement cannot be considered to be non-business expenditure is his own view. Normally a businessman may follow different strategies to earn maximum profit and in the instant case, the assessee appears to have made value addition to the flats allotted to it so that it could fetch high sale price. The said strategy followed by the assessee, on commercial consideration and business strategy, cannot be found fault with merely because the Ld Principal CIT has different view on this matter.
13. We notice that the assessing officer has carried out necessary enquiries with regard to various expenses claimed by the assessee. The notice issued by the AO u/s 142(1) of the Act makes it clear that the assessing officer has examined the claim of the assessee. The assessee has also responded to the AO by furnishing replies to all the queries. Hence, it is seen that the assessing officer has accepted the claim of the assessee after carrying out necessary examination and hence it cannot be said that the assessing officer has committed an error by allowing the claim of the assessee in terms of Explanation 2 to sec. 263 of the Act, which would render the assessment order erroneous.
14. Before us, the Ld A.R placed reliance on host of case laws. In particular, the Ld A.R placed reliance on the decision rendered by Hon’ble Supreme Court in the case of Malabar Industrial Co. Vs. CIT (243 ITR 83), CIT Vs. Max India Ltd (295 ITR 282). He also placed reliance on the decision rendered by the jurisdictional Bombay High Court in the case of CIT Vs. Gabriel India Ltd (203 ITR 108) and CIT Vs. Fine Jewellery (India) Ltd (ITA 296/Mum/2013).
15. All the case laws referred above makes it clear that the assessment order cannot be considered to be erroneous, if the assessing officer has allowed the claim of the assessee after carrying out necessary examination and further if the assessing officer has taken one of the possible views, it cannot be taken as prejudicial to the interests of the revenue. In the instant case, we are of the view that the AO has allowed the claim of the assessee after carrying out necessary examination and has also taken one of the possible views. Accordingly, we are of the view that the impugned assessment order cannot be considered to be erroneous and prejudicial to the interests of the revenue.
16. Further, we notice that the Ld Principal CIT has given direction to start fishing and roving enquiries in matters or orders which are already concluded, which is not permissible in the revision proceedings.
17. In view of the foregoing discussions, we are of the view that the revision order passed by the Ld Principal CIT cannot be sustained. Accordingly, we set aside his order.
18. In the result, the appeal filed by the assessee is allowed.
21. We further observe that Hon. Supreme Court in the case of Rameshwarlal Sanwarmal vs. CIT (supra) dealt with the issue of deemed dividend which was coming u/s 2(6A)(e) of the Indian Income-tax Act, 1922 which in the present is section 2(22)(e) of the Act wherein it has been held that “we are, therefore, of the view that it is only where the loan is advanced by the company to registered share holder and the other conditions set out in sec.2(6A)(e) are satisfied that the amount of loan would be liable to be regarded as deemed dividend within the meaning of section 2(6A)(e) of the Act 1922. The amount of loan would not fall within the mischief of this section if it is granted to beneficial owner of the shares who is not the registered shareholder. The decision of CIT vs. C.P. Sarathy Mudaliar (supra) does in our opinion lay down the correct interpretation of section 2(6A)(e).”.
22. We further observe that Co-ordinate Bench, Mumbai in the case of N.H. Securities Ltd. vs. DCIT in ITA No. 2322 & 4277/Mum/2004 dealt with similar type of case wherein assessee was having an open account and the issue was as to whether the provisions u/s 2(22)(e) of the Act will apply. The Co-ordinate Bench held as under :-
As per the Schedule to the Limitation Act, 1963 and as per arts. 1 and 19 thereto, the limitation period prescribed in the case of mutual, open and current account is three years from the close of the year in which the last item is admitted or proved as entered in the account. On the other hand, in the case of a loan, the limitation period is three years from the date on which the loan is made. This throws light on the characteristic feature of a running account and a loan account in a subtle manner. The Limitation Act, 1963 recognises the running character of a mutual, open and current account by taking the last acknowledged transaction as the starting point of imitation. But in the case of the loan, once for all and single transaction, that single transaction itself is the starting point of limitation. This statutory distraction reflected in the Limitation Act, 1963 is a pointer towards the basic difference between a running account and a loan account. (Para 34)
Wherever payments made by a Ltd. Co. to its shareholder is proved by its characteristic as other than loan/advance; in other words, the payment is for the purposes of repayment of loan or such other existing liability, the question of s. 2(22)(e) applying, does not arise. The nature and character of the payments made by a company is very important in examining whether a payment made by the company falls under s. 2(22) (e) or not. Where a company pays to its shareholder any amount against repayment of an existing loan or advance or against purchase or availing of service or paying on account on any other ground, such payments made in the ordinary course of carrying on of the business of that company cannot be brought under the purview of s. 2(22)(e). That is why s. 2(22)(e) provides that any payment by a company by way of advance or loan to a shareholder alone is to be considered for the purpose oj deemed dividend. Payments made by a company through a running account in discharge of its existing debts or against purchases or for availing services, such payments made in the ordinary course of business carried on by both the parties could not be treated as deemed dividend for the purpose of s. 2(22)(e). The deeming provisions of law contained in s. 2(22) (e) apply in such cases where the company pays to a related person an amount as advance or a loan as such and not in any other context. The law does not prohibit business transactions between related concerns, and, therefore, payments made in the ordinary course of in the facts business cannot be treated as loans and advances. Therefore, payments made by a company in the course of carrying on of its regular business through a mutual, open and current account to a related party do not come under the purview ofs. 2(22)(e). The payments in the present case were made by P in settlement of its accounts with the assessee company in the ordinary course of business where the assessee company is acting as the broker of P in carrying on the business of purchase and sale of shares. The payments were made by P, either in settlement of existing debts or on account. Therefore, in the facts and circumstances of the case the payments made by P to the assessee company through the mutual, open and current account involved in the present case were the payments made in the ordinary course of business and, therefore, do not come under the purview of s. 2(22)(e).-CIT vs. Nagindas M. Kapadia (1989) 75 CTR (Bom) 161 : (1989) 177ITR 393 (Bom) relied on.
23. Further Hon. Delhi High Court in the case of CIT vs. Anil Kumar Sharma (2011) 335 ITR 83 (Delhi) while dealing with the issue about distinction between lack of enquiry and inadequate enquiry has held as under :-
There is a distinction 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 under section 263 of the Income-tax Act, 1961, merely because he has a different opinion in the matter:
Held, dismissing the appeal that the present case would not be one of "lack of inquiry" even if the inquiry was termed inadequate. The Tribunal found that complete details were filed before the Assessing Officer and that he applied his mind to the relevant material and facts, although such application of mind was not discernible from the assessment order. The Tribunal held that the Commissioner in proceedings under section 263 also had all these details and material available before him, but had not been able to point out defects conclusively in the material, for arriving at a conclusion that particular income had escaped assessment on account of non-application of mind by the Assessing Officer. The Tribunal was right and the order of revision was not valid.
24. As regards submissions of ld. DR wherein he has relied on the judgment of Hon. Delhi High Court in the case of CIT vs. National Travel Services (supra) wherein it has been held that a partnership firm can be treated as registered shareholder of a company for the purpose of invoking provisions of section 2(22)(e) of the Act if the partners of the firm are beneficial shareholders of the company. In this regard we find that ld. AR has also referred and relied on various judgments including the judgment of Hon. Supreme Court in the case of CIT vs. C.P. Sarathy Mudaliar (supra) and the decision of Coordinate Bench Mumbai in the case of N.H. Securities Ltd. vs. DCIT (supra) where the decision adjudicating similar facts has been rendered in favour of assessee. Therefore, the judgment relied on by the ld. DR will not be of any help to the Revenue. It also brings out the fact that during the course of assessment proceedings assessee gave a detailed reply towards justification of sec.2(22)(e) of the Act vide its letter dated 25.10.2012 appearing in pages 63 to 67 of the paper book with the reliance on the judgment of Hon. Delhi High Court in the case of CIT vs. Arvindkumar Jain in ITA 589 of 2011 and judgment of Hon. Calcutta High Court in the case of Pradip Kumar Malhotra vs. CIT, West Bengal-V, in ITA no.219 of 2003. We find that on the basis of the replies submitted by assessee ld. Assessing Officer after making proper enquiry has taken one of the legally accepted views. Thus it can be seen that to a specific query raised during the course of assessment proceedings assessee has given a specific reply which was duly accepted by the Assessing Officer. We observe that Hon. Bombay High Court in the case of CIT vs. Gabriel India Ltd. (supra) it has been held that if the Assessing Officer has raised queries and the assessee has filed written submissions/ explanation, merely because there is no discussion in the assessment order on the relevant issue, it cannot be said that such order becomes erroneous.
25. We further find that ld. DR has laid emphasis on the amended provisions of section 263 of the Act wherein explanation -2 has been inserted by Finance Act 2015 during the course of argument, we observe that Hon. Delhi High Court in the case of CIT vs. Anil Kumar Sharma (2011) 335 ITR 83 (Delhi) has explained that – there is a distinction between “lack of inquiry” and “inadequate inquiry”. If there was any inquiry even inadequate that would not by itself give occasion to the Commission to pass orders u/s 263 of the Act merely because he has a different opinion in the matter.
26. We are therefore, of the view that judgment of Hon. Supreme Court in the case of Malabar Industrial Co. (supra) squarely applies on the facts of the case of assessee along with other judgments and decisions observed in the preceding paragraphs. We are of the view that the issue raised by ld. CIT in his notice u/s 263 of the Act has been adequately enquired and thoroughly examined by ld. Assessing Officer during the course of assessment proceedings and he has taken one of the legally possible views as per judicial pronouncements available at that particular point of time and has framed the assessment order by not invoking the provisions of section 2(22)(e) of the Act on the amount of Rs. 1.25 crores received by assessee from M/s Canon Lamination Pvt. Ltd. for the very reason that assessee firm was not registered beneficial shareholder of Canon Lamination Pvt. Ltd. and also for the reason that assessee was having regular current account transactions round the year for making sales to M/s Canon Lamination Pvt. Ltd. and impugned amount of Rs. 1.25 crores was accepted in the nature of trade advance by ld. Assessing Officer. Therefore, we are of the view that order of ld. CIT passed u/s 263 of the Act is invalid and liable to quashed and we restore the assessment order passed u/s 143(3) of the Act on 28.3.2013.
27. As we have already quashed the order u/s 263 of the Act other grounds raised by assessee become infractuous.
28. In the Result, appeal of assessee is allowed.