Income Tax Appellate Tribunal - Kolkata
Peerless General Finance & Investment ... vs Asstt. Cit on 21 July, 2005
Equivalent citations: [2006]5SOT17(KOL)
ORDER
M.V. Nayar, Accountant Member.
The assessee is in appeal against the order passed under section 263 by the CIT, Kolkata, for the assessment year 2000-01.
2. The CIT held that the order passed by the assessing officer in the assessee's case for the assessment year 2000-01 under section 143(3) of the Act, dated 31-3-2003 was erroneous and prejudicial to the interest of the revenue insofar as the assessing officer has not conducted the necessary inquiry during the course of the assessment proceedings which culminated in passing of the said order under section 143(3) of the Act with reference to two sums, namely, Rs. 657 crores and Rs. 584 crores and, thereafter the CIT proceeded to set aside the said order passed by the assessing officer under section 143(3) of the Act with the directions to the assessing officer to conduct full verification and examination of the said sums after giving opportunity of hearing to the assessee.
3. The assessee's grounds of appeal are as under:
"l. That, on the facts and in the circumstances of the case, the learned CIT, Kol-I, erred in assuming jurisdiction and passing an order under section 263 of the Income Tax Act in the case of the appellant in respect of assessment year 2000-01.
2. That, since the letter directing the appellant to show cause against the proposed action under section 263 of the Income Tax Act was issued by the Income Tax Officer, Head Quarters-1, Technical, and not under the signature of the learned CIT, Kol-I, he was not justified in passing orders under section 263 of the Income Tax Act.
3. That, as the learned CIT, Kol-I, failed to establish that the assessment order passed by the assessing officer for assessment year 2000-01 was either erroneous or prejudicial to the interest of the revenue, he erred in cancelling the said order in terms of section 263 of the Income Tax Act.
4. That, on the facts and in the circumstances of the case, since no real opportunity of being heard was given to the appellant as required under section 263(1) in respect of the sum of Rs. 657 crores referred to in the second show cause letter dated 29-3-2005, the learned CIT, Kol-1, in his orders under section 263 of the Income Tax Act erred in issuing any direction to the learned assessing officer in respect of the said amount.
5. That, while passing his order under section 263 of the Income Tax Act, the learned CIT, Kol-I erred in observing that at the assessment stage the learned assessing officer did not examine the appellant's liability of Rs. 657 crores under the head "return to certificate-holders".
6. That, as the learned CIT, Kol-1, had no material on his record alleging non-payment to certificate-holders amounting to Rs. 584 crores (approx.) during the assessment year 2000-01, his order under section 263 having been passed on conjecture, suspicion and doubt, is liable to be cancelled.
7. That, since the alleged non-payment of Rs. 584 crores to certificate holders as shown in Schedule 3 of the appellant's balance-sheet as on 31-3-2000 did not affect the total income of the appellant for the assessment year 2000-01 and consequently resulted in no loss of revenue, the learned CIT, Kol-I, was not justified in passing orders under section 263 on this ground.
8. That, without prejudice to ground Nos. 1 and 2 above, since the purported show cause letters dated 18-3-2005 and 29-3-2005 referred to only two issues viz., 'return to certificate-holders' to the extent of Rs. 65 crores or Rs. 657 crores, and 'payment to certificate-holders' amounting to Rs. 584 crores (approx.), the learned CIT, Kol-I, by his orders under section 263 erred in cancelling the entire assessment order of the appellant for assessment year 2000-01 and directing the learned assessing officer to pass a fresh assessment order de novo.
9. That, since only two issues were raised in the purported show cause letters dated 18-3-2005 and 29-3-2005, the learned CIT, Kol-I, was not justified in travelling beyond those two issues while passing his orders under section 263 of the Income Tax Act without giving a reasonable opportunity of being heard to the appellant in contravention of section 263(l) of the Income Tax Act.
10. That, as the assessment order of the appellant relating to assessment year 2000-01 contained several disputed additions which had already been considered by the learned CIT(A) in appeal, the learned CIT, Kol-I, erred in cancelling the entire assessment orderin total violation of section 263(l)(c) of the Income Tax Act.
11. That, the appellant craves leave to alter, amend and substitute any of the above-mentioned grounds and add any further grounds before or at the time of, hearing of the appeal."
4. Shri R.K. Mitra, the authorised representative appeared for the assessee. His submissions are as under:
(a) Rs. 657 crores, representing liability provided on account of return to certificate- holders The appellant is a residual non-banking financial company, primarily engaged in the business of offering various types of savings deposit schemes to the public in general. The deposits received from the public under the various savings schemes are returned on maturity along with appropriate interest thereon. The aggregate amount of deposit received from the public and the interest accumulated thereon are reflected as liability in schedule 3 to the balance-sheet under the broad heading 'Social Welfare Scheme Fund' (copy of the relevant extract relating to the financial year relevant to the assessment year 2000-01 is enclosed at p. 30 of the paper book).
During the relevant financial year, the appellant had made a provision on account of the liability to pay interest and bonus to the depositors, amounting to Rs. 657 crores, which was debited to the P&L a/c. (p. 29 of the paper book) and correspondingly credited to the 'Social Welfare Scheme Fund'(p. 30 of the paper-book). The said sum was computed on the basis of valuation done by an actuary and represents the correct estimate of the liability on account of interest and bonus payable to the depositors for the relevant financial year.
The 'Social Welfare Scheme Fund' also reflected an adjustment of Rs. 65 crores on account of deferred obligation charged to return to certificate holders, which had no nexus or relevance whatsoever with respect to the sum of Rs. 657 crores, as referred to above. 'In view of certain claims made by the appellant on account of deferred obligation charged to return to certificate-holders, in the income-tax proceedings relating to earlier assessment years, the details with respect to which are not discussed in this submission, as having no relevance with the present case, the appellant had actually offered the said sum of Rs. 65 crores as disallowance while computing the income chargeable under the head "Profits and gains of business or profession" (hereinafter for the sake of brevity, referred to as 'business profits') for the relevant assessment year and the assessing officer had also disallowed the said sum while computing the business profits in the assessment order passed under section 143(3) of the Act (please, refer p. 24 of the paper book).
The CIT issued a notice under section 263 of the Act dated 18-3-2005 (copy enclosed at pp. 10 and 11 of the paper book), wherein he alleged that the said sum of Rs. 65 crores was erroneously allowed as deduction by the assessing officer while computing the business profits in the order under section 143(3) of the Act and accordingly the CIT held that the said order was erroneous and prejudicial to the interest of the revenue inter alia on that account. He required the appellant "to show cause as to why the order passed under section 143(3) of the Act would not be revised by the CIT in exercise of the powers under section 263 of the Act with respect to the alleged mistake committed by the assessing officer in not disallowing the said sum of Rs. 65 crores.
The appellant duly submitted vide the letter dated 28-3-2005 (copy enclosed at pp. 12 to 15 of the paper book) that the allegation of the CIT was totally baseless, since the said sum of Rs. 65 crores was already disallowed by the assessing officer in the order passed under section 143(3) of the Act dated 31-3-2005, as discussed in the paragraphs hereinabove. The appellant, therefore, requested to drop the proceedings initiated under section 263 of the Act inter alia with respect to the said SUM.
Thereafter the CIT issued another letter dated 29-3-2005 (copy enclosed at pp. 16 and 17 of the paper book), in continuation of his earlier notice under section 263 of the Act, dated 18-3-2005 and the submissions of the appellant dated 28-3-2005, stating that a typographical error had occurred in his earlier notice and that his queries and allegations were actually with respect to the sum of Rs. 657 crores, which was provided by the appellant as liability on account of interest and bonus payable to the certificate-holders, and not with respect to the sum of Rs. 65 crores, which the CIT had admittedly referred to in the said notice and with respect to which the appellant had filed submissions to the effect that the said sum stood already disallowed by the assessing officer.
In the said subsequent letter dated 29-3-2005, the CIT alleged that since the appellant had not credited the sum of Rs. 657 crores against each individual certificate-holder, the said sum did not qualify as deduction while computing the business profits for the relevant assessment year. The CIT further alleged that there was no basis on the part of the appellant in arriving at the said figure of Rs. 657 crores. The CIT held that since the assessing officer had not conducted necessary enquiry with respect to the said sum of Rs. 657 crores, the assessment order passed under section 143(3) of the Act was erroneous and prejudicial to the interest of the revenue inter alia with respect to the said issue and he required the appellant to show cause as to why the said assessment order would not be set aside by the CIT under section 263 of the Act on the said ground.
It is pertinent to note that the CIT required the appellant to respond to the said letter dated 29-3-2005 within just one day, i.e., 30-3-2005. The said letter dated 29-3-2005 was served in the receiving section of the appellant's office at 5.30 p.m. on even date, i.e., after the closure of office hours, and the hearing on the next day, i.e., 30-3-2005 was fixed at 11.30 a.m. The said letter was brought to the notice of the concerned officials of the appellant, through the normal procedure of routing mails from the receiving section, only at around 4 p.m. on 30-3-2005, when the time for the hearing fixed at 11.30 a.m. was already over. Further, it was not possible for the appellant to prepare necessary submissions and cause appearance before the CIT through a proper counsel, even within the next working day, i.e., 31-3-2005. The appellant accordingly submitted a letter before the CIT dated 31-3-2005 (copy enclosed at p. 18 of the paper book), stating the aforesaid facts.
It is understood that the time-limit for passing the order under section 263 of the Act in the instant case of the appellant for the assessment year 2000-01 was expiring on 31-3-2005 and accordingly the CIT proceeded to pass the said order on even date. In the said order, the CIT made several allegations with, respect to the sum of Rs. 657 crores, which he had brought to the notice of the appellant only vide his letter/notice dated 29-3-2005. It may please be noted that several of the said allegations had no relevance or nexus whatsoever with the ground on which the CIT proceeded to hold that the assessment order passed under section 263 of the Act was erroneous and prejudicial to the interest of the revenue inter alia with respect to the said sum, in the letter/notice dated 29-3-2005. The CIT finally held in the order passed under section 263 of the Act that since the assessing officer had not conducted necessary enquiry with respect to the said sum of Rs. 657 crores, the assessment order passed under section 143(3) of the Act was erroneous and prejudicial to the interest of the revenue inter alia with respect to the said sum and he set aside the said order with the directions given to the assessing officer to conduct a de novo enquiry /examination with respect to the said sum after giving an opportunity of hearing to the appellant.
There is no dispute to the fact that section 263 of the Act permits the CIT to revise an order of assessment as being erroneous and prejudicial to the interest of the revenue if the assessing officer has not conducted necessary enquiry with respect to any particular item of income/ expenditure, and accordingly direct the assessing officer in exercise of the powers conferred upon him by the said section to conduct a de novo verification/ examination of the relevant issue after giving an opportunity of hearing to the assessee. However, the fact remains that before the CIT proceeds to take such an action under section 263 of the Act, there are certain basic or fundamental conditions, which he must satisfy, failing which the order passed by the CIT containing such direction to the assessing officer to conduct a de novo verification examination, would be rendered illegal and void ab initio.
The Hon'ble Calcutta High Court, namely, the Hon'ble High Court of jurisdiction had laid down, in the case of Bagsu Devi Bafna v. CIT (1966) 62 ITR 506,522 (Cal) certain principles on the rules of natural justice applicable to a proceeding under section 263 of the Act, inter alia as follows :
"(a) The CIT must disclose, in his notice to the assessee, the grounds on which he desires to revise. This is essential; otherwise the assessee may not be able to show any cause and the opportunity of being heard which section 33B requires may prove illusory to the assessee. If the assessee does not know on what point he is to be heard, he may not visualise what he has to say at the hearing at all.
(b) The notice to show cause must be served upon the assessee reasonably ahead of the date fixed for hearing. A notice calling upon an assessee to show cause why assessment orders for several years should not be revised, within an unreasonably short time should be condemned. What should be the reasonable time must always depend on the facts of each case, (C) to (e)** Even if an assessee be absent at the hearing, the CIT must not proceed against him on undisclosed grounds or an undisclosed basic material collected against him. He must give further notice to the absent assessee, if it becomes necessary for him to proceed on the basis of new grounds and new undisclosed basic materials.
(g) If the CIT discloses one or more grounds in the notice, but revises the order on an entirely different ground, not disclosed to the assessee, that order cannot be sustained."
Reference is also invited to the observations of the Hon'ble Andhra Pradesh High Court in the case CIT v. G.K. Kabra (1995) 211 ITR 336 (AP), in the context of the principles of natural justice associated with proceedings under section 263 of the Act, as follows - "it is necessary for the CIT to point out the exact error in the order which he proposes to revise so that the assessee would have an adequate opportunity of meeting that error before the final order is made. The Hon'ble court further observed that what is required by section 263 is that the assessee must be afforded with an opportunity of being heard by the CIT with regard to the error which he proposes to revise. Affording any further opportunity after setting aside the order of the Income Tax Officer would not amount to an opportunity of meeting the alleged error in the assessment proposed to be revised'."
On a conjoint reading of the decisions of the Hon'ble Calcutta High Court and the Hon'ble Andhra Pradesh High Court, the following propositions of law evolve, which have a direct nexus with the case on hand:
(i) The CIT must give an adequate opportunity of hearing to the assessee. Requiring the assessee to respond within an unreasonably short time should be condemned as violating the principles of natural justice, which would make the order passed under section 263 of the Act ab initio void.
(it) While passing the order under section 263 of the Act, the CIT cannot traverse or travel beyond the allegations raised in the notice issued under section 263 of the Act, to which the assessee could have responded in the course of the hearing afforded to him. If the CIT, in the final order passed under section 263 of the Act, revises the order of assessment passed by the assessing officer on a logic or ground or material which was not earlier disclosed to the assessee vide the notice under section 263 of the Act, then the order passed by the CIT under section 263 of the Act would be illegal and ab initio void, as violating the fundamental principles of natural justice. In fact, on a similar issue, the Hon'ble Kolkata Tribunal, in the case of GECA Isthom India Ltd v. Dy. CIT(2000) 112 Taxman 241 (Kol) (Mag.) (copy enclosed at pp. 31 to 36 of the paper book) has delivered a decision in favour of the assessee by following the principles of natural justice relating to proceedings under section 263 of the Act, which had been laid down by the Hon'ble Calcutta High Court, as above.
It is submitted that if examined on the touchstone of the aforesaid principles laid down by the Hon'ble High Courts and Tribunal, the order passed by the CIT under section 263 of the Act inter alia with respect to the said sum of Rs. 657 crores, is clearly illegal and ab initio void, for the following reasons :
(i) The CIT brought the issue relating to the sum of Rs. 657 crores to the notice of the appellant for the first time vide the letter/notice dated 29-3-2005, which was issued in continuation to the earlier notice issued under section 263 of the Act, dated 18-3-2005. As stated earlier, the said letter dated 29-3-2005, was served at the receiving section of the appellant only at 5.30 p.m. on 29-3-2005, namely, after closure of office hours and the CIT required the appellant to comply with the said notice at 11.30 a.m. the following day, namely, 30-3-2005. It is palpably apparent that an unusually short time was afforded to the appellant to comply with the allegation of the CIT. As stated earlier, the normal procedure for routing mails in the system of the appellant-company, escalated the said notice to the concerned person in the afternoon of 30-3-2005, and the appellant could not have prepared a suitable or reasonable submission and also arrange an appropriate representation before the CIT within the next day, i.e., 31-3-2005, even if the CIT were to have deferred the hearing scheduled on 30-3-2005 by one day. Thus, since not even one full working day was afforded to the appellant to reasonably comply with the notice/ letter dated 29-3-2005, and accordingly rebut the allegations contained therein with respect to the said sum of Rs. 657 crores, the order passed by the CIT under section 263 of the Act inter alia with respect to the said sum of Rs. 657 crores is patently illegal and ab initio void, having infringed the principles of natural justice.
(ii) Without prejudice to the contentions preferred in para. (1) above, the order passed under section 263 of the Act infringes the principles of natural justice also on other logic or grounds. As has been stated earlier, in the said subsequent letter dated 29-3-2005, the CIT alleged that since the appellant had not credited the sum of Rs. 657 crores against each individual certificate-holder, the said sum did not qualify as deduction while computing the business profits for the relevant assessment year. The CIT further alleged that there was no basis on the part of the appellant in arriving at the said figure of Rs. 657 crores. The CIT held that since the assessing officer had not conducted necessary enquiry with respect to the said sum of Rs. 657 crores, the assessment order passed under section 143(3) of the Act was erroneous and prejudicial to the interest of the revenue inter alia, with respect to the said issue and he required the appellant to show cause as to why the said assessment,order would not be set aside by the CIT under section 263 of the Act on the said ground.
It is submitted that the allegations made by the CIT in the notice/letter dated 29-3-2005, with respect to the sum of Rs. 657 crores, on a stand alone basis or by themselves, are totally baseless and merely on the strength of the said allegations, the CIT could not have set aside the issue to the file of the assessing officer for fresh verification. If a liability is properly calculated, then it is immaterial as to whether the same is credited to the account of the recipient or booked in the form of a liability as such, in the balance sheet of an assessee, for the purposes of the same being allowed as deduction while computing business profits under the Act. In fact, even the Act recognises crediting of liability in the suspense account of the balance-sheet of an assessee as constituting accrual of liability and accordingly income, necessitating withholding of tax at source. Thus, crediting of the aggregate liability amounting to Rs. 657 crores on account of interest and bonus payable to the certificate-holders for the relevant financial year in the form of return to certificate-holders, under the broad liability heading 'Social Welfare Scheme Fund', is sufficient compliance of the fact that the said liability having actually accrued and the fact that posting of the relevant liabilities on such account against individual accounts of certificate-holders was not done, has no relevance whatsoever with the accrual or otherwise of the liability. It is a settled principle that accrual of liability is not dependent on the accounting treatment adopted by the assessee. For this proposition, reliance is placed upon the observations of the Hon'ble Supreme Court in the case of Kedarnath Jute Mfg. Co. Ltd. v. CIT (1971) 82 ITR 363 (SC) that 'whether the assessee is entitled to a particular deduction or not will depend on the provision of law relating thereto and not on the view which the assessee might of its rights nor can the existence or absence of entries in the books of account be decisive or conclusive in the matter'. Further, the allegation of the CIT that there was no basis for arriving at the figure of Rs. 657 crores is also fallacious to any extent, since there was no material disclosed to the appellant vide the said letter dated 29-3-2005, on the strength of which the CIT could have framed the allegation as above. Thus, as stated earlier, the allegations made by the CIT in the notice/letter dated 29-3-2005, with respect to the sum of Rs. 657 crores, on a stand alone basis or by themselves are totally baseless and merely on the strength of the said allegations, the CIT could not have set aside the issue to the file of the assessing officer for fresh verification.
However, in the order passed under section 263 of the Act, the CIT has given several other grounds or logic, based on certain observations of the auditors of the appellant-company to hold that the liability for the said sum of Rs. 657 crores was not properly quantified or calculated and the assessing officer having failed to conduct an enquiry or verification with respect to the quantification thereof, the order passed by the assessing officer under section 143(3) of the Act was erroneous and prejudicial to the interest of the revenue to that extent and accordingly proceeded to set aside the said order and restore the issue to the file of the assessing officer for fresh verification after giving an opportunity of hearing to the assessee.
It is submitted that revision of the order by the CIT under section 263 of the Act on the lines referred to above, by adopting the logic or grounds not disclosed to the appellant in the notices/letters issued under section 263 of the Act dated 18-3-2005, and 29-3-2005 is clearly without necessary jurisdiction and accordingly the order of the CIT is patently bad in law and ab initio void, having infringed the principles of natural justice, which is inextricably linked and inseparably blended with the revisionary powers of the CIT under section 263 of the Act, as observed in the decision referred to above.
(b) Rs. 584 crores, representing payment to certificate- holders on maturity of certificates deposits :
The 'Social Welfare Scheme Fund' account appearing in schedule 3 to the balance-sheet prepared for the relevant financial year reflected an entry of Rs. 584 crores, representing the amount actually paid by the appellant to various certificate-holders on maturity of the certificates during the relevant financial year. The said sum of Rs. 584 crores was reduced from the total liability due to the certificate-holders, as representing the value of liability depleted on actual payment made.
The CIT in the notice under section 263 of the Act dated 18-3-2005 (copy enclosed at pp. 10 and 11 of the paper book), has alleged that the particular issue was not examined by the assessing officer during the course of assessment proceedings and on that ground the assessment order was erroneous and prejudicial to the interest of the revenue. He required the appellant to show cause as to why the order passed under section 143(3) of the Act would not be revised by the CIT in exercise of the powers under section 263 of the Act with respect to the alleged mistake committed by the assessing officer in not examining the said sum of Rs. 584 crores.
The appellant duly submitted vide the letter dated 28-3-2005 (copy enclosed at pp. 12 to 15 of the paper book), that the allegation of the CIT was totally baseless, since the said sum of Rs. 584 crores represented actual payment made to the certificate-holders and there was not even a tinge of provision in the said item. It was also stated in the said letter that as per the procedure followed by the appellant-company, before the actual payment was made on maturity of a certificate, a discharge form was issued to the certificate-holder showing the amount payable to him including interest, and only when the address of the certificate-holder got confirmed through the discharge form being received back from the certificate-holder that the cheque was issued to the certificate-holder in lieu of his dues. In a case where discharge form was not received from the certificate-holder, then the liability of the appellant towards such certificate-holder continued and the dues could never be forfeited as per the guidelines and directions issued by the RBI. It was also submitted before the CIT that the said sum of Rs. 584 crores was in reality a balance-sheet item, having no relevance or nexus whatsoever with the business profits of the appellant for the relevant financial year, whether prepared for the purposes of corporate accounts or for the purposes of assessment under the Act.
The CIT, however, refused to accept the submissions of the appellant and proceeded to set aside the issue to the file of the assessing officer for fresh verification after giving the appellant an opportunity of being heard. In the order passed under section 263 of the Act, the CIT had also alleged that the assessing officer failed to examine whether tax had been deducted from the payments made to the certificate-holders.
There is no dispute to the fact that section 263 of the Act permits the CIT to revise an order of assessment as being erroneous and prejudicial to the interest of the revenue if the assessing officer has not conducted necessary enquiry with respect to any particular item of income/ expenditure, and accordingly direct the assessing officer in exercise of the powers conferred upon him by the said section, to conduct a de novo verification/ examination of the relevant issue after giving an opportunity of hearing to the assessee. However, the fact remains that before the CIT proceeds to take such an action under section 263 of the Act, there are certain basic or fundamental conditions, which he must satisfy, failing which the order passed by the CIT containing such direction to the assessing officer to conduct a de novo verification/ examination, would be rendered illegal and void ab initio.
The Hon'ble Bombay High Court had laid down in the case of CIT v. Gabriel India Ltd. (1993) 203 ITR 108 (Bom) certain principles relating to the initiation of proceedings under section 263 of the Act, as follows : 'The consideration of the CIT as to whether an order is erroneous insofar as it is prejudicial to the interests of the revenue, must be based on materials on the 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 CIT 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 CIT cannot initiate proceedings with a view to start fishing and roving. enquiries in matters or orders which are already concluded.' Reference is also invited to the decision of Hon'ble Rajasthan High Court in the case of CIT v. Trustees Anupam Charitable Trust ( 1987) 167 ITR 129 (Raj) wherein the Hon'ble High Court held that the error envisaged in the proceedings under section 263 of the Act, is not which depends on possibility or guess work but it should be actually an error either of fact or law.
It is submitted that if examined on the touchstone of the aforesaid principles laid down by the Hon'ble High Courts, the order passed by the CIT under section 263 of the Act inter alia with respect to the said sum of Rs. 584 crores, is clearly illegal and ab initio void, since there was no material before the CIT on the basis of which he could have initiated proceedings under section 263 of the Act. The CIT has merely tried to make fishing and roving enquiries against the settled issues and such an act on the part of him is against the principles for initiating proceedings under section 263 of the Act, as laid down by the Hon'ble High Courts in the decisions quoted herein-above. There was no material before the CIT to even come to a conclusion that the payment of Rs. 584 crores to the certificate-holders on maturity of the certificates, which was an out and out balance-sheet item, could have any impact on the business profits and accordingly the total income of the appellant chargeable to income-tax for the relevant assessment year.
The CIT had also alleged that the assessing officer has failed to examine whether the tax had been deducted at source on payments made to the certificate-holders. In this connection it may be kindly noted that the examination of such matters neither falls within the jurisdiction of the CIT nor the assessing officer. It is a matter of TDS Officer and, therefore, the CIT was wrong in alleging that such examination had not been carried out by the assessing officer, while setting aside the issue to the file of the assessing officer under section 263 of the Act.
It is, therefore, submitted that revision of the order by the CIT under section 263 of the Act on the lines referred to above, by trying to make fishing and roving enquiry and acting on mere suspicion without having any material on record is clearly without necessary jurisdiction and accordingly the order of the CIT is patently bad in law and ab initio void, Without prejudice to the submissions made hereinabove, it is submitted that in the event the direction of set aside and restoration of the aforesaid issues by the CIT to the file of the assessing officer in exercise of the powers conferred upon him under section 263 of the Act are ultimately upheld by the Hon'ble Tribunal, then the Hon'ble Tribunal may kindly issue a direction to the effect that such setting aside /restoration may be limited to only the issues referred to in the order passed under section 263 of the Act, namely, the ones referred to above, and the entire assessment order passed under section 143(3) of the Act for the relevant assessment year may not be set aside or restored to the file of the assessing officer for fresh verification, since the CIT had not found any error with respect to the several other issues contained in the assessment order, vis-a-vis computing the total income of the appellant chargeable to income-tax for the relevant assessment year and also the income-tax payable thereon. The appellant places reliance on the principles laid down by the Hon'ble Delhi High Court in the case of Addl CIT v. JX DCosta (1982) 133 ITR 71 (Del).
5. Sri S. Guha, the learned departmental representative, appeared for the revenue. He relied on the order passed by the CIT under section 263 of the Income Tax Act.
6. We have heard the rival contentions of the parties and also perused the records in detail. We are of the opinion that the assessee should succeed with respect to both the issues involved in the appeal, namely, the sums of Rs. 657 crores and Rs. 584 crores as above. So far as the sum of Rs. 657 crores is concerned, the full facts have been stated above. We have noted that the CIT had given the assessee less than one day's time to comply to his query with respect to the said sum of Rs, 657 crores, inasmuch as he issued the notice/letter on 29-3-2005, which was served upon the receiving section of the assessee at 5.30 p.m. and, thereafter, required the assessee reply to his query by 11.30 a.m. the very next day, ie., 30-3-2005. Admittedly the assessee could not comply with such requisition. However, the fact remains that granting an opportunity to comply with the query raised in a proceeding under section 263 of the Act within less than a day, cannot under any stretch of imagination, be held to be a reasonable opportunity, of hearing and such unreasonable short time should be condemned as violating the principles of natural justice, as laid down by the Hon'ble Calcutta High Court in the case of Bagsu Devi Bafna v. CIT (1966) 62 ITR 506, 522 (Cal).
Therefore, in our view, the order of the CIT passed under section 263 of the Act dated 31-3-2005, and also the proceedings initiated under section 263 of the Act vide the notice dated 18-3-2005, read with the letter dated 29-3-2005, to the extent the same revises the assessment order passed under section 143(3) of the Act dated 31-3-2003, with a view to set aside the issue of allowability of the liability on account of return to certificate-holders amounting to Rs. 657 crores to the file of the assessing officer for fresh verification, is to be treated as bad in law and ab initio void in view of the binding principles of Hon'ble Calcutta High Court.
7. However, as requested by the learned authorised representative of the assessee, we also proceed to consider another aspect of the argument preferred by the said learned authorised representative with respect to the said issue of Rs. 657 crores in his attempt to prove that the CIT was wrong in setting aside the said issue to the file of the assessing officer vide the order under section 263 of the Act. We again respectfully follow the binding precedent of the Hon'ble Calcutta High Court in the aforesaid case and the principles laid down by the Hon'ble Andhra Pradesh High Court in the case of CIT v. G. K. Kabra (1995) 211 ITR 336, 340 (AP) for the proposition as referred to for our consideration by the learned authorised representative, that if the CIT discloses one or more grounds in the notice issued under section 263 of the Act, but revises the order on an entirely different ground, not disclosed to the assessee then the said order cannot be sustained, as having infringed the principles of natural justice.
8. The learned authorised representative submitted that the objections/ allegations made by the CIT in the notice/letter dated 29-3-2005, with respect to the sum of Rs. 657 crores, on a stand alone basis, were totally baseless and merely on the strength of the said allegations the CIT could not have set aside the issue to the file of the assessing officer for fresh verification. We agree with the submissions of the leanred authorised representative. The CIT alleged that since the assessee had not credited the sum of Rs. 657 crores against each individual certificate-holder, the said sum did not qualify as deduction while computing taxable profits. However, that by itself cannot be a ground of disallowance. If a liability is properly calculated, then it is immaterial as to whether the same is credited to the account -of the recipient or booked in the form of liability as such in the balance-sheet of the assessee, for the purposes of allowability for tax purposes. In fact, we are in full agreement with the submissions of the learned authorised representative that even the Income Tax Act recognises in various provisions relating to TDS (e.g., sections 193, 194A, 194C, 194H, 194-1, 194J, 194K, etc.) that crediting of liability in such suspense account of the balance-sheet constitutes 'accrual of liability, necessitating withholding of tax at source thereon. Further, as held by the Hon'ble Supreme Court in the case of Kedarnath Jute Mfg. Co. Ltdv. CIT(1971) 82 ITR 363, 367 (SC), the mere manner of accounting does not decide allowability of an expense. Therefore, this allegation of the CIT has no legs to stand. The CIT further alleged in the notice/letter dated 29-3-2005 that there was no basis for arriving at the figure of Rs. 657 crores. However, we find that the CIT did not even disclose any cogent material to the assessee vide the said letter to make such an allegation. If the CIT does not disclose the material to the assessee, then how can the assessee comply with such allegation in a proceeding under section 263 of the Act. Thus, we agree that the allegations of the CIT made in the proceedings under section 263 of the Act vide the notice/letter dated 29-3-2005, by themselves were totally baseless and merely on the strength of such allegations, the CIT could not have set aside the issue relating to the allowability of the sum of Rs. 657 crores to the file of the assessing officer for fresh verification.
9. We have observed that in the order passed under section 263 of the Act, the CIT has given several other grounds or logic, based on certain observations of the auditors of the assessee, which were not disclosed to the assessee during the proceedings under section 263 of the Act, to hold that the liability for the said sum of Rs. 657 crores was not properly quantified or calculated and the assessing officer having failed to conduct an enquiry or verification with respect to the quantification thereof, the assessment order passed under section 143(3) of the Act was erroneous and prejudicial to the interest of the revenue to the extent thereof and accordingly, the CIT proceeded to set aside the issue to the file of the assessing officer for fresh verification.
10. We agree with the submissions of the learned authorised representative that revision of the assessment order by the CIT under section 263 of the Act on the above lines, namely, by adopting the logic or grounds not disclosed to the assessee in the notices/letters issued under section 263 of the Act dated 18-3-2005 & 29-3-2005, was without necessary jurisdiction, the same having violated the principles of natural justice, and accordingly, the order under section 263 of the Act, to the extent the same relates to the direction given by the CIT to set aside the said issue to the file of the assessing officer is void ab initio.
11. The learned departmental representative pleaded that no prejudice has been caused to the assessee by merely setting aside the issue to the assessing officer for fresh verification. However, we are unable to accede to such a request. The proceedings under section 263 of the Act are not empty formalities or rituals. The same must comply and adhere to the principles of natural justice as pronounced by the Hon'ble Calcutta High Court and the Hon'ble Andhra Pradesh High Court in the decisions referred to above. Respectfully following the principles laid down in the said decisions, we hold that the CIT had wrongly set aside the issue of allowability of the said sum of Rs. 657 crores to the file of the assessing officer for fresh verification and we hereby reverse the order passed under section 263 of the Act to the said extent.
12. We would now touch upon the other issue, namely, the one relating to payments made by the assessee to the various certificate-holders on maturity of certificates during the relevant financial year amounting to Rs. 584 crores. We have noted earlier that the CIT has also set aside the relevant issue to the file of the assessing officer for fresh verification on the ground that the assessing officer had failed to conduct necessary enquiry with respect to the same during the assessment proceedings.
13. The arguments of the learned authorised representative of the assessee have been recorded earlier. We agree with him that the CIT had no cogent material in his possession to unnecessarily reject the submissions of the assessee made by the letter dated 29-3-2005, that the said sum of Rs. 584 crores was in reality a balance-sheet item, representing actual payment of liability accrued in earlier years, and the same had no relevance or nexus whatsoever with the taxable business profits of the assessee for the relevant financial year. We are in respectful agreement with the principles laid down by the Hon'ble Bombay High Court in the case of CIT v. Gabriel India Ltd. (1993) 203 ITR 108, 113-114 (Bom) and by the Hon'ble Rajasthan High Court in the case of CITv. Trustees Anupam Charitable Trust (1987) 167 ITR 129,135 (Raj) which were referred to us by the learned authorised representative, that' if there are no materials on record on the basis of, which it can be said that the CIT acted in a reasonable manner in a proceeding under section 263 of the Act, to come to a conclusion that the order passed by the assessing officer was erroneous and prejudicial to the interest of the revenue, then the very initiation of the proceedings would be illegal and without jurisdiction and that the CIT cannot initiate proceedings under section 263 of the Act with a view to start fishing and roving enquiries in matters or orders which are already concluded.
14. We find in the instant case that there was no material before the CIT to even come to a conclusion that the payment of Rs. 584 crores to the certificate-holders on maturity of the certificates, which was a balance sheet item, could have any impact on the taxable profits of the assessee for the relevant assessment year. The CIT has alleged in the order passed under section 263 of the Act that the assessing officer had failed to examine whether tax had been deducted at source by the assessee on payments made to certificate-holders. We agree with the submissions of the learned authorised representative that examination of such matters; does not fall within the jurisdiction of the assessing officer and the CIT, under whom the assessing officer works. It is a matter of concern of the TDS Officer and, therefore, the CIT had no occasion to say that the assessing officer had failed to carry out such examination, when the same was not even warranted by law. Thus, in a nutshell we are of the considered opinion that the revision of the assessment order by the CIT under section 263 of the Act with respect to the said sum of Rs. 584 crores is an attempt on the part of the CIT to initiate a fishing and roving enquiry while acting on mere suspicion and without having any material on record and the same is without necessary jurisdiction and, thus, the order of the CIT passed under section 263 of the Act to the extent the same relates to the CIT setting aside the said issue to the file of the assessing officer for fresh verification, is totally arbitrary and erroneous. We, therefore, reverse the order passed under section 263 of the Act to the said extent also.
15. Therefore, in totality, the order passed under section 263 of the Act is quashed and/or set aside in its entirety and the appeal of the assessee is, therefore, fully allowed.