Delhi H.C : Whether, on the facts and in the circumstances of the case, the Tribunal was right in upholding the action of the CIT in invoking the provisions of s. 263 of the IT Act, 1961, and in sustaining the order passed by him under that section ?

High Court Of Delhi

Duggal & Co. vs. CIT

Sections 263

Asst. Year 1970-71

K. Shivashankar Bhat & D.K. Jain, JJ.

IT Ref. No. 286 of 1977

25th August, 1994

Counsel Appeared

None, for the Petitioner : B. Gupta with D.C. Taneja, for the Respondent

K. SHIVASHANKAR BHAT, J.:

The Tribunal has referred the following question for our consideration under s. 256(1) of the IT Act, 1961, arising out of the proceedings in respect of asst. yr. 1970-71 :

“Whether, on the facts and in the circumstances of the case, the Tribunal was right in upholding the action of the CIT in invoking the provisions of s. 263 of the IT Act, 1961, and in sustaining the order passed by him under that section ?”

2. There was an order of assessment made against the assessee by the ITO. The said proceedings were scrutinised by the Commissioner who noticed that an amount of Rs. 19,981 had been allowed to the assessee as an expenditure under the head “interest”. The Commissioner found that the assessee-firm paid interest on its borrowing at the rates varying from 9 to 12 per cent while the assessee charged from M/s Atul Glass Industries Pvt. Ltd. interest at 4% only. In these circumstances the Commissioner was of the view that prima facie case for taking action under s. 263 of the Act existed. The Commissioner felt that the firm was probably diverting a part of its borrowings for its investment with M/s Atul Glass Industries Pvt. Ltd. and allied concerns for considerations other than that of business. This order of the Commissioner was challenged before the Tribunal. The Tribunal declined to interfere with the order of the Commissioner. The Tribunal in support of its conclusion held as follows :”On a careful consideration of the rival contentions, we have to hold that the increasingly large advances made by the assessee firm to M/s Atul Glass Industries (P) Ltd., on which an evidently concessional rate of interest was being charged, deserve a careful scrutiny by the ITO, who is not only an adjudicator but also an investigator. He had evidently not considered the implications of the special features of the assessee’s transactions with M/s Atul Glass Industries (P) Ltd., (described in the Accounts as investment but stated to be mere advances). The CIT took pains to consider the relevant matters missed by the ITO and he has issued directions which do not in our view, circumscribe the ITO’s discretionary powers. All that he has directed is that only such part of the interest shall be disallowed as is not ascribable to the carrying on of the assessee firm’s business activity. As such we decline to interfere with the order under s. 263.”

3. We do not think that a question of law arises from the order of the Tribunal on the facts of this case. The Commissioner was perfectly competent to exercise his powers under s. 263 whenever he found, prima facie, that there was need to enquire if the interest of the Revenue had suffered by an order of assessment. He has given certain reasons. The basis for the order of the Commissioner is a question of fact and whether it is correct or not shall have to be found out after enquiry by the ITO. The Commissioner has found that the ITO has omitted to enquire into this question found by the Commissioner implicit in the manner in which the amounts were borrowed and advanced by the assessee-company.

4. In Ghee Vee Enterprises vs. Addl. CIT 1975 CTR (Del) 61 : (1975) 99 ITR 375 (Del) this Court held that the ITO is not only an adjudicator but also an investigator. He cannot remain passive in the face of a return which is apparently in order but calls for further inquiry and that 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 incumbent on the ITO to further investigate the facts stated in the return, when circumstances would make such an inquiry prudent and the word “erroneous” in s. 263 includes the failure to make such an enquiry. The order becomes erroneous because such an inquiry has not been made and not because there is anything wrong with the order if all the facts stated therein are assumed to be correct.

Consequently the question is answered in the affirmative and in favour of the Revenue.

No order as to costs.

[Citation: 220 ITR 456]

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