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Shrinivas Pictures Vs. Income-tax Officer - Court Judgment

LegalCrystal Citation
CourtIncome Tax Appellate Tribunal ITAT Bangalore
Decided On
Judge
Reported in(1982)1ITD574(Bang.)
AppellantShrinivas Pictures
Respondentincome-tax Officer
Excerpt:
1. these two appeals are by the assessee and the following common grounds have been taken : 1. the order of the learned commissioner of income-tax insofar as it is against the appellant is opposed to law, equity, facts and circumstances of the case. 2. the order of the hon'ble commissioner of income-tax under section 263 is illegal and it is not in accordance with the law, in that the order of income-tax officer dated 2-11-1976 which is sought to be revised does not suffer from any error insofar as it is prejudicial to the interests of revenue, in that no income which should have been assessed as the income of the appellant has escaped the assessment for the relevant assessment years. 3. the hon'ble commissioner of income-tax is not justified in arriving at the conclusion that there is.....
Judgment:
1. These two appeals are by the assessee and the following common grounds have been taken : 1. The order of the learned Commissioner of Income-tax insofar as it is against the appellant is opposed to law, equity, facts and circumstances of the case.

2. The order of the Hon'ble Commissioner of Income-tax under Section 263 is illegal and it is not in accordance with the law, in that the order of Income-tax Officer dated 2-11-1976 which is sought to be revised does not suffer from any error insofar as it is prejudicial to the interests of revenue, in that no income which should have been assessed as the income of the appellant has escaped the assessment for the relevant assessment years.

3. The Hon'ble Commissioner of Income-tax is not justified in arriving at the conclusion that there is diversion of income from the appellant in favour of Shrinivas Pictures of which Sri K.V. Raja Family Trust is the owner. The Commissioner ought to have appreciated that the transactions entered into by the appellant firm with the said Srinivas Pictures and were in accordance with the normal practice that too in the regular course of business operations as entered into at arms length between two different businessmen and the agreements being for valuable consideration were valid in law.

4. The finding of the Commissioner that the income arising to Srinivas. Pictures (K.V. Raju Family Trust) should have been assessed in the hands of the appellant is vitiated in that the Commissioner has attached undue importance to the relationship of the beneficiaries of the said trust with the partners of the firm.

5. The Hon'ble Commissioner is also not justified in holding that the income arising to (1) K. Venkataramana (Parent HUF), (2) K. Venkataramana (Minor HUF), (3) K. Vinaya Kumar, (4) Master K. Prakash, and (3) Master K. Vinay, on the exploitation of the pictures should be assessed as income of the appellant firm. The finding is not supported by any material and is not sustainable in law.

For the above and other grounds that may be urged at the time of hearing of the appeal, your appellant humbly prays that the appeal may be allowed and justice rendered.

2. After filing the appeals, the assessee has sought to place additional ground in respect of both the years under appeal, which is reproduced below ; The learned Commissioner of Income-tax having, for the purpose of initiation of action under Section 263, looked into material other than what was available before the Income-tax Officer at the time of completion of the assessment in question, the impugned order under Section 263 is bad in law and may be quashed.

3. The point involved in these appeals is common. The counsels of both the sides have addressed us in one set. Hence, for the sake of convenience and brevity, the appeals are disposed of by a common order.

4. At the time of hearing, the learned counsel for the assessee urged that the additional ground as reproduced above may be admitted as this ground would go to the root of the matter which is in dispute before us. It is his contention that the additional ground relates to a question of law and which involves no investigation of facts at all and accordingly, the same may be admitted. In this connection, the learned counsel for the assessee sought to rely on the ratio of the decision of the Hon'ble Mysore High Court in the case of Gundathur Thimmappa & Sons v. CIT [1968] 70 ITR 70, and also in another decision of the Madras High Court in the case of CIT v. Madras Industrial Investment Corporation Ltd. [1980] 124 ITR 454. It is submitted on behalf of the assessee that in respect of the additional ground raised by the assessee, no fresh facts would be required to be investigated and that only the facts found and dealt with by the lower authorities are required to be looked into.

5. On the other hand, the learned departmental representative submits that the additional ground cannot be allowed to be raised at this stage, particularly, when in this additional ground, the assessee has sought to challenge the jurisdiction of the Commissioner in taking action under Section 263. It is pointed out by him that the assessee had the opportunity to raise this jurisdiction matter before the Commissioner when notice was given by the Commissioner for hearing at the first instance and that since the assessee did not avail of that opportunity, the assessee cannot be allowed to raise this fresh and additional ground before the Appellate Tribunal. According to the learned departmental representative, this ground would involve investigation of fresh facts and new materials and facts would have to be looked into. As such it is submitted that although a legal issue may be involved but under the facts and circumstances of the present case before us, the additional ground may be disallowed.

6. We have taken into account for our consideration the rival contentions and submissions of both the sides. It is to be mentioned here that the present appeals preferred by the assessee are directed against the consolidated order of the Commissioner dated 27-9-1978 under Section 263, The Commissioner examined the records and gave the assessee an opportunity of being heard and thereafter the impugned order was passed by him. We have gone through the grounds of appeal preferred by the assessee. The first ground as reproduced above challenges the order of the Commissioner insofar as it is against the assessee and is opposed to law, equity, facts and circumstances of the case. In other words, the entire order of the Commissioner is challenged before us. We have perused the additional ground of appeal as reproduced above. The additional ground sought to be raised before us would go to the root of the matter which is in dispute before us. As such we have no hesitation to admit the additional ground of appeal. We shall now proceed to dispose of the appeals in the following paragraphs : 7. It is submitted by the learned counsel for the assessee that there was no justification in law and on facts for the Commissioner to take action under Section 263 in the present case of the assessee. It is submitted that the Commissioner has acted illegally and not in accordance with law when he took up the proceedings under Section 263, particularly when the orders of the ITO dated 2-11-1976, relating to the assessment year 1975-76 and dated 28-1-1977 for the assessment year 1976-77, do not suffer from any error insofar as the same could be said to be prejudicial to the interest of the revenue. It is submitted that no income which should have been assessed as the income of the assessee for these two years has escaped assessment. It is also the appeal of the assessee that it was not justified for the Commissioner to arrive at the conclusion that there was diversion of income of the assessee.

It is also argued that the Commissioner should have appreciated that the transactions between the family trust and the assessee were entered into in the course of regular business activities and business operation by the parties concerned and there was nothing illegal in this connection. It is also submitted that there was no justification for the Commissioner to infer that the income arising in the hands of the family trust should be assessed in the hands of the assessee.

8. At the first instance, the learned counsel for the assessee brought to our notice the order of the assessment made by the ITO under Section 143(3) after the assessee was heard by the ITO. It is pointed out that the ITO has completed the assessment properly after taking into account the receipts shown by the assessee from its business in distribution of pictures and also the commission receipts. It is pointed out by him that the assessment order was a short and brief one and that, in fact, it was an exercise in brevity. It is also argued that from the assessment order it can be seen that the ITO has not dealt with the points or evidence which the Commissioner has discussed and adjudicated upon specially regarding the existence of the trust and the alleged diversion of income of the assessee in favour of the family trust.

According to the assessee, the family trust was validly formed on 1-7-1974 and that it was not the case of the Commissioner that the creation of a family trust was a sham or a bogus one. It is submitted on behalf of the assessee that in the present case the Commissioner has taken certain evidences, material facts, etc., into consideration before he took the proceedings under Section 263, which were not before the ITO, at the time of pasing the assessment orders for the years under appeal. It is his submission that any subsequent information that might have come in the possession of the Commissioner, should not be taken into account or considered by the Commissioner for the purpose of Section 263. For this proposition, the learned counsel relies on the ratio of the decision of the Hon'ble Calcutta High Court in the case of Ganga Properties v. ITO [1979] 118 ITR 447. It is also submitted by him that the Commissioner in exercising of his revisional powers should take into account only those materials or records which were considered and decided upon by the ITO, and that for the purpose of Section 263, the Commissioner cannot travel beyond the records considered by the ITO. In this connection, reliance is placed on the ratio of the decision of the Hon'ble Gujarat High Court in State of Gujarat v.Chelabhai Bhanabhai Prajapati [1974] 33 STC 147, in which it has been held, inter alia, that the Deputy Commissioner of Sales Tax, for initiating suo motu revision under Section 57 of the Bombay Sales Tax Act, 1959, could take into consideration only the record of the proceeding before the taxing authority and could not consider materials which did not form part of the records of the assessment. It is the submission made on behalf of the assessee that the provisions of the Sales Tax Act, in this connection, are in pari materia with the provisions of Section 263. It is contended that as it could be seen from the assessment orders, the ITO has considered the different items and examined the same and, in fact, after application of his mind, the ITO has passed the assessment orders and there was no justification to say that there was any error in the assessment orders passed by the ITO. Under such circumstances, it is urged that there was no justification for taking action under Section 263. It is submitted that the Commissioner has to act within a limited sphere of activity as far as action under Section 263 is concerned, while referring to the decision of the Hon'ble Karnataka High Court in the case of CIT v.Executors of the Estate of late H.H. Rajkuverba Dowager Maharanl Saheb of Gondal [1978] 115 ITR 301, in which it was held, inter alia, that the following conditions must co-exist, that is to say, that there should be a proceeding under the Act and in such proceeding the ITO must have passed an order and that the Commissioner should consider that the said order is erroneous and prejudicial to the interest of the revenue. This decision relates to the non-levy of interest by the ITO under Section 217. As there was no order under Section 217, it was held that it was prematur for the Commissioner to take action under Section 9. At this stage and in course of his arguments, the learned counsel for the assessee deals with the various powers of different appellate authorities while relying on the decision of the Hon'ble Punjab and Haryana High Court in the case of CIT v. Jay Textile Mills [1981] 128 ITR 480 to emphasise his arguments that the Commissioner has to act within a limited sphere provided certain conditions are fulfilled. It is pointed out by him that those conditions are non-existent and as such, the order of the Commissioner impugned before us is vitiated. It is argued that in spite of the improper action and initiation of proceedings under Section 263, the Commissioner did not even dealt with the different aspects of the contentions and submissions made by the assessee before him in its written reply, but has conveniently brushed aside the objections of the assessee to the action proposed under Section 263. It is also pointed out that the Commissioner has dealt with the claim of the assessee regarding existence of a family trust which the Commissioner has not found to be sham or fictitious. The functioning of the trust, existence of beneficiaries, management and administration of the trust, etc., have not been challenged. It is pointed out that in similar situation the Hon'ble Supreme Court in the case of CIT v. Jayantilal Amratlal [1968] 67 ITR 1 has sustained the claim of that assessee. It is repeatedly stressed before us that the Commissioner has not given a finding that the trust in question was a sham or that the business arrangement made by the assessee was fictitious. It is argued that in the absence of such finding the Commissioner cannot cancel the assessment order under Section 263.

10. In the course of his argument, the learned counsel for the assessee also stressed the point and the ratio of the decision as laid down in the case of Ganga Properties (supra), in which reference was made to the decision under the Sales Tax Act in the case of Chelabhai Bhanabhai Prajapati (supra), in which the Hon'ble High Court followed the decisions earlier rendered by the Hon'ble Supreme Court under similar provisions. It was pointed out in that case that the ratio of the decision made by the Hon'ble Supreme Court referred to by the Hon'ble Gujarat High Court, was also followed by the Hon'ble Punjab and Haryana High Court in the case of Jagajit Spinning & Weaving Industries Ltd. [1971] 28 STC 709. The learned counsel for the assessee further referred to the ratio of the decision of the Hon'ble Karnataka High Court in the case of CIT v. T. Narayana Pai [1975] 98 ITR 422 in which, inter alia, it was held that the Commissioner had not recorded any finding to the effect that the consideration for the transfer of shares declared by the assessee was less than the fair market value of the shares and that there was no material to come to the conclusion that Section 52(2) was attracted to the facts of the case and the Commissioner had no jurisdiction to revise the order of the ITO under Section 263. It is pointed out also that in that decided case, it was observed by the Hon'ble High Court that the Commissioner has left open the question as to the fair market value of the shares to be decided by the ITO without coming to the conclusion that the value declared was less than the fair market value. The order of the Tribunal setting aside the order of the Commissioner under Section 263 was affirmed. It is, therefore, pointed out and argued on behalf of the assessee that in the present case before us also the Commissioner, as pointed out earlier, has not given his finding that the family trust of the present assessee was bogus or sham but the matter was left open to the ITO to ascertain those facts after investigation and after giving the assessee an opportunity of being heard. It is urged that in view of the ratio of the decision in the aforesaid case, the impugned order of the Commissioner is vitiated and under the circumstances the same cannot be sustained. In this connection, it is further urged on behalf of the assessee that in a slightly similar situation the Hon'ble Madras High Court in the case of Sri Ramalinga Choodamhikai Mills Ltd. v. CIT [1955] 28 ITR 952 has, among other things, held that the sales could not be regarded as mere sham transactions unless there was sufficient evidence to support that and if they were sham transactions, the sales had to be ignored and the company could be assessed only on the profits, if any, made by the benami purchasers when they sell the goods. It was also held that in the absence of evidence to show that the sales were sham transactions or that the market prices were in fact paid by the purchasers, the mere fact that the goods were sold at a concessional rate to benefit the purchasers at the expense of the company could not entitle the incometax department to assess the difference between the market price and the price paid by the purchasers, as profits of the company. Thus, the learned counsel for the assessee emphatically contended that in the case before us also there was no evidence to show that the family trust was bogus and the contract arrangements were sham. Further reliance is also placed on the decision of the Hon'ble Supreme Court in the case of CIT v. Calcutta Discount Co. Ltd. [1973] 91 ITR 8 in which it was held that where a trader transfers his goods at a lesser price than the market price and the transaction was a bona fide one, the taxing authority cannot take into account the market price of the goods, ignoring the real price fetched, to ascertain the profits from the transaction and that the assessee can so arrange his affairs as to minimise its tax burden. It is pointed out by the learned counsel that the present assessee also has arranged the affairs of its business in accordance with the provisions of the law in order to minimise its tax burden and it was not for the Commissioner to dictate in what manner the business is to be run or conducted by the assessee, particularly, in the instant case when the Commissioner has observed that creating of the family trust resulting in diversion of income of the assessee, was not a commercial expediency.

11. As mentioned earlier, the learned counsel for the assessee has been stressing the point that the Commissioner should consider only the records which were in existence at the time when the assessment order was passed by the ITO as decided in the case of Ganga Properties (supra). He further placed reliance on the ratio of the decision of the Hon'ble Supreme Court in the case of Addl. CIT v. Gujargravurex (P.) Ltd. [1978] 111 ITR 1, which dealt with the power of the AAC and it was held that it was not open to him to travel outside the record, i.e., the return made by the assessee or the assessment order of the ITO, with a view to find out its sources of income and that the power of enhancement of the AAC is restricted to the sources of income which have been the subject-matter of consideration by the ITO. It is stressed by him on behalf of the assessee that the power prescribed under Section 263 is more limited and the Commissioner cannot go beyond the records which were before the ITO at the time of making the assessment order. Under the circumstances and in view of his arguments and submissions made, the learned counsel for the assessee submits that the impugned order of the Commissioner under Section 263 should be cancelled.

12. On the other hand, the learned departmental representative strongly supports the order of the Commissioner, while contending that the case laws and the ratio of the decisions in all the cases cited have no applicability to the facts of the present case. It is submitted that the Commissioner has taken into account only the records, facts and materials which were before the ITO at the time of making the assessments. In this connection, the learned departmental representative refers to the report dated 15-10-1977 sent by the ITO to the Commissioner in which the different aspects and details of the facts as brought out by the Commissioner in his notice to the asseesse as well as in his order under Section 263 were discussed briefly. It is submitted that in that report the ITO has given his opinion that the family trust was a bogus and the real owner of the income of the so-called trust, was the assessee and that it was only an attempt on the part of the assessee-firm to divert what was really its income through the medium of a private trust. It is submitted on behalf of the revenue that the Commissioner has acted within the provisions of Section 263 and that, in fact, before action under Section 263 was taken, the various aspects were informed to the assessee and that the assessee gave its reply to the proposed action of the Commissioner under Section 263. It is urged that at this stage the assessee could not challenge the jurisdiction of the Commissioner or urge that the Commissioner could not take into consideration of any fact or record which were not before the ITO at the time of making the assessments, as in fact, there was no such occasion. It is submitted by the learned departmental representative that the assessee in its letter dated 1-8-1977, addressed to the ITO, has referred at paragraph 5 of its letter to the point that the matters relating to the business activities carried on on behalf of the minors by their guardians, etc., have been explained to the ITO at the time of the assessments and all the necessary details have been submitted. In that same para 5, it was also mentioned that the original contracts have been produced by the assessee at the time of assessments which have been returned to the assessee after duly verified by the ITO. Copy of the above said letter is placed on our record. It is submitted, therefore, that what the Commissioner took into account before initiation of the proceedings under Section 263 and for passing his orders thereon were only the record, facts, and details which were before the ITO at the time of making the assessments and under such circumstances, it is urged that the arguments and contentions made on behalf of the assessee in this respect cannot be accepted at all. It is pointed out that there was no new material before the Commissioner before the initiation of the proceeding under Section 263.

13. That apart, on behalf of the revenue a chart is filed before us showing the different collections and receipts of the assessee from its business for the different assessment years. It is submitted by the learned departmental representative that the chart has been prepared from the assessment record and any ordinary person could easily see wide variance of the income returned by the assessee for the earlier year, i.e. 1974-75 as compared with the years under appeal. It is submitted that the chart which showed a marked increase in the collections made by the assessee but not marked increase in the income.

It is pointed out that this fact alone would show that the ITO did not examine the facts of the case with reference to the account, etc., which rendered his assessment order to be erroneous which is prejudicial to the interests of the revenue. It is pointed out that the ITO in his report has stated that the family trust to be bogus. That was why a report was submitted by him to the Commissioner on the materials available with the ITO then and that it was, in fact, on receipt of this report the Commissioner took the initiation of proceedings under Section 263 as discussed earlier. The learned departmental representative prefers to the case laws relied on by the learned counsel for the assessee as expounded by different High Courts connected with the sale tax cases. It is pointed out by him that in those decided cases, the Courts have not given a demarcating line or time with reference to which record to revising authority could and could not take into account (sic) before exercising their revisional powers as conferred by Section 263. It is submitted that in dealing with the matters under Section 263 one has to take into account the scheme of the Act. It is stated that the Commissioner can exercise his powers to rectify or modify even the administrative errors committed by the ITO under Section 263. It is pointed out by him that for taking action under Section 154 the ITO could take into account information, material or fact which came to his possession even after the assessment order is passed. It is the contention of the revenue that mistake of law or of fact can be rectified by the ITO on the basis of subsequent information as well. It is, therefore, submitted that it is wrong for the assessee to contend that the Commissioner cannot go beyond the records which may not be available at the time of making the assessment order by the ITO. It is pointed out by the learned departmental representative that in the case of Ganga Properties (supra), no bifurcation was made so as to preclude certain records which should not and could not be taken into account by the Commissioner before exercising his revisional power under Section 263.

14. It is also contended by the learned departmental representative that the Commissioner would be acting within his jurisdiction if action under Section 263 was taken by him on the report of his subordinates.

For this proposition the learned departmental representative relies on the decision of the Hon'ble Calcutta High Court in the case of Smt.

Sumitra Devi Khirwal v. CIT [1972] 84 ITR 26.

15. Further reliance is placed on behalf of the revenue on the ratio of he decision in the case of CIT v. Durga Prasad More [1971] 82 ITR 540 SC) in support of the contention that the Commissioner in his concluding paragraph has noted that the assessments were completed by the ITO without taking into account the entire profit from the distribution of films claimed to have been made by the trust and has taken into account only a small commission said to have been earned by the assessee and that this fact goes to show that the orders of assessments for the years under appeal are erroneous and prejudicial to the interests of the revenue and that the arguments and objections put forward by the assessee before the Commissioner have been correctly rejected by the Commissioner. It is argued that the genuineness of the trust and other alleged business activities were doubted and which required probing. It is submitted that was why the Commissioner has cancelled the order of the ITO with a direction to make a fresh assessment after giving the assessee an opportunity of proving the contention that the transaction which had been indulged by them were genuine. It is submitted that in the case of Durga Prasad More (supra), among other things, it was held that apparent statement must be considered real until it was shown that there were reasons to believe that the apparent was not the real. In a case, where a party relied on self-serving recitals in documents, it was for that party to prove the truth of these recitals and the taxing authorities were entitled to look into the surrounding circumstances to find out the reality of such recital. The learned departmental representative, therefore, contends that there was no infirmity in the initiation of the Commissioner for taking action under Section 263 and the subsequent order thereon, in view of the facts of the case and in view of the decisions of various Courts on this point. It is vehemently urged by him that the ratio in the case of Durga Prasad More (supra) squarely applies to the facts of the case before us and as such the order of the Commissioner requires to be sustained. It is further urged by him that even any administrative error on the part of the ITO can be modified by the Commissioner under this section. For this proposition, the learned departmental representative draws our attention to the notes of Chaturvedi and Pithisaria's Income-tax Law, 2nd edition, at page 2618.

At this stage of his arguments, the . learned departmental representative reminds us of the submissions made on behalf of the assessee that orders of the ITO for both the years were not speaking orders and that they were exercise in brevity. It is pointed out by him that these circumstances by themselves would justify action of the Commissioner under Section 263 as there was obvious failure by the ITO.It is submitted that all these proved that the orders of the ITO were erroneous and was prejudicial to the interest of the revenue.

16. It is also contended on behalf of the revenue that it is wrong to say that the Commissioner must give his finding which he has failed to do in the present case, as sought to be made out by the learned counsel for the assessee. it is submitted that it was not necessary for the Commissioner to make further enquiries for cancelling the assessment order of the ITO. In this connection, reliance is placed by the revenue on the decision of the Hon'ble Delhi High Court in the case of Gee Vee Enterprises v. Addl. CIT [1975] 99 ITR 375. It was held, inter alia, in that case that the Commissioner can regard the order as erroneous on the ground that the ITO should have made further enquiries before accepting the statement made by the assessee in its return and that the reason was obvious. It was also held that the position and function of the ITO is very different from that of civil court which is neutral.

The civil court only gives decision on the basis of the pleading and evidences which come before it, but the ITO is not only an adjudicator but also an investigator and he cannot remain passive on the face of a return, when further enquiry was apparently required and that it is his duty to ascertain the truth of the facts. It is argued vehemently by the learned departmental representative that viewed from any angle the impugned order of the Commissioner in the present case cannot be said to suffer from any infirmity or illegality. It is stated by the learned departmental representative that the Commissioner has given the direction to the ITO to frame the assessment afresh after making certain enquiries and after giving the assessee an opportunity of being heard and this direction of the Commissioner is in consonance with the ratio of the decision of the Hon'ble Supreme Court in the case of Rampyari Devi Saraogi v. CIT [1968] 67 ITR 84. It was held, inter alia, in that case that the assessee had not in any way suffered from the failure of the Commissioner to indicate the results of the enquiries and moreover, the assessee will have full opportunity of showing to the ITO whether the income assessed in the asseesment orders made originally, was correct or not and that the assessee could not, therefore, be said to have denied an opportunity in this respect. It was noted in the case of Rampyari Devi Saraogi (supra) that there was ample material to show that the ITO had made the assessments in undue haste, without any evidence or enquiry. At this juncture, the learned departmental representative sought reliance on the decision of the Hon'ble Karnataka High Court in the case of Thalibai F. Jain v. ITO [1975] 101 ITR 1 in which it was held that the assessments made without enquiry and evidence, and in undue haste were erroneous and prejudicial to the revenue. The action of the Commissioner under Section 263 was upheld. It is submitted, therefore, that the order of the Commissioner may be sustained.

17. In reply, it is submitted on behalf of the assessee that the assessee was not supplied with a copy of the ITO's report to the Commissioner. referred to by the departmental representative, in the course of his argument. It is pointed out that in any way it would be apparent from the assessee's letter dated 1-8-1977 to the ITO, that the assessee has stated at para 5 of its letter that the matter has been explained to the assessing ITO and that all the necessary details have been submitted and that the original contracts were produced and were taken back by the assessee. It is the submission on behalf of the assessee then even those contract papers were not with the ITO at the time of making the assessment orders. It is submitted that "records" should be the records which were with the ITO at the time of making the assessment orders. In this connection, the learned counsel sought support from the decision of the Bombay High Court in the case of CIT v. Indian Card Clothing Co. (P.) Ltd. [1977] 110 ITR 103, with reference to the page 113 as relevant to the facts of the case. Again at this stage, the learned counsel for the assessee sought reliance on the decisions of the Hon'ble Supreme Court rendered under the Sales Tax Act mentioned below :State of Gujarat v. Chelabhai Bhanabhai Prajapati (supra) ; State of Kerala v. KM. Cheria Abdulla & Co. [1965] 16 STC 875 and Swastik Oil Mills Ltd. v. H.B. Munshi 18. On behalf of the assessee, reference is also made to another decision of the Hon'ble Mysore High Court in the case of Ganapatlii Subbaraya Hegde v. State of Mysore [1977] 84 ITR 523 in which it was held that the agricultural ITO was not entitled to look into the records of the proceedings for the assessment year 1967-68 for the purpose of invoking his jurisdiction under Section 37 of the Agricultural Income-tax Act in respect of the assessment years 1964-65 to 1966-67.

19. The learned counsel for the assessee, therefore, argues that in view of the submissions and arguments and in view of the ratio of the different decisions relied on by him and in view of the facts and circumstances of the case, the order of the Commissioner under Section 263, before us, requires to be cancelled.

20. We have gone through the order of the Commissioner impugned before us and considered the various submissions and contentions made by both the sides. We have also perused the decisions of different High Courts in the cases relied on by the parties before us. Admittedly, the ITO heard the assessee under Section 143(2) and completed the computation of the assessee's income from distribution of films in Bombay-Karnataka area. The ITO has noted that the assessee got commission for exhibition of films from the various producers and principal distributors. The ITO noted the total commission receipt and after hearing the assessee and on examination of the books of account, the taxable income of the assessee was computed. This is the position of the assessment orders in respect of both the years under appeal. There is no discussion absolutely about any family trust or contract, etc., in the assessment orders. There was not even a whisper that certain trust was in existence with which the assessee has made some business transactions as brought out in the notice issued by the Commissioner to the assessee at the time of initiating the proceedings under Section 263 and ultimately incorporated by him in his order. As mentioned at the first few paragraphs, the assessment orders for the years under appeal was passed on 2-11-1976 and 28-1-1977, respectively. The report referred to by the learned departmental representative before us at the time of hearing was dated 15-10-1977, that is, after the assessment orders were completed. In that aforesaid report the ITO has mentioned about existence of a family trust with which the assessee made certain business contracts, which, according to the ITO was bogus. It is not evident from the records before us as to what were the bases for the ITO to send a report as done by him in the present case and on firm what records and materials, the ITO came to know the existence of a family trust and existence of business contracts made by the assessee and the trust. From the assessee's letter dated 1-8-1977 (copy of which has been placed in our file by the revenue), it is seen at para 5 of the letter that the assessee has referred to the certain details produced before the then assessing ITO and that those original contracts were then returned back to the assessee. The contention of the revenue is that these papers, records were before the ITO at the time of making the assessment and which formed the basis of the ITO to make the report referred to above to the Commissioner. It could not be established by the revenue as to what precisely were the records before the ITO at the time of making the assessments and which were considered by the Commissioner at the time of initiation of action under Section 263. As mentioned earlier in the assessment order, there was no discussion or any mentioning about the existence of the family trust, contracts, etc. At the same time, it has not been suggested to us that the assessment orders in the present case have been passed by the ITO without enquiry or investigation or in undue haste. In the case of Ganga Properties (supra) it was held, inter alia, that if the revisional jurisdiction of the Commissioner under Section 263 could be exercised on the basis of the subsequent report of the Valuation Officer it would conflict with the jurisdiction of the ITO under Section 147 or Section 154. The provisions of Section 263(1) have to be understood on its own language and in the context of the jurisdiction of the Commissioner to revise orders and as conferred by that section and also in view of the scheme of the Act. Sections 263(1), 147 and Section 154 have got separate spheres of operation and it was not the intention of the Legislature that the same powers should be exercised by two different authorities. For the purpose of initiation of proceedings under Section 263, the Commissioner can take into account only the records considered by the ITO and thereafter the Commissioner can take into account any material which may come into existence later on in view of the expression "after making or causing to be made such enquiry as he deems necessary". In the present case before us it is not disputed that the Commissioner could initiate action under Section 263 after receipt of the report from his subordinates. It is also not the case of the revenue that the assessments have been completed by the ITO in undue haste. Even in the copy of the letter dated 1-8-1977 which the assessee addressed to the ITO, referred to earlier, there is no mentioning or referring to the existence of a family trust. Similarly, there is no such mention of any trust in the assessment order. The Commissioner at page 4 of the impugned order has mentioned that for the assessment years 1975-76 and 1976-77 the assessee-firm consisted of six partners (names recorded therein) and that two partners, namely, Smt.

Badam Venkataramanamma and Smt. G. Shamala have executed a trust on 1-7-1974 and the object of the trust was to provide for general welfare, etc., to the beneficiaries of the trust. From the facts, materials and papers placed before us, we do not find that the issue or the material regarding existence of any trust was ever dealt with or considered by the ITO at the time when the assessment orders were passed by him. We were told at the time of hearing that the trust is being assessed by different officer. We have also perused the decision of the Hon'ble Allahabad High Court as reproduced and reported in T.P.Srivastava & Sons Ltd. v. CIT [1978] 111 ITR 326 referred to by the learned counsel for the assessee in support of his contention in which it was observed that the Commissioner should have examined the plea of that assessee and that he could take the action only if he rejected the plea of the assessee. It was held in that case that without going into the merits of the claim of the assessee it was not possible for the Commissioner to say that the order of the ITO was erroneous. As contended by the learned counsel for the assessee different points of submissions and arguments were made in its reply to the Commissioner in response to the show cause notice issued by him under Section 263. But the Commissioner has simply rejected the contentions in view of the facts and circumstances discussed by him in the impugned order. At the time of his arguments, the learned departmental representative has also referred to the decision of the Hon'ble Supreme Court in the case of Smt. Tara Devi Aggarwal v. CIT [1973] 88 ITR 323, in which it has been held that the Commissioner was justified in passing order under Section 33B of the 1922 Act (equivalent to Section 273 of the new Act). The facts of that case are distinguishable. In the case of Smt. Tara Devi Aggarwal (supra) it was held that the assessee was assessed on the income returned voluntarily, but it was found that income has not been earned by the assessee although the assessee wanted it to be assessed in her hands in order to assist someone else who had been assessed to a larger amount. Among other things, it was held that action under Section 33B of the Indian Income-tax Act, 1922 was proper. But such circumstances has not been suggested to be in existence in the present case before us. Since the facts are distinguishable, the ratio of the decision is not applicable.

21. If the Commissioner takes into account records, evidences, etc., to be considered for the purpose of initiation under Section 263, but such materials, records, evidence, etc., were not before the ITO at the time of making the assessment, then it would be impossible to say as to what extent the mind of the Commissioner was affected by those materials, record, etc. The Hon'ble Gauhati High Court has expressed a similar view in the case of Smt. Indu Barua v. CWT [1980] 125 ITR 436 in which it was held that when a court of fact acts on material, partly relevant and partly irrelevant, it is impossible to say as to what extent the mind of the Court was affected by irrelevant materials used by it in arriving at its finding and such finding is vitiated.

22. That apart in the case of T. Narayana Pai (supra), the Hon'ble Karnataka High Court has held that the Commissioner has not recorded any finding and has left open the question as to the fair market value of the shares to be decided by the ITO, without coming to the conclusion that the value declared was less than the fair market value.

In that decided case, the Hon'ble High Court sustained the order of the Tribunal in setting aside the order of the Commissioner under Section 23. We have given our anxious thought over the issue involved along with the rival contentions of both the sides. Having regard to the facts of the case, as discussed in the preceding paragraphs, we are of the opinion that the assessee is entitled to succeed. We find that the Commissioner had taken into account the report of the ITO which was made available to him after the assessment orders were passed by the ITO and in that report the ITO had mentioned about certain family trust, etc., which reference found no place in the assessment orders in respect of the years under appeal. Even in the assessee's letter dated 1-8-1977, referred to on behalf of the revenue at the time of hearing, there was no mention or discussion about such trust. The revisionary power of the Commissioner cannot be equated with powers of the reassessment of the ITO. Having regard to the facts of the case and the ratio of the decision in T. Narayana Pai's case (supra), we are of the view that the impugned order of the Commissioner under Section 263 before us cannot be sustained on facts and in law. Accordingly, we cancel the order of the Commissioner made under Section 263.


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