1. This appeal by the assessee is directed against the order of CIT, Surat, dt. 5th February, 1993 passed under s. 263 of the IT Act, 1961 relating to asst. yr. 1989-90.
1. The CIT erred in assuming jurisdiction under s. 263 when assessment order passed was not erroneous on the issue pointed out by him.
2. On the facts and circumstances of the case, the CIT ought to have dropped the proceedings under s. 263 instead of setting aside the assessment.
3. Briefly stated the facts of the case are that the assessee is a registered partnership firm, regularly assessed to tax. The AO completed its assessment under s. 143(3) of the Act vide his order dt.
25th October, 1990. While examining the case records of the assessee firm for the year under consideration, the CIT found that the assessment passed by the AO was erroneous and prejudicial to the interests of Revenue. While exercising revisional jurisdiction under s.
263 of the Act, the CIT issued a show-cause notice to the assessee to the following effect : "On verification of case records and the assessment finalised under s. 143(3) dt. 25th October, 1990 for asst. yr. 1989-90, it is seen that the AO had given detailed reasonings in holding that the cloth resetting business was not at all done by the assessee and this business was, in fact, done by your sister concern Vikas Industries.
Had that be the facts of the case, the AO ought to have disallowed the entire expenditure of Rs. 10,99,691 instead of disallowing only loss of Rs. 3,34,841. Since the AO failed to allow entire claim of expenses, the assessment finalised is considered as erroneous and prejudicial to the interest of Revenue , which requires to be revised under s. 263 of the IT Act." 4. Before the CIT, it was submitted by the assessee that the assessment order passed by the AO was neither erroneous nor prejudicial to the interests of Revenue. It was also submitted that the assessee firm and Vikas Industries are sister concerns. During the year under consideration, Vikas Industries has got some cloth resetting work done by the assessee firm. It was also claimed that the assessee firm had taken on hire/lease machineries which were utilised for cloth resetting and the assessee had paid Rs. 10,99,691 as rent/hire charges to the owner of the machineries. Further contention of the assessee was that the AO was justified in allowing the lease rent of the machineries as deduction. However, it was claimed that the AO was not correct while making disallowance of loss of Rs. 3,34,841; against the said action of the AO, an appeal was preferred before the CIT(A). It was specifically contended before the CIT that insofar as the allowance of deduction for the rent of Rs. 10,99,691 by the AO was concerned, there was no error in the order of the AO. The assessee also filed a detailed written submission vide its letter dt. 28th January, 1993 before the CIT.5. After considering the arguments advanced on behalf of the assessee, the CIT was of the view that the assessment order dt. 25th October, 1990 was erroneous and prejudicial to the interest of Revenue. He observed that the assessee-firm and another firm namely Vikas Industries are sister concerns. The assessee-firm claimed that it had done cloth resetting work for Vikas Industries on hired machineries and the assessee had paid hire charges on these machines amounting to Rs. 10,99,691 to Vitta Mazda Ltd. The assessee firm had received Rs. 7,64,850 as cloth resetting majuri at the rate of 28 paise per meter from Vikas Industries. The assessee claimed the loss of Rs. 3,34,841 in cloth re-setting activities as higher charges paid for machineries were more than that of the payment received for cloth resetting work. The CIT also observed that in the assessment order, the AO had given a clear finding that during the assessment year under consideration, the assessee had not done any cloth re-setting business and that the whole claim of loss was unsustainable and in that view of the matter the AO had disallowed the claim of loss at Rs. 3,34,841. In this view of the matter, the CIT concluded that the AO had not correctly understood the issue involved in the instant case. According to him, if the finding of the AO is correct to this extent that the assessee had not done cloth resetting work at all during the period relevant to assessment year under consideration, then it required critical examination whether the claim of loss at Rs. 3,34,841 was required to be disallowed or the entire claim of expenditure of Rs. 10,99,691 on alleged hire charges of the machineries was required to be disallowed. According to the CIT, the AO did not take his findings to its logical and by making full and proper enquiry, which according to him was erroneous and prejudicial to the interest of Revenue. He, therefore, partly set aside the assessment order and consequently directed the AO to decide the issue whether only loss of Rs. 3,34,841 was required to be disallowed or whether the entire claim of expenditure of Rs. 10,99,691 was required to be disallowed.
6. Before us, R. N. Vepari, the learned authorised representative of the assessee vehemently argued that in the facts and circumstances of the case, the CIT was not correct while exercising his revisional jurisdiction under s. 263 of the Act, particularly, when the assessment order passed by the AO was neither erroneous nor prejudicial to the interest of Revenue. He further pointed out that the basis of initiating proceedings under s. 263 of the Act was totally wrong.
According to him it is not the case of the AO that cloth resetting business in respect of which the loss of Rs. 3,34,841 was incurred, was not at all done by the assessee and that his business was done by its sister concern namely Vikas Industries. The learned authorised representative further contended that the AO was also not correct while making the disallowance of loss of Rs. 3,34,841. Without prejudice to above, the learned counsel for the assessee pointed out that there is no case at all for disallowing the entire expenditure of Rs. 10,99,691 in place of Rs. 3,34,841. During the course of hearing, he also invited our attention to the written submission dt. 28th January, 1993, submitted before the CIT. In view of the above submission the learned authorised representative of the assessee urged that the order passed by the CIT should be cancelled.
7. On behalf of the Revenue, G.M. Brahambhatt, the learned Departmental Representative heavily relied on the order of CIT passed under s. 263 of the Act. He also invited our attention to the relevant findings given in the assessment order by the AO. According to him the CIT has not committed any error of law while exercising revisional jurisdiction.
8. After hearing the parties at length, we are of the view that in the facts and circumstances of the present case, the order passed by the CIT is legally valid and justified.
9. To appreciate the present issue in its right perspective, the following findings of the AO are worth noting : "7(i) Nirvan Prints, the assessee firm and Vikas Industries are sister concerns and partners of both the above mentioned firms are close family members. The machineries in question obtained on lease from Vitta Mazda Ltd. has been installed in their factory at Begampura, Nirvan Akhada, Surat. On enquiry it is further found that factory of both the assessee-firm i.e. Nirvan Prints and Vikas Industries are located in the same campus and same factory building at Begampura, Nirvan Akhada, Vikas Industries is doing the job work on majuri basis for 3rd parties and send the cloth to Nirvan Prints for cloth resetting work and the remaining process i.e. dyeing & printing and finishing is done by Vikas Industries itself on their own plant. Thus, it appears that on papers only, a part of the entire process i.e. cloth resetting work has been given to Nirvan Prints whereas factory of both the firms are located in the same building.
(ii) It is further found that Nirvan Prints, the assessee firm has not incurred any expenditure on the said cloth resetting work except paying lease rent to Vitta Mazda Ltd. It has not employed any labour nor used any material nor consumed any electricity for the said cloth resetting work. The entire expenses regarding cloth resetting work have been incurred by Vikas Industries only. It is impossible to understand as to how a machinery work like cloth setting work is possible by the assessee-firm without using any labour or consumption of any materials or electricity. Actually, the assessee-firm has obtained the machinery on lease on papers from Vitta Mazda Ltd. and in actual practice the same has been given for use to Vikas Industries only and exclusively without doing any actual majuri work in the process. During the course of statement recorded under s. 131 Maheshbhai, partner, himself, has admitted that no expenditure as such is incurred by Nirvan Prints except lease rent and all the other relevant expenses with regard to the cloth resetting work are incurred by Vikas Industries and the labourers of Vikas Industries come in the factory and they do the job work on the machineries. Electricity and all other expenses are also borne by Vikas Industries only.
(iii) Maheshbhai, partner of the assessee-firm in answer to Q. No. 10 of the statement has further admitted that the said machinery in question has not been put to any other use other than doing the resetting work for Vikas Industries. In other words, Vikas Industries has done the job work for Vikas Industries only and it has not done any such job work for any other 3rd parties.
(iv) It is further to be seen that the said cloth resetting has got no relation with the assessee firm's main business of manufacture and resale of beam pipes. Actually, the said cloth resetting work has been shown to be done by the assessee-firm on papers only, to help Vikas Industries as admitted by the partner of the assessee-firm in his statement under s. 131 of the Act." "9. From the abovementioned facts and circumstances of the case, it may be seen that the assessee-firm had adopted colourable devices to take on the loss of Rs. 3,34,841 on itself from its sister concerns i.e. Vikas Industries. If we lift the veil and see behind it, it may be seen that the same set of persons i.e. close family members are behind the entire transactions, and by way of this colourable device, they have diverted the loss of Rs. 3,34,841 to the assessee-firm i.e. Nirvan Prints which actually should be borne by Vikas Industries. The said transactions in question therefore is a device to divert loss to avoid tax in the hands of the assessee-firm." From the above findings of the AO, there is no doubt that the AO has in clear terms stated that the cloth resetting business was not at all done by the assessee and this business was in fact done by the assessee's sister concern namely Vikas Industries. If this is the state of affairs, then the learned CIT was justified in partly settingaside the assessment order with the direction to the AO to look into the matter as to whether only the claim of loss of Rs. 3,34,841 was required to be disallowed or the entire claim of expenditure of Rs. 10,99,691 was required to be disallowed. The CIT was correct while holding that the AO has not made full and proper enquiry in the matter.
In our view the conclusions drawn by the AO are not in conformity with the findings given in the assessment order.Asstt. CIT vs. Mukur Corporation (1978) 111 ITR 312 (Guj) the Hon'ble Gujarat High Court has held that where the AO has to make proper enquiries and investigation, such failure on the part of the AO will result in prejudice to the interest of Revenue and initiation of action under s. 263 by the CIT under such circumstances will perfectly be valid and justified.
11. In the case of Swarup Vegetable Products Industries Ltd. vs. CIT (1991) 187 ITR 412 (All), it has been held that it is beyond dispute that, under s. 263 of the IT Act, 1961, the CIT has power to set aside the assessment order and send the matter for fresh assessment if he is satisfied that further enquiry is necessary and that the order of AO is prejudicial to the interests of Revenue.
12. In the instant case, we find that the CIT has given the reasons in support of his conclusion that the assessment order in question is erroneous insofar it is prejudicial to the interests of the Revenue. We are of the opinion that the reasons assigned by the CIT for sending back the matter, are valid and tenable in the eyes of law.
13. It is relevant to note that the Hon'ble Kerala High Court in Malabar Industries Co. Ltd. vs. CIT has held that in case where the AO failed to apply his mind to the case in all its perspectives, the order passed by the AO was erroneous insofar as it was prejudicial to the interests of Revenue and, therefore, the assumption of jurisdiction by the CIT under s. 263 of the Act, was justified.
14. In view of the foregoing reasons, we do not find any legal infirmity in the order of the CIT passed under s. 263 of the Act and accordingly the same is upheld.