IN THE INCOME TAX APPELALTE TRIBUNAL: JODHPUR BENCH : JODHPUR

BEFORE SHRI HARI OM MARATHA, JUDICIAL MEMBER AND SHRI N.K. SAINI, ACCOUNTANT MEMBER.

ITA Nos. 410 & 411/JU/2011 (A.Y. 2007-08 & 2008-09)

M/s Ganesh Builders Vs. The C.I.T, 1-C-19, Jawahar Nagar Bikaner Sriganganagar PAN No. AABFG 1354 Q Assessee by : Shri Suresh Ojha Department by : Shri A.K. Khandelwal, CIT, DR Date of hearing : 18/02/2013 Date of pronouncement : /02/2013

ORDER

PER HARI OM MARATHA, J.M :-

These are two appeals by the same assessee for A.Ys. 2007-08

and 2008-09, which have been filed against the separate but even

dated orders of 4.11.2011 passed by the ld. CIT, Bikaner. In both the

appeals almost identical issues are involved. Therefore, for the sake of

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convenience and brevity, these are being disposed of by this common

order.

ITA No. 410/JU/2011 [A.Y. 2007-08]

2. This appeal emanates from the order of revision passed u/s 263

of the Income-tax Act, 1961 [hereinafter referred to as 'the Act', for

short] by the ld. CIT, Bikaner, dated 4.11.2011. The ld. CIT called for

records of the assessment for A.Y. 2007-08 passed on 27.4.2009 and

after verification has found that the A.O. has allowed the deduction of

interest paid to third party and has treated the income from bank

interest on FDRs as business income without making necessary

enquiries regarding the allowance of interest paid to third parties

while estimating net profit and regarding the question of allowability

of interest received on FDRs. Accordingly, a show-cause notice dated

28.6.2011 was issued u/s 263 of the Act to the assessee which reads as

under:

“After having examined the records of your case, I am

considered the assessment completed u/s 184(1) &

(2)/143(3) on 27/4/2009 for the Assessment Year 2007-08

as erroneous in so far as it is prejudicial to the interest of

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revenue under section 263 of the Act on the grounds

mentioned below.

1. The A.O. has provide benefit of deducting third party

interest amounting to Rs.33,79,844/- from net profit @

8.07% determined on the gross receipts of contract

receipts. In view of judgment of jurisdictional High Court

in the case of Shri Ram Jhanwar, the interest to third

party is not allowable.

2. Income from FDR interest to be assessed as income from other

source, whereas A.O. has assessed amount of FDR interest of

Rs.19,50,875/- as business income and applied profit

2. The A.O. has not properly examined and verified the new

creditors/loan of Rs.13,50,000/- introduced during the year.

3. Details regarding business receipts from property brokerage of the

assessee has not been verified by the A.O. and A.O. has not made

any enquiry in respect of investment in residential property

situated at 154 G Block, Srigangnagar

In view of the above, please show cause why the above

referred assessment order passed u/s 143(3) dated

30/12/2009 be not revised u/s 263 of the I.T. Act 1961

Your case is fixed for hearing on 5/7/11 at 11:30 AM

in my office. You may appear either personally and or

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through a duly Authorized Representative in this

behalf on the date fixed along with written

submission arid evidence etc.. In case of non

compliance, the decision can be taken to decide the

issue on the available materials without any further

reference to you.”

3. In response to the above notice, the assessee submitted a

detailed reply which is extracted below:

“I am here under submitting my submission on the issue of yours grounds of revision

ground wise:

1. Third Party Interest amounting to Rs. 33,79,8447-

You're good self have observed in your first ground that the interest paid to third party is not

allowable in view of the judgment of Hon'ble Rajasthan High Court in case of Sri Ram

Jhanwar. In this respect it is stated that an application for providing copy of judgment has

already been submitted which too is still pending. You are, therefore, humbly prayed that

copy thereof may kindly be provided for filing suitable reply. Meanwhile you are requested to

kindly adjourn the case fixed for hearing on 05.07.2011

Without prejudice to the above it is stated that what I have able to understand that how you

want to rely upon the judgment of Hon'ble Rajasthan High Court in case of Sri Ram

Jhanwarlal, Bikaner. The fact mentioned by your good self is in respect of the judgment seems

to be under some wrong impression or without going through the complete judgment. First of

all, I want to draw you kind attention towards the fact that the issue of allowability of interest

paid to third party was not at all the subject matter of order of Hon'ble Rajasthan High Court.

The issue was in respect of allowability of depreciation only. Not only in the order but also in

the appeal itself there was no relief claimed in respect of the interest

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I am also producing herewith the judgment of Hon'ble Rajasthan High Court.

From the perusal of both the appeal and the judgment, you will not find the

word of the interest paid to third party. The issue in the appeal was in respect

of the judgment was in respect of allowability of depreciation under section 32

of the Income-tax Act. In such circumstances you will observe that the issue was

not at all a issue in respect of allowability of the interest paid to third party,

therefore, the case referred by you is not at all applicable in case of the

assessee and on this basis the order passed by the then Assessing Officer cannot

be called as erroneous as well as prejudicially to the interest of revenue. If you

are having any other judgment of the Hon'ble Rajasthan High Court in which has

been held that the interest paid to third party is not allowable. You are

requested that the same may kindly be supplied to the assessee so that he may

be able to rebut the same.

Without prejudice to above it is stated that though you have only

referred the case of Sri Ram Jhanwar (Not Correct) 1 in which the issue was not

regarding allowability of the interest paid to third party, therefore, the same

cannot be a basis for disallowing the interest paid to third party as alleged by

you.

Furthermore, it will be worthwhile to mention here that in case of M/s

Jain Construction Co. and in case of M/s Bhumi Va Bhwan Path

Nirman(Bohra), the Hon'ble Rajasthan High Court approved the interest paid

to third party. Though, the allowability of the interest paid to third party

can not be at all subject matter of the Hon'ble Rajasthan High Court because

this is not a question of substantial question of a law, but in case of M/s Jain

Construction Co. reported in 245ITR Page No. 527 and the CIT V/s Bhawan &

Path Nirman (Bohra ) reported in 258 ITR Page No. 440 the Hon'ble High

Court approved the interest paid to third party, therefore, you will observe

that the ground mentioned by your good self in the notice is not correct or can

not be a ground for treating the order passed by then Assessing Officer as a

order prejudicially to the interest of revenue as well as erroneous.

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I want to draw your kind attention towards the fact that there is

cantina of judgment in which the interest paid to third party has been held

as allowable after application of rate of profit. In this connection I want to

draw your kind attention towards the order of the Hon'ble Tribunal, Jodhpur

Bench, Jodhpur in case of M/s G.R. Contractor in which the interest paid to

third party has been allowed after application of rate of profit, for your ready

reference copy of the order of the Hon'ble Tribunal is being enclosed herewith.

To the best of my knowledge this can be one of the latest orders in respect of

the interest paid to third party. As per the rule of precedent later judgment

has to be followed even if there are two types of judgments. In case of an

assessee the interest paid to third party was rightly allowed by the then

assessing officer while passing the order.

I also want to draw your kind attention towards the order of Income-

tax Appellate Tribunal, special Bench, Allahabad reported in 105 ITD Page

No. 1 in case of M/s Allied Construction Vs. Deputy Commissioner of

Income Tax- Buland Shahar. In this case the Hon'ble Tribunal held that past

history has to be followed. In case of the assessee in the immediately

various years the interest paid to third party has been allowed as

deduction after application of rate of profit, therefore, the Income-tax

Officer committed no mistake in respect of allowing the interest paid to

third party. Therefore, the order passed by the Income-tax Officer is

having no irregularity/illegality/mistake which is falling under the

definition of erroneous as well as prejudicially to the interest of the

revenue. The issue of allowability of interest paid to third party

remained a precedent after application of rate of profit. The Income-tax

Officer, The Commissioner of Income-tax (Appeals) and Income-tax

Appellate Tribunal is allowing the interest paid to third party. Lastly,

therefore, requested to kindly drop the proceedings initiated by you on

this account.

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In this connection I also want to draw your kind attention

towards the fact that this is not only a single case in which the

interest paid to third party has been allowed by the Assessing Officer

of Sri Ganganagar but also there are dozens of cases assessed to tax at

Sri Ganganagar, in cases of the contractors where interest paid to

third party has been allowed. .1 does not want to bring the name of

the contractors but same are subject to verification by your good

self. In this connection it is stated that if any one case the interest

paid to third party has been allowed in that case the interest paid

to third party cannot be disallowed in another case. It will be

worthwhile to mention here that not only by the assessing officer of

Sri Ganganagar the assessing authority of Bikaner are also

allowing/allowed interest paid to third party. Just for the sake of

example I want draw your kind attention towards the case of Sri Ram

& Co assessed to tax by the ACIT Circle I & II Bikaner and M/s Sri

Subh Laxmi

Construction Company. The Hon'ble Tribunal also allowed

interest paid to third party in case of Sri Ram & Co. reported In

32 TW Page 225. I also want to submit that almost all the

assessing authorities are allowing interest paid to third parties

after application of rate of profit. In this connection the

department himself accepted his allowable deduction,

therefore. different treatment cannot be taken by the

department. To the best of our knowledge the department has

not taken any action therefore, you will observe that in case of

the assessee no action u/s 263 of the Income Tax Act is attracted

therefore humbly prayed that proceedings initiated may kindly be

dropped.

2. Interest Income From FDR of Rs. 19,50,875/-

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As regards your second ground for treating the order as prejudicial to the

interest of revenue is in respect of the interest from FDR assessed to tax as

income from other sources. In this connection it is stated that there is a

direct nexus between the interest income as well as the investment. The

FDR's were not voluntarily invested, but the assessee being a contractor

while getting the registration has to invest/ deposit/pledge the FDR. In

absence of the pledging FDR/NSC the competent authority is not enlisting the

assessee as approved contractor. In such circumstances there is a direct

nexus between the amount of FDR and interest income thereof. From these

facts and circumstances this can not be a ground for treating the order as

erroneous as well as prejudicial to the interest of revenue. In this respect it

is also stated that some of the FDR's are in respect of giving the bank

guarantee as desire by the awarder of the work therefore this can not be

called as voluntary investment in FDR's. In this connection I want to draw

your kind attention towards the case of M/s Gopal Ram Pemaram reported in 24

Tax-World Page No.442 and Sri Ram & Co. reported in 32 TW Page 225. in

which the Hon'ble Tribunal by speaking complete facts treated the interest

income as the interest from business. In this respect it will be worthwhile to

mention here that in case of the assessee himself in the immediately preceding

year the interest income from FDR was taken and treated as income from

business. The Assessing officer, during the year under consideration, also

committed no mistake in treating the interest from FDR as business income. You

are, therefore, requested that the same may kindly be treated as in

accordance with the law. If you are having any judicial pronouncements, please

let us know. Please also show the reasons for treating it other than the business

income we are relying on the order of the Income-tax Appellate Tribunal in case

of M/s Gopal Ram Pemaram .in this case the Hon'ble tribunal even went one step

further that if surplus fund deposited in the FDR said also be taxed as income

from business.

I also want to draw your kind attention towards the case of

Allied Construction Vs. Deputy Commissioner of Income Tax-

Buland Shahar. reported in 105 ITD Page No. 1. The order is an

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order of special bench of Tribunal was binding on the assessing

officer and is also binding upon your good self in respect of adopting

the past history.

Further, I want to draw your kind attention towards the rule

of precedent. The order of the Income-tax Appellate Tribunal is

having the character of binding nature. In this respect I want to

draw your kind attention towards the case of Avon Apparels V/s

ITO reported in 22 Tax-World Page No.399 the relevant portion of

the observation of the Hon'ble Tribunal is being reproduced

hereunder:-

22 Tax-World 399

"Further held that in the Rajasthan, the department is bound to follow the decision of the Jaipur Bench of the Tribunal and that the CIT (A) has committed a mistake which is not curable."

"Also held that CIT (A) was not right at all in not considering^ and following the decision of this bench when the decision was directly on identical issue."

The judgment of Kama Laxmi Finance (SC) is also there about the order of the income tribunal having the character of binding nature. The relevant portion is being reproduced here under:

72 Taxman-Magazine Page43 Union of India

Vs. Kamalaksmi Finance Corpn. Ltd.

This time, an order of the Tribunal passed in some other case

which supported the respondent's claim was brought to the

Assistant Collector's notice, but he refused to follow it on

the ground that the department had gone in appeal against

it. On writ, the High Court set aside the order of the

Assistant Collector and remanded the matter for proper

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consideration and a proper order. The High Court also passed

severe structures against the two Assistant Collectors for

outing judicial discipline by not following appellate orders.

The order of the Appellate Collector is binding on the

Assistant Collectors working within his jurisdiction and the

order of the Tribunals binding on the Assistant Collectors

and the Appellate Collectors who function under the

jurisdiction of the Tribunal. The principles of judicial

discipline require that the order of the higher appellate

authorities should be followed unreservedly by the

subordinate authorities

The Hon'ble Supreme Court, in the clear terms, held that the order of

the Tribunal shall be binding on the lower authorities including the

Commissioner of Income-tax. The order of the A-One Appraisals is also very

speaking in respect of binding nature. In these facts and circumstances you are

supposed to follow the rules of precedent after considering the same you

will observe that the order passed by the Income-tax Officer is a valid order.

The AO followed the order of Hon'ble Tribunal therefore It cannot be called as

erroneous and prejudicial to the revenue. The order it self is speaking in

respect of the following the past precedents. The past history has been

mentioned in the order

As regards the legal position in respect of section 263 of the Income-tax

Act it is stated as under:

Sir, I want to draw your kind attention towards the fact that if two views

are there and out of two views one view has been taken by the Income-tax

Officer that can be termed as in accordance with the law. If you are of

another view in that case the order passed by the Income-tax Officer cannot

be called as order to the prejudicial to the interest of revenue as well as

erroneous! I want to draw your kind attention towards the fact that the

section 263 of the Income-tax Act is not a weapon so as rectify the mistake if

committed. Though, in case of the assessee, no, mistake has been

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committed by the then Income-tax Officer while passing the order. The

Income-tax Officer issued one notice under section 154 of the" Income-tax

Act, but though, the mistake was not rectified by the Income-tax Officer and

not covered under the garb of the rectification. Now you r good self have

utilized the weapon for treating it as prejudicial to the interest of revenue.

The Assessing Officer also expressed that the judgment of Hon'ble

Rajasthan High Court in case of Sri Ram Jhanwar is applicable, but the mistake

was not treated as mistake and proceedings initiated by the Assessing Officer

vide notice dated 18.4.2011has been dropped. The mistake which has been

dropped once cannot be now a subject matter of section 263 of the Income-tax

Act. You are, therefore, requested that the proceedings initiated may kindly be

dropped.

I want to draw your kind attention towards the fact that the

Income-tax Officer even while passing the order under section 143 (3) of

the Income-tax Act relied upon the order of the Allied Construction Vs.

Deputy Commissioner of Income Tax- Buland Shahar reported in

105ITD Page No. 1 (Special Bench) after following the judgment of

Hon'ble Tribunal. The Income-tax Officer assessed the income by

application of rate of profit. The Income-tax Officer, in the assessment

order itself, have mentioned that in the assessment year 2006-07 the

depreciation, interest paid to third party and interest to the partners

has been allowed. This fact has been mentioned at page No. 4 of the

order of the assessment. In these facts and circumstances you will

observe that the order has been passed respectively following the order

of the Income-tax Appellate Tribunal.

In this respect it will be worthwhile to mention here that I have

already made it clear in my earlier submission/ Para that if two views

are possible and out of two views, one view has been taken by the

Income-tax Officer, in that case the order can not be called as

erroneous and prejudicial to the revenue. In this respect your kind

attention is invited towards the following in case of Commissioner of

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Income Tax Vs. DLF Power Ltd. (Del) Reported in 229 CTR Page No. 27

the relevant portion is being reproduced here under:

229 CTR Page No. 27

If two views are possible and the view taken by the AO was plausible one, that would not provide sufficient ground for the CIT to assume jurisdiction under section 263 merely because he had a different view.

Further I want to invite you kind attention in case of Grasim

Industries Ltd. Vs. Commissioner of Income Tax (Bombay)

reported in 321 ITR Page No. 92 the relevant portion is being

reproduced here under:

321WR Page No. 92

Assessing Officer can not be treated as prejudicial

to the interest of the Revenue, for example when

an Income tax officer adopted one of the courses

permissible in law and it has resulted in loss of

revenue, or where two views are possible and the

Income tax Officer has taken one view with which

the Commissioner does not agree, it cannot be

treated as an erroneous order prejudicial to the

interest of the Revenue

The section 263 of the Income-tax Act does not empower to invoke

or go to process of assessment again and again. In this respect your

kind attention is invited towards in case of Commissioner of

Income Tax Vs. Ganpat Ram Bishnoi reported in 152

Taxman Page No. 242 (Rajasthan). If you are not satisfied with

the order of the Income-tax Officer can not provide power to your

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good self so as to pass the order under section 263 of the Income-

tax Act. In this respect your kind attention is invited towards

275ITR Page No. 101 (Tribunal). The relevant portion is being

reproduced here under:

275 ITR 101 (ITATCUTTAK) T. K. International Ltd.

vs Assistant Commissioner Of Income-Tax.

It was further observed that an ITO

adopting one of the course permissible in law and

it has resulted in loss of revenue or where two views

are possible and the ITO has taken one view with

which the CIT does not agree it cannot be treated

as an erroneous order prejudicial to the interest of

the revenue unless the view taken by the ITO is

unsustainable in law.

As far as the application of provisions of section 263 of the

Income-tax Act I want to draw your kind attention that in case of the

assessee the Income-tax Officer already applied his mind properly

and passed the order and allowed the deduction of the interest paid

to third party as well as treated the income of interest from FDR etc.

as interest from the business. The basis of the application of mine of

the Assessing Officer is based on the order of the Income-tax

Appellate Tribunal. The Income-tax Officer did correctly facts and

circumstances of the case because in past the interest paid to third

party was allowed as deduction as well as the interest from FDR was

taxed as income from business. In this respect your kind attention is

invited towards the case of Sh. Ram Dayal Kalla V/s Income-tax

Office reported in 32 Tax-World Page No. 18.

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In above mentioned facts and circumstances you will observe

that the order of the Income-tax officer is a valid order and neither

erroneous nor prejudicial to the interest of revenue, therefore, it is

prayed that the proceedings initiated under section 263 of the

Income-tax Act may kindly be dropped.

The Hon'ble Tribunal in case pof Commissioner of Income

Tax, Bikaner v/s Ganpat Ram Bishnoi in Appeal No. 4$/99

reported in 198 CTR 546 has expressed that if matter has been

examined and gone through then sec. 263 cannot be made

applicable. The department went in the Appeal before the Hon'ble

Rajasthan High Court and Hon'ble Rajasthan High Court confirmed

the order of the IT AT. For your ready reference your kind attention

is invited towards the order of the Hon'ble High Court. Relevant

portion is being reproduced here under: -

"when enquiry in fact has been conducted and the Assessing Officer has reached a particular conclusion, though reference to such enquiries has not been made in the order of the assessment, but the same is apparent from the record of the proceedings, in the present case, without anything to say how and why the enquiry conducted by

the Assessing Officer was not in accordance with law, the invocation of jurisdiction by the CIT was unsustainable. As the exercise of jurisdiction by the CIT is founded on no material, it was liable to be set aside. Jurisdiction under section 263 cannot be invoked for making short enquiries or to go into the process of assessment again and again merely on the basis that more enquiry ought to have been conducted to find something."

The judgment of Hon'ble Rajasthan High Court is based on the

basis judgment given by the Hon'ble Supreme Court in case of

Malabar Industries reported in 243ITR 83.

15

As far as the notice u/s 263 issued by CIT, it is also stated that

the order passed by the Income Tax officer is in accordance with the

law. Neither the order is erroneous nor prejudicial with the interest

of revenue. In this respect your kind attention is invited towards the

following:-

Please refer to 259 ITR page 502 Commissioner of Income

Tax V/s Arvind Jewellers. In this case the Hon'ble High Court in

last but one Para observed which is being reproduced as under :-

"it is the finding of fact given by the Tribunal that the assessee has produced relevant material and offered explanations in pursuance of the notices issued under section 142(1) as well as section 143(2) of the Act and after considering the materials and Explanation, the Income-tax Officer has come to a definite conclusion. The Commissioner of Income-tax did not agree with the conclusion reached by the Income-tax Officer. Section 263 of the Act does not empower him to take action on these facts to arrive at the conclusion that the order passed by the Income-tax Officer is erroneous and prejudicial to the interests of the Revenue. Since the material was there on record and the said material was considered by the Income-tax Officer an<£ a particular view was taken, the mere fact that a different view can be taken, should not be the basis for an action under section 263 of the Act and it cannot be held to be justified."

The Assessing Officer made proper enquiry hence not covered

under u/s 263 of the I.T. Act. This fact is subject to verification from

the assessment record.

I also want to draw your kind attention toward the fact that if the

two views are there and out of that the view has been taken by the

Income Tax officer in that case revision is not permissible. Your kind

attention is invited towards 243 ITR Page 83 and 105 ITR Page 212,

253 ITR Page 645. Your kind attention is also invited towards the

case of Ram Dayal Kalla V/s I.T.O. reported in 32 Tax Word,

18. The Hon'ble Jodhpur

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Tribunal held that matter cannot be reexamined u/s 263. For your

ready reference the head line of the Journal is being reproduced

hereunder:-

"/. Whether the section 263 can be invoked, for re- examination in the matter? - Held No

Whether the provisions of section 263 can be invoked and Tribunal corrective or has reviewed the subordinate's order in exercise of supervisory powers? - Held No."

The case decided by the Hon'ble Tribunal having almost identical

facts, therefore, the judgment of the Jurisdictional Tribunal is

binding too also. You will therefore, observed that the order passed

by the Income Tax officer is not prejudicial in the interest of revenue.

Your Kind attention is further invited towards the judgment of

the Jurisdictional High Court reported in 198 CTR pages 546 -

Commissioner of Income Tax V/s Ganpat Ram Bishnoi In this case

the Hon'ble Jurisdictional High Court observed which are being

reproduced as under:-

"A.O. had not applied hi mind to the various aspect of the matter -Once enquiry in fact has been conducted and the A.O. has reached a particular conclusion, Though the reference to such enquiry has not been made in the order of assessment, the invocation of jurisdiction by the CIT is not sustainable - Same liable to be set aside."

The ratio of the judgment is applicable in toto. You are

therefore requested that proceeding initiated may kindly be dropped.

Your Kind attention is further invited towards the judgment of

the Jurisdictional High Court reported in 233 ITR page 649 -

Commissioner of Income Tax V/s Shiv Hari Madhu Sudan. In this

case the Hon'ble Jurisdictional High Court observed which are being

reproduced as under:-

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"To sum-up, I am of the opinion that assessment as made by the Income Tax officer is in this way has been made by him after conducting the proper enquiry and the Commissioner of income Tax was not justified in setting aside the assessment on the grounds of same, being erroneous, prejudicial of the interest of Revenue."

Your kind attention is further invited towards the case of

commissioner of Income Tax V/s Girdhari Lai reported in 258 ITR

Page 331 in which the Hon'ble Jurisdictional High Court held that the

Assessing officer, after going through the material on record and after

considering

In this connection I have made it clear that when in case of others

the department accepted the one thing which is available in the case of

the assessee, adverse different view cannot be taken. To the best of

our knowledge I am mentioning the name of contractors of Bikaner

in which almost same circumstances exist and same has

taxed like as assessee for the assessment year.

1. Dana Ram Sri Ram 2. Dhundhwal Brothers 3. Dudi & Company 4. Meera Construction Company 5. Ali Mohd. Abdul Mazid 6. Mohata Construction Company 7. Maheshwari Construction Company

Not only in Bikaner but in cases of contractor at Sri Ganganagar

almost all the assessing authorities were allowed interest paid to

third parties and also treated the interest on FDR as business income,

It has been made known following are the similar cases of Sri

Ganganagar:

1. Ganesh Ghadiya Construction Company 2. Surendra Kumar Bansal 3. Jaswan & Co. 4. Basnal Construction Company 5. Leedhar Devki Nandan 6. Guru Nanak Buildcon

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In the above mention cases the act of the A.O. has also approved

by the Tribunal to the best of our knowledge in respect of interest pay

to third party as well as about the interest on FDR etc.

The explanation of the assessee consider by the them assessing

officer and made certain addition and rejected the books of accounts

also which could not be said that the Assessing Officer while passing

the/order has not applied his mind. It is not always necessary that every

assessee in the line of the business should have the same rate of profit

but it all depends on the surrounding circumstances of the case as

regards the interest pay to third party and assessing the income of

interest on FDR also depend on the fact of each case1.

In above mentioned facts and circumstances you will observe

that the order passed by the Income Tax officer is not at all erroneous

as well as prejudicial to the interest of Revenue, therefore, the

proceedings initiated may kindly be dropped.

If still you are not agreeing with the submission please let us know

so that further reply can be submitted.

2. (Sr. No. not correct it should be Sr. No. 3). AO Not examined/verified properly new creditor Loan of Rs. 13,50,0007-

and

3. (Sr. No. not correct it should be Sr. No. 4). AO not verified Business receipts from property brokerage

As regards your last two grounds I could not lay my hand on the

grounds in the set of circumstances and in the Balance Sheet etc. You

are therefore prayed that kindly let us know the basis for revision u/s

263 of IT Act taken by you and explained so that I may be able to file

suitable reply. It seems that same has been mentioned which are related

to some other assessee, any how you are' prayed that kindly let us

know so that I may be able to file suitable reply. Meanwhile the case

fixed for hearing may kindly be adjourned.

19

Without prejudice to above it is also stated that to the best of

our knowledge the action under section 263 of the Income-tax Act seems

to have been taken so as to meet out the objection of the audit. We are

writing because on the basis of audit objection rectification notice

under section 154 was issued and proceedings thereof were dropped.

The action if taken under section 263 on the basis of audit objection is

not in accordance with the law. The audit party is not supposed to

intervene in the power of the Assessing Officer. Though, the

application of rate of profit with further deduction if any is the

wisdom of the Assessing Officer and the audit party is not supposed

to dictate the condition in the power of the Assessing Officer. Though,

there is no direct judgment of any authority under the head 263 but

there are so many judicial pronouncements that on the basis of audit

objection, no action under section 147/148 of the Income-tax Act

whatsoever can be taken at all. For instance, I want to draw your kind

attention towards the judgment of Hon'ble Rajasthan High Court

reported in 249 ITR Page 306 and 38 Tax World Page 52 (Rajasthan).

The principle thereof is applicable in toto in case of the assessee,

therefore, prayed that if the action is taken so as to dispose off the

objection of the audit the proceedings initiated may kindly be dropped.

An application for disclosing the reasons is pending before your good

self. If the reasons shall be disclosed in course of hearing the assessee

reserves his right so as to submit suitable reply.

In case you want to ply upon the'any Judicial pronouncement please let us know following the rule of natural justice. If 4you are in need of further information/details please let us know.

Thanking you, Yours faithfully

(Suresh Ojha) Advocate

20

The Commissioner of Income-Tax, Bikaner.

Reg. M/s Ganesh Builders

Sriganganagar. Assessment year

2007-08

Sub : Written submission u/s 263 of

Income Tax Act. Fixed On: 20.09.2011

Dear Sir,

With reference to above it is stated that on the last date of

hearing your good self directed to submit the details in respect of

the names of the assessee of Biikaner and Sriganganagar. In this

respect it is stated that though, the copies of the order of the

cases are not available /collected, but anyhow, I am enclosing

herewith the order of the Hon'ble Tribunal in case of ITO,

Bikaner V/s M/s Amar Singh Krishan Chander Contractor, Inside

Jassusar Gate, Bikaner decided by the Hon'ble Tribunal,

Jodhpur Bench, Jodhpur dated 16.01.2001. Relevant portion is

being reproduced hereunder-

"Since the depreciation and interest to third parties have been held by the Hon 'ble Jurisdictional High Court to be further separately allowable after determining the net profit, in the case of M/s Jain Construction Co. reported in 22 Tax World 747, We find no fault with the impugned order of Ld. CIT(A) on this count. We, therefore, decline to interfere with the same",

21

From the perusal of the same you will observe that the Hon'ble

Tribunal has categorically mentioned in the order itself that the

interest paid to third party is allowable as approved by the

Hon'ble Rajasthan High Court. I am submitting the order because

your good self in course of hearing expressed that there is no

authority in respect of allowability of the interest paid to third party

after application of rate of profit.

I am also enclosing herewith the order of IT AT the

department not went in the appeal therefore became final. In view

of judgment reported in 269 ITR Page 99 (SC) different views cannot

be taken.

The order referred above is an order of Jurisdictional bench

of Tribunal therefore is binding on all the officers working their

under. If you are the opinion that same is not having the binding

nature. Please show you intimation.

It will be worthwhile to mention here that without

prejudice to above that even otherwise it is the Assessing

authority who can allow further deduction after application

of rate of profit and the Commissioner of Income-tax cannot

impose his condition. If allowed by the Assessing Officer in

that case the order cannot be a subject matter of section 263

of the Income-tax Act. You are, therefore, requested that the

same may kindly accepted.

Regarding applicability of M/s Sri Ram Jhanwarlal, I have

already made it clear, and again stated that the A.O. allowed the

depreciation in this case but the ITAT refused to allow

depreciation. The application of rate is always subject to further

deduction. The rate can't include all expenses. Therefore the

A.O. did as per law.

22

I want to draw your kind attention towards the order of

ITAT Jaipur Bench, Jaipur. In case of Vijay Builders & Sh.

Rajendra Singh Bhambhu & Company assessed to Tax by the

A.O. of Jhunjhunu in which interest paid to third party has

been allowed by the ITAT. To the best of our knowledge this is

the latest judgment of the Hon'ble Tribunal. The order of

ITAT Jaipur Bench, Jaipur is binding also.

Regarding the copies of order of A.O. referred in my

last application. We could not collect copies thereof so far.

Your good self can see and verify it from recorded. Therefore

requested to kindly peruse it.

It is, therefore, humbly, prayed that reasonable time

may kindly be allowed so that the copies may be submitted.

Hope you will consider the request and allow time.

Inconvenience caused to you is deeply regretted.

In case you are in need of further information, please

let us know so that the same can be submitted for entire

satisfaction of your good self.

In case of M/s Ganesh Garhia Construction Co. also

same issue is involved and the department is accepting it.

The interest paid to third party is also one of the issue. In the

other word case of the assessee and Ganesh Garhia Company is

identical. There can't be two yard stick for the same matter.

The case of the assessee is not covered within the ambit

of section 263 of the Income-tax Act, you are requested to

kindly drop the proceedings initiated by you.

i

23

Thanking you,

Yours faithfully,

(Suresh Ojha)

Advocat Date:

20.09.2011

Encl. : As above

4. After considering the reply of the assessee, the ld. CIT has found

the assessment order erroneous and prejudicial to the interest of the

revenue in respect of the above three grounds. He has found the order

erroneous on the third ground relating to allowance of depreciation

which was not included in his show-cause-notice. By setting it aside

he has directed the A.O. to make a de novo assessment in the light of

his observations after giving reasonable opportunity of being heard to

the assessee. From the above finding of the ld. CIT, the assessee is

aggrieved and has come in appeal before us.

5. We have heard rival submissions and have carefully perused the

entire material placed on record. The facts of the case are that the

assessee-firm is a civil-contractor. During this year, it has shown gross

profit of Rs. 2,33,339/- on total turnover of Rs. 32,04,32,400/- giving

gross profit rate of 7.28%. The gross profit rate is found to be better

24

than the last year in which it was 5.02%. The assessee had not

maintained proper bills and vouchers regarding expenses incurred

during the course of its business. It has also not maintained site-wise

details of expenses and also stock register. Accordingly, the A.O. after

rejecting the books of account has invoked the provisions of section

145(3) of the Act and has adopted net profit rate of 8.07% in the light

of the Special Bench order in the case of M/s Allied Construction

reported in 105 ITD page 1 to allow the impugned deductions. The A.O.

has allowed the claim regarding third party interest. As per the ld.

CIT, in the computation of income, the assessee has claimed only

interest payment to partners. According to him, after the provisions of

section 145(3) of the Act are invoked all sorts of deductions including

interest payment etc. are treated as covered and except for the

statutory deductions like depreciation and remuneration and interest

to partners are allowable. Therefore, according to him, the A.O. was

not supposed to allow deduction of interest paid to third parties. He

has also observed that the A.O. has not applied his mind while allowing

deduction of interest paid to third party out of net profit rate arrived

at by applying the rate of 8.07%. It is also mentioned that in A.Y.

2003-04, the same A.O. has not allowed interest paid to third parties

under identical facts. After considering the detailed reply of the

25

assessee, the ld. CIT has found that the finding of the A.O. is erroneous

in so far as it is prejudicial to the interest of the Revenue. Similarly,

in respect of interest on FDRs, which has been assessed by the A.O. as

business income, the ld. CIT has found that the interest of Rs.

19,50,875/- received on FDRs may not be ‘business income’ unless it is

from FDRs made for initial registration as a contractor or subsequently

made as a security deposit towards contracts awarded later on.

According to the ld. CIT, other than the above, any interest on surplus

deposit cannot be allowed and in this regard the A.O. has not made

any investigation, and therefore, here also error has been committed

by the A.O. which is prejudicial to the interest of the revenue.

5. It was argued by the ld. A.R. that the issue of allowance of

interest to third parties stands covered by numerous decisions of the

Hon'ble ITAT including that of the Jodhpur Bench and atleast two

decisions of the Hon'ble Jurisdictional High Court. According to him,

the A.O. has taken one of the possible views after making detailed

enquiry in the matter. It was argued that on the basis of audit

objection, the A.O. had tried to make changes in the assessment order

by resorting to provisions of section 154 of the Act but he failed to do

so as he found his order correct. But in the guise of revision the ld.

26

CIT has tried to amend the assessment order, somehow or the other.

He has further argued that the ld. CIT has not considered the valid

arguments made on behalf of the assessee and has failed to consider

and follow the binding precedents of the Jodhpur Bench of the

Tribunal, and that of the Hon'ble Jurisdictional High Court rendered in

respect of the impugned issues. He has pleaded that this is a serious

mistake on the part of the lower authorities who do not care for the

binding precedents and without referring them pass orders with

reference to decisions which are not really on the subject. It was

argued that this is a serious concern, which should also be looked into.

6. On the other hand, the ld. CIT D.R. Shri Khandelwal has stated

that the ld. CIT has not disregarded any binding precedents either of

the Tribunal or of the Jurisdictional High Court as has been contended.

According to him, there are contradictory decisions on the subject and

the ld. CIT has referred to and relied on a later decision of the Hon'ble

High Court which is desired as per the Rule of the application of

Precedents whereby the later decision has to be followed on a given

subject if there are contrary decisions on an issue. The ld. CIT [DR],

however, admitted that there are various decisions of this Tribunal

which do support the contention of the assessee and that there are

27

number of decisions of the Jurisdictional High Court which directly or

indirectly support the contention of the assessee regarding claim of

deduction of interest paid to third parties and treating the interest on

FDRs as business income under identical facts and circumstances.

According to him, there is no serious disregard or contempt towards

the binding decisions as has been alleged.

7. The ld. A.R. Shri Ojha, quipped at this point and on the subject.

According to him, decision of Hon'ble High Court on which the ld. CIT

[DR] has relied in the case of Shri Ram Jhanwarlal Vs. ITO & ors. order

dated 3.7.2008 does not talk about interest paid to a third party. In

this decision it is not held that once the books of account are rejected

by the A.O. and net profit is estimated interest paid to third party

cannot be allowed. It was further argued that in that case the

question of interest paid to third party is not involved. Therefore, this

decision is per incuriam and is not applicable to the facts of the given

case. He argued that the ld. CIT has not given reasons as to why he has

not relied on the binding decisions.

28

8. We have given thoughtful consideration to the rival submissions

and have given our anxious thought to the precedents relied upon

before us. As per rule of precedent, the orders of the jurisdictional

bench of ITAT and of the Hon'ble Jurisdictional High Court have a

binding nature. The authorities falling under their jurisdiction are

bound to follow them without fail. However, they may distinguish

them if they are really distinguishable. In this case, the ld. CIT has not

even considered the binding decisions and has jumped to one decision.

This is not a correct way of dealing with the precedents. Be that as it

may, it is trite that an order can be revised only and only if twin conditions

of ‘error in the order’ and ‘prejudice caused to the Revenue’ co-exist.

9. The subject of ‘revision under section 263’ has been vastly examined

and analyzed by various Courts including that of Hon’ble Apex Court. The

revisional power conferred on the CIT vide section 263 is of vide amplitude.

It enables the CIT to call for and examine the records of any proceeding

under the Act. It empowers the CIT to make or cause to be made such an

enquiry as he deems necessary in order to find out if any order passed by

Assessing Officer is erroneous in so far as it is prejudicial to the interests of

the Revenue. The only limitation on his powers is that he must have some

material(s) which would enable him to form a prima facie opinion that the

order passed by the Assessing Officer is erroneous in so far as it is prejudicial

29

to the interest of the Revenue. Once he comes to the above conclusion on

the basis of the ‘material’ that the order of the Assessing Officer is

erroneous and also prejudicial to the interests of the Revenue, the CIT is

empowered to pass an order as the circumstances of the case may warrant.

He may pass an order enhancing the assessment or he may modify the

assessment. He is also empowered to cancel the assessment and direct to

frame a fresh assessment. He is empowered to take recourse to any of the

three courses indicated in section 263. So, it is clear that the CIT does not

have unfettered and unchequered discretion to revise an order. The CIT is

required to exercise revisional power within the bounds of the law and has

to satisfy the need of fairness in administrative action and fair play with due

respect to the principle of audi alteram partem as envisaged in the

Constitution of India as well as in section 263. An order can be treated as

‘erroneous’ if it was passed in utter ignorance or in violation of any law; or

passed without taking into consideration all the relevant facts or by taking

into consideration irrelevant facts. The ‘prejudice’ that is contemplated

under section 263 is the prejudice to the Income Tax administration as a

whole. The revision has to be done for the purpose of setting right

distortions and prejudices caused to the Revenue in the above context. The

fundamental principles which emerge from the several cases regarding the

powers of the CIT under section 263 may be summarized below:

30

(i) The CIT must record satisfaction that the order of the

Assessing Officer is erroneous and prejudicial to the interests

of the revenue. Both the conditions must be fulfilled.

(ii) Section 263 cannot be invoked to correct each and every type

of mistake or error committed by the Assessing Officer and it

is only when an order is erroneous, that the section will be

attracted.

(iii) An incorrect assumption of facts or an incorrect application

of law will suffice for the requirement or order being

erroneous.

(iv) If the order is passed without application of mind, such order

will fall under the category of erroneous order.

(v) Every loss of revenue cannot be treated as prejudicial to the

interest of the revenue and if the Assessing Officer has

adopted one of the courses permissible under law or where

two views are possible and the Assessing Officer has taken

one view under with which the CIT does not agree, it cannot

be treated as an erroneous order, unless the view taken by

the Assessing Officer is unsustainable under the law.

(vi) If while making the assessment, the Assessing Officer examines

the accounts, makes enquiries, applies his mind to the facts

and circumstances of the case and determines the income,

the CIT, while exercising his power under section 263, is not

permitted to substitute his estimate of income in place of the

income estimated by the Assessing Officer.

31

(vii) The Assessing Officer exercise quasi-judicial power vested in

him and if he exercise such power in accordance with law and

arrives as a conclusion, such conclusion cannot be termed to

be erroneous simply because the CIT does not feel satisfied

with the conclusion.

(viii) The CIT, before exercising his jurisdiction under section 263,

must have material on record to arrive at a satisfaction.

(ix) If the Assessing Officer has made enquiries during the course

of assessment proceedings on the relevant issues and the

assessee has given detailed explanation be a letter in writing

and the Assessing Officer allowed the claim on being satisfied

with the explanation of the assessee, the decision of the

Assessing Officer cannot be held to be erroneous simply

because in his order he does not make an elaborate discussion

in that regard.

10. Reverting to the facts of this case, we have found that the ld. CIT has

revised the assessment order on two grounds, - (1) regarding benefit of

deduction given in respect of third party interest amounting to Rs.

33,79,844/- from the net profit arrived at by applying net profit rate @

8.07% on the gross contract receipts and – (2) income from FDR interest

which has been held to be assessed as income from other sources as against

treatment by the A.O. the interest on FDR amounting to Rs. 19,50,875/- as

income from business. In nut-shell the controversy between the parties can

be decided by answering whether after the rejection of books and after

applying net profit rate to business receipts deduction in respect of interest

32

paid to third parties can be allowed and interest received on FDRs can be

included in the total turnover or not?

10. After going through various decisions we have found that this Tribunal

as well as the Jurisdictional High Court in more than two cases have given a

finding in the favour of the assessee by holding that the interest paid to

third parties can be allowable even when the net income is estimated under

the provisions of section 145(3) of the Act. In the given case, it cannot be

said that the A.O. has not examined and not verified both the issues which

are the subject matter of this appeal. The A.O. has verily made enquiries

from the assessee and after relying on the decision of the Special Bench of

the Tribunal in the case of Allied Construction reported in 105 ITD 1 [SB] has

allowed this deduction of interest paid to third party. As we have discussed

above the legal position on the subject and have found that in case the A.O.

applies his mind to a given issue and takes one of the possible views and

frames assessment on that issue, that cannot be revised under the provisions

s of section 263 of the Act even if the ld. CIT has a different view on the

subject. Simple reason for the above is that taking a possible view by the

A.O. cannot tantamount to an error in the order. When one of the twin

conditions, the existence of which is sine qua non for applying provisions of

section 263 of the Act, is found missing, the assessment order cannot be

revised. In our considered opinion, the facts of the case in ITO Vs. Mangilal

Didwania reported in 286 ITR 126 [Raj] supports our above finding because in

33

that case it has been held that if the A.O. takes one of the two possible

views, the order cannot be treated as prejudicial to the interest of the

revenue and erroneous. When the A.O. has raised specific queries during

the assessment proceedings, and in response thereto, the assessee has filed

replies, and after considering the same, the A.O. passes an order, in that

eventuality, it cannot be said that the order is erroneous in so far as it is

prejudicial to the interest of the Revenue. The Hon'ble Jurisdictional High

Court has held as above in the case of CIT Vs. Ganpatram Bishnoi reported in

296 ITR 292 [Raj] because in the revisional proceedings, the powers are

confined certain limits as has been discussed above in detail. Therefore,

when there are contrary views and one of the possible views has been

adopted by the A.O., the order cannot be said to be erroneous. Therefore,

in our considered opinion, the action of the ld. CIT in setting aside the order

of the A.O. on the above two points is unjustified. Accordingly, we set aside

the impugned order and restore the order of the A.O. and allow the appeal.

11. Before parting, we may mention that the ground of allowance of

depreciation was not a part of the show-cause notice given by the ld. CIT

u/s 263 of the Act. Legally, the order is not permitted to be revised on a

ground without giving notice to the assessee. Therefore, this action of the

ld. CIT is not at all justifiable. We also set aside his finding on this issue.

34

ITA No. 411/Jodhpur/2011 A.Y. 2008-09

12. In this year, the order of the A.O. dated 11.2.2010 was sought to

be revised u/s 263 in respect of only one ground namely income from

FDR interest which has been accepted as a part of the business income

after applying net profit rate. As we have discussed above, in this year

the order has been revised in the similar manner. The A.O. has

investigated this issue and has found with reference to Tribunal order

and High Court decisions that the interest amount of Rs. 39,27,453/-

received by the assessee is to be treated as business income on which

net profit rate of 8.07% as applied to business income has to be applied

to arrive at a taxable income. In our considered opinion, there is no

error in the assessment order of this year as well in view of the similar

reasoning. In view of the foregoing discussion taken in A.Y. 2007-08,

which applies mutatis mutandis to the facts of this year. Therefore,

we set aside the CITs order for A.Y. 2008-09 also. As a result, we allow

the appeal and restore the assessment order.

35

12. In the result, both the appeals of the assessee are allowed.

Order pronounced in the open court on 26th February, 2013.

Sd/- Sd/-

[N.K. Saini] [Hari Om Maratha] Accountant Member Judicial Member Dated : 26th February, 2013 VL/- Copy to:

1. The Appellant 2. The Respondent 3. The CIT 4. The CIT(A) By Order 5. The DR

Assistant Registrar ITAT, Jodhpur