Commissioner of Income Tax, Central-I vs Maithan International

Girish Chandra Gupta, J.—The subject matter of challenge in this appeal is a judgment and order dated 24th June, 2011 by which the Income Tax Appellate Tribunal has set aside an order passed by the Commissioner in exercise of power under section 263 of the Income Tax Act, 1961 (hereinafter referred to as ''the Act'') on the ground, inter alia, that the powers envisaged under section 263 of the Act in setting aside an assessment are large and wide, but these cannot be exercised to allow the Assessing Officer to make up the deficiency of his case. The CIT had exercised power under section 263 of the Act for the following reasons:

"9. As regards the unsecured loans, it is seen that the assessee obtained loan aggregating to Rs. 1.60 crores from six private parties credit worthiness of which are doubtful. These are as under.

From the details filed, it is seen that the creditors had either nil or negligible income to support such huge cash credits to the assessee. Moreover, from their bank account, it is seen that identical amount was deposited in the bank accounts just 2-3 days before advancing the loan. For example, M/s. Samsung Estate (P) Ltd. received Rs. 10 lakhs from M/s. Pushpak Trading Consultancy (P) Ltd. in December and advanced Rs. 10 lakhs to the assessee on 16th December. Similarly, M/s. Unique Merchant (P) Ltd. received Rs. 5 lakhs from Puspak Trading Co. on 16th December. From the nature of these credit and debit entries in the bank account of the parties, the loans appear to be in the nature of accommodation entries, which require further investigation by the Assessing Officer specially regarding the creditworthiness of the parties. The Assessing Officer has mentioned in the assessment order that the inspector was deputed to verify the fresh loans during the year and his report is on record. The inspector has given identical reports in respect of the enquiries made by him in respect of six parties. His report is very elementary and simply mentions that he has verified bank passbook, P/L account and balance sheet. But, in none of the reports, he has commented on the issue of creditworthiness i.e. whether these parties had sufficient means to advance such huge loan. It is well established that loan credits from parties, who are of no means can not be accepted as genuine. The Assessing Officer was required to make proper investigation to determine whether the loan was really made by the third party or it has come out of the resources of the assessee himself. Thus, he has failed to apply his mind to all aspects of the case. Such non application of mind constitutes passing of an erroneous order which as discussed above is also prejudicial to the interest of revenue".

The learned Tribunal has set aside the order of the CIT for the following reasons :-

"The only other issue is regarding unsecured loan obtained by the assessee from six private limited companies. The Ld. CIT on perusal of the assessment records observed that the A.O. did not make proper enquiries about the creditworthiness of the lenders before accepting the loans to the assessee. He also found in the bank statement of the lenders that identical amounts of loan were deposited in the respective accounts of some of the lenders before they gave loan to the assessee. It thus appears that the Ld. CIT was not satisfied about the enquiry conducted by the A.O. to find out the source of the source. On perusal of the assessment order, it is observed that the A.O. deputed his inspector to enquire into the matter from the lenders. The A.O. was also made available with the return of income, balance sheet, P/L account, bank statement etc. of the lenders. Confirmations from the lenders were also filed before the A.O. We find from the assessment order itself that as many as on six occasions the A.O. heard the assessee and discussed the case with him. Therefore, it cannot be said that the A.O. has not at all enquired into the matter and applied his mind before dealing with the loan creditors and taking a possible view. It is a settled position that the proceedings u/s. 263 of the Act cannot be initiated by the Ld. CIT merely in his supervisory capacity. Before invoking the powers u/s. 263 of the Act, it is necessary for the Ld. CIT to demonstrate that the A.O. had committed a patent error which resulted in prejudice to the revenue. On the contrary, where the Ld. AO has conducted enquiries and after due consideration of the facts and circumstances of the case, he comes to a conclusion, then it is not open to the Ld. CIT to invoke supervisory jurisdiction on the ground of lack of enquiry. Further, a bare reading of section 263 of the Act makes it clear that the pre-requisite for the exercise of jurisdiction by the Commissioner suo motu under it, is that the order of the A.O. is erroneous in so far as it is prejudicial to the interests of the Revenue. The Commissioner has to be satisfied of twin conditions, namely, (i) the order of the AO sought to be revised is erroneous; and (ii) it is prejudicial to the interests of the Revenue. If one of them is absent, i.e. if the order of the AO is erroneous but is not prejudicial to the Revenue or if it is not erroneous but is prejudicial to the Revenue, recourse cannot be had to section 263(1) of the Act just to re-examine or re-verify the issues already examined/verified at the assessment level. It is only when an order is erroneous that the section will be attracted. In the case before us, it is not disputed that the A.O. made enquiries and gone through the documents collected from the lenders and then decided the issue which he deemed fit in the circumstances of the case. The Ld. CIT stated that the AO failed to make any enquiries regarding creditworthiness of the loan creditors. This observation, in our considered opinion, is not correct on the face of the enquiry conducted by the A.O. The A.O. verified/examined the return of income, balance sheet, P/L Account, statement, confirmation etc of the lenders and also perused the Inspector''s report, it goes without saying that the A.O. considered the creditworthiness of the loan creditors also. Therefore, it is not the case that the Ld. A.O. did not make any enquiry at all. In our opinion, the entire exercise u/s. 263 of the Act was made by the Ld. CIT merely with a view to give a second inning to the A.O. to re-examine and re-adjudicating the concluded issues. The powers envisaged u/s. 263 of the Act in setting aside an assessment are large and wide, but these cannot be exercised to allow the A.O. to make up the deficiency of his case. Hon''ble ITAT, Kolkata Bench in the case of Plastic Concern vs. ACIT [61 TTJ 87 (Cal.)] has held that mere possibility of gathering more material to prove the claim of the assessee wrong would not make the concluded assessment erroneous so long as the Ld. AO had acted judiciously and conducted enquiries in the course of assessment proceedings. There is a distinction between lack of enquiry and inadequate enquiry. If there is an enquiry, even inadequate, that would not by itself give occasion to the Ld. CIT to pass order u/s. 263 of the Act, merely because he has a different opinion in the matter".

Aggrieved by the order of the learned Tribunal, the revenue came up in appeal. The question of law framed at the time of admission of the appeal is as follows:

"Whether on the facts and in the circumstances of the case, the learned Tribunal was justified in law in cancelling the order passed under section 263 of the Income Tax Act, 1961 ignoring the facts that no proper enquiries were made regarding genuineness of loan transactions".

Mr. Sinha, learned Advocate appearing for the appellant submitted that the view taken by the learned Tribunal is palpably wrong in the facts and circumstances of the case. Mr. Khaitan, learned senior Advocate appearing for the Assessee-Respondent submitted that all the papers required by the Assessing Officer were duly furnished. The Assessing Officer also had the loan transactions enquired into by an inspector and being fully satisfied with the genuineness of the loan transactions, he passed the order of assessment. Simply because the CIT was of the opinion that some more enquiry should have been made, he could not have set aside the order passed by the Assessing Officer. Mr. Khaitan drew our attention to a judgment of this Court in the case of COMMISSIONER OF INCOME TAX Vs. MULCHAND BAGRI., (1992) 108 CTR 206 : (1993) 68 TAXMAN 215 . He relied upon paragraphs 13 and 14 of the judgment, which read as follows:

"13. There can be no doubt that if the ITO accepted the assessee''s case without any enquiry about the sale of silver utensils, the Commissioner was entitled to come to the conclusion that the assessment order was erroneous and prejudicial to the interest of the revenue. Even if similar utensils were sold in the earlier years and some enquiries were made in the earlier years, that will not be of any relevance in the current assessment year because that will not be of any relevance in the current assessment year because every sale has to be examined separately and independently by the ITO. But unfortunately, for the revenue in this case, the finding of the Tribunal is that:

''... but in the present case, before us, the ITO appears to have made enquiry from the assessee as can be seen from his letter dated 29-12-1980 which is at page 23 of the paper book placed before us to which the assessee sent a reply, which is at page 21.

Having regard to the facts of the case, we are of the opinion that even on merits the provisions of Section 263 cannot be invoked on the facts of the present case before us.''

This finding has not been challenged by the Commissioner as perverse in this case. There is no allegation of any misdirection of law. In other words, the finding of the Tribunal was that the ITO had actually made an enquiry into the sale of silver utensils. Therefore, the Commissioner was not right in his conclusion that the case of the assessee had been accepted by the ITO without any enquiry. Since this finding of fact of the Tribunal has not been challenged, it will be academic to give any answer to the question of law posed by the revenue. The Tribunal might have wrongly decided the question of the Commissioner''s jurisdiction under section 263 and the nature of the assessment order made by the ITO pursuant to a direction given by the IAC. But the Tribunal has come to a conclusion that the ITO had made enquiries about the sale of the silver utensils. Therefore, the Commissioner was not right in coming to the conclusion that the order passed by the ITO was prejudicial to the interest of the revenue because he had not made the necessary enquiry in this regard. So long as this finding of fact stands, it has to be held that the Commissioner''s decision to revise the order of the ITO under section 263 was erroneous".

The next judgment cited by Mr. Khaitan is in the case of The Commissioner of Income Tax Vs. Development Credit Bank Limited, (2010) 323 ITR 206 : (2011) 196 TAXMAN 329 . He relied upon the following observations of the Division Bench of the Hon''ble Bombay High Court:-

"In the order of assessment, the Assessing Officer had after making an enquiry and eliciting a response from the assessee come to the conclusion that the assessee was entitled to depreciation to the extent of Rs. 622.39 lakhs on the value of securities held on the trading account. In the absence of any tangible material to the contrary, the Commissioner of Income Tax could not have treated this finding to be erroneous or to be prejudicial to the interests of the Revenue. The observations of the Commissioner of Income Tax that the Assessing Officer had arrived at his finding without conducting an enquiry was erroneous, since an enquiry was specifically held with reference to which a disclosure of details was called for by the Assessing Officer and made by the assessee. We have adverted earlier to the directions which have been issued by the Commissioner of Income Tax to the Assessing Officer with regard to the holding of a fresh enquiry. Before us, it is common ground between counsel that the first and the second issues therein relating to the capital gain of Rs. 1.26 crores and depreciation of Rs. 622.39 lakhs constitute the basis of the view of the revisional authority and the others follow in consequence. Once we come to the conclusion that the revisional authority was not justified in exercising the jurisdiction under section 263 with reference to the aforesaid issues (i) and (ii) in the directions of the Commissioner of Income Tax noted earlier, the other issues are consequential to the enquiry which was directed in respect of the first and second issues. This has not been disputed."

The third judgment cited by Mr. Khaitan is in the case of Spectra Shares and Scrips Pvt. Ltd. Vs. Commissioner of Income Tax - III, (2013) 261 CTR 499 . He relied upon sub-paragraphs (e) and (f) at page-59 of the report, which reads as follows:-

"(e) The Commissioner cannot initiate proceedings with a view to start fishing and roving inquiries in matters or orders which are already concluded; that the Department cannot be permitted to begin fresh litigation because of new views they entertain on facts or new versions which they present as to what should be the inference or proper inference either of the facts disclosed or the weight of the circumstance; that if this is permitted, litigation would have no end except when legal ingenuity is exhausted.

(f) Whether there was application of mind before allowing the expenditure in question has to be seen; that if there was an inquiry, even inadequate that would not by itself give occasion to the Commissioner to pass orders under section 263 merely because he has a different opinion in the matter; that it is only in the cases of lack of inquiry that such a course of action would be open; that an assessment order made by the Income-tax Officer cannot be branded as erroneous by the Commissioner simply because, according to him, the order should have been written more elaborately; there must be some prima facie material on record to show that the tax which was lawfully exigible has not been imposed or that by the application of the relevant statute on an incorrect or incomplete interpretation, a lesser tax than what was just, has been imposed".

The fourth judgment relied upon by Mr. Khaitan is in the case of DIT Vs. Jyoti Foundation, (2013) 357 ITR 388 . He relied upon paragraph-5 of the judgment, which reads as follows:-

"In the present case, inquiries were certainly conducted by the Assessing Officer. It is not a case of no inquiry. The order under section 263 itself records that the Director felt that the inquiries were not sufficient and further inquiries or details should have been called. However, in such cases, as observed in the case of DG Housing Projects Ltd. (supra), the inquiry should have been conducted by the Commissioner or the Director himself to record the finding that the assessment order was erroneous. He should not have set aside the order and directed the Assessing Officer to conduct the said inquiry".

The fifth and the last judgment referred to by Mr. Khaitan is in the case of J.L. Morrison to which one of us (G.C. Gupta, J.) was a party wherein this Court upheld the order of the Tribunal setting aside an order u/s. 263 even though the assessing officer in that case had omitted to spell out any reason for the view taken by him.

Mr. Khaitan has not disputed as a proposition of law that creditworthiness of the alleged lender is a relevant enquiry. This was also the view expressed by the Delhi High Court in the case of Commissioner of Income Tax Vs. NR Portfolio Pvt. Ltd., (2014) 1 AD 681 : (2014) 264 CTR 258 : (2014) 206 DLT 97 wherein the following views were expressed after analyzing a large number of authorities.

"23. The contention that the Revenue must have evidence to show circulation of money from the assessee to the third party is fallacious and has been repeatedly rejected, even when Section 68 of the Act was not in the statute. In A. Govindarajulu Mudaliar Vs. Commissioner of Income Tax, Hyderabad, AIR 1959 SC 248 : (1958) 34 ITR 807 , Supreme Court observed that it was not the duty of the Revenue to adduce evidence to show from what source, income was derived and why it should be treated as concealed income. The assessee must prove satisfactorily the source and nature of cash received during the accounting year. Similarly observations were made in Commissioner of Income Tax, Madras vs. M. Ganapathi(1964) 53 ITR 623 (SC) , inter alia holding that it was not necessary for the Revenue to locate the exact source. This principle was reiterated in Commissioner of Income Tax, Uttar Pradesh Vs. Devi Prasad Vishwanath Prasad, (1969) 72 ITR 194 , wherein the contention that the Assessing Officer should indicate the source of income before it was taxable, was described as an incorrect legal position. Thus when there is an unexplained cash credit, it is open to the Assessing Officer to hold that it was income of the assessee and no further burden lies on him to show the source. In Yadu Hari Dalmia Vs. Commissioner of Income Tax, Delhi (Central), (1980) 17 CTR 234 : (1980) 126 ITR 48 , a Division Bench of Delhi High Court has observed:-

"It is well known that the whole catena of sections starting from s. 68 have been introduced into the taxing enactments step by step in order to plug loopholes and in order to place certain situations beyond doubt even though there were judicial decisions covering some of the aspects. For example, even long prior to the introduction of s. 68 in the statue book, courts had held that where any amounts were found credited in the books of the assessee in the previous year and the assessee offered no explanation about the nature and source thereof or the explanation offered was, in the opinion of the ITO, not satisfactory, the sums so credited could be charged to income-tax as income of the assessee of a relevant previous year. Section 68 was inserted in the I.T. Act, 1961, only to provide statutory recognition to a principle which had been clearly adumbrated in judicial decisions."

We are conscious of the doctrine of ''source of source'' or ''origin of origin'' and also possible difficulty which an assessee may be faced with when asked to establish unimpeachable creditworthiness of the share subscribers. But this aspect has to be decided on factual matrix of each case and strict or stringent test may not be applied to arms length angel investors or normal public issues. Doctrine of ''source of source'' or ''origin of origin'' cannot be applied universally, without reference to the factual matrix and facts of each case. The said test in case of normal business transactions may be light and not vigorous. The said doctrine is applied when there is evidence to show that assessee may not be aware, could not have knowledge or was unconcerned as to the source of money paid or belonging to the third party. This may be due to the nature and character of the commercial/business transaction relationship between the parties, statutory postulates etc. However, when there is surrounding evidence and material manifesting and revealing involvement of the assessee in the "transaction" and that it was not entirely an arm''s length transaction, resort or reliance to the said doctrine may be counter-productive and contrary to equity and justice. The doctrine is not an eldritch or a camouflage to circulate ill gotten and unrecorded money. Without being oblivious to the constraints of the assessee, an objective and fair approach/determination is required. Thus, no assessee should be harassed and harried but any dishonest fa�ade and smokescreens which masquerade as pretence should be exposed and not accepted.

In Lovely Exports (supra), a Division Bench examined two earlier decisions of this court in Commissioner of Income Tax Vs. Stellar Investment Ltd., (1991) 72 CompCas 775 : (1991) 99 CTR 40 : (1991) 192 ITR 287 and Commissioner of Income Tax Vs. Sophia Finance Ltd., (1994) 1 BC 499 : (1993) 113 CTR 472 : (1993) 27 DRJ 385 : (1994) ILR Delhi 212 : (1994) 205 ITR 98 : (1993) 70 TAXMAN 69 . The decision in Steller Investment''s case (supra) was affirmed by the Supreme Court but, by observing that the conclusion was on the facts and no interference was called for. Lovely Exports (supra) was a case of public limited company where shares were subscribed by public and it was accordingly observed:-

"This reasoning must apply a fortiori to large scale subscriptions to the shares of a public Company where the latter may have no material other than the application forms and bank transaction details to give some indication of the identity of these subscribers. It may not apply in circumstances where the shares are allotted directly by the Company/assessee or to creditors of the assessee. This is why this Court has adopted a very strict approach to the burden being laid almost entirely on an assessee which receives a gift."

Thereafter reference was made to Full Bench decision in the case of Sophia Finance Ltd.''s case (supra) wherein it has been observed that if the shareholders exists then, "possibly", no further enquiry needs to be made and that the Full Bench had not reflected upon the question of whether the burden of proof rested entirely on the assessee and at which point this burden justifiably shifted to the assessing officer. The Full Bench has observed that they were not deciding as to on whom and to what extent was the onus to show that the amount credited in the books of accounts was share capital and when the onus was discharged, was not decided. The standard of proof might be rigorous and stringent and was dependent upon nature of the transaction and where there was evidence that the source of investment cannot be manipulated, it was material. Similarly, it was observed that assessee could scarcely be heard to say that he did not know the particulars of a donor in case of a gift. It was held:-

"There cannot be two opinions on the aspect that the pernicious practice of conversion of unaccounted money through the masquerade or channel of investment in the share capital of a company must be firmly excoriated by the Revenue. Equally, where the preponderance of evidence indicates absence of culpability and complexity of the assessee it should not be harassed by the Revenue''s insistence that it should prove the negative. In the case of a public issue, the Company concerned cannot be expected to know every detail pertaining to the identity as well as financial worth of each of its subscribers. The Company must, however, maintain and make available to the Assessing Officer for his perusal, all the information contained in the statutory share application documents. In the case of private placement the legal regime would not be the same. A delicate balance must be maintained while walking the tightrope of Section 68 and 69 of the Income Tax Act. The burden of proof can seldom be discharged to the hilt by the assessee; if the AO harbours doubts of the legitimacy of any subscription he is empowered, nay duty-bound, to carry out thorough investigations. But if the Assessing Officer fails to unearth any wrong or illegal dealings, he cannot obdurately adhere to his suspicions and treat the subscribed capital as the undisclosed income of the Company.............

................. Once material to prove these ingredients are produced it is for the Assessing Officer to find out as to whether, on these materials, the assessed has succeeded in establishing the ingredients mentioned above. The Assessing Officer ''lift the veil'' and enquire into the real nature of the transaction. Commissioner of Income Tax Vs. Ruby Traders and Exporters Ltd., (2003) 182 CTR 596 : (2003) 263 ITR 300 : (2004) 134 TAXMAN 29 , Commissioner of Income Tax Vs. Nivedan Vanijya Niyojan Ltd., (2003) 182 CTR 605 : (2003) 263 ITR 623 and Commissioner of Income Tax Vs. Kundan Investment Ltd., (2003) 182 CTR 608 : (2003) 263 ITR 626 : (2003) 130 TAXMAN 689 are the other three.

In this analysis, a distillation of the precedents yields the following propositions of law in the context of Section 68 of the IT Act. The assessee has to prima facie prove (1) the identity of the creditor/subscriber; (2) the genuineness of the transaction, namely, whether it has been transmitted through banking or other indisputable channels; (3) the creditworthiness or financial strength of the creditor/subscriber. (4) If relevant details of the address or PAN identity of the creditor/subscriber are furnished to the Department along with copies of the Shareholders Register, Share Application Forms, Share Transfer Register etc., it would constitute acceptable proof or acceptable explanation by the assessed. (5) The Department would not be justified in drawing an adverse inference only because the creditor/subscriber fails or neglects to respond to its notices; (6) the onus would not stand discharged if the creditor/subscriber denies or repudiates the transaction set up by the assessee nor should the Assessing Officer take such repudiation at face value and construe it, without more, against the assessee; and (7) The Assessing Officer is duty-bound to investigate the creditworthiness of the creditor/subscriber the genuineness of the transaction and the veracity of the repudiation."

The decision in the case of Lovely Exports (supra) was considered in CIT vs. Nova Promoters and Finlease (P) Ltd. (supra) and it was elucidated:-

"The ratio of a decision is to be understood and appreciated in the background of the facts of that case. So understood, it will be seen that where the complete particulars of the share applicants such as their names and addresses, income tax file numbers, their creditworthiness, share application forms and shareholders'' register, share transfer register etc. are furnished to the Assessing Officer and the Assessing Officer has not conducted any enquiry into the same or has no material in his possession to show that those particulars are false and cannot be acted upon, then no addition can be made in the hands of the company under sec. 68 and the remedy open to the revenue is to go after the share applicants in accordance with law. We are afraid that we cannot apply the ratio to a case, such as the present one, where the Assessing Officer is in possession of material that discredits and impeaches the particulars furnished by the assessee and also establishes the link between self-confessed "accommodation entry providers", whose business it is to help assessees bring into their books of account their unaccounted monies through the medium of share subscription, and the assessee. The ratio is inapplicable to a case, again such as the present one, where the involvement of the assessee in such modus operandi is clearly indicated by valid material made available to the Assessing Officer as a result of investigations carried out by the revenue authorities into the activities of such "entry providers". The existence with the Assessing Officer of material showing that the share subscriptions were collected as part of a pre-mediated plan - a smokescreen - conceived and executed with the connivance or involvement of the assessee excludes the applicability of the ratio. In our understanding, the ratio is attracted to a case where it is a simple question of whether the assessee has discharged the burden placed upon him under sec. 68 to prove and establish the identity and creditworthiness of the share applicant and the genuineness of the transaction. In such a case, the Assessing Officer cannot sit back with folded hands till the assessee exhausts all the evidence or material in his possession and then come forward to merely reject the same, without carrying out any verification or enquiry into the material placed before him. The case before us does not fall under this category and it would be a travesty of truth and justice to express a view to the contrary.

In Nova Promoters and Finlease (supra), it was held that in view of the link between the entry providers and incriminating evidence, mere filing of PAN number, acknowledgement of income tax returns of the entry provider, bank account statements etc. was not sufficient to discharge the onus.

In CIT Vs. Nipun Builders and Develpers Pvt. Ltd., (2013) 2 AD 675 : (2013) 256 CTR 34 : (2013) 199 DLT 158 : (2013) 350 ITR 407 : (2013) 214 TAXMAN 429 , this principle has been reiterated holding that the assessee and the Assessing Officer have to adopt a reasonable approach and when the initial onus on the assessee would stand discharged depends upon facts and circumstances of each case. In case of private limited companies, generally persons known to directors or shareholders, directly or indirectly, buy or subscribe to shares. Upon receipt of money, the share subscribers do not lose touch and become incommunicado. Call monies, dividends, warrants etc. have to be sent and the relationship is/was a continuing one. In such cases, therefore, the assessee cannot simply furnish details and remain quiet even when summons issued to shareholders under Section 131 return unserved and uncomplied. This approach would be unreasonable as a general proposition as the assessee cannot plead that they had received money, but could do nothing more and it was for the assessing officer to enforce share holders attendance. Some cases might require or justify visit by the Inspector to ascertain whether the shareholders/subscribers were functioning or available at the addresses, but it would be incorrect to state that the assessing officer should get the addresses from Registrar of Companies'' website or search for the addresses of shareholders and communicate with them. Similarly, creditworthiness was not proved by mere issue of a cheque or by furnishing a copy of statement of bank account. Circumstances might require that there should be some evidence of positive nature to show that the said subscribers had made a genuine investment, acted as angel investors, after due diligence or for personal reasons. Thus, finding or a conclusion must be practicable, pragmatic and might in a given case take into account that the assessee might find it difficult to unimpeachably establish creditworthiness of the shareholders.

What we perceive and regard as correct position of law is that the court or tribunal should be convinced about the identity, creditworthiness and genuineness of the transaction. The onus to prove the three factum is on the assessee as the facts are within the assessee''s knowledge. Mere production of incorporation details, PAN Nos. or the fact that third persons or company had filed income tax details in case of a private limited company may not be sufficient when surrounding and attending facts predicate a cover up. These facts indicate and reflect proper paper work or documentation but genuineness, creditworthiness, identity are deeper and obtrusive. Companies no doubt are artificial or juristic persons but they are soulless and are dependent upon the individuals behind them who run and manage the said companies. It is the persons behind the company who take the decisions, controls and manage them."

When payment by cheque does not establish the creditworthiness of the lender, mere examination of the pass-book or the bank statement or the letter of confirmation or the balance sheet of the lender is also not enough. The inspector appointed by the Assessing Officer did not go beyond the aforesaid documents. Therefore, it cannot be disputed that the view formed by the CIT that in none of the reports, he has commented upon the issue of creditworthiness i.e. whether these parties had sufficient means to advance such huge loans is not without basis. It is well established that credits allegedly based on loan from parties, who are not possessed of sufficient means cannot be accepted as genuine. The Assessing Officer was required to make proper investigation to determine whether the money was really lent by the third party or it has come out of the resources of the assessee himself. The source of the apparent source is a relevant enquiry. That, the Assessing Officer has failed to apply his mind to all aspects of the case is therefore self-evident. Such non-application of mind constituted passing of an erroneous order which is also prejudicial to the interest of revenue. If any further authority is required reference may be made to the judgment of the Apex Court in the case of M/s. The Malabar Industries Co. Ltd. Vs. Commissioner of Income Tax, Kerala State, (2000) 2 JT 15 : (2000) 1 SCALE 495 : (2000) 2 SCC 718 : (2000) 1 SCR 744 : (2000) AIRSCW 428 : (2000) 1 Supreme 425 .

The particulars appearing from paragraph-9, quoted above, of the judgment of CIT have not been disputed nor the factual aspects appearing from paragraph-10 of the judgment of the CIT have been disputed. We are, as such, of the opinion that CIT had reasons to hold that creditworthiness of the alleged lenders was not enquired into. Mere examination of the bank pass book, profit and loss account and balance sheet, as we already have indicated, is not enough. When the requisite enquiry was not made, the order is bound to be erroneous and prejudicial to the interest of the revenue. The learned Tribunal proceeded on the theory that it was not a case of no enquiry; that no doubt is true, but that is not enough. If the relevant enquiry was not made it may in appropriate cases amount to no enquiry and may also be a case of non-application of mind. We are supported in our view by the following judgments:-

(a) In the case of Gee Vee Enterprise Vs. Additional Commissioner of Income Tax, (1975) 1 ILR Delhi 53 : (1975) ILR Delhi 53 : (1975) 99 ITR 375 the Delhi High Court opined as follows:-

"It is not necessary for the Commissioner to make further inquiries before cancelling the assessment order of the Income-tax Officer. The Commissioner can regard the order as erroneous on the ground that in the circumstances of the case the Income-tax Officer should have made further inquiries before accepting the statements made by the assessee in his return. The reason is obvious. The position and function of the Income-tax Officer is very different from that of a civil court. The statements made in a pleading proved by the minimum amount of evidence may be adopted by a civil court in the absence of any rebuttal. The civil court is neutral. It simply gives decision on the basis of the pleading and evidence which comes before it. The Income-tax Officer is not only an adjudicator but also an investigator. He cannot remain passive in the face of a return which is apparently in order but calls for further inquiry. It is his duty to ascertain the truth of the facts stated in the return when the circumstances of the case are such as to provoke an inquiry. It is because it is incumbent on the Income-tax Officer to further investigate the facts stated in the return when circumstances would make such an inquiry prudent that the word "erroneous" in section 263 includes the failure to make such an enquiry. The order becomes erroneous because such an inquiry has not been made and not because there is anything wrong with the order if all the facts stated therein are assumed to be correct."

(b) In the case of Additional Commissioner of Income Tax, Gujarat Vs. Mukur Corporation, (1978) 111 ITR 312 the Assessing Officer had allowed two deductions of a sum of Rs. 2,00,000/- and a sum of Rs. 1,45,000/- without proper enquiry. The question arose whether exercise of power by the Commissioner under Section 263 in the circumstances was proper which was answered in the affirmative. The Division Bench held as follows:-

"that the words "prejudicial to the interests of the revenue" in section 263 have not been defined but they must mean that the orders of assessment challenged are such as are not in accordance with law, in consequence whereof the lawful revenue due to the State has not been realised or cannot be realised. In the present case, it was obvious that the Income-tax Officer had committed an error in not making enquiry into the details as regards both the deductions and also that want of such enquiry had resulted in prejudice to the interests of the revenue. To this extent, the initiation of action under section 263 by the Commissioner was quite proper."

(c) In the case of Addl. Commissioner of Income Tax, Mysore Vs. Krishna Narayan Naik, (1983) 37 CTR 195 : (1984) 150 ITR 513 : (1983) 15 TAXMAN 535 the Division Bench upheld the finding that:-

"An order could be said to be erroneous when either it did not decide a point and record a finding on an issue which ought to have been done or decided it wrongly."

(d) In the case of Commissioner of Income Tax Vs. Precision Finance Pvt. Ltd., (1994) 121 CTR 20 : (1994) 208 ITR 465 : (1995) 82 TAXMAN 31 this court also took the following view:-

"It is for the assessee to prove the identity of the creditors, their creditworthiness and the genuineness of the transactions. In our view, on the facts of this case, the Tribunal did not take into account all these ingredients which have to be satisfied by the assessee. Mere furnishing of the particulars is not enough. The enquiry of the Income-tax Officer revealed that either the assessee was not traceable or there was no such file and, accordingly, the first ingredient as to the identity of the creditors had not been established. If the identity of the creditors had not been established, consequently the question of establishment of the genuineness of the transactions or the creditworthiness of the creditors did not and could not arise. The Tribunal did not apply its mind to the facts of this particular case and proceeded on the footing that since the transactions were through the bank account, accordingly, it is to be presumed that the transactions were genuine. It was not for the Income-tax Officer to find out by making investigation from the bank accounts unless the assessee proves the identity of the creditors and their creditworthiness. Mere payment by account payee cheque is not sacrosanct nor can it make a non-genuine transaction genuine."

(e) In the case of COMMISSIONER OF Income Tax Vs. EMERY STONE MFG. CO., (1995) 126 CTR 345 : (1995) 213 ITR 843 : (1995) 83 TAXMAN 643 it was held by the Rajasthan High Court that omission to hold necessary enquiry resulted in non-application of mind reference may be made to the following observations:-

"From the assessment order framed under section 143(3) it is clear that the Inspecting Assistant Commissioner has not applied his mind at all and there is no finding in the assessment order regarding the application or non-application of Explanation 3 to section 43(1). The Inspecting Assistant Commissioner having not applied his mind at all and having allowed the depreciation at the enhanced value without considering Explanation 3, the order was prejudicial to the interest of the Revenue. Not only this, the commissioner of Income-tax found that the depreciation has been allowed on land, which is complete non-application of mind and in such a situation the power under Section 263 could be exercised by the Commissioner of Income-tax. On the point as to whether the main purpose of transfer of the assets was to reduce the tax liability or not, the matter could have been decided by the assessing authority after taking into consideration the oral and written evidence. The Commissioner of Income-tax also in such a situation should have set aside the assessment on this point and should have left it to the assessing authority to come to the conclusion whether the main purpose of transfer of the assets was to reduce the tax liability or not. He could have called for the copy of the partnership deed and dissolution deed and could have taken other evidence into consideration. In the absence of any finding recorded by the assessing authority, though the Commissioner of Income-tax has power to record a finding after giving opportunity to the assessee, the proper course for the Commissioner of Income-tax was to set aside the assessment order on that point so that the assessing authority could record his finding whether the transfer of assets was for the purpose of reduction of tax liability by taking into consideration the earlier dissolution deed, new partnership deed, valuation report and other relevant facts including the oral evidence. The Income-tax Appellate Tribunal has come to the conclusion that the Commissioner of Income-tax was not justified in invoking Explanation 3 when the firm was reconstituted after a gap of more than three months with different partners. The gap of three months may or may not be relevant looking to the particular circumstances of a case. Simply because after the dissolution of the firm a new firm was reconstituted after three months, does not mean that the main purpose was not for transfer of assets to reduce the tax liability. The different partners are not outsiders, but family members of the same partner, who was a partner in the earlier firm. It is no doubt true that the burden is on the assessing authority to prove that the main purpose for transfer of the assets was to reduce the tax liability, but he can definitely take into consideration the relevant facts. If the view taken by the Tribunal is accepted as the correct view then the Explanation cannot be invoked in any case, and, therefore, in order to find out whether the Explanation is applicable or not, the entirety of the circumstances has to be taken into consideration and it could not be for one reason or the other. It was a case where the assessing authority has not applied his mind. That was the end of the matter for exercising power under section 263 and, therefore, the matter should have been sent back to the assessing authority for applying his mind to find as to whether the Explanation is applicable or not. The observation of the Tribunal that full facts were brought to the notice of the Inspecting Assistant Commissioner (Assessment) is also not correct inasmuch as after giving statement with regard to the actual cost of the assets and depreciation claimed thereon, the assessing authority was bound to consider the Explanation. Simply because the facts have been disclosed by the assessee, it does not give immunity from revisional jurisdiction which the Commissioner can exercise under section 263 and as such even in a case where the facts have been disclosed by the assessee to the assessing authority and the correct provisions of law have not been examined by the assessing authority, the power under section 263 can be invoked."

(f) In the case of Duggal and Co. Vs. Commissioner of Income Tax, (1996) 220 ITR 456 : (1994) 77 TAXMAN 331 the Delhi High Court upheld the order of exercise of power under Section 263 holding that:-

"The commissioner was perfectly competent to exercise his powers under Section 263 whenever he found, prima facie, that there was need to enquire if the interest of the Revenue had suffered by an order of assessment. He has given certain reasons. The basis for the order of the Commissioner is a question of fact and whether it is correct or not shall have to be found out after enquiry by the Income-tax Officer. The Commissioner has found that the Income-tax Officer has omitted to enquire into this question found by the Commissioner implicit in the manner in which the amounts were borrowed and advanced by the assessee-company."

(g) Reference in this regard may also be made to the judgment in the case of Commissioner of Income Tax, Bangalore Vs. Shree Manjunatheaware Packing Products and Camphor Works, AIR 1998 SC 1478 : (1998) 231 ITR 53 : (1997) 9 JT 583 : (1997) 7 SCALE 390 : (1998) 1 SCC 598 : (1997) 6 SCR 109 Supp : (1998) AIRSCW 333 : (1997) 10 Supreme 368 wherein the following views were expressed:-

"The section did not at first contain any Explanation. An Explanation was added to section 263(1) by the Taxation Laws (Amendment) Act, 1984. By the Finance Act, 1988, the said Explanation was substituted with effect from June 1, 1988. The Explanation was again amended by the Finance Act, 1989. By the amendments made by the Finance Acts of 1988 and 1989 a definition of the term "record" was provided. It has been provided that "record" shall include and shall be deemed always to have included all records relating to any proceeding under the Act available at the time of examination by the Commissioner. It cannot be said that the correct and settled legal position, with respect to the meaning of the word "record" till June 1, 1988, is that it meant the record which was available to the Income-tax Officer at the time of passing of the assessment order. Such a narrow interpretation of the word "record" is not justified in view of the object of the provision and the nature and scope of the power conferred upon the Commissioner. The revisional power conferred on the Commissioner under Section 263 is of wide amplitude. It enables the Commissioner to call for and examine the record of any proceeding under the Act. It empowers the Commissioner to make or cause to be made such enquiry as he deems necessary in order to find out if any order passed by the Assessing Officer is erroneous in so far as it is prejudicial to the interests of the Revenue. After examining the record and after making or causing to be made an enquiry, if he considers the order to be erroneous, then he can pass the order thereon as the circumstances of the case justify. Obviously, as a result of the enquiry he may come into possession of new material and he would be entitled to take that new material into account. If the material, which was not available to the Income-tax Officer when he made the assessment could thus be taken into consideration by the Commissioner after holding an enquiry, there is no reason why the material which had already come on record though subsequent to the making of the assessment, cannot be taken into consideration by him. Moreover, in view of the clear words used in clause (b) of the Explanation to section 263(1), it has to be held that while calling for and examining the record of any proceeding under section 263(1), it is and it was open to the Commissioner not only to consider the record of that proceeding but also the record relating to that proceeding available to him at the time of examination."

(h) Reference may also be made to the judgment in the case of Consolidated Photo and Finvest Ltd. Vs. Asst. Commissioner of Income Tax, (2006) 200 CTR 433 : (2006) 281 ITR 394 : (2006) 151 TAXMAN 41 wherein the following views were expressed:-

"The principle that a mere change of opinion could not be a basis for reopening completed assessments would be applicable only to situations where the Assessing Officer had applied his mind and taken a conscious decision on a particular matter in issue. It would have no application where the order of assessment did not address itself to the aspect which was the basis for reopening of the assessment. Therefore, it was inconsequential whether or not the material necessary for taking a decision was available to the Assessing officer either generally or in the form of a reply to the questionnaire served upon the assessee. What is important was whether the Assessing Officer had, based on the material available to him taken a view. Since he had not done so, the reassessment could not be challenged on the ground that it was based on a change of opinion."

(i) Following the judgment in the case of Mukur Corporation, in the case of Commissioner of Income Tax Vs. Daga Entrade (P) Limited, (2010) 236 CTR 296 : (2009) 1 GLD 493 it was held that:-

Additional Commissioner of Income Tax, Gujarat Vs. Mukur Corporation, (1978) 111 ITR 312 has held that when the Income-tax Officer at the stage of making assessment fails to make inquiry into relevant details, such assessment has to be considered as erroneous. If fresh assessment is thereafter ordered by the revisional authority, the only proper course for the revisional authority would be to desist from expressing any final opinion on controversial points.

On the submission made on behalf of the assessee that more detailed reasoning should have been indicated by the Commissioner of Income-tax, we find that it is nobody''s case that, the finding of the appraisal report of the Investigation team, following the search and seizure made, were not relevant for making the assessments.

It is also seen that the Assessing Officer was very much aware about the appraisal report indicting the assessee. Yet the materials revealed through the appraisal report were not considered by the Assessing Officer, while finalizing the assessments, nor were the assessees confronted and given opportunity to rebut the findings of the appraisal report. The Assessing Officer merely stated that some loose sheets seized during the survey were not relevant for the period of assessment under consideration, without referring to the actual appraisal report or indicating any reason as to why the appraisal report ought not to be considered.

Referring to the above circumstances, the Commissioner held that the assessments have been finalized without reference to relevant materials and therefore, the said assessment orders, in our considered view, have been rightly held to have been erroneously passed by the revisional authority and the reasons indicated by the Commissioner are found by us to be sufficient, without undue elaboration."

The views expressed in the case of CIT Vs. Daga Entrade were affirmed by a Special Bench of the Gauhati High Court in the case of CIT Vs. Shri Jawahar Bhattacharjee, wherein the following views were taken:-

"Non-application of mind is a ground for interference under Section 263 in the case of Commissioner of Income Tax Vs. Bhagwan Das, (2004) 191 CTR 531 : (2005) 272 ITR 367 : (2005) 142 TAXMAN 1 the Division Bench opined that exercise of power under Section 263 was proper when there was no discussion regarding the question as to whether the amount of income shown by the assessee which was claimed to be exempted had actually been earned by him and whether the entire amount of income from agriculture and Poultry Farming was exempted from tax."

The judgments cited by Mr. Khaitan are all distinguishable because in none of the cases, the creditworthiness of the alleged lender was in issue.

In the case of CIT Vs. Mulchand Bagri (supra) the issue was whether the profit to the tune of Rs. 16,237/- on the sale of some silver utensils can be treated as exempt income because the sale was of the utensils which constituted personal effects of the assessee. CIT exercised power holding that no enquiry was made. It transpired that an enquiry had, in fact, been made and in earlier years also identical claim of the assessee was allowed. Their Lordships of Division Bench in that case held that "even on merits the provisions of Section 263 cannot be invoked on the facts of the present case before us". Because the order was unexceptionable on merits, the exercise of power under section 263 of the Act was not upheld.

In the case of CIT vs. Development Credit Bank Ltd. (supra) evidently the assessee was a bank. The assessee claimed depreciation on the investments on the basis that they were treated as stock in trade. The claim was allowed after necessary enquiry or investigation that the investments was treated as stock in trade. The mere fact that other investments made by the assessee were treated as long term investment could not be a pointer to establish that the investments in the nature of stock in trade could not have been there. The Assessing Officer after enquiry was satisfied that those investments were in the nature of stock in trade and thereafter depreciation was allowed. The exercise of power by the CIT under section 263 of the Act in the circumstances was not allowed.

In the case of Director of Income Tax vs. Jyoti Foundation (supra), the views drawn to our attention by Mr. Khaitan, quoted above, are on the basis of explanation added to section 263 of the Act by the amendment of the Finance Act, 1988 which clarifies that the supervisory authority is entitled to hold an order erroneous on the basis of further enquiry made by the supervisory authority itself. Ordinarily, supervisory authority is expected to confine itself to the evidence which was before the Trial Court or the forum of the first instance. But Section 263 conferred wider powers which was clarified by the explanation. Reference in this regard may also be made to the judgment in the case of CIT Vs. Manjunathesware (supra). The fact that the Commissioner is entitled to make enquiries does not mean that he is powerless to ask the Assessing Officer to make a fresh assessment after making fresh enquiry because assessment inheres enquiry.

(j) In any event the Division Bench, in the case relied upon by Mr. Khaitan, followed the judgment in the case of Income Tax Officer Vs. DG Housing Projects Ltd., (2012) 10 AD 280 : (2012) 343 ITR 329 wherein the Delhi High Court itself opined as follows:-

"In some cases possibly though rarely, the Commissioner of Income Tax can also show and establish that the facts on record or inferences drawn from facts on record per se justified and mandated further enquiry or investigation but the Assessing Officer had erroneously not undertaken the same. However, the said finding must be clear, unambiguous and not debatable."

Mr. Khaitan, as aforesaid, has not disputed that creditworthiness of the alleged creditors, insisted upon by the CIT, is a relevant enquiry.

The judgments cited by Mr. Khaitan in the case of Spectra Shares and Scrips (supra) is an authority for the proposition that change of opinion cannot be a ground for exercise of power u/s. 263. The question of change of opinion cannot arise when all relevant facts have not been ascertained as is the case before us.

The judgment in the case of J.L. Morrison does not assist the assessee because in that case the question was whether the receipt was a revenue receipt or a capital receipt. The assessing Officer treated the receipt as a capital receipt which the Division Bench found was a possible view. Unlike in the present case no factual enquiry was necessary in that case.

The learned Tribunal entertained an incorrect impression of law which was responsible for the impugned judgment which is also evident from the following sentence:

"The powers envisaged under section 263 of the Act in setting aside an assessment are large and wide, but these cannot be exercised to allow the Assessing Officer to make up the deficiency of his case".

The power under section 263 of the Act can be exercised where the order of the Assessing Officer is erroneous and prejudicial to the interest of the revenue. When an order is erroneous, then the order is also deficient and in order to remedy the situation, power under section 263 of the Act has been given. Therefore, the view that the power could not have been exercised to allow the Assessing Officer to make up the deficiency is altogether an incorrect impression of the law. Further, incorrect impression of law of the learned Tribunal is to be found from the following sentence.

"If there is an enquiry, even inadequate, that would not by itself give occasion to the Ld. CIT to pass order u/s. 263 of the Act."

The sentence quoted above, as a matter of law, has to be understood in its proper perspective. Inadequacy of enquiry by itself is not a ground for revision. If it can be shown that the inadequate enquiry led the assessing officer or may have led him to assumption of incorrect facts that would make the order erroneous and prejudicial to the interest of revenue. Setting a bad trend is also prejudicial to the revenue.

In Venkatakrishna Rice Company Vs. Commissioner of Income Tax, (1987) 163 ITR 129 it was opined that "There must be some grievous error in the order passed by the Income-tax Officer, which might set a bad trend or pattern for similar assessments, which on a broad reckoning, the Commissioner might think to be prejudicial to the interests of Revenue administration."

It is not the law that the assessing officer occupying the position of an investigator and adjudicator can discharge his function by perfunctory or inadequate investigation. Such a course is bound to result in erroneous and prejudicial orders. Where the relevant enquiry was not undertaken, as in this case, the order is erroneous and prejudicial too and therefore revisable. Investigation should always be faithful and fruitful. Unless all fruitful areas of enquiry are pursued the enquiry cannot be said to have been faithfully conducted. In a different context the Apex Court observed "contra veritatem lex numquam aliquid permittit: implies a duty on the Court to accept and accord its approval only to a report which is the result of faithful and fruitful investigation" (See Sidhartha Vashisht @ Manu Sharma Vs. State (NCT of Delhi), AIR 2010 SC 2352 : (2010) 4 JT 107 : (2010) 4 SCALE 1 : (2010) 6 SCC 1 : (2010) 4 SCR 103 : (2010) 3 UJ 1650 )

For the aforesaid reasons, the order under challenge is set aside.

It is clarified that the order under challenge also touches questions involving Section 92 of the Act, but that part of the order is not within the scope of the appeal. Therefore, the order of the Tribunal is set aside for the purpose of this appeal and the question, as framed, is answered in the negative and in favour of the Revenue.

The appeal to that extent is allowed.