G. Santhanam, Accountant Member - (1.) THIS is an appeal by the assessee against the order of the learned Commissioner of Income-tax under Section 263 of the Income-tax Act, 1961.
(2.) The assessee was having three bar attached hotels and two foreign liquor wholesale shops. As against the returned loss of Rs. 3,95,978 for the assessment year 1985-86, the total income was determined at Rs. 10,93,910 involving several additions. In the tax audit report accompanying the return of income it was mentioned in Form No. 3CD that the assessee has borrowed Rs. 12 lakhs on hundi other than through account payee cheques. No addition was made by the ITO under Section 69D of the I.T. Act. It is seen from the records that the ITO had called for the confirmatory letters in respect of credit balances of financiers by his letter dated 18-3-1987 and the assessee had complied with the same. Thereupon the assessment was completed. The learned Commissioner of Income-tax acting under Section 263 of the I.T. Act, 1961, issued notice to the assessee bringing her attention to the fact that the ITO had overlooked the provisions of Section 69D of the I.T. Act and as such his order dated 31-3-1987 was erroneous in so far as it was prejudicial to the interests of the revenue and required suitable revision. The assessee filed her objections by her letter dated 13-10-1988 and explained that she was under the bona fide belief that any borrowal of money from money-lenders constituted a hundi transaction and as such she gave the information to the auditors that the borrowings were on hundi and thus the auditor has made his remark referred to by the Commissioner of Income-tax in the impugned notice. Further it was contended that the borrowings were cash transactions without any documents like hundi or pronote and wanted an opportunity of being heard. An opportunity was given to the assessee and it was pleaded before the Commissioner of Income-tax that the description of the transaction amounting to Rs. 12 lakhs by the auditor in his report given under Section 44AB of the I.T. Act was incorrect and that the ITO was satisfied with the genuineness of the transactions and hence there was no error in his order resulting in any prejudice to the interests of the revenue. The Commissioner of Income-tax in his order under Section 263 held that if the borrowings were by means of hundies the ITO should have straightaway made an addition of a like sum to the income of the assessee. However, in view of the revised stand of the assessee that the description in the audit report was not correct and that the transactions were ordinary loan transactions through cash without being supported by hundi papers or promissory notes, it has become necessary for him to set aside the order of the ITO to enable him to look into the genuineness of the transaction. In this view of the matter, he set aside the order of the ITO on this count and restored the same to the ITO for fresh disposal. Being aggrieved, the assessee is now in appeal before us.
(3.) SHRI C.K. Nair, the learned counsel for the assessee, submitted that the proposal in the notice was to treat the transactions as hundi transactions and to make addition under Section 69D of the I.T. Act. The proposal was not for looking into the genuineness of the transaction. The ITO has made omnibus additions to the income of the assessee on several counts as will be evident from the fact that the loss of Rs. 3,59,978 was converted into an income of Rs. 10,93,910. Thus the assessment was made under Section 143(3) of the I.T. Act. The audit report describing the loans amounting to Rs. 12 lakhs as hundi loans received in cash was also before the ITO. In fact, he was satisfied that they were not hundi loans and that was the reason why he wanted to test the genuineness of the transactions by calling upon the assessee to produce confirmatory letters etc. The assessee complied with the same. The amount came from about 35 persons. The assessment was made after a search and seizure made under Section 132 of the I.T. Act and after a study of all the documents on record. The ITO was satisfied about the genuineness of the loan transactions. That is why he did not make any addition covering this sum of Rs. 12 lakhs. The confirmatory letters and account copies were all before the ITO. When the ITO was making huge additions as a result of search operations and on the basis of the seized records and after a thorough scrutiny it passes ones comprehension as to how he could have overlooked the auditor's remarks about the hundi loans. Rather he was convinced that the loans amounting to Rs. 12 lakhs were not hundi loans and that is why he called upon the assessee to produce the confirmatory letters etc. Unfortunately for the assessee the learned ITO has not specifically stated that these are not hundi loans. However, his conduct will show that he looked upon them as non-hundi loans. Therefore, there was no error resulting in prejudice to the revenue. When these points were brought to the notice of the learned Commissioner of Income-tax in the course of the hearing under Section 263 proceedings, the learned Commissioner took the mistaken view that the assessee had changed her stand and, therefore, it was but necessary to enquire into the genuineness of the transactions. SHRI Nair further submitted that it was not the assessee who had changed her stand but it was the learned CIT who had shifted his ground as will be evident from the fact that whereas the original notice was for treating the transaction as hundi loan, the final order under Section 263 was for finding out the genuineness of the transaction. If the learned CIT had thus other ideas about the nature of the transaction or its validity, he ought to have issued fresh notice under Section 263. This apart, he submitted, that there was nothing in the order of the ITO which would show that the ITO had not enquired into the genuineness of the transaction. Therefore the order of the CIT is without any basis whatsoever. He relied on the following decisions:- (i) CIT v. Caxton Press (P.) Ltd. [1981] 129 ITR 462 (Delhi) (ii) Bagsu Devi Bafna v. CIT [1966] 62 ITR 506 (Cal.) (iii) V. Venkata Rao v. ITO [1989] 45 Taxman 88 (Hyd.) (Tax - Mag.), a decision of the Hyderabad Bench 'B' of the Tribunal (iv) CIT v. Kanda Rice Mills [1989] 44 Taxman 316 (Punj. & Har.).;