COMMISSIONER OF INCOME TAX Vs. RAJKUMAR DIPCHAND PHADE

JUDGEMENT

(1.) THE following question of law arises for determination in the above two appeals which are disposed of by this common judgment :

(2.) DURING the period 15th Jan., 1983, upto 4th Nov., 1983, Deepchand Lalchand Phade Family Trust, was the proprietor of the business. On 9th April, 1984, a partnership deed was executed w.e.f. 5th Nov., 1983. Therefore, a partnership firm consisting of the trust and seven other partners came to be formed w.e.f. 5th Nov., 1983. On 15th May, 1984, the trust retired from the firm. On 16th May, 1984, the firm got reconstituted between the seven partners w.e.f. 5th Nov., 1983. In these appeals, we are concerned with asst. yrs. 1986 87, 1987 88 and 1988 89. A return of income declaring total income of the firm was filed on 26th Aug., 1987. It was accepted by the AO under S. 143(1). However, the CIT on the above facts, came to the conclusion that the above arrangement was entered into in order to evade the tax. The CIT further found that the goodwill of Rs. 2,50,000 was credited in the books of the firm which was to be collectively paid to the trust by the incoming partner. That under the partnership deed the goodwill was payable by the incoming partners and not by the firm and, therefore, the firm was not liable to pay any interest for the liability of the goodwill and since the firm was not liable to pay interest, the interest amount paid for each of the aforestated asst. yrs. 1986 87, 1987 88 and 1988 89 at the rate of Rs. 52,500 for each assessment year cannot be claimed as a deduction by the firm. Accordingly, the CIT modified the assessment order passed by AO under S. 143(1) and the interest paid by the firm to the trust came to be disallowed. Being aggrieved by the order passed by the CIT, the assessees went in appeal to the Tribunal. The Tribunal, however, came to the conclusion that once an assessment is made under S. 143(1), it was not open to the CIT to invoke S. 263 of the IT Act. The Tribunal further came to the conclusion that since the proposed addition made by the CIT was not within the ambit of S. 143(1), the order of the AO cannot be considered as erroneous and the CIT erred in assuming jurisdiction under S. 263 of the IT Act. Being aggrieved, the Department has come in appeal under S. 260A of the IT Act.

(3.) IN the case of Malabar Industrial Co. Ltd. vs. CIT (2000) 159 CTR (SC) 1 : (2000) 243 ITR 83 (SC), the apex Court has laid down two prerequisites for exercise of jurisdiction by the CIT suo motu viz. that the order of AO was erroneous and, secondly, that the order of AO was prejudicial to the interest of the Revenue. In the light of the said judgment, it is clear that merely because an order is passed under S. 143(1) by the AO is no bar for the CIT to invoke S. 263 of the IT Act. In the present matter, the above facts clearly show that the assessees claimed deduction in respect of the interest amount paid to the trust on the goodwill during the asst. yrs. 1986 87, 1987 88 and 1988 89 whereas under the partnership deed, the goodwill amount was payable by incoming partners and, therefore, no amount was payable by the firm as and by way of interest for the liability of the goodwill and, therefore, the firm was not entitled to claim any deduction in respect of the interest paid to the trust. Under the order of AO the relevant facts have not been examined. The order of AO was erroneous. The order of AO was prejudicial to the interest of the Revenue.