1. 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 p
of 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.

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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

16. 16
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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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