The main legal point established in the judgment is that the CIT can exercise powers under Section 263(1) of the Act only after examining the entire record of the proceedings.

N.K.Sud, J.

1. The assessee has filed this appeal under Section 260A of the IT Act, 1961 (for short the Act) against the order of the Tribunal, Delhi Bench, Delhi, dt. 20th July, 2001, whereby its appeal against the order of the CIT, Rohtak, dt. 31st Oct., 2000, has been dismissed.

2. The assessee-firm is engaged in the business of trading of Saria on wholesale basis. For the asst. yr. 1998-99, the assessee filed its return on 29th Oct., 1998, declaring a loss of Rs. 1,97,707. This return was initially processed under Section 143(1)(a) of the Act on 16th March, 2000, and, thereafter, notices under Sections 143(2) and 142(1) of the Act were issued for making regular assessment. Ultimately, assessment under Section 143(3) of the Act was framed by the AO on 31st March, 2000, who determined the total loss at Rs. 1,27,011.

3. Subsequently, the assessee received a notice dt. 12th Oct., 2000, under Section 263(1) of the Act to show cause as to why remedial steps may not be taken as the assessment order, dt. 31st March, 2000, in the opinion of the CIT, was erroneous and prejudicial to the interest of the Revenue This opinion had been formed by the CIT on the ground that the AO, while framing the assessment, had not examined the following points :

"(1) During the course of survey operation under Section 133A an amount of Rs. 10,50,000 was surrendered by you but in the return of income the surrendered amount was not shown. The AO failed to examine this issue properly while framing the assessment.

(ii) Proper enquiries/investigation from the parties concerned were not made to ascertain the genuineness of the purchases."

The assessee furnished a detailed reply to the show-cause notice in which it was explained that the AO had made detailed inquiry on both the issues before completing the assessment. On receipt of this reply, the CIT passed order dt. 31st Oct., 2000, which reads as under:

"1. Assessment in this case was completed by the Dy. CIT (Investigation Circle), Gurgaon, under Section 143(3) of the IT Act, 1961, on 31st March, 2000, on a loss of Rs. 1,27,011 as per details given in the assessment order.

2. The assessee-firm is engaged in the business of trading of Saria on wholesale basis. A survey under Section 133A was carried out on the business premises of the assessee-firm on 27th Nov., 1997. At the time of survey the assessee-firm made a surrender of Rs. 50,000 on account of excess cash found and Rs. 10 lakhs on account of excess stock found. The assessee-firm in the return of income did not show the amount of Rs. 10,50,000 so surrendered at the time of survey for the assessment year under consideration. The AO failed to examine this issue while framing the assessment. The AO also failed to make enquiries/investigation from the parties concerned to ascertain and examine the genuineness of the purchases made by the assessee-firm. The difference in stock as per inventories prepared at the time of survey operation was not properly examined and tallied with the books of accounts of the assessee-firm at time of assessment proceedings. Thus, the assessment order, dt. 31st March, 2000, of the AO appears to be erroneous and prejudicial to the interests of the Revenue.

3. On the date fixed for hearing i.e., on 31st Oct., 2000, Shri Ram Krishan Gupta, manager of the assessee-firm, attended the proceedings and filed a written reply. I have gone through the reply filed by the assessee and do not agree with the same. The order passed by the AO without application of mind is held to be erroneous and prejudicial to the interests of the Revenue and is hereby cancelled under Section 263 of the IT Act, 1961. The AO, is, therefore, directed to frame the assessment afresh as per law after allowing reasonable opportunity of being heard to the assessee." [Emphasis, italicised in print, supplied] The assessee preferred an appeal before the Tribunal challenging the order of the CIT on legal grounds as well as on merits. The Tribunal has reject