It was incumbent on AO to show in reasons recorded that any income escaped assessment due to error or omission on part of assessee in not disclosing all material facts - DR not prepared - adjournment refused - ITAT

THE appeal of the revenue is in respect of three major issues,
(i) an amount of Rs. 2,89,84,79,013/- added by the A.O. u/s 68 of the Act and deleted by the CIT(A),
(ii) interest of Rs. 9,17,03,473/- in respect of aforesaid amount added u/s 68, deleted by the learned CIT(A), and
(iii) addition of Rs. 2,76,24,511/- made by the A.O. out of the expenses and deleted by the learned CIT(A).

The computation of income inter-alia indicates disallowance of about Rs. 28.03 crore out of the expenses. CIT(A) held that the admissibility of the expenditure of Rs.2,76,24,511/-may be again considered by the Assessing Officer after going through various details with a view to ascertain the specific expenditure which could be disallowed.

The DR submitted before the Tribunal that
(i) the revenue had ordered special audit u/s 142(2A) of the Act of the books of account of the assessee and the assessee did not cooperate in the matter.

(ii) the assessee filed a writ petition before the Hon'ble Allahabad High Court against the direction for special audit, which was dismissed as not maintainable for want of territorial jurisdiction.

(iii) However, such dismissal did not preclude the assessee from filing fresh petition before the Lucknow Bench of the Court.

(iv) the writ petition was filed to stall assessment proceedings and similar issues are involved in all the writ petitions.

(v) The petitioner failed to perform its duty and the obligation to produce books of account and relevant information, which were complex in nature, leaving no option to the Assessing Officer but to exercise his power u/s 142(2A) and that the limited purpose for filing writ petition was to frustrate the enquiry in the course of assessment proceedings.

(vi) if the information had been furnished to the statutorily appointed auditor, the correct facts would have come to notice and addition on proper basis could have been made u/s 68.

(vii) expenditure of Rs. 18,38,03,645/- was debited in the books of account under the head "interest on deposits received under financial schemes".

(viii) The assessee was required to furnish the details of depositors who defaulted in compliance with the terms and conditions of various deposit schemes and the details of new depositors, who joined the scheme in this year and defaulted in this or subsequent year.

(ix) Such details were not filed. The assessee also did not comply with the direction u/s 142(2A), because of which exact interest liability could not be worked out.

(x) various names appearing in the ledger account could not be treated as effective depositors as many of them had defaulted at one time or the other.

(xi) the liability for interest ought to have been worked out in respect of each depositor considering the status of the account.

(xii) the accounts of the assessee are not correct in so far as provision of interest is not an ascertained and genuine liability; claim of deduction on account of interest on deposits is prima facie excessive; the details of deposits which were eligible to earn interest and computation of interest provided thereon were not furnished and, therefore, it was not feasible to work out the amount of interest deductible in computing the income.

(xiii) Finally, the Assessing Officer allowed interest of Rs. 9,21,00,172/- against the claim of Rs. 18,38,03,645/-, leading to disallowance of Rs. 9,17,03,473/-.

The Tribunal observed that in so far as the addition in respect of credits u/s 68 is concerned, the same was based upon the orders of the Commissioner u/s 263 of the Act. This order was set aside by holding that the order of the Assessing Officer was not erroneous and prejudicial to the interests of revenue in so far as he did not make any addition u/s 68 of the Act. This part of the order of the Tribunal holds good and it has not been reversed by the order or
decision of any higher appellate forum or the jurisdictional High Court. In view thereof, this ground does not survive. Therefore, ground no. 1 is dismissed.

On ground No.2, - the issue is :- whether, the assessee has been making reasonable provisions in respect of interest liability on deposits mobilized under various schemes from year to year?

If the provisions made are reasonable even if not of exact amount, then, it would be futile to make any disallowance from the interest as exactness of the calculation would always be a matter of dispute arising out of the disputes whether some accounts could be termed as
default accounts or lapsed accounts. At the instance of the revenue, statutory audit of the books of the assessee had been conducted for assessment year 1998-99 and it was found that in the relevant previous year, there was a short provision of Rs. 1,20,89,426/-. This finding of the statutory auditor appointed by the revenue has not been disputed by the D.R. Therefore, it can be said that there was no excess provision made in the books on an overall basis up to
assessment year 1998-99. In such a circumstance, there is no reason to hold that there would have been an excess provision for and up to assessment year 1994-95. No particular fact emerges which lead to a conclusion that the provision made in this year or up to this year
was not on a fair basis.

Thus, the Tribunal did not find any reason to displace the finding of the CIT(A) on merits also. Thus, ground no. 2 is also dismissed.

Ground no. 3 is regarding disallowance out of the expenditure. From the facts narrated by the rival parties, it is clear that the matter was restored to the file of the Assessing Officer by the CIT(A) vide order dated 15.2.1998. The Assessing Officer requisitioned the vouchers for the first time on 5.3.2001. From the order of the CIT (A) it is clear that books and vouchers were produced in the case of the assessee for this year under the Wealth-tax Act on 5.3.2001,
which could not be examined by the Assessing Officer as the assessee was directed to produce them on 7.3.2001 at 11.00 A.M. In such a circumstance, it will be difficult to hold that the same books of account were not produced in the income-tax proceedings for the same
year. Thus, it can be concluded safely that the Assessing Officer was not in a position to examine the evidence on that day for lack of time. He granted time under the wealth-tax proceedings and, thus, it becomes clear that he ought to have granted time even under the
income-tax proceedings. However, instead of granting time, he proceeded to complete the assessment without verification of the evidence.

Having considered the whole matter, ITAT was of the view that the Assessing Officer should have granted time to the assessee and examined the books and vouchers on any subsequent date. The failure to do so does not by itself lead to a conclusion that the expenditure was genuine or it was deductible u/s 37 of the Act.

In another related case, the revenue took three substantive grounds to the effect that the learned CIT(A) erred in -
(i) deciding the appeal on the issue of validity of notice u/s 148 when a writ application of the assessee on this issue was pending before Hon'ble Allahabad High Court,

(ii) holding that notice u/s 148 was bad in law without appreciating the fact that the notice was issued in view of concealment detected on account of special audit conducted in the case of the assessee for assessment year 1991-92, and

(iii) ignoring that the books of account were never produced before the Assessing Officer and in any case it was impossible for him to detect the concealment with due diligence since it could only be detected after thorough special audit u/s 142(2A) of the Act.

The cross objection of the assessee is in support of the order of the learned CIT(A). It is mentioned that the CIT(A) was fully justified in -

(i) cancelling the assessment made u/s 147,
(ii) holding that there was no valid reason for reopening the assessment, and
(iii) cancelling the order after consideration of all the facts and circumstances of the case.

The original assessment u/s 143(3) was completed on 26.3.1993 at total income of Rs. 25,07,554/-. Thereafter, notice u/s 148 was issued and served on the assessee on 4.11.1996 by recording the following reasons:-

i) The assessee company had kept throughout the year average funds of approximately Rs. 8,75,74,400/-with its sister concern M/s Sahara India Firm, and interest thereon at 18% i.e., Rs. 1,57,67,392/- had failed to be charged and declared as an income for the year.

ii) The assessee company claimed operational expenses being service charge of Rs. 1,50,40,582/- as reimbursed to sister concern M/s Sahara India Firm but only 3% i.e., Rs. 4,51,215/-were permissible as genuine and the balance of Rs. 1,45,89,367/-being not genuine
were not allowable as deduction;

iii) Income from interest on FDRs loans and advances was wrongly charged at a lower rate than chargeable and hence income was declared lower than taxable."

The re-assessment proceedings were completed on 22.3.1999 at total income of Rs. 8,80,43,087/-.

The CIT(A) cancelled the assessment by inter-alia holding that there was no failure on the part of the assessee to disclose fully and truly all material facts relevant for the assessment.

An interesting twist - DR is not prepared - adjournment refused:

The DR pointed out that she has not prepared the case for lack of time and, therefore, the case may be adjourned.

The counsel for the assessee pointed out that the facts are clear from the orders of the Assessing Officer and the CIT(A) and, therefore, there is no reason to adjourn the hearing of the case. After hearing preliminary arguments on this issue, the request for adjournment of the DR was refused and the case was proceeded with. Thereafter, the learned DR did not make any argument in the matter thereafter.

Now had the DR said that she was not feeling well and sought an adjournment, it would have been surely given, but for her honest admission that she was not prepared, the Revenue lost the chance of defending the case.

On merit, the Tribunal observed,

The original assessment order was passed after obtaining details in respect of all the three reasons. Therefore, there is an inescapable conclusion that the Assessing Officer had applied his mind to the facts of the case at the time of making original assessment. Thus, there is no reason to believe that the income had escaped assessment. Further, notice u/s 148 was issued after four years of the close of the relevant assessment year. Thus, it was incumbent on
the Assessing Officer to show in the reasons recorded by him that any income escaped assessment due to error or omission on the part of the assessee in not disclosing all material facts relevant for assessment of this year. The assessment order does not show any
error or omission on the part of the assessee in disclosing all material facts.

So the Tribunal held that the CIT(A) was right in cancelling the re-assessment.