1997 (11) TMI 119 - AT - Income Tax

Summary

Issues Involved:
1. Jurisdiction to pass order under Section 263 by the CIT.
2. Disallowance under Section 40A(3) of IT Act.
3. Payment of additional tax under Section 104 of IT Act.

Issue-wise Detailed Analysis:

1. Jurisdiction to pass order under Section 263 by the CIT:
The assessee challenged the jurisdiction of the CIT to pass an order under Section 263 of the IT Act for the assessment year 1985-86. The CIT issued a notice dated 6th March 1990, seeking to revise the order passed by the ITO, which was found erroneous and prejudicial to the interest of Revenue. The CIT directed the AO to decide the issue afresh after providing a reasonable opportunity of being heard to the assessee. The assessee argued that the payments in question, amounting to Rs. 2,15,97,829, were made to different officers and field staff of M/s Sarabhai Chemicals and not to M/s Sarabhai Chemicals directly. The payments were made on behalf of Sarabhai Chemicals and debited to their accounts in the appellant's books. The assessee contended that the CIT and AO wrongly recorded that the payments were made to M/s Sarabhai Chemicals. The CIT accepted that the payments were made to staff and officers of Sarabhai Chemicals but still held the order passed by the ITO as erroneous. The Tribunal found that the CIT's finding of the order being erroneous and prejudicial to the interest of Revenue was not justified as the AO had made necessary enquiries regarding the applicability of Section 40A(3).

2. Disallowance under Section 40A(3) of IT Act:
The AO, during the assessment under Section 143(3), found that the payments exceeding Rs. 2,500 were satisfactorily explained by the assessee and did not disallow the payments under Section 40A(3). The CIT, however, held that the ITO had not scrutinized the nature of the payments properly and considered the order erroneous. The assessee argued that the payments were made on behalf of Sarabhai Chemicals and debited to their accounts, thus not representing the assessee's expenditure. The Tribunal noted that the CIT acknowledged the payments were made on behalf of Sarabhai Chemicals and found the CIT's direction to the AO for further enquiry unjustified. The Tribunal concluded that no disallowance under Section 40A(3) was warranted in the hands of the assessee as the payments were made on behalf of Sarabhai Chemicals.

3. Payment of additional tax under Section 104 of IT Act:
The Revenue appealed against the CIT(A)'s order canceling the additional tax levied under Section 104 for the assessment year 1983-84. The ITO had levied additional tax as the assessee did not declare any dividend and did not respond to the show cause notice. The CIT(A) found that the total income was reduced to Rs. 2,16,366 after an order under Section 154 and that there was a brought forward loss of Rs. 25,90,360, resulting in a negative balance of Rs. 3,84,429. Thus, the assessee had no profits to declare dividends from and was covered by clause (i) of sub-section (2) of Section 104. The Tribunal upheld the CIT(A)'s decision, noting that the assessee was not in a position to declare any dividend due to the adjusted losses and reduced income, and dismissed the Revenue's appeal.

Conclusion:
The Tribunal set aside the order passed under Section 263 and allowed the assessee's appeal, concluding that the AO had made necessary enquiries and the order was not erroneous or prejudicial to the interest of Revenue. The Tribunal also dismissed the Revenue's appeal regarding the additional tax under Section 104, upholding the CIT(A)'s decision that the assessee had no profits to declare dividends from due to adjusted losses and reduced income.