2006 (5) TMI 114 - AT - Income Tax

Revision u/s 263 - reasons given in the order for holding the assessment order as erroneous and prejudicial are different from the reasons given in the show-cause notice issued - whether there was lack of enquiry and non-application of mind on the part of Assessing Officer vis-a-vis the issue relating to unsecured loans and excessive allowance of expenditure vis-a-vis section 40A(2) - HELD THAT - In the present case the reason given in the show-cause notice was that duty drawback received by the assessee could not be considered as profit derived from export in view of the Supreme Court judgment in the case of Sterling Foods and therefore the said amount did not qualify for deduction u/s 80HHC. However the order u/s 263 held the assessment order as erroneous on different grounds namely (i) the Assessing Officer should have excluded the export incentives of Rs. 18, 99, 015 instead of Rs. 18, 58, 350 (ii) Central Excise refund and Sales Tax set-off should have been excluded from the business profits under clause (baa) of Explanation to section 80HHC and (iii) Central Excise refund and Sales Tax set-off should have been included in the total turnover. However there is no mention of the basis mentioned in the show-cause notice. This clearly shows that there was no nexus between the reasons given in the show cause and the reasons given in the impugned order for holding the order of Assessing Officer as erroneous qua deduction u/s 80HHC. Therefore we quash the order of the Learned CIT (A) to the extent mentioned above. Assessing Officer did not make any enquiry regarding prevalent market price of the goods purchased by the assessee from the sister concern. In the absence of such enquiry on the part of Assessing Officer in our opinion the assessment order became erroneous. Therefore the order of the Learned CIT (A) has to be held to be valid in this regard. Regarding the issue of unsecured loans No doubt the payments were by cheques but that by itself does not prove the creditworthiness of the assessee. Neither the Bank statement of cash creditors nor their Balance Sheet were examined. Even the Assessing Officer had not made any enquiry from the concerned Assessing Officers with whom they were assessed. Therefore in our opinion the Assessing Officer failed to make proper enquiries before accepting explanation of assessee. Thus there was lack of proper enquiry on the part of the Assessing Officer. No evidence was furnished regarding the creditworthiness of the parties. Even otherwise in such situation the Assessing Officer should have made enquiries in this regard before accepting the explanation of the assessee. Therefore in our opinion there was lack of enquiry on the part of Assessing Officer and the same rendered the assessment order to be erroneous and prejudicial to the interest of Revenue. The order of the Learned CIT(A) is therefore sustained on this issue. Thus the order of the Learned CIT u/s 263 is partly quashed. Consequently the appeal of the assessee is partly allowed.

Summary

Issues Involved:
1. Validity of the Learned CIT's order under Section 263 for different reasons than those stated in the show-cause notice.
2. Lack of proper enquiry by the Assessing Officer regarding purchases under Section 40A(2)(b).
3. Lack of proper enquiry by the Assessing Officer regarding unsecured loans under Section 68.

Detailed Analysis:

1. Validity of the Learned CIT's Order Under Section 263:
The first issue revolves around whether the Learned CIT's order under Section 263 can be upheld when the reasons provided for holding the assessment order as erroneous and prejudicial to the interest of Revenue differ from those stated in the show-cause notice. The Tribunal held that the order of the Learned CIT must be confined to the reasons given in the show-cause notice. If the CIT intends to deviate from the reasons mentioned in the show-cause notice, fresh reasons must be confronted to the assessee, and a fresh opportunity must be provided. This principle is supported by the judgments of the Hon'ble Andhra Pradesh High Court in the case of G.K. Kabra and the Tribunal, Madras Bench in the case of Sanco Trans Ltd. The Tribunal concluded that the order of the Learned CIT was bad-in-law as it was not based on the reasons given in the show-cause notice. Consequently, the Tribunal quashed the order of the Learned CIT to the extent that it was based on different grounds than those mentioned in the show-cause notice.

2. Lack of Proper Enquiry by the Assessing Officer Regarding Purchases Under Section 40A(2)(b):
The second issue pertains to whether there was a lack of enquiry by the Assessing Officer concerning the purchases made from the sister concern under Section 40A(2)(b). The Tribunal observed that while the assessee had provided details of the sister concerns and the bills issued by M/s. Mineral India International, this information alone was insufficient to determine whether the payments were reasonable and not excessive. The Assessing Officer failed to make any enquiry regarding the prevailing market prices of the goods purchased from the sister concern. The Tribunal held that the absence of such enquiry rendered the assessment order erroneous. Therefore, the order of the Learned CIT was upheld in this regard.

3. Lack of Proper Enquiry by the Assessing Officer Regarding Unsecured Loans Under Section 68:
The third issue concerns whether there was a lack of proper enquiry by the Assessing Officer regarding unsecured loans under Section 68. The Tribunal noted that the audit report provided details of loans exceeding the limit prescribed in Section 269SS, and the Assessing Officer had asked the assessee to furnish details of unsecured loans along with confirmation letters and Permanent Account Numbers. However, the evidence produced did not establish the creditworthiness of the cash creditors. The Tribunal emphasized that the onus is on the assessee to prove the identity, creditworthiness of the cash creditors, and the genuineness of the transactions. The Assessing Officer had not examined the bank statements or balance sheets of the cash creditors, nor made any enquiries from the concerned Assessing Officers. Therefore, the Tribunal concluded that there was a lack of proper enquiry by the Assessing Officer, rendering the assessment order erroneous and prejudicial to the interest of Revenue. The order of the Learned CIT was sustained on this issue.

Conclusion:
In conclusion, the Tribunal quashed the order of the Learned CIT under Section 263 to the extent that it was based on different grounds than those mentioned in the show-cause notice. However, the Tribunal upheld the order of the Learned CIT regarding the lack of proper enquiry by the Assessing Officer concerning purchases under Section 40A(2)(b) and unsecured loans under Section 68. Consequently, the appeal of the assessee was partly allowed.