2006 (3) TMI 224 - AT - Income Tax

Validity of assessment - jurisdiction of the authority to act as the AO - Jt./Adl. CIT heading the Ranges - authorised officers u/s. 120(4)(b) - term AO defined under sub-s. (7A) of s. 2 - HELD THAT - Section 2 of the Act which defines expression AO opens with the expression In this Act, unless the context otherwise requires . While interpreting a definition, it therefore, has to be borne in mind that the interpretation placed on it should not only be not repugnant to the context, it should also be such as would add the achievement of the purpose which is sought to be served by the Act. The IT Act has been enacted with the object to charge income-tax on the total income of a person of the previous year in accordance with and subject to the provisions contained therein. Procedure for assessment of such total income is contained under Chapter XIV. The appointment and control of IT authorities is contained under Chapter XIII while the jurisdiction of such IT authorities is regulated by Chapter XIII-B. The machinery provision regulating procedure for assessment in various sections like, 142, 143, 144 or 148 has used the expression AO to carry out these functions . For the purpose of this Act, an AO is not a class of IT authorities. This is only a designation given to certain IT authorities to exercise or perform all or any of the powers and functions conferred on or assigned to them. There been the intention to include Addl. CIT to be an AO or that the powers of AO were to be delegated to the Addl. CIT, then, his name would have been included in s. 120(4)(b) itself or at least in the definition of AO contained under sub-s. (7A) of the s. 2 of the Act. If the Parliament in its wisdom did not include Addl. CIT in the definition of AO such authority would be barred to act as an AO even if the powers arepowers ed upon him, when the purpose can be achieved by delegation of authority to Jt. CIT or Jt. Director, and it shall not be mandatory that one should mechanically attribute the meaning assigned to Jt. CIT under sub-s. (28C) of s. 2 of the Act and import the same in the definition clause of AO given under sub-s. (7A) of s. 2 of the Act. Thus, we are satisfied that in view of the definition contained under sub-s. (7A) of s. 2 of the Act, an Addl. CIT cannot be an authority to exercise or perform all or any of the powers and functions of an AO to make assessment of income and as such the assessment made on appellant by such Addl. CIT, Range-20, New Delhi, is liable to be quashed. In the result, the appeal stands allowed.

Issues Involved:

1. Validity of the assessment order passed by the Addl. CIT.
2. Jurisdiction of the Addl. CIT to act as AO under Section 2(7A) of the IT Act.
3. Rejection of books of account and estimation of sales.
4. Addition of Rs. 46,95,347 as trading addition.
5. Enhancement of sales by Addl. CIT.
6. Estimation of GP rate by AO.
7. Rejection of evidence and explanation submitted by the assessee.
8. Addition of Rs. 9,80,000 on account of cash found during survey.
9. Addition of Rs. 48,000 due to stock difference.
10. Disallowance of salary paid to the working partner.
11. Disallowance under Section 43B for late payment of ESI and EPF.

Issue-wise Detailed Analysis:

1. Validity of the assessment order passed by the Addl. CIT:
The appellant challenged the validity of the assessment made by the Addl. CIT, arguing that the Addl. CIT could not be the AO within the meaning of Section 2(7A) of the IT Act. The CIT(A) rejected this contention, stating that the AO had correctly been assigned jurisdiction. The ITAT, however, quashed the assessment order, concluding that the Addl. CIT did not have the requisite jurisdiction to act as AO as per the statutory provisions.

2. Jurisdiction of the Addl. CIT to act as AO under Section 2(7A) of the IT Act:
The ITAT examined whether the Addl. CIT could be considered an AO under Section 2(7A). The definition of AO includes specific authorities but does not explicitly include the Addl. CIT. The ITAT found that the Addl. CIT could only act as AO if specifically directed under Section 120(4)(b), which was not done in this case. The ITAT concluded that the Addl. CIT did not have valid jurisdiction, rendering the assessment order invalid.

3. Rejection of books of account and estimation of sales:
The AO rejected the books of account and estimated the sales at Rs. 6 crores against the declared sales of Rs. 5,48,90,910. The CIT(A) upheld this rejection. The ITAT noted that the reasons for rejecting the books were inadequate and that the estimation of sales was arbitrary and without basis.

4. Addition of Rs. 46,95,347 as trading addition:
The CIT(A) confirmed the addition of Rs. 46,95,347 as trading addition. The ITAT found that this addition was based on an arbitrary estimation of sales and GP rate, without any material evidence. The ITAT quashed this addition.

5. Enhancement of sales by Addl. CIT:
The Addl. CIT enhanced the sales to Rs. 6 crores from Rs. 5,48,90,910. The ITAT found this enhancement to be arbitrary and without any adverse material or evidence. The enhancement was quashed.

6. Estimation of GP rate by AO:
The AO estimated the GP rate at 21%, which was upheld by the CIT(A). The ITAT found this estimation to be arbitrary and without any material evidence. The estimation was quashed.

7. Rejection of evidence and explanation submitted by the assessee:
The CIT(A) rejected the evidence and explanation submitted by the assessee regarding the GP rate declared in the books of account. The ITAT found that the rejection was arbitrary and without basis. The rejection was quashed.

8. Addition of Rs. 9,80,000 on account of cash found during survey:
The CIT(A) sustained the addition of Rs. 9,80,000 found during the survey. The ITAT found that the explanation and evidence submitted by the assessee were rejected arbitrarily without pointing out any discrepancy. The addition was quashed.

9. Addition of Rs. 48,000 due to stock difference:
The CIT(A) sustained the addition of Rs. 48,000 due to stock difference. The ITAT found that the assessee had submitted complete explanation and evidence for the stock differences, which were rejected arbitrarily. The addition was quashed.

10. Disallowance of salary paid to the working partner:
The CIT(A) confirmed the disallowance of Rs. 60,000 paid as salary to the working partner. The ITAT found that the disallowance was arbitrary and ignored the evidence and explanation submitted by the assessee. The disallowance was quashed.

11. Disallowance under Section 43B for late payment of ESI and EPF:
The CIT(A) confirmed the disallowance of Rs. 29,152 under Section 43B for late payment of ESI and EPF. The ITAT found that the CIT(A) ignored the explanation and case law cited by the assessee. The disallowance was quashed.

Conclusion:
The ITAT quashed the assessment order passed by the Addl. CIT on the grounds of lack of jurisdiction and arbitrary estimations and additions. The appeal was allowed in favor of the assessee.

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