2006 (3) TMI 247 - AT - Income Tax

Revision action u/s 263 by the CIT - lower net profit - MAT - Erroneous And Prejudicial Order - non-examination by the AO of the applicability of provisions of s. 40A(3) - HELD THAT - We find that the consideration of expenses by the CIT for the purpose of making disallowance u/s 40A(3) is directed towards the direct expenses and odd, which were debited to the trading account. Obviously, when the GP rate of 5 per cent was applied by rejecting the books of account, the AO became powerless to again go through the books of account and make separate additions u/s 40A(3). It is pertinent to note that the CIT gets revisional power u/s 263 where assessment order passed by the AO is erroneous and prejudicial to the interest of the Revenue. The twin conditions are required to be satisfied simultaneously. If an order is only erroneous and not prejudicial to the interest of the Revenue, that case does not fall within the sweep of s. 263. In the like manner, if the assessment order is not erroneous but prejudicial to the interest of the Revenue, the same also goes out of the ambit of the revisional power of the CIT u/s 263. Adverting to the facts of the instant case; we find that the view of the AO on all the three points, considered by the learned CIT for invoking the provisions of s. 263, is not erroneous. He has adopted a reasonable view, which cannot be disturbed by the CIT. As the very assessment order is held to be not erroneous, there can be no question of invoking the provisions of s. 263. We, therefore, set aside the impugned order on this count. In the result, the appeal is allowed. The nature of business of the present assessee is similar to that of its sister-concern and the order of the learned CIT u/s 263 also proceeds on the same basis. To be more particular, we find that this assessee had declared GP rate of 3.75 per cent as against 4.39 per cent of the preceding year. The AO while finalizing the assessment rejected the books of account and applied GP rate of 4.86 per cent, which resulted into an addition of Rs. 2,71,118. The other factors, which were considered by the learned CIT to brand the assessment order as erroneous and prejudicial to the interest of Revenue are non-consideration of the applicability of provisions of s. 40A(3) by the AO and improper examination of genuineness of outstanding liabilities. Both the sides, are in agreement that the basic facts of this assessee, mutatis mutandis are similar to that of M/s Hanuman Construction Company. By adopting the same reasons, as discussed supra, we hold that learned CIT was not justified in setting aside the assessment order passed by the AO u/s 143(3). We, therefore, overturn the impugned order. In the result, the appeal is allowed.

Summary

Issues:
1. Revision under section 263 based on lower net profit showing.
2. Rejection of books of account and application of GP rate.
3. Provision made in books of account not properly examined.
4. Non-examination of applicability of provisions of section 40A(3).

Issue 1: Revision under section 263 based on lower net profit showing:
The appeals stemmed from orders by the CIT under section 263 concerning the assessment year 2004-05. The core issue revolved around the lower net profit shown by the assessees. The CIT contended that the net profit was understated and not adequately examined by the AO. However, the Tribunal noted that the AO had consistently followed the adoption of GP rate in previous years and allowed deductions for expenses, which was a valid approach. The CIT failed to establish that the net profit rate in the preceding year was lower, and the AO's method of applying GP rate was deemed appropriate.

Issue 2: Rejection of books of account and application of GP rate:
The AO rejected the books of account due to deficiencies and applied a 5% GP rate, resulting in additional income. The CIT argued that the AO should have considered the net profit rate instead. However, the Tribunal found that the AO's action of applying GP rate and allowing deductions for expenses was consistent with past practices and upheld the approach. The interest income in question did not impact the GP rate, and the major expenses claimed were regular and nominal, justifying the AO's decision.

Issue 3: Provision made in books of account not properly examined:
The CIT raised concerns about a significant provision made by one of the assessees in its books of account, which she believed was not adequately scrutinized by the AO. However, the Tribunal analyzed the details and concluded that the provision was related to expenses already considered in the GP rate calculation. Therefore, the AO's acceptance of the provision was deemed appropriate.

Issue 4: Non-examination of applicability of provisions of section 40A(3):
The CIT criticized the AO for not examining the applicability of section 40A(3) regarding certain expenses. The Tribunal clarified that once the AO applied the GP rate after rejecting the books of account, separate additions under section 40A(3) were not permissible. Citing a relevant court judgment, the Tribunal supported the AO's decision and deemed the assessment order to be in line with the law.

In conclusion, the Tribunal found that the AO's actions were reasonable and not erroneous, thereby setting aside the CIT's orders under section 263. Both appeals were allowed in favor of the assessees, emphasizing the importance of consistency in applying established practices and legal principles in tax assessments.