2013 (9) TMI 202 - AT - Income Tax

Jurisdiction u/s 263 - Revision - Ordered passed by the AO is unreasoned - an order erroneous or prejudicial to revenue - Held that - It is obligatory on the part of the assessing officer to record reasons in the assessment order. Recording of reason would not only enable the revisional / appellate authorities to discharge their function effectively but also repose confidence in the system. Therefore, we are of the considered opinion that there was an error in the order of the assessing officer inasmuch as that the assessing officer has not recorded his reasons for reaching a conclusion - that a speaking order must speak for itself and a reference to show cause notice is uncalled for. It is also well settled principles of law that judicial order shall speak for itself and the reason for the conclusion reached in the judicial order shall contain in the order itself. Reason for a decision cannot be substituted or supplemented by way of an affidavit or otherwise - Commissioner of Income-tax has rightly exercised his powers u/s 263 of the Act. However, he ought not to have disallowed the claim of the assessee straight away. In other words, the Administrative Commissioner ought to have directed the assessing officer to examine the books of account in the light of provisions of section 40(a)(ia) and 40A(3) of the Act. Accordingly, the assessing officer is directed to examine the books of account in the light of provisions of sections 40(a)(ia) and 40A(3) of the Act and thereafter decide the issue in accordance with law without being influenced by any of the observations made by the Commissioner of Income-tax in the impugned order. The order of the Administrative Commissioner is modified to this extent - Decided against assessee.

Issues Involved:
1. Validity of the Administrative Commissioner's order under Section 263 of the Income Tax Act.
2. Application of Section 40A(3) of the Income Tax Act.
3. Application of Section 40(a)(ia) of the Income Tax Act.
4. Requirement for the Assessing Officer to record reasons for decisions.

Issue-wise Detailed Analysis:

1. Validity of the Administrative Commissioner's order under Section 263 of the Income Tax Act:
The appeals were directed against the Administrative Commissioner's orders under Section 263 for assessment years 2003-04 to 2008-09. The assessee argued that the Commissioner directed disallowances without providing an opportunity to explain, thus lacking clarity and enforceability. The Tribunal noted that the Commissioner's exercise of powers under Section 263 was justified as the Assessing Officer (AO) failed to consider Sections 40A(3) and 40(a)(ia), which rendered the assessments erroneous and prejudicial to the revenue's interest.

2. Application of Section 40A(3) of the Income Tax Act:
The Commissioner directed the AO to disallow cash payments under Section 40A(3) without examining the books of account. The Tribunal opined that the Commissioner should have directed the AO to examine the books and consider the claim in light of Section 40A(3) rather than outright disallowance. The Tribunal emphasized the necessity for the AO to evaluate the books of account before making disallowances.

3. Application of Section 40(a)(ia) of the Income Tax Act:
For the assessment years 2006-07 and 2007-08, the Commissioner directed the AO to disallow commission and brokerage payments under Section 40(a)(ia). The Tribunal observed that the application of Section 40(a)(ia) was not considered in previous appeals before the CIT(A) or the Tribunal. Thus, the Commissioner's direction under Section 263 was valid. However, the Tribunal modified the Commissioner's order, directing the AO to examine the books of account in light of Section 40(a)(ia).

4. Requirement for the Assessing Officer to record reasons for decisions:
The Tribunal highlighted the necessity for the AO to record reasons for decisions to ensure transparency, minimize arbitrariness, and facilitate effective appellate review. Citing judgments from higher courts, the Tribunal stressed that recording reasons introduces clarity and fairness in decision-making. The failure to record reasons in the assessment order was deemed an error prejudicial to the revenue's interest.

Conclusion:
The Tribunal upheld the Commissioner's exercise of powers under Section 263 but modified the directive to disallow claims outright. Instead, the AO was instructed to examine the books of account and decide the issues per Sections 40(a)(ia) and 40A(3) of the Act. The appeals of the assessee were dismissed, and the order was pronounced on August 30, 2013.

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