2013 (11) TMI 1063 - HC - Income Tax

Rejection of Bokks - Held that - The Assessing Officer did not point out any specific defects in the maintenance of books of account or the audit report - He did not reject the books of account before calculating the average interest on various type of advances - The Assessing Officer did not examine the books of account before arriving at the finding of charging of lower interest and also did not refer the matter for special audit - Unless the books of accounts are rejected addition cannot be made - Decided against Revenue.

Summary

Issues:
1. Interpretation of provisions under Income Tax Act regarding rejection of books of account and special audit.
2. Authority of the Assessing Officer to include interest income in the assessee's total income.
3. Compliance of the assessee with providing details of interest received on advances.
4. Justification of the Tribunal's decision in confirming the CIT (A)'s deletion of the addition of interest income.
5. Application of sections 145(3) and 142(2A) of the Income Tax Act in enhancing income.

Issue 1: Interpretation of provisions under Income Tax Act regarding rejection of books of account and special audit:
The Tribunal upheld the CIT (A)'s findings that unless the books of account were rejected or special audit was directed, the Assessing Officer was not entitled to include interest received on loans in the assessee's income. The Tribunal emphasized that there is no provision empowering the Income Tax Officer to include interest not due or collected in the assessee's income.

Issue 2: Authority of the Assessing Officer to include interest income in the assessee's total income:
The Assessing Officer, in this case, did not reject the audited books of account or direct for a special audit before calculating the interest income on various advances. The AO averaged the interest on advances arbitrarily without specific defects in the maintenance of books of account or the audit report. The Tribunal found that the AO did not have the authority to include interest income that was not due or collected unless the books of account were rejected or special audit was conducted.

Issue 3: Compliance of the assessee with providing details of interest received on advances:
The assessee, a cooperative bank, had submitted audited books of account to the Assessing Officer, which were examined. However, the assessee failed to provide details of interest received from various categories of borrowers on advances as requested by the AO. The AO did not reject the books of account or order a special audit but averaged the interest on advances ad hoc, resulting in the addition of interest income to the assessee's total income.

Issue 4: Justification of the Tribunal's decision in confirming the CIT (A)'s deletion of the addition of interest income:
The Tribunal found that the AO did not properly examine the books of account before determining the interest income on advances and did not refer the matter for special audit. Therefore, the Tribunal confirmed the CIT (A)'s decision to delete the addition of interest income made by the AO, emphasizing the lack of authority for the AO to include interest income without rejecting the books of account or ordering a special audit.

Issue 5: Application of sections 145(3) and 142(2A) of the Income Tax Act in enhancing income:
The Tribunal concluded that unless the audited books of accounts were rejected or special audit was conducted, the Assessing Officer was not entitled to average interest on advances and add the difference to the assessee's income. The Tribunal's decision was based on the provisions of sections 145(3) and 142(2A) of the Income Tax Act, emphasizing the necessity of following proper procedures before enhancing the income of the assessee.

In summary, the High Court dismissed the Income Tax Appeal, affirming the Tribunal's decision that the Assessing Officer lacked the authority to include interest income in the assessee's total income without rejecting the books of account or ordering a special audit. The Court found no error of law in the Tribunal's decision and concluded that the questions of law raised did not apply in the appeal.