INCOME TAX ACT, 1961

Revision under section 263- Erroneous and prejudicial order-Lack of proper enquiry by AO

Assessee filed its return declaring some income after claiming deduction under section 80HHC. AO framed its assessment order under section 143(3) accepting the said return. CIT issued notice under section 263 on the ground that the assessment order was erroneous and prejudicial to the interest of the revenue as the deduction under section 80HHC allowed on the duty draw-back received as per proviso to section 80HHC(3) was erroneously allowed and no enquiry was carried out with reference to the genuineness of the loan as well as the transactions falling under section 40A(2)(b). CIT held that excessive deduction was allowed under section 80HHC because (i) AO should have excluded the entire export incentive from the business profits instead of 90 per cent thereof, (ii) the central excise refund and sales-tax set off should have been included in the total turnover and (iii) the central excise refund and sales-tax set off should have been excluded from the business profits as per clause (baa) of Explanation to section 80HHC and that there was lack of proper enquiry on the part of AO for determining the genuineness of the loans as well as with reference to the transactions of purchase from the sister concern vis--vis section 40A(2)(b). So, he held that the order of AO was erroneous and prejudicial to the interest of the revenue and set aside the impugned order to AO for his fresh adjudication. Held: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, therefore, the said amount did not qualify for deduction under section 80HHC. However, the order under section 263 held the assessment order as erroneous on different grounds. But, there was no mention of the basis mentioned in the show cause notice. That clearly showed 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 AO as erroneous qua deduction under section 80HHC. Therefore, the order of CIT(A), to that extent, was to be quashed. There was no dispute that lack of enquiry would render the order of the assessment as erroneous and prejudicial to the interest of revenue. The lack of enquiry would include not only the situation where no enquiry is made but would also include the situation where no proper enquiry is made considering the facts of the case. Whenever the assessee claimed expenditure as deduction, the onus is on the assessee to prove its genuineness. However, where payment is made to the persons mentioned in section 40A(2), then it is the duty of AO to make proper enquiry to ascertain whether such expenditure is reasonable with reference to the prevailing market price. Where any receipt is claimed to be exempt from taxation, it is the duty of AO to ascertain whether conditions for allowing expenditures are fulfilled or not. The duty of AO is to collect the correct tax due from the assessee -neither a penny more nor a penny less. Therefore, if he fails in performing his duty, then his order can be considered as erroneous and prejudicial to the interest of the revenue. Mere collection of material is not enough in discharging of such duty. It is also the duty of AO to evaluate the material or evidence collected and then ascertain whether such materials are enough to sustain the claim of the assessee. In the present caxe, the payments made by the assessee falling under section 40A(2)(b), the assessee had given details of sister concerns to whom the payments were made. The detail provided the dates and invoice numbers as well as the total amount of purchases. The assessee gave no other information. That information, by itself, was not sufficient for holding that payments made to sister concern under section 40A(2)(b) were reasonable and not excessive. Whether the payment was excessive or not would depend upon the prevalent market prices. AO 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 AO, the assessment order became erroneous. Therefore, the order of CIT (A) had to be held to be valid in that regard. The audit report provided the details of loans accepted by the assessee, exceeding the limit prescribed in section 269SS. It also appeared that AO asked the assessee to furnish the details of unsecured loans along with confirmation letters and the permanent account numbers of the cash creditors. In response to the same, the assessee had furnished the copies of the accounts of those cash creditors in the books of the assessee on which such cash creditors had confirmed such accounts. It is the settled legal position that in the case of cash credits appearing in the books of the assessee, the onus is on the assessee to prove the identity and creditworthiness of the cash creditors as well as the genuineness of the transactions. The evidence produced before AO nowhere provided the creditworthiness of the cash creditors. No doubt, the payments were made by cheques but that, by itself, did not prove the creditworthiness of the assessee. Neither the bank statement of cash creditors nor their balance sheet was examined. AO failed to make proper enquiries before accepting the explanation of the assessee. Thus, there was lack of proper enquiry on the part of AO and the same rendered the assessment order to be erroneous and prejudicial to the interest of revenue.