Consequence of Passing of an Assessment Order without Proper Enquiry

ITAT, HYDERABAD BENCH `B’

Thermal Systems (Hyd.) Pvt. Ltd. v. ACIT

ITA No. 270/Hyd/2006 FEBRUARY 2, 2008

RELEVANT EXTRACTS:

6. We have also carefully gone through the judgment of the Gujarat High Court in the case of Mukur Corporation (supra). In the case before the Gujarat High Court, the assessee claimed two deductions to the extent of Rs.1,45,000 and Rs.2,00,000 from the profit. The AO, without any enquiry, allowed the deduction claimed by the assessee. The Commissioner, in exercise of his power under sec. 263 of the Income-tax Act, set aside the order of assessment and directed the AO to make a fresh assessment after giving proper opportunity to the assessee. In those circumstances, the Gujarat High Court held that the words “prejudicial to the interests of the revenue” in sec. 263 have not been defined, but they must mean that the orders of assessment challenged are such as are not in accordance with law. The Income-tax Officer had committed en error in not making enquiry into the details as regards both the deductions and also the want of such enquiry resulted in prejudice to the interests of the Revenue. Accordingly, the Gujarat High Court upheld the initiation of proceedings under sec. 263 of the Income-tax Act. We have also carefully gone through the judgment of the Bombay High Court in case of Krishna Narayan Naik (supra). In the case before the Bombay High Court, the assessee filed return of income beyond the prescribed time and no application was made for extension of time. However, the Assessing Officer completed the assessment without levying interest under sec. 139 of the Income-tax Act for delay in filing the return. The Commissioner, in exercise of his power under sec. 263 of the Income-tax Act, found that the action of the AO in not levying interest under sec. 139 was erroneous and prejudicial to the interests of the Revenue and directed the AO to levy interest. On appeal by the assessee before this Tribunal, the Tribunal held that in the absence of a specific order by the Income-tax Officer either to charge or not to charge interest under sec. 139, the provisions of sec. 263 were not applicable; hence the order passed by the CIT was without any jurisdiction. On reference to the Bombay High Court, It was held that the Income-tax Officer was bound to charge interest under sec. 139(8) of the Income-tax Act. The AO also had the power to waive or reduce the interest. The AO did not consider the question of interest as he was obliged to do. His order was silent on the point of interest. Therefore, his order was erroneous and prejudicial to the interests of the Revenue. Therefore, the High Court reversed the order of the Tribunal and answered the question referred in favour of the Revenue.

8. From the above decisions, it is very clear that when theAssessing Officer has not made any proper enquiry, there is an error in the order of the AO to that extent. The AO also has to record the reason why he is taking a particular view. In the absence of such reason recorded in the assessment order, the failure of the AO would make the assessment order erroneous and prejudicial to the interests of the Revenue. In this case, admittedly, the claim of the assessee under sec. 80HHC was allowed without any discussion in respect of sec. 80- IA(9) of the Income-tax Act. The AO has not made any enquiry whether the deduction allowed under sec. 80-IA is to be deducted while computing the eligible profit for the purpose of deduction under sec. 80HHC. The AO also has not recorded any reasons for accepting the claim of the assessee with regard to sections 80-IA and 80HHC. Therefore, as held by the Rajasthan High Court in the case of Emery Stone Mfg. Co. (supra), the Gujarat High Court in the case of Mukur Corporation (supra) and the Bombay High Court in the case of Krishna Narayan Naik (supra), the failure of the AO to record the reasons and to make enquiry with regard to the claim of the assessee makes the assessment order erroneous and prejudicial to the interests of the Revenue. The Delhi High Court in the case of Consolidated Photo and Finvest Ltd. (supra), held that the application of mind shall be expressed by recording reasons in the order. Since no reason was recorded, it cannot be said that the AO has expressed any opinion or view at all.