Kerala H.C : Not invoking provisions of section 40A(3) is a fit case for CIT to declare it as prejudicial to interest of revenue

High Court Of Kerala

Raja & Co. vs. CIT (Central)

Assessment Year : 2000-01 to 2006-07

Section : 40A(3), 263, 40(a)(ia)

C.N. Ramachandran Nair And K. Surendra Mohan, JJ.

IT Appeal Nos. 320, 324, 325, 328, 339, 340 And 345 Of 2010

October 15, 2010

JUDGMENT

C.N. Ramachandran Nair, J. – There is only one question raised in all the connected appeals filed by the very same assessee for the assessment years 2000-01 to 2006-07, that is about the validity of the suo motu revisional order issued by the Commissioner of Income-tax under section 263 of the Income-tax Act. We have heard Sri T.M. Sreedharan, counsel appearing for the appellant-assessee and have gone through the orders of the Tribunal and that of the Commissioner of Income-tax.

2. The reason why the Commissioner directed revision of assessment in exercise of his powers under section 263 is because the Assessing Officer in the course of completion of assessments did not consider the application of section 40A(3) disallowance for all these years, and disallowance under section 40(a)( ia) of the Income-tax Act for the assessment years 2005-06 and 2006-07. The assessee, a rice merchant, admittedly had made cash purchases for all the years in excess of the limit provided under section 40A(3) of the Act. The Assessing Officer did not consider disallowance under section 40A(3) and, therefore, the Commissioner through orders issued under section 263 directed the Officer to verify whether any disallowance is called for. So far as assessment years 2005-06 and 2006-07 are concerned, the assessee did not make any payment of tax at source for the inward freight charges paid for goods purchased. Consequently the Commissioner in exercise of suo motu revisional power under section 263 directed the Assessing Officer to consider this matter also. The assessee filed appeals against the orders of the Commissioner issued under section 263 contending that the Commissioner of Income-tax (Appeals) while deciding the appeals against regular assessments considered the issue of disallowance under section 40A(3) and held in their favour and so much so, the Commissioner cannot exercise suo motu revisional power after disposal of appeals. The specific case of the assessee is that section 263(e) applies to his case. However, the Tribunal after verifying the records found that the Assessing Officer did not in fact consider disallowance under section 40A(3) for the purchases made by the assessee against cash payments. The finding of the CIT (Appeals) is also to the effect that the issue does not arise from assessment orders because the Assessing Officer has not made any disallowance. Admittedly the assessee was engaged in purchase of rice and the purchases are made against cash payments which attract section 40A(3) of the Act. In fact exemption available under rule 6DD(a) is only for purchase of agricultural produce and since rice is not an agricultural produce exemption is not available to the assessee and this is available for purchase of paddy under rule 6DD(e) of the Rules. Therefore, the Commissioner directed the Assessing Officer to verify the facts with reference to section 40A(3).

3. The Tribunal rejected the assessee’s case by following the decision of the Supreme Court in Malabar Industrial Co. Ltd. v. CIT [2000] 243 ITR 83 1 wherein the Supreme Court held that non-application of mind or lack of proper enquiry in the matter by the adjudicating authority would make the order vulnerable for revision under section 263 of the Act. We are of the view that the finding of the Tribunal is perfectly justified because once assessment is made by the officer without referring to mandatory provisions of section 40A(3) in a case where the assessee is admittedly engaged in purchase of goods paying cash over the limit that attracts the provisions of section 40A(3) then such order is erroneous in law and prejudicial to the interests of the revenue because if provisions were considered at the time of assessment, probably there would have been disallowance leading to demand of tax. In the circumstances, we are of the view that Tribunal rightly upheld the order of the Commissioner issued under section 263 of the Income-tax Act.

4. On merits we do not want to go into the contentions raised by the appellant because in the course of revision of assessments being consi-dered by the Assessing Officer based on orders of Commissioner under section 263, the assessee can produce proof and claim eligible benefit under the provisions of the Act and Rules. We, therefore, leave it to the assessee to claim exemption or exclusion against disallowance of cash purchases permissible under law.

5. So far as the validity of orders issued under section 263 for considering disallowance under section 40(a)( ia) also we feel the finding of the Tribunal is correct because the basis adopted by the Tribunal for upholding section 263 order in the case of section 40A(3) applies to this case as well inasmuch as assessee has not deducted any tax payable in terms of the above provision on the payment to transport contractors. Therefore, matter requires to be considered with reference to cash payments made to such contractors. Therefore, we uphold the order of the Commissioner issued under section 263 for considering disallowance under section 40(a)( ia) of the Act.

Consequently we dismiss all the appeals, leaving the appellant to raise all contentions on merits before the Assessing Officer while revising the assessments in terms of Commissioner’s order under section 263 of the Act.

[Citation : 335 ITR 381]

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