2009 (10) TMI 429 - HC - Income Tax

Court Rules Lack of Proof Not Grounds for Disallowance in Income-tax Assessment

The court ruled in favor of the assessee, holding that disallowance under section 143(1)(a) of the Income-tax Act cannot be made solely due to lack of ... Assessment- The assessee filed its returns for the assessment year 1989-90 along with the tax audit report under section 44AB of the Act. In the computation of income, the assessee claimed deduction of Rs. 21,12,766 under section 80G, being 50 per cent. of the donation amount of Rs.42,25,533. an intimation under section 143(1)(a) of the Act was issued by the Assessing Officer on August 6, 1990. In the said intimation, the Assessing Officer made, inter alia, the following adjustments: (i) Disallowance under section 43B as per tax audit report (ii) Donation debited to profit and loss account disallowed for want of any receipt and also for want any valid certificate for tax exemption certificate filed. Thus, the assessee was made liable for payment of additional tax over and above the normal. Commissioner (Appeals) allow the appeal of assessee. The Tribunal deleted the adjustment made with reference to section 80G. However, the Tribunal upheld the adjustment made under section 43B on the ground that it was based on the observation made by tax auditor in its report. Held that- the Tax Auditor did not specify in the tax audit report the amount inadmissible u/s 43B. Therefore, it was necessary for the Assessing officer to issue a notice under section 143(2) for the purpose of making proper assessment under section 143(3). Thus allow the appeal. Issues Involved:1. Whether disallowance under section 143(1)(a) of the Income-tax Act, 1961 can be made merely because proof in support of a claim made in the return is not annexed to the return.2. Whether the Tribunal was justified in holding that the disallowance made by the Assessing Officer falls within the purview of prima facie adjustment within the meaning of section 143(1)(a).Issue-wise Detailed Analysis:Issue 1: Disallowance under section 143(1)(a) due to lack of proof annexed to the returnThe court examined whether an Assessing Officer (AO) can disallow claims in a tax return under section 143(1)(a) simply because supporting evidence was not attached. The appellant argued that the AO's power to make prima facie adjustments under section 143(1)(a) is limited and analogous to the power under section 154, which only allows rectification of apparent mistakes without involving any doubt, debate, or factual investigation. The court agreed, citing various precedents including *Khatau Junkar Ltd. v. K.S. Pathania* and *S. R. F. Charitable Trust v. Union of India*, which held that prima facie adjustments could not be made merely due to the absence of evidence with the return. The court emphasized that if further inquiry or proof is needed, the AO must issue a notice under section 143(2) for a detailed assessment under section 143(3).Issue 2: Tribunal's justification of disallowance as prima facie adjustmentThe court scrutinized the Tribunal's decision that upheld the AO's adjustments under section 43B based on the tax audit report. The appellant contended that the tax audit report did not provide sufficient details to justify a prima facie disallowance under section 143(1)(a). The court noted that the tax audit report lacked a breakdown of amounts and necessary information regarding the applicability of the provisos to section 43B. The court reiterated that without such details, the AO could not make a prima facie adjustment and should have issued a notice under section 143(2) for further inquiry. The court cited *Jagatdal Jute and Industries Ltd. v. CIT* and *G. K. W. Ltd. v. CIT*, which supported the necessity of further inquiry for disallowances under section 43B.Conclusion:The court concluded that the AO's adjustments under section 143(1)(a) were not justified merely due to the absence of supporting evidence with the return. The court held that the AO should have issued a notice under section 143(2) for further inquiry. The court also found that the Tribunal erred in upholding the AO's adjustments based on the tax audit report without sufficient details. The court answered both questions in favor of the assessee and allowed the appeal.