By TIOL News Service

ALLAHABAD, JAN 09, 2014: THE issues before the Bench are - Whether while granting administrative approval u/s 158BG CIT is obliged to give a hearing opportunity to assessee and Whether in case an assessee follows cash basis of accounting, interest income must be taken on receipt basis only. And the verdict partly goes in favour of Revenue.

Facts of the case

Both the assessees are doctors, carrying on medical profession. A search u/s 132 was carried out at the residence and the business premises of the assessee. During search, certain incriminating documents were found. AO made the additions which were upheld by the CIT(A). On further appeal, Tribunal had observed that in the instant cases, no opportunity was given by the CIT while giving approval u/s 158 BG, so, no enhancement can be made out.

Before the HC, the Revenue's counsel had submitted that in the instant case, AO had prepared a draft assessment order which was sent to CIT for approval. The CIT on the basis of the material available on record, had given certain directions. AO in compliance of the observations/directions issued by CIT, passed the assessment order without providing opportunity to the assessee. The same was upheld by CIT(A), but Tribunal had observed that the ultimate impact of all these decisions was that the issues/additions/portion of the assessment order, which had been decided in accordance with the directions of the C.I.T., gets vitiated and hence was a nullity. The Revenue's counsel had drawn attention to the assessment order, where letter of CIT had been reproduced while granting the approval by raising various points. It was also submitted that the direction was for re-computation, and the amount was Rs.10 Lacs which was found recorded on the loose sheets. The A.O. had made the addition of Rs.9 lacs and left out remaining Rs.1 lac. So, the CIT has directed to compute the entire amount of Rs.10 lacs. Further, it was submitted that the rate of tax was fixed @ 60% which was a statutory provision. So, no direction was given and no enhancement was made out. The CIT had pointed out only the correct legal position. On the other hand, assessee's counsel had submitted that in the instant case, while granting the approval, CIT did not provide any opportunity to the assessee. It was further submitted that the direction issued by the CIT amounts to the enhancement in the addition. The CIT, while according approval, cannot give any direction to the AO to make additions pertaining to undisclosed income of assessee, in the draft assessment order.

Held that,

++ it appears that while granting the approval, the CIT has made some observations. Whether these observations amount to the enhancement of the addition or not, this aspect was not examined by the Tribunal. The Tribunal has not gone into the merit of the observations/directions, if any, made by the CIT. The Tribunal has merely decided the issue on a technical ground. It may be mentioned that no opportunity is required while giving the approval by the CIT as per the ratio laid down in the case of Rishabchand Bhansali vs. Deputy Commissioner of Income Tax (Investigation), where it was held that being an administrative action, assessee is not entitled to opportunity of being heard. Further, in the case of Lakshmi Jewellary vs. Deputy CIT, it was held that the CIT before making an order approving the order of assessment made by AO in exercise of his powers u/s 158BG(a) need not give a hearing to the assessee;

++ similarly, in the case of Shree Rama Medical and Surgical Agencies vs. CIT, it was observed that the provisions of Section 158BG do not contemplate that the Commissioner should come face to face with the assessee while according approval for the proposed assessment under Chapter XIB-B of the Act. Apart from the language of the provision, the nature of the functions confided to the Commissioner is inconsistent with the application of the principles of natural justice. For the examination of the merit pertaining to each addition vis-a-vis CIT report dated 29.09.1997, we, therefore, refer the matter back to the Tribunal with a direction to examine the same on merit and pass a fresh order as per law after providing reasonable opportunity to the assessee. Hence, answer to the substantial questions of law 1 to 4 is not required specially when the matter is restored to the Tribunal for adjudication;

++ regarding the substantial question of law no.5, after hearing both the parties at length, we find no infirmity in the Tribunal's order, where the Tribunal observed that the interest income must be taken on receipt basis shown by the assessee from the F.D.Rs., Sahara and L.I.C. mutual funds. The assessee is maintaining the accounts on actual receipt basis and he is not maintaining any account on mercantile basis, as appears from the record. When it is so, then the answer to the substantial question of law is in favour of the assessee and against the Department. In the result, the appeal filed by the Department is partly allowed.

(See 2014-TIOL-38-HC-ALL-IT)