INCOME TAX ACT, 1961

Section 143(3)

Assessment - Addition to income - Mismatch between income as per Form 26 AS and per books of account - Critical evidences not admitted by CIT(A).

Assessee was engaged in business of providing trading kits for software manufacturers. The assessee filed its return of income reporting loss of Rs. 26,54,729. AO during course of assessment proceedings observed that there was a mismatch between income as per Form 26AS maintained in data base of Revenue and income offered to tax by assessee in return of income filed with the Revenue as was reflected in books of accounts. The difference in the income as was reflected in books of accounts of assessee which was offered to tax in return of income filed with Revenue and in Form 26AS was to the tune of Rs. 4,49,69,696. The AO gave credit for government taxes payable included in aforesaid differential income, viz. Service Tax/VAT/CST to the tune of 12% and brought to tax remaining amount to the tune of Rs. 3,26,88,378 by making additions to the income of the assessee. Assessee filed first appeal with CIT(A) and the assessee claimed to have submitted rconciliation of income offered to tax vis-à-vis income as reported in AS-26. Assessee admittedly filed fresh evidences before CIT(A). CIT(A) rejected admission of additional evidences on the ground that AO had given proper opportunity to assessee during course of assessment proceedings and there was no justification for admitting these additional evidences. Thus, the CIT(A) confirmed the additions as were made by AO.Held: There could be several reasons for mismatch between income as is reflected in Form 26AS and income offered to tax in return of income filed with Revenue which could be due to recognition of income in the preceding year or in the subsequent year by the taxpayer vis-a-vis the other party owing to stage of completion of the work, different method of accounting followed by taxpayer and other party , deficiency in rendering of services/supplies which could lead to rejection of material/services rendered , credit notes/debit notes issued by one party while the same is not accounted by other party, etc. Assessee on its part had tried to reconcile its income as offered in the books of accounts with Form 26AS but the said evidences which were critical evidences going to the root of the matter had been discarded by the CIT(A). No doubt, rule 46A of the 1962 Rules give powers to CIT(A) to refuse admit additional evidences in certain circumstances as stipulated under rule 46A but whence substantial justice is pitted against technicalities, the courts will lean towards substantial justice. Under these circumstances, the additional evidences filed by assessee before CIT(A) were admitted and the matter was restored back to the file of the AO for framing fresh assessment de novo after considering entire evidences furnished by the assessee in its defense on merits in accordance with law.