Loading judgment…
No AI summary yet for this case.
Income Tax Appellate Tribunal, JAIPUR BENCHES,”A” JAIPUR
Before: SHRI VIJAY PAL RAO, JM & SHRI VIKRAM SINGH YADAV, AM vk;dj vihy la-@ITA. No. 1370/JP/2019
आयकर अपीलीय अधिकरण] जयपुर न्यायपीठ] जयपुर IN THE INCOME TAX APPELLATE TRIBUNAL, JAIPUR BENCHES,”A” JAIPUR Jh fot; iky jko] U;kf;d lnL; ,oa Jh foØe flag ;kno] ys[kk lnL; ds le{k BEFORE: SHRI VIJAY PAL RAO, JM & SHRI VIKRAM SINGH YADAV, AM vk;dj vihy la-@ITA. No. 1370/JP/2019 fu/kZkj.k o"kZ@Assessment Year : 2009-10 cuke M/s Baboo Lal The ITO, Vs. 47, Hanuman Nagar, Opp. Vijay Path, Ward-6(1), Mansarovar, Jaipur. Jaipur. LFkk;h ys[kk la-@thvkbZvkj la-@PAN/GIR No.: AADFB 9044 L vihykFkhZ@Appellant izR;FkhZ@Respondent fu/kZkfjrh dh vksj ls@ Assessee by : Shri G. M. Mehta (C.A.) jktLo dh vksj ls@ Revenue by : Miss Chanchal Meena (JCIT) lquokbZ dh rkjh[k@ Date of Hearing : 14/02/2020 mn?kks"k.kk dh rkjh[k@Date of Pronouncement : 18/02/2020 vkns'k@ ORDER
PER: VIKRAM SINGH YADAV, A.M. This is an appeal filed by the assessee against the order of ld. CIT(A)-II, Jaipur dated 23.10.2019 for the assessment years 2009-10 wherein the assessee has taken the following grounds of appeal:-
“1. Ld. CIT(A) has erred in sustaining legality of order under section 144 of the IT Act when during the course of hearing books of accounts were produced and A/R on behalf of the assessee attended from time to time, though not accepted as reliable.
2 ITA No. 1370 /JP/2019 M/S Baboo Lal vs. ITO
Ld. CIT(A) was not justified in sustaining: (a) Addition of Rs. 4,29,625/- for shortage of cash which is covered on application of N.P. Rate on civil construction contract as the books of accounts were not accepted as correct and complete; and (b) Disallowance of 15% of expenses of Rs. 11,84,522/- incurred in carrying out contract work. 3. Ld. CIT(A) has erred in law in not admitting the additional ground in respect of alliawability of Rs. 1,56,732/- for interest on capital contribution and Rs. 2,40,000/- for remuneration to working partners which was originally allowed by the Ld. AO but later on disallowed/withdrawn through rectification order dt. 06.08.2013 u/s 154 of the IT Act i.e. after about 21 months of filing the appeal by assessee against order dt. 14.11.2011, ignoring the law laid down by Hon’ble jurisdictional High Court (245 ITR 527). 4. Additional and legal ground of appeal: Ld. CIT(A) has erred in law in not allowing remaining depareciation of Rs. 2,27,013/- out of Rs. 2,38,263/- on fixed assets used in carrying on contract business by assessee {( @ 10% on shop of Rs. 22,87,000/- and @ 15% on tools & plant of Rs. 63,750/-} allowable as per expl. 5 to section 32 of IT Act for which no claim was needed.”
Briefly the facts of the case are that the assessee firm is engaged in the business of civil construction and has filed its return of income declaring total income of Rs. 2,64,178/- which was selected for scrutiny and notice U/s 143(2) of the IT Act was issued. Subsequently, during the course of assessment proceedings, a show cause U/s 144 was issued however, the assessee failed to furnish any reply to show cause
3 ITA No. 1370 /JP/2019 M/S Baboo Lal vs. ITO
and the assessment was completed U/s 144 of the Act at total income of Rs. 18,78,330/-. Subsequently vide order passed U/s 154 dated 06.08.2013, the assessee’s income was recomputed at Rs. 22,75,057/-. Being aggrieved, the assessee carried the matter in appeal before the ld. CIT(A) who has sustained the disallowances so made by the Assessing Officer. Against the said findings, the assessee is in appeal before us.
In ground no. 1, the assessee has challenged the legality of the order passed U/s 144 of the Act. It was submitted by the ld. AR that after getting the books of accounts audited U/s 44AB, return of income was filed on 29.09.2009. During the course of scrutiny assessment, the books of accounts were produced. Like majority of other civil construction contractors, complete bills, muster-rolls, wages register could not be produced. From the examination of cash book, the ld. AO made addition for minus cash balance and disallowed part of business expenses. It was submitted that the sole reason for completion of assessment U/s 144 of the Act was non production of complete supporting evidences. The provisions of Section 144 of the Act are applicable only if no return of income was submitted or the assessee has not complied with terms of notice U/s 142(1) of the Act. Under the given facts, the only course open with the Assessing officer was to apply provisions of Section 145(3) of the Act and to estimate income by applying GP/NP rate but in no case the assessment could be completed U/s 144 of the Act.
4 ITA No. 1370 /JP/2019 M/S Baboo Lal vs. ITO
Per contra, the ld. DR submitted that during the course of assessment proceedings, sufficient opportunities were provided to the assessee to produce complete bills, muster-rolls, wages register and purchase bills and was also issued a specific show cause vide order sheet entry dated 02.09.2011 as to why the assessment should not be made U/s 144 of the Act however, the assessee has failed to submit any reply to the said show cause notice and therefore, the Assessing Officer was correct in completing the assessment U/s 144 of the Act wherein he has made specific disallowances, addition has been made towards payments from its undisclosed income which resulted in negative cash balance in its cash book and the assessment was completed U/s 144 of the Act by invoking the provisions of Section 145(3) of the Act. Further, it was submitted by the ld. DR that the assessee has taken this ground as an additional ground before the ld. CIT(A) and in absence of a specific payer made by the assessee, the said ground was not admitted and dismissed by the ld. CIT(A).
Regarding ground no. 2, the ld. AR submitted that the assessee had made payment of certain expenses after gap of few days from the date of receipt of expenses vouchers but due to mistake of the accountant, had entered the payment of these expenses on the date of vouchers which resulted in negative cash balance on 04.03.2019. Otherwise, at the end of the year, cash balance was a positive amount as per audited statements of accounts. As per practice of Department, in given facts, had the ld. AO applied NP rate on gross receipts, there was no need for separate addition.
5 ITA No. 1370 /JP/2019 M/S Baboo Lal vs. ITO
Per contra, the ld. DR submitted that during the course of assessment proceedings on verification of cash book, it was found that the assessee was having negative cash balance of Rs. 4,29,625/- on 04.03.2009 and assessee has failed to submit any explanation on this issue. Accordingly, in the absence of any explanation the AO was right in treating this payment from its undisclosed income which was added to the income of the assessee. It was further submitted that during the course of appellate proceedings, the assessee had stated that there were certain errors in cash book filed earlier and had filed a fresh cash book. In this regard, the remand report was called by the ld. CIT(A) and in the remand report, the Assessing Officer after verification stated that the assessee could not justify bills/vouchers which were claimed as wrongly entered in cash book. In the absence of any bills/vouchers submitted by the assessee, the second cash book submitted by the assessee was an afterthought and an attempt to justify the negative cash balance, therefore, there is no infirmity in the finding of the lower authorities and the same should be confirmed.
Regarding ground no. 3, the ld. AR submitted that the partners were paid interest of Rs. 1,56,732/- and remuneration of Rs. 2,40,000/- as per the provisions of partnership deed dated 01.04.1999 which is duly allowable U/s 40(b)(iv)& (v) of the Act as well as in view of the decision of the Hon’ble Rajasthan High Court in case of CIT vs. Jain Construction Co. (2000) 245 ITR 527 and the said claim has been wrongly denied by the AO and confirmed by the ld CIT(A).
6 ITA No. 1370 /JP/2019 M/S Baboo Lal vs. ITO
Per contra, the ld. DR submitted that since the assessment has been completed U/s 144 of the Act, in view of the provisions of Section 184(5) of the Act, the Assessing Officer has rightly disallowed the interest and remuneration paid to the partners of the assessee-firm. It was accordingly submitted that there is no infirmity in the finding of the lower authorities which should be confirmed. It was further submitted that the assessee has taken this ground by way of an additional ground before the ld. CIT(A) which was also not admitted and dismissed at the preliminary stage itself.
Regarding ground No. 4, the assessee has challenged the action of the ld. CIT(A) in not allowing depreciation of Rs. 2,28,700/- on fixed assets used in carrying on contract business by the assessee. In this regard, the ld. AR submitted that out of allowable depreciation of Rs. 2,39,950/- on shop and tools & plants, depreciation of only Rs. 11,250/- on tools and plants was allowed as claimed by the assessee in the profit and loss account. It was submitted that as per explanation 5 to Section 32, the AO should have allowed remaining depreciation on shop even if not claimed by the assessee and in support, reliance was placed on the decision of Platiblends India Ltd. vs. Add.CIT (2017) 398 ITR 568(SC).
Per contra, the ld. DR submitted that in the computation of income filed by the assessee at its Paper book page 17, it has shown tools and plants under the head “ Fixed Assets” on which depreciation of Rs. 11,250/- has been claimed and duly allowed by the Assessing Officer. Further, our reference was also drawn to the audit report wherein the auditors have also considered the fixed assets consisting of
7 ITA No. 1370 /JP/2019 M/S Baboo Lal vs. ITO
only tools and plants on which depreciation has been computed at Rs. 11,250/-. It was accordingly submitted that there is nothing on record in terms of any asset other than tools and plants on which depreciation has not been allowed by the AO and thus, the additional ground so raised by the assessee deserve to be dismissed.
We have heard the rival contentions and perused the material available on record. The question that arises for consideration is whether the Assessing officer was correct in invoking the provisions of section 144 of the Act and if the answer to the same is in affirmative, how should he go about in making the best assessment. The provisions of section 144 provide clearly the various scenarios where the AO is empowered to make the best judgment assessment which reads as under: “144. 27[(1)] If any person— (a) fails to make the return required 28[under sub-section (1) of section 139] and has not made a return or a revised return under sub-section (4) or sub-section (5) of that section, or
(b) fails to comply with all the terms of a notice issued under sub- section (1) of section 14229[or fails to comply with a direction issued under sub-section (2A) of that section], or
(c) having made a return, fails to comply with all the terms of a notice issued under sub-section (2) of section 143, the 30[Assessing] Officer, after taking into account all relevant material which the 30[Assessing] Officer has gathered, 31[shall, after giving the assessee an oppor-tunity of being heard, make the assessment32] of the total income or loss to the best of his judgment and determine the sum payable by the assessee 33[***] on the basis of such assessment :
8 ITA No. 1370 /JP/2019 M/S Baboo Lal vs. ITO
34[Provided that such opportunity shall be given by the Assessing Officer by serving a notice calling upon the assessee to show cause, on a date and time to be specified in the notice, why the assessment should not be completed to the best of his judgment : Provided further that it shall not be necessary to give such opportunity in a case where a notice under sub-section (1) of section 142 has been issued prior to the making of an assessment under this section”
In the instant case, we find that during the course of assessment proceedings, the Assessing officer has issued notice u/s 143(2), 142(1) and through such notice, has sought to examine the books of accounts of the assessee. The assessee in turn submitted copy of cash book and ledgers however, bills, vouchers, muster rolls, wages register, purchase bills, etc were not produced for verification inspite of various opportunities granted by the Assessing officer as apparent from the following findings in the assessment order dated 14.11.2011 which remain undisputed before us:-
“The assessee is a firm engaged in the business of civil construction. During the year under consideration the assessee has shown net profit of Rs.6,72,160/- before depreciation, interest and remuneration partners against gross receipts of Rs. 90,71,494/- i.e. 7.40%. During the immediately preceding year the assessee has declared net profit rate of 8% before depreciation, interest and remuneration to partners. During assessment proceeding written submissions were filed and copy of audit report was filed. copy of cash book and ledger was filed but bills, vouchers, wages sheets, muster rolls, vouchers for payments were not produced although sufficient opportunity was provided to the assessee. Opportunity was provided to the
9 ITA No. 1370 /JP/2019 M/S Baboo Lal vs. ITO
assessee 09-06-2011, 05-07-2011, 12-07-2011, 25-07-2011, 02- 08-2011, 08- 18-20-1I, 25-08-2011, 02-09-2011, 09-09-2011, 07-10-2011, 12-10-2011, 19-10-2011, but the assessee failed to avail these opportunities and failed to produce complete bills, vouchers, muster rolls, wages register and purchase bills. The assessee was asked vide order sheet entry dated 02-09-2011 to show cause as to why assessment shall not be completed u/s 144 i.e. best judgment assessment. But the assessee failed to furnish any reply on show cause and even bills/ vouchers etc. were not produced till date, therefore, I have no alternative but to complete the assessee u/s 144 i.e. best judgment assessment.”
We therefore find that the Assessing officer having given sufficient opportunity to furnish the aforesaid details and the assessee failing to even attend to the proceedings and replying to the show- cause so issued by the Assessing officer, the provisions of section 144 have been rightly invoked by the Assessing officer.
Now, coming to the second question as to how the powers of best judgment should be exercised by the Assessing officer and what principles should be followed by the Assessing officer while making the best judgment. In this regard, we refer to well-settled legal proposition so laid down by the Hon’ble Supreme Court in case of Brij Bhushan Lal Parduman Kumar [1978] 115 ITR 524 as under:
“At the outset, it may be stated that in the case of both the assessees their returns and book results were rejected on the ground that proper and reliable books of account had not been maintained and the ITO was required to make the assessments
10 ITA No. 1370 /JP/2019 M/S Baboo Lal vs. ITO
on "best judgment" basis. However, the principles to be followed by the ITO while making a best judgment assessment have been clearly laid down by the Privy Council as also by this court in a number of decisions. In CIT v. Laxminarain Badridas [1937] 5 ITR 170 (PC), their Lordships of the Privy Council observed as follows: "The officer is to make an assessment to the best of his judgment against a person who is in default as regards supplying information. He must not act dishonestly or vindictively or capriciously because he must exercise judgment in the matter. He must make what he honestly believes to be a fair estimate of the proper figure of assessment, and for this purpose he must, their Lordships think, be able to take into consideration local knowledge and repute in regard to the assessee's circumstances, and his own knowledge of previous returns by and assessments of the assessee, and all other matters which he thinks will assist him in arriving at a fair and proper estimate; and though there must necessarily be guesswork in the matter, it must be honest guesswork. In that sense, too, the assessment must be, to some extent, arbitrary."
Since the law relating to "best judgment assessment" is the same both in the case of income-tax assessment and sales tax assessment, the following observations of this court in Raghubar Mandal Harihar Mandal v. State of Bihar [1957] 8 STC 770 , 778 (SC), a case under the Bihar Sales Tax Act, would be material:
11 ITA No. 1370 /JP/2019 M/S Baboo Lal vs. ITO
"No doubt it is true that when the returns and the books of account are rejected, the assessing officer must make an estimate, and to that extent he must make a guess; but the estimate must be related to some evidence or material and it must be something more than mere suspicion."
Again in Stale of Kerala v. C. Velukutty [1966] 60 ITR 239 (SC), which was a case under the Travancore-Cochin General Sales Tax Act, Subba Rao J. (as he then was), speaking for this court, observed at page 244 of the report thus: "The limits of the power are implicit in the expression 'best of his judgment'. Judgment is a faculty to decide matters with wisdom truly and legally. Judgment does not depend upon the arbitrary caprice of a judge, but on settled and invariable principles of justice. Though there is an element of guesswork in a 'best judgment assessment', it shall not be a wild one, but shall have a reasonable nexus to the available material and the circumstances of each case."
It will appear clear from what has been said above that the authority making a best judgment assessment must make an honest and fair estimate of the income of the assessee and though arbitrariness cannot be avoided in such estimate the same must not be capricious but should have a reasonable nexus to the available material and the circumstances of the case. It is with reference to these
12 ITA No. 1370 /JP/2019 M/S Baboo Lal vs. ITO
principles that the question raised before us will have to be considered and looking at it from that point of view the real question is whether the turnover represented by the cost of the stores/ material supplied by the M.E.S. department involves any element of profit having regard to the terms and conditions on which such supply is made? If it does, then the cost of such stores/material will have to be taken into account, but if it does not, such cost will have to be excluded.”
What is therefore, required is to make an honest and fair estimate of income and such estimate of income should have a reasonable nexus to the available material and the circumstances of the case. In the instant case, we find that the Assessing officer has disallowed 15% of material, wages, office and petrol expenses amounting to Rs 11,84,522 for the reason that the assessee has failed to substantiate these expenses, however, on what basis/rationale, he has arrived at the figure of 15% has not been specified. There is no finding that there are any specific expenses which have either not been incurred for the purposes of business or are bogus in nature, therefore, in absence of any specific finding by the Assessing officer, the disallowance so made is directed to be deleted. Further, interest and remuneration to partners have been disallowed due to specific provisions of section 184(5) which provides that where there is a failure on part of the firm as is mentioned in section 144 of the Act, no deduction by way of interest and remuneration shall be allowed. Given the specific bar in the statute against allowance of such interest and
13 ITA No. 1370 /JP/2019 M/S Baboo Lal vs. ITO
remuneration where the assessment has been completed u/s 144, we donot see any infirmity in the action of the Assessing officer where he has strictly followed the provisions of section 184(5) of the Act. Regarding addition made on account of negative cash balance, we find that inspite of sufficient opportunities provided by the ld CIT(A) during the appellate proceedings and having called the remand report, the assessee has failed to produce the necessary documentation in support of its claim and the addition has thus rightly been made by the Assessing officer. Lastly, regarding non-allowance of full depreciation on all the fixed assets, we find that in the balance sheet as on 31.03.2009, the assessee has shown a shop with a book value of Rs 22,87,000 besides Tools and plant with book value of Rs 63,750. In the profit/loss account, depreciation on only tools and plant has been debited and similar is the position in the computation of income and the auditor’s report where depreciation claim is limited to tools and plants. At the same time, given that value of shop has been reflected as part of block of assets in the financial statements and is a matter of record which can be verified in terms of ownership and where such shop premises are utilized for the purposes of business, the assessee shall be eligible for depreciation even though not claimed earlier and the matter is remanded to the file of the Assessing officer for limited purposes of verifying the depreciation on shop forming part of assessee’s block of assets and where the same is found to be in order, allow the claim as per law.
14 ITA No. 1370 /JP/2019 M/S Baboo Lal vs. ITO
In the result, ground no. 1 & 3 are dismissed, ground no. 2 is partly allowed, ground no. 4 is allowed for statistical purposes and appeal is disposed off accordingly.
Order pronounced in the open Court on 18/02/2020.
Sd/- Sd/- ¼fot; iky jko½ ¼foØe flag ;kno½ (Vijay Pal Rao) (Vikram Singh Yadav) U;kf;d lnL;@Judicial Member ys[kk lnL;@Accountant Member Tk;iqj@Jaipur fnukad@Dated:- 18/02/2020. *Santosh आदेश की प्रतिलिपि अग्रेf’ात@ब्वचल वf जीम वतकमत वितूंतकमक जवरू 1. vihykFkhZ@The Appellant- M/s Baboo Lal, Jaipur. 2. izR;FkhZ@ The Respondent- ITO, Ward-6(1) Jaipur. 3. vk;dj vk;qDr@ CIT 4. vk;dj vk;qDr@ CIT(A) 5. विभागीय प्रतिनिधि] आयकर अपीलीय अधिकरण] जयपुर@क्त्ए प्ज्Aज्ए Jंपचनत. 6. xkMZ QkbZy@ Guard File { ITA No. 1370/JP/2019} vkns'kkuqlkj@ By order,
सहायक पंजीकार@Aेेज. त्महपेजतंत.