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Income Tax Appellate Tribunal, JAIPUR BENCHES,”A” JAIPUR
Before: SHRI VIJAY PAL RAO, JM & SHRI VIKRAM SINGH YADAV, AM
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. 764/JP/2018 fu/kZkj.k o"kZ@Assessment Year : 2014-15 cuke The ITO, Shri Man Mohan Mittal Vs. Ward-2, Prop. Agra Gujarat Cargo Carriers, Beawar. 111B, Shiv Kripa, Ajmer Road, Adarsh Nagar, Beawar. LFkk;h ys[kk la-@thvkbZvkj la-@PAN/GIR No.: AGMPM 2152 R vihykFkhZ@Appellant izR;FkhZ@Respondent
CO No. 24/JP/2018 (Arising out of ITA No. 764/JP/2018) fu/kZkj.k o"kZ@Assessment Year : 2014-15 cuke Shri Man Mohan Mittal The ITO, Vs. Prop. Agra Gujarat Cargo Carriers, Ward-2, Beawar. 111B, Shiv Kripa, Ajmer Road, Adarsh Nagar, Beawar. LFkk;h ys[kk la-@thvkbZvkj la-@PAN/GIR No.: AGMPM 2152 R vihykFkhZ@Appellant izR;FkhZ@Respondent jktLo dh vksj ls@ Revenue by : Shri J.C. Kulhari (JCIT) fu/kZkfjrh dh vksj ls@ Assessee by : Shri Vinod Gupta (C.A.) lquokbZ dh rkjh[k@ Date of Hearing : 04/12/2018 mn?kks"k.kk dh rkjh[k@Date of Pronouncement: 28/02/2019
2 ITA No. 764/JP/2018 & CO No. 24/JP/2018 ITO vs. Shri Man Mohan Mittal vkns'k@ ORDER
PER: SHRI VIKRAM SINGH YADAV, A.M.
This is an appeal filed by the Revenue against the order of the ld. CIT(A), Beawar dated 27.03.2018 and the cross objection filed by the assessee for the assessment year 2014-15.
Briefly the facts of the case are that the assessee is an individual engaged in the business of transportation in the name of M/s Agra Gujarat Cargo Carriers. For the year under consideration, the assessee filed his return of income declaring total income of Rs. 4,61,400/- which was selected for scrutiny and assessment was completed by the Assessing Officer U/s 143(3) of the Act wherein the income was assessed at Rs. 88,46,359/-. The Assessing Officer has made an addition on account of undisclosed turnover from M/s Shree Cement Ltd. amounting to Rs. 32,86,993/-, the freight expenses amounting to Rs. 39,96,344/- were disallowed U/s 40A(3) of the Act besides 1% of the total freight expenses amounting to Rs. 11,01,622/- were also disallowed.
Being aggrieved, the assessee carried the matter in appeal before the ld. CIT(A). The ld CIT(A), besides giving finding on merits of the additions made by the Assessing Officer, held that in view of various discrepancies found in the books of accounts, the books results of the assessee cannot be accepted as true and correct. Accordingly, he rejected the books of account U/s 145(3), estimated net profit and made an addition of Rs. 6,28,345/- and the balance addition so made
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by the Assessing Officer amounting to Rs. 77,56,614/- were deleted. Against the said findings of the ld. CIT(A) the Revenue is in appeal before us and in his cross objection, the assessee has objected to the estimation of the net profit @ 1% as against 0.49% disclosed by the assessee in his return of income.
In ground no. 1 of Revenue’s appeal, the Revenue has challenged the action of the ld. CIT(A) in invoking the provisions of Section 145(3) of the I.T. Act on his own during appellate proceedings and allowing relief of Rs. 77,56,614/- to the assessee. In this regard, the ld. DR has submitted that the Assessing officer has made specific disallowances in the assessment order and has also brought to tax undisclosed business receipt from M/s Shree Cement Ltd. and therefore, the ld. CIT(A) should have examined the said additions on merits. However, the ld. CIT(A) has rejected the book results U/s 145(3) of the Act and instead of specific disallowance made by the Assessing Officer, he has estimated net profit based on past results of the assessee. In this regard, our reference was drawn to the provisions of Sections 145(3) of the Act wherein it has been specifically mentioned that “whereas the Assessing Officer is not satisfied about the correctness or completeness of the accounts of the assessee or where the method of accounting provided in sub-section (1) has not been regularly followed by the assessee, or income has not been computed in accordance with the standards notified under sub-section (2), the Assessing Officer may make an assessment in the manner provided in section 144”. It was accordingly submitted by the ld DR that the power to reject the books of accounts is with the Assessing Officer and not with the ld. CIT(A) and
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therefore, the ld. CIT (A) has exceeded his jurisdiction by invoking the provisions of Section 145(3) of the Act. It was further submitted by the ld DR that the book results cannot be rejected for the benefit of the assessee as is apparent in the present case wherein the ld. CIT(A) after rejecting the books results has allowed the relief of Rs. 77,56,614/- to the assessee and has sustained the addition of Rs. 6,28,345/- only as against Rs. 83,84,959/- made by the Assessing Officer.
The ld. DR has further drawn our reference to the specific findings of the ld. CIT(A) wherein he has invoked the provisions of Section 145(3) of the Act and has estimated the net profit. The said findings are contained at para 5.4 and we deem it appropriate to reproduce the same in verbatim as under:- “I have gone through the assessment order, statement of facts, grounds of appeal and written submissions carefully. As while deciding ground No. 2, I have already held that the expenses of Rs. 32,86,993/- shall also form part of the total expenses claimed in the Profit & Loss Account, therefore the total freight expenses to be considered for the purpose of any disallowance would be Rs. 11,74,45,581/- (Rs. 11,41,58,588 + Rs. 32,86,993). Total receipts of the appellant also would be Rs. 11,89,74,259/- (Rs. 11,56,87,266+ Rs. 32,86,993). It is seen from the page No. 20 of the assessment order that net profit rate declared by the appellant in the A.Y. 2012-13,2013-14, and 2014-15 are as under:-
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A.Y. NP rate 2012-13 0.78% 2013-14 0.77% 2014-15 0.49%
The AO himself has given the finding that freight expenses are 98.67% of the total turnover. In other words, if 1% of the freight expenses are disallowed, the rate of net profit would become 94% (1.44%) of the rate of net profit declared by the appellant (0.49%). In view of the facts discussed by the AO in the assessment order at page No. 20 and 21, I am of the considered view that the book results of the appellant cannot be accepted true and correct. Therefore, the book results of the appellant has to be rejected by invoking the provisions of section 145(3) and a reasonable profit has to be estimated. The Rajasthan High Court in the case of CIT Udaipur vs . Inani Marble Pvt. Ltd. and ITAT Jaipur in the case of Sanjay Jain Prop. Mahaveer Transport Co. vs. ACIT Circle-5, Jaipur (ITA No. 164/2016 dated 31.10.2017) have held that profit rate declared in the preceding assessment years constitutes a good basis for working out the gross profit.
Therefore, in view of the above referred decisions of jurisdictional High Court & ITAT, I am of the considered view that the rate of net profit declared by the appellant in the preceding assessment years would be the most appropriate basis for estimating rate of net profit for the assessment year under appeal. It is seen that in
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the immediately two preceding assessment years ( 2012-13 & 2013-14), the appellant had declared net profit @ .78% and .77% respectively. Therefore, taking into account all the facts of the case, in my view, it would be fair and reasonable to estimate the net profit of the appellant @ 1% on the total turnover of Rs. 11,89,74,259/- (Rs. 11,56,87,266+ Rs. 32,86,993). Accordingly, the net profit of the appellant on the total turnover of Rs. 11,89,74,259/- is estimated at Rs. 11,89,743/-. It is seen that the AO at para 3.12 (page 12) of the assessment order has also mentioned that payment made to Shri Hari Prakash Sharma were also liable to be disallowed U/s 40(a)(ia), as there were no tax deducted at source as required u/s 194C(6). The appellant has declared net profit at Rs. 5,61,398/-. The appellant relying on the decision of Co-ordinate bench of ITAT, Jaipur in the case of Rakesh Construction vs. ACIT and other decisions of ITAT Jaipur Bench has contended that once the net profit is estimated by rejecting bank results u/s 145(3) then no separate disallowance u/s 40(a)(ia) can be made. I have gone through the decisions relied upon by the appellant. The contention of the appellant is found to be acceptable. Hence, out of the total additions/disallowance of Rs. 83,84,959/- (Rs. 32,86,993+ Rs. 39,96,344+ Rs. 11,01,622), addition of Rs. 6,28,345 (Rs. 11,89,743- Rs. 5,61,398) is hereby confirmed and remaining additions/disallowance of Rs. 77,56,614/- (Rs. 83,84,959-Rs. 6,28,345) are hereby deleted.”
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Per contra, the ld. AR has submitted that it is not correct on the part of the ld. DR to state that the ld. CIT(A) has not decided the matter relating to various disallowances on merits. The ld. CIT(A) has examined each of the disallowance on merits and further referring to the overall discrepancies in the books of accounts, which are also noted by the Assessing Officer, during the course of appellate proceedings has held that the book results so declared by the assessee cannot be accepted and therefore, by invoking his powers U/s 251 which are co- terminous with that of the Assessing Officer, he has rejected the books results U/s 145(3) of the Act and has estimated the N.P. in the hands of the assessee. It was further submitted that once the books results are rejected, only recourse available is to estimate the net profit of the assessee and therefore, there is no infirmity in the order of the ld. CIT(A). It was further submitted that given in the past history of the assessee, the net profit has been estimated @ 1% and it has resulted in relief to the assessee to the extent of Rs. 77,56,614/-. However, there was also a possibility where the net profit could have been estimated at a higher rate and the quantum of addition so sustained by the CIT(A) could have been higher given the past history of the assessee. It was accordingly submitted that merely because net results of action of the ld CIT(A) has resulted in partial relief to the assessee, the rejection of book results by the ld. CIT(A) by invoking the provisions of Section 145(3) of the Act cannot be said to be for benefit of the assessee as stated by the ld DR. It was submitted that looking at the various discrepancies and findings by the Assessing Officer as apparent from the assessment order, the ld. CIT(A) has invoked the provisions of Section 145(3) of the Act. In this regard our reference was drawn to the
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various findings of the Assessing Officer in the assessment order as under:- “Finding of the AO (a) Thus, considering the entire facts of the case it is relevant from the records of the assessee that the receipts of Rs. 32,86,993/- are belongs to the assessee for the year under consideration but he has failed to disclose these receipts.” (Refer first para on page 12)
(b) “Further, during examination of books of accounts it is found that assessee has not maintained any records of freight expenses, hence, the arguments of the assessee that payment was made to drivers is not verifiable, therefore, the reply of the assessee is without any basis.” (Refer last para on page 15)
(c) On examination of books of accounts on 8.12.2016, following discrepancies/shortcomings were noticed in the books of accounts, especially in freight expenses:-
(i) The entire freight expenses were claimed in cash showing payment to Truck Numbers. But name and complete address of these parties are not maintained, hence, not open for verification.
(ii) The assessee has not maintained freight payment vouchers/ records. In absence of payment vouchers/records and receipts from the parties to whom freight was paid, the freight expenses claimed by the assessee verifiable from books of accounts of the assessee.
(iii) There is no basis with the assessee for freight expenses claimed. The assessee could not explain
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the basis of freight expenses claimed.(Refer last Para on Page 20)
(d) In view of above discussion the reply of the AR of the assessee is not found satisfactory, the entire freight expenses of Rs. 11,41,58,588/- were claimed in cash, the assessee has not maintained any receipts for such huge payments. There is no basis with the assessee for claiming these freight expenses and the assessee could not explain the basis of freight expenses claimed. The freight expenses claimed by the assessee are not open for verification. The assessee has claimed freight expenses at very higher side i.e. @98.67% of total receipts. Being such heavy amount of cash expenses the assessee has surely inflated his freight expenses and reduced his profit. (Refer para 5.5 on page 24)
It was submitted by the ld AR that perusal of the above findings of the AO shows that AO have time and again pointed out defects in the books of accounts by saying it as non verifiable in some or the other way and ultimately have made the adhoc disallowance of 1% in freight expenses. Freight expenses comprises of 98.67% of the total receipt. He also held that Rs. 32,86,993/- is receipt from Shree Cement against transport services, therefore taking a stand that entire freight expenditure is not verifiable and complete receipt have not been disclosed are in substance rejection of books of accounts.
It was further submitted by the ld AR that a vigilant perusal of finding of Ld. AO shows that although Assessing Officer has not specifically used the word “rejected books of accounts”, however books of accounts have been disbelieved in so many words in the assessment
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order. From the general tone and tenor of the assessment order and from the reasons given by the Assessing Officer, it is apparent that the Assessing Officer disbelieves book results and doubted correctness of the expenditure as well as receipts shown in the P&L Account.
It was further submitted that the ld AR that the foregoing discussion of the finding makes the intent of the Ld. AO clear that in substance he has rejected the books of accounts, although he has not expressly used these words but his observation in substance says that result shown by books of accounts are not correct and acceptable. Therefore, CIT(A) by expressing those finding and action of Ld. AO in clear terms cannot be said that he has done something new in appellate proceeding. It is only a matter of presentation, not more than that, since, in substance action of both the authorities are communicating same inference.
In support, the ld AR placed reliance on the following decisions:
a. ITAT, Delhi in case of ACIT Vs. Advert Communication (ITA No. 3723/Del/2012 vide order dated 28.08.2015) has held that :
“Thus, the powers of the CIT(A) are wide enough to protect the interest of the Revenue as can be observed by the powers of enhancement in the proposition of Hon'ble High Court in the judgment in the case of CIT vs Kanpur Col Syndicate 53 ITR 225 (S.C.) wherein speaking for the Apex court, their lordships held that while an appeal by the assessee the CIT(A) have coterminous powers with the Assessing Officer and he
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can do what the Assessing Officer can do and direct the Assessing OFFOFFICER Officer to do what he has failed to do. 11. Ld. DR contended that the Assessing Officer has not rejected book results and books of accounts of the assessee and all that the Assessing Officer has done is to disallow purchases and add back unclaimed liability (ceased liability of trade creditors) without rejecting the book results. But on vigilant perusal of the assessment order we note that, however, the Assessing Officer has not rejected book results in so many words in the assessment order but from the general tone and tenor of the assessment order and form the reasons given by the Assessing Officer, it is apparent that the Assessing Officer disbelieves book results when he doubted correctness of the purchases as shown in the P&L account and also amount due to the assessee as per books. We further observe that when the P&L account contains both the purchase figure in the debit side and sales turnover figure on the credit side and Assessing Officer commences the computation from the net profit figure shown in the P&L account but when he verified the purchases, he disallowed substantive part thereof without disturbing the sales figure the logical inference would be that the Assessing Officer has not accepted or has not reposed confidence in the books of accounts. It is not open or allowed to the CIT(A) to reject the book results partially and accept them partially. In the eventuality when the Assessing Officer disbelieved purchases and major part of purchases are sought to be treated as bogus or disproved and consequently proceeds to make addition us/ 69C of the Act without correspondingly adjusting the sales figure specially when the liabilities (creditors) recorded in the balance
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sheet are also disbelieved and added back as income, then it would be a reasonable and logical inference that the Assessing Officer has rejected the book results without making any express observations in the assessment order.
b. Jaipur Bench of ITAT in the case of Choudhary & Brothers Vs. ITO (ITA No. 583/Jp/2009 dated 30.9.2010) wherein it is observed that
“If the AO has pointed out several defects in the books of account and has not found them reliable to deduce correct income of the assessee, rejection of books within the meaning of s. 145(3) is implied and there is no need to mention it specifically in the assessment order; AO was not justified in making disallowances out of expenses and depreciation claimed by the assessee; impugned disallowances are set aside and matter is remanded to the AO to estimate assessee’s profit keeping in view the past result.”
c. Jaipur Bench of ITAT in the case of Bhagchand Choudhary vs. ACIT (ITA No. 506/JP/2012 vide order dated 28.11.2014) wherein Ld. A.O. disallowed various expenses by specifying defects in the books of accounts, however, without specifically invoking section 145(3). In that case, Ld. CIT(A) held that A.O. impliedly invoked Section 145(3) while specifying the defects and ultimately instead of disallowances, estimated the net profit. Hon’ble ITAT also held that Section 145(3) has impliedly invoked and estimate the net profit instead of disallowances.
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It was submitted by the ld AR that under the facts and circumstances and cited case laws, Ld. CIT(A) has endorsed the action of the Ld. AO in substance by estimating net profit. In other words, he has only expressed the intent of the Ld. AO which otherwise he impliedly communicated.
It was further submitted that without prejudicial to above, a perusal of the ground raised by the department shows that the Ld. CIT(A) acted beyond jurisdiction. In this regard, our reference was drawn to powers of CIT(A) which have been defined under section 251 of the Income tax Act, 1961 which reads as under:
“(1) In disposing of an appeal, the Commissioner (Appeals) shall have the following powers—
(a) in an appeal against an order of assessment, he may confirm, reduce, enhance or annul the assessment;
(aa) in an appeal against the order of assessment in respect of which the proceeding before the Settlement Commission abates under section 245HA, he may, after taking into consideration all the material and other information produced by the assessee before, or the results of the inquiry held or evidence recorded by, the Settlement Commission, in the course of the proceeding before it and such other material as may be brought on his record, confirm, reduce, enhance or annul the assessment;
(b) in an appeal against an order imposing a penalty, he may confirm or cancel such order or vary it so as either to enhance or to reduce the penalty;
(c) in any other case, he may pass such orders in the appeal as he thinks fit.
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(2) The Commissioner (Appeals) shall not enhance an assessment or a penalty or reduce the amount of refund unless the appellant has had a reasonable opportunity of showing cause against such enhancement or reduction.
Explanation.—In disposing of an appeal, the Commissioner (Appeals) may consider and decide any matter arising out of the proceedings in which the order appealed against was passed, notwithstanding that such matter was not raised before the Commissioner (Appeals) by the appellant.”
It was submitted by the ld AR that a perusal of section 251(1)(a) of the Income tax Act shows that Ld. CIT(A) has enormous powers to deal the assessment order, he may confirm, reduce, enhance or annul the assessment. The action of the Ld. CIT(A) is well within his jurisdiction, which empowered him to confirm, reduce, enhance or annul the assessment which includes invocation of section 145(3) which may result into confirm/reduce/enhance or annulment of assessment. It was submitted that time and again, various Courts have held that powers of CIT(A) are co-terminous with the powers of AO. Reliance is placed on following case laws:
a. CIT, U.P. vs Kanpur Coal Syndicate, (SC) 53 ITR 229:
“However, the Hon’ble Supreme Court, held in the favour of the assessee as under:
“….If an appeal lies, s. 31 of the Act describes the powers of the Appellate Assistant Commissioner in such an appeal. Under s. 31 (3) (a) in disposing of such an appeal the Appellate Assistant Commissioner may, in the, case of an order of assessment, confirm, reduce, enhance or annul the assessment; under cl. (b) thereof he may set aside the assessment and direct the Income-tax Officer to make a fresh assessment. The Appellate Assistant Commissioner has, therefore, plenary powers in disposing of an appeal. The scope of his power is
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coterminous with that of the Income- tax Officer. He can do what the Income-tax Officer can do and also direct him to do what he has failed to do. If the Income-tax Officer has the option to assess one or other of the entities in the alternative, the Appellate Assistant Commissioner can direct him to do what he should have done in the circumstances of a case.
We, therefore, hold, agreeing with the High Court, that the Appellate Tribunal has jurisdiction to give directions to the appropriate authority to cancel the assessment made or the association of persons and to give appropriate directions to the authority concerned to make a fresh assessment on the members of that association individually. The answer given by the High Court to the question propounded is correct. In the result, the appeal fails and is dismissed with costs. Appeal dismissed.”
b. Jute Corporation of India Ltd vs CIT and Anr (SC) 187 ITR 688:
In the said judgment, the Hon’ble Supreme Court had observed and held as under:
“The question is whether the Appellate Assistant Commissioner while hearing an appeal under s. 251(1)(a) has jurisdiction to allow the assessee to raise an additional ground in assailing the order of the assessment before it. The Act does not contain any express provision debarring an assessee from raising an additional ground in appeal and there is no provision in the Act placing restriction on the power of the Appellate Authority in entertaining an additional ground in appeal. In the absence of any statutory provision general principle relating to the amplitude of appellate authority’s power being coterminous with that of the initial authority should normally be applicable.”
…….The declaration of law is clear that the power of the Appellate Assistant Commissioner is coterminous with that of the Income Tax Officer, if that he so, there appears to be no reason as to why the appellate authority cannot modify the assessment order on an additional ground even if not raised before the Income Tax Officer. No exception could be taken to this view as the Act does not place any restriction or limitation on the exercise of appellate power. Even otherwise an Appellate Authority while hearing appeal against the order of a subordinate authority has all the powers which the original
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authority may have in deciding the question before it subject to the restrictions or limitations if any prescribed by the statutory provisions. In the absence of any statutory provision the Appellate Authority is vested with all the plenary powers which the subordinate authority may have in the matter. There appears to be no good reason and none was placed before us to justify curtailment of the power of the Appellate Assistant Commissioner in entertaining an additional ground raised by the assessee in seeking modification of the order of assessment passed by the Income Tax Officer.”
c. In the case of Commissioner of Income-tax v. Nirbheram Deluram [1997] 224 ITR 610 (SC) the Supreme Court again discussed the powers of CIT(A) u/s 251 of the Income-tax Act, 1961. The Court held that:
“It had previously held in Jute Corpn. of India Ltd. v. CIT [1991] 187 ITR 688 t that the declaration of law is clear that the power of the AAC is coterminous with that of the ITO and if that is so, there appears to be no reason as to why the appellate authority cannot modify the assessment order on an additional ground even if not raised before the ITO. The scope of his power is coterminous with the ITO. He can do what the ITO can do and also direct him to do what he has failed to do. The Court further held that having regard to the aforesaid decision it must be held that the High Court was in error in holding that the appellate power conferred on the AAC under section 251 was confined to the matter which had been considered by the ITO and that the AAC exceeded his jurisdiction in making an addition of Rs. 2,30,000 on the basis of the other 10 items of hundies which had not been explained by the assessee. Therefore, even if it was not held that the sum of Rs. 2,30,000 was added by the AAC as new sources of income, not considered by the ITO from the point of view of assessability, the AAC
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had jurisdiction or power to add the sum of Rs. 2,30,000 in the facts and circumstances in which he had added the same. Accordingly, the appeal was to be allowed.”
It was finally submitted by the ld AR that the ld CIT(A), having co-terminous power with AO, has acted within his jurisdiction and have not committed any mistake of facts or law, therefore it cannot be held that he has allowed the relief perversely.
We have heard the rival contentions and perused the material available on record. Broadly, two issues arise for consideration. Firstly, whether the ld. CIT(A) has powers to reject the books of accounts by invoking the provisions of Section 145(3) of the Act in terms of the powers so granted to him U/s 251 of the Act. Secondly, whether in the facts and circumstances of the present case, the books of accounts deserves to be rejected U/s 145(3) of the Act and profits to be estimated.
Regarding the first issue, it is settled legal proposition of law that the scope of powers of the ld. CIT(A) is co-terminous with that of the Assessing Officer. He can do what the Assessing Officer can do and also direct him to do what he has failed to do. Therefore, even though the language contained in Section 145(3) of the Act talks about the Assessing Officer having not been satisfied about the correctness or completeness of the accounts and making the assessment in the manner provided in Section 144 of the Act, given the settled proposition that where the matter relating to correctness and completeness of the
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accounts of the assessee is subject matter of appeal before the ld. CIT(A) and there are glaring discrepencies in the books of accounts and which are clearly discernable from the assessment order, the ld. CIT(A) is well within his powers u/s 251 to reject the books of accounts and estimate the net profit in the hands of the assessee. In the instant case, we have noted that the Assessing officer has himself examined and given a finding relating to undisclosed receipts from shree cements limited and 98.67% of freight expenses not subject to verification. Therefore, where the Assessing officer has himself given a finding in terms of incompleteness and not verifiability of majority of expenses so claimed by the assessee, he has himself cast a serious doubt on the correctness and completeness of the books of accounts. Therefore, when the said matter travels to the ld CIT(A) and he looks at the said facts and findings of the Assessing officer with a fresh mind and comes to a conclusion that the books of accounts are not reliable and he rejects the books of accounts by specifically invoking the provisions of section 145(3), we don’t see as to how he has exceeded his powers and jurisdiction so enshrined upon him by the legislature u/s 251 of the Act. The said legal proposition is laid down by the Hon’ble Supreme Court in case of Jute Corporation of India (supra) and has been consistently followed in subsequent rulings which have been relied upon the ld. AR which supports the case of the assessee. Therefore, we are of the considered view that the ld. CIT(A) is well within his powers U/s 251 of the Act to reject the books of accounts u/s 145(3) of the Act so long as the said matter is arising out of the assessment proceedings before the Assessing officer against which appeal has been preferred before the ld CIT(A). In this regard, useful reference can be drawn to the decision of
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the Hon’ble Rajasthan High Court in case of Commissioner of Income-tax vs. Associated Garments Makers reported in 64 Taxman 215 which was rendered in the context of powers of ld CIT(A) to bring to tax new source of income but we find the said ruling equally relevant in the instant case. In the said decision, the Hon’ble High Court has held as under: “7. Appeals are provided under section 246 of the Act before the AAC and the Commissioner (Appeals). These appeals are by the assessee aggrieved by the orders mentioned therein. Any order made under section 143(3) is appealable and the powers of the appellate court are provided in section 251 of the Act wherein appellate authority has power to confirm, reduce, enhance or annul the assessment or he may set aside the assessment and refer the case back to the ITO for making fresh assessment in accordance with directions given in appeal and after making such further enquiry as may be necessary. These powers are, inter alia, mentioned in the other powers. According to sub-section (2) of section 251, the AAC has no power to enhance assessment or a penalty, or reduce the amount or refund unless the appellant has a reasonable opportunity for showing cause against such enhancement or reduction. An explanation has been provided according to which the AAC may consider and decide any matter arising out of the proceedings in which the order appealed against was passed, notwithstanding the fact that such matter was not raised before him. A perusal of sections 246 to 251 of the Act makes it clear that any questions arising out of the assessment orders in an appeal by the assessee can be possible
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and wide powers are given to the appellate authority, but these powers are circumscribed by the assessment order in the matters arising thereof or a matter arising out of the proceedings. Even the appellate authority has suo motu power to consider the questions arising thereof but there is no provision to go beyond the matter arising out of the proceedings before the assessing authority, more particularly as separate provisions for that are made in the Act. The Tribunal has elaborately discussed the provisions of the Act and the case law on the subject and has rightly come to the conclusion that new sources not mentioned in the return or considered by the ITO are beyond the scope of powers of the AAC. The case relied on by the learned counsel for the petitioner about the power of setting aside the assessment order remanding the case for re-consideration of the whole matter including the evasion by the assessee, is not applicable to the facts of the present case because the matter arising in that case was one which arose out of the proceedings before the ITO. The question was not about new and fresh material for the purposes of enhancement. On the contrary, the case is clearly covered by the decisions of the Supreme Court in CIT v. Shapoorji Pallonji Mistry's case (supra) wherein it has been held that, "In an appeal filed by the assessee the Appellate Assistant Commissioner has no power to enhance the assessment by discovering new sources of income not mentioned in the return of the assessee or considered by the Income-tax Officer in the order appealed against", and in the case of Rai Bahadur Hardutroy Motilal Chamaria (supra) wherein it has been held that, "It is not
21 ITA No. 764/JP/2018 & CO No. 24/JP/2018 ITO vs. Shri Man Mohan Mittal
therefore open to the Appellate Assistant Commissioner to travel outside the record, i.e., the return made by the assessee or the assessment order of the Income-tax Officer, with a view to finding out new sources of income and the power of enhancement under section 31(3) is restricted to the sources of income which have been the subject-matter of consideration by the Income-tax Officer from the point of view of taxability". Their Lordships considered the meaning of the word 'consideration' and held that, " 'consideration' does not mean 'incidental' or 'collateral' examination of any matter by the Income-tax Officer in the process of assessment. There must be something in the assessment order to show that the Income-tax Officer applied his mind to the particular subject-matter or the particular source of income with a view to its taxability or to its non-taxability and not to any incidental connection". In the instant case, the AAC had himself, after issuing notice, considered the new material and had gone into new sources of income for the consideration of which he had no jurisdiction.” A perusal of sections 246 to 251 of the Act makes it clear that any questions arising out of the assessment orders in an appeal by the assessee can be possible and wide powers are given to the appellate authority, but these powers are circumscribed by the assessment order in the matters arising thereof or a matter arising out of the proceedings. Even the appellate authority has suo motu power to consider the questions arising thereof but there is no provision to go beyond the matter arising out of the
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proceedings before the assessing authority, more particularly as separate provisions for that are made in the Act.”
Regarding second issue whether in the facts and circumstances of the present case, the matter requires rejection of books of accounts u/s 145(3) and estimation of net profits, we refer to the various findings of the Assessing Officer which find place in the assessment order. At page 12 of the assessment order, the Assessing Officer has recorded a finding that the receipt amounting to Rs. 32,86,993/- from Shree Cements Limited belong to the assessee but he has failed these receipts. Further, at page 15 of the assessment order, the Assessing Officer has held that the assessee has not maintained any record relating to freight expenses and therefore, the ld. AR submission that payments were made to the truck driver is not verifiable. Further, we refer to the details findings of the AO relating to disallowance of the freight expenses which are contained at para 5.1 and 5.5 of the assessment order which is reproduced as under:- “ Issue Involved- Disallowance of Freight Expenses:
5.1 Brief Facts-
The assessee has submitted a comparative chart of turn over, gross profit and net profit as under: Particulars A.Y. 2012-13 A.Y. 2013-14 A.Y. 2014-15 Turnover 4,96,71,804 6,32,07,343 11,56,87,266 Gross Profit Rs. 9,69,147 10,60,347 15,28,678 Net Profit Rs. 3,88,159 4,87,118 5,61,398 G.P. Ratio 1.95% 1.67% 1.32%
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N.P. Ratio 00.78% 00.77% 00.49%
From the above table it is clear that assessee’s GP ratio and NP ration is declining year by year. On examination of books of accounts on 08.12.2016 following discrepancies/shortcomings were noticed in the books of accounts, specially in the freight expenses:- 1. The entire freight expenses were claimed in cash showing payment to Truck Numbers. But name and complete address of these parties are not maintained, hence no open for verification. 2. The assessee has not maintained freight payment vouchers/records. In absence of payment vouchers/records and receipts from the parties to whom freight was paid, the freight expenses claimed by the assessee iverifiable from the books of accounts of the assessee. 3. There is no basis with the assessee for freight expenses claimed. The assessee could not explain the basis of freight expenses claimed. In view of the above facts freight expenses claimed by the assessee is not open for verification. The AR of the assessee has failed to prove the basis of freight expenses claimed by the assessee. The assessee has booked the freight expenses without any basis at his own will. Thus, it is clear that the assessee has inflated his freight expenses. The assessee could not offer any satisfactory reply in this regard. During course of assessee proceedings these defects/discripencies noticed in the books of accounts brought to the notice of AR of the assessee vide order sheet entry dated 08.12.2016. From the above discussion it is clear that the assessee has claimed freight expenses at very higher side. The assessee has claimed freight expenses total Rs.11,41,58,588/- out of total freight receipts shown at Rs.11,56,87,266/- i.e. @98.67% of total receipts. Being such heavy amount of cash expenses the assessee has surely inflated his
24 ITA No. 764/JP/2018 & CO No. 24/JP/2018 ITO vs. Shri Man Mohan Mittal
freight expenses. Because, the assessee has failed to prove the basis of freight expenses claimed and he has not submitted any documentary evidence for freight expenses. 5.2- Show Cause to assessee- In view of above facts a show cause was issued to AR of the assessee vide order sheet entry dated 08.12.2016 as to why freight expenses claimed by the assessee may not be disallowed @1% of total freight expenses claimed as assessee has not maintained any records of freight expenses and same is proposed to add in the total income of the assessee as assessee. 5.3- Reply of the assessee- The AR of the assessee filed reply in this regard dated 19.12.2016, relevant extract of the reply is reproduced as under:- “ That the assessee is doing business of transportation since last so many years and made to payment to truck drivers/khallasi of trucks as they bring the truck for transportation. Assessee use the truck of different truck operators for the transportation purpose available in near by area accordingly all the truck operators are not known of the assessee. And they will not accept cheque. Accordingly assessee have to made the full payment in cash and as proof of payment assesse maintains the register of payment made to truck drivers/khallasi’s and take their signatures in it as proof of payment made to them in cash. Part payment is made to them as advance because they required money for fuel, toll tax and to meet with other on the way expenses related to transportation and part payment has been made on receipt confirmation of delivery accordingly assessee will pay the amount in cash to them because payment through banking channel is not fruitful for them as well as not practically faceable for them. Unfortunately, the register for the year under consideration is misplaced accordingly the same is not available with us at the time of last hearing with other books of accounts. Moreover we are maintaining regular
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books of accounts in which all the payment details are its self maintained. Which has been verified by your good self atg the time of last hearing as well as we have submitted some confirmations also of truck operators in which they have confirmed the receipts of freight form us. Further we are trying to get some more confirmation form various truck operators who did work for us during the period under consideration and we will submit the same as soon as we will receive the same. We are trying our best to find the register also and we will submit the same before your good self as soon as we will find the same so please grand some time for production of the said freight paid registers accordingly disallowance of lump sum amount of 1% from total freight expense in absence of payment vouchers is unjustified and bas in law because we have maintain the register instead of vouchers as proof of payment of freight and taken signature in it of the receiver of the amount i.e driver n most of the cases.i.e sort of voucher. Due to nature of business and transaction it is justified as well as good in law” 5.4 Rebuttal on assessee’s reply- I have considered the submissions of the AR of the assessee but the same is not found satisfactory, hence, not acceptable. It is admitted fact that assessee has claimed entire freight expenses in cash. But the assessee has not maintained freight payment vouchers of any record of freight expenses. Ample opportunities were provided to the assessee to produce books of accounts and freight expenses vouchers/records, but the assessee has failed to produce freight expenses vouchers/records. The assessee has submitted reasons for cash payment for freight expenses but same is not acceptable because as per confirmation filed by the assessee it is found that assessee has paid huge cash to Truck operators as Sh. Ugma Ram total Rs.1,99,81,606/-, Sh. Sukh Ram Choudhary total amounts Rs.28,39,333/-, ShGaj Raj total amounts Rs.36,21,176/-, Sh. Deep Chand total amounts Rs.44,86,278/-, MukeshJat total amount Rs.32,74,758/-. The assessee has no proper reply for making payments of such huge cash to these persons.
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Therefore, the reply of the assessee is not satisfactory. In the matter the most relevant issue is, that assessee has not maintained any receipts for such huge cash payments. During examination of books of accounts assessee was asked to produce all the records of freight expenses. The AR of the assessee admitted vide order sheet entry dated 08.12.2016 that no records and voucher are maintained for freight expenses claimed by the assessee. But after issuing show cause, the AR submitted that assessee has maintained register of freight payment and same is misplaced. The AR further submitted that we are trying to find out the register and same will be submitted as soon as we will receive the same. The AR requested for time for production of register, The reply filed by the assessee is not satisfactory because ample opportunities were already provided to the assessee during assessment proceedings discussed as under:- (i) The assessee was required to produce books of accounts and expenditure vouchers vide notice u/s 142(1)/query letter dated 26.05.2016 but assessee has not produced the same. (ii) The AR of the assessee was asked to produce freight expenses bills and records vide order sheet entry dated 26.06.2016. But not produced. (iii) Final opportunity letter was issued to the assessee vide letter No.1138 dated 17.11.2016 in which point No.4 specifically asked to produce books of accounts, supporting documents, registers, bill vouchers and all documents related to freight paid expenses. But assessee has not produced as required. (iv) Vide order sheet entry dated 02.12.2016 the AR was asked to produce books of accounts, bills and vouchers for verification.
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The case is barred by limitation as on 31.12.2016 and as discussed ample opportunities were already provided to the assessee, however, further time was allowed to the assessee till 23.12.2016 but assessee has not returned back. Thus, reply of the AR of the assessee is not acceptable. 5.5 Conclusion In view of above discussion the reply of the AR of the assessee is not found satisfactory, the entire freight expenses of Rs.11,41,58,588/- were claimed in cash, the assessee has not maintained any receipts for such huge cash payments. There is no basis with the assessee for claiming these freight expenses and the assessee could not explain the basis of freight expenses claimed. The freight expenses claimed by the assessee are not open for verification. The assessee has claimed freight expenses at very higher side i.e @98.67% of total receipts. Being such heavy amount of cash expenses the assessee has surely inflated his freight expenses and reduced his profit. In view of above facts and circumstances of case, considering the reply of the assessee it will be most reasonable and justified to disallow the freight expenses @1% of total freight expenses claimed. In this case disallowance u/s 40A(3) of Rs.39,96,344/- has already been made in para-4 of this order, hence balance freight expenses remains to Rs.11,01,62,244/- (Rs.11,41,58,588- 39,96,344). Thus in view of above discussion freight expenses disallowed total Rs.11,01,622/- i.e 1% of Rs.11,01,62,244/- and same is added back to the total income of the assessee.”
In light of above findings of the AO, we find that the discrepancies so observed by the Assessing Officer are sufficient enough to hold that the books of accounts so submitted by the assessee are not correct and complete and the results so declared cannot be accepted on face value. The findings of the Assessing officer
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that receipts amounting to Rs 32,86,993 pertaining to the year have not been disclosed raises serious doubt on the completeness of the reported turnover by the assessee. Even the ld CIT(A) has directed to include the said receipts as part of reported turnover. Further, the findings of the Assessing Officer that the entire freight expenses of Rs. 11,41,58,588/- were claimed in cash, the assessee has not maintained any receipts and supporting documentation for such huge cash payments, there is no basis for claiming these freight expenses, the freight expenses are not verifiable and the fact that such expenses constitutes. 98.67% of the total receipts of the assessee, in our view these findings by itself tantamount to rejection of book results of the assessee even though the Assessing Officer has not specifically invoked the provisions of Section 145(3) of the Act. In substance, the books results have been rejected by the AO and therefore, as we have held above, when the said matter travels to the ld CIT(A) and he looks at the said facts and findings of the Assessing officer with a fresh mind and comes to a conclusion that the books of accounts are not reliable and he rejects the books of accounts by specifically invoking the provisions of section 145(3), we don’t see as to how he has exceeded his powers and jurisdiction so bestowed upon him by the legislature u/s 251 of the Act. In our considered view, the books of accounts have been rightly rejected in the present case and we donot see any infirmity in the said findings of the ld CIT(A). We have also gone through the decisions of the Coordinate Benches in case of Choudhary & Brothers (supra), Bhagchand Choudhary (supra) and Advert Communications (supra), and find that similar analogy has been drawn in the said decisions and thus, the said decisions supports the case of the assessee.
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Once the books of accounts and declared results have been rejected, it is a settled legal proposition that the AO has to estimate the profits in the hands of the assessee and the past settled history of the assessee provides a reliable basis to estimate such profits. In the instant case, the AO has made certain specific disallowances, however, the ld CIT(A) has estimated the net profits @ 1% based on past history of the assessee as against 0.79% declared by the assessee. Further, the ld CIT(A) has directed to include turnover of Rs 32,86,993 relating to shree cement limited in addition to reported turnover of Rs 11,56,87,266 and net profit @ 1% on such adjusted turnover comes to Rs 11,89,743 and thus has confirmed the addition of Rs 6,28,345. We find approach of the ld. CIT(A) to be in compliance with the settled legal proposition and don’t see any infirmity in the said findings. The ground no. 1 of the Revenue’s appeal is thus dismissed.
In ground no. 1.1. the Revenue has challenged the action of the ld. CIT(A) in not considering the addition made by the AO U/s 40(a)(ia) by observing that no separate disallowance U/s 40(a)(ia) of the Act can be made in case of rejecting of book results U/s 145(3) of the Act. We find that the matter is no more res integra. The Coordinate Benches as well as Hon’ble High Court have held from time to time that once the book results are rejected U/s 145(3) of the Act and net profit has been estimated, no separate disallowance U/s 40(a)(ia) of the Act can be made. The ground no. 1.1 of the Revenue’s appeal is thus dismissed.
In ground no. 1.2, the Revenue has challenged the action of the ld. CIT(A) in allowing the expenses on the undisclosed receipts of
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Rs. 32,86,993/- which was not shown in the turnover by the assessee. In this regard, as we have upheld the rejection of books of accounts and estimation of net profit on the reported turnover as well as on receipts of Rs 32,86,993, there is no question of separate allowance of expenses against the said receipts. Hence, said ground of appeal is dismissed.
In ground 2, the Revenue has challenged the action of the ld. CIT(A) in deleting the addition of Rs. 39,96,344/- made on account of disallowance of freight expense U/s 40A(3) of the Act. In this regard, without going into the merits of the addition, we find that once the books of accounts have been rejected and one of the significant reasons being the freight expenses incurred in cash and not subject to verification, and the net profit have been estimated, no separate disallowance of freight expenses U/s 40A(3) of the Act can be made. The ground no. 2 of the Revenue’s appeal is thus dismissed.
In ground no. 3, the Revenue has challenged the action of the ld. CIT(A) in restricting the disallowance of freight expenses up to Rs. 6,28,345/- by applying net profit rate of 1% out of total expenses disallowance by the AO at Rs. 11,01,622/-. In this regard, we find that the ld. CIT(A) has not restricted the disallowance of freight expenses at Rs. 6,28,345/- rather he has estimated the net profit as a whole at the entity level and has sustained the disallowance of Rs. 6,28,345/-. Further, once the books of accounts have been rejected, the Assessing officer has to estimate the profits rather than looking at individual head
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of expenses. Accordingly ground no. 3 of the Revenue’s appeal is dismissed.
In its cross objection, the assessee has challenged the estimation of net profit rate @ 1% by the ld. CIT(A) as against 0.79% reported by the assessee. As we have above, the ld CIT(A) by relying on the past results of the assessee has estimated the net profit @ 1%. There is no dispute that past history so taken into consideration by the ld CIT(A) has attained finality. We therefore do not see any justifiable basis in the said objection so raised by the assessee as the Courts have held from time to time that once the book results have been rejected, the past history of the assessee provides a reliable basis for estimation of profits. In the result, the cross objection so raised by the assessee is rejected.
In the result, both the appeal of the Revenue and cross objection of the assessee are dismissed.
Order pronounced in the open Court on 28 /02/2019.
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:-28/02/2019. *Santosh. आदेश की प्रतिलिपि अग्रेf’ात@ब्वचल वf जीम वतकमत वितूंतकमक जवरू 1. vihykFkhZ@The Appellant- ITO, Ward-2, Beawar. 2. izR;FkhZ@ The Respondent- Shri Man Mohan Mittal, Beawar.
32 ITA No. 764/JP/2018 & CO No. 24/JP/2018 ITO vs. Shri Man Mohan Mittal 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. ITA No. 764/JP/2018 & CO No. 24/JP/2018} vkns'kkuqlkj@ By order,
सहायक पंजीकार@Aेेज. त्महपेजतंत