Loading judgment…
No AI summary yet for this case.
Income Tax Appellate Tribunal, “ SMC ” BENCH, AHMEDABAD
Before: SHRI WASEEM AHMED & MS. MADHUMITA ROY
PER WASEEM AHMED, ACCOUNTANT MEMBER: The captioned appeal has been filed at the instance of the Assessee against the order of the Commissioner of Income Tax (Appeals)–2, Vadodara [CIT(A) in short] vide appeal no.CAB/(A)-2/442/2014-15 dated 13/03/2015 arising in the assessment order passed under s.143(3) of the Income Tax Act, 1961(hereinafter referred to as "the Act") dated 01/03/2013 relevant to Assessment Year (AY) 2009-10.
The assessee has raised following grounds of appeal:- All the grounds of appeal in this appeal are mutually exclusive and without prejudice to each other.
ITA No.1596/Ahd/2015 M/s. Shiv & Company vs. ITO Asst.Year - 2010-11 - 2 - 1. The learned Commissioner of Income Tax (Appeals)-2, Vadodara [“the CIT(A)”] erred in fact and in law in confirming the action of the Income Tax Officer, Ward-1, Anand (“the Assessing Officer”) in making addition of Rs.9,87,500/- by disallowing M.O. Commission. 2. The learned CIT(A) erred in fact and in law in confirming the action of the Assessing Officer in rejecting the books of account without pointing out any defects therein and thereby making addition of Rs.5,39,692/- to the income of the Appellant. 3. The learned CIT(A) erred in fact and in law in confirming the action of Assessing Officer in making addition of Rs.12,72,990/- on account of cessation of liability by invoking the provisions of section 41(1) of the Income Tax Act, 1961 (“the Act”). 4. Without prejudice to the above grounds, the learned CIT(A) erred in fact and in law in confirming the actions of Assessing Officer in making addition on account of M.O. Commission and cessation of liability despite the fact that the books of account were held to be unreliable and rejected by the Assessing Officer. 5. The learned CIT(A) erred in fact and in law in confirming the action of Assessing Officer in charging interest u/s.234B of the Act. 6. The learned CIT(A) erred in fact and in law in confirming the action of Assessing Officer in initiating penalty proceeding u/s.271(1)(c) of the Act.
First, we take up Ground No. 4 of the appeal. The issue raised by the assessee in ground No.4 is that the Ld.CIT(A) erred in confirming disallowance made by the Assessing Officer on account of M.O. Commission and Cessation of liability despite the books of account were rejected u/s 145(3) of the Act.
Briefly stated facts are that the assessee is a partnership firm and engaged in the business of trading in steel and commission agency. As
ITA No.1596/Ahd/2015 M/s. Shiv & Company vs. ITO Asst.Year - 2010-11 - 3 - per Form No. 26AS, the assessee received MO Commission from M/s. Binani Cement Co.Ltd. amounting to Rs. 45,86,195/-, but it has shown commission income for Rs. 35,98,695/- only in its P&L account. Thus, the difference of Rs.9,87,500/- was found out by the Assessing Officer.
The assessee explained that it has paid commission expenses to M/s Shiv & Associates for Rs. 9,87,500/- which has been adjusted against the commission income. However, the TDS on such commission expense was duly deducted before making the payment to M/s Shiv & Associates. The assessee in support of his claim filed the ledger copy of MO commission, copies of the bill to M/s Binani Cement Co.Ltd., the income-tax return of M/s Shiv Associates and the copy of the bill issued to M/s.Shiv & Associates.
However, the Assessing Officer during the assessment proceedings observed certain facts as detailed under:
(i) The assessee failed to file the details of the business procured through Shiv & Associates. (ii) The assessee has issued the invoice of Rs.9,87,500/- to M/s Shiv & Associates which is against the prevailing accounting practice. As such, M/s Shiv & Associates was supposed to issue the bill to the assessee for the amount of commission income earned from the assessee. (iii) One of the partners, namely Shri Ramabhai N.Patel was also the partner in M/s.Shiv & Associates having 50% share.
ITA No.1596/Ahd/2015 M/s. Shiv & Company vs. ITO Asst.Year - 2010-11 - 4 - However, this fact was not brought in the tax audit report under the provisions of section 40A(2)(b) of the Act though the impugned transaction was between the related parties. (iv) M/s Shiv & Associates has declared the total income at Rs.1,04,410/-and claimed the refund of Rs.68,727/- in its income-tax return. Besides this, the salary expenses claimed by M/s.Shiv Associates amounting to Rs.3,35,610/- is greater than the salary expenses claimed by the assessee despite the fact the turnover of the assessee exceeds the turnover of M/s Shiv & Associates. Thus, it was clear that M/s.Shiv & Associates claimed more expenses to claim from the Income Tax Department. (v) The assessee failed to discharge his onus to prove that the commission expenses were paid to M/s.Shiv Associates in connection with the business.
In view of the above, the Assessing Officer disallowed commission expenses of Rs. 9,87,500.00 and added the same to the total income of the assessee. 7. The assessee in the year under consideration has shown gross loss of Rs. 2,06,744/- in respect of its trading business. The details of the gross loss claimed by the assessee are given as under:
Sl.No(s) Particulars Amount (in Rs.) 1. Opening Stock NIL
ITA No.1596/Ahd/2015 M/s. Shiv & Company vs. ITO Asst.Year - 2010-11 - 5 - 2. Purchases 1,68,54,190/- Total 1,68,54,190/- LESS : Sales 1,66,47,446/- 3. Closing stock NIL 4. Gross Loss 2,06,744/-
7.1. The assessee explained that it received the order in advance at a particular rate and at the time of sale the rate came down. Therefore, the loss was incurred on the sale of the goods amounting to Rs.2,06,744/- only.
7.2. The assessee also submitted that it has closed down its trading business of steel subsequently. However, the Assessing Officer observed certain facts as detailed under:
(i) The assessee has furnished photocopies of purchase bills in some of the cases. (ii) The assessee did not produce the sale bill. (iii) There were no quantitative details mentioned in the tax audit report in Form No.3CD.
7.3. In view of the above, the Assessing Officer rejected the books of accounts of the assessee and estimated profit @ 2% of the turnover
ITA No.1596/Ahd/2015 M/s. Shiv & Company vs. ITO Asst.Year - 2010-11 - 6 - amounting to Rs. 3,32,948/- being 2% of total sales. Thus, the addition of Rs.5,39,692/- (Rs.3,32,948 + amount of gross loss 2,06,744) and added to the total income of the assessee.
7.4. Similarly, the Assessing Officer observed that the assessee had shown sundry creditors of Rs.12,72,990/- in the name of M/s Hans Ispat Ltd. However, on the confirmation received u/s 133(6) of the Act M/s Hans Ispat Ltd. has shown NIL closing balance. Therefore, the Assessing Officer was of the view that the liability of Rs. 12,72,990/- ceased to exist. Therefore, the Assessing Officer treated such amount of trading liability as income u/s 41(1) of the Act and accordingly added to the total income of the assessee.
The aggrieved assessee, preferred an appeal to Ld. CIT(A).
The assessee before the Ld.CIT(A) submitted that it had filed all the necessary details of purchases and sales of steel along with the copies of the vat returns.
As the assessee has not shown any opening and closing stock of the quantity. Therefore, the column of the tax audit report disclosing the details of the quantity was left blank. However, the assessee has furnished the necessary details of purchases and sales along with copies of the ledgers. But there was no defect pointed out by the Assessing Officer, and he rejected the books of accounts without rejecting the purchases and sales. However, the Ld.CIT(A) confirmed the rejection of
ITA No.1596/Ahd/2015 M/s. Shiv & Company vs. ITO Asst.Year - 2010-11 - 7 - the books of accounts of the assessee by observing that the assessee has not furnished the complete details of the purchase and sales. The assessee has also not furnished the quantitative details in the tax audit report. Therefore, the order of the Assessing Officer was confirmed by the Ld.CIT(A).
The commission expenses of Rs.9,87,500/- was also confirmed on the ground that it was not shown in the profit and loss account.
The ld. CIT-A also confirmed the amount of liability in the name of M/s Hans Ispat Ltd. by observing that these liabilities have ceased to exist.
Being aggrieved by the order of the Ld. CIT(A), the assessee is in appeal before us.
The Ld.AR before us filed a paper-book running from page 1 to 109 and submitted that no addition could be made in respect of commission expenses and cessation of liability in the event of rejection of books of accounts u/s 145(3) of the Act. As per the Ld.AR, once the books of accounts got rejected, then a profit on reasonable basis can be estimated for determining the income of the assessee.
On the other hand, the Ld.DR submitted that the books of accounts were rejected in respect of its trading business of steel. But the profit declared by the assessee in respect of commission income was duly
ITA No.1596/Ahd/2015 M/s. Shiv & Company vs. ITO Asst.Year - 2010-11 - 8 - admitted as per the books of accounts of the assessee. The Ld.DR vehemently supported the orders of the authorities below.
We have heard the rival contentions and perused the materials available on record. The assessee in the instant case has declared income from two different sources under the head business and profession. The 1st source of income was from its trading business of steel, and the 2nd source of income was commission income earned from the Binani Cement Ltd. The assessee was maintaining a single set of the books of accounts in respect of both the sources of income. The consolidated financial statements were prepared declaring a net profit of Rs. 8,30,153/- only. Thus it is clear that the assessee derived such profit after claiming combined indirect expenses against both the sources of income.
15.1. However, the AO found that the assessee has shown the gross loss in respect of its trading business amounting to Rs. 2,06,744/-. But the AO was not satisfied with the claim of the assessee in respect of its trading business of steel where the assessee showed the gross loss. Accordingly, the AO rejected the books of accounts of the assessee in respect of its trading business and estimated the profit at the rate 2% of the turnover of its steel business amounting to Rs. 3,32,948/- (being 2% of Rs. 1,66,47,446/-). It is also important to note that there was no opening and closing stock of material in the steel business.
ITA No.1596/Ahd/2015 M/s. Shiv & Company vs. ITO Asst.Year - 2010-11 - 9 - 15.2. The AO did not disturb the net profit declared by the assessee in its consolidated profit and loss account. As such it was implied that all the expenses relate to the commission income which was allowed by the AO as it is. No defect of whatsoever was pointed out in the expenses claimed in the profit and loss account.
15.3. Thus the income of the assessee was determined by the AO as detailed under: Income from steel trading, 2% of the turnover: 3,32,948/- Add: The gross loss claimed in the consolidated profit and loss account: 2,06,744/- Income as per statement of income : 12,20,150/-
15.4. Besides the above, the AO made the separate additions as detailed under: Commission expenses : 9,87,500/- Liability written of under section 41(1) of the Act : :12,72,990/-
15.5. It is important to note that the assessee did not challenge the rejection of the books of accounts. But it was argued that there could not be any separate addition in the event of rejection of books of the assessee. As such the additions towards commission expenses and the liability written off under section 41(1) of the Act were challenged.
15.6. It is an undisputed fact that the books of accounts were rejected only in respect of its steel business. Thus it is implied that the AO did not
ITA No.1596/Ahd/2015 M/s. Shiv & Company vs. ITO Asst.Year - 2010-11 - 10 - reject the books of accounts maintained in relation to commission income.
15.7. Thus, the 1st controversy that arises before us for the adjudication whether the books of account can be partially rejected. In this regard, we note that the provisions concerning the rejection of the books of accounts are contained under section 145(3) of the Act which reads as under:
“Section 145 (3) Where 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.”
15.8. On perusal of the above provisions, we note that it is nowhere mentioned that the AO can reject the books of accounts partially. It is also an undisputed fact there was a single set of books of accounts maintained by the assessee. We understand that the income shown by the assessee in the instant case can be bifurcated without much effort i.e. trading business and the commission business. But when the issue comes to bifurcate the expenses which have been incurred combinedly for both the sources of income, we find that it is not easy rather impractical to bifurcate the expenses.
15.9. Besides, the above we also note that the assessee to earn commission income has to discharge certain functions which are described below:
ITA No.1596/Ahd/2015 M/s. Shiv & Company vs. ITO Asst.Year - 2010-11 - 11 - 1. Assessee acts as a middle chain between the Binani cement and its customers. 2. Assessee ensures the timely procurement of order as well as order thereof. 3. The assessee has to ensure the timely payment reach to the Binani cement.
15.10. From the above, we find that the assessee did not earn commission income just by making any reference or it was not just the brokerage income earned by arranging a deal between two parties. The assessee to earn commission income has to put continuous efforts by employing a lot of resources of workforce, infrastructure facilities etc. Therefore, it can be inferred that the gross commission income does not represent its full income or major income.
15.11. We also note that the AO has treated all the expenses claimed by the assessee against the commission income. Thus the overall position shows that the assessee has to incur expenses against the commission income.
15.12. After considering the facts in totality, we are of the view that the books of accounts of the assessee cannot be rejected partially. It is because the assessee incurred the expenses for it’s both the activities and there were no separate books maintained by the assessee separately for it’s both sources of income. Thus we are of the view that the books of accounts of the assessee cannot be rejected partially in the given facts &
ITA No.1596/Ahd/2015 M/s. Shiv & Company vs. ITO Asst.Year - 2010-11 - 12 - circumstances. However, if the books of the accounts are rejected then the income from both the sources needs to be estimated.
15.13. In this regard, we place our reliance on the judgment of Hon’ble Gujarat High Court in the case of CIT Vs. Dhiraj R Rungta reported in 40 taxmann.com 284 where the head note reads as under: “Section 145, of the Income-tax Act, 1961 - Method of accounting - Rejection of accounts [Additions to income based on rejected books of account] - Assessment year 2007-08 - Assessee engaged in trading of dress materials filed his return of income declaring certain income - Assessing Officer finding number of glaring mistakes, rejected books of account - He, however, made some additions by relying upon same books of account which had been rejected - Tribunal held that Assessing Officer once having rejected books of account, could not have made further additions by relying upon same books and that it would have been better if Assessing Officer had estimated a reasonable profit of assessee considering history and nature of business - Accordingly, Tribunal granted partial relief to assessee - Whether finding recorded by Tribunal being a finding of fact, no substantial question of law arose therefrom - Held, yes [Para 7] [In favour of assessee]”
15.14 . The lower authorities erred in estimating the income only for one source and second source relying on the same set of the books. Once the books of accounts are rejected which was also not challenged by the assessee, then the income needs to be estimated on some reasonable & scientific basis after taking into consideration the past history and the position of the succeding years and other relevant factors.
15.15. As there is no dispute that both the sources of income of the assessee, as discussed in the preceding paragraph, cannot fetch the same rate of profit in the event of the rejection of the books of accounts. It is
ITA No.1596/Ahd/2015 M/s. Shiv & Company vs. ITO Asst.Year - 2010-11 - 13 - because the nature of both the sources of income is different and distinct from each other. Thus the question arises what should be the rate of profit in the case of commission business. For this purpose we deem it fit to restore this issue to the file of AO for fresh adjudication in the light of the above discussion and as per the provisions of law.
15.16. We also find pertinent to direct the AO to estimate the income in respect of commission business at the gross commission income declared in the form 26AS as discussed above. The AO will not make any separate addition for the commission income directly paid by Binani Ltd to Shiv & Associates.
15.17. We also direct that there will not be any separate addition under the provisions of section 41(1) of the Act as made by the AO in the assessment proceedings. It is because the assessee has not written off its liabilities in its books of accounts. This fact can be verified from the copies of the ledgers filed by the assessee which are placed on page 27 of the paper book. Moreover, once the books got rejected, then there will not be any separate addition under section 41(1) of the Act.
Thus, all the grounds of appeal of the assessee are partly allowed for statistical purposes.
The other grounds raised by the assessee do not require any separate adjudication in terms of our direction as stated above.
ITA No.1596/Ahd/2015 M/s. Shiv & Company vs. ITO Asst.Year - 2010-11
- 14 - 18. In the result, the appeal of the assessee is partly allowed for statistical purposes. This Order pronounced in Open Court on 01/01/2019
Sd/- Sd/- (MS.MADHUMITA ROY) (WASEEM AHMED) JUDICIAL MEMBER ACCOUNTANT MEMBER
Ahmedabad; Dated 01/01/2019 ट�.सी.नायर, व.�न.स./T.C. NAIR, Sr. PS आदेश क� ��त�ल�प अ�े�षत/Copy of the Order forwarded to : 1. अपीलाथ� / The Appellant 2. ��यथ� / The Respondent. 3. संबं�धत आयकर आयु�त / Concerned CIT 4. आयकर आयु�त(अपील) / The CIT(A)-2, Vadodara �वभागीय ��त�न�ध, आयकर अपील�य अ�धकरण, अहमदाबाद / DR, ITAT, Ahmedabad 5. 6. गाड� फाईल / Guard file. आदेशानुसार/ BY ORDER, स�या�पत ��त //True Copy// उप/सहायक पंजीकार (Dy./Asstt.Registrar) आयकर अपील�य अ�धकरण, अहमदाबाद / ITAT, Ahmedabad 1. Date of dictation 24.12.18 (dictation pad 20-pages attached at the end of this appeal-file) 2. Date on which the typed draft is placed before the Dictating Member …26.12.18 3. Other Member… 4. Date on which the approved draft comes to the Sr.P.S./P.S … 5. Date on which the fair order is placed before the Dictating Member for pronouncement…… 6. Date on which the fair order comes back to the Sr.P.S./P.S…….4.1.19 7. Date on which the file goes to the Bench Clerk…………………4.1.19 8. Date on which the file goes to the Head Clerk…………………………………... 9. The date on which the file goes to the Assistant Registrar for signature on the order…………………….. 10. Date of Despatch of the Order……………