GURUBHEJ SINGH CHHABRA,JHALAWAR vs. ITO, WARD-JHALAWAR, JHALAWAR

Aggrieved by the reassessment order, the assessee filed an appeal before the Ld. CIT(A) who held that the assessee’s turnover pattern and commission based activities indicate that section 44AD is not directly applicable to commission agency business. However, for estimation purposes, adopting a higher profit margin where the books are unreliable is within the discretion of the AO. Therefore, the profit rate of 8% is found to be correct and thereby dismissed the appeal filed by the assessee.

Aggrieved by the appellate order, the assessee is in appeal before us raising the following grounds of appeal:-

Ld. Counsel Shri P. C. Parwal appearing on behalf of the assessee argued on two fold i.e. reopening of assessment is bad in law and merits of the case. Ld. Counsel submitted that the case was reopened on the information available with the AO which stated that the assessee had made cash withdrawal from his bank account. This information does not suggest that income is chargeable to tax as escaped assessment. Even during the reassessment proceedings, the AO verified the utilization of cash withdrawal from the bank accounts and did not find any discrepancy in the utilization of such cash withdrawals. Thus, there is no escapement of income. Consequently, the reassessment order passed is illegal and bad in law and the same is liable to be quashed as there is no escapement of income.

As far as on merits of the case, Ld. Counsel submitted that the AO estimated the income @ 8% on turnover of Rs. 1,64,17,658/- as against the declared profit @ 6% by the assessee. The reason for such addition made by the AO is that the assessee has not maintained the audited books of account and most of the transactions were in cash. Ld. Counsel further submitted that the AO cannot invoke the estimation of income without first rejecting the books of account u/s. 145(3) of the Act. In the present case, Ld. AO has not rejected the books of account rather he has expressly recorded in the assessment order that “assessee has reconciled the total turnover with the bank account credits”, thus the AO has accepted the assessee’s books of account. Further, the AO has not justified with any comparable commission business to arrive as estimation of the profit @ 8%. Moreover, the turnover of the assessee is Rs. 72,56,380/- and the commission receipt is Rs. 9,85,059/- and the gross receipt is Rs. 85,41,439/- which is below Rs. 1 crore and the question of audit does not arise in the assessee’s case. Further the CBDT Circular No. 452 dated 17.03.1986 which draws a clear distinction between Kachha Arahtias and Pacca Arahtias and recognizes that Kaccha Arahtias are commission agents and they do not buy or sale on their own account, the turnover of a Kaccha Arahtia, for the purpose of section 44AB, is only the commission received, not the underlying commodity turnover and the commission rate are governed by Mandi regulations. Thus, the addition made by the AO is without justification and is liable to be deleted.

Per contra, Ld. Sr. DR Mrs. Aarti Rawat supported the orders passed by the lower authorities and requested to confirm the addition.

We have considered the rival submissions and perused the materials available on record including the paper book and written submission filed by the assessee. With regard to Ground no. 1 validity of reassessment proceedings, the observations of AO are as follows:-

From the reading of the reasons recorded by the AO, that the cash withdrawal from the bank accounts by the assessee does not suggest that income chargeable to tax as escaped assessment, thus the very basis of reopening of assessment is baseless and against the provisions of section 147 of the Act. Further during the reassessment proceedings, the AO thoroughly verified the reply of the cash withdrawal from the bank account and did not find any discrepancy in the cash withdrawals. Therefore, there is no question of any escaped income in the bank transaction by the assessee. Thus, we have no hesitation in quashing the reassessment order as the reasons recorded by the Ld. AO are baseless and against the provisions of law.

Further, on merits of the case also, the Ld. AO estimated the profit @ 8% without rejecting the books of account u/s. 145(3) of the Act and also without making any comparable sales. The AO concluded that assessee has failed to get his books audited and this cannot be the reason for making estimated addition of commission income of the assessee. On this count also, the addition made by the AO is unsustainable in the eyes of law and liable to be deleted. Thus, the ground no. 2 raised by the assessee is allowed.

In the result, the appeal filed by the assessee is hereby allowed.