INDERJIT MEHTA CONST. (P) LTD. vs. ASSTT. COMMISSIONER OF INCOME TAX

This order shall dispose of three appeals bearing ITA Nos. 615, 616 and 617 of 2008 as learned counsel for the parties are agreed that there is no difference in the factual and legal issue involved therein. Four questions of law have been claimed in ITA No.615 of 2008 and three identical questions have been claimed in ITA Nos. 616 and 617 of 2008. Learned counsel for the assessee submitted that in so far as questions (i) and (iv) in ITA No. 615 of 2008 and question (i) each in ITA Nos. 616 and 617 of 2008 are not being pressed. Thus, in all the three appeals, identical substantial questions of law have been pressed by the learned counsel for the appellant. For brevity, the facts are being extracted from ITA No. 615 of 2008. 2. This appeal has been preferred by the assessee under Section 260A of the Income Tax Act, 1961 (in short “the Act”) against the Singh Gurbachan 2013.09.24 14:57 integrity of this document High Court Chandigarh -2- order dated 7.12.2007 passed by the Income Tax Appellate Tribunal, Amritsar Bench, Amritsar in ITA No. 167(ASR)/2007, relating to the assessment year 2003-04 claiming the following substantial questions of law (out of which questions (i) and (iv) have not been pressed and only questions (ii) and (iii) remains to be answered:- “(ii) Whether the Ld. ITAT is justified to interfere in the well reasoned findings given by the 1st appellate authority to the effect that there is no valid ground to disallow the expenditure of ` 3 lacs out of ` 3.50 lacs claimed by the assessee, from the total receipts made by it, in contract receipts? (iii) Whether on the facts and circumstances of the case, there are any basis for making any addition of ` 2,50,000/- in the total income of the assessee by disallowing expenditure, on surmises and conjectures without finding any discrepancy in Audited books of Account?”

A few facts necessary for disposal of the present appeal as narrated therein may be noticed. The assessee is a Private Limited Company and engaged in the business of building and road construction. The assessee filed its return for the assessment year 2003-04 on 20.11.2003 declaring an income of ` 53,46,840/- accompanied by the Audit Report as required under Section 44AB of the Act. The said return was processed on 22.1.2004 under Section 143(1) of the Act at the returned income. The case was selected for scrutiny and notice was issued on 11.5.2005. The account books and other relevant documents were produced at the time of hearing and no Singh Gurbachan 2013.09.24 14:57 integrity of this document High Court Chandigarh -3- discrepancy was found therein. The questionnaire was also duly replied by the assessee. The Assessing Officer vide order dated 22.12.2005 (Annexure A-1) disallowed an expenditure of ` 3,50,000/- and treated it as income of the assessee holding that the administrative expenses, labour and wages expenses and work expenses were paid in cash and the only evidence was in the form of muster rolls/attendance sheets, therefore, the element of inflated expenditure under the head could not be ruled out. Feeling aggrieved, the assessee filed an appeal before the Commissioner of Income Tax (Appeals) [hereinafter referred to as “the CIT(A)”]. The CIT(A) vide order dated 7.2.2007 (Annexure A-2) upheld the disallowance of ` 50,000/- out of the total disallowance of ` 3,50,000/- and deleted the remaining addition. Against the order of the CIT(A), the revenue filed an appeal before the Tribunal whereas the assessee filed cross-objections. The Tribunal vide order dated 7.12.2007 (Annexure A-3) increased the disallowance of expenditure from ` 50,000/- upheld by the CIT(A) to ` 2,50,000/- out of total claim of ` 3,50,000/-. Hence, the present appeal by the assessee.

We have heard learned counsel for the parties and perused the record.

Learned counsel for the assessee submitted that the Assessing Officer had disallowed ` 3,50,000/- on account of administrative expenses, labour and wages expenses and work expenses whereas on appeal by the assessee, the CIT(A) had reduced the disallowance of ` 50,000/-. However, on appeal by the revenue and cross objections filed by the assessee, the Tribunal while disposing of the same had increased it to ` 2,50,000/-. According to the learned counsel, the same was on the basis of conjectures and surmises and Singh Gurbachan 2013.09.24 14:57 integrity of this document High Court Chandigarh -4- without there being any material on the basis of which the authorities could have formed an opinion for sustaining the addition. Reliance was placed on the decisions of this Court in St. Teresa's Oil Mills v. State of Kerala (1970) 76 ITR 365, Tara Chand Hari Ram v. The Sales Tax Tribunal, Haryana and others, (1972) 30 STC 342 and the judgment of Hon'ble Supreme Court in Dhakeswari Cotton Mills Ltd. v. Commissioner of Income Tax, West Bengal (1954) 26 ITR 775. 6. Controverting the aforesaid submissions, learned counsel for the revenue supported the order passed by the Tribunal. It was argued that the assessee had claimed expenses on account of labour and wages and other work which were made in cash and only evidence maintained was in the shape of muster roll and attendance sheets in which there were no addresses of the parties to whom payments had been made. It was not possible to verify the claim of the assessee in such circumstances. According to the learned counsel, the addition sustained by the Tribunal was, thus, correct.

After giving our thoughtful consideration to the respective submissions of learned counsel for the parties, we find merit in the submission made by the learned counsel for the assessee.

It is trite law that there has to be prima facie material for formation of opinion by the assessing authority that the books of account have not been properly maintained or profits disclosed therein does not depict correct state of affairs. It is accepted principle that where the books of account are rejected or true profits are not disclosed in the books of account, some element of guess work while framing the assessment is inevitable. The guess work should not be a wild one, but should have a reasonable nexus to the available material and the circumstances of Singh Gurbachan 2013.09.24 14:57 integrity of this document High Court Chandigarh -5- each case. There has to be some basis for arriving at the estimate and it should not be on mere suspicion. The assessment order does not depend upon the arbitrary caprice of the Assessing Officer, but on settled principles of justice. The authority concerned has to make an honest and fair estimate of income.

This Court in St. Teresa's Oil Mills' case (supra) observed as under:- “Accounts regularly maintained in the course of business have to be taken as correct unless there are strong and sufficient reasons to indicate that they are unreliable. The department has to prove satisfactorily that the account books are unreliable, incorrect or incomplete before it can reject the accounts. Rejection of accounts should not be done light- heartedly.”

In Tara Chand Hari ram's case (supra), it was noted as under:- “No doubt the irregularities in the books of account were admittedly found by the assessing authority and 11 transactions of sale as entered in the books of account created suspicion but the total amount of those sales is only Rs. 653. 14. In making best judgment assessment certain amount of speculation is bound to creep in but neither the assessing authority nor the appellate authority has disclosed in the impugned orders as to how it worked out the figure at Rs. 51,523.88 as increase. The best Singh Gurbachan 2013.09.24 14:57 integrity of this document High Court Chandigarh -6- judgment assessment, whatever be the extent of speculative element in it, has at the same time to be based on some reasonable objective data. It is not known what facts and circumstances were taken into account in fixing the amount of increase and how an overall assessment was made. There has been progressive increase in the taxable turnover of the assessee and for the previous year he had shown the gross turnover at Rs. 3,06,894.31 as against Rs. 3,73,476.12 for the year in dispute. It cannot, therefore, be positively said, in the absence of any other material, that the assessee had concealed any income. No authority is needed for the proposition that the best judgment assessment cannot be arbitrary. Even best judgment assessment implies and imports a legal and judicial consideration and the assessing authority cannot just base the same on some suspicions without there being any material on which it could rely. The assessing authority has just mentioned a figure at Rs. 51,523.88 but if it had fixed the increase at Rs. one lakh or any other amount, there was nothing to stop it. We are, therefore, satisfied that in the circumstances of the present case there is no evidence on which reliance could be placed to add a sum of Rs. 51,523.88 to the turnover.”

The Hon'ble Apex Court in Dhakeswari Cotton Mills Ltd's case (supra) recorded as under:- Singh Gurbachan 2013.09.24 14:57 integrity of this document High Court Chandigarh -7- “In making an assessment under Section 23(3) of the Indian Income-tax Act, the Income-tax Officer is not fettered by technical rules of evidence and pleadings and he is entitled to act on material which may not be accepted as evidence in a court of law, but the Income-tax Officer is not entitled to make a pure guess and make an assessment without reference to any evidence or any material at all. There must be something more than bare suspicion to support the assessment under Section 23(3). The rule of law on this subject has been fairly and rightly stated by the Lahore High Court in the case of Seth Gurmukh Singh v. Commissioner of Income-Tax, Punjab (1994) (12 ITR 393).”

It is in the light of these principles that we have to consider whether the Assessing Officer, the CIT(A) and the Tribunal in the instant case followed the correct principles. It would be relevant to refer to certain observations made by the Assessing Officer in the assessment order while making the addition which are to the following effect:- “Since the nature of these expenses is such the element of inflated expenditure under this head cannot be ruled out.”

The CIT(A) had recorded as under:- “However, this fact also means that it is not possible to properly verify these expenses. Hence, it would be fair and reasonable to uphold Rs.50,000/- out of the disallowance of Rs.3,50,000/- and balance Singh Gurbachan 2013.09.24 14:57 integrity of this document High Court Chandigarh -8- Rs.3,00,000/- is deleted.”

The Tribunal while adjudicating the appeal had observed as under:- “However, considering that it cannot be ruled out that the assessee would have incurred some expenses under the aforesaid heads, we consider it reasonable to allow deduction of Rs.1,00,000/- in this regard to the assessee. The order of the CIT(A) stands modified to the extent that addition of Rs.2.50 lacs is upheld.”

From the above observations recorded by the Assessing Authority, the CIT(A) and the Tribunal, it emerges that all the three authorities had acted on surmises and guess work while sustaining the additions of different amounts. Further, the authorities were required to have some material to come to the conclusion that the addition was required in the case and not just because the case was selected for scrutiny that the addition was to be made. No justification having been pointed out by the learned counsel for the revenue, the addition of ` 2,50,000/- maintained by the Tribunal cannot be sustained.

Accordingly, the substantial questions of law are answered in favour of the assessee and against the revenue. As a result thereof, the appeals are allowed. (AJAY KUMAR MITTAL) JUDGE August 6, 2013