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Facts
The assessee, a travel agency and tour operator, filed a return declaring a loss for the assessment year 2018-19. The Assessing Officer (AO) rejected the books of accounts due to a failure to provide complete details and evidence for expenses, estimating total income at 8% of turnover.
Held
The Tribunal noted that the AO and CIT(A) arbitrarily rejected the books of accounts. While acknowledging the assessee's failure to provide complete evidence, the Tribunal considered it appropriate to estimate profit at 3% of turnover, setting aside the lower authorities' order. The AO was also directed to verify the eligibility of carry-forward losses.
Key Issues
Whether the rejection of books of accounts and estimation of income at 8% of turnover by the AO and CIT(A) was justified, and the eligibility of carry-forward losses.
Sections Cited
143(3), 144B, 44AB, 142(1), 145(3), 139(1)
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, ‘B’ BENCH, CHENNAI
Before: SHRI DUVVURU RL REDDY, HON’BLE & SHRI S.R. RAGHUNATHA, HON’BLE
PER S. R. RAGHUNATHA, ACCOUNTANT MEMBER:
This appeal by the assessee is filed against the order of the Commissioner of Income Tax (Appeals), National Faceless Appeal Centre (NFAC), Delhi, dated 13.08.2024 for the assessment year 2018-19.
:-2-: ITA. No:2381/Chny/2024 2. The assessee has raised the following grounds:-
1. Commissioner of appeals is not correct in confirming the order of the ITO passed u/s.143(3) r.w.s 144B of the 1.T.Act without giving sufficient opportunity to your petitioner to explain its case and to file the relevant details.
2. The CIT is not correct in confirming the order of ITO rejecting the books of accounts when your petitioner has been maintaining books of accounts according to the principles accepted by the accounting standards, duly audited every year regularly and your petitioner accounts were audited u/s.44AB of the IT Act and there is no deviation/change in the method of accounts.
3. The CIT is not correct in confirming the order of ITO arbitrarily rejecting the books of accounts, make best judgement assessment and apply a net profit rate/ratio without justifying the basis.
4. The CIT is not correct in confirming the order of the ITO exercising his power in invoking Sec.145(3) judiciously and not arbitrarily.
5. The CIT is not correct in not considering the fact that your petitioner's office was closed from 22nd March to November 2020 due to covid 19pandemic and due to the travel ban imposed by the Government of India, your petitioner has closed down its operation in Chennai and Bangalore branches and could not reply to the notices.
6. The CIT ought to have considered the financial statements and audit report filed u/s.44AB of the IT Act and the reconciliation statement filed between income offered in financial statement and 26A5 and all the expenses are duly supported by vouchers and ought not to have confirmed the order of the ITO rejecting the books of accounts and estimating the income based on turnover.
7. The CIT is not correct in rejecting your petitioner's claim of carried forward loss from the earlier asst years when it was clearly qualified and there is no need to claim separately in the return of income. As your petitioner has filed a return claiming loss only and there is no income to claim carry forward loss.
8. The CIT has not considered the extraordinary situation of COVID 19 and resulted lockdown and is not correct in comparing the expenses with last year and rejecting the books.
9. The CIT has not considered the fact that your petitioner has filed all the details called for and the ITO's contention that your petitioner has not filed the bills and vouchers is not correct.
:-3-: ITA. No:2381/Chny/2024 10.Confirming the order of the ITO by the CIT is against the principle of natural justice may be directed to be cancelled.
For the reasons stated above it is prayed that order passed by the ITO U/s.143 (3) read with 144B may be directed to be cancelled and consider the return filed by your petitioner and pass such an order as maybe found in accordance with law.
Brief facts of the case are that the assessee is a private limited company engaged in the business of travel agency and also as a tour operator. The assessee filed its return of income for the assessment year 2018-19 on 28.06.2018 declaring loss of Rs.1,06,69,074/-.The case was selected for scrutiny under CASS to examine the issue of sales turnover / receipts (turnover shown in ITR is substantially lower in comparison to turnover shown in GSTR 1 & 3B) and business expenses (low income compared to large commission receipts). Subsequently, the AO issued notices u/s.143(2) & 142(1) of the Act along with questionnaire. In response to said notices, the assessee had furnished only the profit & loss account and balance sheet before the AO. After considering the submissions, the AO observed that the assessee has failed to furnish the complete details and evidences from whom commission was earned and supporting documentary evidences for huge business expenses. Therefore, the AO noted that verification of claim of the assessee is not possible and the genuineness of :-4-: ITA. No:2381/Chny/2024 expenses debited in P&L account remains unsubstantiated and unexamined. Accordingly, the AO completed the assessment proceedings u/s.143(3) r.w.s. 144B of the Act on 03.09.2021 estimating the total income at 8% of total turnover of Rs.5,37,68,840/- amounting to Rs.43,01,507/-. Aggrieved, assessee filed appeal before the CIT(A).
3.1 The Ld.CIT(A) after examining the assessee’s submissions noted that to examine the genuineness of claim of expenses, bills and vouchers were necessary, which the assessee had failed to produce before the AO during the assessment proceedings and also before him during the appellate proceedings. Hence, the Ld.CIT(A) dismissed the appeal of assessee stating that there is no infirmity in the order of AO. Aggrieved, the assessee is in appeal before us.
The Ld.AR submitted that the assessee is a commission agent of travel business and earning very thin margin profit in commission and after considering the administrative expenses, the company is under loss from past years. Therefore, the assessee could not run the office properly and furnish the entire documents during the assessment proceedings as well as appellate proceedings. The ld. AR stated that the assessee has incurred losses during the :-5-: ITA. No:2381/Chny/2024 impugned assessment year and also previous and next financial years as detailed below : A.Y. 2017-18 Loss declared Rs. 16,02,557/- A.Y. 2018-19 Loss declared Rs.1,06,69,072/- A.Y. 2019-20 Loss declared Rs. 29,86,310/- In support of the above, the assessee filed the paper book of 57 pages consisting of Return of income and audit report u/s.44AB of the Act along with financial statements for the year ending 31.03.2018 & 31.03.2019.
4.1 The ld.AR stated that the assessee maintained proper books of accounts which were duly audited by the statutory auditors both under the Companies Act as well as the Income Tax Act. Further, the ld.AR submitted that both the AO as well as the ld.CIT(A) has arbitrarily made the addition by estimating net profit @ 8% of the Commission earned as income from business without appreciating the nature of business and the percentage of profits earned in the respective service sector. Therefore, ld.AR prayed for restricting the estimated profit to 1% of the turnover of commission shown as per the audited financials. Further, the ld.AR submitted that the assessee is eligible for set off of the losses carried forward from the earlier assessment years, wherein the assessee had filed the return
:-6-: ITA. No:2381/Chny/2024 of income within the due dates prescribed under the provisions of section 139(1) of the Act and prayed for allowing the same.
Per contra the ld.DR supported the orders of the lower authorities and stated that since the assessee has failed to furnish the supporting evidences for expenditure claimed in the profit and loss account. Therefore, the ld.DR prayed for confirming the order of the ld.CIT(A).
We have heard rival contentions and gone through facts and circumstances of the case. Admittedly, the assessee has filed return of income by declaring the net loss of Rs.1.06 Crores for the impugned assessment year by filing the audited financials along with the Tax audit report u/s.44AB of the Act. However, we note that the assessee has failed to submit the evidence in support of the expenditure claimed in the profit and loss account during the assessment and appellate proceedings. Hence, the AO has estimated the profit @ 8% of the Commission income shown in the profit & loss account by rejecting the books of accounts and brought to tax. The same has been confirmed by Ld.CIT(A), since the assessee has only submitted the written submission but not furnished any evidence in support of the expenses claimed.
:-7-: ITA. No:2381/Chny/2024 6.1 We note that the AO and ld.CIT(A) have rejected the books of accounts and estimated the net profit of the business @ 8% of the turnover arbitrarily. Further we find that the assessee had incurred loss in the earlier A.Y. 2017-18 and also next A.Y. 2019-20 apart from incurring the losses during the impugned assessment year. Therefore, to meet the ends of justice and reduce the litigation we consider it appropriate to estimate the profit @ 3% of the turnover of the assessee for the A.Y. 2018-19 by setting aside the order of the ld.CIT(A). In light of the above discussion, we direct the AO to restrict the estimation of profit to 3% of turnover, which works out to Rs.16,13,065/- (Being 3% of Rs.5,37,68,840/-) and recompute the income of the assessee.
6.2 In respect of the ground raised by the assessee for allowing the set off of the carry forward loss of the earlier assessment years, we direct the AO to verify the records, if the assessee has filed the respective assessment year’s return of income within the due dates prescribed under the Act and allow the same, if eligible in accordance with law.
:-8-: ITA. No:2381/Chny/2024
In the result, the appeal filed by the assessee is partly- allowed.
Order pronounced in the open court on 28th March, 2025 at Chennai.