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Income Tax Appellate Tribunal, SURAT– BENCH ‘SURAT’
Before: SHRI RAJPAL YADAV & SHRI AMARJIT SINGH
IN THE INCOME TAX APPELLATE TRIBUNAL SURAT– BENCH ‘SURAT’
BEFORE SHRI RAJPAL YADAV, JUDICIAL MEMBER AND SHRI AMARJIT SINGH, ACCOUNTANT MEMBER ITA No.350/Ahd/2017 �नधा�रणवष�/Asstt. Year: 2014-15
DCIT, cent.Cir.3 Vs. Shri Mehul T. Desai Surat. (Prop. Of Yash Clinical Laboratory) U-11 to 13, Trade Centre Opp: SBI, Nanpura, Surat. PAN : ABWPD 2707 L
(Applicant) (Respondent)
Revenue by : Smt.Smitha V. Nair, Sr.DR Assessee by : Shri Rasesh Shah, CA सुनवाईक�तार�ख/Date of Hearing : 13/11/2018 घोषणाक�तार�ख/Date of Pronouncement: 13/12/2018 आदेश/O R D E R PER RAJPAL YADAV, JUDICIAL MEMBER: Revenue is in appeal before the Tribunal against order of the ld.CIT(A)-4, Surat dated 7.11.2016 passed for the Asstt.Year 2014-15.
Sole grievance of the Revenue is that the ld.CIT(A) has erred in deleting addition of Rs.2,07,41,751/- which was added by the AO on account of unaccounted income earned by the assessee by way of suppression of professional receipts.
Brief facts of the case are that search action under section 132 of the Income Tax Act was carried out in the case of medical professional group of Surat on 4.3.2014. M/s.Yash Clinical Laboratory is proprietorship concern of Dr.Mehul T. Desai. It was
ITA No.350/Ahd/2017 2 covered under survey action under section 133A of the Act. The assessee has filed its return of income on 23.10.2014 declaring total income at Rs.66,97,770/-. According to the AO, during the course of survey certain loose papers reflecting unaccounted receipts were found and impounded as Annexure A/1 to Annexure- A/6. These loose papers pertained to the period of 1.9.2013 to 3.3.2014 i.e. for six months. Sum total of these loose papers was worked out by the AO at Rs.1,62,77,798/-. According to the AO, the assessee failed to explain as to how these unaccounted receipts have been recorded in the regular books of accounts. On the basis of these evidences, pertaining for period of six months, he interpolated receipts for the whole year and worked out such unaccounted receipts at Rs.3,25,55,596/-. The AO thereafter observed that trial balance sheet from regular books of accounts, was drawn out and receipts for nine months have been shown by the assessee in the regular books at Rs.51,10,384/-. Figure of completed year-wise was worked out at Rs.65,13,845/-. The AO has given credit of this, plus Rs.50 lakhs declared by the assessee during the search. The balance of Rs.2,57,41,751/- has been added to the total income of the assessee as unexplained receipts.
Dissatisfied with this addition, the assessee carried the matter in appeal before the ld.C|IT(A). The ld.CIT(A) upheld the conclusion of the AO for working out unexplained receipts at Rs.2,12,91,706/-. The ld.CIT(A) however observed that once unaccounted income of the assessee has been estimated for the completed year on the basis of evidence found pertaining to six months period, then it would show that books of accounts maintained by the assessee were not reflecting true pictures and these books have to be rejected. Once the books are rejected,
ITA No.350/Ahd/2017 3 then profit earned by the assessee during the year has to be estimated. The ld.CIT(A) further observed that profit on these unaccounted receipts being estimated taking into consideration average profit of the assessee for the last five years, then extra income disclosed by the assessee at Rs.50 lakhs would take care of the profit earned by the assessee by way of these unaccounted receipts. Accordingly, the ld.CIT(A) deleted addition of Rs.2,12,91,706/- made by the AO. Dissatisfied with the order of the ld.CIT(A), Revenue is appeal before the Tribunal.
The ld.DR submitted that the ld.CIT(A) has erred in accepting the contentions of the assessee that only profit embedded in the unaccounted receipts deserves to be added. Once the assessee failed to produce evidence of expenditure alleged to have been incurred for earning these receipts, then gross receipts deserves to be added to the total income of the assessee. On the other hand, the ld.counsel for the assessee relied upon the order of the ld.CIT(A).
We have considered rival submissions and gone through the record carefully. Section 145 of the Income Tax Act is the relevant provision for this issue, therefore, it is pertinent to take note of this section. It reads as under :
“145. (1) Income chargeable under the head "Profits and gains of business or profession" or "Income from other sources" shall, subject to the provisions of sub-section (2), be computed in accordance with either cash or mercantile system of accounting regularly employed by the assessee.
(2) The Central Government may notify in the Official Gazette from time to time [accounting standards] to be followed by any class of assessees or in respect of any class of income.
ITA No.350/Ahd/2017 4
(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) [or accounting standards as notified under sub-section (2), have not been regularly followed by the assessee], the Assessing Officer may make an assessment in the manner provided in section 144.]”
A bare reading of Section 145 would reveal that it provide the mechanism how to compute the income of the Assessee. According to sub-section 1, the income chargeable under the head profit and gains of business or profession or income from other source shall be computed in accordance with the method of accountancy employed by an Assessee regularly, subject to sub-section 2 of Section 145 of the Act. Sub-section 2 provides that the Central Government may notify in the official gazette from time to time, the Accounting Standard required to be followed by any class of Assessee in respect of any class of income. Thus, it indicates that income has to be computed in accordance with the method of accountancy followed by an Assessee i.e. cash or mercantile, such method has to be followed keeping in view the Accounting Standard notified by the Central Government from time to time. Sub clause 3 provides a situation, that is, if the Assessing Officer is unable to deduce the true income. On the basis of method of accountancy followed by an Assessee than he can reject the book result and the assessee’s income according to his estimation or according to his best judgment. The Assessing Officer in that case is required to point out the defects in the accounts of Assessee and required to seek
ITA No.350/Ahd/2017 5 explanation of the Assessee qua those defects. If the assessee failed to explain the defects than on the basis of the book result, income cannot be determined and Assessing Officer would compute the income according to his estimation keeping in view the guiding factor for estimating such income.
In the light of the above, let us examine the facts of the present case. A perusal of the record would indicate that evidence exhibiting unrecorded receipts was found for the period starting from 1.9.2013 upto 3.3.2014. It means books of accounts maintained by the assessee were not depicting true picture. The income of the assessee on the basis of these books could not be determined. Book results deserve to be rejected. Books have been rejected and no one has challenged rejection of that books before the Tribunal. This finding has been accepted by the assessee as well as by the Revenue. Short question is that, after rejection of the books, whether gross receipt are to be treated as income of the assessee or only profit embedded in those receipts ? Once the ld.AO has worked out unaccounted receipts for the whole year on the basis of evidence found for the period of six months, then such working is based on an estimate and assumption, and in the same manner corresponding expenditure ought to be assumed and estimated, because no entity could earn gross receipts. This fold of dispute has been ignored by the AO on the ground that evidence was not submitted by the assessee exhibiting incurrence of expenditure. To our mind, this was not correct approach at the end of the AO. The ld.CIT(A) has appreciated the controversy in right perspective and in placing reliance upon the judgment of
ITA No.350/Ahd/2017 6 Hon’ble jurisdictional High Court. It is worth to take note of finding recorded by the ld.CIT(A). It reads as under:
“7. Having gone through the nature of seized documents, the final accounts, the assessment orders, the submissions and the decided law; the following pertinent observations and decisions are culled out:
a) The comparison of the transactions recorded on the registers etc. seized with the books of account and bills, clearly shows that the actual receipts are substantially more than that recorded in the regular books. - .
b) The total receipts worked by the AO are also disputed, and the appellant did not agree with the figures worked out. I have carefully gone through the seized register and the regular books. The following facts and observations are very relevant to the issue:
1) The receipts in the regular books are taken into different heads;
(i) Consulting fees (where fees received with respect to collection center like Me & Mummy etc. are recorded; the total of this amount recorded in the books of account for A.Y. 2014-15 is Rs. 38,84,048/-. The other receipts of the nature corresponding to fee income register Rs. 40,40,998/-.Out of these, payments received from Jeevanshaili in form of test fees, Rs. 21,79,420/- (Ledger polio 158) and in form of consultancy fee, Rs. 60,000/- (LF 157); consultancy fees received from Doctors Clinical Lab (LF 154) Rs. 5,76,750/- and testing fees received from Miraj Health Care (LF 163) Rs. 4,17,000/- do not form part of the Kachba Register of receipts in cash seized during the search. Therefore, out of Rs. 79,25,046/- (Rs. 38,84,048/- plus Rs. 40,40,998/-) only Rs. 46,91,876/-(Rs. 79,25,046/- minus Rs. 21,79,420/- minus 60,000/- minus Rs. 576750/- minus 4,17,000/-) could be set off against the receipts recorded in the Kachha Registers seized.
(ii) Fees register included in regular books are also reflected though party in the Kachha Registers seized and have to be given a set off In regular books fees register receipts Rs. 65,72,014/- are recorded.
(iii) I fully agree with the total receipts of the appellant worked out by the AO. She has correctly extrapolated the receipts found
ITA No.350/Ahd/2017 7 recorded for a period of 6 months to 1 year. The appellant had not reflected a huge amount of receipts in his books of accounts and therefore the accounts are not correct and complete. Therefore, these are liable to rejected 145(3) and the assessment is to be made to the best of judgment' applying provision of section 144. The extrapolation to complete year where record of last six months has been found and seized is fully justified. It cannot be said that suddenly the whole system was devised in the middle of the year. Reliance is placed on the decision of Hon'ble Andhra Pradesh High Court in the case of Rajnik & Co. 251 !TR 0561 and Hon'ble Supreme Court in the case of K. Y. Pillash & Sons 63 ITR 411. However, the total unaccounted receipts would have to be worked out subtracting the corresponding recorded receipts as discussed in points (i) and (ii) above. Therefore, the total, unrecorded receipts for the year is worked out at Rs. 2,12,91,706/- (Rs. 3,25,55,596/- minus Rs. 46,91,8767- minus Rs. 65,72,014/-).
c) The only issue which remains is the quantum of profits to be worked out on the basis of actual and suppressed receipts of the appellant's profession.
d) The Courts have time and again held that what is to be added is the profit embedded in the suppressed receipts, by way of the suppression and not the entire receipts. I agree with the appellant on this count. The following decisions of superior Courts are relied upon and taken guidance from:
1) Commissioner of Income Tax Vs. President industries (2002) 124 Taxman 654 (Gujarat High Court) ;
2) Commissioner of Income Tax Vs. Samir Synthetics Mills (2001) 326 ITR 410 (Gujarat High Court)
3) Commissioner of Income Tax Vs. Gurubachhan Singh (2008) 171 Taxman 406 (Gujarat High Court)
4) Commissioner of income Tax Vs. Balchand Ajit Kumar 135 Taxman 180 (Madhya Pradesh)
5) Kishor Mohnalal Telwala Vs. AC/T (1999)^7 foxmann.com 86 (Ahd)
The decision in the case of Sairam Multi Speciality Hospital Vs. ACIT, (2014) 40 CCH 0132 Hyd. Trib. which relates to similar, business also supports this view.
ITA No.350/Ahd/2017 8 The final accounts of past years and the ratio of receipts to the variable expenses (excluding the fixed or fully disclosed expenses like interest, depreciation, electricity bills etc.) would give a very good guidance to the actual profits on average additional receipts of the business and therefore; the suppression of profits which have been done by the appellant in the relevant previous year.
I have worked out the net profit on total receipts, for A.Y. 2009- 10 to 2013-14, excluding the following fixed or fully disclosed expenses like interest, depreciation, electricity bills etc.: -
1) Rent 2) Insurance charges 3) Electricity expense 4) Municipal and Professional tax 5) Financial charges & Vehicle loan and House loan interest expenses 6) Depreciation as per Income Tax Act 7) Telephone bill (Landline)
Therefore, the net profits for different years considering only the variable expenses is worked out as under:
Direct income A.Y2013-14 A.Y 2012-13 A.Y 2011-12 A.Y 2010-11 A.Y 2009-10 Total receipts 14,117,869 10,338355 9,472,351 7,341,923 6,370,621
Net profit as per books of 11.42 10.26 12.32 14.94 16.52 account Net Profit ratio after removing 14.49 13.83 16.18 19.42 21.69 fixed expenses
The average net profit excluding the fixed expenses works out at 17.12% and maximum net profit was 21.69% 5 years back and has shown a decreasing trend.
The appellant has disclosed additional 50 ac rupees in its return filed. The net profit of 50 lac on unrecorded-receipts for the year worked out at Rs. 2,12,91,706/-; gives a net profit rate of 23.48%. Therefore, the profits declared are held reasonable looking to the profit in the business even after reducing the fixed expense. Without prejudice to the above, even otherwise, if unrecorded receipts as worked out by the AO at Rs. 2,57,41,751 /- were considered the net profit rate on undeclared receipts comes to 19.42% which is much above the average of last 5 years and is reasonable considering the decreasing trend. I have already held that the actual profits and not the entire suppressed receipts are to be added. The profits declared on suppressed
ITA No.350/Ahd/2017 9 receipts (extrapolated for the whole year) at Rs. 50 lac are held reasonable and therefore, any further addition is uncalled for. The addition made is therefore, directed to be deleted. The ground of appeal is allowed.”
After going through the above well reasoned order of the ld.CIT(A), we do not find any error in the order of the ld.CIT(A). In view of the above discussion, the appeal of the Revenue is devoid of any merit. It is dismissed.
In the result, appeal of the Revenue is dismissed.
Order pronounced in the Court on 13th December, 2018.
Sd/- Sd/- (AMARJIT SINGH) (RAJPAL YADAV) ACCOUNTANT MEMBER JUDICIAL MEMBER