M/S ANZ REALITY PVT. LTD.,JAIPUR vs. ACIT, CIRCLE-5, JAIPUR

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ITA 661/JPR/2015Status: DisposedITAT Jaipur24 July 2017AY 2009-108 pages
AI SummaryPartly Allowed

What did the Tribunal hold?

The Tribunal held that while the rejection of books of accounts was justified, the estimation of net profit rate should be based on the average of the past five years. The variation of 0.08% from the declared rate was considered minor and ignorable, directing deletion of the addition.

What were the facts?

The assessee, engaged in civil construction, declared income with a net profit rate of 5.56%. The Assessing Officer rejected the books of accounts and made a trading addition by estimating a higher net profit rate. The CIT(A) upheld the rejection and enhanced the addition by applying a still higher net profit rate.

What were the issues?

Whether the rejection of books of accounts was justified and whether the net profit rate estimation by the authorities was appropriate.

Which sections of the Income-tax Act were involved?

Section 145(3)

AI-generated summary — verify with the full judgment below

Income Tax Appellate Tribunal, JAIPUR BENCHES, JAIPUR

Before: SHRI KUL BHARAT, JM & SHRI VIKRAM SINGH YADAV, AM vk;dj vihy la-@ITA No. 661/JP/2015

Hearing: 12/07/2017

PER:SHRI VIKRAM SINGH YADAV, A.M.

This is an appeal filed by the assessee against the order of Ld. CIT(A)- 02, Jaipur dated 18.05.2015 wherein the assessee has taken following grounds of appeal:

“1. (a) In the facts and circumstances of the case and in law the ld. CIT(A) has erred in confirming the action of the ld. AO in rejecting the books of accounts by invoking the provisions of section 145(3) of the I.T. Act, 1961 and thereafter estimating the net profit (before interest and depreciation) @ 6.52% against the declared net profit rate of 5.56% and assessed net profit rate of @ 6.06% resulting into confirmation trading addition of Rs. 6,17,973/- and enhancement of addition of Rs. 5,56,671/-. The action of ld. CIT(A) is illegal, unjustified, arbitrary and against the facts of the case. Relief may please be granted by quashing the rejection of books of accounts and deleting the Sh. ANZ Realty Pvt. Ltd., Jaipur Vs ACIT, Circle-5, Jaipur trading addition of Rs. 6,17,973 and quashing the enhancement of Rs. 5,65,671/-.

(b) In the facts and circumstances of the case and in law, the ld. CIT(A) has erred in enhancing the income without following the prescribed law and affording the opportunity to the assessee appellant. The action of ld. CIT(A) is illegal. Relief may please be granted by quashing the enhancement.”

2.

Briefly the facts of the case are that the assessee engaged in the business of civil construction filed its return of income declaring income of Rs. 57,20,690/-. The Assessing Officer rejected the books of accounts u/s 145(3) of the Act and thereafter, made a tradition addition of Rs. 6,17,973/- by applying the NP rate of 5.31% (after interest and depreciation) as against the declared net profit of 4.81% (after interest and depreciation).

3.

Being aggrieved the assessee carried the matter in appeal before ld. CIT(A) who upheld the rejection of books of accounts by placing reliance on assessee’s own case wherein the Tribunal has upheld the rejection of books of accounts and thereafter, applied NP rate of 6.52% subject to interest and depreciation. The findings of ld CIT(A) are reproduced as under:

“2.4.1 In this year, the assessee has disclosed a net profit rate of 4.81% which translates into a net profit rate before depreciation and interest of 5.56%. The Assessing Officer has estimated the NP rate at 5.31% (in line with the net profit rate after the addition made in the order u/s 143(3) for A.Y. 2008-09) and made a trading addition of Rs. 6,17,973/-. The appellant has stated that in the preceding years, the ITAT has sustained a net profit rate before depreciation and interest of 5% in A.Y. 2004-05, 5.45% in A.Y. 2005- 06 & 2006-07. It has been stated that in this year, the declared net profit rate before depreciation and interest is higher than the rate which has been sustained by the ITAT in the preceding years.

2.4.

2 In the preceding year A.Y. 2008-09, the assessee has disclosed a net profit rate before interest and depreciation of 6.52%. The appellant has not furnished reasons for decline in this net profit rate before interest and depreciation from 6.52% in the preceding year to 5.56% in this year. In view of the above discussion, the past history of the appellant, the orders of the ITAT in the preceding years, the net profit before interest and depreciation for this year is estimated at the same rate of 6.52%, as in A.Y. 2008-09. Therefore, the trading addition is restricted accordingly. The above ground is partly allowed.”

4.

Being aggrieved the assessee is in appeal before us.

5.

During the course of hearing, the ld. AR submitted that in the year under consideration, the assessee has declared NP rate of 5.56% and, therefore, the assessee’s declared NP rate is better than the NP rate upheld by Hon’ble ITAT before depreciation and interest which is 5.45% in A.Y. 2005- 06 and 2006-07. It was further submitted that rejection of books of accounts does not mandate the trading additions to be made. Reliance is placed on the decision of Hon’ble ITR 243 (Raj.) wherein it was held as under:

“notwithstanding rejection of books of account, the material disclosed by the assessee along with other material that may be collected by the ITO forms the basis of computation of income. On that basis what conclusion is to be reached is independent of results shown in the books of account, if any, maintained by the assessee. Section 145 only provides the basis on which computation of income is to be made for the purpose of determining the amount of tax payable by an assessee. The provision by itself does not deal with additions or deletions in the income.”

It was further submitted that for AY 2008-09, ld. CIT(A) vide order dated 25.05.2015 (Appeal No. 528/11-12) has deleted the ad-hoc trading addition of Rs. 10,00,000/- and upheld the declared results in spite of confirming the rejection of books.

Further, reliance is placed on the decision of Hon’ble Rajasthan High Court in the case of Kansara Bearing Pvt. Ltd. Vs. ACIT (270 ITR 235), wherein it was held that assessee’s own history is the best guide for application of profit rate.

It was further submitted that it is not practically justified to expect from the assessee to declare uniform rate of NP year after year. Thus, ld. CIT(A) has erred in enhancing the income by applying the NP rate of A.Y. 2008-09 of 6.52% (subject to depreciation and interest), in the relevant year as against the NP rate of 5.56% declared. In this regard, it is submitted that although it is a well established that assessee’s own history is the best guide for application of profit rate, however, the NP rate for the immediately preceding year per se cannot be the mirror image of the NP rate of the next year. The fact of significant increase in turnover from 960.23 lakhs to 1235.99 lakhs needs consideration for applying the NP rate.

It was further submitted that while upholding the rejection of books ld. CIT(A) has placed reliance on the orders of Hon’ble ITAT in assessee’s own case, however, while applying the NP rate he has very conveniently and without assigning any reason has ignored the same orders of Hon’ble ITAT in assessee’s own case where rate of NP rate of 5.45% subject to depreciation and interest was upheld as against which ld. CIT(A) has applied NP rate of 6.56%. While allowing the appeal of the assessee the same ld. CIT(A) relied upon the decision of the Hon’ble ITAT in assessee’s own case for AYs. 2005-

06.

However, same ld. CIT(A) while deciding the appeal of the assessee for AY 2009-10 has not followed the same judgments of Hon’ble ITAT.

It was further submitted that the ld. CIT(A) compared the past history of the assessee without adjusting it with reference to the facts of the year under consideration which are as under: - Turnover has increased from 960.23 lakhs to 1235.99 lakhs in the relevant year as compared to A.Y. 2008-09. Thus, there is increase of 275.76 lakhs i.e. 28.72 % - Gross profit has increased in absolute terms from 92.42 lakhs to 115.44 lakhs in the relevant year as compared to A.Y. 2008-09. Thus, there is increase of Rs. 23.02 lakhs, which is 24.91%. - Net profit has also increased from 40.96 lakhs to 59.45 lakhs in the relevant year as compared to A.Y. 2008-09. Thus, there is increase of Rs. 18.49 lakhs, which is 45.14%. - Assessee is engaged construction of school buildings for charitable societies and trusts and, therefore, to achieve the high turnover, construction was done at a very competitive market rate. - The market was volatile, it was very difficult to achieve the sales turnover while maintaining the GP rate and NP rate.

If the two years wrongly compared by the ld. CIT(A), i.e. A.Y. 2008-09 and the relevant year, are adjusted so as to make them comparable, it will be seen that the NP rate declared by the assessee company i.e. 5.56% (subject to depreciation and interest) is apt and, therefore, the same should be accepted.

Without prejudice to above, attention is drawn towards Section 251(2) of the Income Tax Act 1961 which reads as under:

“Section 251: Powers of Commissioner (Appeals) (1)........ (2) The Commissioner (Appeals) shall not be enhance an assessment or a penalty or reduce the amount of refund unless the appellant has held a reasonable opportunity of showing cause against such enhancement or reduction.”

In the present case the enhancement was made without giving the show cause notice to the assessee. Thus, in view of above legal position, the assessee company was deprived of an opportunity of being heard, therefore, the enhancement of Rs. 5,65,671 deserves to be deleted on this legal ground as well. We have already submitted that entire addition over and above the declared results deserve to be deleted on merits based on past history of the assessee emerging from the orders of Hon’ble ITAT. In view of above, addition made by ld. AO and enhancement made by ld. CIT(A) deserve to be deleted.

6.

The ld DR is heard who has relied on the order of the lower authorities and submitted that the powers of ld CIT(A) are co-terminus with that of the AO and there is no infirmity in his order enhancing the trading addition in the hands of the assessee.

7.

We have heard the rival contentions and perused the material available on record. Firstly, it is not in dispute that the books of accounts have been rejected. No arguments have been raised by the ld AR regarding rejection of books of accounts and he fairly conceded on this account. Hence, the ground no 1(a) so far it relates to rejection of books of account is dismissed. Now, coming to estimation of N.P rate, the AO has compared and estimated the N.P rate (after interest and depreciation) @ 5.31% as against 4.81% following the assessment order for immediately preceding AY 2008-09. The ld CIT(A) has 6 Sh. ANZ Realty Pvt. Ltd., Jaipur Vs ACIT, Circle-5, Jaipur also followed the assessment order for immediately preceding AY 2008-09 and however, he compared the net profit before interest and depreciation and then applied 6.52% as against 5.56% offered by the assessee. In our view, the principle of averages taking into consideration last five years (past history) is clearly a more robust and fair estimation of determining the net profits for the year under consideration. The said principle of average has been determined by the Hon’ble Rajasthan High Court and is thus clearly binding and applicable in the instant case. In the instant case, we find that average of past five years of N.P rate (subject to interest and depreciation) comes to 5.64% as against 5.56% (subject to interest and depreciation) offered by the assessee in its return of income, resulting in a variation of 0.08%. The said minor variation can be ignored given the increase in turnover and other business exigencies. The AO is accordingly directed to delete the whole of the trading addition including the addition enhanced by the ld CIT(A). In view of the same, we don’t think its necessary to examine the legality of powers of enhancement of income of the ld CIT(A) without providing an opportunity and per contra, the contention of the ld DR regarding the co-terminus powers of the ld CIT(A). Hence, ground no. 1(a) of the assessee’s appeal is partly allowed and ground no. 1(b) is dismissed as infructious.

In the result, the appeal of the assessee is partly allowed.

Order pronounced in the open court on 24/07/2017. ¼dqy Hkkjr ½ ¼foØe flag ;kno½ (Kul Bharat) (Vikram Singh Yadav) U;kf;d lnL;@Judicial Member ys[kk lnL;@Accountant Member

Jaipur Dated:- 24/07/2017 *Ganesh आदेश की प्रतिलिपि अग्रेषित@ब्वचल वf जीम वतकमत वितूंतकमक जवरू vihykFkhZ@The Appellant- M/s ANZ Realty Pvt. Ltd., Jaipur 1. izR;FkhZ@The Respondent- ACIT, Circle-5, Jaipur 2. vk;dj vk;qDr@CIT 3. vk;dj vk;qDr¼vihy½@The CIT(A) 4. विभागीय प्रतिनिधि] आयकर अपीलीय अधिकरण] जयपुर@क्त्ए प्ज्Aज्ए Jंपचनत 5. xkMZ QkbZy@Guard File (ITA No. 661/JP/2015) 6. vkns'kkuqlkj@ By order, सहायक पंजीकार@ Aेेपेजंदज. त्महपेजतंत.

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