VIRUPAXAPPA SIDRAMAPPA BEMBALGI,BELAGAVI vs. INCOME TAX OFFICER, BELGAVU

We note that, the appellant partnership firm was engaged in wholesale & retail trading of gold, silver and other small jewellery items. The appellant’s total sales turnover for the year under consideration from said business was ₹2,26,41,526/- from which the appellant earned a gross profit of ₹54,63,881/- & net profit of ₹7,65,092/-. For purpose said trading business, the assessee maintained regular books of account as prescribed u/s 44AA of the Act and subjected them to audit u/s 44AB of the Act. With the former details the appellant filed NIL return of income after claiming a set- off of carried forward loss & deduction u/c VI-A of the Act etc. The case of the appellant was selected u/s 143(2) of the Act primarily to scrutinise impact of tax auditor’s ITAT-Panaji Page 3 of 18 M/s Virupakaxappa Sidramappa Bembalgi Vs ITO, Belgaum AY: 2017-18 comment/reporting made against ‘clause 13(e)’ of Form No 3CD i.e. Tax Audit Report [‘TAR’]. In the course of such scrutiny, after considering submission & explanations offered by the appellant, the Ld. AO rejected the appellant’s books, audited results and the returned income. While doing so the Ld. AO founded his rejection on twofold premises viz; (i) the assessee in addition to regular purchases from registered dealers [‘RD’ hereinafter] also had purchases from unregistered dealers [‘URD’ hereinafter], and details of such URD purchases brought on record were insufficient to prove their genuineness as they lacked entire details for their confirmation and (ii) the assessee failed to maintain item-wise stock of small jewellery items along-with stock of gold & silver etc., and details of stock so maintained & produced for verification in view of the Ld. AO were insufficient to effectively demonstrate quantitative corroboration of stock-items with the corresponding amount of total purchases vis-à-vis sales turnovers reported by the appellant firm. ITAT-Panaji Page 4 of 18 M/s Virupakaxappa Sidramappa Bembalgi Vs ITO, Belgaum AY: 2017-18 5. Having rejected the books on former twofold reasons; the Ld. AO proceeded to determine the taxable income with two options viz; Option-(A) addition of ₹1,65,61,814/- on account of 100% disallowance of (i) total URD purchases of ₹1,61,75,480/- and (ii) Labour charges paid for ornamentation ₹3,86,340/- or Option- (B) addition of ₹45,29,674/- on account of estimation of gross profit @40% of estimated ad-hoc sales/turnover of ₹250Lakhs. Since the first option(A) will result into profit of more than the turnover, the Ld. AO chose option (B) over (A) in assessing the total income of the appellant and culminated the assessment vide order dt. 13/11/2019 u/s 143(3) of the Act.

When matter climbed up in first appeal, the Ld. NFAC reconsidered the factual matrix and then countenanced the addition and assessment. While doing so the Ld. NFAC requoted the discrepancies noted by the Ld. AO in relation to URD purchases, discrepancies in stock records and turnover of sales & purchases etc.

Now first coming to provision of section 145 of the Act, which reads as under; 145 Method of accounting. (1) Income chargeable under the head "Profits and gains of business or profession" or "Income from other sources" shall, …………………………. (2) The Central Government may notify in the Official Gazette ……………. (3) Where the Assessing Officer is not satisfied about the correctness or completeness of the accounts of the assessee, or where the method of ITAT-Panaji Page 7 of 18 M/s Virupakaxappa Sidramappa Bembalgi Vs ITO, Belgaum AY: 2017-18 accounting provided in sub-section (1) has not been regularly followed by the assessee, or income has not been computed in accordance with the standards notified under sub-section (2), the Assessing Officer may make an assessment in the manner provided in section 144. (Emphasis supplied)

An austere reading of section 145(3) of the Act, envisages that there could be existence of three situations where assessing officer can resort to rejection of books of account of assessee. And one of such situations with which we are concerned in the present appeals is satisfaction of the Ld. AO about incorrectness or incompleteness of stock register, trading figure of gold & silver and the net results declared of business declared by the appellant assessee. The rejection on such ground however can only be triggered or considered when accounts are found substantially incorrect or incomplete, that is to say incorrectness or incompleteness of substantial accounts shall only form reasonable basis for rejection of books.

Largely based upon books of accounts the taxable income of assessee is determined, wherein the stock/inventory records undisputedly forms substantial ITAT-Panaji Page 8 of 18 M/s Virupakaxappa Sidramappa Bembalgi Vs ITO, Belgaum AY: 2017-18 part of books/accounts, hence in absence thereof any determination of income for taxation under the Act would be meaningless.

In present case, non-maintenance or non- production of product-wise and item-wise trading as well inventory records pertaining to silver & gold ornaments coupled with appellant’s failure to establish genuineness of URD purchases formed a basis in holding accounts as incorrect or incomplete, which in turn triggered rejection u/s 145(3) of the Act. Since the stock/inventory records/details forms significant part of accounts which severally capable of influencing the determination of total income of the appellant assessee hence the non- maintenance vis-à-vis non-production of such records so has to enable the tax authorities to deduce therefrom correct taxable income, in our considered view is capable of construing accounts of the appellant were substantially incomplete & incorrect, thus valid reason for rejection of books u/s 145(3) of the Act.

In view of former judicial precedents, we upheld the rejection of books owning to defects in ITAT-Panaji Page 10 of 18 M/s Virupakaxappa Sidramappa Bembalgi Vs ITO, Belgaum AY: 2017-18 inventory/stock records & appellant’s failure to establish the genuineness of URD purchases. The respective contention/question thus answered accordingly.

Now, once books of account are rejected, the Ld. AO in view of prescription contained in s/s (3) of section 145 of the Act was duty bound to make an assessment in the manner provided u/s 144 of the Act. The appellant on the other hand by second contention puts ice on the cake asserting that, since books of account of the assessee were rejected u/s 145(3) of the Act therefore the assessment was required to be framed u/s 144 of the Act. Contrary to the former provision, since in the present case the assessment is framed u/s 143(3) of the Act, therefore such assessment is bad in law.

The sanction for framing assessment to the best of judgement is provided in section 144 of the Act which reads as under; Best judgment assessment. 144. (1) If any person— (a) fails to make the return required under sub-section (1) of section 139 and has not made a return or a revised return under sub-section (4) or sub-section (5) of that section, or ITAT-Panaji Page 11 of 18 M/s Virupakaxappa Sidramappa Bembalgi Vs ITO, Belgaum AY: 2017-18 (b) fails to comply with all the terms of a notice issued under sub-section (1) of section 142 or fails to comply with a direction issued under sub-section (2A) of that section, or (c) having made a return, fails to comply with all the terms of a notice issued under sub-section (2) of section 143, the Assessing Officer, after taking into account all relevant material which the Assessing Officer has gathered, shall, after giving the assessee an opportunity of being heard, make the assessment of the total income or loss to the best of his judgment and determine the sum payable by the assessee on the basis of such assessment :

From the bare reading of aforestated provision it is intelligible that, the section predominantly coins with twofold facets viz; (i) authority or sanction for framing of assessment and (ii) manner of determination of income to the best of judgement. The s/s (1) of section 144 prescribes that where a person fails in terms of clause (a) or (b) or (c) as the case may be, the assessing officer is empowered to frame an assessment to best of his judgement and determine taxable income on the basis of material already gathered. That is to say, where income of assessee is determined owning to failure on the part ITAT-Panaji Page 12 of 18 M/s Virupakaxappa Sidramappa Bembalgi Vs ITO, Belgaum AY: 2017-18 of assessee to comply with either of the clauses of s/s (1), then assessing officer is bound to frame such assessment u/s 144 of the Act. Then comes with the manner of determination, which mandates for assessing officer to ‘take into consideration all relevant material gathered during such proceedings and to provide an opportunity of being heard to the assessee’ while arriving at total income/loss to the best of his judgement. The manner thus is of twofold prescription. Au contraire where the books of accounts of an assessee for reasons stated in s/s (1) & (2) of section 145 of the Act are rejected, upon such rejection the s/s (3) comes into play which mandates the assessing officer to determine the taxable in the manner provided u/s (1) of section 144 of the Act. Such direction of s/s (3) of section 145 of the Act do not in any way direct framing of assessment u/s 144 of the Act but the manner of determination of income to best of judgement on the basis of material already gathered on record but after the assessee is put to show cause notice[‘SCN’]. ITAT-Panaji Page 13 of 18 M/s Virupakaxappa Sidramappa Bembalgi Vs ITO, Belgaum AY: 2017-18 18. In view of the above discussion, in our considered view the appellant’s assertion of not framing the assessment u/s 144 of the Act when the books of the assessee are rejected u/s 145(3) is purely misconceived, baseless, therefore stands rejected.

Now coming to arbitrary estimation of sales and gross profit. We note that, after rejecting the books, the Ld. AO forthwith proceeded and for the purpose of determination of taxable income estimated sales/turnover @ 250Lakhs & gross profit @ 40% of such estimated sales/turnover. The said estimation prima- facie did fail to consider all the material already taken on record by him during the course of assessment proceedings which inter-alia consisted of (i) TAR (ii) Stock Records (iii) Bank Statements (iv) Purchase & Sales Registers etc. Further the records nowhere clearly deciphers that while resorting to such estimation vis-à- vis determination the appellant was put to show cause in terms of first proviso to section 144 of the Act. Thus ITAT-Panaji Page 14 of 18 M/s Virupakaxappa Sidramappa Bembalgi Vs ITO, Belgaum AY: 2017-18 while determining the income in the manner provided u/s 144 of the Act, the Ld. AO neither provided hearing to the appellant nor considered all essential & decisive material brought on record by the appellant during the course of assessment proceedings. The determination thus not only rendered erratic but also opposed to law.

A clear-cut distinction between Best Judgement assessment and in the manner provided u/s 144 of the Act is required to be understood while resorting to the provision of section 145(3) of the Act. It is well settled law that, in the case of Best Judgement assessment u/s 144 of the Act, the Assessing Officer exercising his jurisdiction cannot act arbitrarily or capriciously. The assessing officer must proceed on judicial considerations in the light of relevant material that may be brought on record by the assessee. Though such assessment would be based on some element of guess work but should clearly have nexus with material placed on records and should not been exercised arbitrarily or capriciously. In ITAT-Panaji Page 15 of 18 M/s Virupakaxappa Sidramappa Bembalgi Vs ITO, Belgaum AY: 2017-18 quoting so, a reliance can be placed on the Hon’ble Allahabad High Court’s decision in the case of CIT V/s. Surjeet Singh Mahesh Kumar [1994, 210 ITR 83]

In the present case, the appellant is engaged in precious metal business which by very nature is complex for the reason of involving intricate processes, high-value transactions with low margins, and a highly competitive market, demanding careful management of inventory, high volatility in pricing, and everchanging customer needs/experience, high risk of fluctuating cost etc. Admittedly, due to complex nature & high-volume transactions involved and insufficiency of inventory the audited books of account & financial results of the appellant were rejected. When such audited results are rejected, then the assessing officer not being an expert of accounts, having regard to complexity of business of the appellant was duty bound to invoke & direct a special audit u/s 142(2A) of the Act. The outcome of such direction could have to rightly enabled the Ld. AO in ITAT-Panaji Page 16 of 18 M/s Virupakaxappa Sidramappa Bembalgi Vs ITO, Belgaum AY: 2017-18 deducing taxable income in the manner & spirt provided u/s 144 of the Act. The ad-hoc determination of taxable income without such assistance from expert in the present case not only jostled ad-hoc & irrational estimations but led to farfetched determination. The said capricious determination of income since based upon ad- hoc estimation of sales/turnover and ad-hoc estimation of gross profit which in turn was devoid of all pivotal information & cogent material taken on records and without putting the appellant to notice is inconsonance with the provisions of section 144 of the Act.

Therefore respectfully following the former judicial precedents, we disapprove the estimations and resultant determination of income and for the reason deem it fit to remand the matter to the Ld. AO for fresh determination of income in accordance with law after complying with the provisions of section 142(2A) of the Act. The contention thus stands accepted and ground number 2 & 3 stands accordingly partly allowed.

The appeal in result allowed for statistical purposes in aforestated terms. In terms of rule 34 of ITAT Rules, 1963 the order pronounced in the open court on date mentioned herein before.