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Facts
The assessee company did not file its income tax return for AY 2010-11. Information from tax authorities revealed significant turnover (Rs. 4,87,50,347) from various sources with TDS deducted, leading the AO to believe income had escaped assessment and initiate reassessment proceedings u/s 148, assuming a 10% net profit. The assessee subsequently filed a return declaring income, but challenged the validity of the reassessment and the disallowance of costs and other business expenses by the lower authorities.
Held
The Tribunal upheld the validity of the reassessment proceedings (Grounds 1, 2, 3), ruling that the AO had 'reason to believe' and not merely 'reason to suspect' based on the assessee's non-filing of return and substantial undeclared revenue, even with an assumed profit margin for quantification. However, regarding the disallowance of cost of sales and other expenses (Grounds 4 & 5), the Tribunal noted that evidence, including bank statements, was not properly examined by the AO or CIT(A). Thus, these issues were restored to the AO for a de novo assessment, granting the assessee a fresh opportunity to present evidence.
Key Issues
Validity of reassessment proceedings initiated u/s 147/148 based on an assumed net profit, and the disallowance of cost of sales and other business expenses.
Sections Cited
Section 139(1), Section 147, Section 148, Section 143(2), Section 151(1), Section 288A, Section 288B, Section 32
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, DELHI BENCH, ‘H’: NEW DELHI
Before: SHRI CHALLA NAGENDRA PRASAD & SHRI BRAJESH KUMAR SINGH
per law, the same is also not acceptable as the estimation of 10% of the gross receipts made by the AO was for the purpose of quantification of the escaped income and even though the word used by the AO is ‘assuming’ but in the given facts of the case, it cannot be said to be an unreasonable assumption. The AO was conscious of the fact that in this case, the assessee company had not filed its return of income and there was an escapement of turnover amounting to Rs.4,87,50,347/-, the profit of which he wanted to assess, for which an assumption of 10% of the escaped turnover amounting to Rs.4,87,50,347/- was made by him in the reasons recorded and it did not mean that the AO only wanted to assess 10% of the escaped turnover as contended by the assessee. Therefore, the contention of the assessee company in ground no.1, 2 and 3 challenging the reopening of the assessment and the AO having not made addition of his 10% NP, for which, he invoked 147, while making other additions are not accepted and the same are rejected. Ground nos.1, 2 and 3 of the appeal are dismissed.
Ground no.4 and 5 of the appeal are reproduced again for ready reference:-
Without prejudice, The Ld. CIT(A) erred in facts, circumstances of the case and in law in denying the cost of sales offered in computation of income after accepting sales in same computation of income.
The Ld. CIT(A) erred in facts, circumstances of the case and in law in denying expenses of the nature of interest & depreciation stating assessee did not earn business income after accepting sales as business income”.
9.1. In this regard, the submissions of the assessee vide letter dated 19.02.2019 (page 25 and 26 of the paper book), which was reiterated before us, are reproduced as under:-
“Ground 4: Without Prejudice, above- Not allowing costs attributable to additional sales offered in ROI and accepted in assessment: Though the appellant had not credited sales and debited corresponding costs in the P&L account, it offered the sales and claimed costs attributed to the sales in return of income. It is an admitted fact that one cannot have sales without costs. The AO Accepted the sales but did not give benefit of costs due to a typographical initially committed by appellant about the costs - Used the term Bad debts instead of costs - Later it was also clarified and also shown that no bad debts have been claimed. Despite AO seeing that what is claimed is only the costs attributable to sales (break up of costs were also provided), and that no bad debts have been claimed, he holding on to the erroneous terminology used by the appellant, denied deduction of costs of sales from sales. If the stand of AO is given credence, then, it would lead to a situation where assesee is expected to make 100% NP .
Ground 5: Disallowance of entire expenses debited to P&l Account: The AO disallowed entire expenses debited to P&L Account except depreciation, stating that expenses claimed by assesee company cannot be allowed in the absence of any business income. This assertion of the AO is factually incorrect as in the Return of Income, the assesee had indeed offered business income of 67.45 lacs. The schedule to the Profit & Loss Account furnished to AO gave full break up of these expenses. He never ever raised any question on these nor issued any show cause notice before making addition. Since the addition has been made on a factually incorrect observation that no business income has been offered, kindly direct deletion of these additions.”
9.2. The assessee company relied upon the computation of income (page no.8 and 9 of the paper book), which is reproduced as under:-
9.3. It is contended by the AR that an amount of Rs.2,61,20,575/- was not allowed by the AO on the ground that the AO held it to be a bad debts, whereas, the assessee company submitted that it was a typographical error and that the amount of Rs.2,61,20,575/- was the cost incurred in realizing the sales. Further, the AO did not allow the expenditure under the head ‘other expenses’ amounting to Rs.10,54,712/- on the ground that these expenses cannot be allowed in the absence of any business income, whereas, the assessee submits that it had offered business income amounting to Rs.67.45 lakhs and the schedule to the profit & loss account furnished to the AO gave full break- up of these expenses. The AR further submitted that the AO never ever raised any question on these nor issued any show-cause notice before making the addition. It was further submitted that since the addition has been made on a factually incorrect observation that no business income has been offered, the addition may be deleted.
Before the ld. CIT(A), the assessee gave the following break up of expenditure of Rs.2,61,20,575/- as under:-
(i) cost of stock in hand – Rs.1,24,32,322/-
(ii) Payment to Asian Power Controls Ltd. -Rs.1,36,88,253/- 10.1. However, the learned CIT(A) rejected the claim on the ground that the assessee did not furnish any invoices, bills, vouchers, payments details pertaining to the expenses incurred. The learned CIT(A) also observed that if the cost included stock value, then why the balance-sheet and profit & loss account shows the closing stock at Rs.1,24,32,322/-.
He also noted that the same stock cannot be stated to be consumed on one hand and on the other hand cannot be stated to be still lying. With regard to the expenditure of Rs.1,36,88,253/- being amount paid to M/s Asian Power Controls Ltd., the learned CIT(A) held that the assessee did not furnish any invoices, bills, vouchers, payments details pertaining to the expenses incurred to show that payment was genuinely made and it was an expenditure. Regarding the expenses of Rs.10,23,375/- in P & L Account (mentioned wrongly as Rs.10,54,712/- in the assessment order), the learned CIT(A) held that the assessee failed to produce the documentary evidence and proof of expenses claimed and other expenses claimed in P & L Account and hence rejected the claim of the assessee.
Against the above order, the assessee is in appeal before us.
The ld. Counsel for the assessee reiterated its submissions as before the ld. CIT(A)
11. The learned DR relied upon the orders of the authorities below.
We have considered the submissions of the assessee company and the facts of the case. There is a merit in the contention of the assessee company that the amount of Rs.2,61,20,575/-which was claimed to be the cost incurred in respect of sales receipts and not bad debts, was never examined by the AO on the ground that the assessee was not clear itself in claiming the deduction even though the assessee company claimed before the appellate proceedings that the break up of the cost were provided to the AO and it was also asserted by the assessee company that no bad debts have been claimed. The contention of the assessee that if the stand of the AO is given credence, then it would lead to a situation, where assessee is expected to make 100% net profit needs verification.
The learned CIT(A) rejected the claim on the ground that no evidence of the expenses claimed regarding the opening stock of Rs.1,24,32,322/- was furnished as well as no details of payments of Rs.1,36,88,253/- being amount paid to M/s Asian Power Controls Ltd. was furnished. However, on perusal of the bank statements, as appearing on pages No.16 to 24 of the paper book, which was also filed before the AO, it is seen that on page no.18 of the paper book that the following transfers have been made to M/s Asian Power Controls Ltd.
(i) 08.01.2010-Rs.8,50,055/- (ii) 11.01.2010-Rs.65,00,055/- (iii) 19.01.2010-Rs.45,00,055/- Total:-Rs.1,18,50,165/-
Thus, it is seen that out of the expenses claimed amounting to Rs.1,36,88,253 paid to M/s Asian Power Controls Ltd., evidence at least to the extent of Rs. 1,18,50,165/-/- is appearing in the account of the assessee company which was neither examined by the AO or the learned CIT(A). Further, there are various other debits in the bank account of the assessee, which also not examined by them. The assessee company submitted before us that the details of the expenses claimed are available with them and it was also submitted before the AO as well as the Ld. CIT(A), which was not examined by them. Further, it is also to be noted that the main promotor was suffering from cancer during that year which ultimately lead to his demise in 2015. Therefore, in the interest of justice, the assessee company deserves one more chance to explain the facts properly before the AO on the merits of the addition/disallowances made in the assessment order. Thus, keeping in view totality of facts and circumstances of the case and in the interest of justice, we restore this issue to the file of the AO for de novo assessment. Needless to say that the assessee be given reasonable opportunity of being heard. Therefore, ground nos. 4 & 5 are set-aside to the file of the AO for de novo assessment.
In the result, the appeal of the assessee is partly allowed for statistical purpose.
Order pronounced in the open court on 8th May, 2024.