SRI. PATIL KADPAKAL GARJAN,,SHIMOGA vs. ADDITIONAL COMMISSIONER OF INCOME TAX, SHIMOGA

Per Shri Vijay Pal Rao, J.M. : This appeal by the assessee is directed against the order dt.31.01.2017 of

Commissioner of Income Tax (Appeals) for the Assessment Year 2009-10.

2 ITA No.874/Bang/2017

30.09.2009 admitting total income of Rs.17,40,960. The Assessing Officer in the

course of scrutiny assessment noted that the assessee has declared net profit

@ 5% on the gross receipt of Rs.3,58,15,566. However the bank account of the

assessee has reflected the total receipt of Rs1.22 Crores therefore the Assessing

Officer asked the assessee to explain the discrepancy in the total receipt as

declared by the assessee in the return of income at Rs.3.58 Crores and receipts

3 ITA No.874/Bang/2017 shown at bank account at Rs.1.22 Crores. The assessee explained that the two

bank pass books of accounts and other vouchers were lost for which the

assessee has already registered a FIR, copy of which was submitted before the

Assessing Officer. Further the assessee pointed out that the two other

accounts, one in Dena Bank and the other in State Bank of Mysore, Bhadravathi

were not reported by the Auditor in the earlier audit report that is the reason

for total receipt in one bank account was reflected at Rs.1.22 Crores. Thus the

assessee filed a revised profit and loss account and explained that the total

turnover of the assessee is matching with the total receipts as reflected in all

the three bank accounts. The assessee has also agreed for estimation of

income @ 12.5% on gross receipts. However it was requested not to initiate

any penalty proceedings as he is agreeing to these additions under unavoidable

circumstances. The Assessing Officer accordingly framed the assessment by

making the addition on estimated income @ 12.5% on the total turnover

including closing stock of Rs.2,45,500, which comes to Rs.3.60 Crores. The

Assessing Officer has also stated in the assessment order that since the

assesseehas furnished inaccurate particulars of income and agreed for certain

disallowances therefore penalty proceedings under Section 271(1)(c) of the

Income Tax Act, 1961 (in short 'the Act') is initiated separately. The assessee

4 ITA No.874/Bang/2017 challenged the action of the Assessing Officer before the CIT (Appeals) and

submitted that the assessee agreed to the addition on estimation of income at

12.5% with the condition that the Assessing Officer not to initiate the penalty

proceedings under Section 271(1)(c) of the Act. Thus the assessee asserted

before the CIT (Appeals) that the estimation of income should not be more

than 8% as it is provided under Section 44AD of the Act. It was contended that

the income @ 12.5% is highly excessive which is not possible in the business of

the assessee. The CIT (Appeals) dismissed the appeal of the assessee on the

ground that when the assessment was framed on the consent of the assessee

then the assessee has no right to challenge the assessment order.

assessee has submitted that the assessee agreed to the assessment of income

on estimate basis subject to the condition that the Assessing Officer shall not

initiate penalty proceedings under Section 271(1)(c) of the Act. He has further

contended that the assessee never concealed income even though there were

some mistakes in making the entries in accounts. The Assessing Officer while

completing the assessment had not found any concealment of income by the

assessee in the return of income filed. The assessee was under Bona Fide belief

that the penalty proceedings initiated by the Assessing Officer will be dropped

5 ITA No.874/Bang/2017 as the assessee had not concealed any income and also for the reason that the

assessee had co-operated in the matter of completion of assessment and paid

the taxes. However the Assessing Officer initiated the penalty and levied the

penalty under Section 271(1)(c) of the Act. Therefore the consent given by the

assessee for estimation of income @ 12.5% cannot be applied as an estoppel

against the assessee to challenge the assessment order. In support of his

contention, he has relied upon the decision of the Hon'ble jurisdictional High

Court in the case of Bhandari Metals & Alloys (P) Ltd. Vs. State of Karnataka

reported in 136 STC 292 and submitted that the Hon'ble High Court has held

that if the assessee makes a mistake in submitting a return to assess the tax

before the assessing authority he has not estoppled or precluded by any law

from preferring an appeal and showing to the appellate authority that the sales

are in fact not exigible to tax. In case such contention is taken, the appellate

authority is under the duty to examine the matter and determine the question

whether or not the sales are not exigible to tax. Thus the Hon'ble High Court

has held that there is no question of invoking the doctrine of estoppels. Hence

the learned Authorised Representative of the assessee has contended that the

consent of the assessee for assessment of income on estimate basis was

subject to the condition which was not accepted by the Assessing Officer then

6 ITA No.874/Bang/2017 the said consent cannot be operated as Doctrine of estoppel for challenging

the order before the appellate authority. He has further contended that

Section 44A provides the estimation of income @ 8% in the cases where the

turnover of the assessee is less than Rs.40 lakhs for the year under

consideration however the said provision also provides a guidance for

estimation of income in other cases where the turnover is more than the limit

provided under the said section.

submitted that once the assessee himself has agreed to the addition on

estimate basis of income @ 12.5% of the gross receipts then the assessee

cannot challenge the said addition made by the Assessing Officer before te

appellate authority. He has further submitted that the provisions of Section

44AD are not applicable in the case of the assessee because the turnover of

the assessee is more than Rs.2.60 Crores and the said provision is applicable

only to the assessee whose turnover is not more than Rs.40 lakhs. He has

relied upon the orders of the authorities below.

record. There is no dispute that during the course of assessment proceedings,

the Assessing Officer noted certain discrepancies in the gross receipts declared

7 ITA No.874/Bang/2017 by the assessee in the return of income at Rs.3,58,15,566 as aginst the receipts

reflected in the bank account of Rs.1.22 Crores. Thereafter the assessee filed

the relevant record and explained that the discrepancy in the audit report was

due to non-declaration of two other bank accounts of the assessee – one in

Dena Bank, Shimoga and other in State Bank of Mysore, Bhadravati. It is

pertinent to note that even after considering the receipts reported in all the

three bank accounts of the assessee, the gross receipts as declared by the

assessee in the original return of income was found to be correct. Therefore

the only discrepancy was that two bank account receipts were not declared in

audit report however, the receipts in those bank accounts were duly declared

by the assessee the return of income. The Assessing Officer accepted the

gross receipts declared by the assessee except the relevant vouchers and books

of accounts were not produced by the assessee being lost and an FIR registered

with the Police in this respect was produced by the assessee before the

Assessing Officer. The Assessing Officer was not satisfied with the income

declared by the assessee at 5% of the turnover and therefore in response the

assessee filed a letter dt.7.12.2011 the relevant portion of which has been

reproduced by the Assessing Officer at pages 2 & 3 as under :

8 ITA No.874/Bang/2017

of gross receipts of Rs.3,58,15,566 subject to the request that penalty

proceedings under Section 271(1)(c) of the Act should not be initiated. The

Assessing Officer accepted the said request of the assessee and accordingly

9 ITA No.874/Bang/2017 framed the assessment however in the assessment order itself the Assessing

Officer has initiated the penalty proceedings in para 5 as under :

“5. Penalty Proceedings u/s. 271(1)(c) : Since the assessee has furnished inaccurate particulars for the A.Y. 2009-10 and agreed for certain disallowances out of purchases and expenses, penal proceedings u/s.271(1)(c) is initiated separately.”

There is no quarrel that the consent of the assessee regarding the estimation of

income would not restrict the jurisdiction of the Assessing Officer to frame the

assessment on the basis of best judgement. However if the Assessing Officer

has accepted the consent of the assessee then such statement of the assessee

has to be considered as a whole and not selective. It is manifest from the letter

reproduced by the Assessing Officer that the assessee has agreed to the adhoc

estimation of income subject to the condition that the Assessing Officer not to

initiate any penalty proceedings. The Assessing Officer accepted only one part

of the consent of the assessee being adhoc estimation of income but has not

accepted the request for not initiating the penalty proceedings. There is no

dispute that the Assessing Officer is not bound by the said request made by the

assessee for not initiating the penalty proceedings and therefore it was well

within the jurisdiction of the Assessing Officer to initiate the penalty

proceedings. However the levy of penalty is always subject to the explanation

and all other relevant factors and circumstances under which the addition was

10 ITA No.874/Bang/2017 made by the Assessing Officer. Once the Assessing Officer is not bound by the

consent of the assessee then on the similar analogy the assessee is also not

bound by one part of the consent when the other part of the consent was not

accepted by the Assessing Officer. Thus when the Assessing Officer has not

accepted the consent of the assessee in toto then the said consent cannot be

applied as a Doctrine of estoppels against the assessee and the assessee has a

legal right to challenge the assessment order before the appellate authority.

The CIT (Appeals) has not gone into the merits of the assessee’s case and

dismissed the appeal of the assessee on the ground that the assessment was

framed on the consented addition. The Hon'ble jurisdictional High Court in the

case of Bandari Metal & Alloys Vs. State of Karnataka (supra) has held in paras

12 to 14 as under :

“ 12. The appellant does not dispute the fact that it had voluntarily filed a return offering the value of non-ferrous metal scrap brought by it into the local area to entry tax or that it had paid the entry tax on the said value or that the assessing authority had accepted the said return and passed the assessment orders. But the question is whether the said action on the part of the appellant bars the appellant from challenging the order of assessment in appeal when once it realises that the goods in question were exempt from tax. 13. The question is covered by the decision of a Division Bench of this Court in NARASOPALLI OIL MILLS v. STATE OF MYSORE, 32(1973) STC 599 - 1973 (2) Mys U. 367 where an identical question was considered. The Division Bench held: "The petitioner cannot ascribe any error in the order of the Commercial Tax Officer since his own return was accepted by the assessing authority and there was no dispute that the sales were not exigible to tax under the Central Sales Tax Act,

11 ITA No.874/Bang/2017 If the assessee makes in a return and submits to be assessed to tax before the assessing authority, he is not estopped or precluded by any law from preferring an appeal and showing to the appellate authority that the sales are, in fact, not exigible to tax. If such a contention is taken, the appellate authority is under a duty to examine the matter and determine the question whether or not the sales are exigible to tax. There is no question of invoking the doctrine of estoppel. In our opinion, the Deputy Commissioner of Commercial Taxes as also the Tribunal have failed to exercise the jurisdiction vested in them." The second question therefore has to be answered in the affirmative in favour of the assessee. 14. The Revisional Authority was not therefore justified in holding that the order of Appellate Authority was erroneous. Consequently the question whether the order was prejudicial to revenue does not arise. The appeals are therefore allowed. The common order dated 31-1-2001 of the revisional authority is set aside and the order of the appellate authority is restored. Parties to bear their respective costs.” Therefore the right of the assessee to challenge the order of the assessment is

a material legal right, which cannot be denied by applying the Doctrine of

Estoppel.

the assessee has offered and agreed to the estimation with the belief and

understanding that the Assessing Officer would not initiate penalty

proceedings. Once the penalty proceedings were initiated by the Assessing

Officer, the said consent of estimation of income is always subject to challenge.

The provisions of Section 44AD of the Act are applied to the small assessees for

computing the income on estimate basis instead of income to be assessed as

per the provisions of Sections 28 to 43C of the Act. Therefore the exemption

or relaxation provided under Section 44AD is only for the manner of

12 ITA No.874/Bang/2017 computation and not in the nature of concession in the quantum of income.

The small assessees are exempted from rigors of the other compliances and

allowed to compute the profit and gain of the assessee on presumptive basis.

The percentage as provided under Section 44AD is certainly has a guidance

and persuation value while estimating the income of the assessee which are

not falling under the category of small assessees as per the provisions of

Section 44AD of the Act. Hence in the facts and circumstances of the case,

when the business of the assessee is not in dispute and the turnover of the

assessee was also not found to be incorrect or inconsistent with the other

record, then the estimation of income has to be made by applying the rate of

8% of the turnover/gross receipt as provided under Section 44AD of the Act.

Consequently, the impugned order of the CIT (Appeals) is set aside and the

Assessing Officer is directed to compute the income of the assessee @ 8% of

the turnover / gross receipts.

*Reddy gp