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Income Tax Appellate Tribunal, BENCH ‘B’ KOLKATA
Before: Hon’ble Shri S.S. Godara, JM & Dr.Arjun Lal Saini, AM ]
ORDER PER S.S. GODARA, JM:
This assessee’s appeal for A.Y.2011-12 emanates from the CIT(A)-4, Kolkata’s order dated 03.10.2016, passed in Appeal No. 1145/CIT(A)-4/Ward- 12(1)/Kol/14-15, confirming the Assessing Officer’s action taking recourse to best judgment assessment thereby disallowing/adding its claim of Rs.2,45,00,000/- comprising of its undisclosed income including the sum of Rs.1,51,00,265/- received as fee from students allegedly swindled by its ex-director Mr. Ashish Mitra; respectively in proceedings u/s 144 of the Income Tax Act, 1961 (hereinafter the Act).
Learned counsel representing assessee submits during the course of hearing that the instant appeal raises two substantive grounds. Former substantive ground challenges correctness of both the lower authorities’ action in taking recourse to section 144 proceedings despite the fact that it had very well placed on record of all documents in the nature of balance sheet, profit and loss account as well as Tax audit report before the Assessing Officer during assessment. Learned counsel vehemently contends that the Assessing Officer ought not to have disturbed the relevant book Exterior Interior (P)Ltd A.Y.2011-12 results after invoking best judgment assessment u/s 144 of the Act. Learned Departmental Representative on the other hand supports both the lower authorities’ action in invoking section 144 proceedings as affirmed in the CIT(A)’s order under challenge.
We have heard both the learned representatives. The first dispute between the parties is that of correctness of both the lower authorities’ action invoking best judgment assessment against the assessee in the course of assessment as upheld in the lower appellate proceedings. There is no dispute that the assessee had not filed its books of accounts during the course of scrutiny as maintained u/s 2 (12A) of the Act. The Assessing Officer afforded 20 opportunities from 28.09.2012 to 22.04.2014 for this specific purpose. He had also issued relevant notices u/s 143(2) on 19.09.2012 as well as the one u/s 142(1) of even date. Section 144 of sub-section (1)(b) and (c) of the Act make it clear that the same come into play in the event of an assessee’s failure in not fully complying with the said notices. The assessee has pleaded before us that it had filed the above stated documents. The same could not have been proved in absence of relevant books of account acting as the foundation thereof. This appears to be the apparent reason for the Assessing Officer to come to best judgment assessment in the event of assessee’s non compliance of his above notices. We quote this tribunal Third Member decision in [2012 ] 12 TMI 1 in Pragati Engineering Corporation vs ITO considering all the relevant law to affirm both the lower authorities’ action proceeding u/s 144 of the Act against the assessee therefore. Learned counsel has also quoted many judicial precedents about ambit and the scope of section 144 proceedings in specific circumstances. The same are found to be not applicable in peculiar facts and circumstances before us since the assessee had failed to submit any response on its part in producing the relevant books of account forming foundation of its documents filed before the Assessing Officer who had no other option but to finalise the relevant assessment as per law. We therefore see no reason to accept assessee’s instant former substantive ground. The same is accordingly rejected.
Exterior Interior (P)Ltd A.Y.2011-12
The assessee’s latter substantive ground challenges both the lower authorities’ action in rejecting its plea that the sum in question of Rs.2,45,00,000/- stood swindled by its former director Mr. Ashish Mitra between September., 2010 to December, 2010 followed by its change in its management from 11.01.2011. We find that the CIT(A)’s detailed discussion on the instant issue summarises the relevant facts, Assessing Officer’s findings and assessee’s detailed submissions as under :- “6. Ground No. 3 This ground relates to the. action of the AO in adding a sum of Rs.2,45,00,000/- as undisclosed income out of which he has admitted that the sum of Rs.1,51,00,265/- was the income from fees not offered for taxation. I find that the AO has dealt with this issue from para 4 to para 6.3 The AO also noted that the swindled funds of Rs.2,45,00,000/- was out of books, on the basis of which the profit & loss account and balance sheet as on 31.03.2011 had been prepared and that the advance fees of Rs.1,51,00,265/- as on 31.03.2010 had not been offered for taxation, as it was not included in fees shown in the Profit & Loss account.
6.1. The AR appearing on behalf of the appellant has submitted as follows:
"Your appellant submits that it had submitted the returns of income along with the audited accounts duly audited by the Statutory Auditors and duly authorised members of the Institute of Chartered Accountants of India which is enacted by an Act of Parliament and the Tax Audit Report u/s 44AB of the Income Tax Act 1961. This one also the report of the auditor who is also authorised by the Income Tax Act.
The Assessing Officer insisted the assessee every time to produce the books of accounts as maintained by the assessee and which were audited by the statutory auditors under Indian Companies Act 1956 and under the Income Tax Act 1961. Your appellant has submitted all the details of the requirements of the assessing officer as and when requisitioned but not the books of accounts. The furnishing of the documents, Balance Sheet, Profit & Loss Accounts the auditors reports thereon and the Tax Audit Reports etc have been confirmed by the assessing officer in item no-4.2 page-5 of his assessment order.
Therefore your appellant submits that when the books of accounts are audited by the Statutory Auditors under the Companies Act 1956 and also by the Tax Auditors under the Income Tax Act 1961 the Profit/loss as determined and certified by the auditors the Assessing Officer has to accept and/or has to give due recognition of the profit but not by changing opinion or raising debate thereon on changing the method separated from the assessee which are Exterior Interior (P)Ltd A.Y.2011-12 consistently followed by the appellant over the years. This is the view of the Supreme Court in CIT vs A Krishnaswami Mudaliar reported in 53 ITR 122 , 127 In this context the assessing officer has to look to the substance of the situation and decide the matter in such a manner that neither the Revenue is put to unreasonable loss nor is the assessee subjected to hardship. This is the view of the Calcutta High Court in CIT vs. Hazaribag Coal Syndicate (P) Ltd reported in 1771TR 135 139.
Your appellant submits that when the appellant could not submit the books of accounts but the audited accounts duly audited and certified by the statutory auditors have been submitted the AO has not rejected those rather accepted and the appellant attended the hearings almost all the days he should pass the order u/s 143(3) and not u/s 144.
More-over the Auditors of the company attended before the Assessing Officer in response to the notice of summons u/s 131 to him and he affirmed that the certified accounts are in agreement with the books of accounts as produced. The statement of summons as raised by the AO to the auditors is in our records too.
Therefore the question arises whether the reports of the auditors could be said to be "Material" on which reliance could be placed by the income tax authorities. Unlike the proof required of such reports as also of the accounts books under the Indian Evidence Act it is quite competent for the income tax authorities not only to accept the auditors report but also to draw the proper inference from the same. The Income Tax Authorities could therefore come to the conclusion that since the auditors were required by the statute to find out if the deductions claimed by the assessee in their balance sheet and the Profit & Loss account were supported by the relevant entries in their accounts books the auditors must have done so and must have found that the accounts books supported the claims for deductions when the deductions were disallowed by the Income tax officer on the ground that the detailed information regarding them was not available justice was not to the assessee. There was however other materials mainly consisting of the auditors reports from which it could be inferred that the deductions were properly supported by the relevant entries in the accounts books. In a sense it may be a question of law as to what the meaning of material" is and whether the auditors reports were material. But the question of law is well settled and is not capable of being disputed and does not therefore call for reference.
Your appellant furnishes the decision of the Delhi High Court in the case of Addl CIT vs Jay Engineering Works Ltd reported in 113 ITR 389 where the appellant furnishes the Auditors Report but could not produce the books of accounts whether "material' in the absence of accounts books. It was held in favour of the assessee by the High Court.
Exterior Interior (P)Ltd A.Y.2011-12 1.10. Your appellant submits that when a return is furnished and the accounts are put in support of the return the accounts should be taken as the basis of assessment. The A. 0 in this case has accepted the audited accounts though books of accounts were not submitted. The procedure of the A.O. should be of a judicial nature and in making addition/ in assessment should proceed on judicial principles.
1.11 Your appellant also submits for your consideration the decision of Calcutta High Court in ITO vs Laxmi Prasad Goenka reported in .110 ITR 674 Where held that an ex-parte best judgement assessment u/s 144 can only be made to defaults specified in that section. Non-compliance with a summons requiring production of accounts books and other documents etc is not such a specified default and therefore it cannot result in an ex-parte best judgement assessment.
1.12. The Madras High Court too has decided in J M Shah vs CIT reported in 56 ITR 293 that mere non-production of books without proof of existence of things non-produced would not fall within the mischief of section 144.
1.13. Therefore since the AO is of the revenue minded whatever the additions are made is of the revenue and not of civil judicial authority. Hence the additions be deleted in full."
6.2. I have considered the assessment order as well as the written submission made by the AR of the appellant company. I find that the AO has made out a clear cut finding that the appellant has filed a police complaint against its ex- director Mr. Ashish Mitra. The sum and substance of such complaint was that Mr. Ashish Mitra had siphoned of Rs.1,75,00,000/- between September 2010 to December 2010 from various bank accounts of the appellant company. The AO noted that in the audit report and the audited accounts as on 31.03.2011 which was signed by the present directors of the appellant company, the said fact was not disclosed. The AO noted from the directors' report which is reproduced at para 4.3 of the assessment order that no fraud was disclosed. The AO further noted that the auditor in his report has also certified that no fraud on or by the company has been reported during the course of audit. In view on these findings, the AO desired explanation by the appellant, but the appellant did not explain this issue. It was explained that the appellant has paid Rs.1,74,62,773/- to Mr. Ashish Mitra for Technical knowhow charges consultancy charges, gratuity, leave encashment etc. It was explained that TDS was also deducted. The AO noted from the documents filed that sum of Rs.1,98,94.804/- was mentioned instead of Rs.1.74,62,773/-. The appellant did not explain this discrepancy as well. The AO has summoned the auditor Mr. R.K. Maheshwari, FCA and his statement on oath was recorded. He stated that he could not understand that the fraud has happened in the company. He also confirmed that in the books of accounts produced before him, no payment in the nature of Technical Knowhow charges. consultancy Exterior Interior (P)Ltd A.Y.2011-12 charges, gratuity, leave encashment, ex-gratia, bonus, royalty was paid' to Mr. Ashish Mitra or Ms. Archana Malhotra. The AO requested the appellant company to cross examine the auditor. but the appellant refused to cross examine them. Thus, the AO's conclusion that the sum of Rs.2.45,00.000/- was out of books remains unrebutted. The AR was not able to controvert any of the findings of the AO before me as well. Thus, I find no reason to interfere with any of the findings of AO and the action of AO is hereby confirmed. This ground is dismissed.”
Learned counsel representing assessee quotes case law in CIT vs Smt Pukhraj Wati Bubber 296 ITR 290 (Punjab & Haryana), Badridas Daga vs CIT 34 ITR 10 (SC), CIT vs Nainital Bank Ltd 55 ITR 707 (SC), Ramchandra Shivnarayan vs CIT 111 ITR 263 (AP) to plead that any loss caused by way of dacoity, embezzlement is a trading loss allowable u/s 37 of the Act in the event of a direct nexus between theft vis-avis the relevant business operations. Learned counsel therefore contends that the assessee is very much entitled to get deduction of the impugned swindling (supra) committed by its ex-director hereinabove. He then invites our attention to the fact that the assessee has initiated criminal complaint as well as civil suit proceedings against its former ex director so as to form sufficient reason for claiming the relief in question. There can be no dispute about legal position settled by various hon’ble courts from time to time that a loss having direct nexus with carrying out of business activities is allowable u/s 28 r.w.s. 37 of the Act. The dispute in the instant case arises because of the relevant facts involved. The assessee fails to rebut both the lower authorities findings that all its documents filed during the course of scrutiny comprising of balance sheet, profit and loss account, Tax audit report (supra) do not contain even a note that there has been any swindling of funds on part of its ex-director (supra). Nor the alleged complaint as well as civil proceedings form part of case record before us. Coupled with this, the Assessing Officer had granted it sufficient opportunity to cross examine Shri Ashish Mitra. Nobody turned up at assessee’s behest to avail the same. Its auditor has also not supported this swindling plea orally as well as by way of putting up a note in the relevant schedule. Learned counsel thereafter submits that there is no loss to the Revenue since the assessee has neither recorded the receipts nor Exterior Interior (P)Ltd A.Y.2011-12 the impugned swindling sum in its books concerned. We find that there is no question about the fact that the assessee had not recorded the income received from students despite the same having duly received in the relevant previous year. There is no quarrel therefore so far as the receipt of the sum in question is concerned. Coming to the alleged swindling of its ex-director, we find that the assessee’s claim does not satisfy the basic conditions of a note being put up in the relevant schedule based on a reasonable assumption as per books as held in hon’ble apex court’s land mark judgment in Chainrup Sampatram vs CIT 241 ITR. We thus see no reason on facts to interfere with both the lower authorities findings making the impugned addition of Rs.2,45,00,000/- on account of assessee’s failure in proving that Shri Mitra had swindled cash sum of Rs.70 lakhs and the other amount of Rs.1,75,00,000/- (supra). . The assessee fails in its latter substantive ground as well.
This assessee’s appeal is dismissed. Order pronounced in the open Court on 11.05.2018.
Sd/- Sd/- [Dr.A.L.Saini] [ S.S. Godara ] Accountant Member Judicial Member Dated : 11.05.2018 [RG Sr.PS] Copy of the order forwarded to: 1.Exterior Interior Private Limited, 152, S.P.Mukherjee Road, Kolkata-700026. 2. I.T.O. Ward- 12 (1), Kolkata. 3. CIT(A)-4, Kolkata 4. C.I.T.-4, Kolkata. 5. CIT(DR), Kolkata Benches, Kolkata. True Copy By order,
Senior Private Secretary Head of Office/D.D.O., ITAT, Kolkata Benches Exterior Interior (P)Ltd A.Y.2011-12 Exterior Interior (P)Ltd A.Y.2011-12