ITO, NEW DELHI vs. M/S. RITA PLASTIC (P) LTD., NEW DELHI

(B.1). On perusal of record, we find that the assessee has not filed any objection to condonation of delay requested by the Revenue. Also in view of the reasons stated by the AO as above, we are satisfied with the reasons advanced by the appellant for delay in filing of appeal. Therefore, we condone the delay in filing of this appeal, and proceed to decide the appeal on merits.

(C) The assessee filed return of income on 31.10.2007 declaring NIL income. The case was selected for scrutiny and notice u/s 143(2) of the Income Tax Act, 1961 (In short “Act”) dated 23.09.2008 was issued to the assessee. A notice u/s 142(1) was also issued on 20.01.2009 in response to which Sh. M.P.Singh, Adv. appeared before the Assessing Officer (In short “AO”) on behalf of the assessee.

A questionnaire was issued by the AO on 26.02.2009 and hearing was fixed on 06.03.2009 but no one complied with it. Subsequently, the AO issued notice on 08.07.2009 and the hearing was fixed on 17.07.2009. Sh. M.P.Singh, Adv. who appeared on behalf of the assessee was requested by the AO to furnish the details as per questionnaire dated 26.02.2009, by 04.08.2009, for which notice u/s 142(1) I.T.A .No.-4159/Del/2011 ITO vs Rita Plastics P.Ltd.

Page 3 of 15 of the Act dated 20.07.2009 was served on him. But no one attended on 04.08.2009. A fresh notice u/s 143(2) was issued on 17.09.2009 fixing the case for hearing on 29.09.2009, through speed post. This notice also remained uncomplied with. On 23.11.2009 Sh. Surjeet Singh, CA and Sh. M.P.Singh, Advocate, both Power of Attorney holders attended before the AO and they were asked by AO to file certain details/information as recorded in order sheet entry dated 23.11.2009. The case was adjourned to 27.11.2009. But no one attended on behalf of the assessee. As the assessment was going to be barred by limitation after 31.12.2009, the AO completed the assessment u/s 144 of the Act vide assessment order dated 10.12.2009. In the aforesaid assessment order dated 10.12.2009, he made additions totaling Rs.1,45,50,955/-, the breakup of which is as under:-

Page 4 of 15 appeal against the aforesaid order of 03.06.2011 of Ld.CIT(A). During appellate proceedings in ITAT, hearings were fixed on 15.11.2011, 09.04.2012, 25.07.2012, 06.06.2013, 15.10.2014, 06.04.2015, 05.08.2015, 16.11.2015, 03.03.2016, 04.07.2016, 05.10.2016, 02.01.2017 and finally on 16.03.2017. Thus, adequate opportunity has been given by ITAT to both sides in this appeal. On the previous date of hearing on 02.01.2017, both sides were represented in the Court Room and hearing was adjourned to 16.03.2017 at the request of both sides and both sides were informed. On 16.03.2017 when the appeal came up for hearing, no one was present on behalf of the assessee. As this is a very old matter (appeal was filed on 15.11.2011) and both sides have already been provided adequate opportunities, we proceed to decide this appeal ex-parte qua the assessee. At the time of hearing before us, the Ld. Departmental Representative (DR) appearing for Revenue objected to admission of additional evidences by CIT(A), contending that the assessee was provided adequate opportunities by the AO during the assessment proceedings. On merits of the additions, the Ld. DR relied on the assessment order. We have also considered the materials on record carefully.

(D) As far as admission of additional evidence by Ld.CIT(A) is concerned, it will be worthwhile to peruse relevant provisions under Rule 46A of Income Tax Rules, which are reproduced as under:-

“Production of additional evidence before the [Deputy Commissioner (Appeals)] [and Commissioner (Appeals) ]. 46A. (1) The appellant shall not be entitled to produce before the [Deputy Commissioner (Appeals)] [or, as the case may be, the Commissioner (Appeals)], any evidence, whether oral or documentary, other than the I.T.A .No.-4159/Del/2011 ITO vs Rita Plastics P.Ltd.

Page 5 of 15 evidence produced by him during the course of proceedings before the [Assessing Officer], except in the following circumstances, namely :— (a) where the [Assessing Officer] has refused to admit evidence which ought to have been admitted ; or (b) where the appellant was prevented by sufficient cause from producing the evidence which he was called upon to produce by the [Assessing Officer] ; or (c) where the appellant was prevented by sufficient cause from producing before the [Assessing Officer] any evidence which is relevant to any ground of appeal ; or (d) where the [Assessing Officer] has made the order appealed against without giving sufficient opportunity to the appellant to adduce evidence relevant to any ground of appeal.

(2) No evidence shall be admitted under sub-rule (1) unless the [Deputy Commissioner (Appeals)] [or, as the case may be, the Commissioner (Appeals)] records in writing the reasons for its admission.

(3) The [Deputy Commissioner (Appeals)] [or, as the case may be, the Commissioner (Appeals)] shall not take into account any evidence produced under sub-rule (1) unless the [Assessing Officer] has been allowed a reasonable opportunity— (a) to examine the evidence or document or to cross-examine the witness produced by the appellant, or (b) to produce any evidence or document or any witness in rebuttal of the additional evidence produced by the appellant.

(4) Nothing contained in this rule shall affect the power of the [Deputy Commissioner (Appeals)] [or, as the case may be, the Commissioner (Appeals)] to direct the production of any document, or the examination of any witness, to enable him to dispose of the appeal, or for any other substantial cause including the enhancement of the assessment or penalty (whether on his own motion or on the request of the [Assessing Officer]) under clause (a) of sub-section (1) of section 251 or the imposition of penalty under section 271.]”

(D.1) Vide letter dated 14.02.2011 submitted by the AO to the Ld. CIT(A), the AO objected to admission of additional evidence under Rule 46A stating as under:-

"In this regard, it is submitted that the assessment proceedings in this case were completed ex-parte u/s 144 of the Act on 10.12.2009. During the course of assessment proceedings, on 26.02.2009 a questionnaire was I.T.A .No.-4159/Del/2011 ITO vs Rita Plastics P.Ltd.

Page 6 of 15 issued fixing the case for hearing on 06.03.2009. Thereafter the case was attended on 20.07.2009 and 23.11.2009 by the Authorized Representatives of the assessee but even a single detail as called for vide questionnaire dated 26.02.2009 was not furnished. Now the Ld. Counsel for the assessee has given a number of reasons to justify a claim that it was passing through a bad phase. it is pertinent to mention here that not even once the assessee has brought on record any such reason during the course of assessment proceedings and whenever an opportunity was granted, as mentioned in the assessment order, the assessee had failed to comply. Under Rule 46A, additional evidences can be admitted where the AO refused to admit evidences or where the assessee is prevented by sufficient cause from producing the evidences, whereas in the instant case, the assessee was provided with sufficient time period, from March, 2009 to November, 2009 i.e. 9 months and opportunities to furnish documentary evidences in support of the claim made in the return of income but the assessee had failed to avail the same and furnish complete documentary evidences. These facts can be verified by calling assessment record…………”

(D.2). However, the Ld. CIT (A) accepted the plea of the assessee that the assessee was prevented by sufficient cause from producing the details during the assessment proceedings and admitted the additional evidences under Rule 46A of the Act. The relevant portion of the appellate order of the CIT (A) is reproduced below:

“I have carefully considered the assessment order, remand report of the AO and the submissions made by the Id. AR. As per the assessment order, the Id. AR of the assessee appeared during the assessment proceedings on various dates and filed certain details including the computation of income, Balance Sheet, Profit and Loss account, and Tax Audit Report. However, the AO called for certain details vide order sheet entry dated 23.11.2009 which was attended by the Id. AR and the case was adjourned to 27.11.2009. But no one appeared on the above date. The AO has, accordingly, passed the order u/s 144 ex-parte on 10.12.2009 in view of the case getting barred by limitation on 31.12.2009. In the impugned assessment order, the AO has added Rs.1,10,75,000/-, Rs. 29,07,958/-and Rs. 5,67,997/- on account of the total increase in share capital and unsecured loan and adhoc 10% disallowance of expenses respectively. In this regard, it is submitted by the Id. AR that during the period there was a major breakdown in the appellant's unit at Kundli which had been installed newly. As a result, there was halt in production and labour unrest alongwith I.T.A .No.-4159/Del/2011 ITO vs Rita Plastics P.Ltd.

Page 7 of 15 death of a worker and the management was unable to go to the factory for obtaining any records. The Id. AR has furnished copy of e-mail correspondences from July 2009 to December 2009 regarding the breakdown at the factory, and copy of the police enquiry report dated 08.01.2009 issued by the Police Station at Kundli regarding death of the worker on 07.01.2009. It is submitted that there was mounting pressure for repayment of loans / credits from banks and creditors. The bankers also called back the entire loan and sent notice under section 13(2) of the Securitisation and Reconstruction of Financial Assets and Security Interest Act, 2002. The appellant has furnished copy of the above notice dated 31.12.2009 issued by the Chief Manager State Bank of Indore, Rajouri Garden, New Delhi Branch. The appellant has also submitted that the main Director, Shri Ashok Batra had serious eye ailment during the above period and was unable to do any paper work during that period. In this regard, the Id. AR has submitted copy of the medical prescription dated 29.11.2009 from Dr. Sanjeev Taneja, Senior Eye Surgeon, Sir Ganga Ram Hospital, New Delhi. It is further submitted that there were cases against the appellant company and its Directors-U/s 138(B) of the Negotiable Instruments Act, 1881 on account of bouncing of cheques for repayment of loan by the company. The Id. AR has submitted copy of Lawyers' notices dated 11.07.2009 and 15.09.2009 and notice dated 01.06.2010 issued by the Hon'ble Metropolitan Magistrate, Kolkata with regard to the above cases. It is further submitted that the appellant sought more time for submission of details before the AO, but the letter of request was not accepted and the assessment was completed on 10.12.2009 ex-parte, although the time for limitation was available till 31.12.2009. The Id. AR has, accordingly, submitted that the appellant was prevented by sufficient cause from producing the details during the assessment proceedings. The AO, in the remand report, has objected to the admission of the additional evidence. However, considering the facts and circumstances of the case as mentioned above, and the fact that the additional evidences were forwarded to the AO and have been examined by the AO in the course of the remand proceeding, and since the additional evidences are relevant to the issues on which additions have been made and on which grounds of appeals have been raised, the said additional evidences are admitted under Rule 46A of the Income Tax Rules, 1962 in the interest of natural justice.”

(D.3). We find that the questionnaire was issued by the AO on 26.02.2009 and which was served on the assessee on the same day. We also find that questionnaire was issued by the AO calling for details and the hearing was fixed on 06.03.2009. Since then, a series of hearing were fixed by the AO and the last

I.T.A .No.-4159/Del/2011 ITO vs Rita Plastics P.Ltd.

Page 8 of 15 hearing was fixed on 27.11.2009. Details of the hearings have been given in the first paragraph of the assessment order, and also have been mentioned in foregoing paragraph (C) of this order. Thus, the assessee had sufficient opportunity since 06.03.2009 to 27.11.2009 to make compliances and furnish the details. However, the assessee failed to fully avail of these opportunities. The reasons which according to the assessee prevented the assessee from furnishing the details to the AO have been narrated in detail by the Ld. CIT (A), and reproduced in foregoing paragraph (D.2) of this order. But, as highlighted by the AO in his letter dated 14.02.2011 submitted by the AO to the Ld. CIT (A), and reproduced in foregoing paragraph (D.1) of this order; these reasons were not even once communicated by the assessee to the AO during the course of the assessment proceedings; even though the assessee failed to avail opportunities provided by the AO and continued its non-compliance with the requirements to furnish the details to the AO. The assessee did not communicate the reasons for non-compliance to the AO but communicated the reasons only at the appellate stage before the Ld.CIT(A). This questionable conduct of the assessee which was pointed out by the AO in his aforesaid letter dated 26.02.2009 has not been dealt with by the Ld. CIT(A). The prolonged non-compliance by the assessee from 06.03.2009 (when the case was first fixed by AO for hearing after issue of questionnaire) till 27.11.2009 (the last date of hearing before AO passed assessment order) cannot be justified on the basis of reasons considered by the CIT(A) . The assessee is a corporate entity and is expected to deal with the various business situations and legal circumstances that arise from time to time.

I.T.A .No.-4159/Del/2011 ITO vs Rita Plastics P.Ltd.

Page 9 of 15 That the assessee had other business situations and legal circumstances to deal with cannot be treated as sufficient cause for protracted non-compliance of more than 8 months. Alongwith other business situations and legal circumstances, the assessee should also have paid attention to the assessment proceedings under Income Tax Act specially as the assessee had the benefit of professional assistance from Sh.M.P.Singh, Advocate and Sh. Surjeet Singh, CA, both of whom attended the assessment proceedings on behalf of the assessee (their attendance before the AO during the assessment proceedings is recorded in first paragraph of the assessment order). The reasons advanced by the assessee before Ld.CIT(A) for admission of additional evidences and considered favourably by Ld.CIT(A), therefore, in our view do not constitute “sufficient cause” within the meaning of Rule 46A of Income Tax Rules. In these facts and circumstances, we are of the view that the assessee was not prevented by sufficient cause from producing the evidences before the AO and the CIT(A) erred in admitting the additional evidences as the reasons stated by the assessee for not producing the evidences before the AO, do not constitute sufficient cause within meaning of Rule 46A of Income Tax Rules. Therefore, we reject the admission of additional evidences by the Ld. CIT(A) and hold that the merits of the additions made by the AO are to be decided on the basis of materials available to the AO at the time when the aforesaid assessment order dated 10.12.2009 was passed. We further hold that the interference by the Ld. CIT(A) with the assessment order made by the AO on the basis of additional evidences admitted by the Ld. CIT(A) was not warranted in view of the facts and circumstances of this case.

I.T.A .No.-4159/Del/2011 ITO vs Rita Plastics P.Ltd.

(E). We notice that this assessment order has been passed not u/s 143(3) of the Act but it is a best judgement assessment u/s 144 of I.T.Act. Best judgment assessment has been explained by Hon'ble Apex court in the highly illuminating order in the case of CST vs. H.M. Esufali H.M. Abdulali, 90 ITR 271 (SC). Although this was a decision under sales tax law, the Hon'ble Supreme Court has noted in this decision itself, at page 278 of 90 ITR, that the law relating to best judgment assessment is the same both in the case of Income tax assessment as well as in the case of sales tax assessment. Therefore, order of Hon'ble Apex Court in CST vs. H.M. Esufali H.M. Abdulali (supra) is applicable to this case, and serves as a binding precedent; but we find that the binding precedent of CST vs. H.M. Esufali H.M. Abdulali (supra) has not been considered by ld. CIT(A). In the case of CST vs. H.M. Esufali H.M. Abdulali (supra) Hon'ble Apex court held that if the estimate made by the assessing authority is a bonafide estimate and is based on a rational basis, the fact that there is no good proof in support of that estimate is immaterial.

The Hon'ble Apex Court further held that prima facie, the assessing authority is the best judge of the situation, that it is his best judgment and not anyone else's. The Hon'ble Apex Court moreover held that high court cannot substitute its best judgment for that of the assessing authority. The substance of this order of Hon.

Apex court in CST vs. H.M. Esufali H.M. Abdulali (supra) is, that in a best judgement assessment, appellate authorities cannot substitute their best judgement for that of the Assessing Officer, if there is a reasonable nexus between the basis adopted by the Assessing Officer and the estimate made by him.

I.T.A .No.-4159/Del/2011 ITO vs Rita Plastics P.Ltd.

(E.1) Hon'ble Madras High Court, in the case of CIT vs. Rayala Corporation (P.)

Ltd. 215 ITR 883 (Mad.) took note of the order of Hon'ble Supreme Court in CST vs. H.M. Esufali H.M. Abdulali (supra). Explaining best judgment assessment, Hon'ble Madras High Court held as under in the case of CIT vs. Rayala Corporation (P.) Ltd. (supra):-

"In a best judgment assessment so long as the estimate made by the assessing authority is not arbitrary and has nexus with the facts discovered the same cannot be questioned. In the very nature of things the estimate made may be an over-estimate or an under-estimate. But, that is not ground for interfering with his best judgment The assessee cannot be permitted to take advantage of his own illegal acts and it is his duty to place all facts truthfully before the assessing authority. If he fails to do his duty, he cannot be allowed to call upon the assessing authority to prove conclusively what turnover he had suppressed. That fact must be within his personal knowledge. Hence, the burden of proving that fact is on him. If the estimate made by the assessing authority is a bona-fide estimate and is made on a rational basis, the fact that there is no good proof in support of that estimate is immaterial. Prima facie, the assessing authority is the best judge of the situation. It is his best judgment and not of anyone else. The question whether the Income-tax Officer has committed any error in his judgment under section 144 of the Act can be decided only on the basis of the materials gathered by him and not on the basis of any materials that are later produced by the assessee. There cannot be a procedure wherein the best judgment of the Income-tax Officer is subjected to the discretion of the assessee to produce evidence/material at the appellate stage and thus convert the proceeding of the best judgment assessment into a proceeding for regular assessment in which the assessee is served with a notice under section 139(2) of the Act. The Tribunal cannot enter into a reappraisal of evidence after taking into consideration the additional evidence produced by the assessee before it in a proceeding arising out of best judgment assessment."

(E.1.1). Explaining the powers and duties of Income Tax Appellate Tribunal (ITAT), Hon'ble Madras High Court further held in the case of CIT Vs. Rayala Corporation (P.) Ltd. (supra) as under:

I.T.A .No.-4159/Del/2011 ITO vs Rita Plastics P.Ltd.

"The Appellate Tribunal is not a court. Its powers, however, are expressed in the widest possible terms under section 254 of the Income tax Act, 1961. Its powers are almost similar to the powers of an appellate court under the Code of Civil Procedure. A wide power, however, is not such that it can be exercised in any manner. The Tribunal can interfere with the orders of the lower authorities, but can do so only on judicial considerations and on the basis of the reasons that suggest clearly that the lower authorities had committed an error of law or such facts that had vitiated its considerations. Its primary task is not to go into the return of the assessee and decide what amount of tax should be levied upon his income, but to see whether the taxing authorities, including the Appellate Assistant Commissioner, have committed any error of law or of fact and on account of such error, the assessee has suffered. The Tribune! has got to protect, on the one hand, the interest of the assessee in the sense that he is not subjected to any amount of tax in excess of what he is bound to pay and on the other hand, it has a duty to protect the interests of the Revenue and to see that no one dodged the Revenue and escaped without paying the tax."

(E.2) On careful reading of the judicial precedents in the cases of CST vs. H.M. Esufali H.M. Abdulali (supra) and CIT vs. Rayala Corporation (P.) Ltd. (Supra), two aspects are relevant in a best judgement assessment: firstly, whether there are sufficient grounds for making the best judgement assessment; and secondly, whether there is a reasonable basis for the estimate made. If the best judgement assessment of the AO passes these two tests, appellate authorities will be without any jurisdiction to interfere with the quantum of addition made by the AO in best judgement assessment.

(F). On perusal of the assessment order, we find that the AO has provided reasonable justification for the additions made by him. The relevant portion of the assessment order is reproduced as under:-

“3. On perusal of balance-sheet as on 31.03.2007 it is observed that the share capital has increased from Rs.98,25,000/- to Rs.2,00,65,000/ and share application money has increased from Rs.68,15,000/- to Rs 76,50,000/- during the year under question. Thus, there is total increase of Rs. 1,10,75,000/- in paid up share capital and share application money during the year. As the assessee willfully and knowingly avoided the proceedings and not produced evidences in support of genuineness of the said increase in share capital and share application money. Rs 1,10,75,000/- is treated cash credits u/s 68 of the Income-Tax Act, 1961 and added to the I.T.A .No.-4159/Del/2011 ITO vs Rita Plastics P.Ltd.

Page 13 of 15 income of the assessee Being satisfied that the assessee has concealed its above income, penalty proceedings u/s 271(1)(c) of the income-Tax Act, 1961 are being initiated separately.

4. On perusal of P & L A/c, it is observed that the assessee has declared receipts on account of sale of Rs 4,03,22,507/- and interest on FDRs of Rs.25.265/- against which the assessee has claimed expenses of Rs.27,83,836/- decides purchases in its trading account and claimed expenses of Rs.28,96,143/- decides depreciation and directors remuneration in its P & L A/c Thus, the assessee has claimed Rs.56.79.979/- on account of various expenses other than purchases, depreciation and directors remuneration against the total receipts of Rs.4,03,47,772/-. As none of the expenses could be verified due to non cooperative attitude of the assessee, Rs.5,67,997/- being 10% of said expenses i.e. Rs.56,79,979/- is disallowed and added to the income of the assessee.”

(G). As far as the separate additions of Rs.1,10,75,000/- and Rs.29,07,958/- u/s 68 of I.T.Act is concerned, it is settled law that the onus is on the assessee to prove identity and creditworthiness of the person and onus is further on the assessee to prove the genuineness of transactions. By not providing relevant evidences and materials to the AO, the assessee failed to discharge the onus on all the counts and, therefore, the AO was justified in making these additions.

Further, the disallowance of 10% out of expenses of Rs.56,79,979/- claimed by the assessee was made by the AO because these expenses could not be verified due to non-compliance by the assessee. When the assessee failed to discharge the I.T.A .No.-4159/Del/2011 ITO vs Rita Plastics P.Ltd.

Page 14 of 15 onus for claiming these expenses as deduction; the AO cannot be faulted for making partial disallowance. The resultant disallowance at the rate of 10% of total claim amounted to Rs.5,67,997/- and there is nothing on record to indicate that this disallowance was excessive, unjust, illegal or unreasonable. Therefore, the AO was justified in making the aforesaid additions of Rs.1,10,75,000/- and Rs.29,07,958/- and Rs.5,67,997/-. We therefore, conclude that the there was reasonable basis for the additions made by the AO.

(H). We have already rejected the admission of additional evidences by the ld. CIT(A) and have held in foregoing paragraph (D.3) that merits of the additions made by the AO are to be decided on the basis of materials available to the AO at the time when the aforesaid assessment order dated 10.12.2009 was passed. We have further already held that the interference by the Ld. CIT(A) with the assessment order made by the AO on the basis of additional evidences admitted by the Ld. CIT(A) was not warranted in view of the facts and circumstances of this case. We have also already held in the foregoing paragraph (G) of this order that there was reasonable basis for the additions made by the AO. This is a best judgement assessment u/s 144 of the Act and the application of section 144 of the Act was not disputed by the assessee before the CIT(A). Even before us, the invocation of s.144 of the Act by the AO is not a matter in dispute. In any case, the protracted non-compliances by the assessee to various statutory notice u/s 142(1) and 143(2) of the Act and further non-compliance with the hearings fixed from time to time make this a fit case for best judgement assessment u/s 144 of the Act. On I.T.A .No.-4159/Del/2011 ITO vs Rita Plastics P.Ltd.

Page 15 of 15 cumulative consideration of the facts and circumstances and the legal position and on further guidance from decided cases in CST vs H.M.Esufali H.M. Abdulali (supra) and CIT vs Rayala Corporation P.Ltd. (supra), we are of the view that the CIT(A) wrongly substituted the best judgement of the AO with his own judgement contrary to the provisions of section 144 of the Act. Therefore, we set aside the order of the CIT(A) and restore the order of the AO. Accordingly, all the additions and disallowances made by the AO in the aforesaid order are sustained.

(I). In the result, the appeal of the Revenue is allowed. The order is pronounced in the open court on 13th of April 2017.