M/S DELUXE ROADLINES PVT. LTD.,,BANGALORE vs. DCIT, BANGALORE

This appeal by the assessee is against the order dated 30.11.2012 of the CIT(Appeals) pertaining to assessment year 2009-10.

In this appeal, the only grievance projected by the assessee is with regard to the action of the CIT(Appeals) in determining the business income of the assessee from the business of owning fleet and operating as a transport contractor @ 3% of the gross receipts as against 8% estimated by the AO. According to the assessee, the profit of assessee ought to have been determined at 1.03% which was the income declared in the return of income and which is comparable with the past history of profits declared in its case.

The facts and circumstances under which the appeal arises are as follows. The assessee is a company. It is a fleet owner and transport contractor. For the AY 2009-10, assessee filed its return of income on 29.9.2009 declaring income of Rs.70,64,490. The freight collection and sales figures were as follows:-

There was a survey carried out in the business premises of the assessee u/s. 133A of the Income-tax Act, 1961 [“the Act”] on 14.7.2011.

In the course of assessment proceedings, Mr. Kushal Chand Dharamshi, M.D. of the company, appeared in response to the notice of the AO to substantiate the expenses debited in the P&L account with supporting documents like vouchers, bills, etc. The assessee was also directed to produce books of account. The assessee did not comply with the directions of the AO in this regard. Hence a proposal u/s. 144 of the Act was issued by the AO vide letter dated 17.11.2011 to assess income of assessee at 8% of the total turnover which was at Rs.52,85,46,030 which works out to Rs.4,22,83,682. It was also proposed to add the other income disclosed by the assessee at Rs.84,63,079. Thus the total income proposed for assessment was Rs.5,07,46,761. Despite the above notice, the assessee did not produce books of account, bank statements, bills, vouchers, in support of expenditure claimed. On the basis of above sequence of events and failure on the part of assessee to produce documents called for, the AO came to the following conclusion:-

The AO accepted the turnover declared by the assessee in the P&L account filed as it was in tune with its past history. Thereafter, the AO proceeded to determine the income of the assessee by applying 8% as proposed in the show cause notice and determined the income of the assessee at Rs.4,22,83,682 which is 8% of the turnover under the head ‘income from business’.

Before the CIT(Appeals), the assessee submitted that, it derives income from transportation of goods and owns about 100 heavy goods vehicle and Light Commercial Vehicles. Sometimes, the Assessee also engaged third party vehicles by paying hire charges for transportation of goods. Apart from the transportation business the Assessee also operated a petrol bunk. This in short was his business activity. As far as transportation business was concerned, the Assessee submitted that it owned about 100 heavy goods vehicles and light commercial vehicles. Judging the extent of income having regard to the presumptive income mentioned in the Section 44AE of the Act, and assuming further that all the vehicles are heavy goods vehicles only, the total income of the Assessee could be worked out, at best, in terms of presumptive provisions at Rs. 42,00,000/- [Rs.3,508/- x 12 x 100]. As far as the business of running petrol bunk, the Assessee submitted that, the turnover of the Assessee for the year under appeal from the petrol bunk business was only Rs. 39,99,554/-. In other words, there was almost no business of operating the petrol bunk carried on by the Assessee during the year under appeal.

The assessee also submitted that income declared by it is in tune with the past history in its own case and therefore addition made by the AO should be deleted.

The CIT(Appeals) firstly upheld the rejection of books of accounts by the AO. The assessee has accepted this part of the order of CIT(Appeals) and in the grounds of appeal filed before the Tribunal, there is no challenge to the validity of rejections of books of account by the AO u/s. 145(3) of the Act. In this appeal we are concerned only with the estimation of income of the Assessee.

The ld. CIT(Appeals) found that profit percentage declared by the assessee in this year was 1.03%. He was therefore of the view that estimation of 8% of turnover as done by the AO was highly excessive and unreasonable. He was, however, of the view that 3% of the turnover could be estimated as profit of the assessee.

Still aggrieved, the assessee has filed the appeal before the Tribunal.

This appeal was heard by the Tribunal and an order dated 1.1.2014 was passed by the Tribunal. The Tribunal firstly came to the conclusion that the assessee failed to demonstrate that it was maintaining books of account as required under the Act. The Tribunal also held that assessee has not brought out any evidence to justify the claim of profit at 1.03% of the turnover, except for placing reliance on the returns of income filed in the earlier years. The Tribunal held that those returns are not conclusive in the matter because those returns for AYs 2004-05 to 2008-09 had been accepted u/s. 143(1) of the Act and acceptance of a return u/s. 143(1) of the Act will not be conclusive as there was no scrutiny assessment. The Tribunal therefore came to the conclusion that the CIT(A) was reasonable in restricting the determination of income at 3%, as compared to 8% of the turnover estimated by the AO. The Tribunal further held that the CIT(A) has not given any comparable cases in similar line of business to come to the conclusion that 3% of the turnover is reasonable in estimating business income of the assessee. The Tribunal held that it would meet the ends of justice if the business income is restricted to 2.5% of the total turnover.

The assessee was not satisfied with the relief given by the Tribunal and filed an appeal before the Hon’ble High Court of Karnataka in ITA No.213/2014. The following substantial question of law was admitted by the Hon’ble High Court:-

The Hon’ble High Court referred to the decision of the Hon’ble Supreme Court in the case of Raghubar Mandal Harihar Mandal v. The State of Bihar (1957 Vol. VIII STC 770), wherein it was held that when the returns and books of account are rejected, the AO must make an estimate and to that extent he must make a guess, but the estimate must be related to some evidence of material and it must be something more than mere suspicion. The AO must make a fair estimate for this purpose, he must take into consideration material before him like assessee’s circumstances, previous returns and all other matters, which the AO thinks will assist him in arriving at a fair and proper estimate. Thereafter, the Hon’ble High Court held as follows:-

In that view of the matter, the impugned orders are unsustainable. Hence, the order passed by the tribunal is hereby set-aside. Matter is remitted back to the tribunal for fresh consideration in the light of the observations made above. In that view of the matter, the substantial question of law is answered in favour of the assessee and against the revenue and appeal is partly allowed.”

The appeal was fixed for hearing as per the directions of the Hon’ble jurisdictional High Court. The ld. counsel for the assessee submitted before us that the Hon’ble High Court has clearly held that evidence in the form of earlier returns had to be taken note of by the Tribunal. According to him, therefore, the assessee’s profit declared in the return of income for AY 2009-10 was more than the past history in its own case and therefore the same ought to be accepted.

The ld. DR, on the other hand, submitted that the Hon’ble High Court has observed that no reasons were given for not relying on the profits declared by the assessee in the past and also that the revenue authorities have not taken into consideration comparable cases in similar business to support its conclusions. According to him, the past history in assessee’s own case is not conclusive in the matter as in none of the earlier assessment years, the assessee’s case was taken up for scrutiny and whatever profits were declared were accepted u/s. 143(1) of the Act without any verification. In such circumstances, according to him, it would not be appropriate to rely on the past history of the assessee’s case and the better way of estimating the profits of the business of the assessee would be to take profits of comparable cases in similar line of business to that of the assessee.

We have given a very careful consideration to the rival submissions.

In our view, the fact that the assessee’s returns in the past was accepted without any scrutiny or verification because those returns were accepted u/s. 143(1) of the Act, was a proper basis not to rely on the past history of profits in assessee’s own case. Therefore, the past history of income in assessee’s own case cannot be the sole basis on which income of the assessee can be determined. Besides the above, as pointed out by the ld. DR in the course of his arguments, at the time of survey u/s. 133A of the Act, no books of account of assessee were found, nor was the assessee able to produce evidence in the form of vouchers in support of expenses debited to the P&L account. As to whether similar state of affairs prevailed in the past for the AYs 2004-05 to 2008-09 in assessee’s case cannot be said with certainty. According to the ld. DR, similar state of affairs would have prevailed in the past assessment years also. The profits earned by the assessees in similar line of business could therefore be considered by the AO in determining the income of assessee.

We have already observed that rejection of books of account by the AO is no longer an issue, as the assessee has accepted the rejection of books of account. When books of accounts are rejected and income is estimated, the best yardstick for such estimation is the past history in Assessee’s own case, provided such past history is accepted by the revenue in assessments completed after due enquiry u/s.143(3) of the Act. When assessment is completed u/s.143(1) of the Act, the return filed by the Assessee is accepted as it is. The scheme of assessment under section 143(1) of the Income-tax Act, 1961, is the policy of tax administrations across countries to adopt a two-stage procedure of assessment as part of risk management strategy. In the first stage, all tax returns are processed to correct arithmetical mistakes, internal inconsistencies, tax calculation and verification of tax payment. At this stage, no verification of income is undertaken. In the second stage, a certain percentage of the tax returns are selected for scrutiny/audit on the basis of the probability of detecting tax evasion. At this stage, the tax administration is concerned with the verification of the income. In India, the scheme of summary assessment being in force since 1st day of June, 1999 does not contain any provision allowing for prima facie adjustment. The scope of the present scheme is limited only to checking as to whether taxes have been correctly paid on the income returned. Under the existing provisions of section 143(1), there is no provision for correcting arithmetical or internal inconsistencies. "The intimation under section 143(1) is only fictionally taken as a notice of demand under section 156 of the Act. Like other fictions, to understand the meaning of this fiction so created here one must look to its purpose. The apparent purpose of this fiction is to make the machinery provision for recovery of tax applicable to the recovery of tax assessed in terms of section 143(1) and nothing more. Though notice of demand under section 156 is to be served in the prescribed form but the intimation under section 143(1) is not in any such prescribed form, yet by fiction so created, all incidence of notice of demand shall become applicable even to that intimation, for any statutory fiction must be carried to its logical conclusion.

In our view, therefore, the past history in Assessee’s case would not be the appropriate yardstick to estimate income. We are therefore of the view that it would be just and appropriate to set aside the order of the CIT(Appeals) on this issue and remand the question of estimation the income of the assessee to the Assessing Officer for fresh consideration, keeping in view the profits earned by the assessees in similar line of business. The AO will make necessary enquiries in this regard and also afford opportunity of being heard to the assessee and thereafter estimate the income of assessee.

For statistical purposes, the appeal of the assessee is treated as allowed for statistical purposes.