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Income Tax Appellate Tribunal, RAIPUR BENCH, RAIPUR
Before: SHRI RAVISH SOOD, JM & SHRI ARUN KHODPIA, AM
राजस्व की ओर से /Revenue by : Shri P.K.Mishra, CIT-DR ननधााररती की ओर से /Assessee by : Shri Veekaas S Sharma, CA सुनिाई की तारीख / Date of Hearing : 27/07/2022 घोषणा की तारीख/Date of Pronouncement : 21/09/2022 आदेश / O R D E R Per Arun Khodpia, AM : These two appeals are filed by the revenue against the order passed by the CIT(A)-3, Raipur, dated 28.05.2019 and against the order CIT(A)-II, dated 07.06.2019.
Similar and identical issue has been raised in both the appeals of the revenue for both the assessment years but figures are different, therefore, for the sake of convenience, these two appeals are taken together for adjudication. We shall take up the appeal of the revenue in filed for the assessment year 2016-2017 as a lead case, wherein the revenue has raised the following grounds :-
1. "On the facts and in the circumstances of the case the Ld. CIT(Appeals) erred in not appreciating that the books of accounts were rejected in the A. Y 2006-07 to 2013-14 voluntarily by the assessee before the Settlement Commission.
2. On the facts an in the circumstances of the case the Ld CIT(A) erred in not appreciating that the assessee before the Settlement Commission has voluntarily accepted the Net Profit at 10% and that the CIT(A) ought to have accepted the net 2 ITA No.169&179/RPR/2019 profit @10% as there is no change in the nature of business or its modus operandi.
3. Brief facts of the case are that the assessee is an individual and derived income from business of construction of canals, dams & other infrastructural projects and income from interest from saving bank A/C and other sources. A search and seizure operation u/s 132 of the Act was carried out at the premises of the assessee on 17.10.2011. The assessee filed return of income for A.Y. 2016-17 on 17.10.2016 declaring total income of Rs.3,77,79,600/-. The case was selected for scrutiny through CASS and upon issuance of statutory notices, the assessee appeared and filed the documents as required by the AO during the course of assessment proceedings. Thereafter the AO completed assessment making addition of Rs.7,02,22,944/- on account of profit from contract business and Rs. 38,73,884/- on account of income from other source.
4. Against the above additions made by the AO in the assessment order, the assessee preferred appeal before the CIT(A) and the CIT(A) allowed the appeals of the assessee.
5. Now, the revenue is in appeals before the Tribunal against the addition deleted by the CIT(A).
6. Ld. Sr DR vehemently relied on the order of AO and submitted that the business of the assessee remained the same in the year under consideration as it was more than last seven years ago. The AO also noted that on the basis of seized documents which was the transactions of just a couple of days and that too for a particular financial year, the assessee admitted to reject the results of audited books of account of all 3 the six assessment years and admitted first the net profit to be adopted @8% of the gross contracts receipts which was further enhanced to 10% of the gross contract receipts. Therefore, the ld. Sr.DR submitted that ld.CIT(A) erred in not appreciating that the assessee before the Settlement Commission has voluntarily accepted the Net Profit at 10% and that the CIT(A) ought to have accepted the net profit @10% as there is no change in the nature of business or its modus operandi. Accordingly, he submitted that the orders of the CIT(A) for both the years under consideration deserve to be reversed.
7. On the other hand, ld. AR before us relied on the order of CIT(A) and submitted that the issue in both the appeals is covered by the coordinate bench of the Tribunal in the assessee’s own case for the assessment year 2014-2015 passed in ITA No.43/RPR/2015, order dated 31.05.2022. Therefore, the ld. AR submitted that the both orders of the CIT(A) deserve to be upheld.
We have heard rival submissions and perused the record carefully. We have also gone through the order of the coordinate bench of the Tribunal relied on by the ld. AR of the assessee in assessee’s own case for the assessment year 2014-2015 (supra), wherein it is held that : 9. Before adverting any further, we deem it fit to cull out the provisions of Sec. 145(3) of the Act which contemplates the circumstances under which the books of accounts of an assessee can be rejected, and reads as under :
“(3). Where the Assessing Officer is not satisfied about the correctness or completeness of the accounts of the assessee, or where the method of accounting provided in sub-section (1) or accounting standards as 4 notified under sub-section (2), have not been regularly followed by the assessee, the Assessing Officer may make an assessment in the manner provided in section 144.” On a perusal of the aforesaid statutory provision, it can safely be gathered that the books of accounts of an assessee can be rejected on satisfaction of either of the three situations, viz. (i). where the AO is not satisfied about the correctness or completeness of the accounts of the assessee; or (ii). where the method of accounting i.e, cash or mercantile system of accounting is not being regularly followed by the assessee; or (iii). where the assessee is not regularly following any accounting standard that had been notified by the Central government in the official gazette and is to be followed by any class of assessee or in respect of any class of income. In the case of the present assessee before us, it transpires that the AO had tried to justify the rejection of his book results, for the reason that he was not satisfied about the correctness or completeness of the accounts of the assessee. However, we find that though the assessee in the course of the assessment proceedings had produced before the AO his books of accounts which had been subjected to a tax audit a/w bills, vouchers, confirmations etc., which were examined and cross-verified by him, but there is not a word of whisper in the assessment order about any defect or irregularity emerging therefrom. On the contrary, as observed by the CIT(Appeals), there is no such finding by the AO that the assessee had either booked any expenditure without having incurred it or had claimed any bogus expenditure which was not supported by bills and vouchers. In our considered view, the AO is obligated to point out the specific defects or irregularities falling within parameters of sub-section (3) of Sec. 145 of the Act, before rejecting the books of accounts of an assessee. Our aforesaid view is supported by the judgment of the Hon’ble High Court of Punjab & Haryana in the case of CIT Vs. Om Overseas (2009) 315 ITR 185 (P&H). In its aforesaid order the Hon’ble High Court while upholding the order of the Tribunal had observed, that as the AO had rejected the books of accounts of the assessee without pointing out any specific defect, therefore, the impugned addition was rightly deleted by the lower authorities. Also, the Hon’ble High Court of Allahabad in the case of Dr. Prabhu Dayal Yadav Vs. CIT (2018) 253 Taxman 191 (All), had observed, that the rejection of the books of accounts is unsustainable where the assessee had maintained his accounts and recorded his professional receipts and there is no evidence to doubt the correctness or completeness of the books of account. Our aforesaid view that existence of infirmities and discrepancies in the accounts maintained by the assessee is a pre-requisite for invoking the provisions of Sec. 145 of the Act, and the AO has to show that the accounts are either incomplete or incorrect, is supported by the judgment of the Hon’ble High Court of Himachal Pradesh in the case of CIT Vs. Swastik Food Products (2015) 275 CTR 109 (HP).
As observed by the CIT(Appeals), the fact as it so remains is that the AO had rejected the books of accounts of the assessee for the year under consideration i.e AY 2014-15, for the reason that as the assessee in his application filed before the ITSC, Kolkata for the earlier years i.e AYs 2006- 07 to 2013-14, had after referring to the peculiar nature of his business and admitting certain irregularities in his books of accounts for the said preceding years, viz. that as proper bills of expenses could not be obtained by him therefore, in order to set-off the same either some bills were arranged from outside parties or the expense were inflated, had on a suo- motto basis declared his income from the contract business @10% of the amount of the gross contract receipts of all the said years, therefore, he was of the view that as the nature of the assessee’s business during the year under consideration remained the same and the turnover/gross receipts was also well above those of the aforementioned preceding years, his income from the said stream of business i.e contract business could thus after rejection of his books of accounts for the year under consideration justifiably be estimated @10% of the amount of gross contract receipts. In sum and substance, the AO going by the suo-motto rejection of books of accounts and declaration of net profit rate @10% of the amount of gross contract receipts by the assessee before the ITSC, Kolkata in the preceding years i.e AYs. 2006-07 to 2013-14, had as a matter of fact tried to extrapolate both the facts and the net profit rate declared by the assessee in those preceding years to his case for the year under consideration i.e AY 2014-15.
At this stage, we may herein observe, that we are unable to persuade ourselves to concur with either the aforesaid view or the basis that had been adopted by the AO for rejecting the books of accounts of the assessee for the year in question and estimating his income from contract business by adopting the net profit @10% of the amount of gross contract receipts. Although the book results of an assessee in a preceding year could be adopted as a yardstick for comparing those shown by him in a subsequent year, but the same by no means can be stretched any further to form a standalone reason for rejecting his books of accounts for the said subsequent year. Our aforesaid conviction is fortified by the following judicial pronouncements: (i). RMP Perianna Pillai & Co. Vs. CIT (1961) 42 ITR 370 (Mad) (ii). CIT Vs. Winner Constructions Pvt. Ltd. (2012) 81 CCH 91 (Del) (iii). CIT Vs. K S Bhatia (2004) 269 ITR 57 (P&H) At this stage, we may herein observe that the AO while rejecting the books of accounts of the assessee for the year under consideration, i.e AY 2014- 15, had observed, that as the assessee in the preceding years i.e AYs 2006- 07 to 2013-14 had on a suo- motto basis rejected his books of accounts for all the years and declared his income from the contract business @10% of the gross contract receipts thus, the nature of his business during the year 6 under consideration i.e AY 2014-15 remaining the same, his income could be estimated on the similar lines, but while so observing he had lost sight of certain material facts on the basis of which the aforesaid estimation of income was carried out by the assessee in the preceding years i.e AYs 2006- 07 to 2013-14. One of the material aspect that the AO had failed to take cognizance of is that in the aforementioned preceding years the assessee in his application filed before the ITSC, Kolkata had though categorically admitted that due to the peculiar nature of his business as proper bills could not be obtained, therefore, to set-off the same either bills were arranged from outside parties; or in some cases such unaccounted expenses were set-off by introducing inflated expenses. As such, the aforesaid admission of the assessee in his application filed with the ITSC. Kolkata for the preceding years i.e AYs 2006-07 to 2013-14 in itself formed a substantial piece of evidence about the existence of the aforesaid infirmities and irregularities in his books of accounts for the said preceding years. However, neither of any such infirmity, viz. (i). booking of any bogus purchases; or (ii). inflating of expenses by the assessee had either been pointed out by the AO while framing the assessment in the case of the assessee for the year under consideration i.e AY 2014-15 or ever admitted by the assessee. Apart from that, it is also a matter of fact borne from the record that though certain incriminating documents evidencing the aforesaid infirmities had surfaced in the course of the search proceedings conducted u/s 132(1) of the Act for the period pertaining to aforementioned preceding years, however, no such material evidencing such infirmities or irregularities in the books of the assessee for the year under consideration is discernible from the records. We, thus, are of the considered view that as the aforesaid peculiar facts as were prevailing in the preceding years were not there during the year under consideration i.e AY 2014-15, therefore, now when the very basis which had prompted the suo-motto rejection of his books of account by the assessee in the aforesaid preceding years is found amiss during the year under consideration i.e AY 2014-15, it was absolutely incorrect on the part of the AO to have tried to justify the rejection of the assessee’s book results by drawing support from the suo-motto rejection of his books of accounts in the preceding years, which as observed by us hereinabove was prompted by substantially differently placed circumstances in the said preceding years.
Also, we are unable to comprehend the observation of the AO, who had proceeded with the rejection of the assessee’s books of accounts for the year under consideration and estimation his income from the contract business @10% of gross contract receipts, for the reason that as the assessee in his application filed before the ITSC, Kolkata for the preceding years i.e AYs. 2006-07 to 2013-14 had admitted certain defects and irregularities in his books of accounts, therefore, it was to be presumed that he would have continued with such malpractices and irregularities in the subsequent years too. Our 7 aforesaid conviction is all the more fortified by the fact that the AO had after calling for and examining the books of accounts of the assessee for the year under consideration a/w bills, vouchers, confirmations etc. had not referred to even a single instance of any such defect or irregularity which would have evidenced that the assessee even during the year under consideration had continued with the malpractices that were adopted by him in the preceding years and the same haunted his business even during the year in question also. A mere presumption of the AO that as the assessee was admittedly carrying out certain malpractices in the preceding years would mean that despite absence of any evidence, it is still to be taken that he would be continuing with the same malpractices in the succeeding years, in our considered view is such a broad and incomprehensible proposition which cannot be subscribed on our part. As stated by the Ld. AR, and rightly so, as each years assessment is a separate assessment, therefore, the facts emanating from the assessment for a specific year cannot in the absence of any supporting evidence be extrapolated to another year. Our aforesaid conviction is supported by the judgment of the Hon’ble Supreme Court in the case of, viz. (i). M.M Ipoh & Ors. Vs. CIT (1968) 67 ITR 106 (SC); (ii). ITO Vs. Murlidhar Bhagwandas (1964) 52 ITR 335 (SC); and (iii). Bharat Sanchar Nigam Ltd. & Anr. Vs. UPI & Ors. (2006) 282 273 (SC). Interestingly, if the observations of the AO are to be accepted, then, it would mean that once an assessee is visited with search proceedings, and he after considering the incriminating documents unearthed during the course of such proceedings comes forth with a disclosure either regards his modus operandi or unaccounted income, then, in all the subsequent years despite there being no iota of evidence that the assessee had continued with his malpractices and modus operandi to generate unaccounted income, it is to be presumed otherwise and has to be made to suffer because of his chequered past. By no means such an incomprehensible and baseless observation of the AO can be accepted. Also, we concur with the view taken by the CIT(Appeals) that even otherwise as the net profit rate disclosed by the assessee during the year under consideration, as demonstrated by him, was better than those of other similarly placed assessee’s of his trade line and was commensurate with that prevailing in the industry, therefore, no adverse inferences on the said count itself i.e as regards the profit disclosed by him was liable to be drawn. As regards the reference to the “Standard Operating Rate” (SoR) by the AO to support his conviction that the income of the assessee from his contract business was justifiably determined by applying a net profit rate @10% to the gross contract receipts for the year under consideration, we are unable to concur to the same. As claimed by the ld. AR, and rightly so, as the SoR for works contracts fixed by the Government departments merely indicates the estimated price of the inputs and expenses and also an estimate of the physical quantity that would be required for execution of the contract, the same, thus, considering manifold factors is too far from the ground realties to have justified earning of a profit margin @10% of the gross contract receipts by the assessee.