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Income Tax Appellate Tribunal, DELHI BENCH ‘G’: NEW DELHI
This appeal by Assessee is filed against the order of Learned Commissioner of Income Tax (Appeals)-20, New Delhi [Ld. CIT(A)”, for short], dated 26/06/2018, for the Assessment Year 2013-14.
Grounds taken in this appeal are as under:
“1. On the facts and circumstances of the case, the order passed by the Learned Commissioner of Income Tax (Appeals) [CIT(A)] is bad, both in the eye of law and on the facts.
2. On the facts and circumstances of the case, the Learned CIT(A) has erred both on facts and in law in confirming the addition to the extent of Rs.31,52,641/- made by the AO on account of low gross profit.
3. On the facts and circumstances of the case, the Learned CIT(A) has erred both on facts and in law in confirming the above said disallowance despite the fact that G.P. rate of the assessee has been tinkered with by the AO without rejecting the books of accounts of the assessee,
4. (i) On the facts and circumstances of the case, the Learned CIT(A) has erred both on facts and in law in confirming the addition made by the AO by adopting an arbitrary rate of gross profit @ 4.39%.
(ii) That the above addition has been confirmed arbitrarily in the adhoc manner without there being any basis for the same.
5. On the facts and circumstances of the case, the learned CIT(A) has erred both on facts and in law in ignoring the detailed explanation and evidences submitted by the assessee in support of gross profit actually earned during the year.
6. The appellant craves leave to add, amend or alter any of the grounds of appeal.”
Brief facts of the case are that, the assessee filed return of income declaring income at Rs. 72,68,250/- the assessment order came to be passed u/s 143(3) of the Act by assessing the income of the assessee at Rs. 1,44,75,890/-. As against the assessment order dated 05/02/2016, the assessee preferred an appeal before the CIT(A). The Ld. CIT(A) vide order dated 26/06/2018, partly allowed the appeal by confirming the addition to the extent of Rs. 31,52,641/- made by the A.O. on account of low gross profit by adopting rate of gross profit @ 4.39%. As against the order of the CIT(A) dated 27/02/2016 the assessee preferred the present appeal on the grounds mentioned above. The Ld. Counsel for the assessee at the outset submitted Page 2 of 11 that though the assessee has taken a specific ground before the CIT(A) i.e. Ground No. 2.1 contending that the action of the A.O. making ad-hoc addition is not tenable as per law on the premise of the books of account of the appellant have not been rejected by the A.O. by invoking the provision of Section 145(3) of the Act, which has not been adjudicated by the CIT(A)
Further submitted that though the CIT(A) has agreed that books of account has not been rejected by the A.O., but continued to sustain addition without adjudicating the ground pleaded by the assessee. Thus, submitted that, the addition of Rs. 31,52,641/- being 3.9% as GP rate sustained by the CIT(A) is liable to be deleted.
Per contra, the Ld. Departmental Representative submitted that since, the Ground No. 2.1 raised by the assessee before the CIT(A) regarding non rejection of books and making addition has not been verified and adjudicated by the CIT(A), the matter may be remitted to the file of CIT(A) for de-novo consideration.
We have heard both the parties and perused the material available on record.
During the assessment proceedings, the assessee was asked to produce books of account by the Ld. A.O. which have been duly produced by the assessee which can be corroborated with the findings of the A.O. at para 3 which reads as under:-
“During the course of assessment proceedings the assessee was asked to produce original books of accounts, bills, vouchers, muster rolls, wage sheets, log books, etc. for verification. After verification of the same on test check basis following disallowance has been made.”
Thus, it is evident that the books of account were duly produced by the assessee but the A.O. has not rejected the books of accounts. In the absence of the books of accounts being rejected by the A.O, he cannot estimate the Net Profit of the assessee. Section 145 of the Act provides method of accounting and it gives only three circumstances in which the books of accounts can be rejected. Firstly, if the income is not computed with either cash or mercantile systems of account, secondly, if Accounting Standards are not followed, thirdly, the Ld. A.O. is not satisfied about the correctness or completeness of the accounts of the assessee.
In the present case, none of the above three conditions were specified even in so far as the third condition, the A.O. nowhere given finding as to whether the books are rejected or not. In such circumstances, the A.O. could have made disallowance of certain expenditure in regard to which A.O. had some adverse interference, but the A.O. cannot tinker with the gross profit rate or net profit rate shown by the assessee. The above said ratio is supported by the judicial pronouncements.
“1) CIT vs. M/s. Anil Kumar Co., (2016) 386 ITR 702 (Karnataka)
"11. Insofar as the estimation of gross profit made by the Assessing Officer modified by the CIT(Appeals), tribunal has rightly held that when the books of accounts of the assessee had not been rejected and assessment having not been framed under section 144 of the Income Tax Act the said authorities were in error in resorting to an estimation of income and such exercise undertaken by them was not sustainable. Section 145(3) of the Act lays down that the Assessing Officer can proceed to make assessment to the best of his judgment under section 144 of the Act only in the event of not being satisfied with the correctness of the accounts produced by the assessee. In the instant case the Assessing Officer has not rejected the books of accounts of the assessee. To put it differently the Assessing Officer has not made out a case that conditions laid down in Section 145(3) of the Act are satisfied for rejection of the books of accounts. Thus, when the books of accounts are maintained by the assessee in accordance with the system of accounting, in the regular course of his business, same would form the basis for computation of income. In the instant case it is noticed that neither the Assessing Officer nor CIT(Appeals) have rejected the books of accounts maintained by the assessee in the course of the business. As such tribunal has rightly rejected or set aside the partial addition made by Assessing Officer for arriving at gross profit and sustained by the CIT(Appeals) and rightly held that entire addition made by the Assessing Officer was liable to be deleted."
2) Swadeshi Commercial Co. Ltd. vs. CIT, dated 18.12.2008 (Cal. HC)
"It also to be noted, as pointed out by Mr.Khaitan, that the books of accounts which were produced were not rejected nor even a single voucher was found unverifiable. The said fact has also been accepted by the Commissioner of Appeal in the order so passed by him. Therefore, it is submitted that the leaned Tribunal without any reason whatsoever has partly allowed the appeal in favour of the Department. He also drew our attention to the orders so passed by the Commissioner of Appeal. The Commissioner of Appeal duly considered the said question including the profit rate as well as the books of accounts and, therefore, Mr.Khaitan submitted that there is no cogent reason has been shown or given by the learned Tribunal to reach the said conclusion.
Mr.Chatterjee learned Advocate appearing on behalf of the Department fairly contended that he cannot join issue with regard to the question as raised by Mr.Khaitan.
Such being the position, in our considered opinion, the learned Tribunal had wrongly decided the said question in holding that the gross profit was required to be estimated at the rate which he arrived at and therefore we found that there is no substance in the submission made by Mr.Khaitan in the matter. Further more since the relevant fact that the books of accounts were not rejected and had been taken into account for the purpose of deciding this question which has been raised in this appeal, we allow the appeal and answered the question in the affirmative in favour of the assessee."
3) PCIT vs. M/s. Marg Limited (2017) 396 ITR 580 (Mad.) "Owing to all that have been stated supra, there is no merit whatsoever in the appeal filed by the Revenue as the addition of income on estimate basis for certain projects has admittedly/concededly (as admitted / conceded by the Revenue before ITAT) been done without scrutiny and without rejecting the Books of Accounts. Equally, no substantial question of law arises."
4) The Cheers vs. ACIT, dated 15.03.2023 (Cal. HC) "7. We after hearing the rival submission of the parties noticed that the assessing officer made the addition on the estimated basis without having rejected the books of accounts filed by the assessee at the time of hearing before him as the accounts maintained by the assessee were duly audited u/s 44AB of the Act and all purchases and sales were recorded in the books of accounts too and when books of accounts were not rejected the Hon'ble Calcutta High Court in the case of Swadeshi Commercial Co. Ltd. vs CIT (ITA No. 219 of 2001 dated 18.12.2008) (Cal) held that gross profit cannot be estimated. In the instantcase, the Id. AO has not pointed out or any discrepancy in the books of accounts filed by the assessee and the assessing officer has no evidence to come to a conclusion that the assessee has undisclosed profit.
The entire addition was made surmises and conjectures. Even otherwise we find that the assessee has explained the issue with facts and figures, under these facts and circumstances, the addition made by the assessing officer as sustained by the Id. CIT(A) is bad in law. In view of the discussions made above, we delete the addition made by the Assessing Officer.
5) Pratham Properties vs. DCIT, dated 23.06.2021
"9.3 Now the question arises whether the basis adopted by the AO for estimating the profit is sustainable in the eyes of law. The answer stands in negative. It is because the books of accounts of the assessee were duly audited and no defect was pointed out by the AO. There can be several factors for having shown lesser profit in the project. One of the major factor as highlighted by the assessee was that the land cost with respect to the residential project was higher than the project of the sister concem eligible for deduction under section 80-IB(10) of the Act. The contention of the assessee has not been doubted by the authorities below. Thus we are of the view that in the absence of any specific defect in the books of accounts of the assessee there cannot be any addition based on estimate to the total income of the assessee.
9.4 We also find that Hon'ble Madras High Court in the case of CIT versus Marg Limited reported in 396 ITR 580 has held as under:
"there is no merit whatsoever in the appeal filed by the Revenue as the addition of income on estimate basis for certain projects has admittedly/concededly (as admitted/conceded by the Revenue before ITAT) been done without scrutiny and without rejecting the Books of Accounts."
9.5 From the above, there remains no ambiguity that the profit declared by the assessee cannot be enhanced on estimated basis without rejecting the books of accounts. The leamed DR at the time of hearing has not brought any judgment of jurisdictional High Court in support of his favour. Therefore we hold that the profit enhanced by the AO and confirmed by the learned CIT (A) on estimated basis cannot be added to the total income of the assessee for the reason that the books of accounts were not rejected by the authorities below. Hence the ground of appeal of the assessee is allowed."
6) Sayqul Islam vs. ITO, dated 31.07.2020 (Gauhati HC) "13. However, we note that assessing officer had not specifically identified any specific defects in the purported evidences and also taking note of the fact that the assessing officer has not held that the expenses so claimed by the assessee in his books of accounts were not incurred by the assessee for the purpose of its business. The assessee has produced all books of accounts, vouchers, bills and other documents but the Assessing Officer without pointing out any mistake and error in the bills/vouchers and in the books of accounts made addition @ 8% which was reduced by the Id CIT(A) to5%. It is also admitted fact that assessee's books of accounts were not rejected by the assessing officer although these were not audited under section 44AB of the Act by a Chartered Accountant. We note that the AO could have ventured into estimation only after rejecting the books of accounts of the assessee u/s 145(3) and thereafter by best judgment assessment u/s 144 of the Act. Here in this case, the AO has not passed any order u/s 144 of the Act. The AO thus without rejecting the books of account of the assessee has gone for estimation on suspicion and conjectures that the assessee may be inflating its expenses and showing net profit ratio at a very low rate. Therefore, based on the factual position narrated above we find merits in the contention of the Counsel."
7) ITO vs. Sunil Nayyar, dated 24.02.2020
"Rejection of books of account - estimation of profit - AO estimating the profit @5% on the gross turnover - HELD THAT:- AO has not pointed out any accounting defects in the books of accounts. Rather he is summarily ignored the books of accounts but has proceeded to invoke the rigour of section 145(3) which is bad in law. The position in law is settled. The AO cannot resort to estimation without confronting to the assessee the "defects" in the books of accounts and "material or evidence or the basis of estimations". The AO has not discharged his primary onus as such the assessment made is bad in law."
In view of the above discussions, considering the fact that the A.O. has made ad-hoc addition without rejecting the books of accounts of the A.O., thus, remanding the matter to the file of CIT(A) to adjudicate the said issues will only amounts to multiplication of proceedings and waste of precious time of the Authority. Thus, finding the merit in Ground No. 3 of the assessee, we are of the opinion that, the additions made by the A.O. which was sustained by the CIT(A) cannot be justifiable, accordingly, we allow Ground No. 3 of the assessee and the addition made by the Lower Authorities are hereby deleted.
In the result, Appeal of the Assessee is partly allowed.
Order pronounced in open Court on 17th August, 2023.