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Income Tax Appellate Tribunal, DELHI BENCH “B” DELHI
Before: SHRI CHANDRA MOHAN GARG & SHRI PRADIP KUMAR KEDIA
The captioned appeal has been filed by the Revenue against the order of the Commissioner of Income Tax (Appeals)- VIII, New Delhi (‘CIT(A)’ in short) dated 22.02.2019 arising from the assessment order dated 22.02.2016 passed by the Assessing Officer (AO) under Section 143(3) of the Income Tax Act, 1961 (the Act) concerning AY 2013-14.
The grounds of appeal raised by the Revenue read as under:
“Whether on the facts and circumstances of the case and in law, the Ld. CIT(A) was justified in deleting the addition of Rs. 1,84,38,968/- being 20% of total turnover of Rs.9,21,94,840/- on account of estimation of income be rejecting the books of accounts of the assessee company u/s 145 of IT Act as the assessee had neither furnished the required details supporting the financial results nor books of accounts produced for examination during the assessment proceedings or during the course of appellate proceedings.”
Briefly stated, the assessee filed return of income for Assessment Year 2013-14 declaring loss at Rs.1,63,77,940/-. The return filed by the assessee was subjected to scrutiny assessment. In the course of scrutiny assessment, the Assessing Officer issued notices under Section 142(1) on several occasions and called for details and documents in support of return and also the books of account. A show cause notice was issued under Section 144 of the Act as well to the Directors of the assessee due to continued non-compliance. The Assessing Officer eventually rejected the books of account under Section 145 of the Act and estimated an addition of 20% on total turnover of Rs.9,21,94,840/- by invoking Section 145 of the Act. An addition of Rs.1,84,38,968/- was accordingly made along with certain other additions with which we are not presently concerned.
Aggrieved, the assessee preferred appeal before the CIT(A). The CIT(A) however displaced the action of the Assessing Officer and reversed the additions so made. The relevant operative paragraph of the order of the CIT(A) reads as under:
“4.1 In the ground No.2, Assessing Officer has made additions of Rs.1,84,38,968/-, i.e., @ 20% of total turnover of Rs.9,21,94,840/- which is unjustified arbitrary and on the basis of surmises and conjectures and bad in law. Rejection of books of account u/s 145(3) and making a best judgment assessment, assessment u/s 144 is a powerful tool in the hands of the Assessing Officer. The Assessing Officer must notice specific defects in the books of account of assessee to be able to reject it & make an assessment on the basis of best judgment. One method of estimating income of assessee in case of rejection of accounts is taking gross profit rate by comparing the assessee with its counterparts' operating results. However, Assessing Officers must exercise this power prudently and not act arbitrarily. It is seen from the order of the AO that the AO has taken an imaginary incorrect figure of Rs.287.47 lacs as turnover in audited balance sheet as mentioned under para XI of page no. 10 of assessment order, whereas it is clearly mentioned in audited balance sheet as well as in IT that there is turnover of Rs. 9.21 crores. Therefore, rejection of books of accounts u/s 145(3) is not found te be correct as the base of rejection of books of accounts is not appropriate. This is based on wrong figures taken by the AO from the audited profit and loss account for the quarter ending 31/03/2013 and not for the complete year, which is clearly mentioned as 9.21 cr in the audited balance sheet. Accordingly addition of Rs. 1,84,38,966/- on imaginary basis at the rate of 20%. These addition appears to be also arbitrary and against the show cause letter dated 05/02/2016 of the AO, in which it is mentioned that "to explain as to why 10% of these expenses should not be disallowed" and the same is also mentioned on pg 11 of his assessment order under point X3. Therefore, the addition @ 20% of the turnover is not only arbitrary and based upon surmises and conjectures. The legal position in this regard is that upon rejecting books of account and invoking Sec.145, the AO does not get unfettered powers to apply any GP rate of his choice. Relying on the judgment of the Hon'ble Sangrur Vanaspati Mills Ltd. vs. CIT (2007) 211 CTR (P&H) 439 and "Hon'ble SC in Kachwala Gems vs. Jt. CIT 288 ITR 10 (SC), the best judgment assessment must be on a reasonable basis and should be honest and fair estimate and not totally arbitrary. In the instant case, AO had not brought any material evidences to show that some business activities has been carried out by the assessee and no finding has been recorded. In view of the above discussion, in my considered opinion the estimate made by the AO is without any basis and hence directed to the deleted. The appeal of the appellant has been allowed. It is further seen that during the year, the gross profit ratio before interest and depreciation is Rs.842.22 lakhs i.e. 91.33% (842.22/922.19*100) as against the previous year of Rs.6.88 lakhs i.e. 38.70% (6.88/17.78*100), which is higher i.e. 2.40 times of the previous year profit before depreciation and interest. Also, the net profit volume has also increased by 83.17 lacs as compared to the preceding previous year and is not considered by the A in the assessment order, which is against the decision of jurisdictional ITAT in the case of Style Syntex Pvt. Ltd. New Delhi Vs. Department of Income Tax Pronounced on June, 2015, decided by the bench of Deva Singh, Judicial Member and N.K.Saini, Accountant Member. And also the case of Sai International, New Delhi Vs. Department of Income Tax on 28th September, 2012, ITAT Delhi Bench G, New Delhi, ITA No.1406/Del/2012, in which it is decided by ITAT Delhi that "the estimate of the AO in assessing the income for the year under consideration was without any basis particularly when he himself assessed the income of the assessee at nil for the preceding assessment years 2003-04 to 2005-06. Therefore, considering the facts and circumstances of the case, the addition of Rs.1,84,38,968/- is hereby deleted.”
Aggrieved by the relief granted by the CIT(A). The Revenue is in appeal before the Tribunal.
The ld. Sr.DR for the Revenue vehemently opposed the action of the CIT(A). The ld. Sr.DR pointed out that the Assessing Officer made all possible efforts by issuing multiple notices to the assessee to gather materials and evidences in support of the return. The Assessee did not produce the evidences and the books of account as called for despite long list of show cause notices. Under the circumstances, the Assessing Officer was left with no option but was constraint to estimate the income to the best of his judgment. The Assessing Officer has estimated a reasonable income of 20% on turnover in the absence of any data made available by the assessee in this regard. The ld. Sr.DR relied upon the judgment in the case of Sanjay Kundu vs. CIT in CWP No.27253 of 2016 judgment dated 15.05.2017 for the proposition that where the assessee failed to produce the books of account despite multiple opportunities, the Assessing Officer was entitled to estimate the income in the absence of books. The ld. Sr.DR submitted that the facts in Sanjay Kundu (supra) are broadly similar and therefore, estimation made by the Assessing Officer in the absence of any historical data provided by the assessee need not be interfered. The ld. Sr.DR thus relied upon the order of the Assessing Officer and urged for setting aside the order of the CIT(A).
The ld. AR for the assessee, on the other hand, supported the order of the CIT(A) and contended that show cause notice under Section 144 was issued only with respect to estimation of 10% income on certain expenses such as depreciation, interest cost etc. and no opportunity was given for estimation of income under Section 145 of the Act vis-à-vis the turnover reported by the assessee. The ld. AR also pointed out that the turnover figure has not been taken correctly for the purposes of assessment under Section 144 of the Act and therefore, rejection of books of account on incorrect facts were not appropriate as rightly held by the CIT(A). The ld. counsel thus submitted that no interference with the order of the CIT(A) is called for.
We have carefully considered the rival submissions and perused the assessment order and the first appellate order and also the material referred to and relied upon in the course of hearing. The issue in the present case is whether the CIT(A) was justified in reversing the estimated additions in the peculiar facts of this case.
8.1 On perusal of the assessment order, it is manifest that the Assessing Officer made utmost efforts in gathering detail from the assessee without any avail. The show cause notices were served on the directors also. Despite all the efforts, the assessee has failed to produce books of account repeatedly called for. A perusal of the order of the CIT(A) also does not confirm as to whether the books of account were called for by the CIT(A) and examined by him. Thus, the fair conclusion would be that there was an abject failure on the part of the assessee to produce the books of account as called for by the Assessing Officer for the purposes of assessment. Under the circumstances, the averments made by the CIT(A) are contrary to the facts on record. The CIT(A) inter alia has observed that the Assessing Officer must note specific defects in the books of account of the assessee to be able to reject it and make an assessment on the basis of best judgment. However, such observation of the CIT(A) is grossly contrary to the fact that books of account were never produced at the first place and therefore, the Assessing Officer was in no position to point out specific defects. However, the CIT(A) has vaguely stated that the Assessing Officer must exercise his power prudently and not act arbitrarily but has not demonstrated as to how the Assessing Officer acted without ordinary prudence particularly where series of notices have been issued and served on the assessee calling for requisite details and books of account. The assessee has apparently disobeyed the statutory notices issued under Section 143(2), Section 142(1) and Section 144 of the Act. The process of reasoning adopted by the CIT(A) is totally contrary to the material available on record. The CIT(A) could not have reached to the conclusion as drawn on the face of such non co-operation and disregard. Needless to say, the CIT(A) is vested with the appellate powers as well as co-terminus power as vested with the Assessing Officer while making the assessment. In the instant case, the CIT(A) ought to have at least called for the books of account himself before coming to any conclusion on the matter. The CIT(A) in our view has acted in a perfunctory manner while dislodging the assessment order.
We are thus inclined to set aside the order of the CIT(A) and restore the issue back to the file of the Assessing Officer. The Assessing Officer shall be entitled to examine the issue without any fetters after calling for all such information as may be required and the books of account maintained for this purpose if any. The assessee is cautioned to attend to the proceedings before the Assessing Officer diligently and without any demur and provide such assistance as may be discernible. The Assessing Officer shall re-examine the issue in accordance with law after giving reasonable opportunity to the assessee.
In the result, the appeal of the Revenue is allowed for statistical purposes. Order pronounced in the open Court on 26/04/2023.