Bulu Ghosh Vs ITO (ITAT Kolkata)
Introduction: In the case of Bulu Ghosh vs. Income Tax Officer (ITO), ITAT Kolkata delivered a significant verdict concerning the estimation of profits without the rejection of books of accounts. This article provides a detailed analysis of the case and its implications.
Background: Bulu Ghosh, the appellant, filed the income tax return for the assessment year 2016-17, which was subsequently selected for scrutiny. The Assessing Officer (AO) raised concerns about the apparent discrepancy between the audited profit and loss account presented by the appellant and the income reflected in Form 26AS. The appellant had reported a net loss from contractual business, while the Form 26AS indicated a higher total contract value.
The AO’s Action: The AO, after seeking an explanation from the appellant, calculated an additional income of Rs. 1,77,046. This additional income was determined by applying the presumptive taxation provisions of Section 44AD, which allows for the estimation of income at 8% of the total contract value. Notably, the AO did not reject the books of accounts of the appellant.
The Appellant’s Grievance: The primary contention of the appellant was that the AO had not invoked Section 145(3) of the Income Tax Act, which is necessary for rejecting the books of accounts. Without the rejection of the books of accounts, it was argued that the addition could not be made. The appellant also cited the decision of the Rajasthan High Court in the case of CIT vs. Maharaja Shree Umaid Mills Ltd. (192 ITR 565) to support their case.
The Tribunal’s Decision: The ITAT Kolkata examined the case and referred to the precedent set by the Rajasthan High Court. In the absence of a formal rejection of the books of accounts, the ITAT ruled that the fall in the gross profit rate could not be considered. Consequently, the addition made by the AO was not justified, and the appellant’s appeal was allowed.
Conclusion: The case of Bulu Ghosh vs. ITO highlights the importance of adhering to the legal procedures for estimating profits and making additions to an individual’s or entity’s income. Without the proper rejection of books of accounts, such estimations may not be valid in the eyes of the law.
This ruling serves as a reminder that tax authorities must follow the due process and legal requirements when making income additions based on profit estimations.
FULL TEXT OF THE ORDER OF ITAT KOLKATA
This appeal of the assessee for the assessment year 2016-17 is directed against the order dated 14.06.2023 passed by the ld. Commissioner of Income-tax, Appeals, NFAC, Delhi [hereinafter referred to as ‘the ‘ld. CIT(A)’]. The assessee has raised the following grounds of appeal:
i. FOR THAT the orders passed by the authorities below are arbitrary and capricious in nature:
ii. FOR THAT both the authorities below failed to appreciate from the audited profit and loss account produced that the appellant had to incur certain administrative expenses like staff salary/bonus and statutory expenses like VAT/PF/ESI, which made an adverse impact, lead to net loss from the contractual business;
iii. FOR THAT when the appellant had duly produced the audited report, final accounts, bank statement of the business at the assessment stage and Profit & Loss (PL) Account, Schedule to PL Account, Purchase Ledger, Paid Challans, Summary of Wages, Hire Charges, Staff Salary, Provident Fund and ESI at the e-proceeding appellate stage, there is no scope to make any estimation or resorting to section 44AD of the Act, when it is evident that the net loss shown (governed by the other factors) had no immediate nexus with the contractual receipts, as such the same cannot be acclaimed as discrepancy;
iv. FOR THAT at the e-proceeding appellate stage, the Ld.CIT, NFAC totally lost sight of the adjournment prayer and the supporting evidence filed, as such in a mechanical manner held that the expenses are not commensurate with the gross contractual receipts, when it is evident that all the relevant documents were filed on numerous occasions, whereupon there was no room for presumption of inflated expenses to arrive at loss figure shown or scope to support the estimation of profit @ 8% of receipt;
2. Brief facts of the case are that the assessee filed return of income for the A.Y. 2016-17. The return of income was duly processed u/s 143(1) of the I.T. Act. Subsequently, the case of the assessee was selected for scrutiny through CASS followed by notices issued u/s 143(2) and 142(1) of the Act. In compliance to the notices, the ld. AR of the assessee appeared before the AO from time to time and furnished necessary details as asked for by providing copy of audit report along with P & L A/c and balance sheet for the year ended 31.3.2016. The ld. AO examined the documents which were produced before him during the assessment proceeding and find that assessee had reflected net loss of Rs. 13,80,362/- from contractual business whereas as per 26AS details of total value of contract works arrived at to the tune of Rs. 22,13,069/-. On this issue, the ld. AO asked the assessee to explain the discrepancy. However, the assessee could not furnish any documentary evidence to reconcile the same within the stipulated time provided by the AO. Thus the ld. AO decided to add an amount of Rs. 1,77,046/- by calculating 8% of total contract value of Rs. 22,13,070/- by resorting to the provisions of section 44AD of the Act.
3. Aggrieved by the above order, assessee went into appeal before the ld. CIT(A) where the appeal of the assessee was dismissed.
4. Feeling dissatisfied with the above order, assessee preferred the instant appeal before the Tribunal. The main grievance of the assessee in the appeal is that assessee maintained complete books of accounts and also filed audit report. There is no whisper in the assessment order about the mistake in the books of account. The ld. AO has not invoked the provision of section 145(3) of the Act and without rejecting the books of accounts of addition cannot be made as held by the Rajasthan High Court in the case of CIT vs Maharaja Shree Umaid Mills Ltd. (192 ITR 565).
5. On the other hand, ld. DR has relied on the findings given by the lower authorities.
6. We have heard the rival contentions and perused the material placed on record. In the present case, assessee has filed duly audited balance sheet along with P & L A/c before the AO at the time of framing of assessment order. However such books of accounts were never rejected by the AO in accordance with law and even the AO as well as ld. CIT(A) has not given any findings on the issue. For estimating the profit without rejecting books of account Hon’ble Rajasthan High Court in the case of CIT vs Maharaja Shree Umaid Mills Ltd. (supra) has held that
“The other question about the fall in gross profit rate cannot be looked into in this case because the Inspecting Assistant Commissioner has not rejected the books of accounts of the assessee and without making this as a base, it could not be said that the expenditure had been inflated which is a question of fact and in view of the findings of commission which is confirmed by the tribunal, the same cannot be allowed.”
Respectfully following the judgement of CIT vs Maharaja Shree Umaid Mills Ltd. (supra) based on the discussion on facts recorded herein above. The contentions of assessee in ground no. 3 is hereby allowed and direct the AO to delete the addition made in the hands of assessee. Ground no. 1, 2 & 4 are being general in nature does not require any adjudication and consequential in nature.
7. In the result, the appeal of the assessee is allowed.
Order pronounced in the open court on 18.10.2023
