IN THE ITAT CUTTACK BENCH
Gayotri Oil Mills
Assistant Commissioner of Income-tax
IT APPEAL NOs. 44 to 61 and 335 (CTK.) OF 2012
[assessment years 2003-04 to 2009-10]
JUNE 29, 2012
These appeals by the respective assesses as enumerated in the cause-title above being the partners and firms are in appeal before us for the respective AYs mentioned against their names on orders of the learned CIT(A) for the respective AYs which are being taken up together for the sake of convenience and brevity and it has been pointed out that primarily identical orders by the Assessing Officer and the learned CIT(A) have been passed, the issue remaining common to all the assessees being taxation of undisclosed income under the provisions of Section 143(3)/153A.
2. The learned Counsel for the assessee pointed out that in the case of M/s. GRM Enterprises for the Assessment Year 2009-10 return being filed in September, 2009 was taken up for scrutiny u/s.143(3) after obtaining approval of the Addl. CIT and is therefore the only appeal not in pursuant to order Section 153A.
3. The learned Counsel for the assessee initiating his arguments submitted that particularly common orders have been made by the Assessing Officer and adjudicated by the learned CIT(A) in a stereo type manner on the appeals of the respective assessees for the simple reason that a search and seizure operation u/s.132 was conducted in the residential and business premises of the group cases of Shri Gudula Venkanta Raman and Gudula Vaskar Rao, which includes M/s. GRM Enterprises and other assessee being common partners. Returns for the respective AYs have been filed electronically and otherwise when in pursuance to notice u/s.153A returns were filed as were filed earlier u/s.139(1). The learned Counsel for the assessee vehemently argued that no iota of searched material could lead to a finding that the assessees could be subjected to any undisclosed income. In other words, the learned Counsel for the assessee submitted that invariably the source of income rendered by the assessee firms having turnover in Crores of rupees leading to return of income on the turnover was accepted but for the percentage of return thereon which the assessing authorities have tried to tinker with without bringing on record any corroborative evidence. In fact by incorporating the turnover of the respective assessee firms at the same figure and also incorporating the returns of sales as not profit has been brought on record by the assessing authorities. For instance in the case of M/s. GRM Enterprises, Koraput, the Assessing Officer has observed that the assessee firm had returned income from the AYs 2003-04 to 2009-10 being the percentage of net profit at 1.24% to 1.76%. The Assessing Officer has estimated the same at 2% without even assigning any reason or the basis for his reasoning estimating at higher rate while combined effect at the average net profit rate cannot exceed 2%. The enhancement therefore is clearly in violation of the provisions of Section 153A which will have a cascading effect to the fact that the Assessing Officer has to sustain this addition for the purpose of initiating penalty proceedings. He pointed out that the penalty proceedings initiated under the provisions of Section 271A on account of non-maintenance of proper books of accounts and documents which hasd not been indicated. The assessee firms are subject to audit u/s.44AB in view of the turnover exceeding Rs. 40 lakhs in each of the Assessment Year as have been noted by him in his order therefore could not lead to a finding that proper books of account have not been maintained. If he was to reject the books of account so maintained, he was to initiate proceedings u/s.145(3) when he chose to estimated 2% without assigning any reason. No specific defects have been found except in the case of Shri Sankar Cashew Industries and instead of choosing to enhance NP he disallowed 20% of the freight charges out of the total claim of Rs. 10,26,200 for the Assessment Year 2008-09. The learned Counsel for the assessee vehemently argued that it was not the case of the assessee to claim expenditure for disallowance u/s.69C when the order has been passed u/s.143(3)/153A. Having accepted the turnover the purchases and freights are incidental to incurring the cost of sales cannot be disallowed on estimation without assigning any reason. He also pointed out that the NP has been computed after paying the working partners salary and interest on the capital contributed by the partners as per the partnership Deed as considered by the Assessing Officer u/s.143(3)/153A contradicts his own finding for estimating the NP as well as disallowance of expenditure. He was not passing the order for disallowance of interest and salary to partners as they are to be taxed in the hands of the partners as business income. By inflating the Net Profit rate the expenses stand allowed to the extent the disallowance of expenditures or interest and salary to partners remains the same. This information was procured by the Assessing Officer from the financial statements duly audited under the provisions of Section 44AB when the auditors have categorically submitted that proper books of account are maintained that have been physically verified by them. The purpose for initiating penalty u/s.271A therefore has not been given the finding for an logical conclusion as of now.
4. On the learned CIT(A) confirming all these estimations of income and disallowance of expenditures the learned CIT(A) swayed by the facts that the Assessing Officer was within his right to proceed to reassess the total income as the word “shall” has been purposefully stated by the Statute in the said section. He submitted that a meaning has been given to the word “shall” u/s.153A has been highlighted insofar as Section 153A clearly provides that it can be made only in the cases of search or requisitions. In other words, the learned Counsel for the assessee tried to address the issue by stating that consequent to a search, on the finding of books of account not available or not properly inscribed, the Assessing Officer could issue notice u/s.153A and pass an order of the total income of the six AYs which has been partly done for other assessees only. He submitted that the authorities below tried to combine fact the prerogative of the assessing authorities to tax the incomes by way of regular assessment and u/s.153A without subjecting themselves to settle the controversy as to whether the assessee can be subjected to estimation which has been justified by the Assessing Officer as well as the learned CIT(A). On perusal of the order of the learned CIT(A) he pointed out that they are doubting the accuracy of determination of income of the audited financial statements on the basis of books of account which as per the panchanama was not impounded by the search party. The learned CIT(A) therefore held that the estimate is based on the incriminating evidence gathered during the search which incriminating was in the sense that same shows that no proper books of account were maintained by the assessee. The learned Counsel for the assessee humbly prayed that it is not the case of the assessee that the universal maintenance of books of account as per the Accounting Standard whether can be considered improper by the assessing authorities when they have been allowed to reject the books of account by invoking the provisions of Section 145(3). He submitted that the Chartered Accountants have been authorized to conduct the audits, submit their reports on having verified the correctness or completeness of the account of the assessee and if so found the assessee should not be subjected to enhancement on the very facts of turnover and expenditure claimed therein on estimation which finding has to be rebutted by the auditors based on the audit reports. The law prescribes maintenance of books of account on mercantile system of accounting have been accepted therefore could not be held as incriminating by the learned CIT(A) as can be perused in his order who has chosen to dismiss the contention of the assessee appellant before him.
5. Concluding his arguments, he submitted that holding of books of account improper and/or incriminating was highly improbable that the estimation for enhancement of the net profit was either under the provisions of Section 143(3) or u/s.153A. The disallowance of expenditures therefore cannot on an isolated holding for estimation at a particular rate to disallow expense of bills and vouchers. The assessee is a trader and manufacturer having rice mill and oil extraction business has to incur all the expenses for the purposes of its business therefore cannot be disallowed u/s.153A. He prayed that the returns for the respective AYs as filed by the respective assessees in response to notice u/s.153A may be accepted as such.
6. The learned CIT-DR opposed the contention of the learned Counsel for the assessee. She submitted that the search party could not find the books of account on a specific query raised by the search party. Part of the books and records were produced which were the search material for the purpose of making the respective assessments in the case of the assessees. She justified the initiation of penalty proceedings u/s.271A insofar as the Assessing Officer had no alternative but to resort to estimation of NP rate for the impugned AYs in accordance with the provisions of Section 153A. The learned CIT(A) on the other hand, confirmed the action of the Assessing Officer insofar as the combined effect of passing the order u/s/.143(3)/153A was the prerogative of the AO who can reassess the income rendered by the assessee under the provisions of Section 139(1) when the assessee has been subjected to proceedings u/s.153A without bringing on record the material for the purpose of enhancing the income. She submitted that it was the case of the Assessing Officer to estimate at a higher figure in view of the improper books of account which were not found or produced when the transactions of such magnitude were to be related in accordance with the business conducted by the respective assesses. It was nobody’s case that the interest and salary paid to the partners has to be claimed first for adopting the NP rate. The learned CIT(A) therefore rightly upheld the Assessing Officer’s rejection of books of account u/s.145 when it was reported by the Assessing Officer that the books of account were incomplete. She fully supported the orders of the authorities below.
7. We have heard the rival contentions of the parties and perused the material available on record. Considering the facts and circumstances of the case, we are inclined to find force in the contention of the learned Counsel for the assessee to the extent that the assessees should be subjected on the concept of real income either in the return filed by the assessees u/s.143(3) or on the basis of search material under the provisions of Section 153A. We have perused all the appeals and the orders of the Assessing Officer as well the learned CIT(A). There is no denying of the fact that the books of account have been maintained and duly certified having been verified by the auditors who have been authorized by the provisions of the I.T.Act under Section 44AB to submit a report certifying that the books of account were verified which books resulted in computing the returned income by the assessee as per the balance sheet and P & L account annexed with the report. In other words, the books not found or incomplete books found were completed and audited by the Chartered Accountants which were verified by the Assessing Officer. This clearly indicates that the learned CIT(A) upholding the contention of the Assessing Officer on having invoked the provisions of Section 145 actually had no basis. On our perusal of the assessment orders this fact emerges in favour of the assessee to the extent that the audited figures of turnover, expenditures claimed and the percentage of return as NP has been inscribed by the Assessing Officer in the respective orders. The interest and salary became expenditure to the firm have not been disturbed. The Assessing Officer has accepted the NP as returned by the assessee but at a higher rate which rates has no basis for enhancement insofar as the gross margin on a turnover is directly related to the sales and the expenditures claimed leading to holding of stock which valuation has not been disputed by the Assessing Officer. This indicates that all the facts remaining the same, the Assessing Officer has not estimated the enhanced NP on sound footings. In fact the estimation has been made on mere surmises, conjectures when the facts borrowed for the purpose of revising the NP rate has been inscribed in the very books of account which the authorities below considered as improper, incomplete or to the extent of incriminating. Disallowance of expenditure by no stretch of imagination can be made once one resort to estimate the NP rate. A gross margin becomes comparable to the extent that the assessee being a trader or manufacturer has direct expenses to bear together with the other expenses claimed by the assessee are allowable u/ss.30 to 37 of the I.T.Act. Disallowance of expenditures claimed u/ss.30 to 37 therefore leave no meaning to consider the NP insofar as the Assessing Officer has not resorted to tinker with the gross profit rate. Therefore, the green signal given by the learned CIT(A) to the Assessing Officer to proceed simultaneously u/s.143(3)/153A is defective to the extent that the AO cannot roll back from the very facts for computation of income of the assessee for the purpose of his enhancing the income. The assessment has to be in accordance with the provisions of the I.T.Act which we have perused in respect of all the assessees have not been in accordance as laid down by the said accounting principles and Court rulings. We do not find any merit in the confirmations thereof by the learned CIT(A) when the respective assessees are registered firms having common partners and the group concerns have not been created after the search period to be subjected to assessment only for undisclosed income. The assessee has been rendering income from the business and the failure on the part of the taxing authorities to have discovered undisclosed income on the basis of search carried out cannot be finalized for the purpose of satisfying the search operation by estimating a meager higher amount as rate of return of NP which NP rate is variable on the basis of claim of expenditure allowable u/ss.30 to 37 of the I.T. Act. Disallowance of expenditures was also not proper on the facts and circumstances of the case, which has been brought before us. In view of the above, we have no hesitation in setting aside the orders of the learned CIT(A) in all the cases and directing the Assessing Officer to accept the returned income as filed by the respective assessees for the purpose of assessment u/s.143(3)/153A.
8. In the result, all the appeals filed by the respective assessees are allowed.