This is an Appeal by the Assessee directed against the Order by the Commissioner of Income Tax (Appeals)-1, Jabalpur (‘CIT(A)’ for short) dated 27/4/2018, dismissing the assessee’s appeal contesting his assessment under section 143(3) of the Income Tax Act, 1961 (‘the Act’ hereinafter) for the Assessment Year (AY) 2009-10 vide Order dated 19/12/2011.
2. At the outset, it was submitted by the ld. counsel for the assessee, Sh. Modh, that the appellate order is without proper application of mind by the first appellate authority. There has been no consideration of the assessee’s replies and explanations furnished during the assessment proceedings – for which reference was made by him to pgs. 1-2/PB-1, in the impugned order. Even the Assessing Officer (AO), who was required to submit his comments by the ld. CIT(A) vide his notice dated 13/12/2017, had not furnished the same. Where then, he posited, was the hurry in deciding the appeal ex parte the appellant in April, 2018, after only two notices of hearing. In fact, he was out of the country at the relevant time, advance information of which had been given to the office of the ld. CIT(A)/AO. On being asked as to why, even so, could not the assessee-noticee respond to the said notices inasmuch as it is he who is served the notice/s of hearing, he would reply by stating that there had been, as ascertained by him from the assessee, no service of any notice of hearing. The matter, it was pleaded by him, be, in the interest of justice, restored to the file of the ld. CIT(A) for a decision afresh after providing due opportunity of hearing to the assessee.
3. I have heard the parties, and perused the material on record.
3.1 The case put up by the ld. counsel, Sh. Modh, before me is not on the merits of the case. Digressing from the grounds of appeal (forming part of Form 36, i.e., the Memo of Appeal), he argued – which he is well entitled to with the leave of the Tribunal (see rules 11 and 27 of the Income Tax (Apellate Tribunal) Rules, 1963), on the impugned order being not maintainable on account of non-application of mind and non-provision of proper opportunity of hearing. As apparent, nothing has been brought on record to substantiate the second (latter) claim/limb of the assessee’s case. As regards the former, the operative part of the impugned order, read out during hearing, reads as under:
“The present appeal is against the order u/s. 143(3) of the I.T. Act, 1961 dated 09/12/2011 passed by the AO for the assessment year 2009-10. I have carefully perused the grounds of appeal and the order of the AO as already available on records. The appellant failed to offer any explanation properly in support of the grounds raised in this appeal nor any supporting evidence were produced despite adequate opportunity having been provided. Since, in the instant case the appellant has not be able to show that the decision of the AO in making the impugned additions was arbitrary, biased, irrational, vindictive or capricious without any basis. Thus I find no reason to interfere with the decision of the AO.”
The same is, without doubt, not an order on the merits of the case, as it purports to be (refer para 2/pg. 2, i.e., the para immediately preceding that reproduced hereinabove), even as observed by the Bench during hearing. It does not satisfy the test of section 250(6) of the Act (again, read out during hearing), which mandates that the order of the Commissioner (Appeals) disposing of the appeal shall be in writing and shall state the points for determination, the decision thereon and the reasons for the decision. The provision is clear and unambiguous, and draws no exception for an ex parte order. That is, the requirement of law is irrespective of the representation or otherwise before him of either appellant or the respondent or even both, in which, latter event the case as set-up by the party not represented before him, at the earlier (assessment) stage, would have to be considered, and necessarily so, by him. And which sums up the assessee’s case, which is unexceptional. This is as only in that case would an appellate authority, in further appeal, be able to know the basis of his adjudication. It is, as such, incumbent upon him to, while reviewing an order, examine the case of the assessee-appellant, i.e., as set-up before him as well as or in the alternative, i.e., as the case may be, before the assessing authority, whose order is being impugned before him, and specify his reasons – on each of the points arising for determination, as to why he considers the latter’s view as meriting acceptance and is being upheld, i.e., in preference to that of the appellant. That only would show his consideration of the issue/s arising, and the basis of his decision. Further, his order being appealable, it is only thereby that a higher appellate authority would, in further appeal, be able to review his adjudication, absent in the instant case. This is even more relevant where, as in the present case, he proceeds ex parte the appellant. How could he, one wonders, in such a case, state that he is disinclined to interfere for want of any case set-up before him by the appellant, and yet claim the adjudication to be on merits, as he does? That, in fact, makes his order self-contradictory. It cannot, accordingly, be said that he has disposed the assessee’s appeal on merits, much less by taking into account all the materials and explanations available on record, which would include that presented in the assessment proceedings.
3.2 In CIT v. H.M. Esufali H.M. Abdulali  90 ITR 271 (SC), the decision relied upon by the ld. CIT(A), it was clarified that an appellate authority cannot substitute his own judgment in place of that of the AO unless it is shown that the judgment of the AO was biased, irrational, vindictive or capricious. The said case, even as pointed out by Sh. Modh, was a case of a best judgment assessment, so that there was no representation by or on the assessee’s behalf before the assessing authority, who accordingly framed the assessment on the basis of the material on record applying his best judgment. As explained by the Hon’ble Court:
‘In estimating any escaped turnover, it is inevitable that there is some guess-work. The assessing authority while making the best judgment assessment, no doubt, should arrive at his conclusions without any bias and on a rational basis. That authority should not be vindictive or capricious. If the estimate made by the assessing authority is a bona fide estimate and is based on a rational basis, the fact that there is no good proof in support of that estimate is immaterial. Prima facie, the assessing authority is the best judge of the situation. It is his best judgment and not of anyone else. The High Court cannot substitute its best judgment for that of the assessing authority.’
In such a case, and even as an appellate authority is not bound by the said judgment, as the same invariably involves an element of guess-work, it was clarified by the Apex Court that it shall accord due deference thereto unless it is shown to be arbitrary, irrational, etc. inasmuch as the law contemplates the best judgment of the assessing authority and not of any other. An appellate authority would not therefore ordinarily substitute its’ own judgment for that of the assessing authority, unless, as stated, it is shown to be vitiated, or where it is not in agreement with the material on record or is without taking all and only the relevant facts into account. This represents trite law, for which reference may be made to CIT v. Daulat Ram Rawatmull  87 ITR 349 (SC); CIT v. Rayala Corporation (P.) Ltd.  215 ITR 883 (Mad). How could the said law apply in the instant case where there has been, on the contrary, proper representation before the AO, who has completed the assessment u/s. 143(3) considering the material on record and the assessee’s explanation/s, not considered by the ld. CIT(A)? The reliance on the said judgment by him is, clearly, misconceived.
3.3 The matter must, therefore, necessarily travel back to the file of the ld. CIT(A) for a consideration of and a decision on the merits of the case after allowing a reasonable opportunity to the assessee to present his case before him. In fact, in this context, two observations are apposite. The principal addition in this case is on account of a valuation difference (of a storage Godown) based on the report by the Departmental Valuation Officer (DVO) to whom reference was made by the AO during assessment proceedings. ‘Valuation’ being a technical matter, while the AO is not a technical person, the statute provides for a reference by him to the DVO where he seeks to verify the veracity of the assessee’s claim with regard to the cost of acquisition/construction of an asset incurred during the relevant previous year (s.142A). The law accordingly obliges an appellate authority (including the Tribunal) to hear the DVO in adjudicating an appeal agitating an addition based on his valuation report. This has not been observed by the ld. CIT(A), which procedure he shall accordingly comply with in the set aside proceedings, dilating on and issuing specific finding/s qua each item of valuation being contested by the assessee before him.
The second observation/s again pertains to this addition. The assessee has in his second paper-book (PB-II) enclosed the decision in Sargam Cinema v. CIT  328 ITR 513 (SC), whereby the Apex Court upheld the Tribunal’s order setting aside an addition based on a valuation report by the DVO as the reference to him by the AO was without rejecting the assessee’s books of account, invalidating the reference, so that the same could not be relied upon. This gives rise to various issues, which are therefore being highlighted with a view to ensure their consideration and adjudication proper, serving the purpose of the set-aside. To begin with, the matter assumes relevance as the books of account of the assessees’ food-grain business were not produced before the AO. The assessee is in hotel and food-grain trading business and, as it appears, the storage-godown being built is for this business. Now, while non-maintenance of books of account (which includes bills and vouchers) may not be conclusively held on the basis of the income of the said business for the relevant year having been returned on presumptive rate basis (u/s. 44AF), the fact of the matter, even as observed by the Bench during hearing, is that the books of account of the said business were not produced by the assessee before the AO in the assessment proceedings. How could the books of account, not produced and, therefore, unable to be verified by him, be rejected by the AO? There could possibly be no rejection (non-acceptance) of the said books under such circumstances?
In fact, the question of non-production, though basic and integral to rejection, is itself rendered superfluous as the income of the assessee’s said business was neither returned nor, consequently, assessed on the basis of the books of account but, as afore-said, on presumptive basis. Where, then, one may ask, was the need for the assessee to produce them, or for the AO to call for and examine them for the purpose of placing reliance thereon for deducing the income of the assessee’s relevant business. And, where found to bear defects, i.e., as not reliable, to reject them and proceed to estimate the said income on the basis of the material available or otherwise gathered by him, after confronting the same to the assessee. In the instant case, the assessee himself does so, i.e., disregards his books – assuming them to be maintained, for returning income, which he does on presumptive basis, i.e., in preference to the results exhibited by the said ‘books’. That is, the conduct of the parties, which is in conformity with the law, itself exhibits the unreliability and, thus, the nonacceptance of the accounts, indeed their irrelevance, for the purpose of determining the income of the assessee’s relevant business. It may also be borne in mind that it is not necessary that a specific order is to be passed by the AO in its respect, and which could be implicit in his order, even as explained in, inter alia, CIT v. A. Krishnaswami Mudaliar  53 ITR 122, 126 (SC) in the following words:
‘No express order was recorded by the Income-tax Officer that in his opinion the income, profits or gains of the business could not properly be deduced from the method of accounting employed by the firm, but it is implicit in what is stated by him that without valuation of the unexpired exploitation rights the profits of the year of account could not be computed. With this view, it appears, the Appellate Assistant Commissioner agreed.’
In the instant case, the AO records a finding (at para 2 of his order), after hearing the assessee (through his counsel, Sh. S.K. Lalwani, CA) from time to time, that he has not maintained books of account as he had returned the income on presumptive tax basis u/s. 44AF. The same being a non-obstante provision, the business income (of the food-grain trading business) was accepted by him at the returned sum of Rs. 3,68,712 (pg. 29/PB-II), which explains the observation hereinbefore of the conduct of the parties being in conformity with law. The maintenance of accounts is itself rendered inconsequential under such circumstances, i.e., even assuming their maintenance, asserted by the ld. counsel during hearing. Further, it may be that the storage-godown is for the warehouse business, commenced during the previous year relevant to AY 2010-11 (pg. 34/PB-II), in which case the AO’s statement, being in respect of the food-grain business, would not be relevant. If, as it appears, the said business did not commence during the current year, with the construction of the Godown, a principal asset of this business, having been completed in the following year, the question is whether the issue of acceptance or otherwise of the accounts, i.e., for the purpose of determining business income, which includes loss, would arise? These and like questions/issues would therefore need to be examined and dilated upon by the ld. CIT(A) where a similar argument/s is made by the assessee-appellant before him, also hearing the AO in the matter.
The argument, rather, and as shall be presently seen, gives rise and has other facets to it. Firstly, assuming that the reference is bad, could the material gathered in pursuance thereof, be relied upon by the AO, of course after confronting the assessee therewith? This question arises as it is well-settled that the validity of an assessment is not impacted by that of the material gathering process, which can, subject to the adherence to the principles of natural justice, as furnishing reasonable opportunity of rebuttal to the assessee, be relied upon for the purpose of assessment. In Pooran Mal v. Director of Inspection (Inv.)  93 ITR 505 (SC), a decision by the larger Bench of the Apex Court, it was explained that the test of admissibility of evidence lies in its relevancy. As such, unless there is an express or necessarily implied prohibition in the Constitution or other law, evidence obtained as a result of an illegal search or seizure is not liable to be shut out. Accordingly, it was held that even though the search and seizure may be in contravention of section 132 of the Act, still the material obtained thereby is liable to be used subject to law before the Income-tax authorities against the person from whose custody it is seized and, therefore, no writ of prohibition in restraint for such use can be granted. This stands reiterated by it in Dr. Pratap Singh & Anr. v. Director of Enforcement  155 ITR 166 (SC). This aspect would therefore, where assumed, have to be considered and answered after hearing the parties.
There is yet another aspect of the matter, which issues forth from the foregoing: Whether a rejection of accounts has to necessarily precede a reference to the DVO u/s. 142A. That is, assuming its applicability and, further, that there has been no implied rejection in the instant case. This is deemed pertinent as there is nothing in the provision of law as well as the clear enunciation of law by the Apex Court per its decisions to so suggest. An addition, as in the instant case, may ensue in case the excess cost (as determined by the VO), i.e., where so, is, in the opinion of the AO, unexplained as to its nature and source (or to the extent it is so) by the assessee. The same is essentially a rule of evidence (ss. 69/69A), as is the case for sec. 68, whereby an unexplained credit in the asseessee’s accounts is deemed as income, and which was upheld by the Courts even in the absence of a codified law, i.e., under the 1922 Act. Refer, inter alia, Kale Khan Mohd. Hanif v. CIT  50 ITR 1 (SC), a decision by a larger Bench of the Apex Court affirming the decision by the Hon’ble jurisdictional High Court. It stands explained therein that the onus of proving the source of money found to have been received by the assessee is on him. A credit entry/s in his accounts is by itself a proof of the assessee being in receipt of taxable income, which therefore has to be shown as tax-exempt or otherwise proved as to its nature and source for it to be not regarded as such. What, therefore, an assessee is in substance being called upon to in such a case establish is the truth of his accounts, i.e., prove the same qua the relevant entries in the accounts – nothing more and nothing less. That is, the truth of his accounts is to be proved despite the entries to that effect therein (refer: CIT v. S. Kamaraja Pandian  150 ITR 703 (Mad)). The plea as to the non-maintainability of an addition u/s. 68, i.e., qua a credit entry/s, in view of the accounts being not accepted, and the income of the assesseee’s business being determined by estimation (with reference to the material gathered by and available with the AO), was accordingly rejected by the Apex Court; it holding that the amounts of the cash credits could be assessed to tax as income from undisclosed sources in addition to the business income computed by estimate. The taxing authorities, it explained, were not precluded from treating the amounts of the credit entries as income from undisclosed sources simply because the entries appeared in the books of the business whose income they had previously computed on a percentage basis. Reference in this context may with profit be also made to the decision in CIT v. Devi Prasad Vishwanath Prasad  72 ITR 194 (SC). The position, as apparent, would be akin to, say, that of a disallowance of an expenditure for want of genuineness despite the assessee’s accounts bearing an entry in its respect. This aspect stands also clarified by the Apex Court in A. Krishnaswami Mudaliar (supra) in the following words:
‘If, therefore, there is a system of accounting regularly employed and by appropriate adjustments from the accounts maintained taxable profit may properly be deduced, the Income-tax Officer is bound to compute the profits in accordance with the method of accounting. But where in the opinion of the Income-tax Officer the profits cannot properly be deduced from the system accounting adopted by the assessee it is open to him to adopt a more suitable basis for computation of the true profits.’ (pg. 129)
What is being not accepted in such a case is the truth of the accounts with regard to the relevant expenditure in the absence of proof – nothing more and nothing less, and which is accordingly disallowed, neutralizing its impact on the profit for the year as per accounts.
In case of an addition u/s. 69A, as in the instant case, on the other hand, the statute itself accords credence to the assessee’s accounts to the extent of the cost debited therein. It is the excess cost, i.e., with reference to the cost debited in the assessee’s accounts, and for which (additional cost) the Revenue has evidence (as in the form of the physical inspection and valuation report of the relevant asset) in its possession, which is to be explained as to its source. Where, then, is the question of rejection (non-acceptance) of the assessee’s accounts, which rather form a part of his explanation, and are being in fact received and accepted in evidence, i.e., to the extent of the cost reflected therein. Why, in a particular case, as in sec. 69, no part of the cost is reflected in accounts, as, for example, where the asset is a personal asset and, thus, does not find mention and reflection in the accounts of the assessee’s business. That is to say, the cost met by the assessee, or otherwise proved to have been incurred, or even not incurred by the assessee, as in the case of gift, inheritance, etc., and irrespective of its reflection in his accounts, where maintained, forms part of the assessee’s explanation, and it is only the balance, excess cost, which is unexplained with any evidence, for which the rule of evidence (ss. 69/69A) deems it to be his income for the relevant year. Where, then, one may ask, is the question, i.e., for invocation of this rule of evidence, of the rejection of the books of account of the assessee’s business, which may not even be maintained or even not bear the said cost, and which (rejection) is for the purpose of properly deducing the business income, which is not a concomitant of the said invocation, and may even be independent of it? Why, the business itself may not have commenced, as in the case of Warehouse business in the instant case. The question begs an answer before the decision in Sargam Cinema (supra) holding a reference without rejection of accounts as bad, could be relied upon.
As seen, the clear and settled law does not require the rejection of accounts and, where so, is deemed irrelevant where specific adjustments to the returned income are made on the basis of the satisfaction of the relevant provisions of law, even though the said adjustments pertain to the entries in those accounts, while for an addition u/s. 69/69A the accounts are in fact being accepted to the extent of the relevant entries therein. The said decision does not cite the precise question of law raised before it for being answered, and indeed that admitted and answered by the Hon’ble Court. It is well-settled that existence of a substantial question of law is sine qua non for the exercise of jurisdiction by the higher courts of law (refer: Maharaja Amrinder Singh v. CWT  397 ITR 752 (SC); Santosh Hazari v. Purushottam Tiwari  251 ITR 84 (SC)). Further still, the judgment is sans any discussion of or on the law in the matter or reference to any precedents. The issue that therefore arises for being answered first is if, in view of the clear provisions of law and the scheme of the Act, and as further explained and expounded by the Apex Court per its several decisions, including by its’ larger Benches, could the said judgment be regarded as a complete statement of law in the matter and, where considered so, the basis thereof, as also the specification of the said statement.
Before parting, it may be clarified that the various issues discussed with reference to the invalidity of the AO’s reference to the DVO are only with a view to emphasize the several aspects/dimensions of the matter on which, therefore, adjudication, where sought, may be required – upon considering all the factual and legal aspects, including those, not discussed, as are agitated or otherwise deemed relevant, per a speaking order. No final opinion in the matter is expressed or may be construed as such. That is, is a case of an open set aside.
3.4 I decide accordingly.
4. In the result, the appeal by the assessee is allowed for statistical purposes. Order pronounced in the Open Court on July 22, 2021