Case Law Details
IN THE ITAT LUCKNOW BENCH ‘B’ (THIRD MEMBER)
Pragati Engineering Corporation
V/s.
Income-tax Officer, Raebareli
IT APPEAL NO. 304 (LKW) OF 2011
[ASSESSMENT YEAR 2005-06]
MAY 14, 2012
ORDER
Sunil Kumar Yadav, Judicial Member
This appeal is preferred by the assessee against the order of the Id. CIT(A) confirming the addition of Rs. 12,55,520 made by the Assessing Officer after making disallowances under various heads on ad-hoc basis ranging from 10 to 20% of the total claim.
2. The brief facts borne out from the record are that the assessee is a Civil Contractor and during the course of assessment proceedings, the assessee was asked to produce the books of account i.e. ledger and cash book, but the same could not be produced despite various opportunities provided to it by the Assessing Officer. It was stated before the Assessing Officer through written submission that the books of account were impounded by the local Police in the case of Shri. Akhilesh Kumar Singh, the husband of Smt. Vaishali Singh who is one of the partners of the firm. Therefore, the assessee could not produce the books of account. In support of these contentions, the assessee could not file any documentary evidence before the Assessing Officer. The Assessing Officer, however, examined the claim of expenses of the assessee under various heads and since these expenses were not open to verification, he made ad-hoc disallowances ranging from 10 to 20% of the total claim. The details of the total disallowances made by the Assessing Officer are as under:-
| S.No. | Item | Disallowance | Amount |
| 1. | Purchases of Materials | 10% | Rs. 8,86,567 |
| 2. | Labour Charges | 10% | Rs. 2,96,332 |
| 3. | Office expenses, vehicle repairs & maintenance, travelling & Conveyance, Postage & Telephone | 15% | Rs. 19,388 |
| 4. | Misc. Expenses including Hire charges, Rent of road Roller Repair & Maintenance | 20% | Rs. 21,223 |
| 5. | Depreciation on Road Roller | 32,000 | |
| Total | Rs. 12,55,520 |
3. The assessee preferred an appeal before the ld. CIT(A) with the submission that the books of account could not be produced on account of its impounding by the Police in a criminal case. The assessee, however, submitted that at the most the books of account can be rejected and net profit can be estimated in the light of provisions of section 44AD of the Income-tax Act, 1961 (hereinafter in short “the Act”). The assessee, however, agreed that net profit rate be estimated at 8% of the gross receipts before depreciation and interest on partners’ capital, etc. He also placed reliance upon various orders of the Tribunal in which net profit was estimated after rejecting the books of account at 8%. The ld. CIT(A) was not convinced with the contentions of the assessee and has confirmed the additions made by the Assessing Officer after having observed that the total receipts are more than Rs. 40 lakhs, therefore, the provisions of section 44AD of the Act cannot be applied.
4. Now the assessee has preferred an appeal before the Tribunal with the submission that the books of account were impounded by the Police in a criminal case and the Police returned the same in a spoiled condition and hence could not be produced before the lower authorities. Therefore, the only option left out is to reject books of account and estimate the net profit on the gross receipts. The ld. counsel for the assessee further contended that the disallowances made by the Assessing Officer under various heads on ad-hoc basis are not sustainable in the eyes of law.
5. The ld. D.R., on the other hand, has placed heavy reliance upon the order of the ld. CIT(A).
6. Having given a thoughtful consideration to the rival submissions and from the careful perusal of the orders of the lower authorities and also in the light of various judicial pronouncements referred to by the lower authorities, we find that undisputedly the books of account were not placed before the Assessing Officer for verification of the expenses claimed by the assessee under various heads. According to the assessee, the books of account of the assessee even after getting it from the Police, cannot be placed as it has been fully destroyed on account of its impounding by the Police in a criminal case. In such a situation, we are of the view that the right course is to reject the books of account of the assessee and to estimate the net profit on gross receipts. Nothing has been stated during the course of hearing of the appeal as to what profit was estimated by the Assessing Officer in earlier years or succeeding years. In these circumstances, we are of the view that let the net profit be estimated @ 10% of the gross receipts before depreciation and interest on capital of the partners, etc. Accordingly, the order of the ld. CIT(A) is set aside and the matter is restored to the file of the Assessing Officer to recompute the net profit of the assessee in terms indicated above.
7. In the result, the appeal of the assessee is partly allowed as indicated above.
B.R. Jain, Accountant Member – Unable to agree with the order proposed by learned Judicial Member, I proceed to write my own order:
The appellant has raised following grounds in appeal:
“1. That under the facts and circumstances of the case the Ld. CIT(A) is unjustified in confirming the addition made by the ITO, Raebareli and dismissing the appeal.
2. That the ld. CIT(A) & ITO was not justified in not allowing agreed net rate @8% before depreciation, salary to partners and intt. On partners capital as assessee is a partnership firm.
3. That the ld. CIT(A) erred on facts and in law to confirmed addition of Rs. 12,55,520.00 @ 10%, 15% & @ 20% on various expenses as below-
| Particulars | Ad hoc Addition | ||
| (a) Purchases of material | 10% | Rs. 8,86,567.00 | |
| (b) Labour Charges | 10% | Rs. 2,96,332.00 | |
| (c) Officer Expenses, Vehicle Repair & Maintt, Travelling & Conveyance, Postage & Telephone | 15% | Rs. 19,388.00 | |
| (d) Misc. exps. incld. Hire charges Rent of road roller repair & Maint. | 20% | Rs. 21,233.00 | |
| (e) Dep. on Road Roller | Rs. 32.000.00 | ||
| Rs. 12.55.520.00 |
4. That the ld. CIT(A) has not considered the vital facts that the A.O. has not rejected the books of account u/s 145 of I.T. Act and made addition as per their own estimations.
5. That the order of the learned CIT(A) in erroneous and bad on facts and in law.”
2. The appellant, a partnership firm, is engaged in contractual activities and filed its return declaring an income of Rs. 4,43,630/-. The return of income was accompanied by the audited accounts. During the course of assessment proceedings, the Assessing Officer required the assessee to produce the books of account. Despite repeated opportunities dated 07/07/2007, 28/08/2007, 14/09/2007, 05/10/2007, 23/10/2007, 05/11/2007, 13/11/2007 and 20/11/2007, the assessee failed to produce the books of account. He, however, placed on assessment record the ledger copies of purchase account, labour charges, salary account, salary payable account, office expenses account, travelling & conveyance account, postage & telephone expenses and vehicle running & maintenance account. Vide letter dated 20/11/2007, the assessee however, took a plea that his books of account have been impounded by the local police in the case of Shri Akhilesh Kumar Singh, the husband of one of the partners namely Smt. Vaishali Singh. The assessee, however, did not produce any evidence for impounding such books of account by the local police. The assessee in this letter also made a voluntary offer to be assessed at a net profit rate of 8% of the gross receipts in the absence of the books of account. The Assessing Officer taking note of the material and facts on record did not accept assessee’s offer of agreeing to be assessed at a net profit rate of 8% of gross receipts of Rs. 1,33,76,545/-. Since the assessee has produced the ledger copies of different accounts relating to purchases account, labour charges, salary account, salary payable account, office expenses account, travelling & conveyance account, postage & telephone expenses and vehicle running & maintenance account and despite repeated opportunities supporting vouchers for such expenses as well as the labour register for payment of labour expenses incurred were neither produced nor genuineness thereof was substantiated, the Assessing Officer after allowing reasonable deduction under various heads of expenses, proceeded to disallow 10% of the total claim thereof being unverifiable in nature as under:
| S. No. | Head of account | Total expenditure claimed | Deduction allowed | Amount disallowed | % of disallowance |
| 1. | Purchases | 88,65,674 | 79,79,107 | 8,86,567 | 10% |
| 2. | Labour charges | 29,63,320 | 26,66,988 | 2,96,332 | 10% |
| 3. | Office expenses and vehicle running, travelling and conveyance, postage and telephone etc. | 1,29,253 | 1,09,865 | 19,388 | 15% |
| 4. | Misc. expenses, hire and rent charges | 1,06,164 | 84,391 | 21,233 | 20% |
2.1 The Assessing Officer also disallowed claim of depreciation of Rs. 32,000/- on the cost of Rs. 1,60,000/- for the Road Roller claimed to have been purchased on 27/12/2004 but the assessee did not produce any proof and mode of such payments, even except producing the original bill thereof.
3. The appellant disputed the additions/disallowances in appeal before the learned CIT(A). Considering the peculiar findings of fact on record, the learned CIT(A) took note that the appellant has maintained the books of account and bills/vouchers, yet without any valid reason he has failed to produce the same for verification before the Assessing Officer. Since the appellant has not produced even a single bill or vouchers for verification of expenses debited in the profit & loss account, he held that the decision taken by the Assessing Officer is reasonable and convincing and thus, rejected the grounds raised in appeal before him.
4. In appeal before the Appellate Tribunal, the learned Counsel for the assessee Shri G. N. Srivastava reiterated that the books of account were impounded by the police in a criminal case. He also took a plea that the police returned the same in spoiled condition and hence could not be produced before the authorities below. In these circumstances the only option left out shall be to reject the books of account and estimate the net profit at 8% of gross receipts as also was suggested by the assessee before the authorities below.
5. The learned D.R., however, took strong objection to the plea for resorting to the rejection of books of account at this stage as Assessing Authority has completed the assessment on the basis of material on record. The Appellate Tribunal is empowered only to correct the errors, if any, committed in the impugned order. Since the appellant has failed to point out any error requiring correction by the Tribunal, the decision reached by learned CIT(A) needs no interference and as such, grounds raised in appeal by the assessee be dismissed.
6. Heard parties and have carefully perused the entire material on record. It is an admitted position that the appellant has maintained books of account and also got its accounts audited from a firm of Chartered Accountants. Copy of such audited accounts were laid by him along with the return of income filed declaring an income of Rs. 4,43,630/-. During the assessment proceedings, the Assessing Officer required the appellant to produce books of account and substantiate the expenditure claimed with supporting vouchers. Despite several opportunities the assessee did not produce books of account but laid on assessment record the copies of certain accounts as under, as were appearing in his ledger:
(i) Ledger copies of purchases account
(ii) Labour charges
(iii) Salary account
(iv) Salary payable account
(v) Office expenses account
(vi) Travelling & conveyance account
(vii) Postage & telephone expenses
(viii) Vehicle running & maintenance account.
6.1 The appellant took a plea that these books could not be produced as the same have been impounded by the local police. No evidence thereof was laid on assessment record nor any such evidence has been laid by the assessee before the learned CIT(A) in that regard. When asked to produce the books before the Appellate Tribunal, the appellant took a new plea that the police returned these books in spoiled condition and thus the same were neither produced before authorities below nor can be produced before the Appellate Tribunal. On specific query to produce the proof of impounding his books by the police authorities and/or the evidence for return thereof in spoiled condition, the learned Counsel for the assessee gave evasive reply that the same may not be available with the appellant and sought to reject the books of account and assess its income by application of a net profit rate. This plea was strongly objected by the Revenue. The assessee even did not demonstrate as to how and where from he got the copies of ledger account or a solitary bill in original for purchase of Road Roller for producing the same before the Assessing Officer when he claims that his books have been impounded by the police authorities and returned in spoiled condition without bringing on record any evidence in that regard. The burden of proving that fact was on the appellant but he has failed to discharge the same. The books of account and vouchers for expenses have not been produced before the Tribunal as well. In fact this is a case where the appellant has kept the books of account, vouchers and relevant material in the back seat. Under these circumstances, the plea of impounding the same by the local police and return thereof in a spoiled condition is merely a pretence. The production of few accounts from his ledger and a solitary bill for purchase of road roller but non-production of whole record by him appears to be a mala fide act. He appears to have not come to this Tribunal with clean hands and thus he is found to have not produced his books of account and supporting vouchers in whatever condition for any valid reasons.
6.2 The subject matter of appeal before the Appellate Tribunal in this case is as to whether there is any error in the order of learned CIT(A) which requires correction by the Appellate Tribunal. Section 254(1) of the IT. Act, 1961 has used the words “thereon” in the expression “pass such orders thereon as it thinks fit”, which restricts the jurisdiction of the Tribunal only to the subject matter of the appeal. In a case like this, even though section 254 of the Act confers powers in widest possible terms, such power however, is not such that it can be exercised in any manner. The Tribunal can interfere with the orders of the lower authorities, but can do so only on judicial considerations and on the basis of reasons that suggest clearly that the lower authorities had committed an error of law or such fact that it vitiated its considerations and gone perverse for such reasons. A useful reference may also be had to the judgment by Hon’ble Madras High Court in CIT v. Rayala Corpn. (P.) Ltd. [1995] 215 ITR 883/[1996] at page 894 as under:
“The Appellate Tribunal is not a court. Its powers, however, are expressed in the widest possible terms under section 254 of the Act, “may after giving both the parties to the appeal an opportunity of being heard, and pass such orders thereon as it thinks fit”. Its powers, thus, are almost similar to the powers of an appellate court under the Code of Civil Procedure. A wide power, however, is not such that it can be exercised in any manner. The Tribunal can interfere with the orders of the lower authorities, but can do so only on judicial considerations and on the basis of reasons that suggest clearly that the lower authorities had committed an error of law or such fact that had vitiated its considerations and gone perverse for such reasons…………..”
“…………….Its primary task is not to go into the return of the assessee and decide what amount of tax should be levied upon his income, but to see whether the taxing authorities, including the Appellate Assistant Commissioner have committed any error of law or of fact and on account of such error, the assessee has suffered……………”
6.3 The appellant in the grounds raised in appeal as well as in the hearing before the Appellate Tribunal admits that the books of account have not been rejected by the authorities below by application of provisions of section 145 of the Act. Section 145(3) empowers Assessing Officer defined u/s 2(7A) of the Act to express the satisfaction about the incorrectness or incompleteness of the accounts of the assessee, or where the method of accounting provided in sub-section (1) or accounting standards as notified under sub-section (2), have not been regularly followed by the assessee, the Assessing Officer may make an assessment in the manner provided in section 144. Such books of account have also not been produced before the Appellate Tribunal for coming to the satisfaction of this Tribunal about the incorrectness or incompleteness of the accounts of the assessee or non-maintenance of its accounts as per prescribed method regularly followed by him. Merely because the appellant is not willing to produce books of account or has failed to produce the same without any valid reason as also found by the learned CIT(A), I find it difficult to act as a court of first instance for deciding the factual aspect that the books of account are not correct and complete or that the assessee has not maintained its accounts regularly followed as per prescribed method of accounting requiring rejection thereof in terms of section 145 of the Act for proceeding to assess the income by application of net profit rate in a case like this, where the authorities below have not returned any findings of fact on that aspect. The Hon’ble Delhi High Court in the case of CIT v. Eastern Medikit Ltd. [2011] 337 ITR 56 on the aspect that Appellate Tribunal cannot act as a court of first instance and decide the factual aspect for the first time has stated at page 63 as under:
“We are afraid these judgments would be of no sustenance to the assessee. No doubt, where the Commissioner of Income-tax, while exercising powers under section 263 of the Act, sets aside the order of the Assessing Officer on the merits as well and gives his categorical finding on the issue involved, naturally the Tribunal will be within its right to examine as to whether the decision on the said issue was proper or not and for this purpose, the Tribunal itself would be entitled to examine the issue on the merits. It was, in these circumstances, the aforesaid two cases were decided. However, where the issue was not examined by the Assessing Officer and on this ground the Commissioner of Income-tax revised the order without giving his own findings, but directing the Assessing Officer to do the necessary exercise, it was not proper for the Tribunal to decide the same, converting itself to a court of first instance and deciding the factual aspect on which neither the Assessing Officer nor the Commissioner of Income-tax had returned any findings.” [Emphasis supplied].
6.4 Had the appellant produced the books of account in whatever condition before either of the authorities below or even before us for examination and enabled to reach the finding with respect to essentials contained u/s 145 of the Act, then the appellant may have a case of exercise of discretion by this Tribunal on that aspect. This, however, is not the case here. In a case like this, when the appellant has failed to do his duty for producing the books of account and supporting vouchers, he cannot be allowed to canvass to record findings on factual aspect for rejection thereof. In the event such a plea is allowed, then hardly any taxpayer would be willing to produce his books of account and vouchers for correct determination of his income and such a practice may go to frustrate the administration of IT. Act in a judicious manner. The learned CIT(A) in the impugned order has also recorded a finding that there are no valid reasons with the appellant for not producing books of account and vouchers. The findings reached by him are not shown to be perverse under the peculiar fact findings of this case and as the appellant does not have good case requiring substitution of the orders of authorities below with its own order of the Tribunal by rejecting the books of account, I find no merit in the appellant’s plea requiring this Tribunal to reject the books of account and estimate his income by application of net profit rate. The same therefore, being devoid of any merit, is hereby rejected.
6.5 On the merits and in so far as the question as to whether the learned CIT(A) committed any error in sustaining the disallowance made by the Assessing Authority, I find that the Assessing Officer, after taking into account all relevant material which he has gathered and after providing sufficient opportunity of being heard to the assessee, made assessment of total income by allowing deduction of the reasonable expenses incurred by the assessee for carrying his business and disallowed only a small portion thereof as set out in the brief facts herein before. Such disallowances made by the Assessing Officer are because the assessee was unable to produce cogent evidence to prove the expenditure so claimed by him. The disallowances made by Assessing Officer are bona fide and found made on a rational basis. The disallowances being reasonable and rested on cogent grounds also are neither arbitrary nor excessive. The Assessing Officer has given justifiable reasons for disallowing the expenses and allowed only the reasonable portion thereof in deducing the income of the appellant. There is also no agreement between the appellant and Revenue to assess income at a net profit rate of 8%. The learned C1T(A) took a view that Assessing Authority has made reasonable and convincing disallowance and that he is justified to assess the expenditure by best judgment assessment. No perversity in the findings of fact reached by learned CIT(A) nor any error therein has been shown by the appellant by bringing any reliable evidence or cogent material on record. Having considered all the factors, 1 find no satisfactory ground requiring this Tribunal to interfere with the well considered and well reasoned order of the learned CIT(A). The view thus entertained by learned CIT(A), I also find in conformity with the judgment rendered by Hon’ble Kerala High Court in the case of CIT v. S.P. Nayak and Ramesh M. [1999] 235 ITR 94. On the peculiar findings, the decision by learned CIT(A) requires no interference by the Appellate Tribunal.
6.6 As regards claim of statutory allowance of depreciation on Road Roller, the appellant is shown to have hired the road roller and paid rent but he has failed to prove the genuineness of purchase. It also has not been proved as to whether any actual payment thereof has been made or it was merely a bill procured by him. Since the actual cost thereof to the assessee has not been established the essentials of section 32 are not satisfied. The disallowance so made by the Assessing Authority and sustained by learned CIT(A) is found justified. This also calls for no interference.
6.7 In view of the conclusions reached hereinbefore, I find no merit in the grounds raised in appeal by the assessee and reject the same.
7. In the result, the appeal stands dismissed.
THIRD MEMBER ORDER
D. Manmohan, Vice-President (As a Third Member) – ITAT “B” Bench, Lucknow heard the matter on 17.11.2011. The main issue before the Bench was with regard to the legality of the addition of Rs. 12,55,520/- . The learned Judicial Member set aside the order of the learned CIT(A) and restored the issue to the file of the AO to recompute the income in the light of the observations made in the said order whereas the learned Accountant Member was of the view that the order passed by the CIT(A) on this issue does not call for any interference. Thereupon the learned Judicial Member framed the following question under section 255(4) of the Income Tax Act and requested the Hon’ble President to nominate a Third Member to resolve the point of difference: –
“Whether the Tribunal being the last fact finding body can estimate the net profit from the business of the assessee in the absence of books of account instead of confirming the disallowances sustained by the ld. CIT(A) under various heads?”
2. However, the learned Accountant Member was of the opinion that the question framed by the learned Judicial Member does not focus the issue in the correct perspective and he, in turn, formulated the following questions:
“1. On the peculiar facts, circumstances of the case and in law whether learned CIT(A) has committed any error in sustaining the disallowance of expenses made by the Assessing Authority and requires application of provisions of section 145 of the Act by the Appellate Tribunal within the scope of its powers and consequent estimation of income by application of net profit rate?
2. On the peculiar facts and in law, whether there is any error in denying depreciation allowance to the appellant on the book value of Road Roller?”
3. Accordingly the matter was referred to the Hon’ble President, who was pleased to nominate me as Third Member with a direction to resolve the points of difference, if necessary, by reframing the questions. Accordingly the matter was placed before me. The learned counsel as well as the learned D.R. agreed that the following question would succinctly bring out the point of difference:
“In the absence of production of books of account, whether an addition deserves to be made by estimating appropriate net profit rate, apart from independently considering the claim of depreciation or separate disallowance of expenditure is permissible by taking into consideration reasonableness of claim under various heads such as purchases, labour etc.?”
4. The facts necessary for disposal of the issue are stated in brief. The assessee firm was engaged in the business of civil contracts. For the year under consideration assessee maintained books of account, which were duly audited, since the turnover of the assessee is to the tune of Rs. 1.33 crores. It declared total income of Rs. 4,43,630/-. Since the case was selected for scrutiny, the assessee was asked to produce the books of account but it failed to produce the cash book, etc.; Only ledger copies of purchase, labour charges, salary payable, etc. were produced on 09.07.2007. Assessee was repeatedly asked to produce the vouchers, etc. in support of its claim of incurring such expenses but the assessee could not produce a single bill in that regard. On 20.11.2007 assessee filed written submission wherein it was stated that assessee’s books of account were impounded by the local police. The case of the assessee is that Smt. Vaishali Singh, one of the partners of the assessee-firm had kept the books of account in the premises of her husband Shri Akhilesh Kumar Singh, but the premises were seized by the local police and the books were impounded. The counsel appearing on behalf of the assessee submitted that the assessee is agreeable to estimation of income, in the absence of books of account, and agreed for a net profit of 8% of the gross receipts.
5. The AO observed that the turnover of the assessee was beyond the prescribed limit of Rs. 40,00,000/- whereby he has to maintain books and hence adoption of flat rate of 8% under section 44AD is not permissible in law. He also observed that the assessee could not produce even a single voucher in support of the purchases, labour charges, vehicle maintenance, office expenses, etc. and no evidence was shown in support of its plea that the vouchers and files of the assessee-firm were impounded by the local police. However, the assessee having filed the ledger copies of purchases, labour charges, salary accounts, etc., for want of verifiable details the AO made item-wise ad hoc additions as under:-:
(a) Purchases: According to the assessee purchase of material and consumables are to the tune of Rs. 88,65,674/-. In the absence of any vouchers 10% of the above book purchases is disallowed being unverifiable in nature – Addition: Rs. 8,86,567/-.
(b) Labour Charges: The assessee booked an amount of Rs. 29,63,320/-. Labour payment/attendance register were not produced. In the absence of any evidence with regard to reasonableness of the claim, 10% of the claim is disallowed which works out to Rs. 2,96,332/-.
(c) Under the heads Office Expenses, Vehicle Repairs and Maintenance, Travelling Expenses, Postage and Telephone Expenses assessee booked an amount of Rs. 1,29,253/- but the same are not supported by bills and vouchers. Hence 15% of the expenditure, i.e. Rs. 19,388/- was added back as unverifiable in nature.
(d) Under the head Miscellaneous Expenses including hire charges, rent of Road Roller, repairs and maintenance, etc. the assessee booked an expenditure of Rs. 1,06,164/- but the same is not supported by evidence. Therefore 20% of the above expenditure, i.e. Rs. 21,233/- was disallowed.
(e) The assessee claimed Rs. 4,77,134/- towards depreciation out of which Rs. 32,000/- was referable to Road Roller stated to have been purchased on 27.12.2004. Though the assessee could not produce any other evidence, he was able to produce invoice No. 7 dated 27.12.2004 from M/s. Road Roller proprietor Gopichand. Assessee was asked to produce proof and mode of payment of Rs. 1,60,000/-. Assessee failed to produce any evidence. As such Rs. 32,000/- depreciation claimed on account of purchase of this Road Roller was disallowed.
Accordingly the assessment was completed on a total income of Rs. 16,99,150/-
6. Aggrieved, assessee contended before the learned CIT(A) that the AO was not justified in rejecting the plea of the assessee regarding estimation of income at 8% before depreciation, salary to partners, etc. It was also contended that the AO was not justified in making ad hoc addition of Rs. 12,55,520/-. It was also contended that the AO made the additions without rejecting the books of account under section 145 of the Act. Reliance was placed upon several decisions of the ITAT in support of its contention that in the absence of books of account estimation of income is the only proper course to be adopted.
7. The learned CIT(A) rejected the contention of the assessee. He observed that the assessee has not filed its return of income under section 44AD of the Act, since the total receipts or turnover of the firm was more than Rs. 40,00,000/-. Therefore it is not necessary to estimate the income under section 44AD of the Act. Moreover, as per tax audit report under section 44AB of the Act, the assessee firm maintained cash book, ledger, etc. for its business activities but did not produce books, despite repeated direction given by the AO. The assessee-firm did not produce even a single bill/voucher to substantiate the expenses debited to its P & L Account. No evidence was placed on record with regard to its claim that books of account and supporting vouchers were impounded by the local police. He also observed that the assessee claimed to have obtained tax audit report in the instant case which implies that the assessee maintains books of account. Under the circumstances, additions and disallowances can be made to the book results even without rejecting the books of account as per the provisions of section 145 of the Act. He thus affirmed the action of the Assessing Officer.
8. Aggrieved by the order passed by the learned CIT(A), the assessee preferred an appeal before the Tribunal, The ITAT “B” Bench Lucknow heard the matter. The learned Judicial Member observed that in the absence of production of books of account before the AO, even after getting it from the police, the right course is only to reject the books of account and to estimate the net profit on gross receipts. He also noticed that there is nothing on record to suggest as to what was the profit estimated by the AO in the earlier years or succeeding years. Under the circumstances the learned Judicial Member concluded that estimation of net profit at 10% of the gross receipts before depreciation and interest on capital of partners, etc. would meet the ends of justice and accordingly restored the matter to the file of the AO.
9. The learned Accountant Member, however, did not accept the view taken by the learned Judicial Member. He passed a detailed order in this regard. Summary of the reasons given by the learned Accountant Member are: –
(a) Despite repeated opportunities given by the AO the assessee failed to produce the books of account and took a plea that its books were impounded by the local police whereas no evidence was produced in support of that stand.
(b) Admittedly assessee has maintained books of account and got its accounts audited from a firm of Chartered Accountants and assessee could produce copies of the ledger accounts and solitary bill, in original, for purchase of Road Roller but surprisingly the books were not produced, without proving that the books were impounded by the police authorities. Even though a new plea was taken that the police returned these books in spoiled condition the same were neither produced before the authorities below nor was the assessee prepared to produce before the Appellate Tribunal. Hence it has to be assumed that assessee kept the books of account, vouchers and relevant material in the back seat and it is not interested in producing the books, by merely making a pretext that books were originally impounded by the police and later returned in spoiled condition and hence they cannot now be filed.
(c) The production of few accounts from ledger and a solitary bill for purchase of Road Roller but non-production of the whole record is a mala fide act and assessee cannot be said to have come before the Tribunal with clean hands by furnishing books and vouchers in whatsoever condition they are available.
(d) The Tribunal has to examine as to whether there is an error in the order of the CIT(A). Section 254(1) uses the expression “pass such orders thereon”, which restricts the jurisdiction of the Tribunal only to the subject matter of appeal and merely because section 254 confers powers in the widest possible terms it should not be exercised in any manner under the circumstances of this case. The orders of the lower authorities can be interfered with only on judicial considerations i.e. when an order of the AO/ CIT(A) is vitiated on account of perverse reasons, etc. Rayala Corpn. (P.) Ltd. (supra).
(e) The books of account have not been rejected by the authorities below. Section 145(3) empowers the AO to reject the book results if he is satisfied about the incorrectness or incompleteness of the accounts. The pre-requisite for recording such satisfaction requires verification of books whereas in the instant case the books of account have not been produced by the assessee. Rather assessee is not willing to produce the books of account or it failed to produce the same without any valid reason, as found by the learned CIT(A).
(f) Whether the books are not correct or whether the assessee has maintained it books of account as per the method of accounting regularly followed are factual aspects on which the AO/CIT(A) should give a finding and the Appellate Tribunal cannot act as a court of first instance to decide the factual aspects for the first time – Eastern Medikit Ltd. (supra).
(g) Had the assessee produced the books, in whatever condition they are, as on today, the assessee-firm may have a case to make a request to the Tribunal to exercise its discretion on this aspect. However, it is not the case here. In such event, if a plea is allowed at this stage then hardly any taxpayer would be willing to produce his books of account and vouchers for correct determination of his income and such a practice may go to frustrate the administration of Income Tax in a judicious manner.
(h) At any rate the learned CIT(A) has taken into consideration all the relevant material and after giving sufficient opportunity of being heard he arrived at a conclusion that the disallowances made by the AO are reasonable and such finding is not found to be perverse; disallowance made by the AO and confirmed by the CIT(A) are on a rational basis.
(i) As regards statutory allowance of depreciation on Road Roller, the assessee is shown to have hired the Road Roller and paid rent but he has failed to prove the genuineness of the purchase; there is no proof of purchase. There is a possibility that the assessee would have procured a bill but it does not establish that the assessee owned the Road Roller. Therefore, assessee is not entitled to depreciation.
10. In the light of the dissenting order passed by the learned Accountant Member the matter was referred to the Hon’ble President for nominating a Third Member to resolve the difference and accordingly the matter was placed before me.
11. The learned counsel submitted that if the books were subjected to tax audit it cannot be assumed that the assessee is purposely avoiding to produce the books. The office of the firm was located in the premises, which was the property of Shri Akhilesh Kumar Singh, a political leader, who was booked under the Gangsters Act. He was arrested on 17.01.2006 whereas in November 2005 the premises, where the books of the assessee-firm were placed, was also seized. On 24.01.2006 Special Judge passed an order whereby the attachment was lifted and directions were given to the police accordingly. He further contended that in the immediately preceding years regular assessments were not made under section 143(3) of the Act since the returns filed by the assessee were processed under section 143(1) of the Act. His main contention was that in the absence of books of account the AO should not make arbitrary additions in spite of rejecting the book results. Even in a scrutiny assessment made under section 145(3) r.w.s. 144 of the Act a rational approach has to be followed and addition should not be made on arbitrary basis. In this regard he relied upon the decision of the Hon’ble Delhi High Court in the case of CIT v. Aero Club [2011] 336 ITR 400. He further submitted that the AO is duty bound to correct all the errors and should not take benefit out of the inability of the assessee to produce the books of account. In this regard he relied upon the decision in the case of Rayala Corpn. (P.) Ltd. (supra). He contended that the Chartered Accountant would not have certified that the asset is genuine without verification. Thus, by ignoring the Auditors’ certificate the AO was not justified in disallowing the claim of depreciation on such asset. He thus strongly relied upon the order passed by the learned Judicial Member.
12. On the other hand, the learned D.R. submitted that section 145(3) of the Act gives discretion to the AO to reject the books of account and to complete the assessment under section 144 of the Act only upon being satisfied that the true and correct profit cannot be deduced from the material filed before the AO; in the instant case the AO examined the material on record and based upon cogent reasons he arrived at a conclusion that this is not a fit case for rejection of books of account so as to complete the assessment under section 144 of the Act and accordingly proceeded to make itemised evaluation of the expenditure claimed by the assessee and he was reasonable in disallowing only around 10% of the total claim. He thus strongly relied upon the order passed by the learned Accountant Member.
13. I have carefully considered the rival submissions and perused the record. In order to resolve the point of difference it is necessary to analyse provisions of section 145 of the Act and the duty vested upon the AO to arrive at a correct income while making the assessment. It is also relevant here to understand the scope and ambit of the powers of the Appellate Tribunal in the matter of determining as to whether the AO has exercised the jurisdiction arbitrarily or in a reasonable manner.
14. It is not in dispute that the assessee maintained books of account and they were duly audited under section 44AB of the Act. In fact the Legislature places an obligation on the assessee, whose turnover is above Rs. 40,00,000/-, to maintain proper books and to obtain a tax audit report. It is not the case of the assessee, at any stage, that it has not maintained the books of account. Once it is not disputed, either by the assessee or by the Revenue, that assessee maintained books of account, the next issue to be considered is whether the AO can arbitrarily reject the book results and estimate the profit in the event of non-production of bills and vouchers. There are host of decisions on this issue that mere non-production of stock register or cash book may not necessarily lead to rejection of book results; so long as the ledger accounts are available, which can be taken as an aid by the AO to determine the true and correct profit which would have been earned by the assessee. Section 143 of the Act enjoins upon the AO the power as well as obligation to take into consideration all the evidences/particulars produced before him and to allow or reject the claim or claims and to determine the total income, The AO is also empowered to take into consideration all accounts or relevant material which is gathered. Section 145 of the Act states that income chargeable shall be computed in accordance with either the cash or mercantile system of account regularly employed.
15. However, if the AO is not satisfied about the correctness or completeness of the accounts maintained by the assessee or where the method of accounting followed in this year is not consistent with the accounting standards or with the method followed regularly by the assessee, the AO “may” make an assessment in the manner provided in section 144. The expression “may” indicate that the AO has to exercise his judicial discretion as to whether in each and every case, when veracity of the book result is disputed, the AO has to proceed to make the best judgment assessment or not. In the event of coming to a conclusion that no part of the book results can be looked into, the AO can resort to make an assessment to the best of his judgment by invoking the provisions of section 144 of the Act. While making the best judgment assessment the AO has to take into account all relevant material which the AO has gathered and, after giving an opportunity to the assessee, total income can be determined to the best of his judgment. It is well settled that even in case of best judgment assessment estimate of profit or addition should be on a rational basis and it should not be based upon the whims and fancies of the AO. If an appellate authority finds that the additions made in a best judgment assessment are excessive and without any rationale, direction can be given to suitably modify the income which accords with some rationale.
16. In the case of CST v. H.M. Esufali H.M. Abdulali [1973] 90 ITR 271 (SC) the Apex Court observed that in the very nature of things the estimate made by the AO may be an over-estimate or an under estimate but that cannot be a ground for interfering with his best judgment. This observation was made on the principle that the assessee cannot be permitted to take advantage of his own deficiencies. The principle that emerges from the aforesaid decision is that if the assessee fails to fulfil his duty he cannot be allowed to call upon the assessing authorities to prove conclusively as to what is the turnover he has suppressed or what is the expenditure he has claimed in excess. Thus the Court had put its stamp of approval on the inevitable margin of irrationality by observing as under:
“it is inevitable that there is some guess-work. The assessing authority while making the “best judgment” assessment, no doubt, should arrive at its conclusion without any bias and on 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 could not substitute its “best judgment” for that of the assessing authority.”
17. Before analysing the powers of the Tribunal it is necessary to notice the hierarchy of appellate authorities and their jurisdiction. Aggrieved by the order of the AO assessee can file an appeal before the CIT(A). As can be noticed from the provisions of section 251 of the Act, the powers of the Commissioner (Appeals) are co-terminus with the powers of the AO. However, the Appellate Tribunal, which is the second appellate body, has to exercise its powers under section 254 of the Act wherein it cannot act like the AO; the powers of the Tribunal are not co-terminus with that of the AO – like the powers given to the Commissioner (Appeals). However, the Tribunal can “pass such orders thereon as it thinks fit”. This expression has come up before the courts for its interpretation. In the case of Rayala Corpn. (P) Ltd. (supra) the Hon’ble Madras High Court observed that though the powers of the Tribunal are widest in its amplitude, the same are subject to the limitation that it cannot substitute its opinion to the opinion of the AO/CIT(A), other than on judicial considerations. In other words, when an order passed by the AO/CIT(A) suffers from an error of law or fact or it is vitiated on account of excessive arbitrariness, which leads to perversity in such order, the Tribunal can substitute its opinion to that of the lower authorities. The court further observed that if two opinions are possible and one opinion is formed by the lower authority, merely because Tribunal had a different view on the matter, it shall not interfere with the order of the lower authority without specifically pointing out as to why such opinion of the lower authority is erroneous on facts or law. So long as the lower authority’s opinion is a possible view on the matter the Appellate Tribunal shall desist from interfering with such orders. The court further observed that the Tribunal has got to protect, on the one hand, the interest of the assessee in the sense that he is not subjected to any amount of tax in excess of what he is bound to pay and, on the other hand, it has a duty to protect the interest of the Revenue and to see that no one dodged the Revenue and escaped without paying the tax.
18. In the backdrop of the legal position the case on hand needs to be analysed. As already stated hereinabove the books of account were duly audited and the AO has not rejected the books. The order of the AO as well as the CIT(A) shows that the assessee merely made a statement that the books of account were impounded by the local police but no evidence, whatsoever, was furnished to support the plea. The learned counsel submitted before me that the premises was seized in November 2005 but the attachment was lifted on 24.01.2006. If the attachment was lifted by a court order it could not have been difficult for the assessee to produce some evidence in that regard but no such evidence was produced.
19. Arguments of the assessee’s counsel, as recorded by Members of the Division Bench, shows that there is no uniformity in the statement made on behalf of the assessee; the learned Judicial Member observed that the books of account could not be produced on account of its impounding by the police in a criminal case and even after getting it from the police it could not be placed as it has been fully destroyed on account of its impounding by the police whereas the learned Accountant Member observed that on a specific query to produce the proof of impounding by the local police and return thereof in a “spoiled” condition, the learned counsel gave an evasive reply that the same may not be available with the assessee. It is strange that the assessee could not produce evidence with regard to the non-availability of books. Therefore the learned Accountant Member inferred that the books were available with the assessee but it did not produce the same either before the AO or before the CIT(A). The firm’s anxiety to get the book results rejected indicates that it was trying to get advantage of its default of non-production of books. Under these circumstances the AO is vested with the discretion of either rejecting the book results to estimate the profit or to proceed on the basis of the ledger, etc.; For want of cross verification of the bills/vouchers it can determine the reasonableness of the expenditure. The AO chose to make ad hoc additions by taking into consideration the quantum of expenditure claimed under each head such as purchases, labour charges, etc. The discretion exercised by the AO can be substituted by the Tribunal only upon showing that the disallowances made are arbitrary and excessive.
20. The order of the learned Judicial Member has not indicated anywhere that the disallowance of expenditure is excessive and arbitrary. In fact it is not the claim of the assessee that the expenditure disallowed is excessive. The learned Judicial Member sought to substitute the method followed by the AO with the method suggested by the assessee and directed the AO to reject the book results and to estimate the net profit on gross receipts. Having held that the net profit is to be estimated he further observed that on the net profit estimated depreciation and interest on capital of the partners should be separately considered. He then directed the AO to recompute the net profit in terms indicated in his order.
21. In my considered opinion the Tribunal is not supposed to substitute the discretion exercised by the AO unless a finding is recorded that the method adopted by the AO is arbitrary and it results in computation of excessive income. The learned counsel for the assessee relied upon the decision of the ITAT Lucknow Bench in the case of Universal Construction [ITA No. 289 (Luck.)/2009, dated 15th June 2010] in support of his contention that in the event of non-production of books the book results have to be rejected and net profit deserves to be estimated. However, that was a case where the AO has exercised his discretion to reject the book results and the limited issue was with regard to the percentage of net profit that has to be arrived at. Having regard to the factual matrix of the case the Tribunal observed that it would be reasonable to adopt the net profit rate at 5.25%. It is, thus, not a case of substitution of the discretionary powers exercised by the AO but it was limited to the percentage of profit to be estimated in the circumstances of the case. Similarly, in the case of CIT v. G.E. Motors [2011] (Punj. & Har.) though the books of account were stated to have been maintained the assessee did not produce complete books and assessment was made by the AO under section 144 of the Act by rejecting the book results. The Tribunal has recorded a finding that the assessee had not deliberately avoided to produce the books of account before the AO and thus remanded the matter to the file of the AO to provide an opportunity to the assessee and pass a fresh assessment order thereafter. The Department was unable to show the court that by doing so any prejudice had been caused to it. Under these circumstances the court observed that the view taken by the Tribunal do not call for interference. However, in the instant case, the AO as well as the CIT(A) observed that there are strong reasons to believe that the assessee is avoiding to produce the books of account. In fact the learned Accountant Member also observed, in para 6.1 of his order, that the plea of impounding the books by the local police and return thereof in a spoiled condition is merely a pretext and the production of few vouchers from its account, a solitary bill for purchase of Road Roller would highlight the mala fide intention of the assessee. He observed that the assessee has not come before the Tribunal with clean hands.
22. Ordinarily, on this issue, a uniform approach is adopted by the Division Bench depending on the facts of the case whereas this is a unique case where the Members have differed on this aspect also and hence it is necessary to consider as to whether the opinion expressed by the learned Accountant Member, which is in conformity with the opinion formed by the AO as well as the CIT(A), can be given due weightage or not. As could be noticed from the case law, referred by the learned Accountant Member as well as the decision of the Apex Court in the case of H.M. Esufali H.M. Abdulali (supra), so long as the opinion expressed by the AO is a possible view, unless some material is brought on record to show that the specific additions made by the AO are highly arbitrary and perverse, in my considered opinion, the Appellate Tribunal should not merely substitute its opinion to that of the AO to hold that it is a fit case for rejection of books of account.
23. The learned counsel for the assessee relied upon the decision of the Hon’ble Delhi High Court in the case of Aero Club (supra) to submit that the assessment should be on a rational basis and the profit margin disclosed by the assessee cannot be rejected arbitrarily. In my view, this decision has no application, in the circumstances of the case.
24. The duty of the Third Member is only to appreciate the orders passed by the respective Members to find out as to which order is more reasonable and the Third Member cannot reappraise the matter in any other manner. In the case before me the learned Judicial Member has not stated anywhere that the profit margin disclosed by the assessee was rejected by the AO arbitrarily and the additions made by the AO are excessive and arbitrary. As has already been stated hereinabove the AO has discretion to either reject the books of account and estimate gross profit or to consider the books and may make specific additions by considering as to whether the expenditure claimed is reasonable or not. The AO having chosen the second option, the Appellate Tribunal cannot substitute its opinion to that of the AO, unless it is pointed out that in the process of adopting the option he had arbitrarily made the additions which have no rational basis. Such a finding/conclusion is absent in the order passed by the learned Judicial Member whereas the learned Accountant Member passed a detailed order in coming to the conclusion that the order passed by the AO/CIT(A) is not erroneous in the circumstances of the case.
25. On a conspectus of the matter I agree with the view taken by the learned Accountant Member, i.e. separate disallowance of expenditure is permissible, by taking into consideration the reasonableness of the claim under various heads such as purchase, labour charges, etc.
26. The matter will now be placed before the regular Bench for passing consequential order in accordance with the majority decision.
ORDER
Sunil Kumar Yadav, Judicial Member
As per majority view, the addition of Rs. 12,55,520 sustained by the Id. CIT(A) under various Acts is confirmed. We, therefore, uphold the order of the Id. CIT(A) confirming the aforesaid addition. Accordingly the appeal of the assessee stands dismissed.
2. In the result appeal of the assessee is dismissed.
The above decision has been set aside by the Hon High Court with directions to the Tribunal to follow its earlier order of applying a flat NP rate and to allow deduction in respect of interest and depreciation