2017 (7) TMI 810 - AT - Income Tax

Tribunal directs deletion of fictitious entries, emphasizes real income in tax assessments

The Tribunal allowed the appeal, directing the Assessing Officer to delete the addition based on fictitious entries and accept the revised income declared ... Addition on unexplained cash credit - assessment framed u/s. 144 - non granting permission for special audit u/s. 142(2A) - non-acceptance of the special Audit Report neither by the Assessing Officer nor by the First Appellate Authority - Held that:- A.O. admits that he has been directed to inform the auditors that they have been appointed to carry out special audit u/s. 142(2A) of the Act. The ITO further writes that the remuneration has been fixed by the Commissioner. This proves that sufficient compliance of the relevant provision has been made by the ITO. Coming to the other objections of the ld. D.R., we find that all the objections relate to the violation of the relevant provisions of the companies act. We fail to understand how the violation of the provisions of companies act will come in the way of Income Tax assessment proceedings A perusal of the re-casted accounts qua the special auditor’s report shows that the original set of accounts were doctored and subsequently the fictitious entries were erased to bring back the real account of the assessee company. It is a settled proposition of law that Income Tax is imposed on real income. As mentioned elsewhere, the entire entries in the books of accounts of the assessee were found to be fudged and fictitious. In our understanding of the law, no addition should be made on the basis of fictitious credit entries where no real money was found to be involved. Considering the nature of the original set of books of accounts and the recasted books of accounts and the observations of the special auditors appointed u/s. 142(2A) of the Act and also considering the factual matrix in totality, we do not find any merit in the impugned additions made solely on the basis of the fictitious entries admitted. We, accordingly, set aside the findings of the ld. CIT(A) and direct the A.O. to delete the addition - Decided in favour of assessee. Issues Involved:1. Validity of the assessment order under Section 143(3) due to improper service of notice under Section 143(2).2. Legitimacy of re-assessed income versus revised income declared by the assessee.3. Consideration of the special Audit Report under Section 142(2A) by the Assessing Officer (A.O.).4. Basis of the assessment order and its reliance on surmises.5. Ignorance of the Audit Report under Section 142(2A) by the A.O.6. Applicability of Section 142(2A) despite other audits.7. Acceptance of revised income based on re-casted accounts subjected to special audit.Issue-wise Detailed Analysis:1. Validity of the Assessment Order:The assessee contended that the assessment order passed under Section 143(3) was invalid due to improper service of notice under Section 143(2). However, this ground was not pressed by the counsel and was dismissed as not pressed.2. Legitimacy of Re-assessed Income:The assessee challenged the upholding of re-assessed income of Rs. 2,51,76,000 against the revised income of Rs. 13,93,790 declared by the assessee based on re-casted accounts. The A.O. had originally added Rs. 2,68,94,000 as unexplained cash credit, which was confirmed by the CIT(A) and the Tribunal. The Tribunal later directed the A.O. to consider the special Audit Report for deciding the assessment.3. Consideration of Special Audit Report:The main grievance revolved around the non-acceptance of the special Audit Report under Section 142(2A) by both the A.O. and the First Appellate Authority. The special audit was conducted following the Tribunal's direction, which highlighted the reasons for fudging the original books and the subsequent re-writing of the accounts.4. Basis of the Assessment Order:The assessee argued that the assessment order was based on surmises without any supporting basis. The Tribunal noted that the original books were doctored, and the re-casted books were subjected to special audit, which explained the fictitious entries and their erasure in the re-casted accounts.5. Ignorance of the Audit Report:The A.O. and CIT(A) were criticized for ignoring the special Audit Report obtained under Section 142(2A). The Tribunal found that the original accounts were fictitious, and the re-casted accounts reflected the real financial position. The Tribunal emphasized that income tax should be imposed on real income, not on fictitious entries.6. Applicability of Section 142(2A):The Tribunal addressed the objections of the Department Representative (D.R.) regarding the procedural compliance for the appointment of the auditor under Section 142(2A). The Tribunal found that the ITO had complied with the relevant provisions, and the objections related to the Companies Act did not affect the income tax assessment proceedings.7. Acceptance of Revised Income:The Tribunal concluded that the re-casted books of accounts, which were subjected to special audit, should be accepted. The fictitious entries in the original accounts were erased, and the real financial position was reflected in the re-casted accounts. The Tribunal directed the A.O. to delete the addition of Rs. 2,51,76,000, thereby accepting the revised income declared by the assessee.Conclusion:The Tribunal allowed the appeal filed by the assessee, setting aside the findings of the CIT(A) and directing the A.O. to delete the addition based on the fictitious entries. The decision emphasized the importance of real income in income tax assessments and validated the re-casted accounts subjected to special audit under Section 142(2A).