TaxTMI 
TaxTMI 
2018 (1) TMI 1119
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.... assessment years 2008-09, are directed against the order of CIT(A) in deleting the additions made on account of applying net profit rate after rejection of books of accounts u/s.145 of the Act for Rs. 1,43,00,000/- for the assessment year 2006-07, Rs. 3,55,00,000/- for assessment year 2007-08, Rs. 2,30,00,000/- for assessment year 2008-09, Rs. 4,39,00,000/- for assessment year 2009-10, respectively. 4. We have heard rival submissions and perused the orders of lower authorities and materials available on record. The assessee is engaged in the business of contract work and transportation work. A search and seizure operation was conducted in the case of the assessee on 24th and 25th May, 2011. In pursuance to the same, notice u/s.153A of the Act was issued and impugned orders of assessments were passed. It is not in dispute that assessment for the assessment years 2006-07, 2007-08, 2008-09 and 2009-10, were completed prior to the date of search. In other words, the assessments for these assessment years were not abated. 5. We find that the above additions made by the AO in the impugned assessment years were not based on any incriminating material found during the course of the ....
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....vt. Ltd. 30,00,000 18 2007-08 Mansarwar Dealers Pvt.Ltd 9,00,000 19 2006-07 Nandan Merchantile Pvt. Ltd. 30,00,000 20 2006-07 Nikhil Trexim Pvt. Ltd. 7,00,000 21 2011-12 Parijat Berter Pvt. Ltd. 5,75,50,000 22 2009-10 Perfect Tradecom Pvt. Ltd. 10,00,000 23 2010-11 Perfect Tradecom Pvt. Ltd. 25,00,000 24 2006-07 Purshottam Garg 8,50,000 25 2010-11 R.R.Energy Limited 4,15,52,000 26 2006-07 Rajendra Kumar Agrawal 4,50,000 27 2009-10 Rajlaxmi Vanijya Pvt. Ltd. 70,00,000 28 2006-07 Savita Garg 2,00,000 29 2010-11 Sector Infrastructure Pvt. Ltd. 40,00,000 30 2006-07 Shreevar Overseas Ltd. 35,00,000 31 2010-11 Spark Enclave Pvt. Ltd. 5,00,000 32 2010-11 Spin Packaging pvt. Ltd. 25,00,000 33 2009-10 Sravsti Udyog Viniyog Pvt. Ltd. 42,00,000 34 2008-09 Subhash Chandra Singhal 9,90,00....
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....e books of account for any previous, then such sums may be charged to tax as income of that previous year. Relying on the following cases the A.O. has concluded that in this case the appellant has failed to discharge its onus in proving the identity, creditworthiness and genuineness of the share applicants. (i) CIT v. P. Mohanakala 291 ITR 278 (ii) CIT v. Durgaprasad More (82 ITR 540) (iii) Sumati Dayal v. CIT (214 ITR 801) (iv) N R Portfolio Pvt. Ltd. (ITA NO. 1019/2011) dtd. 22.11. 2013: (v) Nova Promoters & Finlease (342 ITR 169); (vi) CIT v. Nipun Builders and Developers [2013] 350 ITR 407 (Del); (vii) Bharti Pvt. Ltd. v. CIT [1978] 111 ITR 951 (Cal.); (viii) Hindustan Tea Trading Co. Ltd. (129 Taxman 601 Cal.); (ix) Rathi Finlease Ltd. (IT. Appeal No. 63 of 2004, dtd 11-10-2007) (x) MAF Academy P Ltd (ITA no. 341 /2012) dated 28.11.2013; (xi) Oasis Hospitalities (P.) Ltd. ( 333 ITR 119/ 198); (xii) VijayKumarTalwar v. CIT [2011] 330 ITR 1/196 (S.C) (xiii) Agrawal Coal Corp. Pvt. Ltd. (135 LTD 270); 10. It was further held that inquiries conducted by the A.O. ....
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.... applicant, audited final accounts with Audit Report of the share applicant, Memorandum & Articles of Association of share applicant, bank statement of share applicant from where the amount was drawn for investment into assessee company, etc. The assessee has discharged the burden of proving identity, credit-worthiness and genuineness of transactions. The AO has made enquiry at his end directly from various share applicants and most of them have replied to him, barring only 3 share applicants, as below: Sl.No. A.Y. Name of Share Applicant Amount (Rs.) 1. 2006-07 Shri Santosh Agrawal 2,00,000 2. 2009-10 M/s. Satyam Tradecom 45,00,000 3. 2009-10 M/s. Sravasti Nidhi Pvt. Ltd. 20,00,000 12. The assessee also submitted that in case of Shri Santosh Agrawal no addition was made, being relative, and in case of M/s. Satytam Tradecom & M/s. Sravasti Nidhi Pvt. Ltd., various supportings have been filed by the assessee before the AO and also in appellate proceedings. The AO summarily rejected the evidences without having any material on record. As many as 40 share applicants out of 43 share appli....
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....d during the proceedings u/s 132 on 24.5.2011, From the perusal of statements of Mr. Rajendra Agrawal and Mr. Rahul Singhal, it is seen that the Search Team did not ask any question from the said persons regarding maintenance or otherwise of said statutory records, in this backdrop, it cannot be said to be a finding of the Investigation Wing. The statements of other persons belonging to the aforesaid companies also does not, in any way, lead to an inference that the Group companies or the appellant company does not maintain Statutory records / Registers. From the assessment order, it appears that the A.O. did not take any cognizance of the assertion made by the appellant regarding maintenance of Statutory Records and registers in accordance with the provisions of Companies Act and without verifying the verifiable facts regarding maintenance or otherwise of Statutory records and registers, the A.O simply seems to have found it convenient to remain silent and sit back after making the allegation without any proper basis. It is not the case of the A.O. that the search team had asked a specific query to the appellant company's representative with regard to maintenance of statutory ....
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....s duly reflected in the bank account of the appellant. I have perused the bank statements of the investors, their audited financial statements and confirmation for making such investments, which clearly establishes the factum of making investments. These facts are clearly establishing the identity of the investors and the genuineness of the impugned transactions. 13. It is observed from the records and assessment order that for the purpose of making addition as unexplained cash credits, the AO has heavily relied upon the judicial pronouncements, however, the appellant has made elaborate submissions distinguishing the facts, I am convinced with the explanation of the appellant that the decisions relied upon by the A.O are not applicable in the facts of the present case as there is nothing on record which can indicate that the receipt of share application money was by way of accommodation entries only. It is also not the case of the A.O that the investors have, accepted by way of statement that the sums paid to the appellant was in fact received from the appellant and investors merely routed the undisclosed income of the appellant through money laundering process in the form....
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....cts in such cases are entirely same, particularly, when no differentiation could be effectively demonstrated and brought on to the record by the A.O. The submissions of the AO that the decision of the Hon'ble Supreme Court in the case of Lovely Exports (P) Limited was rendered in the light of different facts inasmuch as the said judgment was rendered by the Hon'ble Supreme Court in the context of public issue, is devoid of merit because the decision was rendered by the Hon'ble Supreme Court in the case of Lovely Exports (P) Ltd. which is a Private Limited Company and which cannot bring public issue of shares. I find that the investments made by the share applicants were duly reflected in the audited financial statements of the corporate investors. It is a settled principle of law that reason for suspicion, however grave it may be, cannot be a basis for holding adversity against appellant. 15. The Assessing Officer has disregarded the documentary evidences adduced by the appellant such as confirmation from the share applicants, their PAN; certificate of incorporation of subscriber companies. The subscription for the shares was received through cheques. The Inves....
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....hi). However, on going through the said decision in Nova Promoters & Finlease (P) Ltd. (supra) I find that the facts are clearly distinguishable. In fact, in Nova Promoters & Finlease (P) Ltd. (supra) itself the Hon'ble Delhi High Court has observed, in the context of Lovely Exports (P) Ltd- (supra), as under:- "The ratio of a decision is to be understood and appreciated in the background of the facts of that case. So understood, it will be seen that where the complete particulars of the share applicants such as their names and addresses, income tax file numbers, their creditworthiness, share application forms and share holders' register, share, transfer register etc. are furnished to the Assessing Officer and the Assessing Officer has not conducted any enquiry into the same or has no material in his possession to show that those particulars are false and cannot be acted upon, then no addition can be made in the hands of the company under sec.68 and the remedy open to the revenue is to go after the share applicants in accordance with law. We are afraid that we cannot apply the ratio to a case, such as the present one, where the Assessing Officer is in possession of....
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....Time Marketing (P.) Ltd. [2008] 173 TAXMAN 41 (DELHI) (h) Assistant Commissioner of Income-tax v, Mansarovar Urban Co-Operative BankLtd. [2009] 124 TTJ269(LUCKNOW); (i) Commissioner of Income-tax -IV v. Empire Buildtech (P.) Ltd. [2014] 43 taxmann.com 269 (Delhi); ( j) Commissioner of Income-tax v. Mulberry Silk International Ltd. [2012] 19 taxmann.com 31 (Kar.); (k) Commissioner of Income-tax-Ill v. Nilchem Capital Ltd. [2012] 18 taxmann.com 350 (Guj.); (1) Commissioner of Income-tax v. Jay Dee Securities & Finance Ltd. [2013] 32 tax.mann.cpm 91 (Allahabad); (m) Commissioner of Income-tax., Delhi-II v. Kinetic Capital Finance Ltd. [2011] 14 taxmann.com 150 (Delhi); (n) Commissioner of Income-tax v. VLS Foods (P.) Ltd. [2011] 15 taxmann.com (o) Commissioner- of Income-tax v. Ambitja Ginning Pressing and Oil Co, (P.) Ltd. [2011] 15 tqy.rn.ann.com 273 (Guj.); (p) Commissioner of Income-tax v. Rock Fort Metal & Minerals Ltd, [2011] 198 TAXMAN 497 (Delhi); (q) Commissioner of Income-tax v. Siri Ram Syal Hydro Power (P.) Ltd, [2011] 196 TAXMAN 441 (Delhi); (r) Commissioner of Income- tax v....
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....ssessment year 2011-12 to the income of the assessee. The AO made the addition on the ground that during the course of search statutory registers which were required to be maintained by the assessee company as per the provisions of Companies Act were not found. The AO also observed that in pursuance to notices issued u/s.133(6) of the Act to the share applicants they furnished their balance sheets. On going through the said balance sheet of the share applicant the AO was not satisfied with the creditworthiness of the share applicants because of the above two reasons. The AO treated the share application money of Rs. 8,56,00,000/- in the assessment year 2010-11 and Rs. 9,64,20,000/- in the assessment year 2011-12 as non-genuine and added to the income of the assessee which was deleted by the CIT(A) for the reasons quoted above in this order. 17. We have not been able to appreciate that how from the non-maintenance of statutory registers under the Companies Act it can be inferred that a part of share application money received by the assessee company was not genuine. The DR could not demonstrate before us the relation between the absence of statutory registers and genuineness or o....
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..... 26. Ground Nos.3 to 6 in appeals for the assessment years 2010-11 & 2011-12 and ground Nos.1 to 4 in appeal for the assessment year 2012-2013, are directed against the order of CIT(A) in deleting the additions made on account of applying net profit rate after rejection of books of accounts u/s.145 of the Act for Rs. 4,62,00,000/- for assessment year 2010-11, Rs. 8,56,00,000/- for assessment year 2011-12 and Rs. 2,45,00,000/- for assessment year 2012-13, respectively. 27. Brief facts relating to the above grounds that the A.O has referred to the Trial Balance prepared as on date of search i.e., 24/05/2011 at Para - 8.1. The AO has stated that the group is not regularly maintaining its books of accounts and it was showing low profit before taxes and high sundry creditors. The AO has incorporated following compilation. Data of Turnover and Profit before taxes F.Y. F.Y. F.Y. F.Y. F.Y. F.Y. F.Y. F.Y. 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 2011-12 Turnover (R....
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....ssee and the assessee is doing business since past many years and the turnover, which was of Rs. 27.90 crores in the year ending on 31/03/2006 reached to the tune of Rs. 121.21 crores in the year ending on 31/03/2012. There is substantial loan from bank in crores, the debtors and creditors are in crores, the assessee is paying Income Tax in lakhs of rupees and without books of accounts, business of this scale cannot be done. The books of accounts were produced during original assessment proceedings before the AO for A.Y 2008-09 & 2009-10 and regular books of accounts have been again produced during proceedings before the AO u/s 153A. During search operation, which was carried-on on 24/05/2011, a Trial Balance dated 24/05/2011 (by default mentioned as 10/06/2011) was found by the authorized officer in the computer and without maintaining regular books of accounts, Trial Balance cannot be prepared. There was difference of Rs. 10,31.29,861/- because opening balance as on 01/04/2011 was not incorporated in the books of accounts for F.Y. 2011-12 as the books of accounts for F.Y.2010-11 were under finalization. The difference of Rs. 10,31,29,861/- was explained before the Assessing Offic....
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..... With regard to higher sundry creditors and debtors ratio mentioned by the AO, the assessee submitted that the observation of the AO was misconceived. It was explained that as per accepted Accounting ratios, the Current Ratio is to be considered wherein Current Liabilities and Current Assets are considered by the Financial Institutions. There was cash credit limit of banks at Rs. 15 crores. The banks are very vigilant about the financial position and liquidity ratio. They prefer 1 : 1.33 where "1" is Current Liabilities and "1.33" is Current Assets. It was explained by way of a compilation that Current Ratio was 1.17 at the lower side and 1.77 at the higher side in all the concerned years. The learned ARs argued that the AO should have considered all the Current Assets and Current Liabilities instead of only debtors and creditors. The Current Assets and Current Liabilities fluctuate on each transaction of purchase or sale. It was accordingly submitted that the accounts should not be rejected and flat rate should not have been applied on the basis of lower profit and higher creditors. 29. The assessee further submitted that with regard to creditors, their complete address for....
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....1 4.96 5.56 5.82 Total (2) + (4) 2.04 3.43 5.19 9.41 9.25 7.65 10.68 5. (-) Depreciation as per IT Act 0.94 1.13 1.61 3.20 4.05 4.63 5.33 6. NP as per I.T. Act 1.10 2.30 3.58 6.21 5.20 3.02 5.35 7. % of NP over Turnover after taking Depreciation as per I.T.Act 3.68% 3.51% 5.30% 5.54% 4.70% 3.35% 4.99% Receipts from both segments of business are as below: Assessment Year Civil work (Rs.) Other work (Rs.) Total receipts (Rs.) 2006-07 234,133,596 44,906,214 279,093,810 2007-08 535.601.243 62,037,810 597,639.053 2008-09 586,772,545 89,425,490 676,198,035 2009-10 914,984,979 206,950,143 112,1935,122 2010-11 726,090,741 380,387,228 1,106,477,969 2011-12 604,303,950 590,383,856 1,194,687,806 2012-13 320.900,815 891,219,069 1,212,119,884 26. The books o....
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.... found that-the claim of assessees for interest on capital contribution by the partners and salary to working partners was allowable deductions to the extent of limit provided under s. 40(b). The Tribunal was justified in doing so. The finding of fact does not give rise to question of Iaw. It is clearly provided that the amendment to s. 40(b) will take effect from 1st April, 1993, and will, accordingly, apply in relation to asst. yr. 1993-94 and the subsequent years thereto- It is also provided that it pertains to the payment to the partner during the previous year, relevant to the assessment year commencing on 1st April, 1993. Obviously, the previous year is 1992-93 and the asst. yr. 1993-94. Dealing with the question of claim of depreciation in a case of determination of income applying the net pro/It rate, it would be pertinent to refer the Circular dt. 31^st Aug., 1965, issued by the Central Board of Revenue, which provides that if a claim for depreciation is made by the assessee in the return and the ITO proposes to estimate the profits, the depreciation alone should be separately worked out. The Board clearly pointed out this aspect of the matter in para 2 of the circular, wh....
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....d on proper appreciation of material on record and the evidence produced by the assesses. As no question of lav? arises out of the order passed by the Tribunal, there is no fault with the order of the Tribunal declining to refer the question. -ClT vs. SM Bhatia Associates (1998) 144 CTR (Raj) 378 : (1998) 226 ITR 675 (Raj) applied." 29. In SHYAM BIHARI vs. COMMISSIONER OF INCOME TAX & ANR. (2012) 345 ITR 283 (Patna) it was held that "The question of law actually falling for consideration would be whether- the authorities under the Act including the Tribunal have erred in being guided by the principles underlying Section 44AD of the Act when that Section is clearly not applicable to the case of the appellant as his gross contract receipt is well above Rs. 40 lakhs. The Tribunal was not justified in adopting the principles underlying Section 44'AD of the Act when the said Section itself was not applicable, - Sri Ram Jhanwar Lal Vs. Income Tax Officer 321 ITR 400 relied. According to the circular of the Board dated 31.8.1965, where it is proposed to estimate the profit and the prescribed particulars have been furnished by the assesses, the depreciation allowance ....
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....een inter alia, provided that the "mere fact that net profits had been estimated could not be a ground for saying that depreciation claimed in the returns had been duly allowed as provided under the Act". Thus, the Board had instructed the authorities that where "it is proposed to estimate the profit and the prescribed particulars have been furnished by the assessee, the depreciation allowance should be separately worked out. " Still further, it was directed that "even where best judgment is made, the above procedure should be adopted provided the required particulars have been furnished by the assessee." Sec. 119 makes it mandatory for the IT authorities to follow the orders, instructions and directions issued by the Board. The directions given in the circular do not fall -within the exceptions embodied in the proviso to sub-s. (1) of s. 119. It was not even suggested that these. are contrary' to any statutory provision. Thus, these were binding on the authorities. These had to be followed. Since the instructions of the Board had not been observed, the contention raised on behalf of the Revenue cannot be accepted. -Navnit Lal C. Jgveri vs K.K. Sen, AAC (1965) 56 ITR 198 (SC) :....
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....In the present case, the AO in coming to the conclusion that the income of the assessee from buffing and polishing was at Rs. 5,50,000 has not brought any material on record. In fact it has been a wild guess on the part of the AO. The addition having been made without any reference to either the past history in assessee's case or any special circumstances suggesting earning of higher income, by the assesses, or any comparative case, the addition deserves to be deleted and the same is directed to be deleted." 32. In the light of facts and circumstances of the case as also ratio laid down in the above cited judicial pronouncements, it is imperative to analyze the profitability before depreciation. The profitability of the appellant before depreciation ranges between 5.74% to 8.81% and cumulative result is 7.70% as worked out in the Table below: S.No Particulars Assessment Year 06-07 07-08 08-09 09-10 10-11 11-12 12-13 Cumulative 1 Turnover 27.9 59.76 67.61 112.19 110.64 119.46 121.21 618.77 2 PBT as per books ....
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....uch finding is given then income chargeable under the head "Profits and gains of business" has to be computed in accordance with the method of accounting regularly employed by the appellant. Furthermore, for rejecting the books of accounts under conditionno.2, the AO has to show that the accounts are not correct and complete as there exist serious defects in maintenance of accounts, irrespective of whether accounting methods or accounting standards are regularly followed; that the AO has to show that the way accounts are written or kept (and not accounting method adopted like cash or mercantile), profits cannot be correctly deduced therefrom. In the instant case, the appellant has claimed that he did produce the books of accounts along with bills and vouchers, however, no cognizance was taken by the A.O. I find that the A.O has riot pointed out any defect for rejecting the explanation of the appellant. It is seen that the A.O has completed the assessment u/'s 143(3) and not u/s 144, though, the A.O has applied his best judgement. 34. As to how the best judgment assessment should be made, the leading decision on the point is the one rendered by the Privy Council in CIT ....
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.... Shri B.P. Singh Deo (1970) 76 ITR 690 (SC) that "the mere fact that the material placed by the assessee before the assessing authorities is unreliable does not empower those authorities to make an arbitrary order. 37. The power of levy assessment on the basis of best judgment is not a arbitrary power; it is an assessment on the basis of best judgment. In other words, that assessment must be based on some relevant material. It is not a power that can be exercised under the sweet will and pleasure of concerned authorities." 38. The basis of estimate or the basis of computation should be disclosed by the assessing authority, or otherwise the best judgment assessment may be quashed. In Anand Rice & Oil Mills v. C!T (1977) 108 ITR 372 (Cal.), huge additions were made by the ITO on the ground that the assessee had inflated the purchase prices of goods and a major portion of the addition was sustained by the Tribunal without furnishing any basis of its own estimate. The Calcutta High Court held that the order of the Tribunal being arbitrary, the same could not be sustained. In Ganga Prasad Sharma v. CIT (1981) 132 ITR 87 (UP'), the Madhya Pradesh High Court emphasiz....
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....f: FY 2005-06 FY 2006-07 FY 2007-08 FY 2008-09 FY 2009-10 FY 2010-11 FY 2011-12 Turnover (Rs. Cr.) 29.90 59.76 67.61 112.19 110.64 0.00 121.21 Sundry Creditors (Rs. Cr,) 9.83 21.71 22.36 21.49 0.00 14.49 Sundry Creditor /Turnover % 16.44% 32.11% 19.93% 19.42% 11.95% 8.4 A Chart Showing Sundry Creditors vis-a-vis sundry debtors and turnover is reproduced as under: Year ended March 31,2009 Year ended March 31,2008 Year ended March 31,2007 Turnover 11219 Lakhs 6761 Lakhs 5976 Lakhs Sundry Creditors 1905 1764 959 Sundry Debtors 1311 632 401 42. In my considered view, the comparison of mere sundry creditors and sundry debtors will not give correct and logical picture of the business much less a basis to hold a view that the books of accounts are liable to be rejected. It is a matter of common knowledge, that it is the Current Ratio which is considered to ....
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.... A.O has completely failed to record the reasons based on material available as the A.O has not referred to even a single seized document which could be regarded as incriminating document and used as an evidence to even remotely support the conclusion of the A.O. The A.O seems to have blown out of proportion merely on the basis of mathematical and mechanical calculations. It is seen that the A.O has not pointed out any suppression of profit based on any cogent and incriminating material against the appellant. Material showing financial nexus can only be a valid basis for holding suspicion or making the addition. Unfortunately not a single document showing any financial dealings by the appellant has been referred to either in the assessment order, or even during the course of hearing, despite the liberty granted vide this office Letters on 17.04.2014. An order based on unconfirmed or uncorroborated belief of suspicion; even though the suspicion rests on the high pedestal of bona fides cannot stand the scrutiny of law. The facts and circumstances of the present case reveal that the A.O just brushed aside the objections/submissions and contentions raised by the appellant and evidences....
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....count but had not pointed out any specific discrepancy nor has he detected any suppression in sales or inflation in purchases/expenses. No evidence whatsoever was brought on record to prove that, the appellant, in fact, earned more than that returned as per the books of account kept in the regular course of business. The assessment order is evidence to the fact that there was no specific finding given by the A.O to the effect that the method employed by the appellant was such that correct profits could not be deduced there from. The A.O. has not come across any material defect in accounts so as to hold that any profit has been suppressed. It is also not the case of the A.O that the appellant has not followed the mercantile system of accounting. It is also not the case of the A.O that the appellant has not followed any particular accounting standards which are notified by the Central Government. It is also not in dispute that the appellant has maintained books of account regularly and these are duly audited u/s 44AB of the I.T. Act. Considering the facts " and circumstances of the case, as also decisions relied upon by the appellant and those cited above, I am of the view that there....
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..... An assessment cannot be made arbitrarily and in order that an assessment can be sustained, it must have nexus to the material on record. (CIT v. Mahesh Chand [1983] 199 ITR 247, 249 (All.). It is the settled position that, though the AO has very wide powers and is not fettered by technical rules of evidence and pleadings, there is one over-riding restriction on his judgement and that is, that, he must act honestly and diligently on the material, howsoever, inadequate it was, and not vindictively, capriciously or arbitrarily. "Probability cannot be construed as material evidence to form an opinion by the AO to conclude an assessment and for drawing adverse inference against the appellant unless there is evidence to substantiate such probable inference.'' Assessment has to be made based on the real income theory, i.e., income to be determined for taxation must invariably be proved to have been the correct quantum of income earned by the appellant during the relevant previous year and the one presumed to have been earned. The presumptions and hypothetical estimations and observations made by the A.O. for making the impugned estimated addition, were extraneous, irrelevant and....