2010 (9) TMI 1135 - AT - Income Tax

Assessment is best judgment assessment or not - Assessment after rejection of books of accounts - Rejection of additional grounds raised before the Tribunal as '' CIT(A) has erred in holding that no question of net profit rate application arises and further erred in confirming the specific disallowances although learned CIT(A) has impliedly rejected the books of accounts'' - HELD THAT - The issue raised is also legal in nature as it questions proper application of the provisions laid down u/s. 145(3) and 144. The Hon'ble Supreme Court in the case of National Thermal Power Co. Ltd. vs. CIT 1996 (12) TMI 7 - SUPREME COURT observe that the Tribunal is confined only to issues arising out of the appeal before the CIT(A) takes too narrow a view of the powers of the Tribunal. Undoubtedly, the Tribunal will have the discretion to allow or not to allow a new ground to be raised, when it is necessary to consider that question in order to correctly assess the tax liability of an assessee. Hence, we allow the same as ground No. 2. Validity of rejection of books of accounts without assigning any reasons y/s 145(3) - HELD THAT - In absence of any specific detail mentioning by the AO, the assessee cannot take advantage that its books of account have not been rejected by the AO especially when the AO has pointed out several defects in the books of account sufficient to draw an inference that the same is not worth relying. The only requirement is that while proposing rejection of books of account, the AO is supposed to give opportunity to the assessee to defend its case against the proposed rejection. There is huge decline in the GP rates declared by the assessee during the year under consideration, observed by the AO. Under this background, the AO went through the books of account and observed some defects therein that the expenses are not fully vouched; assessee has prepared consolidated expenses against contract receipts and receipts from JCB; the wages and other direct expenses have been shown in common and that there is no bifurcation of these expenses. - CIT(A) also upheld the view of the AO that no proper books of account were maintained. Assessment is best judgment assessment or not - Estimation of income - HELD THAT - After rejecting books of accounts of the assessee, the only option available with the AO was to make best judgment assessment under the provisions of s. 144 of the Act on the basis of past history of the assessee itself, treating the same as best guide especially when no basis has been assigned by the AO while making lump sum disallowance out of the claimed expenses. Matter remanded back to AO for estimation of the profit of the assessee keeping in view the past result of the assessee. Disallowance of depreciation - date of acquisition - whether the machinery were put to use and ready of use - HELD THAT - Since there is contradiction in the date of purchase of the machinery, we remand the matter back to the file of the AO to decide this issue afresh after verifying the very date of purchase of machine and that when it was ready to use.

Summary

Issues Involved:
1. Disallowance of expenses by the Assessing Officer (AO) and confirmation by the Commissioner of Income Tax (Appeals) [CIT(A)].
2. Application to raise additional grounds regarding the rejection of books of accounts and the best judgment assessment.

Detailed Analysis:

1. Disallowance of Expenses:
The assessee challenged the CIT(A)'s decision to confirm the AO's disallowance of various expenses. The disallowed amounts were as follows:
- Wages and hire charges: Rs. 5,79,847
- Repair and maintenance: Rs. 1,07,911
- Diesel and petrol expenses: Rs. 3,94,764
- Freight expenses: Rs. 23,879
- Depreciation: Rs. 6,63,750
- Outstanding liabilities (Wages payable): Rs. 16,40,214
- Total: Rs. 34,10,365

The AO pointed out several defects in the books of accounts, such as expenses not being fully vouched and a lack of bifurcation between different types of expenses. The AO made specific disallowances based on these defects, which were upheld by the CIT(A).

2. Application to Raise Additional Grounds:
The assessee sought permission to raise an additional ground, questioning whether the books had been rejected and if the lower authorities' actions constituted a best judgment assessment. The Tribunal allowed this additional ground, noting that the issue was legal in nature and did not require fresh material outside the record.

Analysis of the Additional Ground:
The Tribunal found that the issue of whether the books were rejected went to the root of the matter. It was noted that both the AO and CIT(A) had pointed out several defects in the books, implying their rejection. The Tribunal referenced the case of Asstt. CIT vs. Rishabh Construction (P) Ltd., where it was held that implied rejection of books is valid if defects are pointed out.

The Tribunal emphasized that after rejecting the books, the AO should have made a best judgment assessment under Section 144 of the Income Tax Act. The AO's lump sum disallowances without any basis were deemed arbitrary. The Tribunal noted that past history of the assessee's own case should be considered for making a fair estimate.

Conclusion:
The Tribunal set aside the disallowances made by the AO and remanded the matter back to the AO to estimate the profit of the assessee, considering the past results and providing an opportunity for the assessee to be heard. Regarding the disallowance of depreciation on the J.S. machine, the Tribunal remanded the issue back to the AO to verify the purchase date and readiness for use.

Outcome:
The additional ground and the primary ground were allowed, and the appeal was consequently allowed. The AO was directed to reassess the profit and depreciation claims based on the Tribunal's guidelines.