2010 (4) TMI 837 - AT - Income Tax

Rejection of books - block assessment - addition by estimating the gross profit at 22% and disallowing the various expenditure on account of interest, household expenditure met by drawings of the firm, telephone expenses, motor car expenses, car depreciation and unexplained credits in partners accounts - Held that - AO can adopt only one of the courses either to frame the assessment on the basis of the books and make the addition with respect to the various items if the assessee fails to prove the same or to estimate the income on the basis of GP rate adopted. Once the income was estimated by adopting the GP rate by rejecting the books, then the additions made by the AO based on the books of account are highly improper, arbitrary and unjustified. The AO is not permitted to adopt both the courses available to him, whereas, he can adopt only one of the courses. Once the books are rejected and income is estimated on the basis of GP rate, then no addition can be made on the basis of books of account and disallowing the expenditure claimed by the assessee in the books, after making the addition on the basis of estimated GP rate at 22 per cent of sales - all other additions are uncalled for and unwarranted, other additions made by the AO deleted and confirm the addition made by the AO by estimating the gross profit @ 22 per cent. In favour of assessee.

Issues Involved:
1. Validity of block assessment due to non-service of notice under section 158BC.
2. Unexplained investments and their treatment under section 69.
3. Application of section 40A(3) concerning estimated profit.
4. Additions as credits in partners' accounts.
5. Levy of interest under section 158BFA.
6. Refund of tax paid due to invalid notice under section 158BC.
7. Restriction of agricultural income in arriving at undisclosed income.
8. Deletion of addition on account of unexplained investment in jewelry.
9. Application of surcharge under Finance Act, 1999.

Detailed Analysis:

1. Validity of Block Assessment Due to Non-Service of Notice under Section 158BC:
The assessee argued that the block assessment was invalid as no notice under section 158BC was served. The Revenue failed to provide evidence that the notice was dispatched or served. The Tribunal found that the absence of notice under section 158BC rendered the block assessment null and void ab initio. It emphasized that the notice is the foundation for jurisdiction under section 158BC, and without it, the proceedings are invalid.

2. Unexplained Investments and Their Treatment under Section 69:
The CIT(A) upheld additions for unexplained investments, but the Tribunal did not adjudicate these issues due to the annulment of the block assessment. The Tribunal emphasized that the onus to prove unexplained investments under section 69 lies with the Revenue, which was not discharged.

3. Application of Section 40A(3) Concerning Estimated Profit:
The assessee contended that section 40A(3) should not apply where profit is estimated by a flat rate. The Tribunal did not address this issue due to the annulment of the block assessment.

4. Additions as Credits in Partners' Accounts:
The CIT(A) confirmed additions as credits in partners' accounts. The Tribunal did not adjudicate this issue due to the annulment of the block assessment.

5. Levy of Interest under Section 158BFA:
The assessee challenged the levy of interest under section 158BFA. The Tribunal did not address this issue due to the annulment of the block assessment.

6. Refund of Tax Paid Due to Invalid Notice under Section 158BC:
The assessee sought a refund of tax paid, arguing that without a valid notice, there was no obligation to file a return under section 158BC. The Tribunal did not address this issue due to the annulment of the block assessment.

7. Restriction of Agricultural Income in Arriving at Undisclosed Income:
The CIT(A) restricted the quantum of agricultural income, which the assessee contested. The Tribunal did not address this issue due to the annulment of the block assessment.

8. Deletion of Addition on Account of Unexplained Investment in Jewelry:
The Revenue's appeal contested the deletion of additions for unexplained investment in jewelry. The Tribunal dismissed the Revenue's appeal, following its decision to annul the block assessment.

9. Application of Surcharge under Finance Act, 1999:
The Revenue argued that surcharge should be applied as per the Finance Act, 1999. The Tribunal dismissed the Revenue's appeal, following its decision to annul the block assessment.

Additional Issues in ITA No. 1267/Mad/2005:
The assessee's appeal for the assessment year 1999-2000 included issues of various additions and rejection of books of account. The Tribunal held that the AO cannot adopt dual methods of estimating income on GP rate and making additions based on the same books. It deleted the additions made by the AO and confirmed the estimation of gross profit at 22%.

Conclusion:
The Tribunal annulled the block assessment due to non-service of notice under section 158BC, rendering other issues moot. It dismissed the Revenue's appeal and partly allowed the assessee's appeal for the assessment year 1999-2000, emphasizing that the AO cannot simultaneously estimate income and make additions based on rejected books of account.

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