2015 (10) TMI 1758 - AT - Income Tax

Revision u/s 263 - as per CIT(A) AO has allowed benefit of section 44AD/AF erroneously without considering whether conditions thereto are fulfilled, and also not by applying provisions of section 69A of the Act - Held that - AO, after considering the totality of the facts and circumstances of the case, proceeded to estimate the business income of the assessee @8% of gross receipts and made an addition of ₹ 6,11,230/- which was accepted by the assessee without any further litigation. However, we cannot ignore that the AO in the operative part of the assessment order has referred to section 44AF of the Act while estimating the business income @8% of gross receipts but as per said provision, the business income has to be assessed @5% of the total turnover during the previous year on account of such business provided total turnover of the assessee does not exceed an amount of ₹ 40 lakh in the relevant previous year. AO has not taken total turnover of assessee in the trading of cloth and the AO has adopted higher figure taking total amount of gross receipts during the relevant financial period. The CIT has not brought out any fact to establish that the assessee had not undertaken any inquiry in regard to the alleged cash deposited to his bank account and the CIT has not brought out any fact to this effect that in absence of amount and other records, which were lost by the assessee, the AO was not correct in making estimation of business income @8% of gross receipts and the conclusion drawn by the AO was not in accordance with the provisions of the Act and thus, the same was unsustainable in law. Per contra, as we have already noted that the AO inquired from the assessee about the amount of cash deposited during the relevant financial period and after considering the reply of the assessee wherein the assessee stated that he had lost his books of accounts and other records, then the AO had no alternative but to estimate the business income of the assessee by taking a reasonable and appropriate recourse. Thereafter, the AO proceeded to estimate the business income of the assessee @8% of gross receipts by merely referring to section 44AF of the Act. We cannot ignore this fact that in the letter dated 20.12.2013, the assessee pressing into service his revised computation of income pleaded that the surrendered amount may be considered as business income being 5% of gross receipts but the AO adopted higher percentage of 8% for estimation of business income which is very favourable to the revenue. It is also relevant to point out that the AO has taken 5% on gross turnover for AY 2010-11 viz. preceding assessment year to the present assessment year in the assessment order passed u/s 143(3) of the Act. On the basis of foregoing discussion, we reach to a logical conclusion that the view and approach taken by the AO in framing original assessment order passed u/s 143(3) was quite justified, reasonable and in accordance with the provisions of the Act. - Decided in favour of assessee

Issues Involved:
1. Validity of CIT's assumption of jurisdiction under Section 263 of the Income Tax Act, 1961.
2. Examination of the assessment order passed under Section 143(3) of the Income Tax Act, 1961.
3. Applicability of Section 44AD/44AF and Section 69A of the Income Tax Act, 1961.
4. Determination of whether the assessment order was erroneous and prejudicial to the interest of revenue.

Issue-wise Detailed Analysis:

1. Validity of CIT's Assumption of Jurisdiction under Section 263:
The appeal was directed against the order of the CIT, Delhi-VII, passed under Section 263 of the Income Tax Act, 1961. The CIT issued a notice under Section 263, claiming that the assessment order passed by the AO was erroneous and prejudicial to the interest of revenue. The CIT argued that the AO had not properly applied the provisions of Section 44AD/44AF and Section 69A of the Act. The CIT directed the AO to make a fresh assessment after considering the correct legal and factual position. The Tribunal held that for invoking Section 263, the CIT must establish that the assessment order was both erroneous and prejudicial to the interest of revenue. The Tribunal found that the CIT did not conclusively prove that the AO's order was unsustainable in law and thus, the assumption of jurisdiction by the CIT was not valid.

2. Examination of the Assessment Order Passed under Section 143(3):
The AO completed the assessment under Section 143(3) by making an addition of Rs. 6,11,230 as business income at 8% of gross receipts of Rs. 76,40,380. The AO's primary objective was to examine the source of cash deposited in the assessee's savings bank account. The AO accepted the assessee's explanation and made an addition based on estimated business income from trading of cloth. The Tribunal noted that the AO had conducted an inquiry and adopted one of the permissible courses available, which cannot be considered erroneous merely because the CIT disagreed with the AO's approach.

3. Applicability of Section 44AD/44AF and Section 69A:
The CIT contended that the AO erroneously applied Section 44AD/44AF without considering whether the conditions were fulfilled, and did not apply Section 69A. The Tribunal observed that the AO referred to Section 44AF, which provides for estimation of business income at 5% of gross receipts/turnover, but the AO took 8% for estimation, which was more beneficial to the revenue. The Tribunal also noted that the AO had no alternative but to estimate the business income due to the loss of the assessee's books of accounts, which was reported to the police. The Tribunal concluded that the AO's approach was reasonable and in accordance with the provisions of the Act.

4. Determination of Whether the Assessment Order was Erroneous and Prejudicial to the Interest of Revenue:
The Tribunal emphasized that for an order to be revised under Section 263, it must be both erroneous and prejudicial to the interest of revenue. The Tribunal referred to the judgment of the Hon'ble Jurisdictional High Court of Delhi in the case of ITO vs. DG Housing Projects Ltd., which stated that the CIT must record a finding that the order is erroneous and unsustainable in law. The Tribunal found that the CIT did not provide any conclusive finding to establish that the AO's order was erroneous and prejudicial to the interest of revenue. The Tribunal held that the AO's estimation of business income at 8% was justified and not prejudicial to the interest of revenue. Consequently, the Tribunal quashed the notice under Section 263 and the impugned order passed by the CIT.

Conclusion:
The Tribunal allowed the appeal of the assessee, concluding that the CIT's assumption of jurisdiction under Section 263 was not valid. The assessment order passed by the AO under Section 143(3) was found to be reasonable and in accordance with the provisions of the Income Tax Act, 1961. The Tribunal quashed the notice and the order passed by the CIT under Section 263.

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