2019 (2) TMI 1637 - AT - Income Tax

Assessment u/s 153A - AO has estimated the income by comparing the results of assessee with that of another company M/s VRL Logistics - AO has estimated income of the assessee by comparing the net profit by bringing in the results of a company, called M/s. VRL Logistics and has adopted a net profit of 6.54 percentage and estimated the income of the assessee - HELD THAT - We note that the assessment year 2014-15 was pending on the date of search, so A.Y. 2014-15 is an abated assessment and A.Y. 2015-16 is the year when search took place, therefore scrutiny under 143(3) was carried out in respect of Assessment Year 2015-16. We note that while doing section 153A assessment in the abated proceedings, the AO has no restrictions as in the case of unabated proceedings are concerned. Estimation of incom - according to the ld. AR, the assessee did not get any opportunity to challenge the action of the Assessing Officer to take the case of M/s VRL Logistics as comparable and also the AO did not give any opportunity to the assessee to bring its own comparables - HELD THAT - We note that the DR could not controvert these facts pointed out by the AR challenging the action of Assessing Officer in respect of bringing M/s VRL Logistics as comparable and not giving opportunity to assessee to bring its own comparable to justify the net profit/gross profit of the assessee company.The aforesaid action of the AO cannot be countenanced by us. If the AO found fault with the books which assessee has regularly maintained, and which are admittedly audited, and in case if the AO was of the opinion that the assessee has not regularly followed the method of accounting as mentioned u/s 145(1) of the Act or that the assessee has not computed the income in accordance with accounting standard notified u/s 145(2) and if the AO was not satisfied with the correctness of the accounts of the assessee, then AO was at liberty to make an assessment in the manner provided u/s 144 which is the best judgement assessment. However, before doing so, he has to grant an opportunity of being heard as prescribed u/s 144 of the Act. Without doing so, the AO ought not to have gone to estimate the net profit of the assessee and moreover before bringing in any comparable like that of M/s VRL Logistics, the assessee must have been given notice calling upon the assessee s objection, if any, and also given opportunity to the assessee to bring any comparable cases if it desires so and then only A.O to have carried out the exercise of estimation in a reasonable and just manner. Failure to do so, vitiates the impugned order. We, therefore, set aside the order of the Ld. CIT(A) and estimation made by the A.O and remand the matter back to the AO for first to decide whether to reject or not the books of accounts maintained by the assessee in the light of section 145 and judicial precedence in respect of the same in accordance to law.

Summary

Issues Involved:
1. Validity of additions made under Section 153A for Assessment Years 2009-10 to 2013-14.
2. Validity of income estimation for Assessment Years 2014-15 and 2015-16.

Issue-wise Detailed Analysis:

1. Validity of Additions Made Under Section 153A for Assessment Years 2009-10 to 2013-14:

The primary issue in this case was whether additions could be made under Section 153A for the assessment years 2009-10 to 2013-14 when no incriminating materials were found during the search. The CIT(A) had provided relief to the assessee on the grounds that these additions were based on Section 153A proceedings after a search and seizure operation, and no incriminating materials were unearthed during the search for these assessment years.

The Tribunal noted that these assessment years were not pending before the AO on the date of the search, hence they were considered unabated assessments. The AO could only reiterate the returns filed or assessments made under Sections 143(1) or 143(3) of the Act. The Tribunal concurred with the CIT(A) that additions/disallowances could not be made without any incriminating materials unearthed during the search for these assessment years. This decision was supported by the legal precedents set by the Hon’ble Delhi High Court in Kabul Chawla, the Hon’ble Kolkata High Court in Veerprabhu Marketing Ltd., and the Hon’ble Delhi High Court in Kurele Paper Mills Pvt. Ltd.

The Tribunal upheld the CIT(A)'s order to delete the additions made by the AO under Section 153A for the assessment years 2009-10 to 2013-14, confirming that the CIT(A)'s decision was in accordance with the law and did not require interference.

2. Validity of Income Estimation for Assessment Years 2014-15 and 2015-16:

For the assessment years 2014-15 and 2015-16, the assessee was engaged in the business of transport of goods. The AO noticed that the assessee had made a disclosure of ?7.82 crores for A.Y. 2015-16, along with disclosures from other sister concerns, totaling ?25 crores. However, the AO observed that the total income declared in the return filed post-search was lower than expected. The AO compared the assessee's income to that of M/s VRL Logistics and estimated the income based on a net profit rate of 6.54%.

The Tribunal noted that the AO had not rejected the assessee's books of accounts as required under Section 145(3) of the Act before estimating the income. The AO also did not provide the assessee with an opportunity to challenge the comparables used or to present its own comparables. The Tribunal held that the AO's action of estimating the income without following due process was not justified.

The Tribunal set aside the CIT(A)'s order and the AO's estimation, remanding the matter back to the AO to first decide whether to reject the books of accounts in light of Section 145 and relevant judicial precedents. If the AO decides to reject the books, he must record reasons and provide the assessee with an opportunity to challenge the comparables and present its own. The AO must then finalize the comparables and estimate the income accordingly, ensuring sufficient opportunity is given to the assessee.

Conclusion:

The appeals of the Revenue for the assessment years 2009-10 to 2013-14 were dismissed, confirming the CIT(A)'s deletion of additions made under Section 153A. The appeals for the assessment years 2014-15 and 2015-16 were allowed for statistical purposes, with the matter remanded back to the AO for fresh assessment following due process. The order was pronounced in the open court on 15th February 2019.