2015 (5) TMI 1191 - AT - Income Tax

Revision u/s 263 - A.O. not made any addition with regard to unexplained sundry creditors/unsecured loans, as he had, rejecting the assessee s books of account, estimated its assessee s income invoking section 145(3) - A.Y. 2008-09 - HELD THAT - No verification had been undertaken by the A.O. despite the fact that the balance of one creditor, M/s. Krishna Hardware, Katihar (outstanding at ₹ 50.46 lacs as at 31.03.2008), continues to remain unpaid, save to the extent of ₹ 10 lacs, even up to 26.07.2010, i.e., 2 years after the end of the relevant financial year. The A.O. had taken the confirmations from the creditors at face value, without enquiring into the reasons as to why the balances continue to obtain even much after the end of the relevant year, i.e., considering that a normal transaction would get concluded much earlier, within a period of few days or at best a couple of months after the transaction. Similarly, Smt. Ramba Rai, wife of Lt. Shri Harendra Rai, is stated of having given a loan (unsecured) of ₹ 2,27,000/- to the assessee, which outstands as on 31.03.2008. The same, however, does not find reflection in the assessee s balance sheet as at that date, while those that do (from five parties) are very old, so that the A.O. had failed to, and which he was duty bound to, carry verification as to the genuineness of those liabilities. A failure to make proper enquiry, called for under the circumstances, renders an order per se erroneous insofar as it is prejudicial to the interest of the Revenue. Non inclusion of the income arising by way of miscellaneous sales and royalty - non-verification of unsecured loan/s -A.Y. 2009-10 - HELD THAT - The rejection of the assessee s accounts does not imply discarding all and every information therein or contents thereof. We have already clarified, on the basis of the decisions by the apex court, that estimation of profit upon rejection of the book results would not preclude addition in respect of unexplained credit/s appearing in those accounts, though there could be reasons for telescoping the two additions. Similarly in Shyam Bihari vs. CIT 2012 (8) TMI 420 - PATNA HIGH COURT has clarified for allowance of depreciation separately. True, the same is a statutory allowance, subject to being allowed even where no charge in its respect stands booked in accounts.Cost of acquisition or improvement of the relevant assets and, in turn, the WDV of the relevant block of assets, would only be in terms of the books of account. Why, profit, be it trading or net, is estimated normally on the basis of sales as reflected therein. We can multiply examples; the whole premise being of the assessment of income being on a reasonable and objective basis, taking into account all the relevant information. The royalty income and miscellaneous sales have nothing to do with the contract receipt, income from which activity is estimated in the main, nor any relationship therewith stands shown. The two represent sources of income separate and distinct from the construction business and, accordingly, there is no gainsaying that the same would also stands to be assessed. No enquiry in the matter having been made, the assessment order resultantly suffers from lack of enquiry and due application of mind. We, accordingly, uphold the invocation of section 263 in the instant case. - Decided against assessee.

Summary

Issues Involved:
1. Non-maintainability of the assumption of jurisdiction under section 263 of the Income Tax Act.
2. Non-verification of sundry creditors and unsecured loans for A.Y. 2008-09.
3. Non-inclusion of miscellaneous sales and royalty income, and non-verification of unsecured loans for A.Y. 2009-10.

Detailed Analysis:

Issue 1: Non-maintainability of the assumption of jurisdiction under section 263 of the Income Tax Act
The appellant argued that the Assessing Officer (A.O.) had correctly not made any addition regarding unexplained sundry creditors/unsecured loans because the A.O. had already rejected the books of account and estimated the income under section 145(3). The appellant contended that the A.O. could not fall back on the same accounts to make an addition under section 68. However, the Tribunal referenced the Supreme Court decisions in CIT vs. Devi Prasad Vishwanath Prasad and CIT vs. Manick Sons, which clarified that both cash credits and business income could be taxed even if the books of account were rejected. Therefore, the appellant's argument was found to be legally and factually without merit.

Issue 2: Non-verification of sundry creditors and unsecured loans for A.Y. 2008-09
The Commissioner of Income Tax (CIT) found the assessment order erroneous and prejudicial to the interest of the Revenue due to the A.O.'s failure to verify sundry creditors amounting to Rs. 1,19,29,237 and unsecured loans of Rs. 2,27,000. Specifically, the balance of one creditor, M/s. Krishna Hardware, remained unpaid significantly after the end of the financial year. The A.O. had accepted the confirmations from creditors without proper inquiry. The Tribunal upheld the CIT's directive to re-examine these aspects, citing a lack of proper inquiry as a basis for the order being erroneous and prejudicial to the Revenue.

Issue 3: Non-inclusion of miscellaneous sales and royalty income, and non-verification of unsecured loans for A.Y. 2009-10
For A.Y. 2009-10, the CIT identified deficiencies in the assessment due to the non-inclusion of miscellaneous sales of Rs. 70,000 and royalty income of Rs. 2,45,249, and non-verification of unsecured loans of Rs. 2,27,000. The Tribunal clarified that the rejection of books of account does not imply discarding all information therein. The royalty income and miscellaneous sales were separate from the contract receipts and should have been assessed independently. The Tribunal upheld the CIT's directive to re-examine these aspects, emphasizing that lack of inquiry and due application of mind renders the assessment order erroneous and prejudicial to the Revenue.

Conclusion:
The Tribunal upheld the invocation of section 263, directing the A.O. to re-examine the issues and allow the appellant an opportunity to establish its case for telescoping. The directions by the CIT were modified to ensure consistency with the Tribunal's observations. The appellant's appeals were dismissed, and the matter was remanded to the A.O. for further examination and adjudication in accordance with the law.