2016 (6) TMI 940 - AT - Income Tax

Revision u/s 263 - low profit shown - Held that - Assessing Officer carried out the enquiries and investigation on the relevant aspect of the matter, which is clear from the order sheet entries, query raised and submission of the assessee filed in the course of assessment proceeding and thus the assessment order cannot be termed as erroneous or prejudicial to the interest of Revenue on the issue of low net profit shown by the assessee. We, therefore, set aside the action of the learned CIT in making an addition by applying net profit rate of 5% in ad-hoc manner.- Decided in favour of assessee Non verification of TDS applicability on the rent payment - Held that - We find that the details in respect of rent account was filed by the assessee in its reply dated 07/09/2010.We find that each rent payment made is less than the statutory limit provided in the provisions of the Act related to the TDS. This fact has also been verified by the Assessing Officer in proceedings consequent to 263 proceedings, and amount of the rent paid to single person was below ₹ 1,20,000/- and, therefore, not liable for TDS. Therefore, the findings of the learned CIT on the issue was without proper appreciation of the facts available on record. - Decided in favour of assessee

Issues Involved:
1. Jurisdiction of the Commissioner of Income Tax (CIT) under Section 263 of the Income Tax Act, 1961.
2. Rejection of books of accounts under Section 145(3) of the Income Tax Act, 1961.
3. Estimation of net profit rate and addition to income.
4. Applicability of TDS provisions on rent payments under Section 40(a)(ia) of the Income Tax Act, 1961.

Issue-wise Detailed Analysis:

1. Jurisdiction of the Commissioner of Income Tax (CIT) under Section 263:
The primary issue raised by the appellant was whether the CIT had the jurisdiction to invoke Section 263 of the Income Tax Act, 1961. The appellant argued that the assessment order dated 22.12.2010 passed by the Assessing Officer (AO) was neither erroneous nor prejudicial to the interest of the revenue. The CIT had no jurisdiction under the facts and circumstances of the case.

The Tribunal analyzed the mandate of Section 263, which is attracted only when the assessment order is found to be erroneous and prejudicial to the interest of the Revenue. These twin conditions must be cumulatively satisfied for obtaining valid jurisdiction under this section. The Tribunal emphasized that merely because an assessment order is prejudicial to the interest of the revenue is not enough unless it is shown that the same is erroneous too. Non-investigation by the AO on relevant issues required to be properly looked into makes an assessment order erroneous. However, non-examination of trivial or insignificant issues cannot lead to making an assessment order erroneous.

2. Rejection of Books of Accounts under Section 145(3):
The CIT observed that the assessee had shown a very small amount of net profit on a significant turnover, and the AO did not make an inquiry into how the commission and other income were set off against several expenses. The CIT rejected the books of accounts under Section 145(3) and applied a net profit rate of 5% on the total turnover.

The Tribunal, however, found that the AO had conducted a proper inquiry. The order sheet entries and the query letters issued by the AO sufficiently demonstrated that the assessee was called upon to produce books of accounts, which were produced and test-checked by the AO. The AO examined various expenses and accepted a lump-sum disallowance of ?10 lakh. The Tribunal concluded that the observations of the CIT about non-production of books of accounts and non-examination of low profit and other expenses claimed were not tenable.

3. Estimation of Net Profit Rate and Addition to Income:
The CIT applied a net profit rate of 5% on the total turnover, resulting in an addition of ?90,46,447/- to the income of the assessee. The Tribunal found no justification for applying the net profit rate of 5% on the total turnover without any cogent reason. The AO had made an ad-hoc addition of ?10 lakh to cover possible revenue leakage on account of self-made vouchers, which was considered reasonable.

The Tribunal held that the AO had conducted proper inquiries and investigations on the relevant aspects of the matter. Therefore, the assessment order could not be termed as erroneous or prejudicial to the interest of Revenue on the issue of low net profit shown by the assessee.

4. Applicability of TDS Provisions on Rent Payments:
The CIT directed the AO to examine the applicability of TDS provisions on rent payments of ?5,55,400/- for disallowance under Section 40(a)(ia) of the Act. The Tribunal found that the details in respect of the rent account were filed by the assessee, and each rent payment made was less than the statutory limit provided in the provisions related to TDS. This fact was verified by the AO in proceedings consequent to Section 263, and the amount of rent paid to a single person was below ?1,20,000/-, thus not liable for TDS.

The Tribunal concluded that the findings of the CIT on this issue were without proper appreciation of the facts available on record, and there was no error on the part of the AO.

Conclusion:
The Tribunal set aside the action of the CIT in making an addition of ?90,46,447/- by applying a net profit rate of 5% in an ad-hoc manner. The Tribunal held that the learned CIT was not justified in setting aside the assessment order by terming it as erroneous and prejudicial to the interests of the Revenue. The appeal of the assessee was allowed, and the impugned order of the CIT was set aside.

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