2016 (11) TMI 1250 - AT - Income Tax

Initiation of revision proceedings u/s 263 - estimation of income - non maintenance of proper books of account - Held that - While giving a finding that income is to be estimated on the basis of the survey, the AO has accepted the income returned which is at 1.97% of the gross receipts. The reasons for accepting the income returned on the basis of the books of account are not forthcoming from the order. Therefore, we are of the opinion that Ld. Pr.CIT exercised his jurisdiction u/s. 263 validly as there is an error in the order itself as can be seen on the face of it. This is certainly an order erroneous and prejudicial to the interest of Revenue. However, we are not convinced with the direction of the CIT to adopt 5% of the gross receipts, without giving an opportunity to assessee. In fact, assessee s submission is that it had maintained books of account. Therefore, in our opinion, the veracity and correctness of the books so maintained should have been examined by the AO afresh. Thus we modify the order of CIT directing the AO to enhance the income, to set aside the impugned order of the AO and restore the entire assessment proceedings to the file of AO to examine assessee s contentions in detail a In case of rejection of books of account, however, we make it clear that any estimation of income should not exceed 5% as determined by the Pr.CIT/or admitted by assessee in the course of survey. Consequently, the direction to initiate penalty proceedings also stands modified. AO is free to consider whether to initiate penalty proceedings or not on the basis of examination of assessee s business affairs. He is directed to pass a detailed order so that there will be no confusion, as arising in this case on the impugned assessment order. Assesse should be given due opportunity in the consequential assessment proceedings. With these directions, while upholding initiation of proceedings on 263, the grounds of assessee are partly allowed.

Summary

Issues:
1. Whether the order of the Assessing Officer (AO) was erroneous and prejudicial to the interest of Revenue?
2. Whether the direction of the Principal Commissioner of Income Tax (Pr.CIT) to adopt total income at 5% of the gross contract receipts was justified?
3. Whether the assessment proceedings should be set aside and restored to the file of AO for detailed examination of the books of account?

Analysis:

Issue 1:
The appeal was against the order of the Pr. Commissioner of Income Tax-2, Hyderabad dated 18-02-2016, under section 263 of the Income Tax Act. The Pr.CIT issued a notice to the assessee to explain why the order cannot be modified by determining the income at 5% of the gross receipts as estimated during the survey. The Pr.CIT set aside the assessment with a direction to revise the total income by adopting 5% of the gross contract receipts and to initiate penalty proceedings under section 271(1)(c). The Pr.CIT found the AO's order erroneous and prejudicial to the interest of Revenue due to discrepancies in the statements made and the actual income returned.

Issue 2:
The assessee contested the direction of the Pr.CIT to adopt total income at 5% of the gross contract receipts. The Tribunal noted that the assessee offered income at 5% of the gross receipts during the survey and filed returns for previous years accordingly. However, for the relevant assessment year, the income returned was at 1.97% of the gross receipts. The Tribunal found the AO's order to be erroneous as it accepted the income returned without sufficient reasons. While upholding the initiation of proceedings under section 263, the Tribunal modified the direction to adopt 5% of the gross receipts, emphasizing the need for a fresh examination of the books of account by the AO.

Issue 3:
The Tribunal set aside the impugned order of the AO and restored the assessment proceedings to the file of the AO for detailed examination of the assessee's contentions and the correctness of the books of account. The Tribunal directed the AO to consider whether to initiate penalty proceedings based on the examination of the assessee's business affairs and to pass a detailed order to avoid confusion. The Tribunal allowed the appeal partly, providing the assessee with due opportunity in the consequential assessment proceedings.

In conclusion, the Tribunal found the AO's order to be erroneous and prejudicial to the interest of Revenue, but modified the direction to adopt 5% of the gross receipts, emphasizing the need for a fresh examination of the books of account by the AO. The assessment proceedings were set aside and restored to the file of the AO for detailed examination, and the direction to initiate penalty proceedings was also modified.