2019 (10) TMI 1126 - AT - Income Tax

Reopening of assessment u/s. 147 r.w.s. 148 - reopening based on a survey report prepared after survey u/s.133A - turnover declared was found more than shown by the assessee in its regular books of account - HELD THAT - We note that the assessee s income termed as incentive and sales commission is only on attainment of sales target from the same line of business and, therefore, when the assessee receives incentive/discount a part of it is also passed on to the consumers to attract more consumers. When the books of account of the assessee has been rejected, there was no necessity for separate addition of the commission/incentive/discount which the assessee had undisputedly received in the same business and it is not the case of the revenue that the assessee was engaged in any other business from which assessee had received separate incentive/commission for doing certain other services the said income.Once the books of account of the assessee were rejected by the AO, then he should have only estimated the profits of the assessee. Once the books of account of the assessee were rejected by the AO, then he should have only estimated the profits of the assessee. We note that the turnover found in the impugned typed Balance Sheet and P L Account during survey was to the tune of ₹ 3,00,50,000/- and the sales incentive and sales commission was to the tune of ₹ 31 lacs and ₹ 15 lacs, so the total amounts comes to ₹ 3,00,50,000 ₹ 31,00,000 ₹ 15,00,000 ₹ 3,46,50,000/-. Though the assessee had shown a GP of 4.35%, in the interest of both the parties, we enhance the same to 6% and thus the GP comes to ₹ 20,79,000/- and thus the assessee receives a relief of ₹ 49,31,830/-. Appeal of the assessee is partly allowed.

Issues Involved:
1. Legality of reassessment proceedings under sections 147 and 148 of the Income-tax Act, 1961.
2. Validity of the assessment order under sections 144/145 of the Act.
3. Addition of ?4,22,636 on account of undisclosed turnover.
4. Addition of ?35,20,693 under the head of incentive and sales commission.

Detailed Analysis:

1. Legality of Reassessment Proceedings:
The primary issue was whether the reassessment proceedings initiated under sections 147 and 148 of the Income-tax Act, 1961, were lawful. The assessee contended that the reassessment was invalid as it was based on stale information, with no new tangible material surfacing after the survey conducted on 02.03.2005. The reassessment notice was issued on 04.11.2009, which was argued to be beyond the permissible period without fresh material evidence.

The Tribunal noted that the reassessment was initiated based on a survey report and impounded documents, including a typed Profit & Loss Account and Balance Sheet showing a turnover discrepancy. The Tribunal held that the reopening was justified as it was based on material found during the survey, which indicated income escapement. The original assessment was only an intimation under section 143(1), and thus, the proviso to section 147 did not apply. Therefore, the Tribunal dismissed the assessee's grounds on the legality of the reassessment.

2. Validity of the Assessment Order under Sections 144/145:
The Tribunal examined whether the assessment order under sections 144/145 was tenable. The Assessing Officer (AO) had rejected the assessee’s books of account under section 145(3) due to discrepancies found during the survey, including unaccounted purchases and differences in closing stock.

The Tribunal upheld the AO’s decision, noting that the assessee failed to provide satisfactory explanations for the discrepancies. The AO was justified in rejecting the books of account and proceeding to assess the income based on the best judgment, given the lack of cooperation from the assessee during reassessment proceedings.

3. Addition of ?4,22,636 on Account of Undisclosed Turnover:
The AO added ?4,22,636 to the assessee's income, calculated by applying a Gross Profit (GP) rate of 4.35% on the undisclosed turnover of ?97,15,774, which was found during the survey.

The Tribunal confirmed this addition, agreeing with the AO’s method of calculating the GP based on the discrepancy between the declared turnover and the turnover found in the impounded documents. The Tribunal found no fault in the AO’s approach and upheld the addition.

4. Addition of ?35,20,693 under the Head of Incentive and Sales Commission:
The AO initially added ?46,00,000 for undisclosed incentive and sales commission, which was later reduced to ?35,20,693 by the Commissioner of Income Tax (Appeals) [CIT(A)]. The CIT(A) had extrapolated the incentive/commission based on the entire turnover, which the Tribunal found to be erroneous.

The Tribunal observed that the incentive and commission were part of the same business and should not have been separately added once the books of account were rejected. Instead, the profits should have been estimated. The Tribunal relied on precedents from the Andhra Pradesh High Court, which held that once books are rejected, income should be estimated, and separate additions should not be made for items already considered in the estimation.

The Tribunal recalculated the Gross Profit by enhancing the GP rate from 4.35% to 6% on the total turnover, including the undisclosed turnover and incentive/commission, resulting in a revised GP of ?20,79,000. Consequently, the assessee was granted relief of ?49,31,830.

Conclusion:
The Tribunal partly allowed the appeal, confirming the reassessment proceedings and the rejection of books of account but provided relief by recalculating the Gross Profit, leading to a significant reduction in the total addition to the assessee's income. The order was pronounced on 27th September 2019.

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