2017 (6) TMI 551 - AT - Income Tax

Penalty proceedings u/s 271(1)(c) - estimation of income @ 12.5% of gross receipts - right of the assessee to challenge the order of the assessment - Held that - Assessing Officer accepted only one part of the consent of the assessee being adhoc estimation of income but has not accepted the request for not initiating the penalty proceedings. There is no dispute that the Assessing Officer is not bound by the said request made by the assessee for not initiating the penalty proceedings and therefore it was well within the jurisdiction of the Assessing Officer to initiate the penalty proceedings. However the levy of penalty is always subject to the explanation and all other relevant factors and circumstances under which the addition was made by the Assessing Officer. Once the Assessing Officer is not bound by the consent of the assessee then on the similar analogy the assessee is also not bound by one part of the consent when the other part of the consent was not accepted by the Assessing Officer. Thus when the Assessing Officer has not accepted the consent of the assessee in toto then the said consent cannot be applied as a Doctrine of estoppels against the assessee and the assessee has a legal right to challenge the assessment order before the appellate authority.Therefore the right of the assessee to challenge the order of the assessment is a material legal right, which cannot be denied by applying the Doctrine of Estoppel. The percentage as provided under Section 44AD is certainly has a guidance and persuation value while estimating the income of the assessee which are not falling under the category of small assessees as per the provisions of Section 44AD of the Act. Hence in this case, when the business of the assessee is not in dispute and the turnover of the assessee was also not found to be incorrect or inconsistent with the other record, then the estimation of income has to be made by applying the rate of 8% of the turnover/gross receipt as provided under Section 44AD of the Act. Consequently, the impugned order of the CIT (Appeals) is set aside and the Assessing Officer is directed to compute the income of the assessee @ 8% of the turnover / gross receipts. - Decided partly in favour of assessee.

Issues Involved:
1. Justification of the addition of ?27,19,060/- on an estimated basis at 12.5% of the turnover.
2. Excessiveness of the addition sustained by the CIT(A) at 12.5% of the turnover.
3. Liability to interest under Sections 234B and 234D of the Income Tax Act.
4. Right to challenge the assessment order despite the consent given during the assessment.

Issue-wise Detailed Analysis:

1. Justification of the Addition of ?27,19,060/- on an Estimated Basis at 12.5% of the Turnover:
The assessee, a PWD Contractor, filed a return of income declaring a net profit at 5% on gross receipts of ?3,58,15,566. However, the Assessing Officer (AO) noted discrepancies in the total receipts declared and those reflected in the bank account. The assessee explained the discrepancy due to the loss of bank passbooks and other vouchers, supported by an FIR. The AO framed the assessment by estimating income at 12.5% on the total turnover, including closing stock, amounting to ?3.60 Crores. The assessee contended that the estimation should not exceed 8%, as provided under Section 44AD of the Act. The CIT(A) upheld the AO's decision, stating that the assessment was framed on the consent of the assessee, who had no right to challenge it.

2. Excessiveness of the Addition Sustained by the CIT(A) at 12.5% of the Turnover:
The assessee argued before the Tribunal that the estimation of income at 12.5% was highly excessive and not feasible in their business. The assessee had agreed to the estimation under the condition that no penalty proceedings would be initiated. The Tribunal acknowledged that the AO accepted the consent for estimation but initiated penalty proceedings, which was against the condition agreed upon by the assessee. The Tribunal held that the estimation of income should be made by applying the rate of 8% of the turnover/gross receipts as provided under Section 44AD of the Act, considering it as a guidance value for estimation.

3. Liability to Interest under Sections 234B and 234D of the Income Tax Act:
The assessee denied liability to interest under Sections 234B and 234D, arguing that under the facts and circumstances, the interest charges deserved to be canceled. However, the Tribunal did not specifically address this issue in the judgment, focusing more on the estimation of income and the applicability of the doctrine of estoppel.

4. Right to Challenge the Assessment Order Despite the Consent Given During the Assessment:
The Tribunal emphasized that the consent given by the assessee for the estimation of income was conditional upon the non-initiation of penalty proceedings. Since the AO initiated penalty proceedings, the consent could not be applied as an estoppel against the assessee. The Tribunal referred to the jurisdictional High Court's decision in Bhandari Metals & Alloys (P) Ltd. Vs. State of Karnataka, which held that an assessee is not precluded by any law from preferring an appeal and challenging the assessment order. The Tribunal concluded that the assessee had a legal right to challenge the assessment order before the appellate authority.

Conclusion:
The Tribunal set aside the impugned order of the CIT(A) and directed the AO to compute the income of the assessee at 8% of the turnover/gross receipts, aligning with the provisions of Section 44AD of the Act. The appeal of the assessee was partly allowed, recognizing the right to challenge the assessment order and addressing the excessive estimation of income.

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