2018 (5) TMI 804 - AT - Income Tax

Scope of section 144 proceedings - Best judgment assessment - undisclosed income including the sum received as fee from students allegedly swindled by its ex-director - Held that - As quote this tribunal Third Member decision in Pragati Engineering Corporation vs ITO 2012 (12) TMI 1 - ITAT LUCKNOW considering all the relevant law to affirm both the lower authorities action proceeding u/s 144 of the Act against the assessee therefore. Learned counsel has also quoted many judicial precedents about ambit and the scope of section 144 proceedings in specific circumstances. The same are found to be not applicable in peculiar facts and circumstances before us since the assessee had failed to submit any response on its part in producing the relevant books of account forming foundation of its documents filed before the Assessing Officer who had no other option but to finalise the relevant assessment as per law. We therefore see no reason to accept assessee s instant former substantive ground. The same is accordingly rejected. Addition on swindled cash - Held that - We find that there is no question about the fact that the assessee had not recorded the income received from students despite the same having duly received in the relevant previous year. There is no quarrel therefore so far as the receipt of the sum in question is concerned. Coming to the alleged swindling of its ex-director we find that the assessee s claim does not satisfy the basic conditions of a note being put up in the relevant schedule based on a reasonable assumption as per books as held in Chainrup Sampatram vs CIT 1953 (10) TMI 2 - SUPREME Court . We thus see no reason on facts to interfere with both the lower authorities findings making the impugned addition of 2, 45, 00, 000/- on account of assessee s failure in proving that Shri Mitra had swindled cash sum of 70 lakhs and the other amount of 1, 75, 00, 000/- (supra). The assessee fails in its latter substantive ground as well.

Summary

Issues Involved:
1. Correctness of invoking best judgment assessment under Section 144 of the Income Tax Act.
2. Addition of ?2,45,00,000/- as undisclosed income, including ?1,51,00,265/- allegedly swindled by the ex-director.

Issue-wise Detailed Analysis:

1. Correctness of Invoking Best Judgment Assessment under Section 144 of the Income Tax Act:

The primary issue in this case was whether the lower authorities were correct in invoking best judgment assessment under Section 144 of the Income Tax Act. The assessee contended that it had submitted all necessary documents, including the balance sheet, profit and loss account, and tax audit report, and therefore, the Assessing Officer (AO) should not have invoked Section 144.

The tribunal noted that the assessee did not file its books of accounts during the scrutiny process, despite being given 20 opportunities from 28.09.2012 to 22.04.2014. Notices under Sections 143(2) and 142(1) were also issued. Section 144(1)(b) and (c) of the Act allows for best judgment assessment if the assessee fails to comply with notices. The tribunal affirmed the lower authorities' actions, referencing the Third Member decision in Pragati Engineering Corporation vs ITO, which upheld the invocation of Section 144 in similar circumstances. The tribunal concluded that the AO had no option but to finalize the assessment under Section 144 due to the assessee’s non-compliance, and therefore, rejected the assessee’s ground.

2. Addition of ?2,45,00,000/- as Undisclosed Income:

The second issue was whether the addition of ?2,45,00,000/- as undisclosed income was justified. The assessee argued that this amount was swindled by its ex-director, Mr. Ashish Mitra, and thus should not be taxed. The CIT(A) noted that the AO found discrepancies in the assessee’s claims. Although a police complaint was filed against Mr. Mitra, the audit report and audited accounts did not disclose any fraud. The AO also noted that the auditor confirmed no such fraud during the audit.

Furthermore, the AO summoned the auditor, who confirmed that no payments were made to Mr. Mitra as claimed. The assessee did not cross-examine the auditor, leaving the AO’s findings unrebutted. The tribunal found no reason to interfere with the AO’s conclusion that the sum of ?2,45,00,000/- was out of books and confirmed the addition.

The assessee cited various judicial precedents to argue that losses due to embezzlement are allowable under Section 37 of the Act if there is a direct nexus with business operations. However, the tribunal noted that the assessee failed to provide evidence of the swindling in its documents filed during scrutiny. The tribunal also pointed out that the assessee did not record the income received from students, nor did it provide proof of the alleged swindling. Therefore, the tribunal upheld the addition of ?2,45,00,000/- as undisclosed income.

Conclusion:

The tribunal dismissed the assessee’s appeal, affirming the lower authorities' actions in both invoking best judgment assessment under Section 144 and adding ?2,45,00,000/- as undisclosed income. The order was pronounced in the open court on 11.05.2018.