9911796707
TMI Blog2004 (3) TMI 706X X X X Extracts X X X X X X X X Extracts X X X X ..... itself conduct the audit of such accounts because nobody can be judge in his or her own case. Definitely this is against the ethics as well as against the established standards that no one can audit accounts prepared by himself. It is also true that any income which is determined on the basis of books of account or which is duly recorded in the regular books of account or other records, the same cannot be a part of block assessment because u/s 158BC computation of undisclosed income is to be done on the basis of assets and other documents found during the course of search which are not recorded in the regular books of account . Thus, we are of the considered opinion that reference made by the Assessing Officer for special audit is without proper jurisdiction and is bad in law and in case the assessment so made is barred by limitation of time prescribed under the Act, cannot be added to be within time by resorting to the special audit procedures. As we have mentioned above, the assessment should have been completed by 30th Nov., 1999 but the same was completed on 24th May, 2000. When the extended period of time is not available to the Assessing Officer in view of our above observati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... issue raised by the assessee and dismiss the ground raised by the Department in this regard. Addition in respect of cash credits - It appears that issues relating to Shri Trilokchand, Balcand and Shri Shankarlal where only set aside. The addition in respect of Lalit Kumar had been sustained. In set aside proceedings, this deposit of Rs. 55,000 from Balchand had also been accepted and the assessee does not have any grievance in this regard any more before us. Regarding deposit from Shri Lalit Kumar, the Assessing Officer had himself accepted it to the extent of Rs. 1,25,000. Thus, there was no justification in not accepting the other loan of Rs. 1 lakh from the said party. So in view of our above finding, this addition in respect of cash credits which are stated to be a loan from 3rd party, recorded in the diaries cannot be added in the hands of the assessee under the provisions of section 68 and on merits also, as we have explained above, these additions cannot be sustained. The result is that this ground of the assessee is allowed. In the result, the appeal of the assessee is partly allowed and the appeal of the Department is dismissed. X X X X Extracts X X X X X X X X Extracts X X X X ..... essment to the auditor, the direction for preparing books of account in the form of cash book and ledger was also beyond the scope of section 142(2A) of the Act. No opportunity of hearing was granted prior to approval given by the Jt. CIT, Bikaner Range, Bikaner and above all the resort taken by the Assessing Officer in getting this special audit report was aimed at gaining further time for completing the assessment order in this case, because otherwise, it would have become time barred. 5. We have heard the rival submissions and material on record. The learned Authorised Representative Shri Amit Kothari made two-fold arguments in this regard. One, he has challenged the very reference to the auditor for getting report of the auditor under section 142(2A) of the Act and has canvassed various reasons for assailing this report; second, he has challenged the very assessment order which according to him is time barred. 6. Before we proceed further, we would like to mention that there is no dispute of the fact that in case the matter would not have been referred to the special auditor under section 142(2A) of the Act, the assessment order in question would have become time barred. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ., 1999. So according to the learned Departmental Representative the same was got by the Assessing Officer within time and the assessment was completed within the extended time as per the provisions of the Act. 10. With regard to the objection taken by the learned Authorised Representative about the reference made under section 142(2A) of the Act, the learned Departmental Representative has submitted that the Assessing Officer was fully empowered to get the accounts audited and there was no legal infirmity either in making reference to the special auditor or considering the audit report for completion of block assessment. According to the learned Departmental Representative the only requirement of the provisions in question is that the Assessing Officer during the course of proceedings before him at any stage must have formed an opinion that the accounts should be subjected to special audit because of the nature and complexity of the accounts as well as in the interest of Revenue. He has submitted that the Assessing Officer can issue such direction for special audit report only with the previous approval of the CIT. The provisions of the special audit are equally applicable for co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... particulars as may be prescribed and such other particulars as the Assessing Officer may require." What is important as per this provision for reference to the special audit is the nature and complexity of the accounts of the assessee. Now the question arises as to what is the complexity of the accounts of the assessee. The word "complexity" used in section 142(2A) of the Act as per dictionary means : "Intricate or complex or that is difficult to understand but all that are difficult to understand should not be regarded as complex." Thus, the special audit should not be directed on a cursory look at the accounts. There should be an honest attempt to understand the accounts of the assessee. In this regard, the decision of the Allahabad High Court in the case of Swadeshi Cotton Mills Co. Ltd. v. CIT [1985] 171 ITR 634 (All.). In this case, the Assessing Officer opined at p. 4 of his order that sincere efforts were made to identify the transactions/entries relating to partners and firms but the record being complex and voluminous and the transactions being jumbled, no headway could be made in identifying the transactions relating to the firm and that relating to the partners and w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... icult question to decide as whether the accounts are complex or not, but the perusal of the facts and circumstances before us in this case lead to only one conclusion that the accounts were not complex in that sense as are required under the provisions of section 142(2A) of the Act. 13. Moreover, the work delegated to auditors is to determine undisclosed income of different years in the block period, which is outside the purview of the scope of section 142(2A) of the Act and as such tantamount to transgression of the powers permitted under the law. When any authority is conferred with a power to exercise its discretion in a particular manner, such discretion has to be exercised bona fide with a view to achieve the object laid down under the statute. No discretion is beyond the scope of judicial review. Moreover, we would like to mention that in block assessment, undisclosed income is to be determined on the basis of things or documents found during the course of search, which is not reflected in the regular books of account. So there is no requirement of audit in books of account. Otherwise also, as we have observed above, there was no complexity of the accounts of the assessee wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ive that when the auditor prepares accounts, he cannot himself or itself conduct the audit of such accounts because nobody can be judge in his or her own case. Definitely this is against the ethics as well as against the established standards that no one can audit accounts prepared by himself. 14. The purpose of audit of financial statement is to enable the auditor to express opinion whether the financial statements are prepared in all material respects in accordance with the identified financial reporting frame work or other criteria. The word "audit" does not refer to preparation and compilation of books of account. It only refers to expression of opinion on such books of account to either verify the true and fair financial results of the assessee. If an auditor is appointed to prepare the accounts of the assessee, he cannot at the same time be assigned the job of auditing the accounts of the same books which were prepared by him. 15. It is also true that any income which is determined on the basis of books of account or which is duly recorded in the regular books of account or other records, the same cannot be a part of block assessment because under section 158BC computation ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is also not justified. The plea taken by the Authorised Representative is that if at all the learned CIT(A) had to sustain any addition, it could have been done only on the basis of net profit earned on unrecorded sales. He has further claimed deduction of expenses, interest, etc. recorded in seized diaries and documents and when the income had been estimated, the same should have been allowed. 19. On the other hand, the learned Departmental Representative submitted that as per audit report, the assessee has made sales for different years as per details given therein regarding which the assessee and his Authorised Representative had not raised any objection. According to the learned Departmental Representative the Assessing Officer has also discussed the modus operandi adopted by the assessee. He has further relied on the assessment order as well as certain parts of the order of learned CIT(A) in that respect. 20. After hearing both the parties and on perusal of the documents placed before us, we give the finding as under : 21. The learned CIT(A) confirmed the gross profit rate in the assessment years 1997-98 and 1998-99, as against the net profit rate. The case of the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ,953 5.58 3,57,452 nil 3,57,452 1997-98 61,84,110 71,99,449 5.70 4,10,368 33,542 3,76,826 1998-99 75,64,240 52,78,658 5.70 3,00,883 1,50,606 1,50,277 Total addition made by AO 28,85,701 (Figures marked with *represent estimate made by AO) But the learned CIT(A) was of the view that for years where estimate had been made, the net profit rate of 2 per cent should be applied but where unaccounted sales have been found on the basis of material available the Assessing Officer was justified in applying the gross profit, thus the learned CIT(A) allowed a relief of Rs. 9,02,697. On legal grounds, we hold that the Assessing Officer was not justified in making this addition on the basis of estimate towards the income of the assessee because this estimation could not have been made in the block assessment, in view of our finding that the reference to the auditor and the preparation of the accounts by the auditor which according to us cannot be an evidence in the eye of law. On merits again, we are of the opinion that the Assessing Officer has wrongly estimated the income of the assessee on the basis of gross profit rate in respect of unaccounted sales as against the amou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt year 1991-92 on account of sale of plot which was purchased in assessment year 1990-91 for Rs. 44,000. Half of the plot was sold in assessment year 1991-92 and remaining half was sold in assessment year 1992-93 and the total consideration shown for the two years was Rs. 51,000. The purchase cost being Rs. 44,000, the net income at Rs. 7,000 was taken as income in assessment year 1991-92. The rate of tax being the same for both the years, it is the case of the assessee that there was no such transaction of purchase and sale by him. The addition made on the basis of observation of the auditor is not sustainable but the learned Departmental Representative has rightly relied on the observations of the authorities below wherein it has been observed that this addition is based on the details noted on the seized material. So the contention of the appellant that it cannot be taxed in the hands of the assessee is not acceptable in view of the clear cut facts on record. We also dismiss this ground of the assessee. 26. The next ground pertains to deduction of interest of Rs. 21,200. The case of the assessee is that certain expenses have not been taken into account by the auditors like int ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... already rejected such diaries and had estimated the income of the undisclosed business in the hands of the assessee. Therefore, once again on the basis of the same books of account addition cannot be made. Even if specific effect of the same is given, there is no justification for any further addition on account of these cash credits. The books either should be accepted in toto or should be rejected in toto. The Department cannot be allowed to pick and choose relevant facts which are suitable to its interest. The mere fact that the assessee had taken these loans and the same are recorded in the diaries prima facie explains that it is not the undisclosed income of the appellant. These are loans which have been taken by the assessee. So the apparent cannot be ignored and what is apparent should be accepted as real and true unless contrary is proved. Second, the assessee has taken the plea that under the provisions of section 68, no additions can be made on the basis of the seized diaries because under this section only the credits which are entered in the books of account of the assessee maintained for any previous year and about which assessee does not offer any explanation regardi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... It appears that issues relating to Shri Trilokchand, Balcand and Shri Shankarlal where only set aside. The addition in respect of Lalit Kumar had been sustained. In set aside proceedings, this deposit of Rs. 55,000 from Balchand had also been accepted and the assessee does not have any grievance in this regard any more before us. Regarding deposit from Shri Lalit Kumar, the Assessing Officer had himself accepted it to the extent of Rs. 1,25,000. Thus, there was no justification in not accepting the other loan of Rs. 1 lakh from the said party. So in view of our above finding, this addition in respect of cash credits which are stated to be a loan from 3rd party, recorded in the diaries cannot be added in the hands of the assessee under the provisions of section 68 and on merits also, as we have explained above, these additions cannot be sustained. The result is that this ground of the assessee is allowed. 33. The next issue pertains to addition of Rs. 3,176 made on account of income from Maruti Van, relating to assessment year 1992-93. The facts on this issue are contained in p. 19, in para 11 of the assessment order and p. 27, para 10.1 of the learned CIT(A). 34. The appellant ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ns to notional interest amounting to Rs. 25,960 for assessment year 1993-94 and Rs. 1,600 in assessment year 1995-96 and Rs. 98,924 in assessment year 1997-98. On the basis of notional interest, no addition can be made. After going through the whole gamut of facts and circumstances of the case and after relying on the decisions cited before us, it is held that addition can be made only on the basis of notional interest, which the appellant had not earned and the Revenue the same may be deleted. 39. We find force in the argument of the learned Authorised Representative. In the result we delete this addition. 40. The next issue pertains to legality of the additions sustained under section 158BC of the IT Act, 1961. This ground being general in nature, does not require any adjudication. 41. The next issue relates to penalty under section 158BFA. The other grounds, namely, ground Nos. 11 and 12 do not require any adjudication on merits. 42. Now coming to the Departmental appeal raised by way of ITA No. 165/Ju/2001, ground No. 1 pertains to allowance of relief of Rs. 2,697. This ground stands disposed of in the appeal of the assessee. So this ground is dismissed. 43. Since the gros ..... 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