9911796707
TMI Blog2012 (4) TMI 265X X X X Extracts X X X X X X X X Extracts X X X X ..... p; After having come to the conclusion that the assessee's case required estimation of number of subscribers and income because the correct status in this regard was not reflected in its books, the Ld. CIT(A) ought to have upheld the estimate made by the AO. (4) The Ld. CIT(A) failed to appreciate the fact that the subscriber base was estimate by the AO at 40% of the number of residential accommodation [which, in turn was ascertained from the number of electricity connections] on the basis of the statement of Director of the assessee company that they take 40% of a number of residential accommodation in the area as possible connectivity for planning purposes. The estimate made by the assessee for planning its business can reasonably be expected to be correct as it would be based on the assessee's own experience. (5) The Ld. CIT(A) failed to appreciate the fact that the estimate made by the AO was all the more reasonable as he had taken the electricity connections of only a part of the area serviced by the assessee. (6) The Ld. CIT(A) erred in arbitrarily estimating the suppression of subscriber base by the assessee at 10% of the connection shown by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... declared number of cable connections recorded in the books. AO failed to enlist or outline the reasons for such rejections and discrepancies in the accounts of the assessee. Relying on the provisions of section 145 of the Act, Ld Counsel argued stating that as per the said provisions, AO is authorized to reject provisions of failure to regularly follow a method of accounting, incorrectness or incompleteness of the accounts. In the absence of any such failure or incorrectness or incompleteness, AO cannot silently reject the books and proceed to resort of best judgment assessment in the manner provided in section 144 of the Act. In the background of the above, the assessee filed letter dated 05/09/2011 raising the aforementioned additional ground and convincingly submitted that the above imported additional grounds are legal in nature and they transfuse into the root of the issues raised in the normal grounds raised by both the parties. Therefore, as per Dr Jain, the said additional grounds ought to be admitted and disposed on its merits. According to him, in case the assessee wins on these additional grounds, the adjudication of the original grounds raised by both the parties in al ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ort. Adjudication of the Additional Grounds 8. We heard both the parties and perused the orders of the revenue and issues raised in the orders of the revenue and issues raised in the additional grounds. We find that there is no dispute on the legal nature of the issue raised in the additional grounds. Considering the non requirement of any investigation in to the primary fact required for adjudication of the said legal issue raised in the additional grounds, we are of the opinion that the additional grounds raised should be admitted in the interest of the justice. 9. The issue raised in the additional grounds relates to the requirement of rejection of books of accounts as per the provisions of Section 145(3) of the Act before suppressed receipt is resorted by the assessing officer. For adjudicating to the above we proceed to bring out some relevant facts and the background of the assessee. Background Facts 10. Assessee company carries on the business of cable operator services as well as transmitting signals to its input holders / franchisees. There was search action on the assessee on 14/11/2005. The revenue suspected the bona fide of subscribers base of the assessee and they ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ment for all the seven assessment years were completed and finally determined the undisclosed income of all the seven years as per the chart (on page 24 of assessment order) given below. A.Yrs. Indexed Connectivity Option (40%) Shown by Co. Balance Not shown Rate per connection Undisclosed income (x months) 2000-01 95571 38228 13558 24670 120.00 3,55,24,800 2001-02 42050 42050 14276 27774 170.00 220.00 Sub total 1,41,64,740 5,49,92,520 6,91,57,260 2002-03 115641 46256 14904 31352 220.00 270.00 Sub total 3,44,87,200 5,92,55,280 9,37,42,480 2003-04 127206 50882 15364 35248 270.00 271.43 Sub total 4,75,84,800 6,69,71,552 11,45,56,352 2004-05 139926 55970 16366 39604 271.43 277.78 298.15 Sub total 2,14,99,427 1,10,01,199 10,62,71,393 13,87,72,019 2005-06 153604 61441 21505 39936 298.15 313.70 Sub total 7,14,41,510 7,51,67,539 14,66,09,049 2006-07 168333 67333 23175 44158 355.70 321.84 Sub total 3,14,14,001 14,21,18,107 17,35,32,108 Total 77,18,94,068 13. The above table reflects the mode and manner of estimation of income f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o additional grounds: 17. Assessee is a company whose books of accounts are duly audited as per the provisions of the Act. With the exception of some unfounded or irresponsible assertions of the AO, who held in para 12 of his order that there exists some evidences to support the suppression of cable connections by the assessee, otherwise, the search action did not result in the discovery of any direct evidence to demonstrate the same so show that the entries or books of accounts of the assessee for seven assessment years are inaccurate and they suffer from deadly problem of incompleteness of the books of accounts. However, on the issue of existence of such evidences, there was discussion by both the parties during the proceeding before us. In response to the challenge of the assessee's counsel for production of such evidences, the revenue could not bring out any such evidence to strengthen their case. Therefore, we find no difficulty in expunging such assertions of the AO as inappropriate and therefore, proceed to uphold the view of Ld Counsel for the assessee. Further, in support of their belief on the allegations of suppression, the Revenue kept heavy reliance on the allegat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on (3) on account of Incompleteness of books of account & Inaccuracies of the said books of accounts 14. In the light of the above scope we have examined the fact of the present case. The standard of the revenue is estimations by the assessing officer are justified even when the specific inaccuracies or incompleteness are not pointed out . (2) Assessing officer did not make specific reference of sub-sec.(3) of the Act in his order (3) and there is allegation by the service department about the number of ----statement of Shri Ezaz Inamdar about i.e. "we take 40% as possible connectivity" on the other hand the standard of the assessee is as provided in the Para 5 to 8 and rejoinder also of written submissions which is as under. "5. The Assessing Officer has merely concluded (as can be seen from Para 12 of the assessment order for A.Y. 2000-2001) that there are evidences which reveal that the subscriber base has been concealed as no proper number of connectivity is being shown on record by the company. This is a mere general, feeble and vague statement without any roots in the facts emanating from the search. 6. The Assessing Officer has himself discarded the estimation of income ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ties were either returned unserved or no compliance was made where the assessee has maintained proper books of accounts and they were audited u/s.44AB and were produced before the Assessing Officer in which no other defect was found. vii. DCIT v. Associated Petroleum Corporation - 43 SOT 45 (Ahd) Without pointing out any defect, the Assessing Officer cannot resort to rejection of books and without rejecting books of accounts, Assessing Officer cannot estimate the profits. viii. CIT v. Paradise Holidays - 325 ITR 13 (Delhi) 8. Reliance is place on the following decision for the proposition that in the absence of assessment year specific incriminating material, assessment of such year cannot be disturbed by invoking the provision of Sec.153C. i. Sinhgad Technical Educational Society v. ACIT reported in 56 DTR 241 (Pune) and ii. LMJ International Ltd. v. DCIT reported in 119 TTJ 214 (Kol). Assessee's counsel filed a rejoinder oriented write up summarizing the arguments and counter arguments and the same is reproduced as follows. Quick responses to the comments provided by the learned CIT (DR) vide a letter dated 07/09/2011 from the Assessing Officer. 1.&n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ting 145 (1) ... (2).... (3) Where the Assessing Officer is not satisfied about the correctness or completeness of the accounts of the assessee, or ................ , the Assessing Officer may make an assessment in the manner provided in section 144." 21. Sub-section (2) of the pre-amended provision is same as the sub section (3) of the substituted section 145 of the Income tax Act and it has following ingredients: (a) AO being not satisfied about the correctness or completeness of the accounts of the assessee; and (b) consequential best judgment assessment in the manner provided in section 144 of the Act. The expressions at (a) i.e. "AO not satisfied", correctness, completeness of the accounts of the assessee are relevant and they require more elucidation. Before analyzing the phrases of AO being net satisfied' and the 'correctness and completeness of the accounts', it is necessary to elaborate on what constitutes the "accounts of the assessee' used in conjunction with the 'correctness or completeness'. The same has not been defined in the Act in that form. However, the Finance Act, 2001 introduced clause 12(A) of section 2 providing for an inclusive d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er, with regard to rejection of books of accounts by the AO u/s 145 of the Act, 'accepting the books of accounts of the assessee is a rule and rejecting the same is an exception'. This is the principle in existence and AO shall not reject the books unless the accounts of the assessee suffer from either of the twin reasons specified in the Act ie correctness or completeness. Hon' ble jurisdictional High Court, in the case of Bastiram Narayandas Maheshri v. CIT [1994] 210 ITR 438/74 Taxman 454 (Bom.) , held that the failure to maintain proper registers contributes to the dissatisfaction of the AO about the fairness or correctness of the accounts and thus the AO is empowered to make the best judgment assessment. It is the settled law that the books cannot be rejected u/s 145 of the act and resort to best judgment assessment, unless the AO record any finding that the books of accounts maintained by the assessee are incorrect rendering it impossible to deduce the profits. AO needs to indicate that he noticed any inconsistency or infirmity in the Audit report. Judgment of Hon'ble High Court in the case of Madnani Construction corporation (P.) Ltd v. CIT [2008] 296 ITR 45 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h conclusion, it must be shown that the AO has taken into consideration relevant factors and not omitted to consider the material before him. Thus, the above scope of the provisions of section 145 conclusively establishing the fact that, what is important for rejection of books is the AO being not satisfied about the correctness or completeness of the accounts and it is for the AO to establish the incompleteness or incorrectness of the accounts of the assessee. Divergent Stands of the Parties of the Dispute - Summation: 27. In the light of the above scope and philosophy relating to the provisions of section 145(3) of the Act, we need to examine the divergent stands of the parties in the litigation. A. Stand of the Revenue: We have examined the orders of the revenue, perused the material available before us and heard the arguments of the revenue. From all these sources, we find the case of the revenue is that the assessee is covered by the provisions of section 132 of the Act and gathered evidences to suggest the suppression of the cable connections. Further, as per the revenue, the existence of allegations of the evasion of Service Tax by way of discrepancy on the number o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessment. 28. In the preceding paragraphs of this order, we have analysed the issues concerning the admission of the additional ground tracing the background facts of the case, the scope of the provisions of section 145(3) of the Act, divergent stands of the parties in dispute and the circumstances leading to making of an assessment on estimation basis etc. While discussing the same, we have demonstrated the need for enlisting the accuracies and incompleteness of the accounts of the assessee. In other words, we have approved the existing dictum that 'acceptance of the books of account of the assessee is the rule' and the 'rejection of books is an exception'. In this case, the assessee is under statutory obligation to maintain the books specified in sec. 2(12A) of the Income Tax Act. It is a case where books or accounts are duly audited by the statutory auditors as required under the statute. They are under obligation to provide categorical findings about the verification of the books of account, constant following of the method of accounting adopted, accuracies or completeness if any of the books of accounts. In a case where books are maintained and the same were ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is evident that the said statement is unspecific, vogue and the same was made in connection with planning of the business ie in other words assessee purchases the required machinery with a capacity for gathering 40% of the electricity connections of an area. It should never mean that the assessee is providing cable connections to 40% of the electricity connections. In our opinion it constitutes a wild surmises, which should be rejected outright as done by the first appellate authority in the impugned order. Therefore, this statement of Shri Inamdar ought not to become a basis for rejection of books of account as the said statement failed to contribute to either incompleteness or inaccuracy of the accounts of the assessee for the seven Assessment Years under consideration. The full sentence of the statement of Sri Inamdar reads that "Further for planning purpose, we take 40% as the possible connectivity" and we failed to understand how the AO can construe the same as conclusive evidence in support of the suppression of the cable connectivity of the assessee in the absence of any other corroborative evidences. In our opinion, the scrutiny assessments of this kind and magnitude invo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ences as they unambiguously throw light on the incompleteness and inaccuracy of the accounts of the assessee. It is not the case in here. Therefore, there is no scope for any such surmises and suspicion in matters of rejection of books of accounts. It is the onus on the AO to enlist the defects or discrepancies or entries or failure of the assessee in maintaining some requisite books in the order before the books are rejected u/s 145(3) of the Act. AO might not have mentioned expressively the provisions of sec. 145(3) of the Act in the order but the requirement is, AO must enlist the defects or discrepancies or incompletion or inaccuracies of the accounts of the assessee. In the instant case AO did not bother to honour the law in its true spirit. How AO can resort to estimation of income without rejection of accounts systematically maintained by the assessee for all the years under consideration and also without invoking the provisions of section 145 of the Act after duly complying with the conditions specified in them? Should we encourage such callous approach of the AO, who did not bother to read the said provisions and conditions specified therein?. AO's order does not conta ..... 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