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TMI Blog2012 (12) TMI 1X X X X Extracts X X X X X X X X Extracts X X X X ..... achment was lifted on 24.01.2006. If the attachment was lifted by a court order it could not have been difficult for the assessee to produce some evidence in that regard but no such evidence was produced. The duty of the Third Member is only to appreciate the orders passed by the respective Members to find out as to which order is more reasonable and the Third Member cannot reappraise the matter in any other manner. AO has discretion to either reject the books of account and estimate gross profit or to consider the books and may make specific additions by considering as to whether the expenditure claimed is reasonable or not. The AO having chosen the second option, the Appellate Tribunal cannot substitute its opinion to that of the AO, unless it is pointed out that in the process of adopting the option he had arbitrarily made the additions which have no rational basis. Separate disallowance of expenditure is permissible, by taking into consideration the reasonableness of the claim under various heads such as purchase, labour charges, etc. Addition sustained by the Id. CIT(A) under various Acts confirmed - Decided against the assessee. - IT APPEAL NO. 304 (LKW) OF 2011 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... books of account can be rejected and net profit can be estimated in the light of provisions of section 44AD of the Income-tax Act, 1961 (hereinafter in short "the Act"). The assessee, however, agreed that net profit rate be estimated at 8% of the gross receipts before depreciation and interest on partners' capital, etc. He also placed reliance upon various orders of the Tribunal in which net profit was estimated after rejecting the books of account at 8%. The ld. CIT(A) was not convinced with the contentions of the assessee and has confirmed the additions made by the Assessing Officer after having observed that the total receipts are more than Rs. 40 lakhs, therefore, the provisions of section 44AD of the Act cannot be applied. 4. Now the assessee has preferred an appeal before the Tribunal with the submission that the books of account were impounded by the Police in a criminal case and the Police returned the same in a spoiled condition and hence could not be produced before the lower authorities. Therefore, the only option left out is to reject books of account and estimate the net profit on the gross receipts. The ld. counsel for the assessee further contended that the disallo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 8,86,567.00 (b) Labour Charges 10% Rs. 2,96,332.00 (c) Officer Expenses, Vehicle Repair Maintt, Travelling Conveyance, Postage Telephone 15% Rs. 19,388.00 (d) Misc. exps. incld. Hire charges Rent of road roller repair Maint. 20% Rs. 21,233.00 (e) Dep. on Road Roller Rs. 32.000.00 Rs. 12.55.520.00 4. That the ld. CIT(A) has not considered the vital facts that the A.O. has not rejected the books of account u/s 145 of I.T. Act and made addition as per their own estimations. 5. That the order of the learned CIT(A) in erroneous and bad on facts and in law." 2. The appellant, a partnership firm, is engaged in contractual activities and filed its return declaring an income of Rs. 4,43,630/-. The return of income was accompanied by the audited accounts. During the course of assessment proceedings, the Assessing Officer required the assessee to produce the books of account. Despite repeated opportunities dated 07/07/2007, 28/08/2007, 14/09/2007, 05/10/2007, 23/10/2007, 05/11/2007, 13/11/2007 and 20/11/2007, the assessee failed to produce the books of ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urchased on 27/12/2004 but the assessee did not produce any proof and mode of such payments, even except producing the original bill thereof. 3. The appellant disputed the additions/disallowances in appeal before the learned CIT(A). Considering the peculiar findings of fact on record, the learned CIT(A) took note that the appellant has maintained the books of account and bills/vouchers, yet without any valid reason he has failed to produce the same for verification before the Assessing Officer. Since the appellant has not produced even a single bill or vouchers for verification of expenses debited in the profit loss account, he held that the decision taken by the Assessing Officer is reasonable and convincing and thus, rejected the grounds raised in appeal before him. 4. In appeal before the Appellate Tribunal, the learned Counsel for the assessee Shri G. N. Srivastava reiterated that the books of account were impounded by the police in a criminal case. He also took a plea that the police returned the same in spoiled condition and hence could not be produced before the authorities below. In these circumstances the only option left out shall be to reject the books of account a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... me may not be available with the appellant and sought to reject the books of account and assess its income by application of a net profit rate. This plea was strongly objected by the Revenue. The assessee even did not demonstrate as to how and where from he got the copies of ledger account or a solitary bill in original for purchase of Road Roller for producing the same before the Assessing Officer when he claims that his books have been impounded by the police authorities and returned in spoiled condition without bringing on record any evidence in that regard. The burden of proving that fact was on the appellant but he has failed to discharge the same. The books of account and vouchers for expenses have not been produced before the Tribunal as well. In fact this is a case where the appellant has kept the books of account, vouchers and relevant material in the back seat. Under these circumstances, the plea of impounding the same by the local police and return thereof in a spoiled condition is merely a pretence. The production of few accounts from his ledger and a solitary bill for purchase of road roller but non-production of whole record by him appears to be a mala fide act. He ap ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ppeal as well as in the hearing before the Appellate Tribunal admits that the books of account have not been rejected by the authorities below by application of provisions of section 145 of the Act. Section 145(3) empowers Assessing Officer defined u/s 2(7A) of the Act to express the satisfaction about the incorrectness or incompleteness of the accounts of the assessee, or where the method of accounting provided in sub-section (1) or accounting standards as notified under sub-section (2), have not been regularly followed by the assessee, the Assessing Officer may make an assessment in the manner provided in section 144. Such books of account have also not been produced before the Appellate Tribunal for coming to the satisfaction of this Tribunal about the incorrectness or incompleteness of the accounts of the assessee or non-maintenance of its accounts as per prescribed method regularly followed by him. Merely because the appellant is not willing to produce books of account or has failed to produce the same without any valid reason as also found by the learned CIT(A), I find it difficult to act as a court of first instance for deciding the factual aspect that the books of account a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ks of account and vouchers for correct determination of his income and such a practice may go to frustrate the administration of IT. Act in a judicious manner. The learned CIT(A) in the impugned order has also recorded a finding that there are no valid reasons with the appellant for not producing books of account and vouchers. The findings reached by him are not shown to be perverse under the peculiar fact findings of this case and as the appellant does not have good case requiring substitution of the orders of authorities below with its own order of the Tribunal by rejecting the books of account, I find no merit in the appellant's plea requiring this Tribunal to reject the books of account and estimate his income by application of net profit rate. The same therefore, being devoid of any merit, is hereby rejected. 6.5 On the merits and in so far as the question as to whether the learned CIT(A) committed any error in sustaining the disallowance made by the Assessing Authority, I find that the Assessing Officer, after taking into account all relevant material which he has gathered and after providing sufficient opportunity of being heard to the assessee, made assessment of total in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the result, the appeal stands dismissed. THIRD MEMBER ORDER D. Manmohan, Vice-President (As a Third Member) - ITAT "B" Bench, Lucknow heard the matter on 17.11.2011. The main issue before the Bench was with regard to the legality of the addition of Rs. 12,55,520/- . The learned Judicial Member set aside the order of the learned CIT(A) and restored the issue to the file of the AO to recompute the income in the light of the observations made in the said order whereas the learned Accountant Member was of the view that the order passed by the CIT(A) on this issue does not call for any interference. Thereupon the learned Judicial Member framed the following question under section 255(4) of the Income Tax Act and requested the Hon'ble President to nominate a Third Member to resolve the point of difference: - "Whether the Tribunal being the last fact finding body can estimate the net profit from the business of the assessee in the absence of books of account instead of confirming the disallowances sustained by the ld. CIT(A) under various heads?" 2. However, the learned Accountant Member was of the opinion that the question framed by the learned Judicial Member does not foc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... count in the premises of her husband Shri Akhilesh Kumar Singh, but the premises were seized by the local police and the books were impounded. The counsel appearing on behalf of the assessee submitted that the assessee is agreeable to estimation of income, in the absence of books of account, and agreed for a net profit of 8% of the gross receipts. 5. The AO observed that the turnover of the assessee was beyond the prescribed limit of Rs. 40,00,000/- whereby he has to maintain books and hence adoption of flat rate of 8% under section 44AD is not permissible in law. He also observed that the assessee could not produce even a single voucher in support of the purchases, labour charges, vehicle maintenance, office expenses, etc. and no evidence was shown in support of its plea that the vouchers and files of the assessee-firm were impounded by the local police. However, the assessee having filed the ledger copies of purchases, labour charges, salary accounts, etc., for want of verifiable details the AO made item-wise ad hoc additions as under:-: (a) Purchases: According to the assessee purchase of material and consumables are to the tune of Rs. 88,65,674/-. In the absence of any vou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or turnover of the firm was more than Rs. 40,00,000/-. Therefore it is not necessary to estimate the income under section 44AD of the Act. Moreover, as per tax audit report under section 44AB of the Act, the assessee firm maintained cash book, ledger, etc. for its business activities but did not produce books, despite repeated direction given by the AO. The assessee-firm did not produce even a single bill/voucher to substantiate the expenses debited to its P L Account. No evidence was placed on record with regard to its claim that books of account and supporting vouchers were impounded by the local police. He also observed that the assessee claimed to have obtained tax audit report in the instant case which implies that the assessee maintains books of account. Under the circumstances, additions and disallowances can be made to the book results even without rejecting the books of account as per the provisions of section 145 of the Act. He thus affirmed the action of the Assessing Officer. 8. Aggrieved by the order passed by the learned CIT(A), the assessee preferred an appeal before the Tribunal, The ITAT "B" Bench Lucknow heard the matter. The learned Judicial Member observed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 254(1) uses the expression "pass such orders thereon", which restricts the jurisdiction of the Tribunal only to the subject matter of appeal and merely because section 254 confers powers in the widest possible terms it should not be exercised in any manner under the circumstances of this case. The orders of the lower authorities can be interfered with only on judicial considerations i.e. when an order of the AO/ CIT(A) is vitiated on account of perverse reasons, etc. Rayala Corpn. (P.) Ltd. (supra). (e) The books of account have not been rejected by the authorities below. Section 145(3) empowers the AO to reject the book results if he is satisfied about the incorrectness or incompleteness of the accounts. The pre-requisite for recording such satisfaction requires verification of books whereas in the instant case the books of account have not been produced by the assessee. Rather assessee is not willing to produce the books of account or it failed to produce the same without any valid reason, as found by the learned CIT(A). (f) Whether the books are not correct or whether the assessee has maintained it books of account as per the method of accounting regularly followed are fa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ere not made under section 143(3) of the Act since the returns filed by the assessee were processed under section 143(1) of the Act. His main contention was that in the absence of books of account the AO should not make arbitrary additions in spite of rejecting the book results. Even in a scrutiny assessment made under section 145(3) r.w.s. 144 of the Act a rational approach has to be followed and addition should not be made on arbitrary basis. In this regard he relied upon the decision of the Hon'ble Delhi High Court in the case of CIT v. Aero Club [2011] 336 ITR 400. He further submitted that the AO is duty bound to correct all the errors and should not take benefit out of the inability of the assessee to produce the books of account. In this regard he relied upon the decision in the case of Rayala Corporation (P.) Ltd. (supra). He contended that the Chartered Accountant would not have certified that the asset is genuine without verification. Thus, by ignoring the Auditors' certificate the AO was not justified in disallowing the claim of depreciation on such asset. He thus strongly relied upon the order passed by the learned Judicial Member. 12. On the other hand, the learned D ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed before him and to allow or reject the claim or claims and to determine the total income, The AO is also empowered to take into consideration all accounts or relevant material which is gathered. Section 145 of the Act states that income chargeable shall be computed in accordance with either the cash or mercantile system of account regularly employed. 15. However, if the AO is not satisfied about the correctness or completeness of the accounts maintained by the assessee or where the method of accounting followed in this year is not consistent with the accounting standards or with the method followed regularly by the assessee, the AO "may" make an assessment in the manner provided in section 144. The expression "may" indicate that the AO has to exercise his judicial discretion as to whether in each and every case, when veracity of the book result is disputed, the AO has to proceed to make the best judgment assessment or not. In the event of coming to a conclusion that no part of the book results can be looked into, the AO can resort to make an assessment to the best of his judgment by invoking the provisions of section 144 of the Act. While making the best judgment assessment the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wers of the AO. However, the Appellate Tribunal, which is the second appellate body, has to exercise its powers under section 254 of the Act wherein it cannot act like the AO; the powers of the Tribunal are not co-terminus with that of the AO - like the powers given to the Commissioner (Appeals). However, the Tribunal can "pass such orders thereon as it thinks fit". This expression has come up before the courts for its interpretation. In the case of Rayala Corpn. (P) Ltd. (supra) the Hon'ble Madras High Court observed that though the powers of the Tribunal are widest in its amplitude, the same are subject to the limitation that it cannot substitute its opinion to the opinion of the AO/CIT(A), other than on judicial considerations. In other words, when an order passed by the AO/CIT(A) suffers from an error of law or fact or it is vitiated on account of excessive arbitrariness, which leads to perversity in such order, the Tribunal can substitute its opinion to that of the lower authorities. The court further observed that if two opinions are possible and one opinion is formed by the lower authority, merely because Tribunal had a different view on the matter, it shall not interfere wi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... esults rejected indicates that it was trying to get advantage of its default of non-production of books. Under these circumstances the AO is vested with the discretion of either rejecting the book results to estimate the profit or to proceed on the basis of the ledger, etc.; For want of cross verification of the bills/vouchers it can determine the reasonableness of the expenditure. The AO chose to make ad hoc additions by taking into consideration the quantum of expenditure claimed under each head such as purchases, labour charges, etc. The discretion exercised by the AO can be substituted by the Tribunal only upon showing that the disallowances made are arbitrary and excessive. 20. The order of the learned Judicial Member has not indicated anywhere that the disallowance of expenditure is excessive and arbitrary. In fact it is not the claim of the assessee that the expenditure disallowed is excessive. The learned Judicial Member sought to substitute the method followed by the AO with the method suggested by the assessee and directed the AO to reject the book results and to estimate the net profit on gross receipts. Having held that the net profit is to be estimated he further obs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... merely a pretext and the production of few vouchers from its account, a solitary bill for purchase of Road Roller would highlight the mala fide intention of the assessee. He observed that the assessee has not come before the Tribunal with clean hands. 22. Ordinarily, on this issue, a uniform approach is adopted by the Division Bench depending on the facts of the case whereas this is a unique case where the Members have differed on this aspect also and hence it is necessary to consider as to whether the opinion expressed by the learned Accountant Member, which is in conformity with the opinion formed by the AO as well as the CIT(A), can be given due weightage or not. As could be noticed from the case law, referred by the learned Accountant Member as well as the decision of the Apex Court in the case of H.M. Esufali H.M. Abdulali (supra), so long as the opinion expressed by the AO is a possible view, unless some material is brought on record to show that the specific additions made by the AO are highly arbitrary and perverse, in my considered opinion, the Appellate Tribunal should not merely substitute its opinion to that of the AO to hold that it is a fit case for rejection of boo ..... X X X X Extracts X X X X X X X X Extracts X X X X
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