9911796707
TMI Blog2016 (5) TMI 1009X X X X Extracts X X X X X X X X Extracts X X X X ..... organizations, such as Ship Building Centre, Visakhapatnam, DGNP, Visakhapatnam, etc. There was a search action u/s 132 of the Income-Tax, 1961 (hereinafter called as 'the Act') on 14.7.2009 in the residential and business premises of the assessee. Pursuant to search, the case was centralized with Central Circle-2, Visakhapatnam. Accordingly, notice u/s 153A/153C of the Act was issued calling for the return of income for the assessment years 2004-05 to 2010-11. In response to notice u/s 153A of the Act, the assessee has filed his return of income on 23.3.2011. The case has been selected for scrutiny and accordingly, notice u/s 143(2) & 142(1) of the Act along with detailed questionnaire were issued. In response to notices, the authorized representative of the assessee appeared from time to time and furnished the information called for, however, failed to produce any books of accounts and relevant vouchers. 3. During the course of search proceedings, certain incriminating documents seized reveals that the assessee has inflated 10% labour expense for the assessment year 2008-09 & 2009-10. When these documents were confronted to the assessee while recording a statement u/s 132(4) of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing before any authorities. The time limit for issue of notice u/s 143(2) of the Act has been expired. Therefore, for these assessment years, the A.O. has no jurisdiction to tinker with the assessment. Similarly, in respect of proposed rejection of books of accounts and estimation of net profit from the business, the assessee submitted that he is into the business of execution of contracts for defence organizations and the net profit from his business is varies from 6 to 8 % which is evident from the previous financial results. Therefore, the proposed action of estimation of net profit of 15% and 10% in respect of contract receipts and trading results is quite high. The assessee further submitted that during the course of search proceedings, he has admitted additional income towards disallowance of 10% labour charges and accordingly disclosed additional income agreed before the search proceedings and paid the taxes. Therefore, the A.O. was not correct in proposed estimation of net profit by rejection of books of accounts. 5. The A.O. after considering the assessee's submissions and also relevant facts available on record, held that there is no limitat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ourse of search proceedings, the department has gathered information which reveals that the assessee has inflated 10% labour expenditure, which was accepted by the assessee and disclosed additional income before the search party. Therefore, it is very clear that the assessee is habitual of not maintaining any regular books of accounts and also vouchers in support of the expenditure debited in the P&L account. Considering the inability of the assessee to furnish the books of accounts and also the various information called for, it was opined that the book results admitted by the assessee in his returns is not susceptible to verification and as such are not reliable. The A.O. further held that the assessee is duty bound to produce the full details of expenses and all the evidences called for in the course of assessment proceedings, so as to enable the assessing officer to reasonably compute the profit. Since, the assessee has failed to produce books of accounts and other relevant details, rejected the financial results and resorted to estimation of net profit. The A.O. after considering the relevant details available on record estimated the net profit of 10%, in respect of trad ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssee submitted that the A.O. is not correct in estimating the income at a very high percentage of 10% of the turnover in respect of trading activity and 15% in respect of contract receipts, without disclosing the basis for arriving at the same and also without disclosing any comparable cases. The assessee further submitted that he is into the business of trading in machinery spare parts and the net profit margin in this line of business is varies from 3 to 5%. As against this, the A.O. has adopted net profit of 10% arbitrarily for all the assessment years without any basis. Similarly, the A.O. has adopted 15% uniform net profit for all the 6 assessment years in respect of contract receipts without any basis. The assessee further submitted that he is into the business of execution of works contract for defence organizations and the profit element in this contract is very less. During the relevant assessment years, he has executed part of works on its own and remaining part was handed over to sub contractors for timely execution of works. In the case of works, where he has allowed other contractors to work, the normal net profit percentage is 4 to 6%. The A.O. without consideri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... siness in the normal course and only after search, the fact of inflation brought in to light. Initiation of action u/s 153 of the Act is a mandatory provision, which does not allow any discretion to the assessing authority. After initiation of such assessment proceedings, the assessing officer is free to examine the facts of the case for the purpose of computing the true income of the assessee. In all these 6 years, there is no original scrutiny assessment completed. Therefore, the A.O. is not forced to confine himself to the material found during the course of search. In the absence of application of mind, the A.O. is free to examine the case afresh. With these observations, the legal ground raised by the assessee has been dismissed. 11. As regards the estimation of net profit from the business, the CIT(A) held that the assessee has failed to produce books of accounts and relevant vouchers in support of financial results declared in the return of income. When assessee has been asked to furnish comparable cases, he could not produce any comparable cases so as to compare the net profit declared from his business. In the absence of specific details and comparisons, there is no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d minimum 15% net profit by taking into account the one such comparable case. Since, assessee could not produce any suitable comparables and also failed to produce books of accounts, the A.O. was right in estimating the net profit. Further as contested by the assessee, the A.O. has estimated 15% net profit which is on the higher side. As discussed in the previous paragraphs, for the assessment year 2006-07, the assessee has admitted additional income towards inflation of labour expenses. The net profit declared for the A.Y. 2006-07 after additional income works out to 12.3%. In the absence of independent comparables, it is always preferable to take own comparison of other years. Accordingly, the net profit on contract receipts is required to be estimated at 12.3% on gross contract receipts, which gives reasonable profits which meets the ends of justice. Therefore, the A.O. is directed to estimate net profit of 12.3% on contract receipts for the assessment year 2004-05, 2005-06, 2007-08 & 2009-10. 13. The CIT(A) further held that as far as the assessment year 2010-11 is concerned, the assessee, at the time of search, has disclosed sum of Rs. 1.5 crores towards inflation of labour c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ggrieved by the CIT(A) order, the assessee as well as revenue are in appeal before us. 15. The assessee has raised common grounds for all the six assessment years. From these grounds, the assessee has agitated five main issues i.e. the validity of assessment proceeding, estimation of net profit, denial of deductions towards depreciation and separate additions towards interest and other income under the head income from other sources and levy of interest u/s 234A& 234B of the Act. Similarly, the revenue has raised common grounds for all the six assessment years and the only issue challenged from these grounds of appeal is lowering the estimation of net profit by the CIT(A). The assessee has challenged the validity of assessment orders by way of ground nos.1&2 and also additional ground for the reason that the A.O. has passed assessment order without furnishing seized documents. The A.O. has passed assessment order u/s 143(3) r.w.s. 153A/153C of the Act, whereas the A.O. ought to have passed the assessment order u/s 144 r.w.s. 153A of the Act. The assessee further challenged the assessment order on the ground that the Additional Commissioner has accorded approval u/s 153D of the Act ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... completed assessments, only on the basis of material found during the course of search. Unless there is a seized materials, the completed assessments cannot be disturbed. The Ld. A.R. further submitted that the law is very clear that in the cases, where the return of income has been filed by the assessee, whether intimation u/s 143(1) of the Act or assessment u/s 143(3) of the Act was passed or not and the time limit for issue of notice u/s 143(2) of the Act has been expired, then the A.O. losses jurisdiction to verify the return of income as the assessment was not pending and hence, there would be no abatement of any proceedings. Therefore, the A.O. was not correct in making additions to the returned income for the assessment year 2004-05, 2005-06 & 2007-08 in the absence of any seized materials. 18. The Ld. D.R. on the other hand, submitted that the A.O. was correct in making additions to the returned income, as there was a seized material found during the course of search which indicates the inflation of labour expenditure and also unaccounted investment in properties. The Ld. D.R. further submitted that in those assessment years which are under appeal, no regular scrutiny ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h was conducted. The assessee has filed revised returns in response to notice u/s 153A of the Act and admitted the additional income disclosed during the course of search. The case has been selected for scrutiny. During the course of assessment proceedings, the assessee was asked to produce books of accounts and relevant bills & vouchers in support of expenditure claimed. In response, the assessee filed written submission and stated that the books of accounts are not available and hence cannot be furnished. Therefore, the A.O. issued a show cause notice and asked to explain why the net profit from the business shall not be estimated. In response to show cause notice, the assessee has filed a written reply and contended that the income for the assessment year 2004-05, 2005-06 and 2007-08 cannot be tinkered with, as there was no incriminating material found during the course of search for the above assessment years and as such no additions can be made to the returned income. It is further submitted that as per sec. 153A of the Act, denovo assessment can be made only in respect of the assessment year for which the assessment proceedings had been abated and that in respect of assessmen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed assessments and the manner in which the assessment should be framed, which was further supported by circular no.7 of 2003 issued by the CBDT. When the law has explained the position of abated assessments, then the same way the completed assessment should be treated so as to understand that those assessments are reached finality and which cannot be tinkered with unless there was a seized document. Therefore, we are of the considered opinion that where search is initiated, all pending assessments are merge into one and only one assessment for each assessment year shall be made separately on the basis of findings of search and other material existing or brought on record by the A.O. In respect of non abated or completed assessments, the assessment will be made on the basis of books of accounts or other relevant documents found during the course of search, but not produced in the course of original assessment. 22. In the present case on hand, on perusal of the document available on record, we find that the assessment for the assessment year 2004-05 to 2007-08 were not pending as on the date of search. The fact that the assessment has been completed u/s 143(1) & 143(3) of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ot find any element of law to be decided in this appeal. Hence, the appeal is dismissed. There will be no order as to costs." 25. The assessee has relied upon the coordinate bench decision of ITAT, Visakhapatnam in the case of A.T. Rayudu in ITA No.373 to 379/Vizag/2014. The coordinate bench, under similar circumstances held the issue in favour of the assessee. The relevant portion is reproduced hereunder: "22. In this regard, it is also pertinent to refer to the following observations made by the Special bench in the case of All Cargo Global logistics Ltd (supra):- "57 (f) In the case of Parashuram Pottery works co. Ltd Vs. ITO (106 JTR 57)(SC), it has been mentioned in the last paragraph of the judgment that the court has to bear in mind that the policy of law is that there must be a point of finality in all legal proceedings, that stale issues should not be reactivated beyond a particular stage and that lapse of time must induce repose in and set at rest judicial and quasi judicial controversies as it must in other spheres of human activity. Our decision is in consonance with this observation". The decision rendered by the Special bench that the assessing officer can make a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at the assessee is entitled to take support of the decision in his favour, when two contradictory views have been expressed by the High Courts. In the instant case the Hon'ble jurisdictional High Court comes to the support of the assessee in respect of the legal proposition in addition to the decision rendered by the Hon'ble Bombay High Court. Accordingly, we find merit in the contentions of the assessee on the legal issue." 26. Considering the facts and circumstances of the case and also respectfully following the coordinate bench decision in the case of All Cargo Logistics Pvt. Ltd. (supra), we are of the opinion that the A.O. has made reassessment u/s 153A/153C of the Act on the basis of information/material available in the return of income, without referring to any seized material. Therefore, following the special bench decision (supra) we hold that the A.O. had no jurisdiction to make additions u/s 153A of the Act for the assessments which are not pending as on the date of search. In this case, the search was conducted on 14.7.2009. The assessment for the assessment years 2004-05 to 2007-08, were not pending as on the date of search. The time limit for issue of notice ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sp; further submitted that if the above arguments are not accepted, alternatively the net profit from the business should be estimated @ 8% on the total turnover. The Ld. A.R. further submitted that the ITAT, Chandigarh bench in the case of Sri Ashok Kumar Vs. ITO in ITA No.340/CHD/2014, under similar circumstances estimated the net profit at 8%, therefore requested to scale down the estimation of net profit from 12.3% to 8%. 28. On the other hand, the Ld. D.R. submitted that the CIT(A) was erred in scaled down the estimation of net profit from 15% to 12.3%, without appreciating the fact that the assessee could not produce any books of accounts and other relevant documents at the time of assessment. The Ld. D.R. further submitted that it is an undisputed fact that the seized materials found during the course of search reveals that the assessee has inflated labour payments. It is also an undisputed fact that the assessee has not produced any books of accounts to substantiate the financial results declared in the return of income. Under these circumstances, the A.O. has left with no option but, to estimate net profit. The Ld. D.R. further argued that the Ld. CIT (A) was erred ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is 7% to 8% which is evident from the past history of assessee, therefore, the A.O. was not correct in estimating the uniform net profit rate of 10% and 15% respectively for all the assessment years. 30. The A.O. has estimated net profit of 10% on trading receipts and 15% on contract receipts, however failed to disclose the basis on which such estimation was made. The assessee contended that the net profit estimated by the A.O. is quite high, but failed to furnish any comparable cases to justify his case. It is an admitted fact that the assessee could not produce books of accounts and other relevant documents. It is also an admitted fact that the assessee has inflated the labour expenditure, which was admitted by the assessee and further followed by filing the return of income. Estimation is possible in assessments. There is no hard and fast rule for estimation of income, however, there should be a basis for estimation of income either by comparable cases or assessee's own past results. In the present case on hand, both the parties failed to substantiate their stand by bringing on record any comparable cases. The assessee has filed a paper book containing the working of net ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se of survey, he has accepted the additional income. Based on such findings, the CIT(A) held that it would meet the ends of justice to estimate the net profit of 12.3% for all the assessment years. The assessee requested for 8% net profit on total turnover. In support of his arguments, relied upon coordinate bench decision of ITAT, Chandigarh Bench in the case of Ashok Kumar (supra). Though, the coordinate bench held that 8% net profit is justified, the facts of the case are different. In the case before ITAT, Chandigarh the assessee has reported net profit of 3.17%. In the present case on hand, the assessee himself has admitted a net profit of 11.36% to 11.47%. Therefore, considering the overall facts and circumstances of this case, we are of the opinion that the CIT(A) has rightly estimated the net profit of 10% in respect of trading business and 12.3% in respect of contract receipts by taking into account the net profit declared by the assessee for the assessment year 2006-07. We do not see any error or infirmity in the order passed by the CIT(A) as far as estimation of net profit for assessment year 2008-09 and 2009-10. Hence, we inclined to uphold the order of the CIT(A) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nge gains etc. The Ld. A.R. submitted that the A.O. was erred in making separate additions towards income from other sources, being interest on fixed deposits, miscellaneous receipts and foreign exchange gains. The Ld. A.R. further submitted that the assessee has kept fixed deposits in bank for the purpose of obtaining bank guarantee to be given to the principals for obtaining the contracts. Therefore, the interest earned from the fixed deposits should be assessed as business receipts for the purpose of estimation of net profit. When the A.O. has estimated the net profit on gross receipts, separate additions towards income from other sources being interest on fixed deposits is not correct. The Ld. A.R. further submitted that the assessee has earned foreign exchange gain towards fluctuation in foreign currency in the course of import of machinery spare parts. These receipts are essentially a part of business receipts. Unless, goods are imported, he would not have earned the foreign exchange gains. Therefore, the A.O. should have treated the foreign exchange gain as part of business for the purpose of estimation of net profit. 34. The Ld. D.R. on the other hand strongly suppor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... considered as part of business turnover for the purpose of estimation of net profit. It was the contention of the A.O. that the assessee has not directly involved in any foreign exchange business. The gain or loss on account of fluctuation in foreign exchange rates has nothing to do with the business of the assessee. We do not see any merits in the arguments of the A.O., for the reason that the foreign exchange gain or loss arises in the course of business of the assessee. The assessee is involved in the business of import of machinery spare parts which resulted in foreign exchange gain. As per the principles of accounting, the assessee at his option can either reduce the cost of materials or shown the gain separately in the financial statements. Though, these items are considered as incidental to the activity of the assessee, the foreign exchange gain is essentially a part of business receipts for the purpose of estimation of net profit. Therefore, we are of the opinion that the A.O. was not correct in making separate additions towards foreign exchange gain, when the net profit is estimated on gross receipts. The CIT(A) without appreciating the facts has upheld the order of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ers of the authorities below. The A.O. has charged interest u/s 234A& 234B of the Act, without adjusting the seized cash found during the course of search. The A.O. was of the opinion that the charging of interest u/s 234A & 234B of the Act is mandatory and consequential in nature. Therefore, there is no discretion for the A.O. to charge interest and accordingly, computed the interest u/s 234A& 234B of the Act as per the provisions of the Act. It was the contention of the assessee that the A.O. should have adjusted the seized cash to the existing tax liability first, then, computes the interest u/s 234A& 234B of the Act. We find force in the arguments of the assessee for the reason that if any cash found and seized during the course of search, it should be adjusted to the existing liability. In case there is no existing tax liability, then the seized cash should be adjusted to the tax liability arises because of search. In the present case on hand, the assessee has requested the A.O. to adjust the seized cash for the tax liability of the assessment year 2008-09 and to 2010-11. The A.O. without adjusting the seized cash, has computed the interest u/s 234A& 234B of the Act. Tho ..... X X X X Extracts X X X X X X X X Extracts X X X X
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