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TMI Blog2019 (10) TMI 1177X X X X Extracts X X X X X X X X Extracts X X X X ..... ing the year, which may have different profits margins depending upon nature of work and other parameters, and that too, with a related entity, is clearly a material development and distinction vis- -vis the past year and the same should have been examined and considered while estimating the profits by the AO. AO has failed to take the same into consideration and therefore, the basis of estimation merely relying on the past history cannot be accepted as rational having failed to establish reasonable nexus with the material on record. Violation of provisions of section 40A(3) - Pr. CIT has rightly highlighted this fact which the Assessing has failed to examine during the course of assessment proceedings and the same should be considered as a relevant factor while estimating the profits by the Assessing officer. It is a clear case of failure on part of the AO to examine the matter ignoring the material available on record and thus, a matter of complete lack of application of mind. We therefore donot see any infirmity in the action of the Pr. CIT who has rightly intervened and exercised his revisionary jurisdiction u/s 263 of the Act. Increase in the partner s capital accoun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iven to the assessee firm. Given that the Assessing Officer has not examined the said transaction, there is no infirmity in the action of the ld. Pr. CIT in directing the Assessing Officer to do so in the set aside proceedings. Reflection of individual partner s bank accounts in the balance sheet of the assessee firm , apparently given that these are partner s personal bank accounts and not the bank accounts maintained by the partners on behalf of the assessee firm, we find it strange as to how the personal bank accounts have been reflected as part of the balance sheet of the assessee firm which is legally distinct entity viz a viz the partners as far as taxation laws is concerned. CIT was right in directing the Assessing Officer to examine these transactions in the partner s personal bank accounts and linkage thereof with the transactions of the assessee firm. It is a clear case where the order passed by the Assessing officer is erroneous and prejudicial to the interest of the Revenue. We therefore, do not see any infirmity in action of the ld. Pr. CIT who has rightly intervened and exercised his revisionary jurisdiction u/s 263 of the Act. Appeal of the assessee is dismiss ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Pr. CIT in his order and the contentions advanced by the ld. AR and ld CIT DR in this regard. 4. The first matter raised by the ld. Pr. CIT relates to rejection of books of accounts u/s 145(3) and the estimation of the profits by the Assessing Officer. Firstly, the ld. Pr. CIT(A) observed that the NP rate given in Form 3CD of the audit report is different from the NP rate disclosed by the assessee during the course of assessment proceedings and the Assessing Officer has failed to take notice of the difference so reported in the audit report and the submissions filed by the assessee. Further, regarding the estimation of profit after rejection of books of accounts, the ld. Pr. CIT(A) observed that the AO made a lump sum trading addition of ₹ 2.5 lakhs as against ₹ 3.00 lakhs made in the previous year. In this regard, the ld. Pr. CIT observed that while estimating trading addition, the AO has not taken into consideration the quantum of total turnover which has enhanced substantially during the year in comparison to the quantum of total turnover of immediate preceding year and the same should have been kept in view so that the trading addi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ibility of violation of provisions of section 40A(3) of the Act, the AO should have called for the ledger account of such expenditure and placed on record so as to affirm the fact that the case has also been examined from this angle also for the purpose of estimation towards trading addition so made by him. 7. In this regard, the ld. AR submitted that the Assessing Officer during the course of assessment proceedings rejected the books of accounts of the assessee firm u/s 145(3) of the Act and made trading addition. It was submitted that the Hon ble Rajasthan High Court in case of G. K. Contractor [2009] 19 DTR 305 (Raj.) has held that once the books of accounts are rejected and trading additions are made on estimate basis, no further additions related to expenses can be made in the hands of the assessee relying on the same set of books of accounts. It was accordingly submitted that such decision of the Hon ble Rajasthan High Court was required to be followed by the Assessing Officer even if the same was not expressively put forth before him. It was accordingly submitted that there was no error committed by the AO even if there are certain expenses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... In this regard, the ld. Pr. CIT observed that the nature and source of such transactions should have been ascertained by the AO from the assessee in the form of respective ledger account of M/s HGIEPL RPS (JV) or calling for the information from such concern u/s 133(6) of the Act. The ld. Pr. CIT further observed that as against the interest income receipts shown from FDRs only, the assessee has claimed heavy amount of expenses in respect of interest paid on secured loans and on partners capital. Thus chargeability of interest on the amount advances by the assessee firm to such concern should also have been examined by the AO. 11. In this regard, ld. AR submitted that during the relevant previous year, the assessee firm made capital contribution to AOP and all the relevant information, including all the Bank Statements of the assessee firm, capital account of partners were before the ld. AO and all the transactions to and from the assessee firm were through proper banking channel. It was accordingly submitted that since all such information was found to be correct by the ld. AO, the ld. AO thought it fit in not seeking any information from any sou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted that it is a clear case of lack of enquiry on the part of the Assessing officer on various counts and which have been duly highlighted by the ld Pr CIT in his order. He supported the findings of the ld Pr CIT. 16. We have heard the rival contentions and perused the material available on record. Firstly, regarding estimation of profits, we note that the Assessing Officer rejected the books of accounts by invoking the provisions of section 145(3). Once the books of accounts are rejected by the AO, then the AO is to assess the income of the assessee on the basis of best judgment. The Assessing officer while exercising his jurisdiction cannot act arbitrarily or capriciously. The assessment must proceed on judicial considerations in light of relevant material available on record. In other words, in any case of best judgment, though the element of guess work is involved, however the guess work should have nexus with the material on record and discretion must not be exercised arbitrarily or capriciously. We are therefore of the view that the ld Pr. CIT while exercising his revisionary jurisdiction u/s 263 can examine the basis for estimation, whether such basis for es ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... elopment and in fact, the assessee in its submission during the course of assessment proceedings has submitted the said fact before the Assessing officer. Besides that during the year, the assessee was also engaged in sub-contract work which was awarded by a Joint Venture by name of HGIEPL-RPS JV of which the assessee is one of the members. The fact of increase in turnover and the fact of involvement in a sub-contract during the year, which may have different profits margins depending upon nature of work and other parameters, and that too, with a related entity, is clearly a material development and distinction vis- -vis the past year and the same should have been examined and considered while estimating the profits by the Assessing officer. However, the Assessing officer has failed to take the same into consideration and therefore, the basis of estimation merely relying on the past history cannot be accepted as rational having failed to establish reasonable nexus with the material on record. Further, even going by the findings of the Assessing officer where he says that he makes an adhoc addition of ₹ 3,00,000 is clearly an arbitrarily exercise of discretio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ners capital account has not been examined by the Assessing Officer. Therefore, when the matter has not been examined at first place by the Assessing Officer, it would be difficult to hold that the order of the Assessing Officer is not erroneous and as far as whether the order is prejudicial to the interest of the Revenue or not, the same is subject matter of examination and had the matter been examined by the Assessing officer, it can be determined whether the joint venture has been finally assessed at MMR at claimed by the assessee and whether the shares of the members are determinate or not. Therefore, in absence of examination by the Assessing officer, it is difficult to hold that the issue raised by the ld Pr CIT has not caused any prejudice to the Revenue and therefore, we upheld the order of the ld Pr. CIT and do not see any infirmity in the action of the ld. Pr. CIT in directing AO to examine the same during set aside proceedings. 20. Regarding capital infusion by the assessee firm in the joint venture to the tune of ₹ 3.94 crores, which has been shown as loan and advance in the books of the assessee firm and the fact that the assessee has incurred h ..... X X X X Extracts X X X X X X X X Extracts X X X X
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