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TMI Blog2022 (9) TMI 294X X X X Extracts X X X X X X X X Extracts X X X X ..... oposition which cannot be subscribed on our part. If the observations of the AO are to be accepted, then, it would mean that once an assessee is visited with search proceedings, and he after considering the incriminating documents unearthed during the course of such proceedings comes forth with a disclosure either regards his modus operandi or unaccounted income, then, in all the subsequent years despite there being no iota of evidence that the assessee had continued with his malpractices and modus operandi to generate unaccounted income, it is to be presumed otherwise and has to be made to suffer because of his chequered past. By no means such an incomprehensible and baseless observation of the AO can be accepted. Also, we concur with the view taken by the CIT(Appeals) that even otherwise as the net profit rate disclosed by the assessee during the year under consideration, as demonstrated by him, was better than those of other similarly placed assessee s of his trade line and was commensurate with that prevailing in the industry, therefore, no adverse inferences on the said count itself i.e as regards the profit disclosed by him was liable to be drawn. As regards the refe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... udicating the issue erred in not appreciating that the books of accounts were rejected in the A.Ys.2006-07 to 2012-13 voluntarily by the assessee before the settlement commission. 2. On the facts and in the circumstances of the case, the Ld. CIT(A) erred in not appreciating that the assessee before the Hon ble Settlement Commission accepted the Net profit@ 10% and that when there is no change in the business and modus operandi of the assessee s business, the Assessing officer was justified in estimating 10% net profit as a matter of legitimate corollary to meet the fair ends of justice. 3. Succinctly stated, the assessee who is a civil contractor and derives income from the business of construction of canals, dams and other projects had e-filed his return of income for assessment year 2013-14 on 30.03.2014 declaring an income of Rs.2,19,92,310/-. Case of the assessee was thereafter selected for scrutiny assessment under Sec. 143(2) of the Act. 4. During the course of the assessment proceedings, it was observed by the AO that search and seizure proceedings were conducted on the assessee on 17.10.2011 u/s 132(1) of the Act. On a perusal of the records it was gathered by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ly, the AO on the basis of his conviction that the opening and the closing balances of the various ledger accounts of the assessee for the year under consideration i.e AY 2013-14 could not be relied and acted upon, thus, rejected his books of accounts. Observing, that as the assessee had on a suo-motto basis after rejecting his books of accounts for the preceding years i.e AYs 2006-07 to 2012-13 declared his income from contract business @10% of the amount of gross contract receipts, therefore, called upon him to put forth an explanation that as to why the estimation of his income from contract business may not be similarly worked out i.e @10% of the amount of his gross contract receipts for the year under consideration. Fortifying his aforesaid conviction as regards estimation of the assessee s income from contract business @10% of the amount of gross contract receipts, the AO had drawn support from certain observations that were recorded by the ITSC, Kolkata in its order passed u/s 245D(4), dated 28.09.2015, viz. (i). that the assessee had suo-motto rejected his books of accounts for AYs 2006-07 to 2012-13 and had offered to declare his income from contract business for all of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ot persuaded to subscribe to the view taken by the AO. It was observed by the CIT(Appeals) that the contention of the AO that once the rate of profit was voluntarily declared by an assessee in any previous year owing to the facts and circumstances of that year, the same rate of profit could be made a basis for assessing his income of the subsequent years without considering the facts and circumstances of the earlier years or the year in question was devoid and bereft of any merit and could not be accepted. It was observed by the CIT(Appeals) that as each year assessment was a separate assessment, thus, the same would not govern that of the later years. It was further observed by him that the assessment of each year has to be framed after separately considering the facts and circumstances of the said year. Elaborating on the facts involved in the case of the assessee before him, it was observed by the CIT(Appeals) that the books of accounts of the assessee were subjected to a tax audit and the same a/w bills, vouchers, confirmations etc. were produced before the AO who had after carrying out necessary examination and cross-verifications had not pointed out any infirmity in the same. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the net profit rate that was adopted by the assessee in the preceding years i.e AYs 2006-07 to 2012-13, without giving any cogent reason and justification for adopting of the same during the year under consideration. Also, it was observed by the CIT(Appeals) that the AO had not placed on record any comparable instances of similarly placed entities in the trade line which would justify adoption of the net profit rate @10% of the amount of gross contract receipts. It was, thus, noticed by the CIT(Appeals) that the AO had failed to place on record any supporting or corroborating material which would justify adoption of net profit @10%. Observing, that as a decline in the net profit rate during a year cannot on a standalone basis justify rejection of the book results of an assessee u/s 145(3) of the Act, the CIT(Appeals) was of the view that there was no material which would point out towards unreliability of the books of accounts of the assessee. Rebutting the adoption of the NP rate @10% of the amount of gross receipts by the AO, it was observed by the CIT(Appeals) that the profit declared by the assessee was better than that of the similarly placed entities whose cases had been sc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the contention of the AO that once the rate of profit has been voluntarily declared by the appellant in any previous assessments owing to the facts and circumstances of that year or those years the same rate of profit can be made the basis for assessing the income of other subsequent years without considering the facts and circumstances of earlier years or the year in question. Each year assessment is a separate assessment which attains finality for that year, unless disturbed by cogent facts and material, and does not govern later years. The facts and circumstances of each year are to be considered separately and must find reference in the assessments completed. From the material before me I observe that the books of accounts of the appellant were subject to tax audit which were produced before the AO and were examined by him including the bills and vouchers. In the period covered under the Settlement Commission proceedings there were specific findings from the incriminating material to the effect that inflated bills and expenses were recorded in the books of accounts to cover up the expenses of which proper bills were not available. This fact has been recorded by the AO in his ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n of the books of accounts for the AY 2006-07 to 2013-14 are prevailing for the year under consideration. Coming to adoption of net profit @ 10% of gross receipts it is seen that the AO had not pointed out suppression of income based on cogent material. There is no material showing financial nexus for making the additions, and no document showing any financial dealings by the appellant justifying the adoption of net profit @ 10% has been referred in the assessment order. The facts and circumstances of the present case reveal that the AO has not appreciated the facts and circumstances as well as the submissions put forth by the appellant. The rate of 10% of gross receipts has been stretched by the AO from the AY 2006-07 to 2013-14 up to the assessment year 2014-15 which does not have any correlation with the earlier years. The assessment order is silent on comparable instances of other entities engaged in identical business of civil construction showing net profit @ 10% of the gross receipts. There appears no cogent material before the AO nor has he brought any such evidence on record to corroborate the basis for adoption of net profits @ 10%. Importantly the low net profit ra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ny such specific or material defect in the books of accounts on the basis of which the deducing of the correct profits of the assessee s business for the aforesaid reason was jeopardized. 10. Before adverting any further, we deem it fit to cull out the provisions of Sec. 145(3) of the Act which contemplates the circumstances under which the books of accounts of an assessee can be rejected, and reads as under: (3). Where the Assessing Officer is not satisfied about the correctness or completeness 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. On a perusal of the aforesaid statutory provision, it can safely be gathered that the books of accounts of an assessee can be rejected on satisfaction of either of the three situations, viz. (i). where the AO is not satisfied about the correctness or completeness of the accounts of the assessee; or (ii). where the method of accounting i.e, cash or mercantile system of accounting is not being regul ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ncomplete or incorrect, is supported by the judgment of the Hon ble High Court of Himachal Pradesh in the case of CIT Vs. Swastik Food Products (2015) 275 CTR 109 (HP). 11. As observed by the CIT(Appeals), the fact as it so remains is that the AO had rejected the books of accounts of the assessee for the year under consideration i.e AY 2013-14, for the reason that as the assessee in his application filed before the ITSC, Kolkata for the earlier years i.e AYs 2006- 07 to 2012-13, had after referring to the peculiar nature of his business and admitting certain irregularities in his books of accounts for the said preceding years, viz. that as proper bills of expenses could not be obtained by him therefore, in order to set-off the same either some bills were arranged from outside parties or the expense were inflated, had on a suo-motto basis declared his income from the contract business @10% of the amount of the gross contract receipts of all the said years, therefore, he was of the view that as the nature of the assessee s business during the year under consideration remained the same and the turnover/gross receipts was also well above those of the aforementioned preceding years, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aspect that the AO had failed to take cognizance of is that in the aforementioned preceding years the assessee in his application filed before the ITSC, Kolkata had though categorically admitted that due to the peculiar nature of his business as proper bills could not be obtained, therefore, to set-off the same either bills were arranged from outside parties; or in some cases such unaccounted expenses were set-off by introducing inflated expenses. As such, the aforesaid admission of the assessee in his application filed with the ITSC. Kolkata for the preceding years i.e AYs 2006-07 to 2012-13 in itself formed a substantial piece of evidence about the existence of the aforesaid infirmities and irregularities in his books of accounts for the said preceding years. However, neither of any such infirmity, viz. (i). booking of any bogus purchases; or (ii). inflating of expenses by the assessee had either been pointed out by the AO while framing the assessment in the case of the assessee for the year under consideration i.e AY 2013-14 or ever admitted by the assessee. Apart from that, it is also a matter of fact borne from the record that though certain incriminating documents evidencing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ce, it is still to be taken that he would be continuing with the same malpractices in the succeeding years, in our considered view is such a broad and incomprehensible proposition which cannot be subscribed on our part. As stated by the Ld. AR, and rightly so, as each years assessment is a separate assessment, therefore, the facts emanating from the assessment for a specific year cannot in the absence of any supporting evidence be extrapolated to another year. Our aforesaid conviction is supported by the judgment of the Hon ble Supreme Court in the case of, viz. (i). M.M Ipoh Ors. Vs. CIT (1968) 67 ITR 106 (SC); (ii). ITO Vs. Murlidhar Bhagwandas (1964) 52 ITR 335 (SC); and (iii). Bharat Sanchar Nigam Ltd. Anr. Vs. UPI Ors. (2006) 282 273 (SC). Interestingly, if the observations of the AO are to be accepted, then, it would mean that once an assessee is visited with search proceedings, and he after considering the incriminating documents unearthed during the course of such proceedings comes forth with a disclosure either regards his modus operandi or unaccounted income, then, in all the subsequent years despite there being no iota of evidence that the assessee had continued wi ..... X X X X Extracts X X X X X X X X Extracts X X X X
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