Asstt. Commissioner of Income Tax vs D.M. Brothers

Satish Chandra, J.—All the three appeals have been filed by the department against the judgments and orders dated 28-10-2004 and 29-5-2009 passed by the Tribunal, Lucknow for the assessment years mentioned above.

This Court vide an order dated 20-4-2005 has admitted the appeals on the following substantial question of law for the assessment years 1990-91, and 1991-92:

Whether, on the facts and in the circumstances of the case, the learned Tribunal is right in law in assessing the income by applying 3 per cent net profit rate on the gross receipts ?

Similarly, this Court vide order dated 17-11-2009 has admitted the Appeal No. 150 of 2009 for the assessment year 2005-06 on the following substantial question of law:

(Whether on the facts and circumstances of the case, the learned Tribunal has erred in law in confirming the order of the Commissioner (Appeals) directing to apply 3 per cent net profit rate as against 5 per cent applied by the assessing officer on gross receipts even after holding that the assessing officer rightly rejected the books of account as various expenses such as wages, labour, purchases remained unverifiable ?

Both the parties have agreed that the facts, circumstances and substantial questions of law of all the appeals are identical in nature. Hence, all the appeals are being disposed of by this consolidated order for the sake of convenience.

The brief facts of the case are that the Assessee is a partnership concern doing contract business from last 20 years for MES at various locations where MES awards contracts work. During the assessment years under consideration, the assessing officer found various discrepancies in the books of accounts and rejected the same. The assessing officer estimated 10.27 per cent, 11.96 per cent and 5 per cent net profit rate for the assessment years 1990-91, 1991-92 and 2005-06 respectively. In appeal, the Commissioner (Appeals) has affirmed the same but the Tribunal for the assessment years 1990-91 and 1991-92 has restricted the net profit rate at 3 per cent. The same stand was taken in the subsequent years. Being aggrieved, the department has filed the present appeals.

With this background, learned Counsel for the Appellant Sri D.D. Chopra submits that more or less the facts in all the assessment years under consideration are identical. He further submits that in the course of assessment proceedings for the year 1991-92, the assessing officer verified various purchases debited in accounts by making cross-verification from suppliers. Results of inquiries made from several suppliers reflected that the purchases were bogus. The discrepancy was confronted to the Assessee who replied that the books of accounts had been lost while the accountant was bringing them from Delhi to Lucknow. In addition to above, learned Counsel for the Appellant submits that the account of M/s Mutho Lal Dheeraj Mal, Jhansi had shown that certain payments received during the assessment year 1991-92 to the tune of Rs. 1,19,000 from Assessee but these payments did not find any place in the books of Assessee. He further submits that the Tribunal has erred in law in restricting the net profit rate with the reason that on cross-verification, the assessing officer found that the purchases were either inflated or bogus. These aspects were not considered by the Tribunal.

For the assessment year 1990-91, learned Counsel for the Appellant submits that the purchases shown by the Assessee were bogus as the firm M/s Ashok Kumar and Brothers never existed; and M/s Mutho Lal Dheeraj Mal against whom Rs. 40,100 were shown as credit, but it was found during investigation that there was nil balance as on 31-3-1990. So, he submits that the case of the Assessee was rightly reopened u/s 148/147 of the Income Tax Act.

According to him, the Tribunal has not given due weight age to the vital point that the assessing officer had brought on records, through investigations, facts which proved that the Assessee had inflated his expenses/liabilities in order to suppress profits and had not offered satisfactory explanations before the assessing officer when confronted with the facts. Lastly, he made a request to restore the order of the assessing officer for all the assessment years under consideration.

On the other hand, learned Counsel for the Assessee, Sri Amit Shuklasubmits that the Tribunal in its order dated 28-10-2004 directed that 3 per cent net profit rate be applied on the gross receipts. The Tribunal has taken into consideration the application made by the MES Contractor Association before the Chairman, CBDT to the effect that for the purpose of TDS for MES contractors, the net profit rate of 3 per cent should be taken into consideration.

Sri Amit Shukla learned Counsel for the Assessee has given the chart, where net profit rate was shown with effect from the assessment years 1988-89 to 2006-07. In the chart, the net profit rate was in the range of 1.88 percent to 3 per cent, which was accepted by the assessing officer either u/s 143(1) or 143(3) of the Income Tax Act. The chart furnished by the learned Counsel for the Assessee levelled that for the assessment years under consideration, the net profit rate was assessed by the assessing officer as under:

Asst. yr. NP rate

1990-91 10.27%

1991-92 11.96%

2005-06 5%

He further submits that in all the appeals, the Tribunal by following its earlier decision has upheld the net profit rate at 3 per cent. He also submits that for all the previous assessment years, the net profit rate was accepted by the Tribunal or assessing officer from 1.88 per cent to 3 per cent. He further submits that this is a question of fact and no substantial question of law is emerging from the impugned order passed by the Tribunal. He relied on the ratio laid down by this Court in Income Tax Appeal No. 75 of 2009, in the case of CIT v. Raghvendra Pratap Singh decided on 17-7-2009. He also submits that the entries in the books of accounts of a third party cannot be automatically used against the Assessee and they have to be proved according to law by examining the person concerned who can prove the correctness of the entries and allowing the Assessee against whom these entries were sought to be used, an opportunity of hearing, as per the ratio laid down in a case reported in Malwa Vanaspati & Chemicals Co. Ltd. v. CST 1995 UPTC 987. It was submitted that the said procedure was not followed by the department in the Assessees case. To support his argument, he relied on the ratio laid down in the following cases:

(i) Anis Ahmad and Sons Vs. Commissioner of Income Tax (Appeals), Kanpur and Another,

(ii) CIT v. G.K. Contractor (2009) 19 DTR (Raj) 305;

(iii) Purshottam Dass and Others Vs. Har Narain and Another,

Lastly, he made a request to dismiss the appeals filed by the department.

We have heard both the parties at length and gone through the material available on record.

In the instant case, various discrepancies were found by the assessing officer as has already been pointed out by the learned Counsel of the Appellant. In such a situation, the assessing officer has no option except to reject the books of accounts and estimate the income as the accounts were found defective and Section 145(2) of the Income Tax Act is applicable as per the ratio laid down in the case of Commissioner of Income Tax Vs. Thakurmal Bajranglal, as well as Ramjiwan Lal Vs. Commissioner of Income Tax, Therefore, we uphold the rejection of the books of accounts by the assessing officer for the assessment years under consideration. Additions to the total income shown by the Assessee are not necessary concomitant to an order passed u/s 145 or 143(2) of the Act. Relevance of accounting u/s 145 even in a best judgment case was pointed in the following passage in Commissioner of Income Tax Vs. Gotan Lime Khanij Udhyog,

Therefore, notwithstanding the rejection of the books of account, the material disclosed by the Assessee along with other material that may be collected by the Income Tax Officer forms the basis of computation of income. On that basis what conclusions are to be reached is independent of the results shown in the books of account, if any maintained by the Assessee. Section 145 only provides the basis on which computation of income is to be made for the purpose of determining the amount of tax payable by an Assessee. The provision by itself does not deal with addition or deletion in the income. Therefore, merely because there is some deficiency in the books of account or merely because of rejection of the books of account it does not mean that it must lead necessarily to additions in the returned income of the Assessee. What changes in either case is the basis for computing the income chargeable under the head Profits and gains of business or profession or Income from other sources. The result would depend on the other principles of computing the income. Therefore, we hold that merely changing the basis or method of arriving at the end result of working out the computation of taxable income under the Income Tax Act, necessarily does not result in devising profits or gains from business or other sources different from one returned by the Assessee, where he has returned his income and different from the result reached by the Assessee as per the method of accounting employed by him, by adopting a different basis by the assessing authority.

Similar views were expressed in the case of Commissioner of Income Tax Vs. Usha Tripathi, For determining the net profit rate and turnover, the past history of the Assessee is important. The fact that the Assessees books have been rejected in earlier years may be circumstances to be taken into account and justify the rejection in a subsequent year where they are maintained on the same pattern as before. But it should not be taken as a precedent that because they were not acted upon in an earlier year, they should be rejected in subsequent years too. However, once books are rejected, the past history of the case becomes, perhaps, the most relevant criterion for estimating the income as per the ratio laid down in the case of Delta Engineering Co. (P.) Ltd. Vs. Commissioner of Income Tax, Surrounding the circumstances may also be taken into account while estimating the income where the books are unreliable or lost.

In the instant case, by looking at the history, it appears that the net profit rate was in the range of 1.88 per cent to 3 per cent, which was accepted by the assessing officer himself or by the Tribunal which is a final fact finding authority as observed by the apex court in the case of Kamala Ganapathy Subramaniam and Another Vs. Controller of Estate Duty,

It may be mentioned that the estimation is a question of fact as per the ratio laid down in the following cases:

(i) Biraj Kavar Galada, rep. by her L/R M.C. Galada

(ii) Sanjay Oilcake Industries Vs. Commissioner of Income Tax,

During the assessment years under consideration, no different yardstick can be adopted and no interference is required as per the ratio laid down in the case of Zora Singh Vs. Commissioner of Income Tax, No question of law arises because the method adopted by the assessing officer for determining the net profit rate during the assessment year which is similar as in the other assessment years as per the ratio laid down in the case of Textile Agents Vs. Commissioner of Income Tax, The accounts were rejected and net profit rate was estimated which ultimately leads to the factual aspects of the case and normally no substantial question of law arises as per the ratio laid down in the case of Hargopal Singh Vs. Commissioner of Income Tax,

In view of the above, we decline to interfere with the impugned orders passed by the Tribunal which are hereby sustained along with the reasons mentioned therein.

Hence, we answer the questions for the assessment years 1990-91 and 1991-92 in affirmative, and for the assessment year 2005-06, in negative i.e. in favour of the Assessee and against the revenue.

In the result all the appeals are dismissed. No costs.