If books of account of the assessee is rejected by Assessing Officer, item-wise disallowance can not be done. It cannot be said that it shall be good for one purpose, and not for other. 

Short Overview When AO himself rejected the books of account of assessee after holding that the books did not show true results and made an estimated addition on GP basis, then other item-wise disallowance should not have been made. Therefore, no separate addition of alleged fictitious liability and addition under section 41 were called for and hence, the said additions were liable to be deleted.

AO made addition under section 41 on account of alleged fictitious liability.

It is held that  It was clear that books of account of assessee were rejected by AO and GP was estimated. Further, CIT(A) upheld the rejection of books of account and reduced the profit estimation. When the AO himself rejected the books of account of the assessee after holding that the books did not show true results and made an estimated addition on GP basis, then other item-wise disallowance should not have been made. Once books of account are rejected, then it cannot be said that it shall be good for one purpose, and not for other. Therefore, no separate addition of alleged fictitious liability and addition under section 41 could be made and hence, the said additions were accordingly, deleted.

Decision: In assessee s favour

Relied: CIT v. Bahubali Neminath Muttin (2016) 73 taxmann.com 100 (Karn) : 2016 TaxPub(DT) 4096 (Karn-HC).

 

IN THE ITAT, SURAT BENCH

PAWAN SINGH, J.M. & A.L. SAINI, A.M.

Devyani Tex Chem (P). Ltd. v. ACIT

ITA No. 1009/Ahd/2015

22 June, 2021

Assessee by: Sapnesh Sheth, CA

Revenue by: Anupama Singhla, Sr. DR

ORDER

A.L. Saini, A.M.

Captioned appeal filed by the assessee pertaining to assessment year (AY) 2004-05, is directed against the order passed by the learned Commissioner (Appeals)-1, Surat (in short the learned CIT (A) ) in Appeal No. CASI/130/2013-14 dt. 11-2-2015, which in turn arise out of an assessment order passed by the assessing officer under section 143(3) read with section 254 of the Act (hereinafter referred to as the Act ).

2. Grounds of appeal raised by assessee are as follows:

1. On the facts and in the circumstances of the case, the learned Commissioner (Appeals) has grievously erred in holding that sufficient opportunity of being heard has been given to the appellant by the learned assessing officer.

2. On the facts and in the circumstances of the case, the learned Commissioner (Appeals) has grossly erred in rejecting the appellant s claim that the order passed by the learned assessing officer is bad in law and deserves to be annulled.

3. On the facts and in the circumstances of the case, the learned. Commissioner (Appeals) has erred in arriving to a conclusion that the appellant has understated lease rental income to the extent of Rs. 6,83,500.

4. On the facts and in the circumstances of the case, the learned Commissioner (Appeals) has grossly erred in sustaining the addition on account of GP to the extent of Rs. 10,00,000 when no such addition is called for in the first place.

5. On the facts and in the circumstances of the case, the learned Commissioner (Appeals) has grossly erred in upholding the addition to the extent of Rs. 1,75,840 on account of alleged fictitious liability.

6. On the facts and in the circumstances of the case, the learned Commissioner (Appeals) has grievously erred in upholding the addition of Rs. 16,15,745 under section 41 of the Act.

7. On the facts and in the circumstances of the case, the learned Commissioner (Appeals) has grossly erred in sustaining the addition of prior period expenses of Rs. 30,000.

8. The appellant craves leave to add, alter, amend and/or withdraw any ground or grounds of appeal either before or during the course of hearing of the appeal.

3. Ground nos.1 and 2 raised by the assessee are general in nature, therefore does not require specific adjudication.

4. At the outset, learned counsel informs the Bench that assessee does not wish to press ground no.7, due to smallness of amount, therefore we dismiss ground no.7, as not pressed.

5. Now, we shall take ground nos.3 and 4 together, as these grounds raised by the assessee are identical and similar.

6. Facts of Ground No.3 and 4, which can be stated in brief are as follows. The assessee is in appeal before us (in second), during the original assessment proceedings, the books results were rejected mainly due to the reason that various information called for were not submitted by the assessee to assessing officer. In de novo proceedings, in pursuance of order of Tribunal, the learned assessing officer framed assessment order under section 143(3) read with section 254 of the Income Tax Act, 1961. In de novo proceedings, the assessee vide Submission, dt. 25-2-2013 has stated that it is not at all engaged in any production activity on its own as the factory has been de facto in substance leased out. However in order to avoid any legal complication arising out of tenancy the amount received as lease rent was shown as job work charges under the head Income and Income from textile business house under the head Other Income . However, since the assessee had shown job work income in the books of account they had to maintain the excise records reflecting the job work activity. It was further stated that during the course of assessment proceedings, they had submitted the extracts of the excise records vide their Submission, dt. 8-12-2006 reflecting the details of production, which in fact was not done by the assessee. The assessee only received the lease rentals by giving the factory on lease. Regarding power consumption the assessee filed copy of invoice raised to various parties against recovery of power bills. Further the assessee submitted various details viz. quantitative records of trading of chemical, activity wise trading account with comparative figures, ledger account of salary paid to workers in the textile unit, bills, vouchers, sale bills, purchase bills etc. The details furnished by the assessee have been examined by assessing officer. On examination of the same it cannot be ascertained by assessing officer that whether the books of account are bogus or the submission of the assessee is bogus. The assessee has stated that although it had leased out the factory and it was receiving lease rent but it had fabricated the books of account to show that as job work and for this purpose it had also fabricated the excise register. The assessee had admitted this in writing during the course of original assessment proceedings. The parties have deducted TDS @ 2% which is the normal rate of TDS for job work. If this income was rental then the TDS should have been 20%. Therefore, assessing officer held that the books of the assessee and its accounting is, contrary to all norms and conventions and the books of account are, therefore, not believable at all. The assessee failed to give a written agreement with the parties regarding lease rental and hence even this story is not believable. It is strange and peculiar case that the assessee itself says that it has manufactured and fabricated its books of account, leased out the factory but does not produce the lease agreement to prove that the assessee had leased out the factory. The assessing officer also noted that assessee has not only manufactured its books of account but also fabricated the excise registers. The assessing officer also observed that it is not only a case of rejection of books of account but a clear cut case of prosecution for false verification and for fabrication of record.

Hence, there is no doubt that the books of account do not show the true state of affair, the correct profits cannot be determined from the books of account. Thus, assessee has failed to come forward with any fresh or convincing evidences in support of its claim and the position of the evidences remained same as it was in the original assessment proceedings. In view of the above defects in the accounts of the assessee, the books of accounts were rejected by assessing officer under section 145(3) of the Act and the gross profit is estimated at average GP rate of last two years, which comes to 22.64% (19.81 + 25.46%). Accordingly the gross profit is worked out at Rs. 53,35,130 being 22.64% of the turnover and same was added to the total income of the assessee.

7. Aggrieved by the order of the assessing officer, the assessee carried the matter in appeal before the learned Commissioner (Appeals) who has partly allowed the appeal of the assessee observing as follows:

5.6.1 After going through the submission made by the appellant inter alia comments of the learned assessing officer, it is but obvious that the appellant has fabricated the books of accounts and the same deserve to be rejected under section 145(3) of the Act and, therefore, the action of the assessing officer with regard to rejecting books of accounts is upheld. Now, the question comes as what should be the estimation of profit. The appellant himself admitted that it had received Rs. 15,58,500 as lease rent income (shown as textile income) from different parties viz M/s. Kartik Enterprise, M/s. Status Synthetics and M/s. Diamond Rayons. Against this, in the account submitted vide written Submission, dt. 14-11-2014 in respect of Texturizing Division the appellant has shown lease income at Rs. 8,75,000.

Thus, there is a clear-cut suppression of income to the extent of Rs. 6,83,500 (15,58,500 -,8,75,000). In order plug any other revenue leakage the addition is sustained to the extent of Rs. 10,00,000. In view of this, addition of Rs. 10,00,000 is sustained and the balance of addition of Rs. 43,35,130 (Rs. 53,35,130 – Rs. 10,00,000) is ordered to be deleted. This ground is partly allowed.

8. Aggrieved by the order of the learned Commissioner (Appeals), the assessee is in appeal before us (in second round).

9. Learned counsel for the assessee submits that assessee s books of accounts are audited and no specific defect has found by the assessing officer, therefore rejection of books of accounts under 145(3) is not valid and not in accordance with law. The assessing officer has not gone through the return of income and statements filed by the assessee. The assessing officer has not identified the nature of activities carried on by the assessee-company. The assessing officer has also overlooked the fact that assessee is a trader and a transporter as well as he let out certain properties and earned rental income. The assessee has filed GP Ratio during the assessment proceedings, however, the assessing officer has not applied his mind and rejected the books of accounts mechanically. The assessee s books of accounts should not be rejected. Hence, learned counsel prayed the Bench to delete the addition sustained by learned Commissioner (Appeals).

10. Ms. Anupama Singhla, learned DR for the revenue has primarily reiterated the stand taken by the assessing officer, which we have already noted in our earlier para and is not being repeated for the sake of brevity.

11. We have heard both the parties and carefully gone through the submissions put forth on behalf of the assessee along with the documents furnished and the case laws relied upon, and perused the facts of the case including the findings of the learned Commissioner (Appeals) and other material brought on record. We note that there is a clear cut finding given by the learned Commissioner (Appeals) that assessee has fabricated books of accounts that is why the books of accounts have been rejected by the assessing officer under section 145(3) of the Act. The assessee did not submit required documents during the assessment stage. Assessee has manufactured and fabricated its books of account. The assessee has also fabricated the excise register. We have gone through the order of the learned Commissioner (Appeals), in the light of the above narrated facts, and noted that conclusion arrived at by learned Commissioner (Appeals) does not require interference.

12. Therefore, we confirm and approve the order of learned Commissioner (Appeals).

13. Now, we shall take ground no.5 and 6 raised by assessee which relates to addition of Rs. 1,75,840 on account of alleged fictitious liability and addition of Rs. 16,15,745 under section 41 of the Act.

14. We note that assessing officer has rejected the books of accounts of the assessee under section 145(3) of the Act and gross profit of the assessee was estimated at average gross profit rate of last two years which comes to 22.64% (19.81 + 25.46%). Accordingly, the gross profit is worked out at Rs. 53,35,130 by assessing officer (being 22.64% of the turnover) and same was added to the total income of the assessee. On appeal, learned Commissioner (Appeals) upheld the rejection of books of accounts stating as follows:

..the appellant has fabricated the books of accounts and the same deserve to be rejected under section 145(3) of the Act and, therefore, the action of the assessing officer with regard to rejecting books of accounts is upheld.

After upholding the rejection of books of accounts, the learned Commissioner (Appeals) has further reduced the gross profit estimation.

15. From the above facts it is abundantly clear that books of accounts of the assessee were rejected by the assessing officer and on appeal, learned Commissioner (Appeals) upheld the rejection of books of accounts and reduced the profit estimation. We also upheld the order of learned Commissioner (Appeals), so far rejection of books of accounts are concerned, that is, learned assessing officer has rightly rejected the books of accounts of the assessee which was confirmed by the learned Commissioner (Appeals). Where the assessing officer himself rejected the books of account of the assessee after holding that assessee`s books do not show true results and made an estimate addition on gross profit basis then other item-wise disallowance should not be made. For that reliance can be placed on the judgment of the Hon`ble Karnataka High Court in the case of Bahubali Neminath Muttin (2016) 73 taxmann.com 100 (Karn) : 2016 TaxPub(DT) 4096 (Karn-HC), wherein it was held as follows:

15. The principle that if a finding of fact is not challenged as being perverse, the High Court is bound to accept such finding. Therefore, as no such substantial question of law has been framed and the questions pertain to findings of fact, which cannot be said to be perverse as it is evident that the books of accounts of the respondent had been rejected by the assessing authority, in which case the same books of accounts could not be relied upon in an addition on account of trade creditors and also for arriving at the closing stock. This is an established principle as has been held in the decisions relied upon by the respondent namely Indwell Constructions case (supra), Banwari Lal Banshidhar s case (supra), Aggarwal Engg. Co. s case (supra) and Amman Steel & Allied Industries case (supra).

Thus, we note that, once books of account are rejected then it cannot be said that it shall be good for one purpose and not for other and, therefore, no separate addition of Rs. 1,75,840 of alleged fictitious liability and addition of Rs. 16,15,745 under section 41 of the Act can be made. Therefore, we delete both additions of Rs. 1,75,840 and Rs. 16,15,745.

16. In the result, the appeal filed by the assessee is partly allowed.