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Case Number
Judges
  • Ajay Rastogi
  • J.K Ranka, JJ.
Acts
  • section 260A of the Income tax Act, 1961 (for short the Act),
  • provisions of section 145(3)
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Cites
Cited by
Citation Codes
Equivalent Citations
citation codes
Case Number
Judges
  • Ajay Rastogi
  • J.K Ranka, JJ.
Acts
  • section 260A of the Income tax Act, 1961 (for short the Act),
  • provisions of section 145(3)
See more information ...
Smart Summary

Structured Summary of the Opinion (J.K. Ranka, J.)

Factual and Procedural Background

This appeal under section 260A of the Income-tax Act, 1961 was directed against the Income-tax Appellate Tribunal (ITAT), Jaipur Bench, order dated 30 January 2014 in I.T.A. No. 583.JP/2012 relating to assessment year 2009–10.

The respondent (an assessee partnership firm, civil contractor) filed returns for AY 2009–10 declaring contract receipts of Rs. 12,32,57,523 and a net profit rate of 5.38% (subject to partner interest and remuneration). The Assessing Officer (AO) raised queries during assessment and the assessee explained that the business was largely unorganised, accounts were maintained poorly at various sites by a labour supervisor with limited accounting knowledge, and that turnover and net profit were better compared to the preceding five years.

Dissatisfied, the AO invoked section 145(3) and rejected the book results, making disallowances totalling Rs. 1,17,75,202 across multiple expense heads, which produced an assessed net profit rate of 13.7%.

On appeal, the Commissioner of Income-tax (Appeals) (CIT(A)) upheld invocation of section 145(3) but made an ad hoc addition of Rs. 10 lakhs (on account of possible leakage) and deleted the remainder. Both parties appealed to the ITAT. The ITAT, noting prior Tribunal practice applying a 5% rate in earlier years for the same assessee, sustained an ad hoc addition of Rs. 5 lakhs (reducing the CIT(A)'s Rs. 10 lakhs) and otherwise allowed the appeal. The Revenue challenged the ITAT's order before this Court under section 260A.

Legal Issues Presented

  1. Whether any substantial question of law arises under section 260A from the ITAT's factual findings that the ad hoc addition should be limited to Rs. 5 lakhs and that the AO's larger disallowance (yielding 13.7% net profit) was not justified.
  2. Whether the invocation of section 145(3) and the AO's disallowances could be sustained in the absence of comparable evidence or concrete material justifying the AO's application of a 13.7% net profit rate.

Arguments of the Parties

Revenue's (Appellant) Arguments

  • The Assessing Officer raised multiple queries and the assessee failed to produce vouchers or relevant information to substantiate expenses shown in the profit & loss account; therefore the AO was justified in rejecting book results and making disallowances.
  • Past acceptance of results in earlier years cannot preclude addition in the present year where vouchers are not produced; a mere similarity or slight rise in trading results compared to past years is not a bar to making additions.
  • The AO's order was well-reasoned and substantial questions of law arise from the ITAT's deletion of most of the additions; the appeal should be admitted.

Assessee's (Respondent) Position — as recorded

  • The assessee explained the nature of an unorganised contracting business with accounts maintained at various sites and accounting performed by a labour supervisor lacking formal accounting knowledge, which affected documentary evidence and accounting coordination.
  • The assessee pointed to better turnover and net profit compared to the previous five years and argued that the book results should be accepted in view of past consistency.
  • Before appellate authorities, the assessee's past history (including Tribunal decisions applying a 5% net profit rate in earlier years) was relied upon to contest the AO's large ad hoc disallowances.

Table of Precedents Cited

Precedent Rule or Principle Cited For Application by the Court
Chhabildas Tribhtwandas Shah v. CIT, [1966] 59 ITR 733 (SC) The question whether income can be properly deduced under a method of accounting is a question of fact; in appeals the court is generally concerned whether there is any material supporting the tribunal's finding. The Court relied on this to stress that invocation of section 145(3) and related conclusions are factual matters and that the present challenge must show absence of material; the Court treated the ITAT's finding as a factual conclusion supported by record.
CIT v. Singhal Natural Stone P. Ltd., [2012] 21 Taxmann.com 493 (Raj) Finding rejecting income to a particular extent was based on appreciation of material; hence no substantial question of law arises. Used to support the proposition that appellate courts should not re-open factual appreciation where the tribunal has recorded a reasoned factual finding.
CIT v. Amrapali Jewels P. Ltd., [2012] 19 Taxmann.com 207 (Raj) Once Tribunal accepts factual explanation and deletes additions after appreciating evidence, no substantial question of law arises unless factual finding is perverse, without reasoning, or unrelated to law. Applied to explain that this Court will not undertake a fresh de novo factual inquiry where the Tribunal's factual conclusion is within reason; the Court found no such perversity here.
Pansari Gems International v. CIT, [2013] 33 Taxmann.com 667 (Raj) Where facts and evidence are properly appreciated by the CIT(A) and ITAT, no substantial question of law arises from their orders. The Court cited this to reinforce that the ITAT's fact-based conclusion does not present a substantial question of law for interference under section 260A.
CIT v. Dr. A.P. Bahai, [2010] 322 ITR 71 (Raj) The opinion cites this judgment among other relevant authorities on the general point that estimation/invocation of s.145(3) involves factual findings. The opinion lists this case as one of several authorities supporting that such matters are findings of fact; the text does not elaborate a specific rule beyond that general use.
CIT v. Jaimal Ram Kasturi, [2013] 33 Taxmann.com 315 (Raj) Cited as an authority addressing the factual nature of estimation/rejection of books under s.145(3). Listed among authorities; the opinion does not provide an extended statement of principle specific to this case beyond its inclusion.
Commissioner, Sales Tax, U.P. v. Girja Shanker Awanish Kumar, (1996) 11 SCC 648; [1997] 104 STC 130 (SC) Referenced among other precedents relevant on the question of fact-based assessment and estimation principles. Cited in a list of authorities; the opinion does not state a discrete rule from this decision in the provided text.
CIT v. Jas Jack Elegence Exports, [2010] 324 ITR 95 Cited as relevant jurisprudence on assessment/estimation issues. Included in the list of authorities; the opinion does not set out a particular principle from it within the excerpted text.
Arya Confectionery Works v. Commissioner of Income-Tax, M.P.-I, [1983] 143 ITR 814 (MP) Cited among authorities on assessment/estimation practices. Mentioned in the list; the opinion does not describe a distinct rule from this decision in the provided text.
Awadhesh Pratap Singh Abdul Rehman & Brothers v. CIT, [1994] 210 ITR 406 (All) Cited as an additional precedent on related issues of assessment/estimation. Listed by the Court among other relevant cases; no specific rule from the case is extracted in the opinion excerpt.
CIT v. Inani Marbles P. Ltd., [2009] 316 ITR 125 (Raj) Supports the proposition that past history of the assessee is a reliable guideline in making or resisting estimation/addition. The Court relied on this and similar authorities to hold that past Tribunal practice in the assessee's earlier years (applying 5%) was a relevant factor against the AO's large ad hoc disallowance.
Action Electricals v. Deputy Commissioner of Income-Tax, [2002] 258 ITR 188 (Delhi) Past history of the assessee is a reliable guideline for estimation/addition by the AO. The Court cited this decision (along with Inani Marbles) to emphasize that where past years consistently show a particular rate, that past history is an influential guide and the AO must produce comparable evidence to justify a higher applied rate.

Court's Reasoning and Analysis

The Court proceeded through the following analytical steps, strictly on the basis of the material recorded in the impugned order:

  1. It acknowledged that the AO validly invoked section 145(3) of the Income-tax Act and that this invocation was upheld by the lower appellate authorities (CIT(A) and ITAT).
  2. It observed the legal principle — drawn from precedent — that invocation of section 145(3) and estimation of income under that provision is essentially a finding of fact, and that appellate interference is limited to testing whether there is material to support such a factual conclusion.
  3. It examined the assessment order and found the AO's order to be silent on justification for applying a 13.7% net profit rate: the AO did not produce comparative material (i.e., similarly situated traders/businessmen showing higher net profit) nor concrete evidence explaining why the ad hoc percentage disallowances (generally 10% or 20% across heads) would together justify the uplift to 13.7%.
  4. The Court compared the trading results over six years (2004–05 through 2009–10) as reproduced in the impugned order. The historical record showed that in three earlier years appeals had reached the Tribunal and the Tribunal applied a 5% rate in those years; the immediate preceding year (2008–09) showed 5.02% and was accepted without scrutiny; in the year under appeal 2009–10 the assessee declared 5.38% and the ITAT's outcome effectively adjusted to 5.78% by sustaining only an ad hoc Rs. 5-lakh addition.
  5. The Court accepted the Revenue's general contention that slight or technical improvements in profit margins should not automatically preclude additions where accounts appear manipulated; however, it held that this made it incumbent on the AO to bring concrete, comparable evidence to justify a substantially higher assessed rate — which the AO did not do.
  6. Relying on a line of authorities (including Chhabildas Shah, and several High Court decisions), the Court concluded that the ITAT's and CIT(A)'s conclusions were findings of fact based on appreciation of evidence and past history; the AO's blanket percentage disallowances without supporting comparators or materials were inadequate to sustain the larger addition.
  7. Therefore, the Court found that no substantial question of law arose from the ITAT's order because the ITAT and CIT(A) had engaged in permissible factual appreciation supported by the assessee's past record and the absence of AO's comparators/evidence.

Holding and Implications

DISMISSED, in limine.

Implications and direct effects (as recorded in the opinion):

  • The Revenue's appeal under section 260A was dismissed summarily; the ITAT's reduction of the ad hoc addition to Rs. 5 lakhs (from the CIT(A)'s Rs. 10 lakhs and the AO's larger disallowances) stands.
  • The Court treated the matter as a factual appreciation: because the AO failed to produce comparators or other concrete material to justify assessing a net profit at 13.7%, the larger additions were not sustainable. The appellate factual conclusions by CIT(A) and the ITAT therefore do not raise a substantial question of law for interference.
  • No broader legal precedent was fashioned by this judgment beyond reaffirming existing principles that (a) invocation of s.145(3) and estimation of income is a finding of fact and (b) past history of the assessee (or similar businesses) is a relevant guideline — and that an AO must bring concrete materials to justify departures from historically consistent results.

Note: This summary is restricted to and derived exclusively from the facts, reasoning, citations and conclusions contained in the provided opinion text. Where the opinion simply listed authorities without extracting specific propositions from them, the summary records the citation and notes the limited use made of it in the Court's reasoning.

Show full summary ...

    Commissioner Of Income-Tax v. Gupta, K.N Construction Co.

    J.K Ranka, J.:— The instant appeal under section 260A of the Income tax Act, 1961 (for short “the Act”), is directed against the order of the Income-tax Appellate Tribunal, Jaipur Bench, Jaipur (for short “the ITAT”), dated January 30, 2014, passed in I.T.A No. 583.JP/2012 relating to the assessment year 2009–10.

    2. Brief fats which have been noticed from the impugned order and other material on record are that the respondent-assessee being a partnership firm is engaged in the business of civil contractor and has furnished his income-tax return for the above assessment year under appeal along with the audit report and other information. The respondent-assessee declared a total contract work at Rs. 12,32,57,523 declaring a net profit rate of 5.38 per cent, subject to interest and remuneration to the partners. On a perusal of the order, it is noticed that the net profit rate in the immediate preceding assessment year, i.e, the assessment year 2008–09 was 5.02 per cent. During the course of the assessment proceedings, the respondent-assessee was directed to provide material to justify the expenses claimed in the profit and loss account vis-a-vis receipts and a number of queries were raised. The assessee appears to have replied to the various queries raised by the Assessing Officer and it was admitted that the nature of work of the assessee is fully unorganised and that the work is carried out at various sites, where he could not maintain a proper system of accounting. It was also admitted by the assessee that the accounting work was conducted by the labour supervisor, who was also promoted from amongst labourers and did not have a knowledge of accounting and was unable to maintain coordination between assessee and suppliers and those sites. It was further submitted that the turnover and the net profit rate is better vis-a-vis the last five preceding years and, therefore, the book results should be accepted.

    3. However, the Assessing Officer was dissatisfied with the explanation offered by the assessee and not only invoked the provisions of section 145 of the Act and rejected the book results but he further disallowed the expenses to the tune of Rs. 1,17,75,202 out of the major heads of the expenses, namely, out of purchases of Rs. 7,50,39,180 disallowed at 20 per cent., out of labour charges of Rs. 3,72,48,425 disallowed 10 per cent., out of salary to the tune of Rs. 9,48,000 disallowed 20 per cent., out of vehicle expenses of Rs. 69,850 disallowed 20 per cent., out of vehicle charges of Rs. 69,850 disallowed 20 per cent., out of water charges of Rs. 49,252 disallowed 20 per cent., out of welfare expenses of Rs. 16,245 disallowed 20 per cent., out of vehicle insurance of Rs. 17,190 disallowed 20 per cent., and out of other deduction of Rs. 12,90,245 disallowed Rs. 2,68,219. Thus, the Assessing Officer in effect by disallowing Rs. 1,17,75,202 determined the net profit at 13.7 per cent.

    4. Dissatisfied with the addition of Rs. 1,17,75,202 an appeal was preferred before the Commissioner of Income-tax (Appeals) (for short “the CIT(A)), before whom detailed explanation was offered and the Commissioner of Income-tax (Appeals), after considering the facts on record, was of the view that the provisions of section 145(3) have rightly been invoked as various defects have been noticed by the Assessing Officer and the assessee has not been able to give satisfactory explanation with regard to the deficiencies noticed by the Assessing Officer. The Commissioner of Income-tax (Appeals) was also of the view that the results of the assessee are to be compared alone and in view of the past history, where the Tribunal in the case of the assessee itself applied the rate of 5 per cent., therefore, the Commissioner of Income-tax (Appeals), under such circumstances, sustained and ad hoc addition of Rs. 10 lakhs on account of possible leakage of income of profit and the appellant and deleted the balance addition.

    5. Aggrieved by the order of the Commissioner of Income-tax (Appeals), both the parties preferred separate appeals before the Income-tax Appellate Tribunal. The learned Tribunal, after analysing the evidence on record and the fact that in the immediate past assessment years in the case of assessee itself, it was repeatedly held by the Tribunal that the rate of 5 per cent, is reasonable and since in the present year though the net profit rate of 5.38 per cent, had been shown but still sustained an ad hoc addition of Rs. 5 lakhs as against Rs. 10 lakhs made by the Commissioner of Income-tax (Appeals). It is the deletion of an addition of about Rs. 1.12 crores, which has been assailed before us by the Revenue.

    6. Mr. Praveen Verma, Assistant Commissioner of Income-tax, appearing on behalf of the Revenue, submitted that in the instant case several queries were raised and the assessee was unable to produce the vouchers and/or relevant information to substantiate the claim made in the profit and loss account. He contended that though the results shown may be technically said to be better in comparison to the past years but when the very vouchers have not been produced, therefore, mere acceptance in the past years cannot be a ground not to make addition in the subsequent years like the present one, where the assessee failed to substantiate the expenses claimed. He further submitted that if the said analogy is accepted then in all such cases, where there is slight rise in the very trading result or results are almost similar vis-a-vis in the past year then the addition can never be made. He contended that the order of the Assessing officer was well reasoned one and substantial question of law arises out of the said impugned order, therefore, the appeal deserves to be admitted.

    7. We have considered the submissions of the officer appearing on behalf of the Revenue and have perused the impugned order so also the orders of the lower authorities.

    8. In our view, no substantial question of law can be said to arise out of the impugned order as it is essentially a finding of fact by the two appellate authorities. It is admitted fact that the provisions of section 145(3) of the Act have rightly been invoked by the Assessing Officer so also upheld by the appellate authorities but in a case where the provisions of section 145(3) are invoked, one has to consider either the past history of the assessee or history of similarly situated other businessmen/traders. However, on a perusal of the assessment order, we notice that the Assessing Officer is absolutely silent as to justifying the net profit rate to the extent of 13.7 per cent, whether the addition/disallowance made by the Assessing Officer can be said to be appropriate. The assessment order is totally silent about similarly situated other traders/businessmen showing the net profit over and above what the assessee had shown and compared by the Assessing Officer and no evidence has been brought on record as to how the Assessing Officer was justified in applying the net profit rate at 13.7 per cent. In our view, while comparing with the past history, if the results are fair and reasonable then invariably no addition need to be made. It would be appropriate to reproduce the trading results of the assessee for the year under appeal including the last five years, which reads as under:

    Year Turnover NP declared Percentage of NP declared Percentage applied in assessment done by AO Appeal effect 2009–10 123257523 6629223 5.38 13.7 5.78 by ad hoc add of Rs. 5 lakhs 2008–09 106227305 5338548 5.02 5.02 Accepted without scrutiny
    2007–08 48834743 2389297 5.10 5.10 Accepted without scrutiny 2006–07 21090878 1056688 5.01 6 5% by ITAT 2005–06 12632146 471641 3.73 6 5% by ITAT 2004–05 24003129 852775 3.55 8 5% by ITAT

    9. On a perusal of the above, it is apparent that out of the past five assessment years in three of the assessment years, i.e, 2004–05, 2005–06, 2006–07, the matter travelled up to the stage of the Tribunal where the Tribunal applied the rate of 5 per cent. Compared with the said fact, in the present assessment year though the contract receipts have sharply increased from Rs. 1.0.60 crores to Rs. 12.32 crores in the immediate past assessment year at the same time the net profit has increased from 5.02 per cent, to 5.38 per cent, or now as per the order of the Tribunal it can be said to be raised at 5.78 per cent, with the addition of Rs. 5 lakhs sustained.

    10. Though the argument of the learned officer of the Revenue can be said to be proper and justified that in a case where the assessee manipulates the accounts by keeping the profit margins commensurate with the past assessment years or slightly increases and that itself by a large cannot be a basis for acceptance of the results. But, in the face of the said facts, if it is for the Assessing Officer to bring on record some concrete material/evidence to make a proper addition. We have already noticed hereinabove that the Assessing Officer has merely disallowed 20 per cent, or 10 per cent., as the case may be, out of the various expenses, which, in our view, is not proper and he had to bring on record justifiable basis for making of an addition and bring on record some evidence for making of addition.

    11. The Hon'ble apex court as well as this court had held that invoking of the provisions of section 145(3) and/or estimation of income by itself is a finding of fact and it would be appropriate to refer to a few judgments in this regards.

    12. The Hon'ble apex court in the case of Chhabildas Tribhtwandas Shah v. CIT, [1966] 59 ITR 733 (SC) has observed as under (page 737):

    “We may point out that we are not concerned with the correctness of the conclusion and we are only concerned with the question whether there is any material in support of the finding of the Appellate Tribunal. In cases involving the applicability of the proviso to section 13, the question to be determined by the Income-tax Officer is a question of fact, namely, whether the income, profits and gains can or cannot be properly deduced from the method of accounting regularly adopted by the assessee. There is nothing special about this question of fact, and generally the only question of law that can possibly arise is whether there is any material for the finding. In our opinion the High Court was right in refusing to call for a statement of the case.”

    13. This court in the case of CIT v. Singhal Natural Stone P. Ltd., [2012] 21 Taxmann com 493 (Raj) has held that the finding about the rejection of income from a particular amount (from Rs. 20,78,821 to Rs. 5,15,259) was based on appreciation of material on record and, accordingly, it was observed that no question of law, much less a substantial question of law, arises so as to entertain the said appeal.

    14. This court, again in the case of CIT v. Amrapali Jewels P. Ltd. Reported in [2012] 19 Taxmann com 207 (Raj) observed as under:

    “In our opinion, therefore, once the Tribunal accepted the factual explanation of the assessee and accordingly, deleted the additions in question made by the Assessing Officer in exercise of its appellate discretionary powers, then it would not involve any substantial issue of law as such. In other words, this court in its appellate jurisdiction under section 260A ibid, would not again de novo hold yet another factual inquiry with a view to find out as to whether the explanation offered by the assessee and which found acceptance to the Tribunal is good or bad, or whether it was rightly accepted, or not. It is only when the factual finding recorded had been entirely de hors the subject, or when it had been based on no reasoning, or when it had been based on absurd reasoning to the extent that no prudent man of average judicial capacity could have ever reached to such conclusion, or when it had been found against any provision of law, then a case for formulation of any substantial question of law on such finding can be said to arise. Such is not the case here on facts.”

    15. This court in the case of Pansari Gems International v. CIT reported in [2013] 33 Taxmann com 667 (Raj) has held as under:

    “The total turnover during the year under reference is Rs. 8.86 crores. The Income-tax Appellate Tribunal has held that gross profit rate does not depend on the basis of specification of item, but it depends upon the quality, shine, etc. The assessee has earned gross profit varied from 6.32 per cent, to 26.45 per cent., but from the chart filed by the assessee, it cannot be concluded that gross profit rate declared by the assessee was correct. The Assessing Officer has found that purchases were not fully verifiable. The books of account were rejected for various reasons. Previous year also gross profit rate was 18.87 per cent, and this year, it has been accepted at 17 per cent, by the Commissioner of Income-tax (Appeals) and the order passed by the Commissioner of Income-tax (Appeals) has been affirmed by the Income-tax Appellate Tribunal. In view of the reasons assigned by the Commissioner of Income-tax (Appeals) as well as the Income-tax Appellate Tribunal in its orders, we find that no substantial question of law arises in the present appeal. The facts of the case and the evidence have been properly appreciated by the Commissioner of Income-tax (Appeals) as well as the Income-tax Appellate Tribunal.”

    16. That other judgments on the above aspect are in the case of CIT v. Dr. A.P Bahai reported in [2010] 322 ITR 71 (Raj), CIT v. Jaimal Ram Kasturi, [2013] 33 Taxmann com 315 (Raj), Commissioner, Sales Tax, U.P, Lucknow v. Girja Shanker Awanish Kumar., (1996) 11 SCC 648; [1997] 104 STC 130 (SC), CIT v. Jas Jack Elegence Exports, [2010] 324 ITR 95 (Arya Confectionery Works v. Commissioner Of Income-Tax, M.P-I., [1983] 143 ITR 814 (MP) and Awadhesh Pratap Singh Abdul Rehman and Brothers v. CIT, [1994] 210 ITR 406 (All).

    17. This court in the case of CIT v. Inani Marbles P. Ltd., [2009] 316 ITR 125 (Raj) and also the Delhi High Court in the case of Action Electricals v. Deputy Commissioner Of Income-Tax, [2002] 258 ITR 188 (Delhi) have observed that the past history of the assessee would be one of the reliable guidelines to make or not to make any estimation/addition. We have already referred to hereinabove that the Assessing Officer has failed to bring on record any comparable case so as to justify any estimation/addition, the addition has been deleted by the Commissioner of Income-tax (Appeals) as well as upheld by the Income-tax Appellate Tribunal. In view of what we have observed hereinabove, it is essentially a finding based on appreciation of evidence and is pure finding of fact. Thus, there is no question much less a substantial question of law, which can be said to arise out of the order of the Tribunal.

    18. Consequently, we find no merit in the instant appeal and the same stands dismissed, in limine.

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    Commissioner Of Income-Tax v. Gupta, K.N Construction Co.
    (Aug 18, 2014)