2014 (12) TMI 1439 - AT - Income Tax

Estimation of net profit on the basis of agreed additions at 5.5% - statement of the counsel for the assessee relied upon - Assessee who is carrying on the business of civil construction - non rejecting the books of account - penalty u/s 271(1)(c) levied - HELD THAT - AO was not allowed to make necessary examination of the books of account in order to find out the faults/errors therein to invoke the provisions of section 145(3) of the Act for rejecting the books of account by the assessee s counsel as he has agreed for estimation of net profit rate at 5.5% of the gross receipts. Had it been not a case of agreed addition the AO would have examined the books of account properly and could have find out some fault therein and invoked the provisions of section 145(3) according to the Revenue. We cannot ignore the legal position that assessee cannot make a surrender statement on behalf of the assessee without obtaining the assessee s approval and AO should be more vigilant while recording the surrender statement or making an addition on agreed basis. In this situation the AO should have called the responsible person of the assessee-company to record his statement in this regard but he has not done so. Therefore assessment was completed by the AO hurriedly on the basis of the statement of the counsel for the assessee without making proper verification of the books of account. Therefore we are of the view that the assessment should be framed de novo after affording opportunity of being heard to the assessee. We accordingly set aside the order of the ld. CIT(A) and restore the matter to the AO to frame the assessment de novo after making necessary verification from the books of account instead of relying the statement of the counsel for the assessee. Disallowance of 5% labour charges - This disallowance was also made on ad hoc basis without pointing out any specific defect in the bills and vouchers produced by the assessee. He has simply made a general remark that some vouchers are self made vouchers and are not open for verification. It is the settled position of law that for general comment disallowance cannot be made. If the AO is not convinced with a particular nature of expenses he could have made necessary verification before making the disallowance but the AO has disallowed this expense on ad hoc basis which is not permissible under the law. We therefore find no merit in the addition.

Summary

ISSUES:

Whether an agreed addition to income based on a net profit rate accepted by the assessee's counsel without explicit authorization binds the assessee and precludes challenge to the addition.Whether the Assessing Officer can estimate net profit without rejecting the books of account under section 145(3) of the Income Tax Act.Whether an addition made on the basis of a general remark regarding unverifiable purchases or labour charges without specific evidence or rejection of books of account is sustainable.Whether penalty under section 271(1)(c) can be avoided by an agreed addition between the assessee and the Assessing Officer.The procedural propriety and legal effect of an addition made on the basis of a statement or agreement by the assessee's counsel without the assessee's prior approval.

RULINGS / HOLDINGS:

The court held that the addition based on an agreed net profit rate of 5.5% signed by the assessee's counsel was an agreed addition, and ordinarily binds the assessee, especially as penalty under section 271(1)(c) was not initiated on this basis. However, since the counsel was not authorized to make such agreement, the addition could not be sustained without proper verification of the books of account.The court ruled that estimation of net profit without rejecting the books of account under section 145(3) is impermissible, and the Assessing Officer must make a proper examination and point out defects before estimating profit on an ad hoc basis.The court found that additions based on general remarks about unverifiable purchases or labour charges, without pointing out specific defects or rejecting the books, are not sustainable and cannot be upheld.The court emphasized that penalty under section 271(1)(c) may be avoided if the addition is an agreed addition, but only if the agreement is valid and authorized.Given the lack of authorization of the counsel to agree to the addition and the absence of proper verification of accounts, the court set aside the order deleting the addition and remanded the matter for de novo assessment after proper examination and opportunity to the assessee.

RATIONALE:

The court applied the statutory framework under the Income Tax Act, particularly sections 145(3) regarding rejection of books of account, and section 271(1)(c) regarding penalty for concealment or furnishing inaccurate particulars of income.The court relied on the principle that net profit estimation is permissible only after rejection of books of account or demonstration of their unreliability, and not on mere general observations or without basis.The court recognized that an agreed addition, if validly made, precludes penalty proceedings, but stressed the necessity of proper authorization by the assessee for such agreement, highlighting the limits of representation by counsel.The court noted the absence of any evidence that the assessee authorized the counsel to make a surrender or agreed addition, and the Assessing Officer's failure to verify the accounts or record statements from responsible persons of the assessee, leading to a procedural infirmity.The decision reflects a doctrinal insistence on procedural fairness and proper evidentiary basis before making additions or estimating income, and the necessity of clear authorization for agreements affecting the assessee's rights.