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TMI Blog2009 (8) TMI 757X X X X Extracts X X X X X X X X Extracts X X X X ..... appeals: "1. The order of the learned CIT(A), is contrary to the facts and also the law applicable to the facts. 2. The assessment under s. 143(3) r/w s. 153A of the IT Act, 1961 is bad in law in as much as the return of the income was not processed under s. 143(1)(a) before issue of notice under s. 143(2). 3. The learned CIT(A) is not justified in estimating the income of the appellant at Rs. 4,50,460 by estimating the profit @ 5 per cent of contract receipts clear of depreciation as against income returned by the appellant at Rs. (-)19,091 (before set off of depreciation). 4. The learned CIT(A) is not justified in upholding the action of the AO in rejecting the income arrived at on 'net wealth' method which is an approved method as per Board Circular No. F. No. 2/48/68 (Inv.) dt. 26th Feb., 1969; more so when the AO did not point out any 'material' defects in the 'net wealth' statements. 5. Without prejudice to the above, the estimate at 5 per cent by the learned CIT(A) is on a higher side considering the peculiar facts prevailing in the case of the appellant. 6. The learned CIT(A) ought to have given separate deduction for depreciation claimed by the appellant. 7. For th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s in their statements recorded under s. 132(4) of the Act expressed the inability to adduce evidence regarding the genuineness of the partnership firm and agreed to admit the income on the total contract receipt in the hands of individual/HUF status. Later on, in the course of search proceedings, the assessee filed a letter dt. 1st March, 2006 wherein he agreed to offer income from the contract works at 4 per cent of the gross receipts from the contract works as they were not in a position to prove the genuineness of the firms and further as they were not in a position to prove the genuineness of various deductions claimed in the returns filed by the partnership firm. He however, requested that the tax paid in the hands of partnership firm be given credit in the hands of the assessees. 6. However, at the time of filing the returns of income in response to notice issued under s. 153A, the assessee had chosen to file the returns of income based on net wealth/net worth basis in accordance with the CBDT circular. By way of separate letter enclosed to the return of income, assessee explained the reasons from the deviation from what was agreed during the search proceedings. 7. The AO e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nting and contrary to the accounting principles. As per accounting principles, net income should be arrived on the basis of trading and P&L a/c. (b) Assessee had adopted the wealth statements as per his wish and in a fraudulent manner. He is fraudulently maintaining accounts. (c) The assessee has shown meagre amounts towards personal expenditure. The expenditure on lower side. (d) The non-inclusion of some of assets in the balance sheet could not be ruled out. (e) The cash balance, current assets and fixed assets shown in balance sheet are without any basis, due to fact that no regular books of accounts are maintained. 10. The learned counsel for the assessee has submitted that the net wealth/net worth method is a recognized method for determination of the profit in the absence of proper maintenance of the books of accounts. Our attention was invited to the Circular No. F. No. 2/48/68-IT (Inv.), dt. 26th Feb., 1969 through which the Board has clarified that net worth basis can be usefully employed in case where account books are not available or the data available is not adequate. It was further clarified that this method can be used as a check to determine the correctiveness ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Court in the case of Chief CIT & Anr. vs. Pampapathi (2008) 218 CTR (Kar) 590 in support of his contentions that these type of letters cannot be considered to be the voluntary disclosure of the assessees. 15. With regard to the quantum of profits estimated by the AO and the CIT(A), it was contended that there was no basis with them to estimate the income. 16. The learned Departmental Representative on the other hand has submitted that undisputedly the books of accounts are not properly maintained by the assessees and more so he has not raised any dispute with regard to the rejection of the books of accounts. Now the issue is only with regard to the estimation of profit on contract receipts. The AO has correctly determined net profit at the rate of 8 per cent of the gross receipts following the provisions of s. 44AD of the Act in the absence of proper books of accounts. Since the AO has correctly estimated the net profit at 8 per cent of the contract receipt which is very reasonable, the same should not have been reduced by the CIT(A) without any basis. 17. With regard to the net worth basis adopted by the assessee, the learned Departmental Representative has submitted that this ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... see is entitled to follow the net worth basis. In this regard, we have been carried through the CBDT Circular No. 21/48/68 IT(Inv.), dt. 26th Feb., 1969. Through this circular, the Revenue has clarified that the net worth basis can be usually employed in cases where the account books are not available or the data available is not adequate. The Board however put certain conditions which are to be fulfilled while adopting the net worth basis. For the sake of reference, we extract the circular issued by the CBDT as under: "'Net worth basis' for determination of income: The 'net worth basis' can be usefully employed in cases where account books are not available or the other data available is not adequate. It can also be used as a check to determine the correctiveness of the income worked out on 'source basis'. If there is any big difference between the income determined on the 'source basis', a further examination is necessary before one of them is accepted as correct. In any case a thorough investigation about the extent of wealth and valuation thereof is a prerequisite for the employment of the 'net worth basis' for determining the income. 'Net worth basis' should be subject to t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re maintained by the assessees. Under these circumstances, only two options are left with the assessees, either to compute the profit by applying the net profit rate to the gross receipts, or by taking the net worth basis. It has been repeatedly held through various judicial pronouncements that the mode of accounting should be left to the choice of the assessees. In the instant case, the assessee has adopted the mode of computing its profit of the year on the basis of net worth basis and before the AO he has furnished the details and its mode of computation. We have carefully examined the order of the AO and we find the AO has not pointed out any specific defect in the mode of calculation of the profit on the basis of net worth basis. The reasons for the rejection of net worth method by the AO are as under: "(i) It is reverse method of accounting and contrary to the accounting principles. As per the accounting principle, net income should be arrived on the basis of trading and P&L a/c. (ii) Assessee had adopted the wealth statement as per his wish and in a fraudulent manner. He is fraudulently maintaining accounts, evading taxes and even after search operation he is indulging in ..... X X X X Extracts X X X X X X X X Extracts X X X X
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